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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
SECOND SESSION
ON
S.Res- 84
(72d CONGRESS)
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 OF 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 10
Guardian Detroit Union Group
JANUARY 5 TO JANUARY 23, 1934
Printed for the use of the Committee on Banking and Currency
175541
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1934
COMMITTEE ON BANKING AND CURRENCY
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
ROBERT F. WAGNER, New York
ALBEN W. BARKLEY, Kentucky
ROBERT J. BULKLEY, Ohio
THOMAS P. GORE, Oklahoma
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. SPARKMAN, AGting Clerk
SUBCOMMITTEE ON STOCK EXCHANGE PRACTICES
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
PETER NORBECK, South Dakota 2
ALBEN W. BARKLEY, Kentucky 1
JOHN G. TOWNSEND, JR., Delaware
EDWARD P. COSTIGAN, Colorado
JAMES COUZENS, Michigan
ALVA B. ADAMS, Colorado
1
Alternate, Thomas P. Gore, Oklahoma.
2
Alternate, Phillips Lee Goldsborough, Maryland.
CONTENTS
PABT 10
Bla^r, Frank W., Detroit, Mich., president of the Union Joint-Stock Land
JBank of Detroit
4759, 4797
Bodman, Henry E., Detroit, Mich
4965
Bryan, Charles A., 1209 Federal Reserve Building, Chicago, 111
4707
Covington, Harry S., New York, N.Y
4904, 4962
Ford, Edsel B., President, Ford Motor Co., Dearborn, Mich
4655, 4677
Higbie, Carlton M., investment broker, Detroit, Mich
4924,4934
Kanzler, Ernest, 2501 Iroquois Ave., Detroit, Mich
4587, 4624
Leyburn, Alfred P., Lakeshore Hotel, Cleveland, Ohio; chief national
bank examiner, Fourth Federal Reserve District— 4615, 4618, 4625, 4641, 4699*
Longley, Clifford B., Grosse Pointe Farms, Mich
4807, 4823, 4860*
Lord, Robert O., 3974 Penobscot Building, Detroit, Mich___
5026
McKee, John K., Chief of Examiners' Division, R.F.C., Washington,
D.C
4722,4731
Mott, Charles S., Flint, Mich
4877, 4887
Walsh, James L., Detroit, Mich
4989
Wilkin, Herbert R., Detroit, Mich
5017
EXHIBITS
GUARDIAN DETEOIT UNION GROUP
[Italics indicate page on which exhibit was admitted into the record; roman type,
exhibit printed]
65. Photostat of letter on letterhead of Second National Bank & Trust
Co. of Saginaw, dated Apr. 28, 1932, from R. Perry Shorts to Ernest
Kanzler
66. Photostat of letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Apr. 27, 1932, from Ernest Kanzler
to R. Perry Shorts
67. Letter on letterhead of Guardian Detroit Bank, dated May 5, 1932,
from Fred T. Murphy to Ernest Kanzler
68. Photostat of letter on letterhead of the Capital National Bank of
Lansing, dated May 23, 1932, from F. E. Gorman, president, to
Ernest Kanzler
'.
69. A receipt dated Dec. 11, 1930, from the Guardian Detroit Co. for
$5,000,000 of securities loaned by Mr. Ford
70. A note dated Mar. 9, 1932, for $1,000,000 at 6 months payable to the
order of R. O. Lord, agent, by the Guardian Detroit Co
71. Photostat of a letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Dec. 22, 1932, from vice president and
cashier to B. J. Craig, secretary Ford Motor Co., Dearborn, Mich_
72. Photostat of copy of letter on letterhead of Ford Motor Co., dated
Dec. 28, 1932, from Ford Motor Co., by B. J. Craig, secretary and
assistant treasurer, to Guaranty Trust Co. of New York
73. Photostat of letter on letterhead of Guaranty Trust Co. of New York,
dated Dec. 29, 1932, from William L. Kleitz to Elbert S. Burns
74. Photostat of letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Dec. 24, 1932, from Elbert S. Burns,
vice president Guardian National Bank of Commerce of Detroit,
to Guaranty Trust Co. of New York
175541—pt. 10
m
4604
4605
4605
4606.
4665*
4666
4671
4672
4673
4673
IV
CONTENTS
75. Photostat of letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Dec. 30, 1932, from vice president and
cashier, to B. J. Craig
76. An agreement in letter form, dated Dec. 16, 1931, addressed to the
Continental Illinois Bank & Trust Co. of Chicago, and the Bankers Trust Co. of New York City, signed by Guardian Detroit Union
Group, Inc
_!
77. Photostat of agreement between Ford Motor Co. and Guardian Detroit Union Group, Inc., dated Dec. 29, 1932
78. Original pencil sheet of requirements as prepared by Mr. Kanzler 4738
79. A tabulated statement headed " Status of Loans, made by the
R.F.C. to banks in Guardian Detroit Union Group as of Dec. 19,
1933 " 4753
80. Statement referred to, prepared by the witness, and read into the
record by Mr. Pecora
81. Photostatic copy of letter dated Aug. 21, 1929, from Frank W.
Blair to the stockholders of the Union Commerce Corporation
82. Photostatic copy of letter dated Aug. 21, 1929, on letterhead of
Union Commerce Corporation, signed by John N. Stalker, secretary,
and addressed to the stockholders of the Union Commerce Corporation
,83. Letter dated Apr. 26, 1932, addressed by Henry E. Bodman to
Clifford B. Longley, president of the Union Guardian Trust
Co., Detroit
S4. Statement entitled " General journal and statement of condition "
Union Guardian Trust Co., Feb. 11, 1933
$5. Statement entitled " General journal and statement of condition"
Union Guardian Trust Co., Dec. 31, 1932
86. The intra-Group and interoffice memorandum dated Jan. 16, 1933,
from E. C. Harris to Frank Maurice
87. Memorandum referred to, dated Jan. 12, 1933, to Mr. Frank J.
Maurice from Mr. E. C. Harris
-88. Photostat of intra-Group and interoffice memorandum, dated Jan.
24, 1933, from E. C. Harris to F. J. Maurice
89. Photostat of paper dated Jan. 17, 1933, to Henry E. Bodman from
E. C. Harris
90. Statement entitled " Union Guardian Trust Co.. withdrawals and
deposits, Jan. 1, 1933, to Jan. 28, 1933"
(
91. Photostatic copy of sheet entitled " Certificate of deposit withdrawals (Feb. 1 to Feb. 11, inclusive, 1933)" 4851
'92. Photostatic copy of report of examining committee of Union Guardian
Trust Co. as of Dec. 13, 1932 4855
93. Photostat of hand-written memorandum from A. Quay Beyer to
Frank Maurice, filed Apr. 18, 1933
94. Letter Oct. 23, 1933, Mott to Covington
95. Photostatic copy of the opinion rendered by attorney general of Michigan, Jan. 27, 1931 4967
96. Photostat of a letter written June 17, 1930, by Henry B. Bodman
to Paul H. King, referee in bankruptcy, Detroit, Mich. 4969
97. Photostatic copy of intra-Group memorandum dated Aug. 27, 1931,
to Mr. Robert O. Lord and signed by Mr. Henry E. Bodman
98. 99, 100, and 101. Photostats, debit and credit slirjs
102. Memorandum dated Jan. 31, 1932
103. Photostatic copy of report of condition of Union Industrial Savings
& Trust Co., Flint, Mich., of Dec. 31, 1931 5006
104. 105. Photostatic copies of documents captioned " Union Industrial
Trust and Savings Bank, Flint, Mich., General Journal
Ledges and statement of Condition'' 5007
106. Bulletin no. 2, Jan. 2, 1930, Guardian nion Group, Inc., 5031
107. Letter Jan. 6, 1930, cashier, Bank of Hamtramck, to Lord108. Letter dated Jan. 9, 1930, from Robert O. Lord to W. E. Dingman
109. Intra-Group memorandum, dated Dec. 10, 1930, from B, K. Patterson
to J. N. Stalker
1
Not printed because of length or for reasons given in text.
Pa
£e
4674
4678
4685
4755
4756
4790
4791
4792
4816
4825
4825
4831
4834
4836
4837
4840
5056
(*)
4873
4918
5012
4970
4977
5002
5004
(*)
(*)
(*)
5033
5034
5035
CONTENTS
110. Intra-Group memorandum dated Dec. 8, 1930, from B. K. Patterson
to Robert O. Lord
^_
111. Letter dated Mar. 3, 1933, from R. Perry Shorts to S. Sloan Colt___1
112. Photostatic copy of intra-Group memorandum dated Dec. 22, 1930 ,
addressed by Mr. Lord to the directors of the Group, 503-9
113. Photostatic copy of intra-Group memorandum dated Feb. 25, 1932,
from R. O. Huelsman, on the subject of " Congress Corporation "_
114. Statement entitled " Congress Corporation: assets purchased from
units " 5047
115. Letter dated Jan. 8, 1934, written by Price, Waterhouse & Co.
and addressed to Robert O. Lord, Detroit, Mich. 5047
116. Statement of views and opinions prepared by Robert O. Lord, 50^8
1
Not printed because of length or for reasons given in text.
V
Page
5037
5038
(*)
5043
5056
5048
C)
STOCK EXCHANGE PBACT1CES
FRIDAY, JANUARY 5, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY,
Washington, V.C.
The subcommittee met at 10 a.m., pursuant to adjournment on
yesterday, in Room No. 301 of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams (proxy for Costigan),
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. You
may proceed, Mr. Pecora.
Mr. PEGORA. Mr. Kanzler, will you resume the stand, please?
TESTIMONY OF ERNEST KANZLER, DETROIT, MICH.—Resumed
Mr. PECORA. Mr. Kanzler, referring again to the annual report,
or the remarks, whatever you call them, that you made to the stockholders of the group at the last annual meeting of those stockholders,
held on January 24 last, I want to call your attention to this statement,
which I am reading from committee Exhibit No. 63, in evidence as of
January 4, 1934:
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 less desirable holdings and retaining only the
highest grade securities.
On yesterday when you were on the stand I asked you if you knew
to whom the securities referred to in this part of your report were
sold, and you undertook to obtain the information so as to be in a
position to give it to us today. Have you succeeded in doing so?
Mr. KANZLER. I called Dr. Badger, from whom that language
and those facts were obtained. He advised me that those securities
were sold in the market, not to the units. He said that he could
almost state as a fact that none of them had been sold to any of the
units. Then he said that he did recall some discussion as to whether
or not some amount might not be sold to 1 or 2 units, some securities
that had been written down and a reserve set up the previous year
against them, and that they might have disposed of those to 1 or 2
units. He said the amount involved might have been $10,000, but
that, as his memory served him, it was not more than $10,000 that
was involved, and that they were then transferred at the then market
value.
4587
4588
STOCK EXCHANGE PRACTICES
Mr. PECORA. Your statement to the stockholders was to the effect
that securities carried on the books of the securities affiliate of the
group at $1,712,821 were sold with a resultant net loss of only
$42,201 during the year 1932, which you recognized was a difficult
period for the liquidation of securities.
Mr. KANZLER. Yes, sir.
Mr. PECORA. YOU now say
that those securities were sold with a
resultant net loss .of only $42,201 in the open market during that
difficult year of liquidation.
Mr. KANZLER. They had been written down to those levels so
that they could be sold at that time.
Mr, PECORA. YOU mean that the figure of $1,712,821 represents
the marked-down valuation?
Mr. KANZLER. Having written the cost down on the books, yes,
sir.
Mr. PECORA. Well, that does not appear from the statement you
made here, does it?
Mr. KANZLER. That is what I
Mr. PECORA (interposing). Do you think that is the meaning that
could be placed upon the statement you made to the stockholders at
the last annual meeting?
Mr. KANZLER. That is the meaning that I assumed Dr. Badger
meant it to mean, and I think that would be the meaning I would
take from reading that language.
Mir. PECORA. NOW, when you told the stockholders that those
securities had been liquidated at a resultant net loss of only $42,201,
was it your intent to tell the stockholders that that was the entire
net loss resulting to the securities affiliate from this purchase and
sale of liquidatipn of those securities?
Mr. KANZLER. NO, sir. That would be the loss for that year's
operations. If there had been reserves in preceding years, and written
down, then they would be on the books of the corporation at those
figures. Having been sold during the year the loss from those figures
was $42,201. That is what I assumed that statement to mean.
Senator COUZENS. Were they carried on the books of the corporation at the beginning of the year at the figures you have stated, or
were they cut down during that current year?
Mr. KANZLER. I understand that to mean, Senator Couzens, that
that was the figure io which they had been written down.
Mr. PECORA. HOW long before the liquidation had the mark-down
been made?
Mr. KANZLER. I presume that that meant at the beginning of the
year.
Mr. PECORA. Well, can't you tell us definitely?
Mr. KANZLER. NO, sir; I don't know.
The CHAIRMAN. HOW much was the write-off?
Mr. KANZLER. Prior to that time?
The CHAIRMAN. Yes.
Mr. KANZLER. I have no idea.
»Mr. PECORA. DO you think that telling the stockholders that over
$1)700,000 worth of securities carried on the books of the securities
affiliate at that .figure had been liquidated or sold with a resultant
net loss of only $42,201 gave the stockholders a true picture of what
had actually happened in that respect?
STOCK EXCHANGE PRACTICES
4589
Mr. KANZLER. I can say this, that the thing it means to me was
what I think it would mean to any stockholder, and that is, that the
securities had been written down to $1,712,000 and that those
securities had been sold during the year.
Mr. PECORA. Was there anything in this statement to the stockholders indicating that the securities had been written down to this
figure of $1,712,000?
Mr. KANZLER. Only that they were carried on the books at that
figure.
Mr. PECORA. But they might have been carried on the books at
the original purchase figure. There is nothing in your statement to
the stockholders to inform them, or which would inform them, that
that figure of $1,712,000 was a marked-down figure, is there?
Mr. KANZLER. Well, I think it is usual that from year to year
securities are marked down to certain figures, and then when sold
the loss that occurs during that particular year is the loss between
the price at which they were sold and the figure at which they then
stood on the books.
Mr. PECORA. NOW, Mr. Kanzler, you were a director of the
Guardian Detroit Union Group, Inc., from the inception of that
corporation, weren't you?
Mr. KANZLER. Yes, sir.
Mr. PECORA. And vice president
from its inception, or one of the
vice presidents?
Mr. KANZLER. I do not recall what the officer structure was.
There were a lot of inactive officers named when it was first formed.
Mr. PECORA. Were you one of those inactive officers?
Mr. KANZLER. I was of the Guardian Detroit Group. I am not
certain that I was of the Guardian Detroit Union Group.
Mr. PECORA. According to our examination of the corporate records
you were a director and vice president, or one of the vice presidents,
of the Guardian Detroit Union Group, Inc., from its inception, that
is, during the year 1929, and you continued as such during the year
1930, and that in 1931 you became the chairman of the board.
Mr. KANZLER. That was in 1932. I think.
Mr. PECORA. The annual report for the year 1931 of the group,
that is, the report of the stockholders, carries your name as chairman
of the board.
Mr. KANZLER. That report carried the officers—well, the report,
you see, was issued in 1932, after the election, and that indicates the
officers for the year 1932.
Mr. PECORA. Then you did not become chairman of the board
until the annual election in January of 1932?
Mr. KANZLER. That is correct.
Mr. PECORA. AS a member of the board of directors, from the inception, I assume you were familiar with the various policies of operation that were initiated from time to time by the group.
Mr. KANZLER. In the way that a director would; yes, sir.
Mr. PECORA. Well, directors are supposed to have a fairly complete knowledge of the corporation of which they are directors,
aren't they?
Mr. KANZLER. Yes, sir.
Mr. PECORA. And did you
group?
feel that you had that knowledge of the
4590
STOCK EXCHANGE PRACTICES
Mr. KANZLER. Well, I devoted time to it, and was informed as to
the affairs of the corporation in the normal way.
Mr. PECORA. NOW, when did the members of the board of the
group, including yourself, first come face to face with a realization
that they were fighting a war against the depression?
Mr. KANZLER. I do not know of any particular event at which
that happened. I think that things just got progressively worse
from year to year and from week to week.
Mr. PECORA. When did they first become conscious of the fact
that the war was on?
Mr. KANZLER. I do not believe I can mention any specific date,
and I do not believe I can answer for all the directors. I think we
all got our ideas as time went on.
Mr. PECORA. Well, you got your ideas rather firmly fixed as to
that early in 1930, didn't you?
Mr. KANZLER. Well, in 1930 things were certainly getting worse,
there is no question about that.
Mr. PECORA. And with the exception of a few months in the early
part of 1930, they became steadily worse, didn't they?
Mr. KANZLER. They progressed and progressed; yes, sir.
Mr. PECORA. And the banking situation, not only in Detroit and
throughout the State of Michigan but throughout the country, suffered from those conditions rather acutely, didn't they?
Mr. KANZLER. Yes, sir; they were suffering. There were hopes of
an upturn at times, and then they seemed to get worse.
Mr. PECORA. NOW, did you as one of the directors of the group
help to fix the dividend policy of the group?
Mr. KANZLER. Well, I was one of those who voted from time to
time for a dividend. Sometimes I was not present and sometimes
I was.
Mr. PECORA. YOU were cognizant currently of the dividend policy
of the group, weren't you?
Mr. KANZLER. Yes, sir. Well, now, I don't know that it was a
policy, except that each dividend which was declared was decided
upon the facts and circumstances surrounding that dividend.
Mr. PECORA. Well, the dividends declared were generally, or the
first dividend declared in 1930 was at a rate around 16 percent on the
par value of the group stock, wasn't it?
Mr. KANZLER. Well, I think the invested capital was something
like, or at least the book value was something like $60 or $65 a share
at that time, and I think the original rate was $3.20.
Mr. PECORA. On a par value of the stock of $20 a share?
Mr. KANZLER. Well, I think the par was $20 a share; yes, sir.
Mr. PECORA. In order to enable the group to pay those dividends
the group had to rely upon dividends it received from the various
units of the group, principally the banking units, didn't it?
Mr. KANZLER. Yes,
Mr. PECORA. AS a
sir.
matter of fact the units other than banking
units were we might say liabilities to the group, were they not?
Mr. KANZLER. They became such with——•
Mr. PECORA (interposing). Almost from the start?
Mr. KANZLER. With the depression; yes, sir.
Mr. PECORA. NOW, recognizing, as I understand you did early in
1930, that you were engaged in this war against the depression which
STOCK EXCHANGE PEACTICES
4591
acutely affected the banks, did you approve the policy of suggesting
and I use that term advisedly because that is the term that has been
used here by Mr. Lord, to the boards of the various banking units of
the group, that they pay dividends that were not justified by their
current earnings?
Mr. KANZLER. Well, in the first place I do not believe it was a
policy.
Mr. PECORA. Well, whether it was the policy or not it was done,
wasn't it?
Mr. KANZLER. We of the group company were aware that dividends were being declared by individual units from time to time.
Mr. PECORA. Were you also aware that those dividends were being
declared by those different units pursuant to the suggestions of the
group addressed to those units?
Mr. KANZLER. Not entirely. We assumed that there would,,
naturally, be a contact between the officers of the group and the
officers of the individual banks, and that they would work out what
would be a reasonable program as to what they should contribute by
way of dividends to the group.
Mr. PECORA. Was such a program specifically worked out as a
result of conferences that were held between officers and directors of
the group on the one hand, with officers and directors of the unit
banks on the other hand?
Mr. KANZLER. I have no knowledge of what happened in 1930 or
1931.
Mr. PECORA. Why not?
Mr. KANZLER. Because that was an operation problem, and as
directors we knew nothing of that.
Mr. PECORA. AS directors you knew nothing about the facts and
circumstances that would have to be taken into consideration in
declaring dividends for the group?
Mr. KANZLER. The picture that we got, as I recall it, was that
dividends were being received at such a rate from various units, and
that as a result of such receipts and as a result of the earnings, or
estimated earnings, as the case may be, of the combined units which
would be turned into the group company in the form of dividends,,
that a dividend from the group company to the stockholders would
or would not be recommended, and the officers usually recommended
that to the directors.
Mr. PECORA. What officers recommended it to the directors?
Mr. KANZLER. It depended upon who was reporting on the estimated earnings, or what was expected by way of dividends. Sometimes it might be an executive vice president. Sometimes it might be
the president.
Mr. PECORA. DO you refer to officers of unit banks, or officers of
the group?
Mr. KANZLER. Of the group company.
Mr. PECORA. Officers of the group company, in other words, from
time to time advised the board of directors of the group of the earnings
of the unit banks of the group?
Mr. KANZLER. Yes, sir.
Mr. PECORA. And upon
that information so received the directors
of the group took action with regard to the declaration of dividends
by the group?
4592
STOCK EXCHANGE PRACTICES
Mr. KANZLER. Yes,
sir.
Mr. PECORA. That was the procedure, was it?
Mr. KANZLER. Yes, sir.
Mr. PECORA. AS part of
the information laid before the directors
of the group by its officers, respecting the earnings of the unit banks,
did the board receive at those conferences, or on those occasions,
statements of the condition of the unit banks, with respect to their
ability to pay dividends, and the amount of dividends?
Mr. KANZLER. AS the group corporation got more organized, and
as that seemed to become a more important item, I would say in 1932
there were statements made on the condition of the individual banks
to the directors, in more or less detail.
Mr. PECORA. Were not those statements made during the year 1930
and the year 1931?
Mr. KANZLER. I do not recall directors meetings where the conditions of the units were examined, as a director matter. I do not recall
any such.
Mr. PECORA. Were you, from the outset, a member of the executive
committee of the board of directors of the group?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. Was that kind of information brought 4o the attention of the executive committee of the board of the group during the
years 1930 and 1931?
Mr. KANZLER. I think that at times members of the executive
committee who were heads of units might get up and make remarks
about the condition of their own units.
Mr. PECORA. Was there not a so-called examining group or staff
organized by the group, whose particular function it was to inquire
regularly into the condition of the various bank units of the group?
Mr. KANZLER. That was a force directed by Mr. Patterson.
Mr. PECORA. Exactly. That work was entrusted to Mr. Patterson, or entrusted to his direction.
Mr. KANZLER. And his organization.
Mr. PECORA. And his organization, primarily because of the fullness
of experience which Mr. Patterson had as a national-bank examiner
and a chief national-bank examiner before he became an officer
of the group, was it not?
Mr. KANZLER. We all had confidence and believed in his ability.
Mr. PECORA. YOU believed in that ability because of the experience he had had as a national-bank examiner and chief nationalbank examiner for a great many years, did you not?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Did that staff,
or that division of the group engaged
upon that work under the direction of Mr. Patterson, make reports
from time to time, at regular intervals, to either the board of the
group or the executive committee of the board?
Mr. KANZLER. I recall some comments on some of the units. I
do not recall the specific comments, but I do recall that Mr. Patterson
did report from time to time on the condition of some of the units.
Mr. PECORA. I am going to be more specific. Were you aware of
the fact that in 1930, as well as in 1931—but I am going to ask particularly about 1930—suggestions were made by the group, through
its officers, to the executive officers of certain banking units of the
group with respect to the declaration of dividends by the banking
STOCK EXCHANGE PRACTICES
4593
units, and that upon receipt of those suggestions the officers of the
banking units informed the officers of the group that the dividend
which it was suggested by the group the bank should declare was
not justified by the earnings?
Mr. KANZLER. I do not at the present time recall any such discussions, although they may have taken place.
Mr. PECORA. Such a discussion might have centered, if you recall
it, around the declaration of a dividend requested or suggested by
the group to be made by the Union Guardian Trust Co. for the second quarter of 193CL Do you recall anything about that?
Mr. KANZLER. I think that Mr. Stalker, or Mr. Blair may have
made some remarks about the situation. I do Dot recall it specifically.
Mr. PECORA. What remarks did Mr. Stalker or Mr. Blair make
about the situation around that time?
Mr. KANZLER. I do not specifically recall any remarks, but I do
know that those gentlemen did comment on the progress
Mr. PECORA. Progress, you say?
Mr. KANZLER. In some cases progress, yes, sir. They were cutting expenses, and they were in a period of depression, and decline,,
and they were trying to work up their organizations' efficiency, to
get better results, and they would comment on that from time to
time, and sometimes perhaps the comments might not have been so
favorable.
Mr. PECORA. Did this letter ever come to your notice, as the vice
president and a director of the group? I am referring to the letter
marked in evidence before this Committee as Exhibit No. 7, of December 19, 1933. It consists of an intragroup memorandum addressed
to Mr. Robert O. Lord by Mr. John N. Stalker, dated June 5, 1930,
Mr. Stalker at that time being president of the Union Guardian Trust
Co. [Reading:]
DEAK MR. LORD: We have your letter of the 4th instant with respect to the
5 percent quarterly dividend which you suggested 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.
That is not the entire letter, but I have read, I think, enough to
indicate to you what the letter is, in order to recall it to your mind,
if you had any knowledge of it at the time.
Mr. KANZLER. I think I recall, that there was a general readjustment that was being worked out by the Trust Co., because of
the fact that they were shifting some of the revenue earning departments from one company to another, and because there was a transitional stage and a merger, and a few other things going on, and that
the officers did try to adjust themselves to a new situation.
Mr. PECORA. Did not the officers of the Trust Co. try to point
out, in June 1930, to the officers of the group that the suggestion,
made by the group with regard to the dividend that should be declared by the Trust Co. was not a suggestion warranted by the facts?
Mr. KANZLER. I think that was their first idea, and I think there
must have been some discussions whereby, in view of further expectations of some kind, there was a readjustment of the ideas that were
4594
STOCK EXCHANGE PRACTICES
expressed there. I think that was probably a sound statement at
the time.
Mr. PECORA. DO you know that the readjustment was of a nature
that led to the declaration of the dividend by the Trust Co. in
pursuance of the original suggestion of the group, despite the fact
that the officers of the Trust Co. pointed out that such dividend
was not justified by the earnings?
Mr. KANZLER. I would not have known it, Mr. Pecora, except
that I have been here and heard the testimony, and have heard that
it had been done.
Mr. PECORA. Then, you were not aware of this correspondence
that passed between the officers of the Trust Co. and the president
of the group in June 1930?
Mr. KANZLER. I do not recall whether I was or was not, but I
have heard it now.
Mr. PECORA. IS this the first time you have heard it, that is, since
these hearings commenced?
Mr. KANZLER. I do not recall that I heard it before, but I think
there was some oral discussion in the meeting. I do not think there
were any letters produced or anything of that nature.
Mr. PECORA. Searching your own mind on the matter, Mr. Kanzler,
do you think that if you bad been informed in June 1930 of the facts
pointed out by Mr. Stalker in, his letter to Mr. Lord, a portion of
ivhich I have read to you, that you, as a director and officer of the
group, would have taken the position that the trust company should,
nevertheless, declare the dividend at the rate suggested by the group?
Mr. KANZLER. I cannot answer that question, because I do not
know what Mr. Stalker had in mind as to what he might do in the
way of future revenue-producing steps. That was a large operation.
The trust company had always been a very successful one. Nobody
knew what the next few months were going to bring. He may have
thought he was perfectly justified, for the moment, in doing this, and
in adjusting himself to it.
Mr. PECORA. I thought you were conscious, in June 1930 of the
fact that you were fighting a war against the depression.
Mr. KANZLER. I had not said that. I said before that we realized
things were not as good in 1930 as they had been in 1929.
Mr. PECORA. That is why I asked you at the outset this morning,
Mr. Kanzler, when you first began to realize that the group was fighting
a war against the depression.
Mr. KANZLER. I tried to indicate that
Mr. PECORA. SO far as I understand your answers in the earlier
part of your examination this morning, you became aware of the
existence of the war against the depression sometime early in 1930.
Mr. KANZLER. YOU asked me yesterday where I got this expression "war against the depression." I do not think it was ever used
in 1930. I think that came as the crescendo developed. I do not
remember when we first felt that it was as serious as it finally turned
out to be.
Mr. PECORA. YOU were the head of a credit organization of great
magnitude for many years, were you not?
Mr. KANZLER. It was organized in 1928, yes, sir.
Mr. PECORA. And as the head of that credit company, which was
called the Universal Credit Corporation
STOCK EXCHANGE PRACTICES
4595
Mr. KANZLER. That is correct.
Mr. PECORA. Were you not kept cognizant of business conditions?
Mr. KANZLER. Yes, sir; and we kept abreast of them.
Mr. PECORA. YOU did not have to know that a depression was on
from knowledge that came to you as & director of the group, did you?
Mr. KANZLER. We had a very fine year in 1930.
Mr. PECORA. DO you consider that an answer to my question?
Mr. KANZLER. Yes I do.
Mr. PECORA. Did I ask you
what kind of a year the Credit Corporation had in 1930?
Mr. KANZLER. NO ; you did not, but you say I was kept cognizant
of conditions.
Mr. PECORA. When did you first realize that the depression was on?
Let us put it that way.
Mr. KANZLER. I do not know of any one date.
Mr. PECORA. I do not mean to hold you to a specific day of the
year. What period? What time? What season?
Mr. KANZLER. I would say that it became increasingly impressed
upon my mind that things were getting constantly worse, and I
would not say at one particular time that I started calling it a depression. I knew in October 1929 that we were going through something, and that impression magnified itself from month to month.
Mr. PECORA. When did it first assume the proportions of a depression, as you understand the term?
Mr. KANZLER. I would say—I cannot give you an answer. I do
not know what I would term a "depression", in that sense.
Mr. PECORA. What did you term a " depression" when you said
yesterday you were fighting a war against the depression? What
were you referring to then?
Mr. KANZLER. I was referring particularly to the latter half of
1932.
Mr. PECORA. IS that when the war commenced, that you were
fighting—the latter half of 1932?
Mr. KANZLER. That is when it seemed to me to develop into a
battle.
Mr. PECORA. It was practically a catastrophe then, was it not?
Mr. KANZLER. It was pretty bad.
Mr. PECORA. It did not come overnight, in the latter part of 1932?
Mr. KANZLER. NO; it did not. I say it was a crescendo that
developed.
Mr. PECORA. When did the development commence, in your judgment?
Mr. KANZLER. I think, as an event, it started in the fall of 1929.
Mr. PECORA. YOU were a director of the Union Guardian Trust Co.
in the year 1930, were you not?
Mr. KAN&LER. Yes,
sir.
Mr. PECORA. AS a director of the Union Guardian Trust Co.,
you were familiar with the circumstances under which the bank
declared a dividend at the rate of 20 percent per annum for the second
quarter of that year, were you not?
Mr. KANZLER. We had the recommendation of the officers at that
time, and the facts which they presented at the meetings.
4596
STOCK EXCHANGE PRACTICES
Mr. PECORA. What facts did they present at the meetings which
prompted you to vote in favor of the declaration of that dividend, if
you recall?
Mr. KANZLER. I am very sorry, but I do not recall the specific
facts of a particular directors' meeting in 1930.
Mr. PECORA. DO you recall any meeting of the board of directors
of the Union Guardian Trust Co. held during the year 1930, when the
officers informed the directors that the group had suggested that the
directors of the Trust Co. declare a dividend for the quarter at a rate
which was not justified by the earnings? Do you recall any such
event?
Mr. KANZLER. That does not stand out in my memory at all.
Mr. PECORA. If such a thing had happened, would it stand out
in your memory, or would it have been forgotten by you by this
time?
Mr. KANZLER. It depends upon the explanation which might have
been made, along with such an event.
Mr. PECORA. Don't you recall any such event at all?
Mr. KANZLER. NO, sir; I do not.
Mr. PECORA. AS a director of the
trust company, did you endeavor
to keep yourself cognizant of the position of the bank with respect to
its earnings, so that you might be guided, in the operation of your
judgment on the question of declaration of dividends by the trust
company?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. YOU did?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. Were you cognizant of the fact, in June 1930, not as
an officer and director of the group, but as a director of the Union
Guardian Trust Co., that the group had suggested to the trust
company the declaration of a dividend for the second quarter at the
rate of 20 percent per annum, which was in excess of the earnings of
the trust company for the quarter?
Mr. KANZLER. I do not recall that I was.
Mr. PECORA. AS a director of the trust company, when you voted
to declare dividends, what facts did you base your judgment upon
with regard to the declaration of the dividend?
Mr. KANZLER. I am speaking from my present judgment as to
how I would have acted under the circumstances, because I have no
memory of any such meeting, but I would have based my judgment
upon what th6 officers had told us, what they were recommending,
and what they would point out as to their future, and the occasions
which might have been the cause for not having earned the dividend,
if they had not earned it.
Mr. PECORA. Have you any recollection at all of what the officers
of the trust company told the board with regard to the declaration of
the dividend for the second quarter of 1930?
Mr. KANZLER. NO, sir; I have no recollection.
Mr. PECORA. IS not your recollection refreshed by the portion of
the letter addressed by Stalker to Lord, which I read to you a few
minutes ago?
Mr. KANZLER. NO, sir; only to the extent, as I say, that I have
heard it before here in this testimony.
STOCK EXCHANGE PRACTICES
4597
Mr. PECORA. DO you recall any time when the officers of the Trust
Co. came before the board and asked the board to declare a dividend
at a rate not justified by the earnings?
Mr. KANZLER. I do not recall whether it was a Trust Co. meeting or some other meeting, but I do recall that I have attended
some meetings at which it was stated that earnings had not come up
to the amount that it was considered desirable to declare out of
undivided profits as a dividend, but just when those meetings were, or
where, I do not at this moment recall.
Mr. PECORA. Were the dividends declared in those instances?
Mr. KANZLER. I am certain I attended meetings and voted for
some dividends to be declared out of undivided profits that were not
made out of current earnings.
Mr. PECORA. That was during the war against the depression?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Did you think
Mr. KANZLER. In the light
that was a sound banking policy?
of the circumstances as we saw them
then, I think it was the thing to have done.
Mr. PECORA. That term "in the light of the circumstances as we
saw them then," is not a new one to this committee in these hearings.
What do you mean by it? What were the circumstances you referred
to?
Mr. KANZ'LER. Are you referring now to the Trust Co., or to a unit,
or to the bank, or to the group?
Mr. PECORA. Let us take the Trust Co. situation, the Union
Guardian Trust Co.
Mr. KANZLER. There were times when it was felt that the Group
Co. should pay a dividend and, of course, it was known that the
Group Co. had no earnings except as it received dividends from the
units, and in order to assist the Group Co.Jn its position, in behalf
of the Trust Co., the directors at times thought it wise to declare a
dividend to the Group Co. so that the Group Co. could maintain a
dividend, so that the market of stock, which in the public's mind
was inherently and unfortunately associated with the caliber of the
institutions represented by that stock, would
Mr. PECORA. YOU say inherently and unfortunately associated
in the public mind with the caliber of the instutitions represented by
the stock. Was not that inevitable, rather than unfortunate? We
know it was unfortunate, but was it not inevitable that the public
mind would so regard that association?
Mr. KANZLER. I think it was inevitable.
Mr. PECORA. Was not that foreseen by you as one of the founders
of this group?
Mr. KANZLER. YOU say "as one of the founders of this group."
I happened to be a member of the group, but in 1928 I was establishing a credit corporation with 33 branches throughout the country,
and I was not thinking of the set-up of the group.
Mr. PECORA. Were you one of the founders of the group?
Mr. KANZLER. NO; I would not say I was an active founder. I
became a director in the Guardian Detroit Group when it was formed,
but I would not say I was a founder of the group.
Mr. PECORA. Whom do you regard as the founders of the group?
Mr. KANZLER. I think the founders of the group were the active
175541—34—PT 10
2
4598
STOCK EXCHANGE PRACTICES
Mr. PECOEA. Give us the names. We can identify them better
by name.
Mr. KANZLER. I would say the active officers of the Guardian
Group at the time it became Guardian Detroit Group.
Mr. PECORA. Who were they? Give us their names.
Mr. KANZLER. I do not know whether I know the exact names of
all of them.
Mr. PECORA. Give us the names of as many as you can give us, of
those whom you regard as the founders of the group.
Mr. KANZLER. Of course, I must say this, that the head of the
bank at that time was Mr. Lord. I happened to be in Europe in
1929, when the corporate structure of the Guardian Detroit Bank was
changed to Guardian Detroit Group. Why that was done, and how
it was done, I have no real knowledge. That is where I think one of
the group movements started, and just who were the movers in that
I do not know.
Mr. PECORA. Could you not name for this committee the persons
whom you regarded as the founders of this group?
Mr. KANZLER. I think it was a very broad group, and some had
more to do with it than others. If you would take the directorates
you would probably find the founders of the group—the directors
of the bank.
Mr. PECORA. I was not around Detroit when this group was given
birth. You were, probably. Can you not give us those names?
Mr. KANZLER. AS I say, I was in Europe when the Guardian Detroit
Bank changed to the Guardian Detroit Group, and the specific
reasons, or the legal reasons why that was changed in that form, I
do not know, except that
Mr. PECORA. Changing the name of the*group is just a mere detail?
Mr. KANZLER. I think not, Mr. Pecora.
Mr. PECORA. DO you think it is an important event?
Mr. KANZLER. Yes, because with it came a different charter, and
the power to create more shares, and by that exchange of shares to
take in institutions.
Mr. PECORA. YOU were not in Europe when the group was origiinally founded, were you?
Mr. KANZLER. Yes; when that was done I was in Europe.
Mr. PECORA. Were you named a director of the group at the very
outset, while you were in Europe?
Mr. KANZLER.
Yes.
Mr. PECORA. Did they name you as a director without your knowledge and consent, while you were in Europe?
Mr. KANZLER. They knew I would be very glad to go along with
such a movement.
Mr. PECORA. YOU must have known something about the organization of the group before you went to Europe.
Mr. KANZLER. I do not think it was planned before I went to
Europe.
Mr. PECORA. Did you learn about the founding, or the conception
of this group for the first time while you were in Europe?
Mr. KANZLER. The conception of the group, to go back to the
history of this thing—as a matter of fact, this discussion is recalling
most of it to my mind now. It was the Guardian Detroit Bank,
owing the Trust Company, and the Guardian Detroit Co. by means
STOCK EXCHANGE PRACTICES
4599
of unified shares. Then, I think there came an idea of merging or
acquiring the Highland Park State Bank, which was a bank doing
business in Highland Park, a municipality entirely surrounded by
and within the city of Detroit, and that idea crystallized, as I say,
while I was out of the country, and in order to do that it became
necessary to change the corporate structure of what formerly were
unified shares, and that was done, and in that I would say was the
kernel of the group idea.
Mr. PECORA. Who were the founders of this group, Mr. Kanzler, in
your opinion?
Mr. KANZLER. I think everyone who was a director in the bank,
and who voted for the merger with the Highland Park State Bank.
Mr. PECORA. Who were they? What were their names?
Mr. KANZLER. Have you a list of the directorate there? I do not
recall all of them.
Mr. PECORA. Of what?
Mr. KANZLER. Of the Guardian Detroit Bank.
Mr. PECORA. For what year?
Mr. KANZLER. 1929. It may seem to you, Mr. Pecora, that I am
quibbling on this point, but I really do not know how this came
about, but I do know that this whole group of people were in the
Guardian Detroit Bank, and ended up in the Guardian Detroit
Group, which group had these powers.
Mr. PECORA. In 1929 vou were one of the directors of the Guardian
Detroit Bank?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Were the founders scattered among that board?
Mr. KANZLER. I would say so.
Mr. PECORA. YOU were not only a director, but you were
vice
president of the Guardian Detroit Bank in the year 1929, were you
not?
Mr. KANZLER. Inactive; yes, sir.
Mr. PECORA. Inactive?
Mr. KANZLER. Yes, sir. I had no salary and no specific duties.
Mr. PECORA. Mr. Lord was president of the Guardian Detroit
Bank in 1929?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. DO you regard him as one of the founders of the
group?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Just go along
the line and see if you cannot give us
any other names, without prompting from me, just out of your own
knowledge of the situation.
Mr. KANZLER. I would say Dr. Murphy; Mr. Bodman; I count
myself an absent founder of the group. I was in it at the beginning,
and ended up with it, so I am a founder of the group.
Mr. PECORA. Thank you for that information. I have been
trying to get it for ten minutes. Who else?
Mr. KANZLER. May I have a list of those directors?
Mr. PECORA. Unfortunately the annual report of the group for
the year 1929 does not give the names of the board of the Guardian
Detroit Bank but does give quite a formidable list of officers.
Mr. KANZLER. I can tell from that list, I think. [Mr. Pecora
handed a paper to the witness.]
4600
STOCK EXCHANGE PRACTICES
Mr. KANZLER. James Walsh; John GrierMr. PECORA. That is John C. Grier, Jr., is it not?
Mr. KANZLER. Yes, sir; John C. Grier, Jr.; Phelps NewberryMr. PECORA. Would you say Mr. Edsel B. Ford was one of the
founders?
Mr. KANZLER. Mr. Ford; Mr. Chapin
Mr. PECORA. Koy- Chapin?
Mr. KANZLER. Mr. Roy Chapin; Mr. Jerome Keane; Mr. Higbee;
Mr. Howard Bonbright; Mr. Ralph Booth; Mr. Judson Bradway;
Mr. Walter Briggs; Mr. Howard Coffin; Mr. Frank Couzens; Mr.
George Fink; Mr. Sherwin Hill; Mr. James Inglis; Mr. Albert Kahn;
Mr. AlvanMacauley; Mr. Ledyard Mitchell; Mr. Allan Shelden; Mr.
Hiram Walker; Mr. Clarkson C. Wormer, Jr; Mr. William Robert
Wilson.
I have taken that list from the combined list, and I may have
skipped some that were in that original group, but that approximately
is, I think, the group of people.
Mr. PECORA. NOW, Mr. Kanzler, what were the acts of participation, in your opinion, that constituted all of these men founders of the
group?
Mr. KANZLER. In voting for the charter and approving this program and setting up the organization that then grew from that
original idea.
Mr. PECORA. Whose was the original idea?
Mr. KANZLER. I don't know.
Mr. PECORA. Who first propounded it to you?
Mr. KANZLER. Well, as I say, when I came back to town I was
informed of the idea of a merger between the Highland Park State
Bank and the Guardian Group as it had then been, and I think I
was advised of that by Mr. Lord.
The CHAIRMAN. HOW long were you away?
Mr. KANZLER. About seven weeks.
Mr. PECORA. YOU remarked before that in the public mind the
group became identified inherently and unfortunately with the
various banks that were units of the group. You recall that, don't
you?
Mr. KANZLER. NO; I said that the stock, the price of the stock
inherently and unfortunately
Mr. PECORA (interposing). Price of the stock of the group?
Mr. KANZLER.
Yes.
Mr. PECORA. Inherently and unfortunately was associated in the
public mind with the banks that were units of the group?
Mr. KANZLER. With the condition of the banks.
Mr. PECORA. With the condition of the banks that were units of
the group?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. Was that a factor in determining or shaping the
dividend paying policy of the group?
Mr. KANZLER. I think it had a decided effect on the judgment of
the individuals. I can speak for myself. It did in my case.
Mr. PECORA. NOW, how did your mind operate in that respect?
Mr. KANZLER. On the Detroit Stock Exchange the bank stocks
were listed. If the price of the stock might be 80 or 90 or 20 or whatever it might have been at the time, and from 1 day to the next
STOCK EXCHANGE PRACTICES
4601
dropped 10 points or 11 points or 5 points, depending on what the
margin at that time was, that would immediately have a very unsettling effect on the public's mind as to the safety of their deposits in
the various units and there would be withdrawals and hoarding would
commence.
Mr. PECORA. Then the policy of the group in declaring its dividends was shaped partly, if not entirely, by a consideration of the
effect upon the public mind with respect to the condition of the banks
that were units of the group?
Mr. KANZLER. Yes, sir; I think that that had a decided influence
in the mind of all of the individuals. I would say quite certainly that
had a substantial effect upon the minds of the individuals declaring
the dividends.
Mr. PECORA. DO you think that if that had not been the state of
the public mind a different dividend policy would have been pursued
by the group?
Mr. KANZLER. I have no. question of it.
Mr. PECORA. From that is it fair to infer or to conclude that the
directors of the group in declaring the dividends which they did
declare from time to time fixed those dividends at a figure that was
designed to bolster up public confidence in the banking units of the
group?
Miy. KANZLER. NO, sir; I would put it the other way: I would say
that they declared the dividends in such a way that they would not
destroy the institutions by reason of the runs that might be incited
by a lack of confidence.
Mr. PECORA. Isn't that another way of saying that it was fixed in
a fashion that was designed to keep up confidence of the public in the
banking units?
Mr. KANZLER. I don't think it is the same thing.
The CHAIRMAN. Were dividends declared in order to keep up the
prices of the stock, the quotations on the stock?
Mr. KANZLER. The price of the stock was one of the problems, and
in spite of the fact that the dividend was declared in lesse'ning amounts
the stock acted rather irregularly and affected the institutions.
May I read you a letter from one of our units on that subject?
Senator COUZENS. Were there many transactions in the stock from
d&f to day, Mr. Kanzler?
Mr. KANZLER. Yes, sir; there were a great number of them.
The CHAIRMAN. What stocks were listed?
Mr. KANZLER. All the bank stocks in Detroit were listed on the
Detroit Exchange.
The CHAIRMAN. Was this group stock listed?
Mr. KANZLER. This group stock was listed, yes, Senator Fletcher.
The CHAIRMAN. Any of the units?
Mr. KANZLER. May I show you this letter?
Mr. PECORA. The Senator has asked also about the stocks of the
unit banks.
Mr. KANZLER. NO, sir; the units were not listed. They were all
consolidated in one stock and that stock was listed on the exchange.
Senator COUZENS. Those two groups were the Guardian Detroit
Union Group, Inc., and the other group that you mentioned?
Mr. KANZLER. That is correct; yes, sir.
4602
STOCK EXCHANGE PEACTICES
Senator COUZENS. And you say there were a great many transactions taking place in those stocks every day?
Mr. KANZLER. Yes, sir.
Mr. PECORA. What is the letter you want to read?
Mr. KANZLER. This is a letter written by R. P. Shorts,
president
of the Second National Bank & Trust Co. of Saginaw, Mich.
Mr. PECORA. That was one of the group's unit banks?
Mr. KANZLER. That was one of our very fine unit banks; yes,
sir. It is today. It is open today. This is a letter to Mr. James
L. Walsh, executive vice president, Guardian Detroit Union Group,
Inc., Detroit, Mich.
Senator COUZENS. What date?
Mr. KANZLER. That is dated December 21, 1931. [Reading:]
DEAR COLONEL: Have just wired you as follows: "Congratulations on new
job and assurance of every assistance and cooperation ", which I now confirm.
And then something more about the job.
Mr. PECORA. Suppose you read the whole thing.
Mr. KANZLER [reading]:
Your new job is going to give you broader opportunities than you have ever
had before and certainly the group needs some good men in Detroit devoting his
entire time to its interests.
My own opinion is that the most constructive move you could possibly make
at this time for the benefit of group banking in general, and our two Michigan
groups in particular, would be to make arrangements whereby both the Detroit
Bankers and Guardian stock would be immediately taken off the market. The
Detroit Bankers stock has been nose-diving for some little time now and they
might be in just the proper attitude to approach on this subject. Only last week
one of our depositors withdrew $5,000 from our bank in cash and put it in a safetydeposit box, plainly stating that while he had every faith in our bank as a separate
institution, he was worried about the declining market on Guardian stock—and
would keep his money in cash until things got straightened around. A large percentage of the decrease in Group deposits can be traced directly to market quotations on its stock. If the stock of both Detroit groups were not listed and
constantly flaunted before the public's eye—the same as applied 5 or 10 years
ago—both our depositors and stockholders would be in a, much happier frame of
mind. I know .all of the usual arguments presented against taking our stock off
the market and I am confident that it would be the most constructive step the
group could take at this time, and I would go so far as to do it alone—if the other
Detroit crowd would not join.
Now that that is off my chest, I feel ready for the day's work.
Good luck to you!
Cordially yours,
R. P. SHORTS.
That was in '31.
Mr. PECORA. That was on December 21, 1931?
Mr. KANZLER. Yes, sir.
Mr. PECORA. That was
written by R. Perry Shorts, who then was
president of the Second National Bank & Trust Co. of Saginaw?
Mr. KANZLER. That is correct, sir.
Then on April 28, 1932, he wrote again. He wrote that time to
Ernest Kanzler, chairman of the board, Guardian Detroit Union
Group, Inc., Detroit, Mich.
DEAR ERNIE: Answering your memorandum of the 27th, it strikes me that the
first thing to decide upon is a definite program in regard to taking our Guardian
stock off the market at least 30 days prior to July 1, on which date dividends may
be discontinued. If it is decided to take the stock off the market on or about
June 1, a certain constructive, educational program for the benefit of pur stackholders should be inaugurated. If on the other hand, it is decided not to take
the stock off the market, then an entirely different program should be followed.
STOCK EXCHANGE PKACTICES
4603
I am strongly in favor of taking the stock off the market whether the other
Detroit group does so or not, not later than June 1 and if this program is adopted,
I would suggest procedure along the following lines:
Prepare a strong letter to all stockholders, which would be signed personally
by Mr. Lord as president. This letter would go out to stockholders on the same
day that we would draw the stock from the market and would give our reasons
for such action. This letter should make no reference to whether or not any
dividends are going to be paid in July, but would be devoted solely to the reasons
why the directors or executive committee decided to take the stock off the
market.
This letter should recite the fact that through manipulation of brokers and
speculators, our stock (as is the case with many other high-grade stocks) has been
batted around from pillar to post like a football and driven down to a price which
is wholly inconsistent with its true intrinsic value; that it is immaterial to brokers
whether a stock is sold or bought through them as they make the same commission in either case; that brokers in their desperation for commissions during these
strenuous times are telephoning our stockholders all over the State almost daily,
advising them one way or the other about Guardian stock and inviting orders
from them to either sell or buy; that as a result of this action many stockholders
become greatly alarmed over the true value of their stock and are inclined to be
influenced by every rumor that blows; that the directors know the stock to be
worth far more than its present market quotation and are concerned about the
heavy unnecessary losses being suffered by stockholders who are selling out on
account of unjustifiable fear and untruthful rumors; and that the only way to
protect the stockholders against such sacrifices is to remove the stock from the
market entirely.
The letter should then explain that the directors fully appreciate the advantage
to all stockholders of having some facility available through which they can sell
or buy Guardian stock whenever they desire to do so. To meet this situation the
Guardian will operate a stock trading department for the sole benefit of its
stockholders desiring to buy or sell Guardian stock only. Parties desiring to sell
or buy, may list their orders with the stock department and the manager will
gladly render such stockholders every assistance and cooperation in their endeavors to sell or buy at a fair and reasonable price.
The letter should also mention the fact that the recent revelations to the United
States Senate Committee investigating the New York Stock Exchange clearly
show that on account of manipulation of brokers and speculators, the prices listed
for stocks are often fictitious, unreliable and untruthful manifestations of their
true value—and that bank stocks, representing the financial background of our
country in which every man, woman and child is directly or indirectly interested,
should not be subjected to such speculative attacks.
The letter should then recite that the whole matter had been given most serious
consideration by the directors and large numbers of stockholders and that the
great weight of opinion was that the interests, of all of our stockholders would be
best served by removing the Guardian stock from the market entirely and handling sales transactions through a private department of the bank for the sole use
of the company's stockholders—no publication to be given as to sales or purchases
and every sale to be considered a secret and confidential transaction between the
buyer and the seller.
My idea would be to carefully prepare a letter along the above lines and send
same out to stockholders on the same day we take the stock off the market. I
am confident that practically all of the substantial stockholders (who are not
influenced by brokers) will commend this action on behalf of the director. When
July 1 comes and it is decided that no dividend will be paid, another good letter
should be prepared and sent out to the stockholders, over Mr. Lord's signature,
telling them the reasons for such action. So many large corporations, like
United States Steel, and so forth, have already discontinued dividends that the
damage from our decision to do so will, by July 1, be largely discounted.
With these two things accomplished and out of the way, the officers and
directors will then be able to devote their sole time and attention to upbuilding
the resources of the whole Guardian Group without having their minds continually diverted to crisis after crisis directly chargeable to stock market conditions.
I might add that in my judgment, the Detroit Group already know about our
decision to discontinue dividends on July 1 and they-*will not, therefore, at this,
time permit us to drag them into a position where they willbe pulling our coals
out of the fire by taking their stock off the market at the same time we* do. They
4604
STOCK EXCHANGE PRACTICES
will, however, be glad to to see us take such action and will very probably follow
our lead within a period of 30 to 60 days, and then the whole atmosphere will be
cleared on this stock proposition.
I am convinced that if we postpone taking our stock off the market until they
will join us in such action, that they will string the matter along for many months
and in the meantime, because of our paying no dividends on July 1, we will
suffer far more than they will. Our problem is our own problem, and it is not the
same as theirs, for the simple reason that they have not the July 1 nondividend
action to face.
I am familiar with all of the arguments on the other side of the question and
have weighed them carefully. The biggest argument is the question about the
effect upon deposits. No one can foresee what such effect may be, but personally, I think it is being grossly exaggerated and I am not afraid to "face the
music", but am in fact more fearful of the results that may follow if we do not
promptly take our stock off the market at least 30 days prior to July 1.
If you gentlemen finally decide to adopt the above plan, I shall happily cooperate to the fullest extent in preparing the necessary forms of letters, etc., to
be used in carrying the program into effect.
Cordially yours,
R.
PERKY SHORTS.
Mr. PECORA. Mr. Kanzler, will you produce that letter that you
have just read?
Mr. KANZLER. Yes.
Senator COUZENS. And
before you go into that, Mr. Pecora, I
would like to have the note that Mr. Kanzler wrote to Mr. Shorts
that prompted that letter.
Mr. KANZLER. May I read that letter?
Mr. PECORA. Yes.
Mr. KANZLER. Would you like to follow it from this copy [handing
document to Mr. Pecora]?
Mr. PECORA. Yes. I offer in evidence the letter that has just
been read by the witness and which has just been produced by the
witness.
The CHAIRMAN. Let it be admitted and put on the record.
(Photostat of letter on letterhead of Second National Bank &
Trust Co. of Saginaw, dated Apr. 28, 1932, from R. Perry Shorts to
Ernest Kanzler, was designated " Committee Exhibit No. 65, Jan.
5, 1934," and appears in full immediately above where read by Mr.
Kanzler.)
Senator COUZENS. NOW if you will read your letter.
Mr. KANZLER. Yes; I will read the first letter, a letter to Mr. R.
Perry Shorts, president Second National Bank & Trust Co., Saginaw,
on April 27, 1932, from Mr. Ernest Kanzler, chairman of the board,
Guardian Detroit Union Group, Inc., Detroit. [Reading.]
DEAR PERRY: Please don't forget that you are going to write out a program
for the handling of "roman numeral two."
II. Pride of stock as affected by possible dividend action, which, in turn,
might affect deposits of institutions.
1. Statement to stockholders in letter in advance of date.
2. Dividend action.
3. Possibility of withdrawing from exchange.
4. Publicity attending same.
5. Method ofNhandling after-withdrawals.
6. Any other ideas you might have.
Very truly yours.
Mr. PECORA. That is a letter signed by you?
Mr. KANZLER. That was signed by me, sir.
Mr. PECORA. I offer in evidence the photostatic reproduction of
that letter which has just been read by the witness.
STOCK EXCHANGE PRACTICES
4605
The CHAIRMAN. Let it be admitted and entered on the record.
(Photostat of letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Apr. 27, 1932, from Ernest Kanzler to
K. Perry Shorts, was designated " Committee Exhibit No. 66, Jan.
5, 1934", and appears in full immediately above where read by Mr.
Kanzler.)
The CHAIRMAN. What was done about that? Was that course
pursued as recommended by you?
Mr. KANZLER. It was discussed, Senator Fletcher, but it was considered that it would be too dangerous to take it off the market, and
I think this next letter illustrates the thoughts in the minds of the
directors and the gentlemen who were discussing this problem.
After I received Mr. Shorts' letter I sent it up to Dr. Fred Murphy,
who was chairman of the board of the Guardian National Bank of
Commerce—that was previous stationery there and he was using
that at the time—and on May 5, 1932, he wrote me [reading]:
MR. ERNEST KANZLER,
Chairman of the Board, Guardian Detroit Union Group, Detroit
DEAR ERNIE: Commenting on the letter of Mr. Perry Shorts of April 28. I
quite agree with Mr. Shorts that bank stocks should not be traded in on the
open exchange. To withdraw the Guardian stock without having the Detroit
bankers take a like action would, in my opinion, be dangerous. The fact that
the American State withdrew its stock from the Exchange just before it went
into the hands of the receiver is fresh in the memory of the Detroit public and I
believe that such an action would materially affect deposits.
There can be no question but that brokers, as a class, are interested solely in
the buying or selling of a stock in order that they may collect a commission.
Undoubtedly their constant telephoning to stockholders has been very unsettling.
The stock has, however, reached such a low level, a level out of line both as to
book value as well as to ultimate earning possibilities, that I do not feel that a
still further decline from this point would be followed by any serious withdrawals.
The public has become hardened to these low price levels and since this level
is comparable to that of many other sound stocks it would seem to me to be less
difficult to explain such a shrinkage than to allay the fears of the public as to the
causes leading to withdrawal. Whether the stock is listed or unlisted its price
for purchase and sale will be determined ultimately by the statement of earnings
and general conditions of the group.
If the Detroit bankers would withdraw their stock at the same time ours was
taken off, I should favor the action, but to withdraw our stock without a similar
action on their part would, in my opinion, be a more dangerous procedure than
to have the stock remain and decline to any limits, however low, which might
be determined by the buying public and the brokers' manipulations.
Sincerely,
FRED T. MURPHY.
Mr. PECORA. I offer in evidence the photostatic reproduction of
the letter just read by the witness, which the witness has produced.
The CHAIRMAN. Let it be admitted and entered on the record.
(Letter on letterhead of Guardian Detroit Bank, dated May 5,
1932, from Fred T. Murphy to Ernest Kanzler, was thereupon designated "Committee Exhibit No. 67, Jan. 5, 1934", and appears in
full immediately above where read by Mr. Kanzler.)
Mr. KANZLER. Mr. Pecora, I have another one I think is material
right on that same point that I want to read.
Mr. PECORA. All right.
Mr. KANZLER. This is a letter on the stationery of the Capital
National Bank of Lansing, dated May 23, 1932.
Mr. PECORA. That was one of the units of the group?
Mr. KANZLER. That was one of the units of the group, a unit which
controlled at this time some 85 or 88 percent of the deposits of the
4606
STOCK EXCHANGE PRACTICES
city of Lansing, all the others but one bank having failed and this
bank having taken over one of those banks about to fail.
This is sent to Mr. Ernest Kanzler, chairman of the board, Guardian
Detroit Union Group, Inc., Detroit, Mich, [reading:]
DEAR MR. KANZLER: At the suggestion of our executive committee, I am
writing this letter.
For the past couple of weeks we have found that a great many rumors are circulating about town concerning our institution, and we find upon investigation that
in nearly every case these rumors grow out of discussions of the price on Guardian
stock. A group will get together and gossip about the price of the stock and
someone remarks that there must be something wrong with Guardian or the
stock would not act the way it does. Someone else will say, "Well, probably all
the banks in the group are not in any too good shape," and the next fellow that
tells it says he heard the Capital National Bank was not in any too good shape.
The next person repeating the tale is likely to say that he heard on good authority
that the Capital National Bank was in a bad wav> and about the next time it is
repeated it is to the effect that the Capital National will soon fold up.
There has not been anything in this gossip that has seriously affected us, but
almost every day there are 1 or 2 or more withdrawals from savings accounts,
chargeable to these rumors. Our people have felt that there should be some
method created whereby the price of the stock could be maintained at a reasonable level. I personally think that it would be a great boost to all of our units
if this could be done.
Very truly yours,
F. E. GORMAN, President.
Mr. PECORA. I offer in evidence photostatic reproduction of the
letter just read by the witness, which has been produced by the witness.
The CHAIRMAN. Let it be admitted and entered on the record.
(Photostat of letter on letterhead of the Capital National Bank of
Lansing, dated May 23, 1932, from F. E. Gorman, President, to
Ernest Kanzler, was designated " Committee Exhibit No. 68, Jan.
5, 1934/' and appears in full immediately above where read by
Mr. Kanzler.)
Mr. PECORA. Any other letters on this subject you want to
produce?
Mr. KANZLER. I think there is a whole file that could be collected,
Mr. Pecora, but I just happened to take these to illustrate the point.
Mr. PECORA. What action was taken by the board of the group
with regard to the suggestions that are discussed in these letters?
Mr. KANZLER. There were repeated meetings on the subject, with
an almost equally divided opinion between directors present as to
whether the stock should be withdrawn or not, and it was considered
that Dr. Murphy's advice that in view of the fact of the withdrawal
having immediately preceded the closing of the American State
Bank and withdrawal from the exchange having immediately preceded the closing of the Fidelity Trust Co., the indications that might
be in the minds of the public by such action would be too dangerous
to attempt, and that therefore the stock was ridden through.
The CHAIRMAN. Was the stock ever withdrawn from the exchange?
Mr. KANZLER. It was not, Senator Fletcher. It was on the
exchange the day the banks closed.
Mr. PECORA. AS a matter of fact, during this time, say, in the
early part of 1932, various unit banks of the group held as collateral
large blocks of the group stock, didn't they?
Mr. KANZLER. There was a considerable amount of collateral held
throughout the group.
STOCK EXCHANGE PRACTICES
4607
Mr. PECORA. DO you know the amount?
Mr. KANZLER. I do not know the exact amount.
Mr. PECORA. Approximately, have you any idea?
Mr. KANZLER. The last examiner's report of the Guardian National Bank of Commerce, which is the only one I know about, as I
recall, stated 111,000 shares, which was collateraled with other
collateral for various loans.
Mr. PECORA. That is in that bank?
Mr. KANZLER. In that bank.
Mr. PECORA. That is, 111,000 shares in only one of these banks?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. HOW many thousands of shares of the group stock
were held at about this time by all the unit banks that held such
stock?
Mr. KANZLER. I haven't the figure, and I would not dare estimate,
because I just would not know what that figure is.
Mr. PECORA. Wasn't it considered by the board of the group that
in view of the fact that the various unit banks in the aggregate held
several hundred thousand shares of the group stock as collateral against
loans that the market price of the group stock should be maintained?
Mr. KANZLER. NO, sir; I don't think that that was the consideration at all. I think the consideration was primarily on the question
of deposits. Now, there were many of these shares held where they
were held as collateral in loans that were thoroughly collateralized,
so the fact that 111,000 shares were held as collateral is of some
significance, but it does not tell the story.
Now, take my particular case: I had some bank stock up as collateral, but that loan was adequately collateraled by other shares
and that loan has since been completely paid. So there were many
similar circumstances to that that I am sure of.
There was also this fact, that as the depression continued—I don't
know when it started, but as the depression continued—the officers,
in their effort to further collateralize their loans, would naturally
talk to the debtors and get as much collateral as they could, and in
many cases the last thing that was offered was Guardian Bank stock,
which was then added as additional collateral to a loan that had
previously been thoroughly and adequately collateralized, and in
th&it ,way there was quite an accumulation.
Mr. PECORA. Did you ever have any knowledge of the number of
shares of Group stock pledged as collateral with all of the unit banks
by officers and directors of the Group as well as officers and directors
of the unit banks?
Mr. KANZLER. I think that toward the end of '32 there were some
statistics gathered on that, but I don't recall the figures or know
anything very definite about it.
Mr. PECORA. Was the amount substantial?
Mr. KANZLER. Yes, sir; it
was.
Mr. PECORA. YOU have mentioned here that the stock of the
(Group was traded in very actively on the Detroit Exchange.
Mr. KANZLER. Yes, sir.
Mr. PECORA. Did you trade in that stock?
Mr. KANZLER. NO, sir; I didn't trade in it.
> Mr. PECORA. Were you a participant in any
syndicate or pool accounts that traded in the stock of the group at any time?
4608
STOCK EXCHANGE PRACTICES
Mr. KANZLER. Yes, sir. In October 1931—October 1930
Mr. PECORA. In October 1930?
Mr. KANZLER. In October 1930 this same condition as is expressed
in these letters existed.
Mr. PECORA. In October 1930?
Mr. KANZLER. Yes, sir. At a time when the price of the stock was
then around 75 or 80 or somewhere around there.
Senator COUZENS. From what point had it dropped to that?
Mr. KANZLER. In August 1929, I think, it had sold in quantities
around 250 to 300.
Senator COUZENS. And it had dropped from that time up until
October 1930 to 75 or 80?
Mr. KANZLER. Yes, and that was having a very disquieting effect
upon the stockholders.
Mr. PECORA. Hadn't the quotation gone as high as 350?
Mr. KANZLER. I think there were a few shares traded in at that
price, but I am not aware of just what that was.
Mr. PECORA. GO ahead and tell us about the pool account.
Mr. KANZLER. I would not call it a pool.
Mr. PECORA. What would you call it?
Mr. KANZLER. I would call it a purchase group.
Mr. PECORA. Well, we will adopt your term. Tell us about the
formation of this purchase group.
Mr. KANZLER. In October 1930 when the price of the stock was beginning to be an unsettling factor, directors and officers felt it was
such an important item that they should not let the unwarranted
values in the market affect the institutions, and so they agreed among
themselves—there were 110 or 112 directors in that list that agreed—
that they would purchase the stock at a figure not to exceed 60 and
hold it for a year.
Mr. PECORA. Was any limitation placed in that purchase agreement on the amount of stock that the.group would buy, that the
participants in this purchasing agreement would buy?
Mr. KANZLER. It was agreed in the agreement that the agreement
would not be binding unless people agreeing to buy at least 60,000
shares would sign in the general purpose, because otherwise it was
thought that it would not be enough to stem the tide.
Mr. PECORA. Was such an agreement effected?
Mr. KANZLER. Such an agreement was effected.
Mr. PECORA. Who managed the transactions in behalf of that
purchase agreement?
Mr. KANZLER. Mr. Charles B. Warren was on the committee and
drew up the agreement. Mr. Warren, as you will doubtless remember,
was formerly Ambassador to Japan. And with him on the committee
were Mr. James Inglis, who is now chairman of the board of the
National Bank of Detroit; Mr. Roy Chapin, formerly Secretary of
Commerce; Mr. Hal Smith, a Detroit attorney, and myself. We
acted as trustees for this group, and then in order to handle the
mechanics of purchases the Guardian Detroit Co. was made agent on
behalf of this group of directors, who all signed these individual and
several agreements.
Mr. PECORA. Have you a copy of that purchase agreement?
Mr. KANZLER. I think I may have one here, Mr. Pecora. * [And
the witness begins looking through his papers.]
STOCK EXCHANGE PRACTICES
4609
Senator COUZENS. While you are looking that up let me ask: Did
all those about 110 directors sign that agreement?
Mr. KANZLER. Yes, sir.
Senator COUZENS. YOU say all of them signed it?
Mr. KANZLER. Yes, sir. [After having looked through
his papers.]
No, Mr. Pecora, I haven't a copy of that agreement here.
Mr. PECORA. Can you get a copy of it for us?
Mr.
KANZLER. I can get
one.
Mr. PECORA. Tell us the substance of it.
Mr. KANZLER. It simply said that believing it advisable to purchase in the market a substantial amount of shares at a price not to
exceed 60, the undersigned hereby severally agree, in consideration
of the promises of each other, to purchase the amounts set opposite
their names, at not to exceed 60; and that they appointed the Guardian
Detroit Co. as agent to purchase this stock for them; and that they
will not sell the stock for a year; and that they will honor sight draft
attached to stock when received.
The CHAIRMAN. Did you purchase the 60,000 shares?
Mr. KANZLER. What was that, Senator Fletcher?
The CHAIRMAN. The agreement was to purchase 60,000 shares,
I believe?
Mr. KANZLER. That is, it was not to become binding on any of
the individuals unless there were enough individuals in the group who
would agree to purchase a total of 60,000 shares.
Mr. PECORA. And the agreement became effective, did it?
Mr. KANZLER. Yes,
Mr. PECORA. What
sir.
transactions in the stock of the group were had
in furtherance of the purposes of that agreement?
Mr. KANZLER. Well, as a result of that agreement there were
purchased from time to time substantial blocks of stock, which were
then drafted out to the individuals who purchased them and who
took up the drafts.
Mr. PECORA. Did they all take up their drafts?
Mr. KANZLER. AS I recall it they all took up their drafts. I think
over a period of a year and a half about a total of $3,200,000 worth
of stock was purchased. First of all, that syndicate ran for 6 months,
or that purchase agreement ran for 6 months, and then that purchase
group was renewed for another 6 months, except that the maximum
price as set out was $45 as I recall it, and the amount for which they
had to sign to make it operative was made 20,000 shares.
Mr. PECORA. That is, 20,000 shares in addition to the original
60,000 shares.
Mr. KANZLER. Well, the original 60,000 shares had not been
purchased at the time that agreement expired. It expired by its own
terms in 6 months.
Senator COUZENS. When that first agreement expired how many
shares of stock had been purchased?
Mr. PECORA. That is, upon the expiration of the first 6 months'
period, Senator Couzens?
Senator COUZENS. Yes.
Mr. KANZLER. I would suggest it was about 35,000 shares.
Senator COUZENS. About 35,000 shares had been purchased?
Mr. KANZLER. Yes, sir; I think so.
4610
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW many shares were purchased under the terms
of the renewal agreement?
Mr. KANZLER. I haven't the exact information but would sayabout 18,000 or 20,000 shares.
Mr. PECORA. What became of that stock purchased by that group?
Mr. KANZLER. I cannot tell you, sir. I know that the individuals
paid for it.
Mr. PECORA. Did any of the individuals sell out before the expiration of the time at which they agreed to hold the stock?
Mr. KANZLER. I don't know.
Senator COUZENS. Wasn't there a selling group, too, at one time?
Mr. KANZLER. I do not know of any selling group.
Senator COUZENS. YOU do not know of any selling group?
Mr. KANZLER. NO, sir.
Senator COUZENS. Did you ever
Mr. KANZLER. NO, sir.
Mr. PECORA. In the operations
hear that there was one?
of this purchase group, did they
also sell?
Mr. KANZLER. NO, sir.
PECORA. I mean during
Mr.
stock.
the period when they were buying the
Mr. KANZLER. NO, sir.
PECORA. It was an out and out purchase
Mr. KANZLER. Yes, sir.
Mr. PECORA. With no selling transactions as
Mr.
group, was it?
a part of its opera-
tions?
Mr. KANZLER. NO, sir.
Mr. PECORA. NOW, were you a participant in any other group
trading in, buying, or selling the stock of the group?
Mr. KANZLER. NO, sir. In 1932 I sold a few shares. I had an
interest in about 40,000 shares, or 34,000 shares, at a cost to me of
about 1% million dollars. I sold about $20,000 worth of that; I sold
that and bought it back when I found that the market was about to
establish a new low, as I did not want to see a new low because of the
effect it would have on our stock. So I purchased it in December
of 1932,. purchased that same amount of stock back, and I held more
when the bank closed than at any other time.
Mr. PECORA. NOW, Mr. Lord in his testimony before this committee on yesterday gave the following answers
The CHAIRMAN (interposing). Let me get that matter straight.
Mr. Kanzler, you had how much invested in the stock?
Mr. KANZLER. My investment when the banks closed, standing in
my name, was $1,200,000, at my cost. And a corporation in which
I only had a third interest had an amount of about $600,000 at its
cost. That corporation bought the stock and never sold it.
Senator COUZENS. What was the name of that corporation?
Mr. KANZLER. The K.F.H. Corporation.
Senator COUZENS. IS that corporation still in existence?
Mr. KANZLER. NO, sir.
Senator COUZENS. Where are the shares that that
Mr. KANZLER. I have them.
Senator COUZENS. Who were the owners of the
corporation had?
other two thirds
interest?
Mr, KANZLER. Mr. George Fink and Mr. Carl Higbee.
STOCK EXCHANGE PEACTICES
4611
Mr.
PECORA. They were both directors of the Group, weren't they?
Mr. KANZLER. Yes, sir.
Senator COUZENS. What did the initials K.F.H. represent?
Mr. KANZLER. They represented Kanzler, Fink & Higbee.
Mr. PECORA. Mr. Lord in his testimony yesterday before this com-
mittee gave the following answer, which I will read to you from pages
689 and 690 of the stenographic transcript of the minutes of the
hearing:
Mr. PECORA. And the amount of cash that otherwise should have been available to pay depositors has been reduced by that policy, has 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 come 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.
Now, Mr. Kanzler, was that done in pursuance of a policy determined upon by the officers and directors of the group?
Mr. KANZLER. Well, I remember a meeting in December of 1931,
I think it was—
Mr. PECORA (interposing). Yes.
Mr. KANZLER (continuing). In which the group directors agreed to
discontinue and liquidate the securities companies. And also to lift
out undesirable assets from the banks and trust companies. I think
that was approved at that meeting.
Mr. PECORA. What was the reason for doing that?
Mr. KANZLER. TO strengthen the unit institutions.
Mr. PECORA. TO strengthen the unit institutions, but it was done
at the expense of the parent company, wasn't it?
Mr. KANZLER. Yes, sir; but with the units being strong, or rather
without the units being strong there was no strength in the parent
company.
Mr. PECORA. And if the parent was not strong the units were
correspondingly weak, weren't they?
Mr. KANZLER. Within limits, yes, sir. Naturally the stronger
the parent would be, the stronger the units would be.
Mr. PECORA. Wasn't the group in determining upon this policy
and following it, virtually traveling in a circle; that is, covering a lot
of ground but getting nowhere?
Mr. KANZLER. I think not. If it had been able to turn the corner,
it would have worked itself out.
4612
STOCK EXCHANGE PRACTICES
Mr. PECORA. But they did not turn the corner. They kept going
round in a circle, didn't they?
Mr. KANZLER. NO, sir. I think that the stockholders, in the interest of the depositors, were putting the money into the banking institutions.
Mr. PECORA. They were putting back a part of the money that they
took out of the banks through the dividend policy that was pursued.
Isn't that what it amounted to in substance?
Mr. KANZLER. Yes; but those were not simultaneous transactions.
Mr. PECORA. Oh! I know that.
Mr. KANZLER. And what seemed to be the judgment at one time
in putting back assets, seemed to be the judgment at another time of
paying dividends.
Mr. PECORA. NOW, reference has been made here in the evidence
to a criticism embodied in a report by the national bank examiner, of
the Guardian National Bank of Commerce to the effect that the group,
which was the parent company, itself owed something like 14 million
dollars upon which it had to pay very heavy interest charges annually.
Do you recall that reference?
Mr. KANZLER. I think I do.
Mr. PECORA. For what purposes was that indebtedness of over 14
million dollars contracted by the group?
Mr. KANZLER. I think 7 million dollars of it was in order to enable
the securities companies to carry their inventories, and the other
7% million dollars, or whatever the figure was, was to purchase those
undesirable assets from the various units of the group, in order that
they would be in a more liquid and cleaner condition. I think those
purchases in large measure account for the strength of our units
throughout the State.
Mr. PECORA. SO that the group contracted a very heavy indebtedness, as the parent of the banking units, in order to enable the banking
units to put on a better public appearance.
Mr. KANZLER. NO, sir; not to put on a better public appearance,
but to be better.
Mr. PECORA. Well, that would be reflected in their appearance
before the public, wouldn't it?
Mr. KANZLER. Well, it is not only an appearance but a fact.
Mr. PECORA. It is a fact, you say?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. What do you know about the policy that has been
testified to here that was adopted by the group of having its unit
banks make certain adjustments of transactions, which would enable
the unit banks to show that they owed no bills payable at various
times when statements were made by the banks in response to the
call of the Comptroller of the Currency?
Mr. KANZLER. Well, I know that we always tried to increase
deposits during times when one would normally expect statements.
I think the records of the Federal Reserve will show that bills payable
usually diminish around December 31, and then become increased
right after January 1. And I think that was the general practice.
And we did everything we could to get increased deposits.
Mr. PECORA. Wasn't that calling for window dressing?
Mr. KANZLER. HOW was that?
STOCK EXCHANGE PRACTICES
4613
Mr. PECORA. Wasn't that in fact simply a scheme for window
dressing?
Mr. KANZLER. It was not a scheme,
Mr. PECORA. What was it?
Mr. KANZLER. It was a program to show that the groups within
itself had the strength to be able to get the funds to pay their bills*
Mr. PECORA. Wasn't that a false show of strength?
Mr. KANZLER. NO, sir. The strength was there.
Mr. PECORA. Wasn't it a falsa show of strength, Mr. Kanzler, by
that bank through the medium of a shifting of deposits in order to
show no bills payable, and then only to have the indebtedness restored
after the statement was made in response to the Comptroller's call?
Mr. KANZLER. In my opinion it showed that that bank had the
accounts and the resources; showing it could get the deposits if it
needed them to pay bills payable. It was not a misrepresentation
but a fact.
Mr. PECORA. And you say that even though the indebtedness was
restored almost immediately after the statement was made in response
to the call of the Comptroller of the Currency?
Mr. KANZLER. But still it showed it had the power to pay those
bills.
Mr. PECORA. Even though it was done in that fashion you say
it was not a false showing of strength?
Mr. KANZLER. NO, sir. I think it showed it had that power.
Mr. PECORA. DO you think it showed a true, faithful, and accurate
picture of conditions?
Mr. KANZLER. It showed it had the power to pay those bills.
Mr. PECORA. I asked you: Do you think it showed a true, faithful,
and accurate picture of conditions?
Mr. KANZLER. Yes, sir.
Mr. PECORA. In other words,
if A owes B a note of $1,000 falling
due on, say, the 1st of June, and A pays that note by borrowing
money from C and giving C his note, he has relieved himself of that
indebtedness, has he?
Mr. KANZLER. Well, if A and B are brother and sister, and somebody is giving crbdit to the other, you know the credit is there.
Mr. PECORA. The indebtedness temporarily disappears, doesn't it?
Mr. KANZLER. That is right, sir.
Mr. PECORA. It disappears only for the period of time covered by
the making of the statement in response to the Comptroller's call,
doesn't it?
Mr. KANZLER. Yes,
sir.
Mr. PECORA. And then almost immediately afterward the indebtedness reappears?
Mr. KANZLER. That is right.
Mr. PECORA. And you say that is not putting on a false appearance?
Mr. KANZLER. It shows the power to pay the bill.
Mr. PECORA. I asked you: You say it is not putting on a false
appearance?
Mr. KANZLER. Yes, I say that.
The CHAIRMAN. When the units transferred to the group securities, and the group took up securities from the units, did the units
assign and transfer those securities without recourse?
175541—34—PT 10
3
4614
STOCK EXCHANGE PEACTICES
Mr. KANZLER. They were sold without recourse. It was an outand-out sale as between two different persons.
Senator COUZENS. Mr. Kanzler, I was exceedingly interested in
your answer to Mr. Pecora's question just now, and let me ask you
this question: Assuming that I was applying to your bank for a loan,
and that I furnished a statement to you dated as of January 1, 1933,
in which statement I showed that I did not owe anything and that
I was in good financial condition; but 2 days prior to that time let
us assume that my uncle paid off all my debts, and he afterward
came in and put in his claim for having advanced the money, would
you consider such a statement as obtaining money under false
pretenses?
Mr. KANZLER. Well, I would think that would not be right.
Senator COUZENS. YOU would think that was obtaining money
under false pretenses?
Mr. KANZLER. I would think that would be wrong.
Senator COUZENS. All right.
Mr. PECORA. Mr. Kanzler, is there any difference in principle
between such a transaction and the policy of the group banks in
taking care of temporarily bills payable in the fashion that has been
disclosed here?
Mr. KANZLER. I feel there is; yes.
Mr. PECORA. A real difference in principle?
Mr. KANZLER. I think so, because those are commercial transactions, that are handled as a matter of course in that way by institutions generally. And I think the proof of that would be found in an
examination of the records of the Federal Keserve. I think you
could there find proof of that fact.
Senator ADAMS. Mr. Kanzler, I do not think you are justified in
saying that that is a general practice among banks.
Mr. KANZLER. Well, from my experience; I know that they come
and ask us for deposits right along toward the end of the year.
Senator ADAMS. Aren't you talking about a limited locality?
Mr. KANZLER. NO. I think that is generally true, because nationally we get requests for substantial balances toward the end of the
year.
Senator ADAMS. Well, I do not believe you are justified in saying
that is a general practice.
Senator COUZENS. Well, I simply want to say that I should hate
to think it is a general practice; to say that here is a group, for
instance, that can switch deposits from any place it likes, in order to
make any kind of showing; that the Highland Park Bank can loan
to the Industrial Bank of Flint, and that the Industrial Bank of Flint
can put that in the Guardian Bank, and so on, for that would simply
be going round in a circle.
Mr. KANZLER. NO, sir.
Senator COUZENS. It would
be simply doing that to make a showing
And that substantially was done between the Highland Park Bank
the Industrial Bank and the Guardian National Bank of Commerce.
Mr. KANZLER. I do not understand that there was any kiting of
checks where each would give the other reciprocal checks and build
up accounts. I wouldn't think that was right.
Senator COUZENS. Well, the effect would be the same if you exchanged certificates of deposit because certificates of deposit were
STOCK EXCHANGE PEACTICES
4615
issued from one bank to the other in order to liquidate indebtedness;
and instead of showing in bills payable it would show as deposits
from other banks. A deposit from a bank is the same as a bill payable in practice. In other words, you have to pay it when the other
bank calls for it, so, in effect, it is a bill payable, but it just doesn't
look so good on a statement if shown as a bill payable. It is not
borrowed money, but is a clean-up, the same as a demand bill payable may be a clean-up. In effect when you make a statement showing no bills payable, and you have wiped them out with a temporary
deposit from one of your constituent companies, you invite depositors*
to come in and put in money on the theory that you do not owe anything, that you are in good, sound, financial condition. For instance,
say that I read your statement as of December 31, and a day or two
afterward \vhen I go to your bank and deposit money, your bills payable are reinstated. I consider that as much a fraud upon the public
as though I were to make the kind of statement for an industrial loan
that I just detailed to you.
Mr. PECORA. Mr. Chairman, I want to withdraw the witness for
the time being and call another witness, Mr. Leyburn. You are not
excused from further attendance on the committee, Mr. Kanzler.
Mr. KANZLER. I understand.
The CHAIRMAN. Mr. Leyburn, 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. LEYBURN. I do.
TESTIMONY OF ALFRED P. LEYBURN, LAKESHORE HOTEL,
CLEVELAND, OHIO; CHIEF NATIONAL-BANK EXAMINER,
FOURTH FEDERAL RESERVE DISTRICT
Mr. PECORA. Mr. Leyburn, give your full name, address, and
business or occupation to the committee reporter for the record.
Mr. LEYBURN. My name is Alfred P. Leyburn, Lakeshore Hotel,
Cleveland, Ohio; chief national-bank examiner, Fourth Federal
Reserve district.
Mr. PECORA. What section is comprehended within that Federal
Reserve district?
Mr. LEYBURN. The State of Ohio, western Pennsylvania, eastern
Kentucky, and five counties in West Virginia.
Mr. PECORA. Were you at one time chief national-bank examiner
for the seventh district?
Mr. LEYBURN. Yes; and also a national-bank examiner out there
prior to that time.
Mr. PECORA. HOW long have you been connected as examiner or
otherwise with the Department of the Comptroller of the Currency?
Mr. LEYBURN. Since 1919.
Mr. PECORA. Will you give the committee, briefly, a history of
your connection with the Department of the Comptroller of the
Currency.
Mr. LEYBURN. I was a clerk in the office of the Comptroller of
the Currency from November of 1919 to May 31, 1921. I wasassistant national bank examiner, Fourth Federal Reserve District
from May 31 to September 1, 1921. I was national bank examiner
4616
STOCK EXCHANGE PRACTICES
from September 1, 1921, to August of 1923 in the Ninth Federal Reserve District, comprising Montana, North Dakota, South Dakota,
and half of Wisconsin, as well as the upper half of Michigan. From
August of 1923 to September 1, 1927, I was national bank examiner
of the Seventh District, comprising Iowa, half of Wisconsin, the
southern end of Michigan, half of Illinois, and half of Indiana. I was
chief national bank examiner of the Fourth Federal Reserve District
from September 1,1927 until August of 1929. And from September 1,
1929, to May 16, 1933, I was chief national bank examiner of the
Seventh District. And since that time I have been chief national
bank examiner of the Fourth Federal Reserve District.
Mr. PECORA. What was the section of the country that was generally comprehended in the Seventh District while you were chief
national bank examiner of that district?
Mr. LEYBURN. The industrial area of Michigan, which is what we
call the southern end or the eastern end, where they have all the
large cities, such as Detroit, Kalamazoo, and Battle Creek; Indiana
and Illinois, half of those two States, the entire State of Iowa, and
half of Wisconsin.
Mr. PECORA. DO you know a man by the name of B. K. Patterson?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Was he at
one time to your knowledge connected
with the Comptroller's office as an examiner?
Mr. LEYBURN. Yes, sir; for a long time. As a matter of fact, he
was an examiner in Montana when I was out there.
Mr. PECORA. Did he immediately precede you as chief national
bank examiner for the Seventh district?
Mr. LEYBURN. Yes.
Mr. PECORA. He has
testified here, in substance, that a chief
national bank examiner upon receiving reports of examinations made
by field examiners under his jurisdiction, signs the reports so made by
field examiners as a matter of routine, and transmits them to the
Comptroller of Currency. In view of the years of experience you
have had, both as a field examiner and as a chief examiner, will you
tell this committee whether or not that is the rule, practice, or custom
on the part of chief national bank examiners?
Mr. LEYBURN. Most certainly not. That is an insult to sign the
Comptroller's office. You would not sign anything that you did not
read. How would you know what is in the report if you did not
read it?
Mr. PECORA. What has been the custom and practice on the part
of chief national bank examiners upon receiving reports from their
field examiners and transmitting them to the Comptroller of the
Currency?
Mr. LEYBURN. They always read them. I know that I always
read every one of them. No chief clerk ever signed a report for me;
and that is true of the other chief bank examiners that I know.
Mr. PECORA. And if in the course of reading them you learn or
feel that the conclusions embodied in a field examiner's report are
not in accordance with your views or judgment, what, if anything,
do you do under such circumstances?
Mr. LEYBURN. I call them to the attention of the Comptroller's
office. And if I thought it a serious thing I would take the whole
report under consideration.
STOCK EXCHANGE PEACTICES
4617
Mr. PECORA. Have you ever recognized it to be the practice or
custom for chief national bank examiners to sign reports of examinations made by their field examiners and transmit them simply as a
matter of routine?
Mr. LEYBURN. I do not know of a siixgle chief examiner who does
that.
The CHAIRMAN. DO any of them ever authorize a chief clerk to do.
that?
Mr. LEYBURN. In other words, if you are going to be out of towif
you can designate someone in your office to sign your name; that is,.*5
if you are going to be away for a good period, but it will be some
examiner. You could designate your chief clerk to sign it, but I d®>
not know of anyone who has done that. Why, the chief clerk would
not know whether to send a report in or not as a general rule.
Mr. PECORA. NOW, Mr. Leyburn, during the time you were chief
examiner of the seventh district were examinations made of the
various banks that were units of the Guardian Detroit Union Group,
Inc., under your direction or supervision?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. And as reports
of those examinations were made by
field examiners, did you read them?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Did you at
times take an active part in the conduct
of the examinations of those unit banks?
Mr. LEYBURN. Not in the examinations. At the conclusion of an
examination, or a number of them, I would go up there and have a
meeting with the governing committee, and the examiner was always
present. But I personally never made an examination of those banks,
because—well, I made an examination of the National Bank of Commerce in 1925 I think.
Mr. PECORA. But you did from time to time discuss with the
officers of those various banking units, the conditions disclosed by
reports of field examiners?
Mr. LEYBURN. Yes, sir.
Senator ADAMS. Mr. Leyburn,
you have, perhaps, heard some
testimony here in reference to eliminating, for the purpose of making
statements on call of the Comptroller of the Currency, eliminating
bills payable under the cover of deposits. Would the Comptroller's
Office tolerate that shifting if they were conscious of its being done?
Mr. LEYBURN. Most certainly not.
Senator ADAMS. IS it the practice generally among banks?
Mr. LEYBURN. I wouldn't say generally, but it is done. It is not
done generally.
Senator ADAMS. It is not done with the approval of the Comptroller's Office, is it?
Mr. LEYBURN. Of course not.
Senator ADAMS. Simply if the bank is able to take care of its bills
payable, of course the Comptroller's office is in control of that.
But they wouldn't permit it to be immediately reestablished, would
they?
Mr. LEYBURN. NO. When the group first got together we found
a lot of that put out in other banks, and we started to holler about
it right away, and we got some of it out, especially in Niles, Ionia,
and Battle Greek.
4618
STOCK EXCHANGE PRACTICES
The CHAIRMAN. Does the chief national bank examiner have any
sort of jurisdiction or supervision over field examiners?
Mr. LEYBURN. Yes, sir. That is what he is there for.
The CHAIRMAN. SO that when a report comes in from a field examiner the chief national bank examiner has the right to take it up
with the field examiner and revise his views about it, doesn't he?
Mr. LEYBURN. Yes, sir; that is right.
The CHAIRMAN. We will now take a recess until 2 o'clock this
afternoon.
Mr. PECORA. Will you be back at 2 o'clock, Mr. Leyburn, please?
Mr. LEYBURN. Yes,
sir.
(Thereupon, at 1 p.m., Friday, Jan. 5, 1934, the subcommittee recessed until 2 p.m. at the same place.)
AFTER RECESS
The subcommittee reconvened at the expiration of the recess at
2 p.m., Friday, January 5, 1934.
The CHAIRMAN. The committee will come to order.
TESTIMONY OF ALFRED P. LEYBURN—Resumed
Mr. PECORA. Mr. Leyburn, you testified that as chief national
bank examiner for the seventh district from time to time you discussed with officers of the Guardian Detroit Union Group matters
that appeared in the reports of examinations of the bank units of that
group that were made by your field examiners. Do you recall that?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. With regard
to that bank, and that group known as
the Guardian National Bank of Commerce/' the statement has been
made here by witnesses appearing before this committee that there
was no warrant or justification for the closing of that bank last year.
Do you recall when the bank was closed?
u
Mr. LEYBURN. Yes,
Mr. PECORA. Prior
sir.
to the closing, had you familiarized yourself,
through the medium of reports of examinations made by field
examiners under your direction, with the condition of that bank?
Mr. LEYBURN. I was very familiar with that bank and all the other
national banks in that chain.
Mr. PECORA. Had you, prior to the closing of the bank, discussed
on more than one occasion various phases or items of criticism with
regard to that bank which had come to your notice through the
medium of examinations made by your field examiners?
Mr. LEYBURN. A number of times.
Mr. PECORA. In your own way, Mr. Leyburn, and without specific
questions from me, in order to save time, will you tell the committee
what you know concerning the condition of the Guardian National
Bank of Commerce prior to the time it was closed in February of last
year, and what discussions you had with regard to the condition of
the bank with any of its officers or directors.
Mr. LEYBURN. Of course, Mr. Pecora, in that question you would
have to bring all the banks in that group that tie in to that bank.
Mr. PECORA. Just tell the committee in your own way.
STOCK EXCHANGE PRACTICES
4619
Mr. LEYBURN. The Guardian group was formed in 1929, as I
recall, the spring of 1929. Then they started to pick up some banks
throughout the State at very high prices, and they made the only
examinations of some of those before they were acquired, and after
that time they had their own corps of examiners that made examinations of their banks, including the Guardian National Bank. The
Guardian National Bank was consolidated with the National Bank of
Commerce, December 31, 1931. An examination was made of the
State bank at that time.
Senator COTJZENS. The State bank being the Guardian Detroit
Bank?
Mr. LEYBURN. Yes, sir. That showed that there was a high percentage of questionable paper in both banks. As a matter of fact,
we were amazed at the condition of the Guardian Bank, because it
was a new bank starting from scratch in 1929. We told them at
that time that they were taking in a lot of undesirable stuff that
should not go in. The consolidation went through, and from time to
time, in the examinations of the other banks in the group our reports
disclosed unsatisfactory conditions. Particular cases would be:
Niles, Mich., which was into its deposits. The capital was all
gone. We tried to get that fixed up and new capital put in.
Another was the National Bank of Ionia; and the Grand Rapids
National; and the Union Peoples of Jackson, Mich. But they
were always very reluctant to charge off losses, and they always
contested the loss classification, and they still wanted to keep on
paying dividends. The reason they wanted to do that was that the
Group Co. had obligations of about $14,500,000, and the interest
charge on that alone would be about $850,000 a year. They were
obligations to banks in New York and Chicago. The only way to
get money to pay the interest off was to get dividends from the group
banks, which of course, included the National Bank of Commerce.
The first examination of the consolidated bank was made May 9,
1932 and completed in June, and a meeting was held with the governing committee of that bank about June 15, or somewhere in there,
and the reason why we held the meeting with the governing committee was that there were 61 directors on that board, so you could not
have a meeting and tell them the condition of the
bank was bad, and
not have some leaks, and some "smart money7' run out. At that
meeting we had some of the best men in Detroit on the governing
committee. At that meeting we went over the condition of all the
bad banks in the group, and told them they were not justified in
paying dividends, except in about two banks. Of course, that was
contested; also the losses estimated at that examination, which were
very nominal, $1,198,000; and doubtful, $11,982,000.
Mr. PECORA. Just a moment. I do not want to interrupt you
any more, but I have to go back. I want to go back to the statement
you just made, that you advised them, in June 1932, that the banking
units should not pay dividends. With whom did you have that
conference?
Mr. LEYBURN. Mr. Edsel Ford; Mott, of General Motors; and
Dr. Murphy, who was chairman of the board; Covington, who was
executive vice president of the Guardian Bank; and Inglis and
Longley. Kingston acted as secretary of the meeting.
4620
STOCK EXCHANGE PRACTICES
Mr. PECORA. What did you say to them concerning" the inadvisability of the unit banks paying dividends?!
^
Mr. LEYBURN. I told them it was a question of legality, and the
fact was that they needed that money to take out losses andj[bad
assets.
Mr. PECORA. Had you found that that was the policy of those
banks, not to take out losses or bad assets?
Mr. LEYBURN. Absolutely. They always had arguments with
them in the Comptroller's office, and the correspondence passing
between our office and the Comptroller's office would indicate that.
Mr. PECORA. Upon what basis did these gentlemen contest the
views you advanced with regard to the unit banks not paying
dividends?
Mr. LEYBURN. They thought it would be bad policy if they did not
pay them, and they needed the money to pay those obligations in
the group, the $14,500,000.
Mr. PECORA. NOW proceed with your narration.
Mr. LEYBURN. We went over thoroughly all those banks in the
group, the national banks, of course, which approximated 8 in
number, as I recall it, in the group. We went into their condition,
and the earnings statement showed that they did not have the earnings to pay dividends, and we needed to take out losses at that time.
We also asked them about some of their State banks we happened
to know about, particularly the Union Industrial of Flint, and the
Union Trust Co., right across the street from the Guardian.
Then they said, "Well, we think the branch banking bill is going
to pass." At that time I think it was before the House, and they
said, "If that is the case, we can take the capital out of all our banks
and remove losses, and questionable paper, and conduct them as
branches."
I think I told them at that time tbat they would need some more
money than that. They always stated that there was considerable
strength on the board, and some money had been put in, and possibly some more could be raised if necessary. When they referred to
that, they referred to Edsel Ford and Colonel Mott, I would say
offhand. They were the two that had put up the money before.
We also told them they would take a heavy loss on the American
State Bank which they took over. The Guardian's share of that
guarantee was 18 percent, and I suppose they will lose about $3,000,000 on their share of it. That was taken over in the spring of 1932.
Then there was the repurchase agreement they had with the company, which was $4,945,000, I think—the repurchase agreement from
the group. That was an excessive loan, and the directors would be
liable in case of loss.
Mr. PECORA. Can you give the committee the details of the transaction revolving around that repurchase agreement to which you
have just referred?
Mr. LEYBURN. The group needed money to liquidate the KeaneHigbee Co., which was the brokerage concern they bought. That
is my impression, anyway. They did not have enough to do that.
They were also liquidating the Guardian Co. at that time, too, and
they needed some additional money, and that was the only place to
get it.
STOCK EXCHANGE PBACTICES
4621
Mr. PECORA. HOW did they get it?
Mr. LEYBURN. By the repurchase agreement, which is the same as
a loan.
Mr. PECORA. The same as a loan?
Mr. LEYBURN. Absolutely.
Mr. PECORA. At 100 percent of the collateral?
Mr. LEYBURN. It was over 100 percent of the bank's capital and
surplus, making it excessive.
Mr. PECORA. I was coming to that. By means of this repurchase
agreement, the group was able to borrow from the bank a sum of
money amounting to over $4,000,000, which was secured only by
the securities that they agreed to repurchase. ,
Mr. LEYBURN. That is what it amounts to, because the guarantee
Mr. PECORA. It amounts to the making of a loan up to 100 percent of the value of the collateral.
Mr. LEYBURN. NO. It is not exactly that way. It would make
more than a loan of 100 percent, for the reason that the collateral was
not worth $4,945,000, and the repurchase agreement which was the
guarantee of the group was not worth a dime, because the company
was broke.
Mr. PECORA. Will you give the committee the full substance of
that portion of your discussions with these gentlemen about this
repurchase agreement transaction?
Mr. LEYBURN. Part of it was classified as doubtful in the examiner's
report, as I recall it—part of that particular loan—and we asked
them how they were ever going to get it out, and told them it would
have to be reduced. The Comptroller wrote them and told them the
same thing. He has to, on a violation of law.
Mr. PECORA. DO you have the letter that was written by the
Comptroller's Office to them on that subject?
Mr. LEYBURN. I am not sure whether I have or not. Here is one
of December 7 that calls attention to it.
Mr. PECORA. Will you let me have it? What page is it?
Mr. LEYBURN. Page 9. It begins right up near the top there.
Mr. PECORA. The letter itself was addressed by the Comptroller of
the Currency to the board of directors of the bank on January 28,
1933, was it not, and referred to the examination of the bank made
as of December 7, 1932.
Mr. LEYBURN. That is right.
Mr. PECORA. Have you a copy of that letter before you?
Mr. LEYBURN. I have the one of December 7 here.
Mr. PECORA. Will you read it?
Mr. LEYBURN (reading):
The report of examination of your bank, completed December 7, a copy of
which was furnished you, has been reviewed.
Mr. PECORA. Let me interrupt you. That letter is actually dated
January 28, 1933, is it not?
Mr. LEYBURN. That is right.
Mr. PECORA. But the letter dated January 28, 1933, refers to the
report of the examination of the bank made as of December 7, 1932?
Mr. LEYBURN. That is right. It takes some time to type those
reports and get them down to Washington.
4622
STOCK EXCHANGE PRACTICES
Mr. PECORA. Let me read that letter from the copy I have, and
you follow me [reading]:
The report of examination of your bank, completed December 7, a copy of
which was furnished you, has been reviewed. 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 especial attention is called to the lines of the Guardian Detroit Co.,
Agents, $173,685.62; Guardian Detroit Co., $4,621,787
Mr. LEYBURN. That had been reduced about $300.
Mr. PECORA (continuing reading):
and Union Co., $1,074,097.42, as set out and commented upon by the examiner
on page 4-117, of which $2,777,783 is classed doubtful. Moreover, the line to the
Guardian Detroit Co. represented by the 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 attention as will protect the banks'
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.
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 stock
except the qualifying shares of the directors. This concentration should be on a
substantial reduction basis.
The extent to which the other real 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 assets aggregates
$5,196,237, and apparently you were unable to dispose of any of the parcels.
Present indications forecast heavy losses in the other real estate account.
I want to digress for a moment or two, Mr. Leyburn, to ask you
this. The reference in this letter to the other real estate account is a
reference to real estate other than that owned or occupied by the
bank, is it not?
Mr. LEYBURN. In other words, it is the other real estate account of
the bank, that they had title to. Some bank buildings were in their
banks that they had taken over, but it is the other real estate.
Mr. PECORA. That is, the real estate other than that to which the
bank had title, and which it used for its banking quarters.
Mr. LEYBTJRN. That is correct.
Mr. PECORA. I will resume my reading of the letter (continuing
reading):
With the existing situation in your bank and the 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 eliminations of developing losses, and to provide for further probable defaults in the band 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 excessive loan referred to
above has been reduced to the legal limit, forwarding the copies of your com
STOCK EXCHANGE PRACTICES
4623
munication to Chief National Bank Examiner A. P. Leyburn, 164 West Jackson
Boulevard, room 1209, Chicago, 111.
That is signed by Gibbs Lyons, Deputy Comptroller.
Prior to the sending of this letter by the Deputy Comptroller to the
board of directors of the Guardian National Bank of Commerce, do
I understand you to say that you discussed with the officers and members of the board of the bank the various items that are criticized
and alluded to in this letter of Mr. Lyons'?
Mr. LEYBURN. Yes; especially the violations of law and the repurchase agreement.
Mr. PECORA. What did those gentlemen tell you they would do, if
anything, with regard to meeting the criticisms that you discussed
with them?
Mr. LEYBURN. They said they would do everything in their power
to correct them and, as I say, they were hoping for this branch
banking bill to go through, so that they could clean out all these
things.
Mr. PECORA. In other words, they hoped to take care of these
items of criticism in the event that the branch banking bill was
enacted by Congress.#
Mr. LEYBURN. I think that is correct, beyond any question.
Mr. PECORA. By what process, in the event of the enactment of
that branch banking bill, would they have been able to take care of
these items of criticism?
Mr. LEYBURN. In the Guardian Bank itself, they would not have
been able to do it right in this bank, but they hoped to draw the
capital out of the other banks throughout the State, and take the
losses out of that, and they spoke of increasing the capital of this
bank, of the parent bank. It would have to have more capital.
Mr. PECORA. Had the branch banking bill been enacted, the national banks in this group, other than the Guardian National Bank
of Commerce, would have disappeared as separate banking entities,
and would have been operated as branches of the Guardian National
Bank of Commerce.
Mr. LEYBURN. That is correct.
Mr. PECORA. And by that process the capital funds of those other
national banks in the group would have been available to take care
of these items of criticism; is that right?
Mr. LEYBURN. In the respective banks.
Mr. PECORA.
Yes.
Mr. LEYBURN. And the idea was to increase the capital of the
parent bank. Naturally they would need more capital if they had
all those branches.
Senator COUZENS. Mr. Leyburn, reference is made there to a loan
to the Guardian Detroit Co. agent. Do you know what that
was for?
Mr. LEYBURN. I do not know whether I can tell you. There is
another one in there I can tell you about, I think. That was about
$190,000, was it not?
Mr. PECORA. I will give you the amount. It was $173,685.62.
Mr. LEYBURN. That was in the main office, and was past due when
we were there, and is classed as doubtful. It represents purchases of
Guardian Group stock by individuals connected with the bank, as
4624
STOCK EXCHANGE PRACTICES
secured by 30,000 shares of Group stock, and 313,000 defaulted
Coral Gables (Fla.) bonds.
Mr. PECORA. I want to interrupt your testimony for a moment while
I ask Mr. Kanzler a question, if he will come forward for a moment,
please.
TESTIMONY OF ERNEST KANZLER—Resumed
Mr. PECORA. Mr. Kanzler, you have been listening to the testimony
given by Mr. Leyburn?
Mr. KANZLER. Yes, sir.
Mr. PECORA. Attention
has just been directed, in the course of his
testimony, to this loan to the Guardian Detroit Co., as agents, amounting to around $173,000. Was that loan occasioned by the transaction
that you referred to in your testimony this forenoon, involving the
formation of a purchase group to buy 60,000 shares of the group stock
in order to maintain the market?
Mr. KANZLER. I am inclined to believe it is.
Mr. PECORA. Then the acquisition of that stock was financed in
part by a loan made to the Guardian Detroit Co., as agent for the
subscribers to that purchase group agreement?
Mr. KANZLER. The Guardian Bank, as I recall it, had the individual
signatures of every individual who was a part of that purchase group,
and the Guardian Detroit Co., acting as agent, had the stock delivered
to the bank. The bank picked it up, and because they could not make
a distribution on this very day to the individuals in this purchase
group, it was carried as a clearing transaction, to be picked up and paid
for by the individuals whose names the bank held.
Mr. PECORA. Meanwhile the Guardian Detroit Co., which was
used as the agent in this transaction by the subscribers to that purchase group agreement, borrowed the money from the Guardian
National Bank of Commerce to enable the subscribers to that purchase group plan to pay for the stock which was bought in the open
market.
Mr. KANZLER. It borrowed that money on behalf of the subscribers, in their name, for each one severally, for his proportion, and
it was operated as a clearing transaction.
Mr. PECORA. Was it not more than a clearing transaction? Was
not the bank extending credit to the group?
Mr. KANZLER. TO the individuals in the group.
Senator COUZENS. And did the individuals later take up the stock
and relieve the bank?
Mr. KANZLER. All the individuals took it up, except what I understand is listed here as " Guardian Detroit Co., agent."
Mr. PECORA. Then, there was around $173,000 that was not taken
up and paid for by individual subscribers, is that right?
Mr. KANZLER. I am assuming that is what this account is, because
I have not seen the particular account. I have never heard of any
other account called "Guardian Detroit Co., agent," except this one,
so I am assuming that must be the one.
Mr. PECORA. Are you learning about this phase of that transaction
now for the first time, Mr. Kanzler?
Mr. KANZLER. I know that there was some stock being held, to be
picked up by 3 or 4, or maybe 5 individuals. That is what I do know
about it, and those individuals are responsible for this stock, and it
STOCK EXCHANGE PEACTICES
4625
must be in this amount, and the Guardian Detroit Co. was acting as
agent for them.
Senator COUZENS. YOU do not know, however, Mr. Kanzler,
whether these individual subscribers to this purchase agreement have
relieved the Guardian Detroit Co. or the Guardian National Bank of
Commerce from this $173,000 loan, do you?
Mr. KANZLER. I am assuming they have not, at this time, although
I do not know. I think there were five or six names of individuals who
are indebted to the bank, with this stock as collateral, and with some
other stock as collateral. How those Coral Gables bonds got into
that as security I do not understand.
Mr. PECORA. What is the value of those bonds, do you know?
Mr. KANZLER. I do not know anything about that. As I testified
this morning, there were 112 names in the original group, and all
those people had that stock drafted out, and they paid for it, and the
total sum, as I recall it, was $3,200,000. This figure which is mentioned here today by Mr. Leyburn—whether it is paid for today or
not, I do not know. Apparently that was a residue at that time that
had not been paid for.
Senator COUZENS. With regard to these 112 men you spoke of, were
they directors of different groups, or stockholders of the banks, or
what?
Mr. KANZLER. They were people interested in the group, either as
directors or stockholders.
Senator COUZENS. Did they include all the founders of the Guardian
Group?
Mr. KANZLER. I think they did include all the founders.
Senator COUZENS. Did they include Frank Couzens?
Mr. KANZLER. I do not think so. In fact, I am quite certain he
was not included.
TESTIMONY OF ALFRED P. LEYBURN—Resumed
Mr. PECORA. All right, Mr. Leyburn. Will you resume your testimoney at the point where you were interrupted?
Mr. LEYBURN. I think Mr. Kanzler is about right on that. It is
the tag end of that stock deal.
There was another loan in there of $1,074,000, to the Union Co., it
was called.
Mr. PECORA. Was the Union Co. one of the securities affiliates of
the group?
Mr. LEYBURN. That had very little capital. I think it was Just
organized to take over these employees' and officers' loans, 102 of
them. Some of them were with brokers and other banks. They
formed the company, and the company borrowed the $1,000,000
from the bank, and this stuff seecured it. I think it was just a
company for this purpose.
Mr. PECORA. GO ahead. You were telling about the conversation with the officers of the Guardian National Bank of Commerce,,
as a result of the facts disclosed by the examination of the bank of
December 7, 1932.
Mr. LEYBURN. Of course, we went over a lot of the things we spake
to them about in June, because they were still there. The excess* loan
was still there.
4626
STOCK EXCHANGE PRACTICES
Mr. PECORA. The excess loan is this loan of over $4,000,000 that
has been referred to as a credit existing under this repurchase agreement.
Mr. LEYBURN. That is right. That is the one.
Mr. PECORA. YOU would call that an excess loan because it
amounted to more than 10 percent of the capital and stirplus of the
bank?
Mr. LEYBURN. That is correct; and it is set out in the report,
always stating that it is excessive, and stating that the directors
are liable, and everything else.
The CHAIRMAN. Did they declare a dividend after that?
Mr. LEYBURN. I think they declared a dividend in December 1932,
but I would have to check that. Then, following that examination,
it was about January 15 of this year that Mr. Kanzler called me
Mr. PECORA. YOU mean last year, 1933?
Mr. LEYBURN. That is right, 1933. Mr. Kanzler called me on the
telephone about the 15th of January and asked me when I could come
over to Detroit to see him. Well, I said I could come over in about
10 days. He said " Can't you come sooner?" I told him all right.
Mr. PECORA. Pardon me, Mr. Leyburn. I have just come across
the exhibit heretofore introduced in evidence, which shows that for
the fourth quarter of 1932 the Guardian National Bank of Commerce
paid a dividend amountint to $150,000 to the Group.
Mr. LEYBURN. I think that is correct.
Senator COUZENS. That answers Senator Fletcher's question.
Mr. PECORA. Yes.
Mr. LEYBURN. SO I
went over there on a Sunday morning, at the
office of the Universal Credit Corporation, which at that time was
controlled by the Ford interests. Mr. Kanzler, I believe, was president or vice president of it. At that meeting, as I recall it, were
Murphy and Mr. Longley, and Harry Bodman, and Covington, and
we discussed all the banks of the Group, and they said: "We have
to get considerably more money or the whole Group is going to
collapse. The Union Trust Co. cannot hold up much longer." Of
course, they owned that. Then they showed me a statement of the
Union Trust Co. Then we decided to contact the R.F.C., and we
figured out that probably the best way to do would be to have a
mortgage company get the whole loan, because there would be about
15 banks borrowing, and it would be very hard to handle in that way.
They could sell their assets to the mortgage company and the mortgage company could get the loan from the R.F.C.
Mr. PECORA. On the security of the assets the mortgage company
was to acquire from the unit banks?
Mr. LEYBURN. That is correct; and there were some other things
they had. They had some other company. I do not remember the
name of it now, but they were going to put their assets in also—one
of their affiliated companies. They thought perhaps Mr. Ford
would subordinate some of his deposits in the Union Trust Co. He
was the largest depositor, of course, in Detroit in all those banks.
He always had over $20,000,000 in the Guardian alone. They
thought perhaps they could give a guarantee, and satisfy the R.F.C.
Then we came down to Washington and went up and saw the
Reconstruction Finance Corporation. The Reconstruction Finance
Corporation had made a loan to the Union Trust Co. in the spring of
STOCK EXCHANGE PEACTICES
4627
1932, of approximately $5,000,000. Later that loan was increased
to $15,000,000.
The R.F.C. talked to us about the loan. They figured there was
not enough security there. And they asked all the time, "Well,
what will Mr. Ford do? " And I think Mr. Longley and Mr. Kanzler
contacted Mr. Ford, and the result was that he did not subordinate.
Of course, T don't know what that transaction was in that connection.
The R.F.C. did not make the loan. They figured the security was
not adequate, and they told them so, and the consensus of opinion of
the R.F.C. board was that it was not adequate.
At that meeting was Ogden Mills, the Secretary of the Treasury
then, Under Secretary Ballantine, Jesse Jones, Mr. McCarthy, who
was a member from Utah, and Pomeranus.
Mr. PECORA. Pomerene?
Mr. LEYBURN. Pomerene, I guess it is; and some others, I do not
recall who they were.
Their idea was all the way through, or their thought was—and they
did not hesitate to say so, and I don't recall whether they stated that
openly, I was in the meeting of course by myself; I don't recall whether
they stated it openly or just at the meeting I was present at—but it
was, "Why should we bail out Mr. Ford?" They figured that he
should come to the rescue up there.
Just about the conclusion of that meeting they said, "Why we want
you to get Senator Couzens to recommend this loan to us." And
they didn't care much about that.
Mr. PECORA. Who didn't care much about what?
Mr. LEYBURN. About asking the Senator. Mr. Longley and
Mr. Kanzler did not want to do that.
So they came up and saw the Senator, and he told them that if the
loan was made, I think, he would "shriek from the housetops", or
something like that, if the loan was made to the group on the basis of
that collateral.
Mr. PECORA. Because the collateral was not sufficient?
Mr. LEYBURN. Inadequate, that is right; was inadequate.
So then we came back to the R.F.C, maybe it was the next day,
and talked to Mr. Miller, who was president of the R.F.C. at that
time from New York State, and he made the suggestion that possibly
if he could talk to Mr. Ford and tell him what the situation was, that
it may mean a collapse of the whole banking structure in Michigan
and every other place probably, that may be he would convince him
to put some money in there so the loan could be made.
It was suggested—Mr. Miller suggested possibly Mr. Hoover
could invite Mr. Ford to the White House, and then he would come
over there and see him, and that suggestion was put up to Mr. Ford
by Mr. Longley.
Mr. PECORA. Which Mr. Ford was it?
Mr. LEYBURN. This is Henry Ford. Edsel is the son, the director
of the group. Henry Ford was not a director, in this group.
Then Mr. Longley came back and he said Mr. Ford's answer was
that no matter who called him down to Washington the answer would
be no.
Then we went on back to Detroit, and the R.F.C. men were still
there making appraisals of the assets. We worked up there until the
banking holiday.
4628
STOCK EXCHANGE PRACTICES
Senator COUZENS. Were you present, Mr. Leyburn, when the banking holiday was declared?
Mr. LEYBURN. Yes, sir; and before that too.
Senator COUZENS. I am not asking about before that. Were you
present the night that Governor Comstock issued the closing order?
Mr. LEYBURN. Yes, sir.
Senator COUZENS. At what meeting were you present?
Mr. LEYBURN. The meeting where he made up the decision.
Senator COUZENS. Who were there besides you?
Mr. LEYBURN. Under Secretary Ballantine, Secretary of
Commerce Chapin, who was a director of the group and lives in Detroit,
and Governor Comstock and his secretary, Mills.
Senator COUZENS. What Mills?
Mr. LEYBURN. Mills, of the First National; and Federal Reserve
Agent Stevens. I think Mel Traylor was there from the First of
Chicago, and Mr. Coving ton, and a number of tiie directors from the
Commerce and the First National. I could not remember all of them.
I think Mr. Kanzler was there and Mr. Longley.
The CHAIRMAN. Where was this meeting held?
Mr. LEYBURN. It was held in one of the board rooms of the Union
Trust Co. in Detroit.
Senator COUZENS. I don't w a n ^ to interrupt, but I was wondering
if you could relate the discussion that took place at that meeting?
Mr. LEYBURN. Well, late in the afternoon of the 13th
Mr. PECORA (interposing). Of February 1933?
Mr. LEYBURN. Yes, February 13, 1933—it was very apparent
that no deal could be made with the R.F.C. and that the Union
Trust Co. was about through. So they figured, the consensus of
opinion up there, that the only thing to do would be to get the holiday
there and to give them a breathing spell and maybe work out something.
So the Governor was called over from Lansing by some of the
Detroit bankers. Who actually called him I don't know. When he
got there it was around 8 or 9 o'clock, I think, and there was considerable discussion as to whether the holiday would be called, and he
stated that he would not call it unless it was requested by the bankers
in Detroit and the Michigan Bankers Association. So they made
that request and he declared the holiday.
Mr. PECORA. Can you give us more of the substance of the discussion that took place on that evening prior to the calling of the holiday?
Mr. LEYBURN. Oh, there were a lot of meetings. I really couldn't
tell you, sir. But the situation was serious. They all realized that.
Mr. PECORA. Tell this committee what you can recall of the substance of those discussions that were had prior to the calling of the
bank holiday by Governor Comstock.
Mr. LEYBURN. That is if they could not get money from the R.F.C.
or something was not done the Union Trust Co. could not hold out.
The CHAIRMAN. Were there runs on the Union Trust Co. then?
Mr. LEYBURN. There had been heavy withdrawals for quite a while
on the Union Trust Co. I would not say it was an out and out run.
Senator COUZENS. What did the condition of that one bank have
to do with calling the State holiday?
Mr. LEYBURN. Well, Senator, if you will let one of the largest
banks in Detroit close you cannot keep the parent bank open across
STOCK EXCHANGE PRACTICES
4629
the street, and they had a lot of other weak units out through the*
State that could not stand up anyway. It would kill the whole
thing off.
Mr. PECORA. That is, the closing of one of the banking units of
the group, particularly if it was one of the larger units, would have
its repercussions in all of the units of the group?
Mr. LEYBURN. It could not help but have, and some of those units
in the group were weak out through the State. So no question that
would knock those over right away. Then we would have got a run
on the First National Bank, which was in bad condition too.
Mr. PECORA. That was the principal bank of the Detroit Bankers
Co. Group?
Mr. LEYBURN. That is correct, very large bank.
Mr. PECORA. DO you regard that as one of the inherent weaknessesof group banking?
Mr. LEYBURN. That the failure of one will break the others?
Mr. PECORA. Yes.
Mr. LEYBURN. Absolutely.
The CHAIRMAN. What was
the condition of the Commerical at
that time?
Mr. PECORA. YOU mean the Guardian National Bank of Commerce?
The CHAIRMAN. Yes; Guardian National Bank of Commerce.
Mr. LEYBURN. The Guardian National Bank of Commerce had got
their liquidity up to about 40 percent.
The CHAIRMAN. Wasn't that ordinarily enough?
Mr. LEYBURN. In ordinary times; yes, sir.
Senator ADAMS. Had they done that at the expense of soundness?
Mr. LEYBURN. Got their liquidity up?
Senator ADAMS. Yes. Sometimes that happens.
Mr. LEYBURN. I don't think in that case it happened.
Senator ADAMS. That is what I mean; for instance, if they were
selling bonds at a low market.
Mr. LEYBURN. NO, they did not do that. They got it up by
collections mostly. They were haying it pretty hard. As a matter
of fact, in 1932 Mr. Kanzler went in the group there pretty actively,
and he was doing some good work there, he and Mr. Covington, but
he got in a little bit too late, and the reason why we insisted on getting
that liquidity of that bank up we were afraid of the other banks that
were unsound throughout the State and other cases that we knew of
that were not national banks that were overhanging too.
Mr ; PECORA. YOU said something before about a plan that was
discussed that involved the creation of a new company in the nature
of a mortgage company which would buy from the unit banks of this
group their assets and pledge those assets with the R.F.C. for a loan
to be made by the R.F.C. for the benefit of all of those units. You
recall the plan to which I refer?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Was that plan consummated?
Mr. LEYBURN. It never went through because
the R.F.C. did not
make the loan.
Mr. PECORA. Was the mortgage company created?
Mr. LEYBURN. They were either going to create a mortgage company or use one that they already had that was lying dormant.
175541—34—PT 10
4630
STOCK EXCHANGE PRACTICES
Mr. PECORA. Was it proposed as part of that plan that that mortgage company should provide aii amount of new capital?
Mr. LEYBTJRN. It proposed this way, as I recall it, that some of the
money that Mr. Ford would subordinate would be used for capital
for the mortgage company, as I recall it.
Mr. PECORA. Was that mortgage company able to obtain the required new capital?
Mr. LEYBURN. I don't think so.
The CHAIRMAN. That was about 6 million?
Mr. LEYBURN. Five million they talked of.
Mr. PECORA. NOW, under date of March 14, 1931, did you, in
your capacity as the chief national bank examiner for the Seventh
Federal Reserve District, including the area in which the banks of
this group were located, address a letter to the Comptroller of the
Currency calling attention to the condition of the American State
Bank of Detroit?
Mr. LEYBURN. Yes, sir; dated March 14th.
Mr. PECORA. Yes, March 14, 1931, wasn't it?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. I have what
purports to be a copy of that letter,
which I will read to you, and will you follow me?
Mr. LEYBURN. Yes, sir.
Mr. PECORA (reading):
CHICAGO, March 14, 1931.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
The writer just returned from Detroit today in connection with the
difficulties of the American State Bank of that city, which has a string of banks
throughout Michigan.
In this chain are the First National Bank of Royal Oaky Mich., and the First
National Bank of St. Clair Shores, Mich., and neither one of them is in satisfactory condition. Efforts will be made to recapitalize the First National Bank of
Royal Oak; the American State Bank holds 600 shares of this stock, but it will
probably be surrendered or we can pry it loose by an assessment.
The parent bank, the American State Bank, with deposits of over $40,000,000,
has been unsatisfactory for years. The situation became acute this week and
the People's Wayne County Bank of Detroit absorbed its liabilities and the other
banks in Detroit will protect. This avoided a failure.
They did not attempt to take over the deposits of the banks held by the holding company up-Statey except several close in, and four of them closed yesterday
morning.
DEAR SIR:
On the same date, namely, March 14, 1931, did you address, in
your capacity as chief national bank examiner, another letter to the
Comptroller of the Currency enclosing a report of the examination of
the First National Bank & Trust Co. of Kalamazoo, which was made
as of February 19, 1931?
Mr. LEYBURN. That is correct.
Mr. PECORA. Will you follow me while I read into the record that
letter from a copy which you have furnished to me? [Reading:]
CHICAGO, March 14, 1981.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: There is enclosed report of examination of the First National
Bank & Trust Co. of Kalamazoo, Mich., which was completed February 19.
This office quite agrees with the examiner that the large lines of credit permitted
upon paper-mill stock will cause serious trouble to the institution as the market
is very thin, being a local one. It is further noted that the officers do not keep
their collateral loans up to a conservative margin.
STOCK EXCHANGE PKACTICES
4631
In your letter to the bank please stress these points to them and also insist that
the estimated losses be charged off without delay, as the Guardian Detroit Group
is rather inclined to decide when losses should be taken out in order that they can
show better earnings. This policy is sure to make trouble at some future date.
Very truly yours,
Mr. LEYBURN. I wrote that letter.
Mr. PECORA. Up to the time that you wrote this letter to the Comptroller of the Currency on March 14, 1931 had you taken up with
officials of the Guardian Detroit Union Group their policy of reluctance to charge off losses in order to enable them to pay dividends?
Mr. LEYBURN. Had it up with them a number of times in regard
to all their national banks.
Mr. PECORA. And did you ever succeed in getting them to abandon
that policy?
Mr. LEYBURN. I don Jt think I ever did. The only thing I did finally
get them to do was in June to stop dividends on certain of their banks,
but I always had trouble getting losses out of their banks.
Mr. PECORA. In March 1931 you said in your letter to the Comptroller of the Currency that "this policy is sure to make trouble at
some future date." Did that trouble finally arrive?
Mr. LEYBURN. I would say it did.
Mr. PECORA. And when?
Mr. LEYBURN. When the bank closed.
Mr. PECORA. That was in February of 1933?
Mr. LEYBURN. February of this past year.
Mr. PECORA. That is nearly 2 years later?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. DO you think
that trouble could have been averted
if a different policy had been pursued by the group?
Mr. LEYBURN. If they had taken a firm stand in the management
of their banks and taken the losses out, I think it probably could have
been.
Mr. PECORA. Did you thereafter write another letter in your
capacity as chief national-bank examiner to the Comptroller of the
Currency under date of May 21, 1931, with respect to that unit of
this group called the National Bank of Ionia?
Mr. LEYBURN. Yes,
sir.
Mr. PECORA. Will you follow me while I read into the record that
letter from a copy thereof which I have [reading]:
CHICAGO, May 21, 1931.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: There is enclosed a report of examination of the National Bank of
Ionia, Ionia, Mich., which was completed May 12.
When the Guardian Detroit Union Group purchased this bank, which was
dominated by Governor Green, of Michigan, they were evidently actuated by
political motives. They are paying dearly for that idea at the present time and
the directors of this bank are taking the position that it is up to the Guardian
Group to correct their present situation. The directors and their interests have
not hesitated to use this bank to an unwarranted extent and it is believed that
Director Green is hopelessly involved.
Please instruct the bank to charge off these losses immediately and make your
letter as strong as possible. What the Guardian Detroit Union Group should
really do is recapitalize this institution.
I expect to hold a conference in Detroit with the Guardian Detroit Union Group
concerning several of their banks within the next 2 weeks and this case will be
reviewed with them.
Very truly yours,
.
4632
STOCK EXCHANGE PRACTICES
What was your basis for saying in this letter to the Comptroller:
When the Guardian Detroit Union Group purchased this bank, which was
dominated by Governor Green of Michigan, they were evidently actuated by
political motives?
Mr. LEYBURN. He was the Governor of the State at that time or
shortly before; I don't recall exactly when he went out as Governor,
and of course the group wanted to get legislation passed fovorable to
them, so if they had the Governor on their side they certainly would
do pretty well.
Mr. PECORA. And was it your belief at that time that the group,,
in order to gain that good will, bought or took over the National
Bank of Ionia?
Mr. LEYBURN. My opinion is this, that that bank was in such
condition that it would have to be some motive to buy such a bank.
It was terrible.
Mr. PECORA. In other words, the acquisition of the bank would not
have been in pursuance of sound judgment under ordinary circumstances?
Mr. LEYBURN. That is correct.
Mr. PECORA. What were the fundamental weaknesses of the bank
at that time—I mean the Ionia Bank?
Mr. LEYBURN. The management was unsatisfactory to begin with,,
and the loans were in bad condition, and the bond account—it was
just a general, all around bad bank, and usually a bad bank has got
everything wrong with it.
Mr. PECORA. What was your basis for the statement in this letter
to the Comptroller on May 21, 1931, which reads as follows: "The
Directors"—meaning the directors of this National Bank of Ionia—
"and their interests have not hesitated to use this bank to an unwarranted extent, and it is believed that Director Green is hopelessly
involved"?
Mr. LEYBURN. The directors and their corporations were borrowing heavily from that bank as of that examination.
Mr. PECORA. Borrowing it to an unwarranted extent?
Mr. LEYBURN. That is right.
Mr. PECORA. And were their borrowings adequately secured?
Mr. LEYBURN. I don't think they were.
Mr. PECORA. DO you know what was the extent of the aggregate
of those borrowings by officers and directors?
Mr. LEYBURN. I would have to see the report on that.
Mr. PECORA. YOU don't recall?
Mr. LEYBURN. NO, I don't.
Mr. PECORA. But you did know when you wrote this letter on
May 21, 1931?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. And it was
on the basis of knowledge acquired by
you from the report of the examination of the bank completed as of
May 12, 1931, that you wrote to the Comptroller of the Currency on
May 21 of that year that "the directors and their interests have not
hesitated to use the bank to an unwarranted extent"?
Mr. LEYBURN. That was based on the examiner's report.
Mr. PECORA. And that "Director Green was hopelessly involved"?
Mr. LEYBURN. That is based on the examiner's report.
STOCK EXCHANGE PBAOTIOES
4633
Mr. PECORA. DO you recall any of the details of this hopeless
involvement of Director Green?
Mr. LEYBURN. He had a furniture company up there that was
borrowing from the bank that was one of his lines. I would have to
see the report to really get that.
Mr. PECORA. NOW, under date of June 17, 1931, did you, in your
capacity as the chief national bank examiner, address another letter
to the Comptroller of the Currency in which you referred generally to
the banking situation in the State of Michigan at that time and
•enumerated the situation with regard to different banks?
Mr. LEYBURN. Yes; I wrote that on June 17, 1931.
Mr. PECORA. Will you follow me and see if I correctly read that
letter into the record from a copy thereof which I have before me
[reading]:
CHICAGO, June 17, 1921,
IMPORTANT
•COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: Regarding the banking situation in the State of Michigan, you are
advised as follows:
Pontiac, Mich.: The large State bank which closed here had $700,000 on deposit from small banks in the State and this will seriously affect those banks*
The run on the First National Bank has now subsided. The Bankers Group of
Detroit has a stockholding in this bank and as it is known as one of their group,
it is presumed they will stand by it.
Saginaw, Mich.: The Bank of Saginaw is in a very unsatisfactory condition;
it may suspend, which will cause additional trouble in that area.
Flint, Mich.: The Citizens State Bank is in bad condition and may close.
Birmingham, Mich.: The First State Savings Bank, with deposits of $2,600,000,
•closed which will affect the First National Bank.
Royal Oak, Mich.: The State Bank there has closed which affects the First
National Bank. We are attempting to reorganize the First National Bank at
this time.
Benton Harbor, Mich.: The situation there is very acute in regard to all of
the banks in the town, including the Farmers & Merchants National Bank and
the American National Bank.
St. Joseph, Mich.: The Commercial National Bank is in a precarious condition. This city adjoins Benton Harbor.
Buchanan, Mich.: Buchanan is situated 14 miles from South Bend, Ind.,
where there has been considerable trouble. The American Trust Co. has
-closed, which aggravates the situation at Buchanan considerably and they have
suffered withdrawals. Whether they can meet their future demands is problematical.
Detroit, Mich.: The Metropolitan Trust Co. of Detroit will undoubtedly close
today. It has over $700,000 from 44 small banks in Michigan which will seriously
•embarrass them.
It has just been reported that a large State bank has closed in Toledo, Ohio,
which is 57 miles from Detroit, which will cause additional agitation.
National Bank of Commerce, Detroit: Mr. B. K. Patterson of the Guardian
Detroit Union Group called on me today and he states that in view of the general
unrest their directors are firmly of the opinion that it would be most unwise to
make the charge offs as stated in my letter to you of June 13. It was agreed that
they would immediately charge off $500,000 of estimated losses and the balance
•of the losses by September 1, and at that time, unless the situation is very acute,
they will make a set-up along the lines stated in my letter of June 13.
National Bank of Ionia, Ionia, Mich.: This is one of the worst banks of the
Guardian Detroit Union Group and the situation in that county is most acute.
Mr. Patterson states they have collected $22,000 cash of the estimated losses
and that they will charge off $30,000 additional by June 30.
In view of the fact that we can expect a large number of closings in the State
of Michigan among the State banks, due to the fact that they have been allowed
4634
STOCK EXCHANGE PRACTICES
and encouraged to purchase real estate bonds as an offset for savings deposits,
it is expected that it will affect a number of our national banks from time to time.
In view of the information as set out above, it is recommended that the National
Bank of Commerce be permitted to dispose of the losses as outlined above as well
as the National Bank of Ionia, Ionia, Mich.
Very truly yours,
Mr. LEYBURN. I wrote the letter.
The CHAIRMAN. AS I understand, Mr. Leyburn, the National
Bank of Commerce was not insolvent when it was closed, and but
for the action of the Federal authorities they would have been able
to go on. What have you to say about that?
Mr. LEYBURN. I answered that question a while ago and I stated
that you cannot have an affiliated large bank right across the street
from it close and expect the other one to stay open. They could not
have met their demands in the ordinary course of business. They
would have had to close, whether they were solvent or not.
Senator COUZENS. Were they solvent when they did close? The
Chairman said the National Bank of Commerce now. I assume he
meant the Guardian National.
Mr. LEYBURN. The Guardian. After the banking holiday, or
during the banking holiday when the banks were closed up there,
we went through the assets up there, and of course at that time there
was no value to the Guardian Group stock. They held 149,000
shares of that alone. That was about a million and a half that would
be no good. Then they had a loss on their real estate and collateral
loans. No question but what the bank was insolvent after the
holiday. Whether it was insolvent before the holiday is a matter
of opinion. A lot of banks were insolvent before the holiday. The
question of insolvency in my opinion is, Can a bank meet its ordinary
demands in the ordinary course of business?
Mr. PECORA. What was the state of liquidity of the Guardian
National Bank of Commerce just prior to its closing, if you recall?
Mr. LEYBURN. In December it was around 40 percent. It probably
slumped off.
Mr. PECORA. December 1932?
Mr. LEYBURN. Yes. It slumped off undoubtedly in January.
Mr. PECORA. In estimating that percentage of liquidity are you
including in its cash and in its governments that portion or amount
of Government bonds which which were pledged?
Mr. LEYBURN. NO; I would not figure it that way.
Mr. PECORA. What is that?
Mr. LEYBURN. I say I would not class the ones that were pledged
as liquidity.
Mr. PECORA. In the statement that the liquidity of that bank was
about 40 percent, is that 40 percent exclusive of Government bonds
which were pledged?
Mr. LEYBURN. That would be my opinion, yes.
Senator COUZENS. But you don't know the facts at that time?
Mr. LEYBERN. N O ; I didn't make the examination, so I would not
know. My examiner's statement was approximately 40 percent.
Senator COUZENS. When he made that statement did he include
the Liberty Bonds that were up to secure Government deposits?
Mr. LEYBURN. I would not know that, Senator. I don't think he
would, though.
STOCK EXCHANGE PEACTICES
4635
Mr. PECORA. Under date of October 17, 1931, did you address
another letter to the Comptroller of the Currency with respect to
the condition of the City N atonal Bank & Trust Co. of Niles, which
was one of the Guardian Detroit Union Group banks?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Will you follow me while I read into the record what
purports to be a copy of that letter?
Mr. LEYBURN. Yes, sir.
Mr. PECORA (reading):
CHICAGO, October 17, 1931.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: There is enclosed report of examination of the City National Bank
& Trust Co. of Niles, Mich., which was completed September 19.
The condition of this institution is not satisfactory and the bank should be
required to make good the impairments of capital like any other institution which
is not a group bank.
Subsequent to the examination Mr. B. K. Patterson of the Guardian Detroit
Union Group came to Chicago and he was asked what he intended to do in regard
to the Niles Bank. He advised that the impairment would be made good.
The group is most reluctant to place money in their institution when it comes
to a capital impairment, but in some of their banks it is not understood how they
expect to function without some new cash being placed in for capital purposes.
Very truly yours,
Mr. LEYBURN. I wrote that letter.
Mr. PECORA. DO you know whether the group made that impairment of capital of the Niles Bank good at any time after you wrote
this letter?
Mr. LEYBURN. I don't believe they did. I would have to see that
report on that.
Mr. PECORA. Did you, under date of January 9, 1932, address
another letter to the Comptroller of the Currency, which reads as
follows [reading]:
CHICAGO, January 9, 1932.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: There is enclosed report of examination of the City National Bank
& Trust Co., of Battle Creek, Mich., which was completed December 5.
In conferring with Mr. B. K. Patterson, of the Guardian Detroit Union Group,
he advises that the group intends to purchase real-estate mortgages from this
institution in order to give them the proper liquidity. The bank is badly frozen
at the present time, and there is considerable work to be done in view of the
large amount of loans predicated on real estate.
The Guardian Group have placed one of their own men in the bank as executive vice president, and it is hoped that some results can be obtained in the right
direction.
Very truly yours,
ALFRED P. LEYBURN,
Chief National Bank Examiner, Seventh Federal Reserve District.
Mr. LEYBURN. I wrote that letter.
Mr. PECORA. Did you, under date of February 13, 1932, address
the following letter to the Comptroller of the Currency [reading]:
CHICAGO, February 13, 1932.
COMPTROLLER OF THE CURRENCY,
Washington, D.C.
DEAR SIR: It is believed we should call your attention to the letter dated
February 10, 1932, from the City National Bank of Battle Creek, Mich., relative
to our examination of November 20, 1931.
In checking through the estimated losses it is noted that a very appreciable
amount is not charged off and although they list a certain amount of assets pur
4636
STOCK EXCHANGE PRACTICES
chased by the Guardian Union Group not any of that paper, as a matter of fact,
applies to the dormant, frozen mortgages, which is the main problem of the bank;
-of the $102,747.20 worth of notes purchased, the $75,000 is a note of the Interstate Fuel & Light Co., an asset which was criticised only as slow and against
which there must necessarily be some very appreciable return.
On the O. C. DeVol loan of $35,718.05 a loss was estimated of $16,500 and
doubtful $4,000; the loss was not charged off, but an explanation was given that
security had been obtained in the interim. We should like to know the nature of
the security because of the weak condition of this loan to determine fully whether
that obtained was merely "collateral" or security within the meaning of the word.
The $11,000 estimated as loss on the B. J. Onen line was not charged off and a
notation is cited "we believe satisfactory arrangements can be made relative to
this line in the near future."
There were also several other items listed as loss that were not charged off.
This bank is in a highly deplorable condition and one needs merely to look at
its cash position and the serious ratios as evidenced by the face of the report to
prove that thesis, even without recourse to an analysis of the credit; that analysis
of credit fully substantiates the weak status evidenced by the face of the report.
We take exception to what has been and is the apparent policy of the Guardian
Group toward the examiner's reports in their weak banks when justifiable and
appreciable losses are estimated (for instance, Ionia, Grand Rapids, Niles, and
Battle Creek) and two of those instances, namely, Niles and Ionia, if they were
not members of the Group, would be banks that would necessarily close. There is
*an utter lack of desire to remove bad bank assets, even though losses were estimated on a reasonable and conservative basis.
This instance of the City National Bank of Battle Creek clearly illustrates an
adherence of the Guardian Group toward examinations which is neither commendable nor justifiable.
Very truly yours,
ALFRED P. LEYBURN,
Chief National Bank Examiner, Seventh Federal Reserve District.
Mr. LEYBURN. I wrote that.
Mr. PECORA. DO you know whether or not the Group changed the
policy that you complained of in this letter, after this letter was
written?
Mr. LEYBURN. They never changed the policy at any time.
Mr. PECORA. Under date of May 9, 1932, did you write another
letter to the Comptroller of the Currency reading as follows [reading]:
CHICAGO, May
COMPTROLLER OF THE CURRENCY,
9,
1932.
Washington, D.C.
A meeting was held with President Reynolds and Vice President
Clark, of the Union & Peoples National Bank of Jackson Mich., and Messrs.
B. K. Patterson and Robert Lord, of the Guardian Detroit Union Group in
Detroit.
They are very much disturbed about the condition of this bank and their
other institutions and said that Mott of General Motors and Edsel Ford have
loaned money to the group through the corporation to remove losses. While
the national banks in the group are in bad enough shape, it is a known fact that
the State members of the group are in a deplorable condition, particularly the
Union Guardian Trust Co. of Detroit. Most of the money obtained by a loan
through the affiliated company has removed losses in the State banks.
The management of the Jackson bank is very unsatisfactory. This institution
was a haven for speculators in prosperous times and it is not believed that the
present officers are willing or capable of coping with the situation.
Lord and Patterson are emphatic that if a charge off is made of $309,000 against
their capital structure the effect would be disastrous. In lieu thereof they agree
to cease dividends immediately, which, of course, should have been done long
ago, charge off $100,000 at this time, and care for the balance as earnings will
permit, and Mr. Patterson will spend several days a week in Jackson looking after
the affairs of this bank.
While the writer is most averse to any such arrangement and cannot see any
future in a so-called "moratorium on losses" in the Guardian Detroit Union
-Group, it is believed, in view of their promise to clean up their banks through
DEAR SIR:
STOCK EXCHANGE PRACTICES
4637
the elimination of capital structure if the branch banking bill goes through,
that we are justified to grant them this leeway, inasmuch as the branch banking
bill is now before the House. This office does not desire to take the responsibility
of doing anything that would injure the banking situation in the State of Michigan, which is in a precarious condition. As a matter of fact, it would take very
little to set off a conflagration. This might be brought about by the failure of
any one of the following three banks:
The Citizens Commercial & Savings Bank, Flint, Mich., with deposits of
$8,307,070;
The Bank of Saginaw, Saginaw, Mich., with deposits of $15,838,010; or
The Bank of Kalamazoo, Kalamazoo, Mich., with deposits of $8,870,970.
Without any question, the banks in the Guardian Detroit Union Group are
not in satisfactory condition and the allied strength is more of a myth than a
reality, in the writer's opinion.
If the branch banking bill doesn't go through, it is apparently their idea to
remove losses from earnings, but when you take into consideration the condition.
of their banks, this is manifestly impossible.
Very truly yours,
ALFRED P. LEYBURN,
Chief National Bank Examiner, Seventh Federal Reserve District.
Mr. LEYBURN. I wrote that.
Mr. PECORA. What were the conditions that prompted you to say
in this letter that I have just read, as follows [reading]:
Without any question, the banks in the Guardian Detroit Union Group are
not in satisfactory condition and the allied strength is more of a myth than a
reality, in the writer's opinion.
Mr. LEYBURN. In view of the heavy burden of the group company
I did not figure there was any strength to the group itself, and we
knew the condition of the banks.
Mr. PECORA. Did you, under date of June 13, 1932, address a
letter to Robert Lord, president of the Guardian Detroit Union Group,
reading as follows [reading]:
CHICAGO, June 18, 1932.
Mr. ROBERT LORD,
Guardian Detroit Union Group, Detroit, Mich.
DEAR SIR: Referring to my conversation with you in Detroit last Friday
concerning the Grand Rapids National Bank of Grand Rapids, Mich., after
considering this situation, there is nothing that I can add other than it is requested
that the losses be charged out.
This is in accordance with the letter of May 26 which was addressed to the
bank by the Comptroller of the Currency, a copy of which is encloses!.
Very truly yours,
ALFRED P. LEYBURN,
Chief National Bank Examiner, Seventh Federal Reserve District.
Mr. LEYBURN. I wrote that, and I enclosed a copy of the criticism
that the Comptroller's office had written to the Grand Rapids
National Bank.
Mr. PECORA. DO you know what was done by Mr. Lord or any
other officer of the Guardian Detroit Union Group about the subject
matter of this letter of June 13, 1932?
Mr. LEYBURN. I would not know what action they took, but the
losses were not charged out. If they were, it would be a very small
amount.
4638
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you, under date of June 14, 1932, address a letter
to the Comptroller of the Currency reading as follows [reading!:
CHICAGO,
June 14, 19SB.
COMPTROLLER OF THE CURRENCY,
Washington, B.C.
GUARDIAN DETROIT UNION GROUP
In order to arrive at a true picture, it is necessary to consider all
the national banks in the group.
The classification shown in the report of examination of the Guardian National
Bank of Commerce, Detroit, Mich., as of May 16, 1932, is Slow $22,000,000,
Doubtful $11,982,000, and Loss $1,198,000.
A meeting was held with the governing board consisting of approximately
eleven leaders of industry and finance, including Edsel Ford and Mott, of General
Motors, in Detroit, and at that time the entire group was discussed with them
in order to arrive at some solution of the problem.
The Guardian group of banks was somewhat of a promotion scheme and in
order to show satisfactory earnings in the holding company dividends were
declared far beyond the point of conservatism 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.
The Guardian Detroit Co.'s condition is very unsatisfactory as they took over
the Keane Higbie Co. for liquidation, which was a brokerage concern, and at
the present time they are borrowing over $14,000,000. Mr. Edsel Ford personally guarantees $2,500,000; Colonel Mott $2,500,000, and Mr. Ford, in addition, has loaned the company about $5,000,000 in Liberty Bonds which are
used as collateral to the company's obligation in New York. Of course, it can
readily be seen that the fixed charges on these obligations are considerable and
they have attempted to pull themselves up by their boot straps by obtaining
sufficient dividends from the Group to pay these charges and also make payments on notes.
Obviously this is impossible and it was decided that the only national banks
in the Group justified in paying dividends are as follows:
Second National Bank & Trust Co., Saginaw, Mich., $100,000 per annum.
Capital National Bank, Lansing, Mich., $30,000 between now and the end
of the year.
While the Guardian National Bank of Commerce has considerable doubtful
paper that might be properly classified under existing conditions as a loss, in
view of the fact that this bank has been capably administered by Vice President
Covington, it was decided that the dividend would be cut to $100,000 per quarter
instead of $200,000 per quarter. It is believed that this is advisable in view of
the adverse comment that would be caused should the largest bank cease its
dividend entirely.
It is very apparent that Mr. Lord of the Guardian Group is not a banker and
that he never has been and never will be one. He is more of the " glad-hand"
promotion type and he always chooses the path of least resistance, which has
now created the present problem with the group. It is apparent that Kanzler,
who is Edsel Ford's brother-in-law, will step more energetically into the picture
and endeavor to correct the situation in the banks. They also have a good man
in Wilkins, who will look after some of the banks, throughout the State in which
the Guardian Group is interested.
The worst national banks in this group are:
City National Bank & Trust Co., Battle Creek, Mich.
Grand Rapids National Bank, Grand Rapids, Mich.
National Bank of Ionia, Ionia, Mich.
Union & Peoples National Bank, Jackson, Mich.
City National Bank & Trust Co., Niles, Mich.
First National Trust & Savings Bank, Port Huron, Mich.
It is understood that the State banks in the chain are even worse than the
National banks, and the Union Guardian Trust Co. of Detroit would be the
most unsatisfactory, in our opinion.
One of the weaknesses in connection with the group seems to be that no one
has any definite delegated authority to act. The group organization, because
DEAR SIR:
STOCK EXCHANGE PEACTICES
4639
of its own financial weakness and management, is very much at the mercy of the
other banks—that is to say, the parent organization needs funds to pay the interest on its borrowings through the company and to pay the various salaries in the
operating company. They therefore have been reluctant to put much pressure
on certain banks as they desire reimbursement from them in the form of dividends.
Another bad feature is the number of high-salaried officers in all the banks
who have substantial loans that are largely predicated on Guardian stock, which,
at the present writing, is selling at about 8, and it is expected that the dividend will be cut off entirely July 1. This is done to a large extent so that the
officers can pay the interest on their loans, all of which, of course, is a drain
on the banks and does not forestall them from eventually taking a loss on the
obligations, since in a number of cases they will never be paid. In several
instances the bank would be better off to dismiss the officer and charge off the
loan.
While the picture as a whole is not one that is very bright, it is believed the
following steps in the right direction have been arrived at. Edsel Ford and
Kanzler will be more active in the management, and they will dictate the policies
to a greater extent than heretofore. In this connection, in view of the fact that
Edsel Ford's name has been prominently used in the Guardian Group, it is not
known how he could retire gracefully from the picture should be so desire at some
future date, and then, too, he has considerable invested. Mott, of General
Motors, who is the man that saved the situation at Flint several years ago, is a
high type of character and has never been known to run away from his obligations. With all the earnings being conserved and the question of dividends
being settled, it is hoped that we can accomplish something in this institution.
It would appear as if Mr. B. K. Patterson, chose to follow the dictates of Mr.
Lord and the wrong clique in the group, with the result that the fact that he
did not take a firm stand on matters to be corrected has mitigated considerably
against his favor; in addition, he became heavily involved through the purchase
of Guardian Detroit stock.
We are forced to the conclusion that group banking is fundamentally unsound
and dangerous and that it constitutes a menace to the general banking situation.
The company that is supposed to have strength, in the final analysis, is generally
loaded with stock of the banks and undesirable assets and is certainly used as a
medium to make the lopsided wheel revolve. It is also very difficult to inculcate
the views of the group's head office to the members throughout the State, and
the member banks too often take the stand that they only have a little stock
interest and that the responsibility for any losses should devolve upon the group
itself. Every effort is usually made to show high earnings at the expense of the
undesirable assets in the banks, and rather than take the losses in each bank,
they are more apt to let them pile up using the blind theory that the group is
strong and will stand by the banks.
Very truly yours,
ALFRED P. LEYBURN,
Chief National Bank Examiner, Seventh Federal Reserve District.
LEYBURN. I wrote that letter.
PECORA. It is dated June 14^ 1932.
LEYBURN. That was after that meeting that was held to
Mr.
Mr.
Mr.
discuss the banks.
Senator COUZENS. Did you get any acknowledgment of any of
those letters by the Comptroller? Does the Comptroller acknowledge
these letters usually?
Mr. LEYBURN. NO, sir.
Senator COUZENS. That is not a practice of the
Mr. LEYBURN. NO, sir; it is not a practice of the
The CHAIRMAN. The committee will now take a
Department?
Department.
recess until 10:30
a.m. next Tuesday.
(Thereupon, at 4 o'clock p.m., a recess was taken until Tuesday,
January 9, 1934, at 10:30 o'clock a.m.)
STOCK EXCHANGE PEACTICES
THURSDAY, JANUARY 11, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURKENCY,
Washington, D.C.
Ths subcommittee met at 10:30 a.m., pursuant to adjournment
<on Friday, January 5, 1934, in Room No. 301 of the Senate Office
Building, Senator, Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams (proxy for Costigan), 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. You may
proceed, Mr. Pecora.
Mr. PECORA. We will resume with Mr. Leyburn.
TESTIMONY OF ALFRED P. LEYBURN—Resumed
Mr. PECORA. Mr. Leyburn, during the latter part of
was any definite policy adopted by the Comptroller of
with respect to the exercise of duties by national-bank
Mr. LEYBURN. Well, with regard to what?
Mr. PECORA. I refer particularly to the matter
appraising securities and other assets of banks.
the year 1931
the Currency
examiners?
of examiners
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Was that policy
indicated in any written communications by way of instructions that were given to examiners by the
Comptroller of the Currency?
Mr. LEYBURN. By telegram and letters.
Mr. PECORA. Was one of the telegrams dated October 6, 1931?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Did you receive oiie on
reading as follows:
that date, or bearing that date,
OCTOBER 6,
1931.
A. P. LEYBURN,
Chief National Bank Examiner,
164 West Jackson Boulevard, Chicago, III.
Please instruct all examiners to exercise extraordinary discretion in their work,
and to use every effort to encourage and sustain the morale in banks examined.
Leniency consistent with proper regard for public interest should be extended.
Present conditions demand sympathetic treatment on the part of this office, and
examiners can in important measure contribute to the alleviation of the difficult
problems with which we are temporarily faced.
J. W. POLE, Comptroller.
4641
4642
STOCK EXCHANGE PRACTICES
Mr. LEYBURN. Yes, sir. That went to all chief examiners.
Senator COUZENS. Mr. Leyburn, in that connection let me ask
what instructions did you give your examiners with respect to that
telegram?
.Mr. LEYBURN. Approximately the same as the instructions contained in here.
Senator COUZENS. YOU just transmitted the telegram to your
subordinates, so to speak?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Well, now,
what did you understand by the statement in this telegram of instructions in which examiners were instructed to exercise extraordinary discretion in their work/ and to
use every effort to encourage and sustain morale in banks examined?
Mr. LEYBURN. Of course, in 1931 and 1932 the morale of bankers
was badly shattered all over the country, and it just meant that we
were to pep them up as much as we could, and not to make any
unusual demands, such as might cause them to throw up their hands
and quit.
Mr. PECORA. What did you understand the Comptroller to mean
by the instruction reading:
Leniency consistent with a proper regard for public interest should be extended.
Present conditions demand sympathetic treatment on the part of this office,
and examiners can in important measure contribute to the alleviation of the
difficult problems with which we are temporarily faced.
Mr. LEYBURN. I would say in that regard it would be more a
matter of public policy than anything else. That is, if you made
unusual demands on a bank it might crowd the situation, and if it
should cause a number of closings, then you would have hurt public
policy, and have gone contrary to the very spirit of the telegram.
Mr. PECORA. In what respect did you consider this telegram to
require you to show leniency consistent with a proper regard for
public interest?
Mr. LEYBURN. I construed that telegram to mean, to be very
lenient in the examination of banks, plainly speaking, and in the
matter of demands.
Mr. PECORA. Well, to be lenient in the examination of banks is a
rather general expression. How would you apply it?
Mr. LEYBURN. Well, for instance, suppose you found a bank that
had a surplus of a million dollars, and on a close appraisal on a
depressed market you had a loss of 1% million dollars. Like, for
instance, Chrysler Motors, during the bank holiday that stock was
selling at about 10, and now it is up around 52. And in the case of
General Motors it was then selling around the same figure, and is now
selling about 36. If you had a good stock up as collateral, and not
some cats and dogs, you would give them a break on that, and not
charge out 1% million dollars.
Senator ADAMS. That was in part a recognition of the general view
that market values at that time were below fair values, and that it
was due to depressed conditions, both as to stocks and bonds. That
is, apparently good bonds, bonds that everyone knew to be good and
would be paid, but which had dropped to 25 or 30, the result would
have been if you had required a bank to charge down those bonds in
accordance with the depressed, abnormal, or panic market, you would
STOCK EXCHANGE PEACTICES
4643
have made a disastrous, and a really untrue statement as to the
bank's ability to pay its depositors.
Mr. LEYBURN. Intrinsic value.
Senator COUZENS. Mr. Leyburn, will you define the language that
has been used here frequently, such as "cats and dogs"? What is the
definition of cats and dogs among such
Mr. LEYBURN. Why, I should say it would be a stock that was
purchased in a mine known as the " Bonanza-so-and-so ", and probably owned by a champion liar, or something like that, or some promotion scheme, something that had no market value, was not quoted
on any exchange.
Senator COUZENS. IS that all of the definition of "cats and dogs"?
Mr. LEYBURN. I should say undesirable securities.
Senator COUZENS. Will you give us some other definition?
Mr. LEYBURN. I would say second and third mortgages would be
cats and dogs.
The CHAIRMAN. HOW did you estimate the values of bonds at that
time? Did you use market value or quoted value or Actual value?
Mr. LEYBURN. Here is the way that was handled. We took the
market value, but the regulations from the Comptroller's Office were
that no charge-off on account of bond depreciation should be made,
except actual losses in the case of defaulted bonds. So they got
plenty of leniency there. Of course if the total bond depreciation
encroached on a bank's capital we would have to get that fixed up.
The CHAIRMAN. YOU construed this telegram to mean that you
could allow estimated values of bonds without regard to quoted prices
on the market?
Mr. LEYBURN. NO. I would construe that in this way: We appraised them at the market, but with no demand on them to charge
off the depreciation.
The CHAIRMAN. I see.
Senator ADAMS. Your examiners
made reports always listing at the
market value as a part of the reports, didn't they?
Mr. LEYBURN. Yes, sir.
Senator ADAMS. And showed
the depreciation below book value on
the bank's books, and the market value of the stock; but you did not
always require them to reduce the book value down to the market
value?
Mr. LEYBURN. That is right.
Mr. PECORA. NOW, Mr. Leyburn, did you also on the date of December 18, 1931, receive a letter of instruction from the Comptroller
of the Currency with respect to the policy to be adopted and followed
by examiners in making bank examinations, which letter reads as
follows:
WASHINGTON, December 18, 1931,
To all National Bank Examiners:
The collapse in the market for securities has, in the opinion of this office, reduced quoted prices for sound bonds to distress levels, out of any relation to
intrinsic values.
In the emergency that results, examiners are instructed until further notice
to disregard market depreciation upon bonds not in default. Bonds should be
rated and appraised as heretofore, but no part of the depreciation, except that
upon defaulted issues, should be shown on page 11 of the report. Depreciation
of defaulted bonds should be regarded as losses and shown as such on page 11.
Where the examiner is of the opinion that the quoted securities of the portfolio
of the bank under examination is such as to point to serious loss, he should indi«
4644
STOCK EXCHANGE PRACTICES
cate his conclusions in his report to this office, with recommendation as to appropriate action. In such cases he should discuss the situation with the directors
and urge recourse to methods by which the bank may be strengthened, but should
make no mandatory requirements.
Examiners are expected to ascertain the exact condition of national banks, but
to make it plain by their attitude they wish to be helpful in devising means for
correcting weak situations.
There has never been a time when there was greater need for constructive work
by examiners, and every effort should be made to encourage and sustain the
morale in banks examined, and leniency consistent with a proper regard for public
interest should be extended.
This is a confidential communication and must be regarded as such.
Respectfully,
J. W. POLE,
Comptroller of the Currency.
Did you receive such a communication?
Mr. LEYBURN. Yes, sir. That was a letter.
Mr. PECORA. NOW, thereafter did you receive a further communication of instructions from the Comptroller of the Currency, reading
as follows:
JULY 1, 1932.
To all Chief National Bank Examiners:
Reports of examinations received by this office recently clearly indicate that
some examiners have not fully grasped the meaning of previous instructions issued
by this office during the past year with respect to examinations, more particularly
the instructions issued under date of October 6, 1931.
And it would also seem that some examiners may not have fully appreciated the
extremely abnormal business conditions and the weakened condition of the
securities market at this time. Specific attention is called to the classification of
loans and discounts, particularly collateral loans which are in amounts in excess
of the present market value of the collateral held. In the classification of such
loans the examiner should exercise extraordinary discretion.
In addition to giving consideration to the present weak condition of the securities market, very careful consideration should be given to the worth of the debtor,
morale, standing, and earnings expected.
You will please instruct examiners in your district accordingly.
Please acknowledge receipt of this letter.
Very truly yours,
J. W. POLE, Comptroller.
Mr. LEYBURN. I received that letter.
Mr. PECORA. Did you communicate these instructions to the
various examiners who were under your direction or jurisdiction?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. SO far as you know, were those instructions followed
by the examiners under your jurisdiction who made examinations of
the various national banks that were included in the Guardian Detroit
Union Group?
Mr. LEYBURN. I am of the opinion that they were.
Mr. PECORA. That is, whatever report was made of the conditions
of the banks was made in accordance with the letter as well as the
spirit of the instructions embodied in these three communications
which I have read?
Mr. LEYBURN. I am of that opinion.
Mr. PECORA. With the leniency that was exercised in response to
these instructions in the examinations and valuations of the assets of
these banking units of the Guardian Detroit Union Group you made
the criticisms that have already been alluded to in your testimony and
the testimony of other witnesses before this committee?
Mr. LEYBURN. That is correct.
STOCK EXCHANGE PEACTICES
4645
Mr. PECORA. With what officers of the Guardian Detroit Union
Group did you from time to time have conferences or discussions
with respect to the condition of the unit banks of the group examined
by you and your field examiners?
Mr. LEYBURN. It was usually with Mr. Patterson, Mr. Lord, and
Mr. Kanzler—although Mr. Kanzler did not get actively into that
end of it, where I came in contact with him, until early in 1932; and
then at the board meeting in June 1932, we went over the condition
of the unit banks, and at that meeting were Mr. Mott of the General
Motors, Dr. Murphy, Mr. Bodman, Edsel Ford, and some others
whose names I cannot recall at the moment. I can check them for
you.
Mr. PECORA. Was that the meeting at which Field Examiner
Walker was present?
Mr. LEYBURN. Yes, sir. He made the examination starting May
9 and finishing in June, and he had also made an examination of a
number of the banks of the Guardian Group throughout the State.
That was his district.
Mr. PECORA. Was it at that meeting that Examiner Walker made
& statement in substance to the effect that the group had bought a
number of its unit banks when it knew that they were not sound or
in good condition?
Mr. LEYBURN. He made the statement, as I recall it, that they
bought some of the banks when they knew they were rotten.
Mr. PECORA. What followed as a result of that statement?
Mr. LEYBURN. We almost had a riot, and the remark was later
withdrawn, to keep peace in the family; but that did not change his
opinion any.
Senator ADAMS. Nor the fact?
Mr. LEYBURN. That is correct, sir.
Mr. PECORA. It was withdrawn in a parliamentary sense?
Mr. LEYBURN. That is right; as a matter of policy.
Mr. PECORA. The sentiment remained?
Mr. LEYBURN. Correct.
Mr. PECORA. Did he particularize the unit banks that he considered rotten at the time they were acquired by the group?
Mr. LEYBURN., He mentioned some of them. I will have to give
that from memory. He mentioned Ionia in particular, and Jackson
and Niles, and possibly some others.
Senator COUZENS. I observe that between the instructions that
you received in October and December of 1931 and July 1, 1932, no
reference was made to the leniency that was to be given to collateral
loans, but only to the portfolios. Did you, between October and
December 1931 and July 1, 1932, exercise the same leniency with
respect to collateral loans as you did with respect to the portfolios?
Mr. LEYBURN. I am of the opinion that we exercised greater
leniency on collateral loans than on the other kind; and in that letter
in 1932 specific attention was called to the classification of loans and
discounts, particularly to collateral loans.
Senator COUZENS. But in the prior communications which you
received in October and December 1931 no reference was made to
collateral loans, but only to portfolios; and I just wondered whether
you exercised the same consideration with respect to collateral loans
175541—34—PT 10
5
4646
STOCK EXCHANGE PRACTICES
during the period from October 1931 until July 1, 1932, as you did
with respect to the portfolios.
Mr. LEYBURN. I am of the opinion that we did.
Senator ADAMS. TO what extent, roughly, was the policy of the
Comptroller's Office justified by subsequent events irf the matter of
leniency?
Mr. LEYBTJRN. Senator, time alone will tell.
Senator ADAMS. I mean, as far as it has apparently been demonstrated now. Has there been a substantial justification of it?
Mr. LEYBURN. I do not believe I am that good a prophet.
Senator ADAMS. I was not asking you for prophecy.
Senator COUZENS. I think that is a very pertinent question. I
wish the witness would express an opinion at least as to whether, in
his judgment, from close contact, the leniency was justified.
Mr. LEYBURN. YOU are trying to "put me on the spot"; aren't you?
Senator COUZENS. NO; there is no censorship here about giving
opinions.
Mr. LEYBURN. Let me have that question again.
Senator ADAMS. My inquiry was this. There was a certain policy
laid down in instructions for you to exercise leniency and to give
consideration to the depressed condition of the market, and I want
to know to what extent events subsequent to that time have justified
that policy.
Mr. LEYBURN. I will give you my opinion now.
Senator ADAMS. That is what I was asking for.
Mr. LEYBURN. It does not represent the views of the Comptroller's
office or the Treasury Department or anybody else; this is my own.
If this policy had not been followed we would have had the crash in
1930 instead of in 1933. There is no doubt about that, in my mind.
It was just a question of how long. Did you want it in 1930, or did
you want it in 1933?
Senator COUZENS. In your opinion, would it have been better to
have it in 1930 than in 1933?
Senator ADAMS. It could not have been worse.
Senator COUZENS. It could not have been worse; and I assume
that that is a rather rediculous question.
Mr. LEYBURN. My opinion is that it would have been better if it
had been in 1930.
Senator COUZENS. That is all. I just wanted to get some expert's
opinion.
Mr. LEYBURN. I thank you for the compliment.
The CHAIRMAN. YOU mean that the results would not have been
as disastrous if it had begun in 1930 and we had put the banks on a
settled or stable basis at that time?
Mr. LEYBURN. That is my opinion, sir, my personal opinion.
Senator ADAMS. YOU had, did you not, in the banks generally during this unsettled condition in 1931 and 1932, and the occasional
failure of banks, a decrease in bank deposits throughout the country
of some thirteen or fifteen billion dollars which tended to continue the
tightened conditions?
Mr. LEYBURN. That was all over the country; and of course they
had to liquidate their best securities to meat that in a number of cases.
STOCK EXCHANGE PEACTICES
4647
Senator ADAMS. There really was a decrease, dropping from almost
sixty million dollars, as I recollect the grand total, until it got down to
about forty-five billion at the time of the closing?
Mr. LEYBURN. I do not know the exact figures, but there was a
decrease in bank deposits in the past 3 years, there is no question
about that, all over the country.
Mr. PECORA. DO you recall that an examination was made by
your field examiners of the Guardian National Bank of Commerce
as of November 9, 1932, which was completed about December 7,
1932?
Mr, LEYBURN. That was the Consolidated Bank; yes, sir.
Mr, PECORA. And that was the last examination that was made of
that bank, was it not?
Mr. LEYBURN. That is correct; completed on December 7.
Mr. PECORA. DO you recall what was disclosed by that examination
with regard to the amount of doubtful and slow assets and losses?
Mr. LEYBURN. Slow, $25,388,000; doubtful, $18,695,000; losses,
$456,000, which was a loss on defaulted bonds. Nothing was charged
off for the loans. At that time the repurchase agreement was $4,621,787. It had been reduced from $4,945,000, I think it was. And in
addition to that, the bond depreciation was around close to $2,000,000,
I believe, at that time.
Mr. PECORA. What were the capital and surplus of the bank at that
time?
Mr. LEYBURN. The capital was $10,000,000 and the surplus was
$5,000,000.
Senator ADAMS. That is the book surplus and capital?
Mr. LEYBURN. That is the alleged surplus and capital.
Senator COUZENS. " Alleged " is well put.
Mr. PECORA. When this examination disclosed slow assets of over
25 million and doubtful assets of 18 million did you take the matter up
with the officials in charge of the group or the bank?
Mr. LEYBURN. At the conclusion of the examination in December I
went up there and held a meeting at which the examiner was present;
and I have a list of directors who were at that meeting.
Mr. PECORA. Who were they?
Mr. LEYBURN. Lord, Coyington, Edsel Ford, Mott, Murphy,
Kanzler, and vice-president Kingston acted as secretary of the meeting,
Mr. PECORA. Will you give this committee the substance of the
discussion that ensued between you and your field examiner and the
members of this board with whom you discussed the report made by
your examiner?
Mr. LEYBURN. AS I recall it, that their liquidity had been brought
up from about 20 to 40 percent, which was commendable, and that
they should keep highly liquid in the parent bank in view of the condition of the other banks throughout the State that we knew to be in
bad condition, and especially the Union Trust Co. across the street,
and that their credit department had shown some improvement.
We were of the opinion that considerable more loss should be charged
out of that bank. They were fearful that if they tapped the surplus
to any appreciable extent it would cause considerable trouble. So
then we agreed that they would charge off only the loss on defaulted
bonds and nothing on the loans and discounts.
4648
STOCK EXCHANGE PEACTICES
Senator COUZENS. Were there any defaulted bonds in the loans and
discounts?
Mr LEYBURN. N O ; that is a separate thing.
Senator COUZENS. What I mean is this. When you did not compel
the charging off of any of the loans and discounts, were there any
defaulted bonds as security for those loans and discounts?
Mr. LEYBURN. Of course in any bank, Senator, they might be all
right when they took them, but
Senator COUZENS. I understand that they would not be in default
when they took them. But you did not compel any charge off?
Mr. LEYBURN. NO, sir.
Senator ADAMS. Were defaulted bonds charged off absolutely or
charged down to the then market for that particular bond?
Mr. LEYBURN. TO the market; never charged off completely.
Mr. PEC OR A. The field examiner in charge of the examination of
the Guardian National Bank of Commerce at that time was Mr. W.
A. Reagan, was he not?
Mr. LEYBURN. I am sure that he was. Does it show on top of the
report there—W. A. Reagan?
Mr. PECORA. Yes. Now, let me read to you a comment or criticism made by Examiner Reagan and by yourself as chief examiner in
the report made to the Comptroller of the Currency with respect to
this examination, under the caption of " General remarks. Include
here criticisms and reasons therefor which the examiner does not
deem advisable to state in the report proper."
Mr. LEYBURN. Are you reading from the supplementary report, or
page 11?
Mr. PECORA. The supplemental report. [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 tofindways and means to liquidate some of their own debts, and have no
funds or assets with which to assist the member banks. Group assets consist
almost entirely of bank stocks which are not productive of dividends. It was
frankly stated that the Group was very much interested in coming national
legislation in the 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 this 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
Senator ADAMS. Would you read that again about national legislation?
Mr. PECORA (reading):
It was frankly stated that the Group was very much interested in coming
national legislation in the 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 this
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 in this bank, as admitted at its examination, are
nominal as compared witn their 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 additional loss
classifications until some future time when the possibility of using a portion of
the Group's capital structure can be determined.
STOCK EXCHANGE PEACTICES
4649
Do you recall that comment or criticism?
Mr. LEYBURN. Yes; at and various times that was brought up,
that they expected to be able to clean up the banks through the
branch banking bill that they hoped would go through.
Mr. PECORA. Between November 9, 1932, which was the date as of
which this examination was made, and February 13, I think it was
1933, when the bank holiday was declared by the Governor of Michigan, had the condition of this bank improved, so far as you know?
Mr. LEYBURN. Between the meeting on December 9 and the time
of the bank holiday?
Mr. PECORA. Yes.
Mr. LEYBURN. N O ;
it had not improved; it had gotten worse.
And that is true of a lot of other banks. As a matter of fact, in that
period I do not believe any bank in the United States had improved
any.
Mr. PECORA. YOU referred before to the fact that in this report of
the examination of this bank made as of November 9, 1932, a loss of
$456,942 was indicated. Is that the loss that you referred to in this
report under the caption of "General remarks", as being merely
nominal as compared with the very questionable assets that it was
desired to eliminate?
Mr. LEYBURN. Yes,
sir.
Mr. PECORA. A nominal figure?
Mr. LEYBURN. That is correct; just the loss on defaulted bonds.
Mr. PECORA. It did not represent your opinion or the field examiner's opinion of the actual losses?
Mr. LEYBURN. NO, sir.
Mr. PECORA. The actual
losses considerably exceeded this sum of
four hundred fifty-six thousand and odd dollars?
Mr. LEYBURN. Yes, sir.
Senator COUZENS. When
this report was made to the directors
were the items enumerated that made up the aggregate of some 25
million, as I remember the total of the slow and some 18 millions of
doubtful?
Mr. LEYBURN. I do not believe all of the items were read over to
them. Some of them undoubtedly were, some of the big items; but
when the report of the examination comes back, they are stated in
detail.
Senator COUZENS. SO there would be available detailed itemization
of the classifications made with respect to slow and doubtful assets?
Mr. LEYBURN. Yes, sir; at all times, in every examination.
The CHAIRMAN. Was anything done as a result of this to help the
situation of the banks?
Mr. LEYBURN. YOU are referring to the December meeting?
The CHAIRMAN.
Yes.
Mr. LEYBURN. Well, of course, the banking holiday followed that
shortly afterward. I cannot say that there was, Senator.
Mr. PECORA. The bank holiday followed about 2 months afterwards?
Mr. LEYBURN. Yes.
Mr. PECORA. DO you
know of anything done in that intervening
period of 2 months to correct the conditions that you had brought to
the attention of this committee of the bank or the bank's board?
4650
STOCK EXCHANGE PRACTICES
Mr. LEYBURN. NO, sir; I do not know of anything except when
they had a meeting there in January, when they approached the
R.F.C.
Mr. PECORA. I have no further questions to ask you. Is there
anything that you want to volunteer?
Mr. LEYBURN. Yes, sir. You asked me, when I was on the stand
on Friday, if the impairment of the capital of the National Bank
at Niles, Mich., had been made good. Do you recall that?
Mr. PECORA. Yes.
Mr. LEYBURN. I checked
that, and found that it was not made
good. As a matter of fact, the classification on the last examination
of that bank showed a surplus fund of $100,000, profits or reserve of
$24,000, which makes a total of $124,000, and the bond depreciation
alone was $231,000.
Then you asked me about Ionia.
Mr. PECORA. About the National Bank of Ionia?
Mr. LEYBURN. Yes, sir. Since that time I have got the report of
examination on it. You asked me as to the classifications. The
examination of December 21, 1931, shows that at that time the bank
was borrowing $76,000, and the classification is, loss, $169,000;
doubtful, $176,000; slow $556,000, against surplus and profits of
$174,000. The directors were borrowing direct $115,000; indirect,
$60,000, besides loans to other corporations. At that time President
Green, who is ex-Governor of Michigan, was endorsing $34,430—
a guarantor, in other words. Then we have, under large loans of
credit, which means loans to one interest or affiliated interest of the
Ypsilanti Reed Furniture Co. in which he was a heavy stockholder—
they had a bank credit of $25,000. The indirect paper of ex-Governor
Green was $36,430, and the loan to Director Chapman, $22,000.
That is in there because he is also a director of the Ypsilanti Reed
Furniture Co. Then the loans of collateral for the stock bring the
total up to $158,000.
At that meeting the governor was present and went over the papers
as to the classification. It was also very significant—I want to call
your attention to this—that at that meeting when the classification
was discussed the group's own examiner, Mr. Penningrath, sat in
that meeting, and the examiner said in principle he agreed with the
examination. And based on that report of the examination the Comptroller addressed a letter to the bank in February 1932 setting out the
condition of it to them.
The next examination was June 29, 1932. At that time the bank
was borrowing 182,000 and the loans to Director Green were indirectly
increased to 43,000. Classification at that time showed 77,000 loss,
110 doubtful, 490 slow.
Senator COUZENS. What was the capital and surplus at that time?
Mr. LEYBURN. The capital of the bank was 150,000 surplus 100,000,
undivided profits 38,000 reserve accounts 15,000.
Governor Green also sat in on the discussion at that time. And in
the letter from the comptroller based on the report of examination
among other things, it speaks of the large account and says:
President Green apparently gave little consideration to depositors whose funds
have been loaned out to such an extent to himself and his interests, the total of
these loans exceeding the amount the bank is borrowing from all sources.
STOCK EXCHANGE PEAOTICES
4651
And this bank always had considerable public money deposits in it.
Then we come along to the last examination.
Senator ADAMS. Were the public moneys secured by deposits of
collateral in those banks, or were they simply carried as ordinary
deposit accounts, or did they have surety bonds?
Mr. LEYBURN. Most of them had surety bonds up in that State.
In most States they have to pledge the bank's own assets.
Mr. PECORA. Mr. Leyburn, do you know whether the so-called
"surety bonds77 that were furnished by some of these unit banks to
secure deposits of public funds were surety bonds that were executed
by the group itself rather than by some outside corporation or agency?
Mr. LEYBURN. I am of the opinion that they guaranteed some of
those themselves, but I am not sure of that. And they did have some
surety bonds also.
The last examination of the National Bank of Ionia was made on
the 25th of November.
Senator ADAMS (interposing). If I may interrupt
Mr. LEYBURN. Yes.
Senator ADAMS. In the
term "surety bonds77 the word "surety 77 is
not entirely accurate in these days, is it?
Mr. LEYBURN. When I use the term "surety77 I mean like the
National Surety.
Senator ADAMS. I am still saying that the term "surety 77 is an
exaggeration, isn7t it, in connection
with the bonds written.by some
so-called "surety companies77?
Mr. LEYBURN. Some companies; yes.
Mr. PECORA. May I say, Senator Adams, in connection with some
evidence which I shall present to the committee77that the group corporation itself executed so-called
"surety bonds for its own banks.
Senator ADAMS. "Insecurity77 bonds.
Mr. LEYBURN. The last examination of the National Bank of Ionia
was made on the 25th of November. At that time they had borrowed
money, $175,000.
Senator COUZENS. What year?
Mr. LEYBURN. 1932—they had there for liquidity
Senator COUZENS (interposing). When those examinations were
made, just to get the record clear, Mr. Green was not Governor, was
he?
Mr. LEYBURN. Not when these were made; no, sir.
Senator COUZENS. NO.
Mr. LEYBURN. NOW Mr. Green was present. After this examination Mr. Patterson of the group discussed things with the Comptroller of the Currency. He figured he would go down to Washington
and discuss some of these reports with the Comptroller^ office.
Classification at that time showed 32,000 loss, 141 doubtful, 461
slow.
Then there is considerable criticism like along the other lines about
"too much borrowed77. And they had public money at that time of
294,000.
Senator COUZENS. Did your examinations show whether those
deposits were secured?
Mr. LEYBURN. It does not show that they are secured by collateral
on here, Senator.
4652
STOCK EXCHANGE PRACTICES
Senator COUZENS. Does it show that it was secured in any other
way.
Mr. LEYBURN. N O ; it does not. Wait a minute; maybe I can tell
here in a minute from the bond account. There is some of it here
secured by bonds; that is, the bank's bonds. I see several of them in
here. "Secured state funds and postal savings.77
Senator COUZENS. By what bonds?
Mr. LEYBTJRN. By some of the bank's listed bonds.
Senator COUZENS. I did not get the answer.
Mr. LEYBURN. By some of the bank's listed bonds.
Senator COSTIGAN. In what year or years was Mr. Green governor
of Michigan?
Mr. LEYBURN. I believe he was governor in 1929 and maybe ran
over into 1930. I am not certain.
Senator COSTIGAN. Was he a banker prior to becoming governor?
Mr. LEYBURN. This was his bank; yes, sir.
Senator ADAMS. That is debatable, Senator Costigan.
Mr. LEYBURN. He ow^ned and dominated this bank.
Now, I noticed when I mentioned Friday in the testimony that h.&
used the bank to an unwarranted extent, which is just a matter of
record—why, I never met Governor Green personally; I only go
by the record—that he comes out and states in a political statement
Mr. PECORA. AS of what time did he make this statement that you
are now going to refer to?
Mr. LEYBURN. January 5.
Mr. PECORA. Of this year?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. YOU mean last week?
Mr. LEYBURN. He made it either Friday
Mr. PECORA. All right.
Senator COUZENS. Just a moment. That
or Saturday of last week.
is a newspaper statement,,
is it not?
Mr. LEYBURN. N O ; it is quotation. It is a quotation.
Senator COUZENS. Yes; but we have excluded that sort of testimony heretofore.
Mr. LEYBURN. Well, it is all right for me to say just what—it
brings out a point here I would like to put across.
Senator COUZENS. We have refused to let newspaper articles be
read into the record heretofore. I think Mr. Chairman, we ought
to adhere to that.
The CHAIRMAN. I think that is right. The quotation may be
right and it may not. It is not the best evidence.
Mr. LEYBURN. The point is that this was a bad bank and he was a
director and it was always his bank and it was bad.
Senator COUZENS. YOU have the records there of the Comptroller's
office and you do not need to refer to newspaper statements.
Mr. LEYBURN. I know I do not.
Mr. PECORA. Mr. Leyburn, last Friday in the course of your testimony I read into this record the letter which you addressed to the
Comptroller of the Currency under date of May 21, 1931, accompanying the report of the examination of the National Bank of Ionia,
which was completed on May 12, 1931. In the concluding paragraph
of that letter you said:
STOCK EXCHANGE PRACTICES
4653
I expect to hold a conference in Detroit with the Guardian Detroit Union
Croup concerning several of their banks within the next few weeks, and this
case will be reviewed with them.
Do you recall now whether or not you had such a conference in
Detroit with the officers or directors of the group at which was discussed the condition shown by the examination of the Ionia bank?
Mr. LEYBURN. Discussed that with some of the officers a number
of times, and also this: Sometimes Mr. Patterson would come down
to Chicago and we discussed it, and then he also discussed it with
the Comptroller's office in Washington.
Mr. PECORA. What positon did the officers of the group take with
regard to the criticisms, suggestions or comments that you made to
them concerning the Ionia Bank?
Mr. LEYBURN. They never wanted to charge out anything, which
was the policy in the group, and finally they put some of their own
men in there to try to straighten it out.
Mr. PECORA. DO you know which one of their men they put in
there?
Mr. LEYBURN. They had Mr. Penningrath there for several months,
d then Mr. Bryant for a couple of weeks.
Senator COUZENS. Both formerly bank examiners?
Mr. LEYBURN. Yes, sir. But they were working for the group
when they went in there.
Senator COUZENS. I understand.
Mr. PECORA. I think that is all of Mr. Leyburn.
The CHAIRMAN. DO you know the date of this moratorium based
•on the proclamation of the Governor, the holiday?
Mr. LEYBURN. YOU mean the Governor's holiday of Michigan?
The CHAIRMAN. Yes.
Mr. LEYBURN. That was
declared the early morning of the 14th.
The meeting went into session on the 13th.
Mr. PECORA. That is February 14, 1933?
Mr. LEYBURN. Yes, sir; the holiday.
The CHAIRMAN. The bankers of Detroit were all in favor of that,
were they not? They urged the Governor to do this, did they not?
Mr. LEYBURN. Absolutely. And while we are on that subject I
would just like to bring out something..
The CHAIRMAN. What is that?
Mr. LEYBURN. I would like to make a statement in regard to that.
The CHAIRMAN. Very well.
Mr. LEYBURN. In other words, the question will undoubtedly arise
in your mind as to why Michigan happened to have the holiday. I
will tell you. Michigan just beat some other State to the draw; that
was all. I will give it to you this way and you can draw your own
conclusions:
The Guardian Trust Co. of Cleveland, Ohio, on the 31st of December 1932 was borrowing $18,000,000 on deposits of 109, and they had
practically all of their assets pledged. The R.F.C. had poured considerable money in there, and they had just about reached their
borrowing limit, and after the banking holiday the cash on hand
was $1,732,000 against deposits of $76,000,000, and bills payable of
$19,385,000.
Since that time, with the aid of the R.F.C., that bank has paid
out 20 percent.
4654
STOCK EXCHANGE PRACTICES
Now, you compare that with the banks in Detroit and you can
readily see that this thing was just ready to blow in your face. I was
afraid it was going to blow while I was up there in Detroit on this
other deal.
Then we go to the Union Trust Co. of Cleveland, with deposits of
194 million on the 31st of December 1932, bills payable 15 million
878 thousand, cash 35 million. In addition to borrowing that 15
million they had borrowed through an affiliated mortgage company
about 21 million. They had just about exhausted their borrowing
power. After the banking holiday that bank, with the aid of the
K.F.C., paid out 35 percent.
The Guardian Trust Co. could not have stayed open at all, because
when the banking holiday was declared and the banks were authorized
to make disbursements some of them made 5 percent and 10 percent,
but the Guardian Trust Co. of Cleveland made a disbursement of 1
percent. It is the smallest amount I ever heard of such a large bank
making.
Then we come over to Indiana. In the northern part of the State
was the old National Bank of Fort Wayne. They had just about
exhausted their borrowing power and their closing was inevitable.
Then we come to the Fletcher-American of Indianapolis, with deposits
of 25 million, of which 4 million 6 thousand was in bank accounts
of small banks throughout the State. They had just about exhausted
their borrowing power, and if it had closed it would have thrown the
holiday in Indiana. That bank was later reorganized with the aid of
the R.F.C. on a 50 percent basis. The Fort Wayne, as I recall it, was
reorganized on the basis of about 50 percent or 55.
So you can readily see by those figures that the holiday should
have been in some other State, and then that would have forced
Michigan and Indiana, and then there you are all the way down the
line. It would have had to come. I don't know how you are going
to get out of it. For a year the banks had been trying to pay deposits
of 100 cents on the dollar with 80 percent assets and 50 percent
assets, which is manifestly impossible.
Senator COUZENS. Those Cleveland banks that you have just referred to are still closed?
Mr. LEYBURN. They are. They are both members of the Federal
Reserve System.
Senator COUZENS. But both with State charters?
Mr. LEYBURN. Yes, sir. One of them has paid out 20 percent
through the aid of the R.F.C. and through another bank, and. one
has paid out 35 percent with the aid of the R.F.C. through a national
bank.
Mr. PECORA. Which Union Trust do you mean?
Mr. LEYBURN. The Union Trust of Cleveland and the Guardian
Trust of Cleveland.
Senator ADAMS. Mr. Leyburn, the requirement of the Comptroller's Office is, is it not, that the report of the examiner of each bank
shall be submitted to and considered by the/directors of the bank and
that the directors shall either by resolution or letter advise the Comptroller that they have studied and read the report?
Mr. LEYBURN. NO; it is not exactly that way. When we send the
copy back to the bank we send a slip along with it to be signed by the
STOCK EXCHANGE PRACTICES
4655
cashier that he has received the report and it will be submitted to the
board of directors.
Senator ADAMS. But isn't there, as a matter of custom, a resolution
adopted by the board of directors following that out showing that the
report hais been submitted to the directors?
Mr. LEYBURN. The regulation of the Comptroller is that it should
be read and so noted on the minutes that they have received the
report. I would like to see, though, a signed statement that they saw
the report. It would have been a good thing. But often they claim
they never saw the report and knew nothing about the bank.
The CHAIRMAN. The conclusion you draw is that the declaration
of the holiday did not cause the closing of these banks but they would
have closed if it had not been for that?
Mr. LEYBURN. That is absolutely correct.
The CHAIRMAN. Then the action by the Comptroller, the Federal
authorities, did not hasten the closing of these banks?
Mr. LEYBURN. NO, sir.
Senator COUZENS. The reverse was the fact, was it not?
Mr. LEYBURN. That would be a matter of opinion.
Mr. PECORA. Thank you, Mr. Leyburn.
The CHAIRMAN. YOU are excused, Mr. Leyburn. Mr. Ford.
TESTIMONY OF EDSEL B. FORD, PRESIDENT FORD MOTOR CO.,
DEARBORN, MICH.
The CHAIRMAN. DO you solemnly swear that you will tell the
truth, the whole truth, and nothing but the truth, regarding the
matters now under investigation by this committee. So help you
God?
Mr. FORD. I do.
Mr. PECORA. Mr. Ford, will you give your full name, address, and
business or occupation to the reporter.
Mr. FORD. Edsel Brant Ford; Ford Motor Co., Dearborn, Mich.
Senator COUZENS. YOU are president of the Ford Motor Co.?
Mr. FORD. President of the Ford Motor Co.
Mr. PECORA. Mr. Ford, were you an officer or director of the
corporation called the Guardian Detroit Union Group, Inc.?
Mr. FORD. I was a director.
Mr. PECORA. Were you a director of that corporation from its
inception?
Mr. FORD. I believe so; yes, sir.
Mr. PECORA. AS a director, were you also a member of the standing committees of the board of directors,of that group?
Mr. FORD. I do not think so. I cannot recall.
Senator COUZENS. Were you a director of any of the units?
Mr. FORD. Oh! The units? Yes. I beg your pardon.
Senator COUZENS. He did not ask that. I am asking that.
Mr. FORD. Yes.
Senator COUZENS. What units?
Mr. FORD. The Guardian National Bank of Commerce.
Senator COUZENS. IS that the only one?
Mr. FORD. And the Trust Co.
Senator COUZENS. The Union Guardian Trust Co.?
Mr. FORD. The Union Guardian Trust Co.
4656
STOCK EXCHANGE PRACTICES
Mr. PECORA. Were you also a director of the Guardian Detroit
Bank, one of the units?
Mr. FORD. Yes.
Mr. PECORA. Also the Guardian Trust Co.?
Mr. FORD. The Union Guardian Trust Co.
Mr. PECORA. And of the National Bank of
Commerce before it
consolidated?
Mr. FORD. Formerly.
Senator COUZENS. But not at the time of consolidation.
Mr. FORD. Oh, yes.
Senator COUZENS. Of the National Bank of Commerce?
Mr. FORD. When the National Bank of Commerce was consolidated
with the Guardian Detroit Bank, I was a director of the National
Bank of Commerce.
Mr. PECORA. That is what I asked you, if you were a director of the
National Bank of Commerce before its consolidation with the Guardian Detroit Bank.
Mr. FORD. Yes, sir.
Mr. PECORA. According
to Committee's Exhibit No. 36 of December 20, last, which consists of a copy of the annual report for the year
1930, issued by the group to the stockholders, you were a member of
the advisory committee of the board of directors of the group that
year. Do you recall that?
Mr. FORD. I think so.
Mr. PECORA. YOU also were a member of the advisory committee of
the board of directors of the group for the year 1931.
Mr. FORD. That must be so.
Mr. PECORA. YOU have no recollection of it?
Mr. FORD. Yes, vaguely.
Mr. PECORA. What were the duties of the advisory committee of
the board of directors of the group?
Mr. FORD. TO advise with the officers.
Mr. PECORA. IS that the answer, to advise with the officers?
Mr. FCSRD. I would think so. ^
Mr. PECORA. Did the advisory committee frequently advise with
the officers of the group?
Mr. FORD. I could not say. I cannot remember.
Mr. PECORA. Were you a regular attendant at meetings of the
advisory committee of the board of directors of the group.
Mr. FORD. Perhaps not. I do not recall.
Mr. PECORA. Were you a regular attendant at the meetings of the
board of directors of the group?
Mr. FORD. Not very regular.
Mr. PECORA. DO you recall
Senator COUZENS. I think we had better have Mr. Colombo on the
record here. If Mr. Colombo desires to speak to the witness during
his presence on the stand we ought to make a record of it.
Will you please tell the committee, Mr. Colombo, your name, and
whether you are attorney for Mr. Ford?
Mr. COLUMBO. Louis J. Columbo; attorney for Mr. Edsel Ford.
Mr. PECORA. DO you recall any conferences that you, as a member of the advistory committee of the board of directors of the
group, had with other members of that committee with the officers
of the group?
STOCK EXCHANGE PRACTICES
4657
Mr. FORD. I do not recall any specifically. I advised with the
officers of the bank at various times, but I do not recall anything
specific.
Mr. PECORA, I do not mean officers of the bank. I mean the
officers of the group.
Mr. FORD, I do not recall any specifically.
Mr. PECORA. DO you recall any such conferences generally that
you had as a member of the advisory committee of the board, with
the officers of the group?
Mr. FORD. NO, sir.
Mr. PECORA. I think, during the course of his testimony last week
before this committee, Mr. Kanzler, whom you doubtless know,
inehided you as one of the founders of the Guardian Detroit Union
Group. You do not quarrel with that designation of you as one of
the founders of this group, do you?
Mr. FORD. NO, sir.
Mr. PECORA. NOW,
the company of which you are president, the
Ford Motor Co., was a large depositor in some of the unit banks of
this group# was it not?
Mr. FORD. That is right.
Mr. PECORA. DO you remember in which of the group's banks the
largest deposits were maintained by the Ford Motor Co.?
Mr. FORD. In the Guardian National Bank of Commerce and the
Union Guardian Trust Co. of Detroit.
Mr. PECORA. They were both in Detroit?
Mr. FORD. Yes, sir.
Mr. PECORA. Could
you tell the committee the average balances
carried by the Ford Motor Co. in each one of those banks?
Mr. FORD. I cannot. I can tell you that balances at the time of
the closing.
Mr. PECORA. What were they? By the closing, you mean the
closing in pursuance of the Governor's decree?
Mr. FORD. The Governor's proclamation.
Mr. PECORA. On February 14, last.
Mr. FORD. Yes. There was $32,500,000 in the various units of
the Guardian group.
Mr. PECORA. What was the largest amount on deposit in any one
of the group bank units at the time of the closing?
• Mr. FORD. Approximately $15,000,000 in the Guardian National
Bank of Commerce
Mr. PECORA. DO you recall, at any time during the years 1930, 1931
or 1932, your having participated in any conferences or discussions
as a director of the group, with respect to the condition, financial and
otherwise, of the group and its various units?
Mr. FORD. I cannot remember any specific instances, but naturally
we would
Mr. PECORA. Naturally you wha^?
Mr. FORD. We were discussing the conditions as we went along.
Mr. PECORA. Without reference to any specific discussion of that
kind, will you tell the committee about how many such discussions
you participated in?
Mr. FORD. I cannot recall.
Mr. PECORA. Can you tell us approximately?
Mr. FORD. NO; I have no idea.
4658
STOCK EXCHANGE PEACTICES
Mr. PECORA. Were they few or were they many?
Mr. FORD. Probably few.
Mr. PECORA. Were there more than one or two a year that you
attended?
Mr. FORD. I could not say.
Mr. PECORA. Well, do you recall the general course of the discussions that were had at those few conferences that you attended, at
which the condition of the group and its units was discussed?
Mr. FORD. NO, sir; I do not.
Mr. PECORA. Why are you unable to tell us that, Mr. Ford?
Mr. FORD. Because I do not remember.
Mr. PECORA. DO you redall questions arising at meetings of the
board of directors of the group attended by you, with respect to the
financial condition of the group?
Mr. FORD. There were discussions of the financial condition at the
meetings that I attended.
Mr. PECORA. What was the general tenor of those discussions?
Mr. FORD. That the banking situation was very tense and getting
worse, and conditions were arising each day that needed careful
handling and watching, and conditions of the country at that time
were going from bad to worse. The assets and securities that the
banks held were naturally depreciating. It was a question of coping
with the situation as it changed from day to day.
Mr. PECORA. DO you recall, Mr. Ford, how you coped with the
situation as it changed, and gradually got worse from day to day?
Mr. FORD. I do not know; what you mean by that, Mr. Pecora.
Mr. PECORA. YOU just said that at these conferences in which you
participated, in which the condition of the group and its units was
discussed, it was remarked that conditions were getting worse, that
securities held by the unit banks, either in their portfolios or as collateral against loans, were depreciating in value, and the group was
endeavoring to cope with the situation. What steps, if any, do you
recall were taken by the group in coping with that situation to which
you have alluded?
Mr. FORD. In the first place, the group responsibility was to
scrutinize each one of the unit banks/each one of the units in the bank,
and counsel with their officers, and try to carry on a course of operations in the most successful manner possible.
Mr. PECORA. What methods, what steps were taken, what policies
were adopted to carry on in the face of these conditions that were
steadily growing worse?
Senator COUZENS. Let us make that more specific, Mr. Ford*
Did you at any time, or any of your associates, go to the relief of any
of these units?
Mr. FORD. I did, sir.
Senator COUZENS. That would be a very pertinent answer, I think,
to Mr. Pecora's question. Just what did you do in that connection?
Mr. PECORA. YOU see, that relates to a specific time. I wanted to
get first from the witness, if he could tell us, the general line of action
that the group adopted in order to meet these conditions that were
steadily growing worse—not anything that he individually did, but
what he, as a director and as a member of the advisory committee of
the board of the group, did; and what the other directors did, and what
STOCK EXCHANGE PRACTICES
4659
the group generally did, as a corporation. Can you tell us anything
about that, Mr. Ford?
Mr. FORD. Not specifically.
Mr. PECORA. Can you tell us generally?
Mr. FORD. The assets were criticized in the member banks. The
Group Co. were assisting the member banks in loans.
Mr. PECORA. The Group Co. had to borrow money for that purpose,
did it not? It has been testified to here by Mr. Lord that in the years
1929, 1930, 1931, and 1932 the group received from its various unit
banks sums exceeding 9 million dollars in the form of dividends paid
by the banks. He also claimed that about $8,400,000 was put back
in the unit banks by the group. Are you familiar with those facts?
Mr. FORD. Not the figures.
Mr. PECORA. DO you know that of that $8,400,000-odd that was put
back into the unit banks, over 7K million went to one bank alone,
namely, the Union Guardian Trust Co.? Do you know that?
Mr. FORD. I do not know it specifically, but I assume it is right.
Mr. PECORA. DO you assume it is right because I am telling you
that, or do you assume it because of personal knowledge you have of
the fact?
Mr. FORD. I know there was money put back into the Union
Guardian Trust Co., but I do not know the actual amount that was
put there. I do not recall it.
Mr. PECORA. DO you know how the group obtained the money
that it put back into any of the unit banks to help them out?
Mr. FORD. By dividends and by borrowing.
Mr. PECORA. That is, the group declared dividends in favor of
those banks?
Mr. FORD. Didn't the group receive dividends from those banks?
Mr. PECORA. From the banks, yes.
Mr. FORD. From the member banks.
Mr. PECORA. Yes. From what sources did the group derive the
money that they put back, as has been claimed here, into some of
these unit banks? Do you know?
Mr. FORD. I just stated that they got it from dividends from other
member banks and from borrowing.
Mr. PECORA. HOW much of it did they raise by borrowing?
Mr. FORD. I do not know the total figure. About 16 million dollars
is the figure I have in mind, but I am not positive.
Mr. PECORA. But they put back only 8 million dollars.
Mr. FORD. I do not know about that.
Mr. PECORA. Did you ever read any annual report issued by the
group to its stockholders?
Mr. FORD. Undoubtedly.
Mr. PECORA. Did you ever attend meetings of the board of directors of the group at which there were presented to the board
statements concerning the conditions of various unit banks in the
group?
Mr. FORD. The statements of each unit bank?
Mr. PECORA.
Yes.
Mr. FORD. I do not recall. I probably did, but I do not remember.
Mr. PECORA. Who determined the dividend policy of the group,
Mr. Ford?
4660
STOCK EXCHANGE PRACTICES
Mr. FORD. The officers of the group made suggestions to the directors, I suppose.
^ Mr. PECORA. Can you not give us something more than supposition? Can you not tell us what the facts were?
Mr. FORD. It is a pretty general question.
Mr. PECORA. Mr. Ford, you were not only a member of the board
of directors, but also a member of the advisory committee of the
board of directors, the functions of which, you said, were to advise
with the officers of the group-1—I presume with regard to the conduct,
management, and operation of the group and its unit banks. Is that
correct?
Mr. FORD. Yes,
sir.
Mr. PECORA. AS such, can you not tell this committee what was*
done, and by whom it was done, in connection with the adoption of
a dividend-paying policy both by the group and its various unit
banks?
Mr. FORD. The policy was outlined, of course, by the officers.
Mr. PECORA. What was that policy?
Mr. FORD. When do you mean?
Mr. PECORA. What is that?
Mr. FORD. At what time, sir?
Mr. PECORA. Whenever they adopted it.
Mr. FORD. The dividend policy would change from time to time*
Mr. PECORA. Who changed it? What was the original dividend
policy adopted? Can you tell us that?
Mr. FORD. NO, sir; I cannot.
Mr. PECORA. Can you tell us when any change was made?
Mr. FORD. I know there was a change made when dividends were
cut out, but I cannot recall exactly when it was.
Mr. PECORA. Who was responsible for that change?
Mr. FORD. I do not recall. One of the officers undoubtedly, but I
do not recall who.
The CHAIRMAN. HOW was this $32,500,000 distributed to your
units, Mr. Ford?
Mr. FORD. HOW was it distributed by units?
The CHAIRMAN. Yes.
Mr. FORD. There was
$13,000,000 in a special account of the
Guardian National Bank of Commerce; $571,000 to the Boulevard
office; there was $2,000,000 in C. of D.'s in the Guardian National
Bank of Commerce; $109,000 in the cashier's account; $1,837,000 in
the pay-roll account; $2,500,000 in the treasurer's account of the
Union Guardian Trust Co.; $5,000,000 of C. of D.'s in the Union
Guardian Trust Co.; $3,500,000—that was a note of the Group;
$200,000 in the Grand Rapids National Bank; $1,000,000 in the
Highland Park State Bank, treasurer's account; $250,000 in the
Highland Park Trust Co.; $25,000 in the Union Peoples National
Bank of Jackson, Mich.; and $100,000 in the Capital National of
Lansing.
Mr. PECORA. Did you know, Mr. Ford, that the Group, in the
years 1930, 1931, and 1932, had a deficit at the end of each of those
years?
Mr. FORD. I do not remember.
Mr. PECORA. Did you ever know it?
STOCK EXCHANGE PRACTICES
4661
Mr. FORD. I probably did at the time, but I do not remember it
now.
Mr. PECORA. Would not that be a fact that would linger in your
memory?
Mr. FORD. Not necessarily. There are losses in many other corporations.
Mr. PECORA. HOW large a stockholder were you of the group?
Mr. FORD. I had something over 50,000 shares at the closing, or
bank holiday.
Senator COUZENS. HOW much did you have when the group was
organized, Mr. Ford, do you remember?
Mr. FORD. Shall I give this in detail?
Senator COUZENS. Please.
Mr. FORD. I started out with 125 shares of the National Bank
stock. That was converted into 125 shares of the Union Commerce
Investment Corporation. I purchased 45 shares, exercising rights,
making a total of 170 shares. I received 850 shares of the Union
Commerce Corporation in exchange for the 170 shares. That was
converted into 850 shares of the Guardian Detroit Union Group, in
exchange for the 850 shares of the Union Commerce Corporation.
I started out with 250 shares of Guardian Trust Co. That was
converted into 250 units of the Guardian Detroit Bank. I purchased
4,000 units, which made a total of 4,250. I received 21,250 shares of
Guardian Detroit Group, Inc., in exchange for the 4,250 shares.
Senator COUZENS. That was all you got for the exchange? There
was no cash?
Mr. FORD. NO cash; 21,250 shares. I may have. I do not know.
Was there cash distributed?
Senator COUZENS. I do not recall.
Mr. FORD. I do not recall either. There were 2,125 shares purchased through the exercising of rights, making a total of 23,375.
Then there was a 20 percent stock dividend, 4,675 shares, making a
total of 28,050 shares. I had 2,688 shares in the Bank of Detroit,
which was converted; 84 shares in the Fordson State Bank; 1,188
shares in the Highland Park State Bank; 850 shares in the National
Bank of Commerce; 7,054 shares of the Union Commerce Corporation;
100 shares of the Bank of Commerce of Spring Wells. I do not have
that total.
Senator COUZENS. Was that all later converted into the Guardian?
Mr. FORD. Those shares were all converted into Guardian Detroit
Union Group shares.
Senator COUZENS. After that conversion took place, what were your
aggregate holdings in the Guardian Detroit Union Group, Inc.?
Mr. FORD. I made some purchases after that.
Senator COUZENS. Before you made the purchases?
Mr. FORD. I do not have them totaled, but it would be approximately 39,000 or 40,000 shares.
Senator COUZENS. After you had made all those conversions you
had 39,000 or 40,000 shares, and the difference between that amount
and some 50,000 or 55,000 which you owned at the time of the closing
was represented by purchases, is that correct?
Mr. FORD. Except for a^gift of 1,188 shares from Mr. Henry Ford
at one time.
175541__34_PT io
6
4662
STOCK EXCHANGE PEACTIOES
Mr. PECORA. According to an examination of the minute book of
the board of directors of the group for the yaer 1932, which I have
caused to be made, your name nowhere is recited as having attended
any of the meetings of the board of directors held in that year. Is
that in accordance with your recollection of the fact?
Mr. FORD. It must be so. I do not recall.
Mr. PECORA. At the meeting of the board of directors of the group
held on March 12, 1931, the following motion appears to have been
made, seconded, and unanimously carried. I will read the entry
from the minutes of that meeting [reading]:
Advisory committee. On motion duly made, seconded, and unanimously
carried, the advisory committee was asked to look into the status, policies, and
investments of all security company affiliates of the Guardian Detroit Union
Group, Inc., and report back to this board.
Do you recall, as a member of the advisory committee of the board
of directors of the group, acting in response to that motion?
Mr. FORD. I do not recall.
Mr. PECORA. DO you recall ever making any examination, as a
member of the advisory committee of the board, into the status,
policies, and investments of the security company affiliates of the
group?
Mr. FORD. I do not remember having done so.
Mr. PECORA. Would that indicate that you made no such examination and took no part in any such examination?
Mr. FORD. I may riot, or may have. It may indicate that or may
not.
Mr. PECORA. YOU say you do not recall having made any such
examination.
Mr. FORD. NO, sir.
Mr. PECORA. DO you recall having participated in the making of
any report to the board of directors of the group?
Mr. FORD. NO, sir.
Mr. PECORA. On the status, policies, and investments of the investment company affiliates of the group?
Mr. FORD. NO, sir; I do not recall.
Mr. PECORA. Would that indicate that you did not participate in
the making of any such report?
Mr. FORD. I may have.
Mr. PECORA. If you did, you do not recall it?
Mr. FORD. NO, sir.
Mr. PECORA. DO you
consider that during the years that you were
a director of the group, you were active in the discharge of your duties
as such director?
Mr. FORD. I was in close contact with the members of the operating organization, Mr. Longley, Mr. Kanzler, Mr. Lord, and Dr.
Murphy.
Mr. PECORA, Were you active in the discharge of your duties as a
director, in you own opinion?
Mr. FORD. I thought I was. I was counseling with those men on
the policies of the bank.
Mr. PECORA. HOW much counseling did you do?
Mr. FORD. I do not remember, but there were many times when
various matters were discussed.
STOCK EXCHANGE PRACTICES
4663
Mr. PECORA. DO you remember any special policy that you ever
advocated for the group to follow?
Mr. FORD. I do not recall advocating any policy.
Mr. PECORA. Were you present at any meeting of the board, or
the advisory committee of the board, at which there was brought up
the discussion and consideration of any protest by the officers of any
of the unit banks with respect to declaring a dividend, at the rate
suggested by the group to such banks?
Mr. FORD. A protest by the various members?
Mr. PECORA. By officers.
Mr. FORD. By officers of some of the units?
Mr. PECORA.
Yes.
Mr. FORD. NO, sir; I don't remember it,
Mr. PECORA. NOW, Mr. Ford, Senator Couzens a few minutes ago
asked you to tell specifically what, if anything, you did with regard
to any relief measures taken by the group on behalf of the group
at any time during its life. Will you answer that question now?
Mr. FORD. I loaned them some money.
Mr. PECORA. DO you recall when?
Mr. FORD (looks through some papers).
Mr. PECORA. If you are ready you may go ahead.
Mr. FORD. I loaned them $5,000,000 in municipal bonds and
$1,000,000 in cash. And that receipt is dated December 11, 1930.
Mr. PECORA. That is when you loaned $1,000,000 in cash?
Mr. FORD. Yes, sir.
Mr. PECORA. NOW,
you loaned that money to the Guardian
Detroit Co., didn't you, one of the securities affiliates of the group?
Mr. FORD. Yes,
sir.
Mr. PECORA. YOU did not loan it to the group itself?
Mr. FORD. I beg pardon, but it was to the Guardian Detroit Co.
Mr. PECORA. DO you know the occasion for the company getting
that loan?
Mr. FORD. DO you mean the reason for it?
Mr. PECORA. Yes.
Mr. FORD. Well, as
I understood it the Guardian Detroit Co. had
borrowings in various other banks, outside banks, on which collateral
was posted. This was at the time when collateral values had shrunk
materially, and as I understood it the collateral was insufficient for
the loans that were outstanding at that time. Officers of one of the
units of the Group, I think it was, came to me and asked for this loan
which I made in order that they could rectify the loans that had been
made outside.
Mr. PECORA. That is, the Guardian Detroit Co. was indebted to
interests outside of the Group?
Mr. FORD. Indebted on loans to banks outside the Group.
Mr. PECORA. Yes, and in order to enable that company to meet
that indebtedness you loaned that company $1,000,000 on December
11, 1930.
Mr. FORD. That is right.
Mr. PECORA. Has that loan been repaid?
Mr. FORD. NO, sir.
Mr. PECORA. That was a 6 months' loan originally, wasn't it?
Mr. FORD. It was a 6 months' note.
Mr. PECORA. Who were the endorsers on that note, do you recall?
4664
STOCK EXCHANGE PRACTICES
Mr. FORD. Guardian Detroit Union Group—well, this note may
be a renewal, and this is dated in March of 1932.
Mr. PECORA. It is March 9, 1932, isn't it?
Mr. FORD. Yes.
Mr. PECORA. NOW,
this first loan of yours of $1,000,000 was made
in December of 1930, and that was about a year after the Guardian
Detroit Union Group, Inc., was formed, wasn't it?
Mr. FORD. Yes, sir.
Mr. PECORA. And the
fact that it needed money at that time and
should have to borrow from you in order to enable it to meet obligations it owed to interests outside the group, of which it was a unit,
and that it has not been able to pay back that loan, would be some
evidence, would it not, in your opinion of the unsoundness of the
company?
Mr. FORD. I wouldn't say so necessarily. It might.
Mr. PECORA. What would it indicate?
Mr. FORD. There were many other conditions at that time that
were affecting the status of the company.
Mr. PECORA. Well, did you press the note for payment?
Mr. FORD. NO, sir.
PECORA. Were you asked to forbear?
FORD. I do not recall. I do not think so.
PECORA. Well, did you voluntarily let it drift
Mr. FORD. Yes.
Mr. PECORA. Was that because you did not want
Mr.
Mr.
Mr.
along?
it repaid, or because you did not think it could pay it back?
Mr. FORD. The reason for making that loan was to help the company, that particular company, and I did not press them to pay it
back because I felt when they could pay it they would.
Mr. PECORA. Well, the fact that they did not pay it back at any
time would indicate that they could not pay it back, is that a fair
assumption?
Mr. FORD. Could not pay it back at that time it is true.
Mr. PECORA. At the same time that you made to the Guardian
Detroit Co. this loan of $1,000,000 in cash you also loaned them
securities of a par value of $5,000,000, didn't you?
Mr. FORD. Yes, sir.
Mr. PECORA. And what was that done for?
Mr. FORD. I understood, as I now recall, that
it was for the same
purpose.
Mr. PECORA. Isn't it a fact that the Guardian Detroit Co. used that
5 million dollars face value of securities that you loaned to them as
collateral against a loan of 4% million dollars that that bank negotiated or obtained Irom the Bankers Trust Co. of New York?
Mr. FORD. I believe that is right.
Mr. PECORA. Did you get those securities back?
Mr. FORD. I beg your pardon?
Mr. PECORA. I say, did you get these securites back?
Mr. FORD. Well, actually I did get them back; yes. The Ford
Motor Co. paid off that loan and the securities were returned, and
then I satisfied the Ford Motor Co. later on, or, in other words, I
repaid the Ford Motor Co.
Mr. PECORA. YOU got them back through the medium of some one
other than the borrower?
STOCK EXCHANGE PRACTICES
4665
Mr. FORD. Yes, sir.
Mr. PECORA. That is,
the Guardian Detroit Co. not paying the
loan for which they put up that collateral as security with the Bankers
Trust Co. of New York?
Mr. FORD. Yes, sir.
Mr. PECORA. DO you
know the purpose for which the Guardian
Detroit Co. required that loan of 4% million dollars in December of
1930?
Mr. FORD. WeH, I thought it was for the same purpose that they
borrowed the 1 million dollars in cash.
Mr, PECORA. DO you recall what the condition was of the Guardian
Detroit Co. at that "time? I am referring now to December of 1930.
Mr. FORD. That was very shortly after the first market crash.
Their portfolio consisted of securities that had depreciated very greatly
and they had heavy borrowings.
Mr. PECORA. DO you know
Senator COUZENS (interposing). Mr. Pecora, before you go further
into that let me ask Mr. Ford: You said they had heavy borrowings.
What were those borrowings for?
Mr. FORD. I suppose to buy securities.
Senator COUZENS. That is, for the Guardian Detroit Co. to buy
securities?
Mr. FORD. That was a securities company, you know.
Senator COUZENS. Well, you say they borrowed money from you in
the first instance to buy securities?
Mr. FORD. NO. They borrowed money from me to satisfy some
loans outstanding and on which securities they owned had depreciated.
Senator COUZENS. In other words, they borrowed in the first
instance money with which to buy securities, which securities afterwards depreciated, is that it?
Mr. FORD. They had loans. I do not know whether they altogether
bought securities for which they borrowed money. I really could
not say about that.
Senator COUZENS. They would not have any other purpose for
borrowing money, except to buy securities, would they?
Mr. FORD. I could not say. I wouldn't think so.
Mr. PECORA. Mr. Ford, have you the receipt given to you by the
Guardian Detroit Co. for this $5,000,000 face value of bonds that
you loaned to it in December of 1930?
Mr. FORD. Yes,
Mr. PECORA. I
sir.
show you what purports to be a photostatic reproduction of such receipt. Will you please look at it and tell me if
you recognize it to be a true and correct copy thereof? It is the top
document in that file of papers I am handing over to you.
Mr. FORD (after having his attorney, Mr. Columbo, read the
phostatic copy, while the witness held his own paper). That is correct,
Mr. PECORA. I offer it in evidence, Mr. Chairman.
Senator COUZENS. Let it be received.
(A receipt dated Dec. 11, 1930, from the Guardian Detroit Co. for
5 million dollars of securities loaned by Mr. Ford, was marked "Committee Exhibit No. 69, Jan. 11, 1934", and will be found immediately
following where read by Mr. Pecora.)
4666
STOCK EXCHANGE PEACTICES
Mr. PECORA. The document received as committee Exhibit No. 69
of this date, reads as follows:
Guardian Detroit Company acknowledges receipt from Edsel B. Ford of municipal bonds of the par value of ($5,000,000) as listed and described in the
attached photostatic copies of safe keeping receipts.
These bonds have been loaned to the undersigned GUARDIAN DETROIT
COMPANY in order that that company may use the same as collateral to secure
loans made or which may be made by the GUARDIAN DETROIT COMPANY
and/or KEANE, HIGBIE & COMPANY. All or any part of such bonds shall
be returned by the undersigned GUARDIAN DETROIT COMPANY to EDSEL
B. FORD upon demand. If any of these bonds are used to secure loans of either
of these Companies at banks or trust companies not in the Guardian Group, the
proceeds of such loans must be used to pay or reduce loans at Guardian banks or
trust companies.
It is expressly understood that all principal and interest collected on such bonds
by said GUARDIAN DETROIT COMPANY shall be paid immediately upon
receipt thereof, to the said EDSEL B. FORD.
GUARDIAN DETROIT COMPANY,
By ROBERT O. LORD,
Its Vice President.
Dated December 11, 1930.
Now, Mr. Ford, do you know whether or not this loan of 4:}{ million
dollars that was procured by the Guardian Detroit Co. from the Bankers Trust Co. of New York was used by the Guardian Detroit Co. to
pay or reduce loans it had in banks belonging to the group?
Mr. FORD. NO, sir; I do not know that.
Mr. PECORA. NOW, Mr. Ford, I show you what purports to be a
photostatic reproduction of the note for 1 million dollars given to
you under date of March 9, 1932, and which I understand was the
final renewal note for the 1 million dollar loan that you made on
December 11, 1930, to the Guardian Detroit Co. Will you look at
it and tell me if you recognize it to be a true and correct copy of such
note, together with the endorsements thereon?
Mr. FORD (comparing photostat with his own paper by the aid of
his attorney, Mr. Columbo). That is right.
Mr. PECORA. I offer it in evidence.
Senator COUZENS (presiding). Let it be received.
(A note dated Mar. 9*, 1932 for 1 million dollars at 6 months payable to the order of K. O. Lord., agent, by the Guardian Detroit Co.
was marked "Committee Exhibit No. 70, Jan. 11, 1934", and will
be found immediately following where read by Mr. Pecora.)
Mr. PECORA. I will read the note, as follows:
$1,000,000.00
DETROIT, MICHIGAN, March 9, 1932.
Six months after date we promise to pay to R. O. Lord, agent, or order, one
million dollars at GUARDIAN NATIONAL BANK OF COMMERCE.
Value received »,wiih 5,,perc^nt interest per annum payable, monthly.
GUARDIAN DETROIT COMPANY
By F. W. PRITCHARD Treasurer.
Countersigned by R. C. Huelsman.
And the endorsements thereon are as follows:
GUARDIAN DETROIT UNION GROUP, INC.
By B. K. PATTERSON, Treasurer.
By C. H. HABERKORN, Secretary.
R. O. LORD, Agent.
Now, for whom was Mr. Lord acting as agent in this transaction?
Mr. FORD (after talking with his counsel, Mr. Columbo). The
Guardian Detroit Group Co.
STOCK EXCHANGE PEACTICES
4667
Mr. PECORA. DO you mean the Guardian Detroit Union Group,
Inc.?
Mr. FORD. I would think so.
Mr. PECORA. DO you know what was done by the Guardian Detroit
Co. with the loan of 4% million dollars that it obtained in December of
1930 from the Bankers Trust Co. of New York, what use was made of
the proceeds of that loan?
Mr. FORD. I do not recall.
Mr. PECORA. What was that answer?
Mr. FORD. I do not recall.
Mr. PECORA. Well, do you know, or did you ever know?
Mr. FORD. I may have known, but I don't now recall. That is the
loan that was obtained from
Mr. PECORA (interposing). That was a loan obtained on the collateral that ;you loaned to the Guardian Detroit Co.
Mr. FORD. I am only assuming, or at least I thought they were used
for satisfying loans made to the Guardian Detroit Co. by banks, on
which the collateral had become reduced.
Mr. PECORA. But you don't know what was actually done with the
proceeds of the loan, do you?
Mr. FORD. No; I do
not.
Mr. PECORA. NOW, Mr. Ford, were there occasions when requests
were made of the Ford Motor Co., or of you individually, to make
special and temporary deposits in any one of the unit banks of the
Group, in order to—well, to make a special or temporary deposit,
first?
Mr. FORD. There may have been.
Mr. PECORA. In how many instances was that done?
Mr. FORD. Oh, I have no idea.
Mr. PECORA. In many instances?
Mr. FORD. Those requests would undoubtedly go through Mr.
Craig, who was assistant treasurer. I do not recall any request ever
having been made directly to me, but there might have been.
Mr. PECORA. DO you know the purpose for the making of those
temporary deposits?
Mr. FORD. I suppose to show increased deposits in their statements.
Mr. PECORA. That is, in the annual statements?
Mr. FORD. I am not sure.
Mr. PECORA. DO you know the largest individual special or temporary deposit of that kind made in any one of the unit banks by you
or your company?
Mr. FORD. The actual amount?
Mr. PECORA. Yes.
Mr. FORD. No, sir.
Mr. PECORA. AS a
bank director—and you were a bank director,
weren't you?
Mr. FORD. Yes, sir.
Mr. PECORA. In how many banks were you a director?
Mr. FORD. When?
Mr. PECORA. During the years 1930,1931, and 1932.
Mr. FORD. The National Bank of Commerce until
it was consolidated afterwards with the Guardian National Bank of Commerce
of Detroit.
4668
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, as a bank director, Mr. Ford, and as a business
man, do you think it was an ethical method of enhancing the appearance, or improving the appearance of the bank's condition by making a
temporary deposit and withdrawing it shortly after the first of the
year?
Mr. FORD. Well
Mr. COLUMBO. You don't know that it was done.
Mr. PECORA. Mr. Columbo, won't you let me get Mr. Ford's
opinions?
Mr. COLUMBO. Well, I was trying to refresh his recollection.
Mr. PECORA. YOU cannot refresh the witness' recollection concerning an opinion, which was what I was calling for at the moment, can
you?
Mr. COLUMBO. Yes.
Mr. PECORA. YOU say you can?
Mr. COLUMBO. Well, I cannot if you object to it.
Mr. PECORA. What was that?
Mr. COLUMBO. I say I won't if you don't want me to do it.
Mr. PECORA. I have no objection to your aiding the witness
with
any facts. But when I call for his opinions I want the witness to
give me his opinions.
Mr. COLUMBO. Well, I want him given the facts on which he may
base an opinion.
Mr. PECORA. The facts are already admitted, namely, that temporary deposits were made over the end of the year in order to enable
unit banks to show an increase of deposits. I am asking Mr. Ford
for his opinion as to whether or not, as a bank director and as a business man, he thinks that is a fair and ethical method.
Mr. FORD. Perhaps not. I do not remember the circumstances
under which the requests were made.
Mr. PECORA. Haven't you already indicated that you knew what
the circumstances were, namely, to enable the bank to show an increased amount of deposits at the end of the year?
Mr. FORD. That is quite possible, yes.
Mr. PECORA. And do you consider that an ethical and fair practice?
Mr. FORD. NO; I don't suppose it is. I don't really know about
that.
Mr. PECORA. DO you know why you did it?
Mr. FORD. NO, sir.
Mr. PECORA. While
I am on this subject I will depart for a moment
or two from loans that you made to the group or any of the units of
the group and ask you this question: Do you recall a transaction had
in December of 1932 in which the Ford Motor Co. purchased from the
Guaranty Trust Co. of New York, United States Treasury 1-year
notes of the face amount of $7,500,000?
Mr. FORD. The Ford Motor Co. purchased them, do you mean?
Mr. PECORA. Yes.
Mr. FORD. NO, sir;
I do not recall it. It is quite possible that we
did, though.
Mr. PECORA. Purchased them as of December 31, 1932, and sold
them on January 3, 1933.
Mr. FORD. It is quite possible, but I don't know.
Mr. PECORA. What was the reason for that transaction?
STOCK EXCHANGE PRACTICES
4669
Mr. FORD. I do not remember that specific transaction, but I
know the purpose for converting cash into bonds at the end of the
year.
Mr. PECORA. Well, tell us what it was.
Mr. FORD. We wanted to show less cash on our annual statement
which would be published in Massachusetts later on in the spring.
We wanted to show more diversification of our intangible assets.
Mr. PECORA. Did you also want to avoid the payment of the tax
levied under the laws of the State of Michigan on those cash assets?
Mr. FORD. There is no tax levied on them.
Mr. PECORA. Are you sure of that?
Mr. FORD. Quite sure. And I know that that had nothing to do
with it, and there was no tax matter involved. Or that is my understanding of it. Am I wrong about that?
Mr. PECORA. YOU better ask your counsel as to that.
Mr. FORD (after inquiring of Mr. Columbo, and Mr. Columbo conferring with Mr. Longley). Well, counsel states that we have an
opinion from the Attorney General of Michigan on that point, that
there is no tax involved.
Mr. PECORA. What do you mean, that you have an opinion there
was no tax involved?
Mr. FORD. Well, apparently we have not paid the tax.
Mr. PECORA. YOU did not pay a tax on the cash that you converted
into bonds, into Government bonds, is that what you mean?
Mr. FORD. What would the tax be paid on?
Mr. PECORA. A personal property tax under the laws of the State
of Michigan.
Mr. FORD. Yes, that is true, but it is my understanding there was
no tax-saving involved in this transaction.
Senator COUZENS. In other words, the cash that you had left over
after purchasing those Government bonds, was tax-exempt, is that
what you mean?
Mr. COLUMBO. That is right.
Senator COUZENS. That is your understanding?
Mr. FORD. I understand that there is no tax involved in a transaction of that kind.
Senator COUZENS. I wasn't talking about the transaction.
Mr. FORD. Well, it was trying to convert cash into that type of
securities.
Senator COUZENS. I understand that, but if I understand Mr.
Pecora's question the implication is that you purchased those bonds
for the purpose of avoiding payment of a tax on the cash you had
on hand.
Mr. FORD. Well,
Senator COUZENS (continuing). But that was not the purpose, and
that was not accomplished, is that your answer?
Mr. FORD. I do not think there was any tax-saving involved.
Senator COUZENS. I think that is correct, Mr. Pecora.
Mr. COLUMBO. There is no tax on intangibles in Michigan, Mr.
Pecora.
Mr. PECORA. What is the opinion from the Attorney General that
vou have referred to, Mr. Ford? Will you produce it now?
Mr. FORD (after consulting Mr. Columbo). I have no copy here.
4670
STOCK EXCHANGE PRACTICES
Mr. PECORA. Have you been advised by your counsel that moneys
belonging to the Ford Motor Co. and standing to its credit at the
end of the year are not taxable under the personal property tax laws
of the State of Michigan?
Mr. FORD. Yes.
Mr. PECORA. Which counsel is giving you that advice?
Mr. FORD. Mr. Columbo.
Mr. PECORA. Have you gotten similar advice from Mr.
Mr. FORD. Yes, sir.
Mr. PECORA. Well, was it the practice or custom of jour
Longley?
company
to take funds it had on deposit in any of those banks in Detroit and
purchase Government bonds with them and resell those bonds a few
days after the first of the ensuing year? That is, to make purchases
as of the end of the tax year and resell those securities within 2 or 3
days thereafter?
Mr. FORD. That was done.
Mr. PECORA. What did you say that it was done for?
Mr. FORD. TO show diversification in our annual statement which
we filed with the Secretary of State of Massachusetts, so that we did
not show as much cash on the annual statement.
Mr. PECORA. TO what extent was that practiced?
Mr. FORD. I could not say.
Mr. PECORA. That is, how much every year, at the end of the year,
was drawn out from bank deposit accounts
Mr. FORD (interposing). I could not tell you.
Mr. PECORA (continuing). For the purchase of Government securities and a resale of those Government securities within 2 or 3 days
thereafter.
Mr. FORD. I could not say. It varied from year to year I expect,
but I have no idea of the amount.
Mr. PECORA. Well, now, you said you wanted to show diversification in some report that you had to file in the State of Massachusetts.
Mr. FORD. Yes, sir.
Mr. PECORA. Did you
consider that cash on hand or in bank was
not a good asset?
Mr. FORD. NO, sir. It was just a question of not showing as
much cash on hand, because they usually made a big statement in
the papers about it, and we did not care about that.
Senator COUZENS. DO you recall what was the largest amount that
you purchased with security bonds to effect the purpose?
Mr. FORD. I haven't any idea, Senator. Mr. Craig has all that
information.
Mr. PECORA. Who is Mr. B. J. Craig?
Mr. FORD. He is the secretary and assistant treasurer of the
company, Ford Motor Co.
Mr. PECORA. I show you what purports to be a photostatic reproduction of a letter addressed to Mr. Craig as Secretary of Ford Motor
Co., by the Vice President and Cashier of the Guardian National Bank
of Commerce of Detroit, bearing date December 22, 1932. Will you
look at it and tell me if you know it to be a true and correct copy of
such a letter sent to Mr. Craig, secretary of the Ford Motor Co.?
Mr. FORD (after perusing document). I don't recall ever having
seen that letter, sir.
STOCK EXCHANGE PRACTICES
4671
Mr. PECORA. DO you question the authenticity of this copy of the
letter?
Mr. FORD. NO, sir.
Mr. PECORA. I may
say that we obtained it from files of the
Guardian National Bank of Commerce of Detroit.
Mr. FORD.
Yes.
Mr. PECORA. I offer it in evidence.
Senator COUZENS. The same will be entered in the record.
(Photostat of a letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Dec. 22, 1932, from Vice President and
Cashier to B. J. Craig, Secretary Ford Motor Co., Dearborn, Mich.,
was thereupon designated "Committee Exhibit No. 71, Jan. 11,
1934/' and same appears in full immediately following, were read
by Mr. Pecora.)
Mr. PECORA. The letter received in evidence as committee^
exhibit no. 71 of this date reads as follows, on the letterhead of the
Guardian National Bank of Commerce of Detroit [reading]:
DECEMBER 22,
Mr.
B. J.
1932.
CRAIG,
Secretary Ford Motor Company,
Dearborn, Michigan.
DEAR M R . CRAIG: In accordance with arrangements made with you today,
we hereby confirm sale to you of $7,500,000 par value U.S. Treasury Certificates
%% of Series TD 1933 dated December 15, 1932, maturing December 15, 1933,
at 100.40625 ($7,530,468.75) plus accrued interest ($2,472.53) and enclose confirmation showing the amount which will be due in payment.
We understand that this transaction is to be as of December 31, 1932, and
further, that you authorize us to charge your Treasurer's demand account,
carried on our books, on that date in the amount of $7,532,941.28, with the
further understanding that if your Treasurer's demand account does not have
sufficient balance to cover this charge we may transfer from your Treasurer's
savings account a sufficient amount to cover it.
We also understand that you have agreed to resell these certificates to us on
January 3, 1933 at 100.40625 ($7,530,468.75) plus accrued interest ($2,936.10)
and we enclose confirmation showing the amount ($7,533,404.85) which will be
due to you in payment thereof, and, in accordance with your instructions, we
will credit to your Treasurer's demand account, on that date, with the further
understanding that we will charge your Treasurer's demand account and credit
your Treasurer's savings account with the same amount, if any, which we will
have been required to transfer on December 31, 1932, as hereabove provided for.
As explained to you during our discussion of this matter, in Mr. Judson's office
today, the Guaranty Trust Company of New York, through whom we are purchasing these securities, has requested that they be furnished a letter from the
Ford Motor Company relative to our agreement to purchase from them and their
agreement to sell to us on December 31, 1932, the above-mentioned bonds, said
letter also consenting to and authorizing the pledging to the Guaranty Trust
Company of the bonds as collateral security for the payment of the Guardian
National Bank of Commerce of Detroit Cashier's check, payable to the Guaranty
Trust Company, which we purchased with your funds and forwarded to them
and which would not clear for payment through the Detroit branch of the Chicago
Federal Reserve Bank until Tuesday, January 3rd.
A copy of the proposed letter, together with a copy of the proposed agreement,
was handed to you today and we would appreciate it, very much, if you will issue
such a letter direct to the Guaranty Trust Company, advising us that you have
done so or, if you desire, forward the letter together with the exhibit direct to us
and we will forward it to New York.
With the exception of this letter and exhibit, as requested by the Guaranty
Trust Company, the mechanical operations in this transaction are identical with
the method used last year in the handling of a similar matter for your company.
As we must close this arrangement in New York at the earliest possible time,
we would appreciate your acknowledgement and acceptance of this program,
Very truly yours,
Signed by " E . S. Burns, Vice President and Cashier."
4672
STOCK EXCHANGE PRACTICES
Now I show you what purports to be a photostatic copy of a letter
addressed by Ford Motor Co., B. J. Craig, Secretary and Assistant
Treasurer, to the Guaranty Trust Co. of New York, dated December
28, 1932, and apparently written in pursuance of the suggestion contained in the letter marked "Committee's Exhibit No. 71" as of this
date. Will you please look at it and tell me if you recognize it to be
a true and correct copy of such a letter written by your company to
the Guaranty Trust Co. of New York?
Mr. FORD (after perusing letter). What was the question?
Mr. PECORA. DO you recognize that as a true and correct copy?
Mr. FORD. I have never seen that letter.
Mr. PECORA. DO you doubt the authenticity of it?
Mr. FORD. NO, sir.
Mr. PECORA. I offer it in evidence.
Senator COUZENS (presiding). The same will be entered in the
record.
(Photostat of copy of letter on letterhead of Ford Motor Co.,
dated Dec. 28, 1932, from Ford Motor Co. by B. J. Craig, Secretary
and Assistant Treasurer, to Guaranty Trust Co. of New York, was
thereupon designated "Committee Exhibit No. 72, January 11,1934/'
and same appears immediately following, where read by Mr. Pecora.)
Mr. PECORA. Mr. Colombo, with regard to any of these letters the
witness may have identified, any advice you can give to impeach the
authenticity of any of these documents, we will be glad to get from
you and we will amend the record accordingly.
Mr. COLOMBO. I reserve the right to object.
Mr. PECORA. There is no such right.
Mr. COLOMBO. I thought I could make one.
Mr. PECORA. The letter is marked "Committee's Exhibit No. 72
of this date/' and reads as follows, on the letterhead of the Ford
Motor Co., Rouge Plant, Dearborn, Mich, [reading]:
DECEMBER
GUARANTY TRUST COMPANY OF NEW
28,
1932.
YORK,
140 Broadway, New Zork, N.Y.
DEAR SIRS: We have examined and approved the proposed form of agreement
to be made between yourselves and Guardian National Bank of Commerce of
Detroit, a copy of which is annexed hereto as Exhibit A, with respect to the purchase by said Guardian National Bank of Commerce of Detroit from you of
$7,500,000 principal amount of U.S. Treasury One year 3/4% notes dated December 15th, 1932.
We hereby advise you that we consent to and authorize the pledge with yourselves of said $7,500,000.00 principal amount of U.S. Treasury Notes as collateral
security for the payment to you of the Cashier's Check of Guardian National
Bank of Commerce of Detroit, all in the manner referred to in said agreement.
Yours very truly,
FORD MOTOR
B. J. CRAIG,
COMPANY,
Secretary and Assistant Treasurer.
I show you what purports to be a photostatic reproduction of a
letter addressed by the Guaranty Trust Co. of New York to Mr,
Elbert S. Burns, vice president and cashier of the Guardian National
Bank of Commerce, Detroit, Mich., dated as of December 29, 1932,
referring to the letter from the Ford Motor Co. marked " Committee's
Exhibit No. 72." Will you look at it, Mr. Ford, and tell us if you
know anything about it?
Mr. FORD (after perusing document). No, sir.
STOCK EXCHANGE PRACTICES
4673
Mr. PECORA. It relates to the transaction referred to in the two
previous letters, doesn't it?
Mr. FORD. I would assume it did.
Mr. PECORA. I offer it in evidence.
Senator COUZENS (presiding). The same will be entered on the
record.
(Photostat of letter on letterhead of Guaranty Trust Co. of New
York, dated Dec. 29, 1932, from William L. Kleitz to Elbert S. Burns,
was thereupon designated "Committee Exhibit No. 73, Jan. 11,1934 ",
and same appears in full immediately following, where read by Mr.
Pecora.)
Mr. PECORA. The document marked " Committee's Exhibit No.
73 of this date", written on the letterhead of the Guarant}^ Trust Co.
of New York, reads as follows [reading]:
DECEMBER 29,
1932.
Mr. ELBERT S. BURNS,
Vice President and Cashier, Guardian National Bank of Commerce,
Detroit, Michigan.
DEAR MR. BURNS: We have received the letter with enclosures from the Ford
Motor Company dated December 28th, enclosed with yours of the same date.
We also acknowledge receipt of your accepted copy of our letter to you dated
December 22nd. We are returning herewith our accepted copy of your letter
to us dated December 24th.
On receipt of your treasurer's check for $7,532,941.28 on December 31st, we
will sell to you $7,500,000.00 principal amount of U. S. Treasury One Year 3/400
Notes dated December 15, 1932.
Very truly yours,
W. L. KLEITZ, Vice President.
I show you what purports to be a photostatic copy of another letter
addressed to the Guaranty Trust Co. of New York, signed by the
Guardian National Bank of Commerce of Detroit, dated December
24, 1932, and which appears to be the letter of that date referred to
in Committee's Exhibit no. 73 just received in evidence. Will you
look at it, Mr. Ford, and tell us if you know anything about that
letter?
Mr. FORD (after perusing document). I have never seen that letter>
sir.
Mr. PECORA. But you know that it relates to the same transaction?
Mr. FORD. I would think so.
Mr. PECORA. I offer it in evidence.
Senator COUZENS (presiding). It may be entered on the record.
(Photostat of letter on letterhead, of Guardian National Bank of
Commerce of Detroit, datedDec. 24, 1932, from Elbert S. Burns,
Vice President Guardian National Bank of Commerce of Detroit to
Guaranty Trust Co. of New York was designated "Committee Exhibit No. 74, Jan. 11, 1934 ", and appears in full immediately following
where read by Mr. Pecora.)
M.r. PECORA. The letter is marked "Exhibit No. 74" of this date
on the letterhead of the Guardian National Bank of Commerce of
Detroit and reads as folio vvs. [Reading:]
DECEMBER 24,
GUARANTY TRUST COMPANY OF NEW
1932.
YORK,
141 Broadway, Neiv York, N.Y.
(Attention of Mr. Wm. L. Kleitz, Vice President.)
DEAR SIRS: We beg to confirm as follows the arrangements which we have
made with you with respect to your purchase of $7,500,000.00 principal amount
of U.S. Treasury One-year %% notes dated December 15, 1932:
4674
STOCK EXCHANGE PRACTICES
1. We hereby agree to purchase from you, and you agree to sell to us, on
December 31, 1932, $7,500,000.00 principal amount"of U.S. Treasury One-year
%% notes dated December 15, 1932 (hereinafter referred to as U.S. Treasury
Notes) at a price of 100.40625, plus accrued interest thereon to December 31,
1932.
2. Payment for said U.S. Treasury Notes shall be made by us to you by our
delivering to you, at your office in New York City on the morning of December
31, 1932, our Cashier's Check for said purchase price.
3. You are hereby authorized and directed to hold said U.S. Treasury Notes
as collateral security for the payment of our above mentioned Cashier's check
until said Cashier's Check has been paid in full.
Apparently they were not taking any chances with a Cashier's
check.
4. It is our intention to sell the said U.S. Treasury Notes on December 31,
1932, to Ford Motor Company, and we hand you herewith the written consent
and authorization of said Ford Motor Company to the pledge of said U.S.
Treasury Notes with yourselves as collateral security as aforesaid.
If the foregoing is in accordance with your understanding of our agreement,
kindly so indicate by signing and returning to us the enclosed carbon copy of
this letter, whereupon this letter shall constitute a binding agreement between us.
Yours very truly,
GUARDIAN NATIONAL BANK OF COMMERCE OF DETROIT,
By ELBERT S. BURNS, Vice President.
The foregoing is hereby approved and accepted.
GUARANTY TRUST COMPANY OF NEW YORK,
By W. L. KLEITZ, Vice President.
At the same time did the Guardian National Bank of Commerce of
Detroit purchase from the Chemical Bank & Trust Co. of New York
for the account of the Ford Motor Co. $7,300,000 of Fourth United
States Liberty Loan bonds, 4% percent, for the principal amount, with
accrued interest, of $7,648,372.21?
Mr. FORD. Did they?
Mr. PECORA. Yes.
Mr. FORD. I do not know.
Mr. PECORA. I show you what
purports to be a photostatic copy of
a letter addressed by Mr. Burns as vice president and cashier of the
Guardian National Bank of Commerce of Detroit to Mr. B. J. Craig,
secretary of the Ford Motor Co., Dearborn, Mich. Will you look at
it and tell me if that is a true copy of such a letter?
Mr. FORD (after perusing document). I don't recall having seen
that letter, sir.
Mr. PECORA. Well, I offer it in evidence subject to any correction
of the record you may want to make if you should learn that that is
not a true and correct copy.
Mr. FORD. I don't question it at all.
Mr. PECORA. What is that?
Mr. FORD. I don't question it.
Senator COUZENS (presiding). The same may be entered in the
record.
(Photostat of letter on letterhead of Guardian National Bank of
Commerce of Detroit, dated Dec. 30, 1932, from Vice President and
Cashier to B. J. Craig, was designated "Committee Exhibit No. 75,
Jan. 11, 1934", and same appears immediately following where read
by Mr. Pecora.)
Senator COUZENS (presiding). I think, Mr. Pecora, that the committee should recess until 10:30 tomorrow morning on account of the
Senate being in session now.
STOCK EXCHANGE PEACTICES
4675
Mr. PECORA. This is the last letter I want to offer in evidence, and
then I suggest an adjournment be taken.
The document received in evidence as committee's Exhibit No, 75
of this date reads as follows, on the letterhead of the Guardian
National Bank of Commerce of Detroit. [Reading:]
DECEMBER 30, 1932.
Mr. B. J. CRAIG,
Secretary, Ford Motor Company., Dearborn, Michigan.
DEAR M R . CRAIG: Supplementing my letter of December 22, 1932, I wish to
advise that the Chemical Bank & Trust "Company are billing for delivery December 31, 1932 direct for the account of the Ford Motor Company $7,300,000.00
par value 4th 4.}i% U.S. Liberty Bonds at 103 2%2, or a principal amount of
$7,582,875.00, plus accrued interest to December 31, 1932 of $65,497.21, or an
aggregate total of $7,648,372.21.
In accordance with our previous letter, we are charging your Treasurer's
demand account for this amount on December 31, 1932, to cover the purchase
of our Cashier's Check, payable to the Chemical Bank & Trust Company, Number C 24000, in payment of this purchase for your account.
In accordance with your agreement to sell these securities to us on January 3,
1933, as outlined in our letter of December 22nd, we are enclosing our confirmation of purchase from you of the above mentioned bonds at the same market
value at which they were purchased by you, plus accrued interest to January 3,
1933 of $67,220.81, or an aggregate total of $7,650,095.81. On January 3, 1933
we will credit your Treasurer's demand account for this amount, as outlined in
our letter of December 22nd.
Yours very truly,
Signed by ELBERT S. BURNS,
Vice President and Cashier.
Senator COUZENS (presiding). The witnesses will be present tomorrow morning at 10:30, and the committee will stand in recess
until then.
(Accordingly, at 1:02 p.m., the committee adjourned until 10:30
a.m. of the following day.)
STOCK EXCHANGE PEACTICES
FRIDAY, JANUARY 12, 1934
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 Boom No. 301 of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Costigan, Adams, 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; and Clifford B. Longley and Louis J. Colombo, attorneys for Edsel B. Ford.
The CHAIRMAN. The subcommittee will come to order. Mr. Ford
will take the stand, please.
TESTIMONY OF EDSEL B. FORD, PRESIDENT FORD MOTOR CO.,
DEARBORN, MICH.—Resumed
Mr. PECORA. Mr. Ford, do you know what expense, if any, the
Guardian National Bank of Commerce was put to in order to purchase Government securities for the account of the Ford Motor Co.,
at the end of 1931, buying them from the Ford Motor Co.?
Mr. FORD. NO, sir.
Mr. PECORA. Did the
Ford Motor Co. defray to the bank any of the
expense that the bank might have been put to, or the loss which it
might have incurred, in connection with that transaction ?
Mr. FORD. I do not know, sir. I did not handle the transaction.
Mr. PECORA. On yesterday in the course of your testimony you told
the subcommittee about a loan of 1 million dollars which you made
to the Guardian Detroit Co. on December 11, 1930; and about a loan
of 5 million dollars of securities which you made at about the same
time to the same company, in order to enable that company to use
those securities as collateral for a loan of 4y2 million dollars. Nows
did you or your company make any other loans to either the Guardian Union Group, Inc., or any of its units?
Mr. FORD. The Guardian Detroit Union Group, Inc., made a loan
at the Continental Commercial Bank, on which I was endorser.
Mr. PECORA. When?
Mr. FORD (witness begins looking through some papers7 in his
portfolio).
Senator COUZENS. While you are looking through your records, Mr.
Ford, do you remember the amount?
175541—34—PT 10
7
4677
4678
STOCK EXCHANGE PRACTICES
Mr. FORD. I t was 2y2 million dollars.
Mr. PECORA. Was that on or about July 1,1932?
Mr. FORD (continuing to look through some papers in his portfolio). The agreement was dated December 16, 1931.
Mr. PECORA. Who were the parties to that agreement?
Mr. FORD (continuing to look through his papers).
Mr. PECORA. While you are looking that up let me ask you: Was
that agreement the one under which a credit not to exceed 15 million
dollars was arranged for ?
Mr. FORD. I do not believe I remember that.
Mr. PECORA. DO you recall anything at all about the terms of the
agreement ?
Mr. FORD. I would have to look it up to see.
Mr. PECORA. All right.
Mr. FORD (continuing to look through some papers). I haven't
the agreement—yes, I find I have a copy of the agreement here.
Mr. PECORA. Will you produce it, please?
Mr. FORD. DO you want it?
Mr. PECORA. Yes.
Mr. FORD. Here it is.
Mr. PECORA. Thank you.
Now, Mr. Ford, I have before me what
purports to be a photostatic reproduction of the copy of the agreement which you have just shown me. Will you look at the photostatic reproduction thereof, which I now hand to you, and tell me
if you recognize it as a true and correct copy of the agreement in
question ?
Mr. FORD (after making a comparison, Mr. Colombo, his attorney,
holding the photostat, and the witness holding his own paper).
The CHAIRMAN. YOU can answer now if you "are ready, Mr. Ford.
Mr. FORD. Yes, sir; that is a copy.
Mr. PECORA. Mr. Chairman, I offer in evidence the photostatic
reproduction of the agreement.
The CHAIRMAN. Let it be admitted and entered in the record.
(An agreement in letter form, dated Dec. 16, 1931, addressed to
the Continental Illinois Bank & Trust Co. of Chicago, and the
Bankers Trust Co. of New York City, signed by Guardian Detroit
Union Group, Inc., was marked " Committee Exhibit No. 76, Jan.
12, 1934 ", and will be found where read by Mr. Pecora.)
Mr. PECORA. NOW, Mr. Ford, do you know the circumstances under which this agreement, which has been marked " Committee Exhibit No. 76 ", in evidence, was entered into?
Mr. FORD. I do not quite get your question, Mr. Pecora.
Mr. PECORA. DO you know the circumstances under which this
agreement was entered into?
Mr. FORD. Well, this is the agreement. Do you mean by your
question, the terms of the agreement ?
Mr. PECORA. NO ; not the terms, but
Mr. FORD (continuing). The reasons for it?
Mr. PECORA (continuing). The reasons or circumstances under
which it was found necessary or advisable to make the agreement
that has just been produced and placed in evidence.
Mr. FORD. Well, the Guardian Group wished to borrow some
money, and that was the method by which they went about doing it.
STOCK EXCHANGE PRACTICES
4679
Mr. PECORA. What was the condition of the Guardian Group at
that time which made it necessary for it to borrow money ?
Mr. FORD. Well, the assets of members or units were being criticized, and
Mr. PECORA (interposing). Criticized by whom?
Mr. FORD. By the examiner, I suppose.
Mr. PECORA. By assets of the members—do you mean assets of
the banks that were units of the group ?
Mr. FORD. Units of the group; yes, sir. And as I remember it
those funds were used to take out those criticized assets.
Mr. PECORA. Well, now, I will read the agreement that has been
offered in evidence and received as " Committee Exhibit No. 76 " of
this date. It is in letter form, and as follows:
GUARDIAN DETROIT UNION GROUP, INC.,
Detroit, Mich., December 16, 1931.
OONTINETAL ILLINOIS BANK & TRUST CO.,
Chicago.
BANKERS TRUST CO.,
New York.
GENTLEMEN: It is proposed that the Guarian Detroit Union Group, Inc., a
Michigan corporation, borrow in its own name or in the name of certain of
its directors, for or on its behalf, not to exceed an aggregate of $15,000,000 as
set forth in this letter and as authorized by the board of directors at a regular
meeting held on December 14, 1931.
1. The loan which the Bankers Trust Co. now holds from the Guardian
Detroit Co. of $4,500,000 will be assumed by the Guardian Detroit Union Group,
Inc. This loan is now secured by approximately $5,000,000 par value of municipal bonds, the property of Mr. Edsel B. Ford and loaned by him to the
Guardian Detroit Co. with full power in that company to pledge the same.
The Bankers Trust Co. will continue to carry said loan as the obligation of the
Guardian Detroit Union Group, Inc., under the same terms and conditions as
it is now carrying the obligation of the Guardian Detroit Co. The Bankers
Trust Co. will also loan to the Guardian Detroit Union Group, Inc., up to
$3,000,000, which said loan is to be secured by certain bonds and stocks of a
character acceptable to Bankers Trust Co. (by D.P.C.) and now the property
of the Guardian Detroit Co. (to be acquired by the Guardian Detroit Union
Group, Inc.), said loan to be collateralized with a margin of at least 25 percent
in market value as against the face amount of the loan. Both of the aforesaid
loans, that is to say, the loan for $4,500,000' and loan for $3,000,000, may be
liquidated from time to time by the sale of the collateral, and the Guardian
Detroit Union Group, Inc., shall have the right to pledge such additional
collateral as it may have available when and as needed (other than its holdings
of bank shares).
2. The Bankers Trust Co. will loan for a period, with renewals, not exceeding
3 years, to Mrs. C. S. Mott, $2,500,000, said loan to be collaterialized by the
note of a like amount of Guardian Detroit Union Group, Inc., payable to the
order of said Mott, and by him endorsed and assigned in connection with his
loan.
3. The Continental Illinois Bank & Trust Co. will loan the Guardian Detroit
Union Group, Inc., for a period with renewals not exceeding 3 years, $2,500,000
upon the direct unsecured obligation of said corporation.
4. The Continental Illinois Bank & Trust Co. will loan to Mr. Edsel B.
Ford for a period with renewals not exceeding 3 years, $2,500,000, said loan
to be collateralized by the note of a like amount of the Guardian Detroit Union
Group, Inc., payable to said Ford and by him endorsed and assigned in
connection with his loan.
5. In connection with the three last-named loans of $2,500,000 each, aggregating $7,500,000, it is understood and agreed as follows:
(a) The rate of interest for the first year shall be 5% percent per annum
payable quarterly on the 5th of January, April, July, and October.
(6) The rate of interest after the first year shall be as agreed upon from
time to time, but at a rate not less than 5 percent nor more than 6 percent per
annum.
4680
STOCK EXCHANGE PRACTICES
(c) The Guardian Detroit Union Group, Inc., undertakes to pay not less
than $1,500,000 on or before January 1, 1933, a further sum of not less than
$2,250,000 on or before January 1, 1934, and the balance on or before January
1, 1935.
(d) All payments made upon the principal of said loans shall be applied
pro rata thereon.
(e) The maturity of the notes evidencing said indebtedness from time to
time shall be as may be agreeable to the Bankers Trust Co. and the Continental
Illinois Bank & Trust Co., with the understanding that renewals will be
made from time to time to the end that the entire obligation of $7,500,000
will be liquidated on or before January 1, 1935.
6. Except from or by liquidation of the collateral itself, the loans made by
the Bankers Trust Co., aggregating approximately $7,500,000 and specifically
referred to in paragraph 1 of this letter, will not be liquidated from other
sources than the collateral securing the same without the consent of the Continental Illinois Bank & Trust Co., Mr. Edsel B. Ford, and Mr. C. S. Mott.
7. Mr. Edsel B. Ford will agree that the present obligation of $1,000,000,
owing to him by the Guardian Detroit Co., will remain the obligation of that
company until the total borrowings of the Guardian Detroit Union Group, Inc.,
have been reduced to such an extent that the transfer of said obligation from
the Guardian Detroit Go. to the Guardian Detroit Union Group, Inc., will not
exceed the $15,000,000 hereinafter referred to, authorized by the board of
directors and, furthermore, that said obligation and the obligation to return to
him said $5,000,000 par value of bonds will be carried by said Edsel B. Ford
until the final liquidation and payment of the $7,500,000 of loans referred to
in paragraphs 2, 3, and 4 of this letter, and that until such liquidation said
obligations will be subordinated to the payment thereof.
8. The Guardian Detroit Union Group, Inc., undertakes that other than
the borrowings previously referred to in this letter, it will make no further
or additional borrowings without the prior consent of the Bankers Trust Co.,
the Continental Illinois Bank & Trust Co., Mr. Edsel B. Ford, and Mr. C. S.
Mott.
9. The Guardian Detroit Union Group, Inc., agrees that no sale of its major
bank stock holdings will be made without the consent of the parties named in
the foregoing paragraph as long as all or any part of the $7,500,000 loans
referred to in paragraphs 2, 3, and 4 of this letter s^all remain outstanding,
Unless the proceeds of such sale or sales shall be applied in liquidation of said
loans and shall be sufficient in amount to accomplish such liquidation.
10. No major changes shall be made in the management of the Guardian
Detroit Union Group, Inc., or in any of its large Detroit units after Mar?h 1,
1932, which in the opinion of the Bankers Trust Co. and the Continental Illinois
Bank & Trust Co., shall be detrimental to the entire situation or which may
adversely affect the security of their obligations.
Yours very truly,
ROBERT O.
LORD,
President
A. A. F. MAXWELL,
Secretary.
We have read the foregoing and the terms thereof are satisfactory to us and
we agree to the terms thereof:
C. S. MOTT.
EDSEL B. FORD.
Accepted, December 18, 1931.
BANKERS TRUST CO.,
S. SLOAN COLT,
President.
CONTINENTAL ILLINOIS BANK & TRUST CO.,
ABNER J. STILWELL,
Vice President.
Now, reference is made, as you have probably noticed in this
letter of agreement, to action taken by the board of directors of the
Guardian Detroit Union Group, Inc., at its regular meeting held
on December 14, 1931, authorizing the making of the loans referred
to in this letter of agreement. Are you familiar with the action
that was taken by the board of directors at that time?
STOCK EXCHANGE PBACTICES
4681
Mr. FORD. I do not recall it.
Mr. PECORA. See if your recollection is refreshed by my reading
to you the following extract from the minutes of the meeting of the
board of directors of the group on December 14, 1931. At the meeting in question, according to the minute book, you did not attend.
Does that accord with your recollection ?
Mr. FORD. I don't remember, sir.
Mr. PECORA. I will read this extract from the minutes, under the
caption of the " Report of the President ":
President Lord made the following recommendations, which, on motion duly
made and seconded, were unanimously approved:
Then follow recommendations numbered here 1, 2, 3, 4, 5, 6, 7, 8,
and 9. The fourth recommendation reads as follows:
Second. We recommend that all bad or doubtful assets be lifted out from all
banks and trust companies, so as to place these units in the best possible condition to compete for banking and trust business, to which we recommend that
we confine our activities in the future.
Then recommendation no. 5 made by Mr. Lord reads as follows,
according to the minutes:
Third: In order to effect liquidation of the portfolio of the securities companies to best advantage, we recommend that this liquidation be centered in
the Group Co. and that all loans of the various securities companies be consolidated in a loan by the Group Co., part of the proceeds of which will be used
to pay off existing loans of the various security companies.
Recommendation no. 8 reads as follows:
In order to assume and pay off present loans to the securities companies and
provide for working out recoveries from slow or doubtful assets of banks and
trust companies, and thereby give them increased liquidity, it is recommended
that authority be granted to the officers of the Group Co. to borrow from time
to time, as may be necessary to put the above program into effect, a total of
not to exceed 15 million dollars, upon such terms as may be agreed upon.
The CHAIRMAN. HOW many of those security companies were
there, Mr. Ford; do you remember ?
Mr. FORD. I think there were four, but I am not sure.
The CHAIRMAN. Their business chiefly was to furnish security for
deposits on public funds in these institutions ?
Mr. FORD. Oh, no, sir; they were to deal in securities.
Mr. PECORA. They were security affiliates of the different bank
units in the Group. And the most important one and the largest
one was the company known as the Guardian Detroit Co. ?
Mr. FORD. That is right.
Mr. PECORA. That was the security affiliate of the Guardian Detroit Bank, which afterward became the Guardian National Bank
of Commerce?
Mr. FORD. Yes, sir.
Senator COUZENS. Can you enumerate those
Mr. FORD. Keane, Higbie & Co. was one at
four affiliates?
one time. I cannot
quite remember the termination. The Guardian Detroit Co. was
another one. And I think there were two up in the State, but I
cannot recall them.
Senator COTJZENS. DO not recall the names ?
Mr. FORD. NO, sir; I do not. I may be mistaken about that
number, but I think there were four.
4682
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you recall that the condition not only of the Group
but of its various bank and security affiliate units in December 1931
was rather serious?
Mr. FORD. Yes. These assets were being appraised and depreciated all the time, and that is what made the different units require
assistance of this kind to satisfy the depreciation and the criticism
of the securities against the loans in these banks.
Mr. PECORA. DO you know how much of the moneys representing
proceeds of any loans made to the Group under the terms of this
agreement of December 16, 1931, which has been marked in evidence
as " Committee's Exhibit No. 76 " was actually used for the purposes
that you have referred to?
Mr. FORD. NO, sir. I do not.
Mr. PECORA. DO you know how
much was actually borrowed by
the Group under the terms of this agreement of December 16,1931 ?
Mr. FORD (after referring to documents). I would not dare say.
I don't know the exact figure.
Senator COUZENS. Was the whole fifteen million borrowed?
Mr. FORD. I don't know that. I don't think so, but I don't remember.
Senator COITZENS. May I ask, Mr. Pecora, at this time whether
those minutes of December 14,1931, included the list of directors who
were present?
Mr. PECORA. Yes, sir; I will read them into the record from the
minute book. This purports to have been an adjourned regular
quarterly meeting of the board of directors of the Guardian Detroit
Union Group, Inc., held on Monday, December 14, 1931, at 2 p.m.
" There were present "—and I will read the names from the minutes—" Frank W. Blair, Arthur C. Bloomfield, Henry E. Bodman,
Clarence H. Booth, Joseph H. Brewer, Daniel D. Brown, Charles
S. Campbell, George R. Cook, Harry S. Covington, John H. French,
Frank E. Gorman, Stephen A. Graham, C. H. Haberkorn, Jr., Sherwin A. Hill, Ernest Kanzler, Robert O. Lord, Frank J. Maurice,
Edwin R. Morton, Charles S. Mott, Fred T. Murphy, Edwin H.
Nelson, Phelps Newberry, Bert K. Patterson, Herbert S. Reynolds,
John R. Russell, Murray W. Sales, Henry W. Sanger, R. Perry
Shorts, Hal H. Smith, John N. Stalker, James L. Walsh, Charles
B. Warren.
" Mr. Frank W. Blair, chairman of the board, presided, and Mr.
A. A. F. Maxwell acted as secretary."
Now, apparently the difficulties of the Group and various of its
units became so marked by December of 1930 that loans of 5y2 million dollars had to be obtained, which were obtained by a loan of
1 million dollars, which you individually made, and a loan of 4 ^
million dollars, obtained from the Bankers Trust Co. upon 5 million
dollars principal amount of securities loaned by you to the Guardian
Detroit Co.
Mr. FORD. Yes, sir.
Mr. PECORA. NOW,
despite that fact, Mr. Ford, it appears that
during the year 1930 and during the year 1931, particularly, the
Group paid substantial cash dividends to its stockholders, the greater
portion of which it obtained in the form of dividends declared by
the various banking units of the Group. You recall that to be the
fact, don't you ?
STOCK EXCHANGE PRACTICES
4683
Mr. FORD. Yes, sir.
Mr. PECORA. Did you,
as a director of the Group, sanction the
declaration and payment of those dividends during those years both
by the Group and by the various unit banks in the Group ?
Mr. FORD. I don't recall actually sanctioning them, but I know
that they were being paid. I didn't criticize them.
Mr. PECORA. YOU did not criticize them ?
Mr. FORD. NO, sir.
Mr. PECORA. YOU
did not offer any objection or protest to such
action ?
Mr. FORD. NO, sir.
Mr. PECORA. Were
you present at the meetings of the board of the
Group at which those dividends were declared?
Mr. FORD. I don't remember.
Mr. PECORA. During the years 1930 and 1931 ?
Mr. FORD. I don't remember.
Mr. PECORA. Have you a good memory, Mr. Ford ?
Mr. FORD. I think so.
Senator ADAMS. It does not always operate.
Mr. PECORA. Up to the present time you have not recalled many,
or most in fact, of the important things that I have asked you about
concerning the business and the operation of the Group and unit
banks.
Mr. FORD. Well, I am very sorry, sir, but there are a great many
things going on from day to day that I have to go through with, and
it is not always possible to retain all kinds of facts and figures.
Some people are more able to do that than others.
Mr. PECORA. Outside of your position as president of the Ford
Motor Co., and I presume a member of its board of directors, did
you act as a director or officer of any other corporation during the
years 1930 and 1931 and 1932, with the exception of this Group and
one or two of its unit banks ?
Mr. FORD. Well, I would have to refer to my records. We have a
lot of subsidiary corporations.
Mr. PECORA. By " we " you mean the Ford Motor Co. ?
Mr. FORD. Yes.
Mr. PECORA. Outside
of the immediate corporate interests of the
Ford Motor Co. and its subsidiaries, did you sit and serve as a member of the board of directors of any other corporation or corporations
than this Group and any of its unit banks during the years 1930
and 1931 and 1932?
Mr. FORD. I don't think so.
Mr. PECORA. DO you know what the status is today of any of the
loans that were made under this agreement of December 16, 1931?
Mr. FORD. I know that some of them were paid.
Mr. PECORA. DO you know which ones ?
Mr. FORD. The 4% million dollar loan that was at the Bankers
Trust Co. and the 2% million dollar endorsement which I made was
paid. Those are the only ones I know of.
Mr. PECORA. The others remain unpaid ?
Mr. FORD. I don't know, sir.
Mr. PECORA. NOW, you spoke of the payment of the loan of 4%
million dollars. Was that paid by the group or by any of its units?
4684
STOCK EXCHANGE PRACTICES
Mr. FORD. NO.
Mr. PECORA. AS
a matter of fact, it was paid by the Ford Motor
Co., wasn't it?
Mr. FORD. That is right.
Mr. PECORA. When I asked you before about the status of these
loans and you said that some of them were paid I wanted you to
tell which of these loans or portions thereof had been paid by the
Group or any of its units.
Mr. FORD. I don't think any of them were paid by the group or
its units.
Mr. PECORA. And that was because the group and those units were
not in a position to repay those loans, wasn't it?
Mr. FORD. I don't know about that. They may have had assets
or cash to pay them, but they did not pay them.
Mr. PECORA. The loan of 4 ^ million dollars which has already
been spoken of and which you say was paid by the Ford Motor Co.—
has that been repaid to the Ford Motor Co. ?
Mr. FORD. NO, sir.
Senator ADAMS. And
the Ford Motor Co. holds the original papers
against the bank ?
Mr. FORD. The Ford Motor Co. paid it temporarily and then I reimbursed the Ford Motor Co., so it is an obligation
Senator ADAMS (interposing). But you hold the obligation againstthe
Mr. FORD. Against the group.
Senator ADAMS. Against the group. And that is true as to the
2y2-million-dollar obligation also, is it?
Mr. FORD. Yes, sir.
Mr. PECORA. NOW, the
2y2 million dollars and the 4%-milliondollar obligation that you referred to were both paid on February
18, 1933, by the Ford Motor Co., were theyi not?
Mr. FORD. Yes, sir.
Mr. PECORA. And the
Ford Motor Co. has been reimbursed by you
individually ?
Mr. FORD. Yes, sir.
Mr. PECORA. And you now hold those
Mr. FORD. Yes, sir.
Mr. PECORA. Which remain unpaid?
Mr. FORD. Yes, sir.
Mr. PECORA. In addition to the loans
obligations?
provided for by this agreement of December 16, 1931, was any other loan made by you or the
Ford Motor Co. to the Guardian Detroit Union Group, Inc., or to
any of its units ?
Mr. FORD. There was a 314-million-dollar loan made on [examining papers]
Mr. PECORA. December 1932, wasn't it ?
Mr. FORD. Yes, sir; to the Trust Co.
Mr. PECORA. TO the Union Guardian Trust Co. ?
Mr. FORD. Yes, sir.
Mr. PECORA. Who made that loan to it ?
Mr. FORD. The Ford Motor Co.
Mr. PECORA. Was it collateralized or secured in any way?
Mr. FORD. Ford Motor Co. holds a note dated December 29,
1932.
STOCK EXCHANGE PRACTICES
Mr. PECORA.
NO part
Mr. FORD. NO, sir.
Mr. PEGORA. NOW, I
4685
of which has been paid ?
show you what purports to be a photostatic
copy of an agreement made between the Ford Motor Co. and the
Guardian Detroit Union Group, Inc., under date of December 29,
1932. Will you look at it and. tell me if you recognize it to be a true
and correct copy of memorandum of agreement under which this
loan of Zy2 million dollars was made by your company to the
Guardian Detroit Union Group ?
Mr. FORD. I think that is correct.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Photostat of agreement between Ford Motor Co. and Guardian
Detroit Union Group, Inc., dated Dec. 29, 1932, was designated
"Committee Exhibit No. 77, Jan. 12, 1934", and appears in full
immediately following, where read by Mr. Pecora.)
The CHAIRMAN. Mr. Ford, may I ask how the stock of the Ford
Motor Co. is held ?
Mr. FORD. Held by Mr. Henry Ford and Mrs. Ford and myself.
The CHAIRMAN. Not held by the public ?
Mr. FORD. NO, sir.
The CHAIRMAN. Then
you have another corporation, the Ford
Motor Co. of Canada?
Mr. FORD. Yes, sir.
The CHAIRMAN. That
stock is listed on the Exchange, I believe,
and distributed to the public generally, but that is a separate corporation ?
Mr. FORD. That is a separate corporation. We are stockholders
in that, and many other people.
Mr. PECORA. The agreement offered in evidence and received as
Committee's Exhibit No. 77 of this date reads as follows (reading) :
MEMORANDUM OF AGKEEMENT
This agreement made this 29th day of December 1932 A.D. by and between
the Ford Motor Co., a Delaware corporation, of Detroit, Mich., of the first part,
and the Guardian Detroit Union Group, Inc., a Michigan corporation, of Detroit,
Mich, (hereinafter called the " Group Co.") of the second part.
Witnesseth: First, the Ford Motor Co. agrees to loan the Group Co. the
sum of $3,500,000, as evidenced by a note of the Group Co. delivered herewith, dated December 2;9, 1932, A.D., and payable on or before 3 years from
date and bearing interest at the rate of 3% percent per annum, payable
semiannually.
Second. The Ford Motor Co. further agrees that the payment of such loan
shall be subordinated to the present outstanding obligations of the Group Co.,
covered by such company's existing agreements with the Continental, Illinois
National Bank & Trust Co., of Chicago, and the Bankers' Trust Co. of New York
City, such indebtedness being referred to set forth in an agreement dated December 16, 1931, A.B., between such banks and the Group Co., a copy of which
is attached hereto and made a part hereof.
Third. The Group Co. agrees that it will make no further or additional
borrowings nor pledge the capital stock of any of its subsidiary companies without the prior consent of the Ford Motor Co., so long as the obligation hereby
created remains unpaid.
Fourth: The Group Co. also agrees during the period this loan or any
part thereof remains unpaid that no sale of its major bank holdings will be
made without consent of the Ford Motor Co., unless the proceeds of such sale
or sales shall be applied in liquidation of this loan and shall be sufficient in
amount to accomplish such liquidation.
4686
STOCK EXCHANGE
PRACTICES
Fifth: The Group Co. agrees that the company will pay no dividends
upon its capital stock without the consent of the Ford Motor Co. "unless
the indebtedness referred to in paragraph 1 shall have first been paid in full.
In witness whereof the parties hereto have executed the foregoing.
FORD MOTOB CO.,
By EDSEL B. FORD, President.
BY B. J. CRAIG, Secretary.
GUARDIAN DETROIT UNION GROUP, INC.,
By ROBERT O. LORD, President.
By O. H. HABERKORN, Jr., Secretary.
The undersigned hereby consent and agree to the making of the loan to the
Group Co. by the Ford Motor Co., above referred to.
CHICAGO, I I I . ,
, 19—.
CONTINENTAL ILLINOIS NATIONAL BANK & TRUST CO.,
By
, Cashier.
NEW YORK, N.Y., December SO, 1932.
BANKERS TRUST CO. OF NEW YORK,
By S. SLOAN COLT, President.
EDSEL B. FORD.
C. S. MOTT.
Senator COUZENS. Was there any collateral for that loan?
Mr. FORD. NO, sir.
Mr. PECORA. What is the status of this loan ? Has any part
of it
ever been repaid ?
Mr. FORD. Not paid.
Mr. PECORA. Any interest due thereon ever been paid ?
Mr. FORD. I don't know.
Mr. PECORA. In the agreement of December 16, 1931, which has
been received in evidence this morning as Committee's Exhibit No.
76, I notice the following provision therein. I t is in the concluding
paragraph, no. 10:
No major changes shall be made in the management of the Guardian Detroit
Union Group, Inc., or any of its large Detroit units after Marcth 1, 1932,
which, in the opinion of the Bankers Trust Co. and the Continental Illinois
Bank and Trust Co., shall be detrimental to the entire situation or which
may adversely affect the security of their obligations.
Isn't that rather an unusual provision, whereby a bank holding
company virtually surrenders its powers to two banks in two other
States?
Mr. FORD. Well, it may be. I never considered it that way. They
had loans, as well as ourselves, which they naturally were anxious
to protect, and I suppose that provision was put in for that purpose. I t never occurred to me that it showed any control or attempted control on the part of anybody else.
Mr. PECORA. I t virtually gave these two creditor banks a veto
power, didn't it ?
Mr. FORD. On any major changes?
Mr. PECORA. Yes.
Mr. FORD. Not necessarily
the banks alone. Doesn't that include
myself and Mr. Mott?
Mr. PECORA. NO ; unfortunately. The provision is:
No major changes shall be made in the management of the Guardian Detroit
Union Group, Inc., or in any of its large Detroit units after March 1, 1932,
which, in the opinion of the Bankers Trust Co. and the Continental Illinois
Bank & Trust Co., shall be detrimental to the entire situation.
STOCK EXCHANGE PBACTICES
4687
Mr. FORD. Yes. I am sorry. I misunderstood.
Mr. PECORA. It was probably thought that you as a director in the
group were in a position to exercise some voice or judgment with
regard to the management of the group. Does not the inclusion
of that remarkable provision in this loan agreement indicate further
the desperate situation of the group and its unit banks in December
1931?
Mr. FORD. That is subject to interpretation. I do not know that
it was necessarily desperate; I did not think so.
Mr. PECORA. Did you think its condition was desperate?
Mr. FORD. I thought it was difficult, but I did not think it was
desperate.
Mr. PECORA. Did you think it had become desperate by December
1932?
Mr. FORD. That all depends on what " desperate " means. Each
month was more difficult, of course.
Mr. PECORA. When February 1933 came around—you are familiar >
are you not, with the fact that representatives of the group sought
aid from the Eeconstruction Finance Corporation?
Mr. FORD. Yes, sir.
Mr. PECORA. Did you
take any part in any discussions or proceedings in relation to those efforts ?
Mr. FORD. Not with the authorities down here.
Mr. PECORA. I did not limit the question to efforts with the authorities; but did you take part in any discussions or proceedings with
respect to the making of such efforts ?
Mr. FORD. Yes, sir.
Mr. PECORA. Will you
tell the committee the extent of your participation and the substance of your participation in those discussions, and give also the substance of the discussions themselves?
Mr. FORD. The whole matter was gone over with me by Mr.
Kanzler and it was his recommendation that a plan be devised
whereby assistance might be had from the Eeconstruction Finance
Corporation, and I concurred in that; and steps were taken to
proceed.
Mr. PECORA. When did Mr. Kanzler first discuss that subject with
you?
Mr. FORD. In January sometime.
Mr. PECORA. Of 1933?
Mr. FORD. Yes, sir.
Mr. PECORA. HOW many
conversations did you have with him on
that subject—more than one?
Mr. FORD. Oh, yes. I don't recall, but it was more than one.
Mr. PECORA. YOU discussed the subject about that same period
of time with other officers of the group, did you not?
Mr. FORD. I think so.
Mr. PECORA. With whom?
Mr. FORD. Mr. Longley; I do not recall any others.
Mr. PECORA. Just what was the situation of the Group and its
unit banks at that time as it was represented to you by Mr. Kanzler
or Mr. Longley or anyone else?
Mr. FORD. Some of them were, in their opinion, in good shape,
and some of them had considerable frozen assets.
4688
STOCK EXCHANGE PRACTICES
Mr. PECORA. Which were those, in their opinion, that had considerable frozen assets?
Mr. FORD. The Union Guardian Trust Co. was the worst.
Mr. PECORA. Which were the others that had frozen assets ?
Mr. FORD. I guess they all had to a certain extent.
Mr. PECORA. Which were those that, in their opinion, as stated to
you, were considered by them to be in need of outside relief ? And
when I say " outside relief " I mean, relief from outside the Group.
Mr. FORD. The plan was to secure sufficient from the Reconstruction Finance Corporation, if possible, to bolster up perhaps all of
the units, to put them in shape so that they would weather any storm
that might come later on. That was the purpose of the plan.
Mr. PECORA. Well, in the formulation of the plan had any study
or survey been made, so far as you knpw, by anyone, showing the
condition of the various banking units in the Group and the condition of the Group itself?
Mr. FORD. Yes, sir.
Mr. PECORA. Were the
results of such a survey or examination
placed before you?
Mr. FORD. In the form of a discussion; perhaps not a report.
Mr. PECORA. If they were placed before you in the form of a discussion or in any other way, what information was given to you indicating the condition of the Group and its various unit banks, in
January 1938?
Mr. FORD. I knew the condition of the group, because of the loans
that they had made. Loans were made from time to time to assist
the units of the group. This was a further requirement of the
units of the group as a precaution to a great extent.
Mr. PECORA. Tell the committee what you knew, then, whether
it was knowledge acquired by you directly or whether it was
hearsay obtained by you from Mr. Longley or Mr. Kanzler or any
other officers of the group.
Mr. FORD. It was information given to me by the officers whom
I have mentioned and perhaps others whom I do not recall.
Mr. PECORA. What was the substance of that information? In
other words, did they tell you just the condition of each banking
unit in the group or the condition of the group itself ?
Mr. FORD. Not in any great detail.
Mr. PECORA. TO what extent did they inform you about the
condition of such unit banks ?
Mr. FORD. They enumerated the various banks and said that
such and such a bank was in more or less liquid condition, some
more liquid than others, and that the less liquid ones would need
assistance. I do not recall which ones outside of the Union Guardian
Trust Co.
Mr. PECORA. Did you ever attend any meeting of the board of
directors of the group or the advisory committee of the board of
directors of the group at which there was specifically discussed and
considered the condition of each banking unit in the group ?
Mr. FORD. A specific meeting?
Mr. PECORA. Any meeting at all.
Mr. FORD. I do not remember.
STOCK EXCHANGE PRACTICES
4689
Mr. PECOEA. YOU do not remember any such meeting of the board
of directors attended by you at which that subject came up for
discussion ?
Mr. FORD. NO, sir; I do not. My discussions were principally
with the officers mentioned, in discussion of the problems of the units.
Mr. PECORA. Tell us in as much detail as your memory will enable
you to do what Mr. Kanzler said to you in January 1933 concerning
the condition of the group and its banking units that rendered it
advisable or necessary to seek financial assistance from the R.F.C. ?
Mr, FORD. The Trust Co. had
Mr. PECORA. YOU mean the Union Guardian Trust Co. ?
Mr. FORD. Yes—I am sorry. The Union Guardian Trust Co. was
in a frozen condition. I t had a banking department which was
being depleted by withdrawals, and the assets of the bank had frozen
to such an extent that they could not be liquidated fast enough to
take care of the withdrawals. That was the major problem that was
presented down here to the Reconstruction Finance Corporation, and,
as I remember it, the suggestion was made that not only should
the Trust Co. be taken care of but any other units that needed
assistance from the Reconstruction Finance Corporation should be
included in this commitment or requirement whereby the units could
be put on a sufficiently liquid basis to take care of any withdrawals
that might come along.
Mr. PECORA. What units other than the Union Guardian Trust Co.
did Mr. Kanzler tell you were in such condition as to require assistance from the R.F.C. ?
Mr. FORD. I could not answer that from any definite remembrance
at all. I think Flint was one, the unit at Flint, Mich., and I think
Lansing was another.
Senator ADAMS. Were you seeking to make a loan to the group
from the R.F.C. or individual loans to the different units ?
Mr. FORD. I think it was one loan from the R.F.C. in which the
collateral was to be put up by these units and the assistance to go
back to these units in the way of cash from the Reconstruction
Finance Corporation.
Mr. PECORA. Have you told us the substance of all that Mr.
Kanzler stated to you on that subject?
Mr. FORD. I have told you all I can remember at this time.
Mr. PECORA. Tell us what Mr. Longley said to you about the same
subject.
Mr. FORD. The discussion was on the same subject, and I cannot
vary it any. I mean, the whole problem was discussed and certain
conclusions were arrived at that the application be made.
Mr. PECORA. HOW much was to be sought from the R.F.C. for the
relief of the group and its banking units?
Mr. FORD. That figure varied. Originally I think the*idea was,
as I have said before, for the requirements of the Union Guardian
Trust Co. Then there was a much bigger commitment asked, I
think, to take care of all these requirements for the units, which was
some sixty million, I think. Then it was reduced to forty-one or
forty-five millions, or something like that.
4690
STOCK EXCHANGE PRACTICES
Senator COUZENS. Before you got to the point of including all of
the other units of the group did you frame an application for a loan
for the Union Guardian Trust Co. by itself?
Mr. FORD. The Union Guardian Trust Co. already had a loan.
Senator COTJTZENS. But was there not another plan to add to that?
Mr. FORD. Yes, sir; to add to that.
Senator COUZENS. HOW much were you asking for in your first
plan?
Mr. FORD. I have not the figures here, Senator, and it is awfully
hard to remember; but at some time I know that there were 24 or
25 million dollars of deposits and they wanted sufficient money to
take care of the deposit liabilities, and as I tried to memorize it, there
were about 14 millions, but I am not positive.
Senator COUZENS. Then that was afterward enlarged, as I understand the testimony to state, to a larger amount to include all the
units. Is that correct?
Mr. FORD. Yes, sir. I think, on the suggestion of the R.F.C.
Senator COUZENS. DO you know what security was offered to take
care of the application for the Union Guardian Trust Co. ?
Mr. FORD. The second application or the original one ?
Senator COUZENS. The second application.
Mr. FORD. The kind of security?
Senator COUZENS. Yes; and the value that was placed upon it.
Mr. FORD. I think they offered all the remaining assets. The
value that was placed on it I do not recall, but it was less than the
requirement.
Senator COUZENS. I t was less than the requirement ?
Mr. FORD. AS I understand it.
Senator COUZENS. But you do not know how much less ?
Mr. FORD. Those figures changed from time to time. I t was sixty
some million dollars, and then it was reduced.
Senator COUZENS. I mean before you got to including all the
Group, when you first made up your application to secure a loan
sufficient to pay off all of your depositors in the Trust Co., there
was a deficiency, as I understand it, between the securities offered and
the amount of the loan applied for ?
Mr. FORD. Yes, sir. I do not remember what that was. I remember what the final deficiency was, but I do remember what that was at
the time.
Senator COUZENS. What was the final deficiency?
Mr. FORD. I t was about $7,000,000.
Mr. PECORA. Are you familiar in any way with the results of the
conferences that were had with members of the board of the R.F.C.
by officers and directors of the Guardian Detroit Union Group during January and February of 1933 with respect to the Group's
application for a loan from the E.F.C. to enable the Group and the
unit banks to take care of the situation in which it then found itself?
Mr. FORD. Yes; I think I am.
Mr. PECORA. Tell the committee what you understand to have been
the course of events.
Mr. FORD. I thought I already had—that Mr. Kanzler and Mr.
Longley came to Washington and contacted the Reconstruction
Finance Corporation and made this request. The Reconstruction
STOCK EXCHANGE PEACTICES
4691
Finance Corporation sent appraisers or technical men to Detroit to
appraise the assets, and then they had various meetings, or several
meetings, with the R.F.C. board and others that were interested—I
think, Treasury officials. I t was a matter of negotiation from then
on, which took many days. The first trip was made in the latter part
of January, I believe, and then there was another trip on the 6th or
7th or 8th of February.
Is that what you want, Mr. Pecora ?
Mr. PECORA. Well, I want whatever you know of that.
Mr. FORD. Well
Mr. PECORA. I S that all you know about it?
Mr. FORD. I would much rather have you ask me a specific question. I t seems to me that I have covered that phase of it. I said
they contacted with the R.F.C. officials, and after that it was a
matter of negotiation as to the value of the assets, the value of the
collateral pledged, and the amount of loan required, and the details
started to be worked out.
Mr. PECORA. YOU understood that the R.F.C, as the result of conferences that its members had with officers of the group, sent examiners to Detroit to examine the assets of the unit banks and of the
group which would be available as security for a loan that was
sought from the R.F.C. ?
Mr. FORD. Yes, sir.
Mr. PECORA. DO you
know the result of the examination of those
assets by the examiners for the R.F.C. ?
Mr. FORD. I have been told that the assets which were first presented were not of sufficient value; that the officers that came down
here were told to put in the slow assets, not to put in the liquid
assets; that the slow assets, provided they were all right, would be
just as suitable for a loan of that kind; and they did that. Then,
when these figures were made up the collateral was insufficient and
they came back to Detroit and put in additional collateral.
Mr. PECORA. Well, with the additional collateral, was the amount
of the security found sufficient ?
Mr. FORD. I t was insufficient.
Mr. PECORA. By what amount?
Mr. FORD. Six or seven million dollars, I believe.
Mr. PECORA. Was any suggestion made with regard to that 6 or 7
million dollars?
Mr. FORD. TO me ?
Mr. PECORA. TO you.
Mr. FORD. For what purpose ?
Mr. PECORA. AS to how it might be taken care of.
Mr. FORD. That we supply it?
Mr. PECORA. Yes, sir.
Mr. FORD. Yes.
Mr. PECORA. What suggestion was made to you
on that subject!
Who made it, and what was the outcome of it ?
Mr. FORD. I think Mr. Kanzler made it—perhaps Mr. Longley.
I discussed it with both—the question of subordinating the balance
of our deposits in the Union Guardian Trust Co.
Mr. PECORA. DO you recall how much your company had on
deposit in the Union Guardian Trust Co. at that time?
4692
STOCK EXCHANGE PRACTICES
Mr. FORD. Seven and a half million dollars.
Mr. PECORA. What was the suggestion made to you about it ?
Mr. FORD. That they be subordinated.
Mr. PECORA. TO what?
Mr. FORD. TO the other deposits.
Mr. PECORA. Was any other suggestion made on that subject ?
Mr. FORD. Later on the suggestion was made that we supply
additional capital besides that subordination.
Mr. PECORA. For a new company to be created ?
Mr. FORD. A new mortgage company to be created.
Mr. PECORA, Which would take over the assets of the group and its
unit banks and pledge them with the R.F.C. for a loan to be made by
the R.F.C. for the benefit of the group and its banks?
Mr. FORD. I think that was it.
Mr. PECORA. What specifically was the suggestion made to you on
that phase of the subject; that is, of providing new capital for this
mortgage company to be created for the purposes that have been
indicated ?
Mr. FORD. It was just that, that we supply, I think, $5,000,000 more
capital.
Mr. PECORA. What decision did you reach with regard to those
suggestions ?
Mr. FORD. That we would not do it.
Mr. PECORA. That you would neither supply the capital required
for the creation of the new mortgage company nor subordinate your
deposits in the Trust Co.?
Mr. FORD. It did not come to a definite understanding about the
subordination, but I think it was pretty generally understood what
we would do. We did not make any definite agreement, but it was
understood that the subordination would take place.
Mr. PECORA. It was understood what subordination would take
place ?
Mr. FORD. Seven and a half millions additional deposits in the
Union Guardian Trust Co. I mean, in the discussion it was assumed
that we would do it.
Mr. PECORA. Did you indicate that you would do it?
Mr. FORD. Yes.
Mr. PECORA. Did
you state that definitely to Mr. Kanzler or Mr.
Longley or any other officer of the Group ?
Mr. FORD. I think I did; yes.
Mr. PECORA. Was that communicated to the R.F.C. ?
Mr. FORD. I do not recall. I did not do it; I did not communicate with them. I don't know whether they did or not; perhaps so.
Mr. PECORA. Did you authorize them to tell the R.F.C. that your
company would subordinate its deposits in the trust company ?
Mr. FORD. I do not believe it was quite as definite as that, but it
was a possibility, if everything else worked out all right. I mean,
if that was the only thing left to do.
Mr. PECORA. If that loan would meet the situation you indicated
that your company would be willing to subordinate its deposits?
Mr. FORD. Yes,
sir.
Mr. PECORA. Did you not understand at the time that there were
requirements in addition to that ?
STOCK EXCHANGE PEACTICES
4693
Mr. FORD. I did not understand it at the time. I t was all in the
status of negotiation, and the figures changed all the time and the
requirements changed, and the assets were being worked over and
reappraised, or at least more thoroughly appraised. I do not know
exactly how it was done, and I did not know at that time that an
additional requirement was made beyond the subordination.
Mr. PECORA. Did you not know at some time of the additional
requirement for raising capital for the new mortgage company?
Mr. FORD. That came later, as I remember it.
Mr. PECORA. Yes. When that did come up, what decision did you
make or indicate?
Mr. FORD. I answered that, that we refused to add to the subordination; that we would not put up more new capital. We had
put up what we thought was a great amount of money to help this
situation through and we came to the end of it. We decided we
could not do any more.
Mr. PECORA. According to evidence heretofore introduced before
this committee, at a meeting with the Board of Directors of the Reconstruction Finance Corporation, held by Mr. Kanzler, Mr. Longley, and Mr. James L. Walsh, executive vice president of the
Guardian Detroit Union Group, Mr. Kanzler stated—and I am
quoting from the minutes of the Eeconstruction Finance Corporation—that:
in his opinion it would not be feasible to induce depositors to* subordinate their
claims during the life of the loan by the Corporation, if made, with the exception, possibly, of a few of the larger customers of the Guardian Group, including
the Ford Motor Co. In connection with the deposits of this company, totaling
about $30,000,000, in the various member banks of the Guardian Group, Mr.
Kanzler stated that not only had Henry Ford within the past 3 years aided the
group to the extent of about $16,000,000 but felt that he had done enough and
that they would be obliged to go to Mr. Ford again to assist in raising $5,000,000
of new capital for the proposed mortgage company. Mr. Kanzler said that it
would be impossible, in his opinion, to obtain this $5,000,000 advance from Mr.
Ford if the deposits of the Ford Motor Co. in the Guardian Group of banks
were frozen.
Does that represent
Mr. FOED. Excuse me. What date was that ?
Mr. PECORA. February 6, 1933.
Mr. FORD. I know nothing about that, Mr. Pecora. I was not at
that meeting.
Mr. PECORA. I know that, but what I am asking you is this: Was
that statement which Mr. Kanzler, according to the minutes of the
E.F.C., made to the directors of the E.F.C. on February 6 last, correctly representing the attitude that you had indicated to Mr. Kanzler
and his associates in the group that the Ford Motor Co. would take?
Mr. FORD. That we would not furnish additional capital for the
mortgage company?
Mr. PECORA. Yes.
Mr. FORD. AS it turned
out, that is what it was; but that was Mr.
Kanzler's opinion at that time.
Mr. PECORA. In substance, he forecast the attitude that the Ford
Motor Co. eventually took?
Mr. FORD. That is right.
175541—34—PT 10
8
4694
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you have any discussion of this subject with Mr.
A. A. Ballantine, who at that time was Under Secretary of the
Treasury ?
Mr. FORD. At what time ?
Mr. PECORA. In February of 1933.
Mr. FORD. Yes, sir. I met Mr. Ballantine twice.
Mr. PECORA. What was the substance of the discussion you had
with Mr. Ballantine when you met him on those two occasions ?
Mr. FORD. The first occasion was in the Secretary of the Treasury's office on the 8th, I think, of February. I was down here on
another matter, and I met Mr. Ogden Mills and he asked me to come
over to his office the following morning, which I did, and Mr.
Arthur Ballantine was there and Mr. Miller, president of the R.F.C.
I believe that is all.
Mr. PECORA. What was the discussion that you had ?
Mr. FORD. I understand; I am coming to that. There was verjr
little detailed discussion then; it was a question of the general situation which they pointed out.
Mr. PECORA. Tell us what they pointed out.
Mr. FORD. I do not want to betray any
Mr. PECORA. Assume that we are in complete ignorance of what
happened between you and Mr. Mills and Mr. Ballantine, and tell
us the substance of the conversation that you had.
Mr. FORD. I do not like to quote conversations of Cabinet officersMr. PECORA. Not the words, but the substance.
Mr. FORD. They pointed out the difficult situation in Detroit due
to the more acute economic distress in Detroit and Cleveland. I
think they mentioned Minneapolis. They mentioned the worst
places in the country where the banking situation was the most
tense; and they outlined to me what the negotiations had been with
the Detroit bank officials. I t was a very general discussion. I do
not recall any more than that, on that occasion.
Mr. PECORA. Was anything said in the course of those discussions
upon the subject of whether or not your company would freeze its
assets or subordinate them?
Mr. FORD. Yes. I think Mr. Mills suggested the possibility of
such a thing.
Mr. PECORA. HOW did you meet the situation ?
Mr. FORD. I said we had already done some, and I could not give
him a definite answer at that time. That is as I recall it.
Mr. PECORA. Did you eventually give them any kind of a definite
answer on that?
Mr. FORD. Mr. Ogden Mills?
Mr. PECORA. Either Mr. Mills or Mr. Ballantine or anyone else
connected with the Treasury Department or the R.F.C.
Mr. FORD. Mr. Arthur Ballantine was in Detroit on Monday,,
the
Mr. PECORA. The 13th of February?
Mr. FORD. The 13th5 was it?
Mr. PECORA. Yes.
Mr. FORD. And he called to see me with Mr. Roy Chapin, who was.
Secretary of Commerce at that time. They urged very energetically
the making of an additional financial commitment—not a commitment, but that we put up additional capital.
STOCK EXCHANGE PEACTICES
4695
Mr. PECORA. That is, they suggested that you and your father or
your company put up additional capital ?
Mr. FORD. Yes; in addition to
Mr. PECORA. In addition to subordinating your assets ?
Mr. FORD. Yes; in addition to what we had already done and were
considering at that time, and we told Mr. Ballantine we would not
go any farther.
Mr. PECORA. NOW, Mr. Ford, let me read to you what has already
been placed in evidence before this committee, the following extract
from the minutes of a board meeting of the Reconstruction Finance
Corporation held on February 13, 1933:
Mr. A. A. Ballantine, Under Secretary of the Treasury, said Mr. Henry Ford
stated that he would not freeze or defer the deposit of 7% million dollars of,
the Ford Motor Co. in the Union Guardian Trust Co., nor would he put any
money in the proposed mortgage company. He indicated furthermore, Mr.
Ballantine said, that he would withdraw the deposit of the Ford Motor Co. in
the First National Bank of Detroit amounting to $25,000,000 tomorrow morning.
In the light of those developments it became evident that it would be impossible for the banking and business interests of Detroit to organize the
proposed mortgage company in order to meet the situation. It was generally
agreed by the bankers in Detroit, Mr. Ballantine said, that the Union Guardian
Trust Co. would not open tomorrow morning.
Is that a fairly correct statement of the attitude of you, your
father, or the company, or of all combined, as stated to Mr. Ballantine?
Mr. FORD. There was a lot of discussion. Mr. Henry Ford felt
that when he had the suggestion put to him, that adidtional cash
capital be put up, he felt that they were asking too much, and he
then said that there would be no subordination or furnishing of
additional capital. Then the discussrion revolved around whether
the Union Guardian Bank could open or not. I think they said it
could not open because the Union Guardian Trust Co.—or could
not open bearing a similar name, of being affiliated with the group,
the Guardian National Bank of Commerce, that it could not stand
it if allowed to open. And they said that the bank should not be
opened. And then discussion was had as to opening the First
National Bank. I think Mr. Henry Ford had the feeling that there
might have been some desire on somebody's part to open that bank
and not to allow the Union Guardian Bank to open. He thought
they should both be treated alike in every instance,
Mr. PECORA. That is, if one should be closed the other should be
closed, or if one should remain open the other should remain open ?
Mr. FORD. That was his feeling.
Mr. PECORA. What, if anything, was said about the withdrawal
of a deposit of about $25,000,000 from the First National Bank of
Detroit by the Ford Motor Co. ?
Mr. FORD. Mr. Henry Ford made that statement. That is, he
impressed upon Mr. Ballentine his feeling that the two banks should
be treated alike. He was quite incensed over the way the thing
turned out at the end; I mean this suggestion about a great amount
of additional help after what we thought was a lot of help that
had been given, that we had given in the past, and so he made that
statement.
Mr. PECORA. And that was the end of the road at that time, wasn't
it?
4696
STOCK EXCHANGE PRACTICES
Mr. FORD. It was so far as he was concerned.
Mr. PECORA. And the following day, namely, Tuesday, February
14, all the banks in Michigan were closed under the moratorium or
bank holiday declared by the Governor of Michigan, is that right?
Mr. FORD. That was on Monday, and did you say the 13th?
Mr. PECORA. NO ; the 14th.
Mr. FORD. Tuesday morning, the 14th ?
Mr. PECORA. Yes.
Mr. FORD. That night I think the Governor
of Michigan issued
the bank holiday proclamation.
Senator COUZENS. SO in effect, after you had about 57% million
dollars in the two large banks—and you testified on yesterday that
you had 32% million dollars in the Guardian Bank, I believed
Mr. FORD. I did not say anything about the other bank.
Senator COUZENS. I know; but in view of the testimony given
before you must have had about 25 million dollars in the First National Bank of Detroit.
Mr. FORD. I can tell you about that if you wish it.
Senator COUZENS. If you will.
Mr. FORD. The First National account, the Trust Co. account, and
the Peoples Wayne County Bank of Dearborn, which was an affiliate,
was about 18 million dollars.
Senator COUZENS. Then it was not nearly 25 million dollars as
testified before the K.F.C. ?
Mr. FORD. Those were doubtless general remarks.
Senator COUZENS. All right.
Mr. PECORA. NOW, Mr. Ford, is there anything else you would
like to tell this committee with regard either to the negotiations with
the E.F.C. had in January and February of last year, or
Mr. FORD (interposing). That I had t
Mr. PECORA. That were had in behalf of the Guardian Detroit
Union Group, Inc.
Mr. FORD. NO, sir; I haven't anything else to suggest. I think
it could be told much better by the men who dealt directly with
them.
Mr. PECORA. Have you told the committee now substantially everything that is without your knowledge concerning those negotiations,
any part that you played in them to the extent of conferring with
officers of the group about those negotiations ?
Mr. FORD. I cannot remember anything else at this time.
Mr. PECORA. I S there anything you want to tell this committee
with regard to the group itself, or its unit banks and their management and operation during the years 1929, 1930, 1931, and 1932?
Mr. FORD. Not that I can think of.
Senator COUZENS. Mr. Ford, I am a little uncertain about how
the record stands here. In answer to a query by Mr. Pecora as to
whether you were a director of any corporation or institution outside
of these subsidiaries of the Ford Motor Co. and the Guardian Group,
I understand your answer was " no." Is that quite correct ?
Mr. FORD. Well, it isn't correct. But I do not believe I can
remember any more at this time, or didn't at that time at least.
Senator COUZENS. Can you remember any more now ?
Mr. FORD. Well, there is the Ford Motor Co. of England
STOCK EXCHANGE PEACTICES
4697
Senator COUZENS [interposing]. I mean outside of the Ford Motor
Co. or any of its subsidiaries, were you a director in any other banks
outside of the units of the group ?
Mr. FORD. The Dearborn State Bank.
Senator COTTZENS. That was not a member of the group ?
Mr. FORD. NO.
Mr. PECORA. Any other bank besides that ?
Mr. FORD. NO.
Senator COUZENS. YOU are not a director in any bank besides that?
Mr. FORD. NO, sir.
Senator COTTZENS. Thank you.
Mr. PECORA. Mr. Ford, is there anything else you want to tell this
committee without being asked questions specifically?
Mr. FORD. I do not believe so. I think the whole situation is one
of great trial, which we tried to face the best way we could.
Senator COTTZENS. Mr. Ford, after your experience have you any
opinion with respect to the efficacy of group banking?
Mr. FORD. Well, there may be some values in group banking, and
there may be some very definite faults connected with it, as in the
instance of the Union Guardian Trust Co. being frozen, and the
opinion that it was because it was an affiliate of the Union Bank of
Commerce. If so, that was; very decidedly a definite handicap. But
it was a matter of opinion at the time. It may be the bank could
have opened up and gone right along, but one does not know that.
On the other hand, the Group Co., as to a lot of the smaller unit
banks up in the State, tided them over or carried them along by reason of the assistance they gave them when perhaps they would have
had to fail otherwise. I t is a very involved question, and I have
never studied it from that angle myself.
Senator COUZENS. Well, Mr. Ford, after having weighed the defects and the good points of group banking, which outweighs the
other?
Mr. FORD. Well, of course, we were going through such abnormal
times it is very difficult to say.
Senator COUZENS. I mean, now looking to the future.
Mr. FORD. Oh, looking to the future?
Senator COUZENS. Yes.
Mr. FORD. Well, I would rather not give an opinion. I do not
think it would be worth anything.
Senator COTTZENS. Suppose you let us be the judges of that.
Mr. FORD. I really could not say. As I see the situation there are
things that come up, and without a terrific analysis whether I could
say one would outweigh the other, I just don't know.
Senator COTTZENS. If you had to start all over again would you
prefer to be under the group system or under the individual unit
system ?
Mr. FORD. If we had to start all over again would it be the individual unit system or the group system ?
Senator COUZENS. Yes; based upon your past experience.
Mr. FORD. Well, past experience has been mad, but it may have
been on account of economic conditions, that they caused it. I would
not blame the group for that.
4698
STOCK EXCHANGE PRACTICES
Senator COUZENS. I am not asking you to blame anybody. This
committee is organized for the purpose of recommending the enactment of legislation. I am trying to get your judgment as to whether
or not, in your opinion, it would be, wise to eliminate group banking
in the future.
Mr. FORD. I would not think so. There are group banks existing
today, and I think there is one out of the Buffalo district, and a
group banking system in Minnesota, and that they are going along.
I do not know enough about it, Senator Couzens, to say.
Senator COUZENS. SO if you were a legislator you would not approve elimination of group Tmnking?
Mr. FORD. I would have to look into it a lot more thoroughly.
Senator COUZENS. All right.
Mr. PECORA. YOU would have to have more knowledge on the subject than you now claim to possess, is that it ?
Mr. FORD. Yes, sir.
The CHAIRMAN. Mr. Ford, do you favor branch banking?
Mr. FORD. Well, there are several systems of branch banking.
The
Canadian system, I understand, is very successful, and the English
system is very successful. I do not know whether there are other
elements which enter into those systems which make them successful
or not. It may be their policies are entirely different and more
sound, but I don't think so.
Mr. PECORA. Mr. Ford, from time to time the Guardian Detroit
Union Group, Inc., acquired different of its banking units.
Mr. FORD. Yes.
Mr. PECORA. Through
an exchange of its capital stock for the capital stock of the bank units themselves.
Mr. FORD. Yes.
Mr. PECORA. On
those occasions was there brought to your knowledge, as a director of the group, any report showing the specific condition of such a bank as was sought to be acquired?
Mr. FORD. I do not recall having seen any specific written reports,
but the various units were discussed as they were acquired, and I
depended largely on the advice of auditors and the officers as to the
values involved, and the exchange basis on which they were made. '
Mr. PECORA. In what form did those auditors give you their
information ?
Mr. FORD. The auditors did not. It was the officers, and based on
auditors' figures. They presented the different banks and the figures
that were involved. And as to some of them, perhaps not, and perhaps as to some of them I did not go into the matter at the time, but
as to others I did.
Mr. PECORA. Weren't the ratios of exchange of capital stock of the
group for the capital stock of the unit bank about to be acquired,
sometimes fixed without a previous examination of the unit bank ?
Mr. FORD. I do not know that.
Mr. PECORA. That is, without previous examination of the unit
bank which was the subject of the acquisition.
Mr. FORD. DO you mean that a bank was acquired without an
audit?
Mr. PECORA. Practically that; yes.
Mr. FORD. Well, I don't know. I wouldn't think so, but I don't
know.
STOCK EXCHANGE PEACTICES
4699
Mr. PECORA. I think that is all with this witness, Mr. Chairman.
The CHAIRMAN. YOU may be excused, Mr. Ford.
Mr. FORD. I beg pardon?
The CHAIRMAN. I say, you may be excused. That is all.
Mr. FORD. I thank you.
(Thereupon, Mr. Ford was excused.)
Mr. PECORA. IS Mr. Leyburn here?
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Will you resume the stand, Mr. Leyburn ?
TESTIMONY OF ALFRED P. LEYBURN—Resumed
Mr. PECORA. Mr. Leyburn, as you know and as the committee
knows, and as I guess the whole country knows, all banks were
closed by Executive order of the President last March.
Mr. LETBURN. Yes, sir.
Mr. PECORA. And that included
all of the unit banks of the Guar-
dian Detroit Union Group, Inc.
Mr. LEYBURN. Yes, sir.
Mr. PECORA. Since then
have any of those unit banks been permitted to reopen ?
Mr. LEYBURN. By reorganization; yes.
Mr. PECORA. By reorganization.
Mr. LEYBURN. With the exception of two of them. I can give you
a list of those if you want it.
Mr. PECORA. Will you please do so.
Mr. LEYBURN. These figures I am now going to give you are about
3 weeks old and it may be that some bank has been reopened since
then. I can give you the names and the terms on which they were
reorganized.
Mr. PECORA. Please do so.
Mr. LEYBURN. The Grand Rapids National Bank in December
of 1932 had deposits approximating 16 million dollars. I t has been
reorganized on a 50-percent waiver with the aid of the R.F.C.
And when I say on the basis of a 50-percent waiver, that means that
the depositors receive an immediate credit of 50 cents on the dollar,
and they have to gamble on the rest. The other part takes out the
undesirable assets. The National Bank of Ionia in December of
1932 had deposits of approximately $1,100,000. It is still in the
hands of the conservator, but they hope to reorganize on a 45-percent
basis. The Union Peoples National Bank of Jackson had deposits
in December of 1932 of about 7% million dollars. They reorganized
August 1, 1933, with the help of the R.F.C., and depositors received
30 cents on the dollar. The Capital National Bank of Lansing,
Mich., had deposits in December 1932 of about 13 million dollars.
The bank is still in the hands of the conservator, but hopes to reorganize with the aid of the R.F.C. on a 40-percent basis. The City
National Bank & Trust Co. of Battle Creek had deposits of about
$1,525,000. It has since been reorganized with the help of the R.F.C.
on a 55-percent basis. The First National Bank & Trust Co. of Port
Huron had deposits of about 9 million dollars. That opened after
the bank holiday, and they obtained some capital from the R.F.C,
being opened on a 100-percent basis. The Union Industrial Bank
& Union Industrial Trust Co. of Flint had assets in 1932 of about
4700
STOCK EXCHANGE PRACTICES
15 million dollars. They have a plan, approved, to reorganize on
a 45-percent basis. The First National Bank of Kalamazoo opened
after the holiday, and also the Second National Bank of Saginaw,
and some new money was put into that bank. And the City National
Bank & Trust Co. of Battle Creek also opened after the holiday, and
some E.F.C. money went into that bank.
The CHAIRMAN. Mr. Leyburn, what did you mean by a 25-percent
basis ?
Mr. LEYBURN. I didn't say 25 percent.
The CHAIRMAN. I thought you said something about a 25-percent
basis.
Mr. LEYBURN. It was a 30-percent basis in the case of the Union
Peoples National Bank of Jackson, Mich.
Mr. PECORA. What did you mean by that?
Mr. LEYBURN. I thought I had already explained that fully, but
will try to do so again. It means that the depositors receive an
immediate credit of 30 cents on the dollar, and that the other 70
cents was used to remove undesirable assets from the bank. What
the depositor will get out of that depends upon the condition of the
undesirable stuff. You might call that a composition, or a waiver
of deposits, is what we always called it. Now, as to the Union
Trust Co. of Detroit
Mr. PECORA. YOU mean the Union Guardian Trust Co. ?
Mr. LEYBURN. Yes. I do not think any attempt has been made to
reorganize that company. As a matter of fact, it would take a
Houdini to open that bank.
Mr. PECORA. What did you say?
Mr. LEYBURN. It would take a Houdini to open that bank.
Mr. PECORA. But Houdini is dead.
Mr. LEYBURN. And so is the bank. [Laughter.]
Mr. PECORA. All right. Go ahead.
Mr. LEYBURN. I think I have covered all the banks. Of course,
there are some State banks in the group that I did not have anything to do with. I do not know what happened to them. Now,.
that is the picture. You could talk forever on the details as to
the banks being bad, but that is the statement. Now, you might
take the case of the bank with payment of 30 cents on the dollar^
and this little Governor Green Bank of Ionia, that he claimed was
never a liability on the group, and that it was always a good bank
and still would be open, after the bank holiday—but I believe I
told you about that.
Mr. PECORA. Repeat what did happen to that bank.
Mr. LEYBURN. I t is in the hands of a conservator, and I do not
think it has opened yet. But a plan has been approved by which,
if the E.F.C. comes to their support, the depositors will waive about
55 percent and get an immediate credit of 45 cents on the dollar.
Then you also must consider that there were other banks in Michigan
that were overhanging this situation and that did not come into the
group. There was the Bank of Saginaw, and it had deposits of
over 10 million dollars, and I do not think that bank has opened
yet. Then in the case of the Grand Rapids Savings Bank, it had
deposits of about 12 million dollars, which is Senator Vandenberg's
bank, and that has been reorganized on a 50-percent basis.
STOCK EXCHANGE PRACTICES
4701
Senator COUZENS. Those banks are not members of the group?
Mr. LEYBURN. NO, sir. And the old Merchants Bank of Battlecreek is another one, and that has been reorganized.
Mr. PECORA. Mr. Leyburn, I understand that the allegation has
been made and given publication in Detroit substantially to the effect
that the Guardian National Bank of Commerce, and other banks in
the group, were not permitted to reopen because of some plot that has
been referred to as a Wall Street plot. Do you know anything about
that?
Mr. LEYBURN. Only what I have heard through reading the papers
and all. I have heard that, of course.
Senator COUZENS. Well, that wouldn't be evidence.
Mr. PECORA. DO you know anything about any such plot?
Mr. LEYBURN. NO ; I do not. I think it is a wonderful fairy tale
if you want to know my thought about it.
Mr. PECORA. I think that is all for Mr. Leyburn.
Mr. LEYBURN. I should like to make a statement, if you don't
mind?
Mr. PECORA. All right.
Mr. LEYBUHN. I S that agreeable ?
Mr. PECORA. Yes.
Mr. LEYBURN. I stated
in my testimony the other day that approximately 149,000 shares of Guardian Stock was held as collateral,
and that after the bank did not open it would be a loss of about
ty2 million dollars. That loss would run higher than that,
because loans were made on that stock at $50, and in some
case$ maybe as high as $100, and it was the policy of the Group
never to sell any loan collateralized by their stock. I want to correct that statement to that extent.
Now, I presume this is my last appearance before your committee,
and I want to leave with this situation corrected: The Government,
and I mean by " Government" the Treasury Department and the
E.F.C., have been accused of being the big bad wolf, and of coming
up into the State of Michigan on a cold, dark night and slaying
virgin and innocent lambs. As a matter of fact, the Government
gave those banks every support, and I was up there and doing all
I could, but I don't know whether they would say that was a good
influence or not. [Laughter.] But I do not think that a single witness would dare come before you and say the Government did not
help them in every conceivable way. The fact of the matter is that
the most of that complaint comes from (some politicians who are
trying to make political pawns out of some depositors. That is
the chief reason—present company excepted, Senator Couzens. But
I think it is an insult to the people of Michigan for anyone to think
that they do not understand some of the stuff that is being passed
out on this .subject. Many of the people of Michigan already know,
and others are going to know, the truth, and they will decide who
was right and who was wrong, and exactly why the banks failed.
As a matter of fact, the failure of the Group was due to three things:
First, there was the matter of the management, and you saw how
in the set-up of the Group, the Union Trust Co.
Mr. PECORA (interposing). Do you mean the Union Guardian
Trust Co.?
4702
STOCK EXCHANGE PRACTICES
Mr. LEYBURN. Yes, sir.
Mr. PECORA. What was the second reason ?
Mr. LEYBURN. The taking of the heavy loss
on the Keane-Higbie
Co., that they took over, and of the American State Bank, and the
heavy obligations of the Group itself, they all contributed to the
downfall, practically 15 million dollars.
Mr. PECORA. DO you think the dividend-paying policy of the
Group or of the units was a sound one ?
Mr. LEYBURN. NO, sir.
Mr. PECORA. What is your opinion about that?
Mr. LEYBURN. About the payment of dividends ?
Mr. PECORA. Yes.
Mr. LEYBURN. It was absolutely unwarranted
from a legal as
well as a business standpoint, even if someone told them to pay them.
Mr. PECORA. Have you any opinions to express to this committee
in the light of your experience as a national bank examiner and a
chief national bank examiner, on the question of the merits or demerits of group banking ?
Mr. LEYBURN. Well, now, when I tell you that I am not referring
to any group except this one, because I presume group banking
could be run good like anything else, if you had good management.
But as conducted by these two groups in Detroit, I think it was
vicious. I would personally rather see branch banking than this
kind of banking. But that is my personal view and not from
headquarters.
Mr. PECORA. Yes; we understand that you are now expressing
your personal view.
Mr. LEYBURN. Yes, sir.
Senator COUZENS. Mr. Leyburn,
I should like to know what your
interpretation is of the failure of the office of the Comptroller of the
Currency during the years 1931 and 1932, and more particularly
when you were sending in those bad reports as to banks, as to the
cause of their failure to act.
Mr. LEYBURN. NOW, do you mean as to the matter of failure of
management?
Senator COUZENS. Well, you were sending in over the years 1930,
1931, and 1932, particularly, I might say, reports of the condition
of those units of the Guardian Detroit Union Group, Inc., and we
have no evidence here as to any action ever having been taken by
the Comptroller of the Currency. What is your interpretation of the
failure of the Comptroller of the Currency to act on all those numerous reports that were being received by his office ?
Mr. LEYBURN. It was because he was told by the higher command
Senator COUZENS (interposing). Are you now going to testify of
your own knowledge, or are you guessing?
Mr. LEYBURN. From my own knowledge.
Senator COUZENS. All right. Go ahead.
Mr. LEYBURN. The Comptroller of the Currency was instructed by
the higher command not to do anything to rock the boat, and not
to have any more bank failures.
Senator COUZENS. Was that the reason for his ignoring all those
reports you were sending in about the weak condition of those units ?
STOCK EXCHANGE PBACTICES
4703
Mr. LEYBURN. I am of that opinion, Senator Couzens; yes, sir.
Then, when it comes to the question of management, if we are to
speak about that, there was no way until the new National Bank Act
was passed in 1933 whereby the Comptroller of the Currency had
the power to remove an officer for bad banking.
Mr. PECORA. That is, you mean prior to the amendment of the
National Banking Act, contained in the provision enacted in 1933,
there was nothing which empowered the Comptroller of the Currency to take any steps toward removing officers or directors of a
national bank for mismanagement or unwise management or anything
of that kind ?
Mr. LEYBURN. That is absolutely correct. The only alternative
that he had was under section 5239 to forfeit the charter of an
offending bank, which, of course, meant that he would have to file a
suit in the Federal court of the district in which the bank was
located, stating why he wanted the charter taken away. And then
there would be a hearing, maybe within 10 days. Meanwhile there!
would be a run on the bank. And I might cite you a case where that
was done once: The First National Bank of Hagerstown, Md., about
1919 or 1920, was run by a crowd named Wingard, or something of
that kind, and they violated every section of the National Banking
Act and looked for more to violate. And they practically told the
Comptroller's office to go to the devil, that he could not do anything
with them. I might say that that bank was on a sort of special list,
and in the year 1931 the Comptroller of the Currency decided he
would forfeit the charter of the bank. So he brought suit in the
Federal court. That brought a run on the bank, and then he appointed a receiver. Then during the 10 days set for the hearing and
before the hearing came up, officers and directors of that bank came on
here to Washington and conferred with the Attorney General and the
Comptroller of the Currency, and stated they would resign and sell
their stock to responsible interests if the Comptroller would withdraw
the suit. So he agreed to that, and the bank was turned back to those
men about 10 days later. Now, I might say that that that bank never
recovered from that shock. Later it closed, and it is my opinion it is
closed today. In other words, it sounds good to say that you can do
anything you want to with an offending bank, but if you give them
the medicine it kills the patient. In other words, that was the
experience there.
Mr. PECORA. In other words, the medicine was worse than the
disease.
Mr. LEYBURN. Yes, sir.
The CHAIRMAN. Speaking
about the power of the Comptroller of
the Currency, if you, as a bank examiner go into a bank and find
the bank is violating the law in the conduct of its business, violating the regulations laid down by the Comptroller, you have the
right to immediately take charge of that bank?
Mr. LEYBURN. NO, sir; you are wrong, Senator.
The CHAIRMAN. I have known of its being done over and over
again.
Mr. LEYBURN. I think you will find there were other circumstances.
4704
STOCK EXCHANGE PRACTICES
The CHAIRMAN. But if a bank, for instance, loans to one borrower in excess of the amount which the law says it shall loan to
a borrower, you walk into that bank as a bank examiner and find
that they are violating that law, and you can immediately close
that bank?
Mr. LEYBURN. NO, sir.
The CHAIRMAN. And say,
" Don't you open this bank any more. I
will take charge of it."
Mr. LEYBURN. Senator, you are wrong.
The CHAIRMAN. I t has been done over and over again.
Mr. LEYBURN. There were other circumstances. You would have
to invoke the law I just read to you, Senator, in order to do that.
The CHAIRMAN. And forfeit the charter ?
Mr. LEYBURN. That is the only way you would have to do it, in
a Federal court.
The CHAIRMAN. All over the country receivers have been appointed
for banks when they have been found to be violating the banking
law.
Mr. LEYBURN. Not for that. You will find it was a bad bank, and
probably insolvent.
The CHAIRMAN. They can do that if they find it insolvent.
Mr. LEYBURN. If they find it insolvent.
The CHAIRMAN. A lot of these banks were found to be insolvent.
Mr. LEYBURN. That is correct.
The CHAIRMAN. YOU could have had a receiver appointed for
them at once. The comptroller could have done that.
Mr. LEYBURN. If it is insolvent; yes.
The CHAIRMAN. YOU admit that?
Mr. LEYBURN. If it is insolvent.
The CHAIRMAN. And they have done it the other way, too.
Wherever they have found them violating a law, a receiver has been
named for them at once.
Mr. LEYBURN. A national bank
The CHAIRMAN. Usually the bank examiner is named receiver for
the time being.
You speak about the " high command." You mean the Secretary
of the Treasury ?
Mr. LEYBURN. I mean the Secretary of the Treasury and the White
House, either one or both. That is not the present Secretary of the
Treasury.
The CHAIRMAN. I know.
Senator COUZENS. YOU said either one or both. Do you know
whether it was one or both ?
Mr. LEYBURN. It was both.
Senator COUZENS. Both the President of the United States and
the Secretary of the Treasury at the time ?
Mr. LEYBURN. Yes,
Mr. PECORA. Does
sir.
an examiner, when he finds any situation in a
national bank which is in violation of law, have the power and the
right himself, upon his initiative, and without instructions or directions from the Comptroller, to take possession of the bank?
STOCK EXCHANGE PRACTICES
4705
Mr. LEYBURN. Not for a violation of law. You have to go
through the Federal court.
The CHAIRMAN. He has to do it through the Comptroller, but the
Comptroller has the power.
Mr. LEYBURN. What do you mean? To take away the charter
of the bank?
Mr. PECORA. He can take charge of the bank.
Mr. LEYBURN. I cannot see under what law he could take charge
of the bank if the bank is not insolvent. Some State laws probably
are that way, but I do not know of any such case with a national
bank. But you will find that a bad bank has all the violations of
law, as you say. There is no question about that.
In section 30 of the Banking Act of 1933 the power is conferred
to take out any officer or director for violation of law or mismanagement.
Mr. PECORA. That is the law of 1933?
Mr. LEYBURN. Yes; the banking law of 1933.
Mr. PECORA. He can only do that through a proceeding instituted through the Federal Reserve Board for the particular district
in which the bank is located.
Mr. LEYBURN. In other words, the accused man has a hearing
before the Federal Reserve Board.
Mr. PECORA. The Comptroller of the Currency makes charges
against an officer or officers of such bank, and those charges are
read before the Federal Reserve Board of the district and, after
hearing, determined by the Federal Reserve Board.
Mr* LEYBURN. Yes.
Mr. PECORA. That, in
substance, is the provision embodied in the
1933 Banking Act.
Mr. LEYBURN. That is about the size of it. That has teeth in it,
if you want to use it. There is no question about that.
Mr. PECORA. Would you care to advance any opinion to this
committee with regard to the sufficiency of that provision of the
law?
Mr. LEYBURN. I believe that is all right, but there are other sections of that act that are very ambiguous, especially that one with
regard to affiliates. Under this provision, an affiliate, it seems to
me, is anything in the bank, except the president's wife's first husband. But that ought to be clarified.
The CHAIRMAN. YOU mean there ought to be a definition of what
an affiliate is ?
Mr. LEYBURN. I think it ought to be clarified as to just what is
an affiliate.
Senator COUZENS. Because of your position, Mr. Leyburn, you
do not have to answer this question if you do not desire to. But
what would you think of prohibiting bank examiners from joining
banks after they leave the Government service, for a period of 2
years ?
Mr. LEYBURN. I am glad you asked me that question. I shall be
glad to answer it. A man coming into the service as an examiner,
on account of the salary, and everything else, has nothing to look
forward to unless he can go into a bank. Frequently an attorney
4706
STOCK EXCHANGE PRACTICES
will win a case against the Standard Oil Co. or the American Telephone & Telegraph Co., and that corporation will hire him. I
would hate to see that done, because I think it would ruin the morale
of the force, and we have some wonderful men in the examining
division. If you have in mind passing such a law, I think it would
be better to prohibit him from going to the bank which he examined;
and, with the approval of the Comptroller of the Currency, he could
go with a bank.
Senator COTJZENS. In other words, you would prohibit a bank
examiner, for a period of 2 years after leaving the service, from
Ding to any bank which he had examined without the consent of the
omptroller of the Currency ?
Mr. LEYBURN. NO ; I did not say that. If you mean to pass such
a law, that would be the best way to do it.
Senator COUZENS. Would you be in favor of such a law?
Mr. LEYBURN. NO ; I would not.
Senator COUZENS. YOU believe it ought to stand as it is?
Mr. LEYBURN. I think so, except to provide that it may be done
with the approval of the Comptroller of the Currency.
Senator COUZENS. In other words, he can go to any bank that
wants to employ him so long as he gets the approval of the Comptroller of the Currency ?
Mr. LEYBURN. That would be my idea.
Mr. PECORA. What objection do you see to a proviso that no such
employment shall be legal within a period of 2 years ?
Mr. LEYBURN. If a bank wants somebody to go with them, they do
not want to wait for 2 years. In numerous cases examiners have
gone into bad situations in banks and worked them out, to the credit
of the depositors. If somebody wanted to hire you, they would not
want to wait for 2 years. They want you now.
Senator COUZENS. I could express an opinion, but I am not on the
witness stand.
Mr. LEYBURN. I would like to have your opinion just the same.
Mr. PECORA. I think that is all of this witness. Is there anything
else you wanted to tell the committee ?
Mr. LEYBURN. NO. I think I have spoken my piece. I will add
this, that the Comptroller's Office has not muzzled me in any way,
shape, or form, and has given me, and also this committee, the best
of cooperation.
The CHAIRMAN. Very well, Mr. Leyburn. I believe that is all.
Mr. LEYBURN. I S that all for me on this case ?
g
Mr. PECORA. Yes.
Mr. LEYBURN. Thank you.
The CHAIRMAN. The committee
will take a recess until 2 o'clock.
(Whereupon, at 12:45 p.m., Friday, January 12, 1934, a recess was
taken until 2 p.m.)
AFTER RECESS
The subcommittee reconvened at the expiration of the recess, at 2
p.m. Friday, January 12, 1934.
The CHAIRMAN. The committee will come to order. Proceed, Mr.
Pecora.
Mr. PECORA. Mr. Bryan.
SffOCK EXCHANGE PRACTICES
4707
TESTIMONY OF CHARLES A. BRYAN, 1209 FEDERAL RESERVE
BUILDING, CHICAGO, ILL.
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. BRYAN. I do, sir.
Mr. PECORA. What is your full name and address ?
Mr. BRYAN. Charles A. Bryan, 1209 Federal Eeserve
Building,
Chicago, 111.
Mr. PECORA. What is your present business or occupation?
Mr. BRYAN. I am a national-bank examiner.
Mr. PECORA. When did you become a national-bank examiner for
the first time?
Mr. BRYAN. In August of 1924.
Mr. PECORA. HOW long did you continue serving as a national-bank
examiner from that time on ?
Mr. BRYAN. Until 1929.
Mr. PECORA. What did you do in 1929?
Mr. BRYAN. I went with the Guardian Detroit Union Group on
December 1.
Mr. PECORA. 1929?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. In what capacity?
Mr. BRYAN. AS the Group examiner.
Mr. PECORA. HOW long did you continue in the service of the
Guardian Detroit Union Group, Inc. ?
Mr. BRYAN. Until December 26, 1931.
Mr. PECORA. Then what did you do ?
Mr. BRYAN. I then became vice president of the Capitol National
Bank of Lansing, one of the units of the Group.
Mr. PECORA. Did you continue to serve in that capacity for some
period of time?
Mr. BRYAN. Until the Michigan holiday.
Mr. PECORA. That is, until the Michigan banking holiday?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. That was declared on February 14, 1933.
Mr. BRYAN. Yes, sir.
Senator COUZENS. Before
you became a bank examiner, what was
your experience to qualify you to become a bank examiner?
Mr. BRYAN. I had had 16 years' practical experience in a bank.
Senator COUZENS. Where?
Mr. BRYAN. In Idaho.
Mr. PECORA. Who was your immediate superior when you first
entered the employ of the Group on December 1, 1929 ?
Mr. BRYAN. Mr. B. K. Patterson.
Mr. PECORA. Had you previously known him ?
Mr. BRYAN. Yes; Mr. Patterson and I were friends in Pocatello,
Idaho, as young men. He was in one of the banks and I was in
the other one.
Mr. PECORA. Had you served in the same area, or district, or jurisdiction as national bank examiners?
4708
STOCK EXCHANGE PRACTICES
Mr. BRYAN. Yes, sir. I first was assigned to the ninth district at
Minneapolis, under Chief Examiner Harris, and Mr. Patterson later
became chief national bank examiner of that district, and when he
was transferred to Chicago as chief examiner I was transferred to
Chicago as one of the examiners, with my headquarters at Detroit,
Mich.
Mr. PECORA. Who first offered you employment with the group ?
Mr. BRYAN. Mr. Patterson.
Mr. PECORA. Shortly prior to your resignation as a national bank
examiner ?
Mr. BRYAN. Yes, sir.
Mr. PECORA. What duties
were assigned to you from the outset
after you entered the employ of the group?
Mr. BRYAN. TO examine the unit banks of the group.
Mr. PECORA. All the unit banks, both State and national?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. HOW many unit banks were there in the group, both
State and national in character ?
Mr. BRYAN. They were changing, Mr. Pecora, by consolidations.
From 18 to 22,1 should say.
Mr. PECORA. Were there 18 when you entered the employ of the
group in December 1929 ?
Mr. BRYAN. Approximately that number, Mr. Pecora. They were
being acquired, and then they were being consolidated.
Mr. PECORA. HOW many examinations of each banking unit of the
group were you to make?
Mr. BRYAN. It was the policy of the group to make 2 examinations of each bank a year, but there were 2 examiners, Mr. Penningrath and myself, and then there was a corps of assistants of
about 8 men.
Mr. PECOKA. YOU and Mr. Penningrath were in charge of that
corps of assistants?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. Had Mr. Penningrath been a national-bank examiner
prior to his employment by the Group ?
Mr. BRYAN. Yes, sir.
Mr. PECORA. Had you
served with him in the same district as a
national-bank examiner ?
Mr. BRYAN. Mr. Penningrath started out as an assistant in Minneapolis, and he served under me from time to time as my assistant,
and he later became an examiner in that district.
Mr. PECORA. Did you and Mr. Penningrath and your corps of
eight assistants actually make, from the time that you entered the
employ of the Group, two examinations per year of each of the unit
banks of the Group ?
Mr. BRYAN. I cannot say as to that. That was the intention, and
I think it was pretty largely carried out. For instance, I may have
examined Jackson the first part of the year, and he may have examined it the second part of the year. I would not keep any record
of that.
Mr. PECORA. Did you make such examinations in the same fashion
in which you had been accustomed to make examinations of national
banks for the Comptroller of the Currency?
STOCK EXCHANGE PRACTICES
4709
Mr. BRYAN. AS an examiner, Mr. Pecora, I have always felt it my
duty to obtain the facts as I saw them in the examination of the
bank, and as a national-bank examiner I submitted that to the
Comptroller for him to do as he saw fit. When I went with the
Group I assumped that my position was to determine the condition
of the banks for Mr. Lord, who was in charge of the Group. I
considered that he would want to know the facts.
Mr. PECORA. The actual facts?
Mr. BRYAN. The actual facts of the banks as they existed, and
I examined them on that basis. I have always been considered, I
believe, a severe examiner, and I examined the banks of the Group
on the same basis that I would examine a national bank.
Mr. PECORA. That is, as a national-bank examiner?
Mr. BRYAN. Yes, sir.
Mr. PECORA. In what
form did you make to Mr. Lord, or to any
other executive officer or officers of the group, a report of your
various examinations of the unit banks from time to time ?
Mr. BRYAN. We made a complete report, which followed along
the lines of the national-bank examinations, criticizing each loan. I
think we went down to loans of $500 and over and all loans under
that that were past due. I think you would find in my reports that
jach loan that was subject to criticism would be listed in those reports. Bonds and all the assets were listed and classified as to slow,
doubtful, or loss. That report was typed in the group office, and
3 copies were made, 1 for the bank, 1 for the general files, which
were under Mr. Patterson, and a copy for Mr. Lord. In the copies
that went to Mr. Patterson and Mr. Lord was a confidential section
regarding the management of the bank, the conditions as we found
them, and any items that we believed were subject to criticism and
should not be imparted to the bank—that is, the unit bank.
Mr. PECORA. Have you ever had access to any of those written reports of your examinations?
Mr. BRYAN. I had access to them all the time that I was with the
group. They were in the files. Of course they were kept under
lock and key, so that everyone could not have access to them, but I
had access to them.
Mr. PECORA. Did you know in whose immediate custody they were
kept?
Mr. BRYAN. I cannot recall the girl's name. There was a young
lady employed that had the keys to the file. I should say they were
under the custody, though, of Mr. Patterson, and he had his girl in
charge of them.
Mr. PECORA. Take the year 1930, which was the first full calendar
year in which you worked as an examiner for the group.
Mr. BRYAN. Yes,
Mr. PECORA. DO
sir.
you recall whether or not you examined, at least
once in that year, every one of the unit banks of the group ?
Mr. BRYAN. NO, sir; not every one of them.
Mr. PECORA. HOW many of them did you examine in that year?
Mr. BRYAN. Oh, I should say possibly 15 or 20 examinations. I
would do special work. I might be in the office for 2 weeks or a
month. I remember at one time I installed a complete record in the
175541—34—PT 10
9
4710
STOCK EXCHANGE PEACTICES
units of all of their bonds for the Guardian Group files, and that
took quite a lot of time.
Mr. PECORA. DO you recall the names of the banks that you examined for the group in the year 1930?
Mr. BRYAN, The Michigan Industrial Bank
Senator COTJZENS. Of Flint?
Mr. BRYAN. NO; of Detroit, Senator; the Guardian Trust Co.
That was before the consolidation. The Grand Rapids Trust Co.;
I believe the National Bank of Commerce in that year.
Mr. PECORA. What is that?
Mr. BRYAN. I believe the National Bank of Commerce, Mr. Pecora.
I cannot remember, though.
Senator COUZENS. Of Detroit?
Mr. BRYAN. Yes, sir. And in the summer of 1930, I believe it was,
I examined the Bank of Detroit before consolidation with the Guardian Bank. In the latter part of the year I believe I examined the
Guardian Bank.
Senator COUZENS. That was before it was a national bank ?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. The Guardian Detroit Bank, so-called ?
Mr. BRYAN. Yes, sir.
Mr. PECORA. That had
been made up of the consolidation of the
Guardian Bank with the Bank of Detroit.
Mr. BRYAN. That was after the consolidation, I believe.
Mr. PECORA. Yes. Are there any others that you recall you examined in that year 1930?
Mr. BRYAN. I know that I did, but I cannot recall them right
now. Port Huron, I believe, was made the early part of 1930.
The CHAIRMAN. HOW long does it take to examine a bank?
Mr. BRYAN. AS a national bank examiner, Senator, for instance,,
the bank at Jackson, would take, with the same crew, possibly a
week—probably not quite that long. I spent at least 2 full weeks
there with my crew. I made a somewhat different examination.
I broke down things that national bank examiners would not do.
That is, I would make a set-up of loans, we will say, from a dollar
up to $500, to see what percentage were concentrated in small loans?
and what percentage in large loans. We used to do that with the
individual ledgers. Our earnings report was somewhat more complete than a national bank examiner's report. We worked the thing
out on a percentage basis, and we went into the general methods of
keeping the books somewhat more than a national bank examiner
would do.
Mr. PECORA. DO you recall the general nature of the confidential
criticism or comments that you made to the officers of the group
in the reports of your examinations of these banks in 1930?
Mr. BRYAN. I found practically all the unit banks in an undesirable condition. I am not saying they were insolvent, by any means?
but with many slow loans, many fixed loans that had been carried
for a period of years, many poiicy loans to friends and——
Mr. PECORA. Officers?
Mr. BRYAN. Officers and directors; many collateral loans that were
undercollateraled. In my judgment, when the collateral on a loan
reaches a certain point it is the duty of the bank to collect that loan,
or get more collateral. There were many undercollateraled loans.
STOCK EXCHANGE PRACTICES
4711
My confidential section would criticize the slow and doubtful loans.
It would criticize the management. Some reference would probably
be made to the earnings of the bank, the policy, and things of that
nature.
Mr. PECORA. Did you find as a result of your examination of these
unit banks for the year 1930 that there had been a reluctance or an
unwillingness to set up reserves against losses?
Mr. BRYAN. That was more of an operating problem. The group
was on approval basis, and they had men who were expert in that
phase of the business that took up those matters; with them. Our
work was more in the nature of appraising the assets. I cannot say
that there was a particular reluctance to set up reserves. The attitude of the banker was the same toward the group examiner that it
usually is toward the National or State examiner.
Mr. PECORA. What was that attitude as you found it?
Mr. BRYAN. That the position of the examiner is uncalled for or
too severe or not correct. Very few bankers believe that a. bank
examiner knows anything about his business.
Mr. PECORA. And vice versa?
Mr. BRYAN. Yes, sir. I think the results of the past few years
indicate that somebody has been wrong.
Mr. PECORA. NOW, when you made your second examination of
these banks as the examiner for the group, do you recall whether
or riot you found that any of the unsatisfactory conditions that you
had pointed out and reported upon in the report of your prior examination had been attended to?
Mr. BRYAN. Well, of course, in some individual instances correction had been made, but
Mr. PECORA (interposing). In the main what was the situation in
that respect?
Mr. BRYAN. Generally conditions were getting worse, and naturally the banks grew worse from year to year, in my opinion. These
things were brought up to Mr. Lord in the report. I personally
talked to him about my reports. At one time each bank had to
submit to the group each month a list of the criticized assets as
shown by our reports and just what correction had been made. That
is, if in January John Jones' loan was $5,000, he had to show what
it was in February and in March. That was not very effective,,
however.
Then later on the banks were divided somewhat. I know after
I became connected with the bank at Lansing Mr. Patterson was
designated to sort of father our bank, and he would come down
once a week, meet with the executive committee, discuss the things
that he thought needed attention, but conditions were changing so
rapidly and
Mr. PECORA (interposing). And changing for the worse?
Mr, BRYAN. For the worse. And I think in the main the bankers
failed to correct the position
Mr. PECORA (interposing). Correct the positions that you had
criticized ?
Mr. BRYAN. Yes,
Mr. PECORA. DO
sir.
you know, Mr. Bryan, what action, if any, was
taken by the officers of the group or by the board of directors of
4712
STOCK EXCHANGE PRACTICES
the group to bring about correction or remedying of the conditions
that you criticized with regard to any of the unit banks?
Mr. BRYAN. Well, it was a very peculiar situation. I was just
an employee. It was very embarrassing to me in a way—I did not
feel it, however, but some people might have who are very sensitive—to go in and criticize. We will use as an example Mr.
Reynolds' bank at Jackson. I submitted my report to the Guardian
Group, and Mr. Keynolds sat on top on this committee. Well, that
was rather an embarrassing situation.
Senator COUZENS. In other words, you were criticizing your chiefs?
Mr. BRYAN. That is right, sir. And, of course, that life of a bank
examiner is not an easy one, just going around and criticizing
people, and especially when you are criticizing your chief it does not
make you very popular.
Mr. PECORA. Nor comfortable?
MrJ BRYAN. Well, I slept pretty well. I felt I was right. I was
honestly and sincerely trying to do something to help the group.
That was my position, and if I lost my job for it, why, that is all
right, too.
Mr. PECORA. TO what do you ascribe the failure to correct the
conditions which you criticized from time to time in your report and
examinations of the unit banks of the group ?
Mr. BRYAN. Well, fear on the part of the management of the
group, which I think was probably brought about by the bankers
of the various units. For instance, Mr. Herb Reynolds—I will
use him again—is a very prominent man in the city of Jackson.
Now, Mr. Reynolds would not like to have all of these things
called to the group's attention—my severity and the condition of his
bank—and he had a great deal of power in his community. I think
that the group officers were reluctant to be too aggressive, because
they did not want to displease Mr. Reynolds and lose his interest
in the group, because they were largely dependent upon the success
in that bank because of Mr. Reynolds.
In other words, if the group did not have the faith and confidence
of the individual cities in which it operated, its success would be a
failure. But if the assets of the banks continued to just deteriorate,
why, its failure was immient anyway.
Mr. PECORA. YOU spoke before of criticizing loans that you termed
"policy loans" that you found in these various unit banks from
time to time. Now, just for the record, what do you mean by socalled " policy loans " ? I know what you mean, but I want the
record to show, so there will be no misunderstanding of your
testimony.
Mr. BRYAN. In Lansing, for instance, I am familiar with that situation because I was in the bank for over a year. We had many
large loans, $50,000 and $60,000, made to friends of Mr. Gorman or
the other directors. They were under collateral. They had been
in the bank for years. Mr. Gorman was probably reluctant to
collect those loans.
I remember one loan to a former State treasurer of Michigan in
our bank that was a very large sum, undercollateral, been there for
years.
Mr. PECORA. Had been there while the borrower was State treasurer?
STOCK EXCHANGE PRACTICES
4713
Mr. BRYAN. Well, I think so. I think it came in at that time,
although I cannot say. It was in the bank for a long time before
I was there.
Mr. PECORA. What was the size of that loan ?
Mr. BRYAN. I think it was over a hundred thousand dollars, and
we did get it reduced below that amount.
Mr. PECORA. TO what extent did you find it to be undercollateralized?
Mr. BRYAN. Well, part of it was contingent upon real estate, and
of course it would be hard to place a value on that. It was unsatisfactory collateral and very much undercollateral. I should say
if you got 25 or 30 thousand dollars out of it from the collateral
you would do well.
Mr. PECORA. DO you remember the name of that borrower?
Mr. BRYAN. I hate to state. I just cannot recall the names. I
would hate to give the name of someone and be incorrect on it.
Mr. PECORA. Haven't you any clear recollection of that individual
loan account?
Mr. BRYAN. NO; I have not.
(At this point Mr. Bryan conferred with Senator Couzens.)
As I recall, it was Frank McKay, but I am not positive.
Mr. PECORA. That is your present best recollection?
Mr. BRYAN. Yes,
sir.
Mr. PECORA. What other of these so-called " policy loans" made
to friends of the officers or directors of the banks did you find had
been made, we will say, to friends of directors and also held public
office? Did you find many of them?
Mr. BRYAN. Well, of course, there were not—I am speaking of
Lansing now—there were not a lot of loans to people who held
public office, although there were more than that. But that is the
most glaring one I can think of right now. There was a loan to a
real estate company in Lansing, the Michigan Mortgage Co., of
which Director Ballantine was the guiding spirit. He was a director
of our bank. He afterwards was removed as a director or was not
reelected, or resigned, I don't remember the facts, because it was
before I went there. He afterwards went into bankruptcy. There
was a very heavy loss on that loan.
Mr. PECORA. Did you find a considerable number of these socalled " policy loans " to have been made by all of the unit banks
as a result of your examinations of 1930?
Mr. BRYAN. Yes. And most of them were made prior to the
group acquiring the banks.
The CHAIRMAN. Did you find instances where in your judgment
the group paid, too much for these banks, or more than they were
justified in paying?
Mr. BRYAN. In my judgment they paid far too much, Senator.
Mr. PECORA. For all of them?
Mr. BRYAN. Yes; I should say all of them. In fact, I think some
of those banks were acquired before they were even examined by
our examining division.
Mr. PECORA. And the purchase price or basis of acquisition determined upon before any examination ?
4714
STOCK EXCHANGE PRACTICES
Mr. BRYAN. Yes, sir; that is my understanding of it.
Mr. PECORA. Did you at any time in the years 1930 and 1931 make
any examination for the group of a bank that was either in process
of acquisition by the group or was in contemplation of being acquired
by the group ?
Mr. BRYAN. NO, I didn't. You see, I came a little late to get in
on banks they were acquiring. They acquired Ionia in 1930, I
believe, beginning of the year, and I didn't make that examination.
Mr. PECORA. DO you know whether anybody made an examination
of the Ionia bank in behalf of the group prior to the acquisition of
the bank by the group ?
Mr. BRYAN. Mr. Penningroth examined it, I think, prior to the
acquisition, but I don't know whether a deal had already been made
for the bank before that examination.
Mr. PECORA. AS a result of examinations that you made for the
group of the banks which it had acquired, did your examinations
of those unit banks indicate to you that their acquisition on the
terms on which they were acquired by the group was bad judgment?
Mr. BRYAN. Well, as we look back, yes. Of course, I think perhaps the officers of the Guardian Group realized that there were
slow loans and doubtful loans in those banks, but many of them had
SL long record ofT operation, they had become established in the community, they w ere large banks generally, had adequate earnings
under normal conditions. I believe that we owned in most instances
the largest and the best banks of each town in which we operated
and I think that they thought that that good will and the history
behind those banks would offset any poor assets, and I think they
were naturally—none of us realized the severity of the depression at
that time. Naturally they thought that that would terminate sooner
than it did, and any poor assets could be earned out or collected.
Mr. PECORA. It has been disclosed by evidence presented to this
committee that many of these unit banks of the group held large
blocks of the group stock as collateral to loans.
Mr. BRYAN. Yes, sir.
Mr. PECORA. Did you find that condition
Mr. BRYAN. Yes, sir; but that was not
prevalent ?
as prevalent in the unit
banks out-State as in Detroit.
Mr. PECORA. That is, outside of the
Mr. BRYAN. I mean by out-State, not in Detroit. I mean in the
State of Michigan.
Mr. PECORA. In the State but outside of the city of Detroit?
Mr. BRYAN. Yes, sir. I think naturally the large concentration
was in the Detroit banks.
Mr. PECORA. And who were the borrowers who put up a large part
of the group stock for such loans with the group banks ?
Mr. BRYAN. Well, in my opinion, they were officers and employees
of the banks, ajid also individuals in the community. In the outState banks I don't think there was an unusual concentration to
officers and employees.
There may have been stenographers and
people like that wTho had smaller loans secured by group stock, but
the large deals were not in the unit banks. They were too small.
Mr. PECORA. Did you find in your examination of the unit banks
in the city of Detroit that you made for the group such a concentra
STOCK EXCHANGE PRACTICES
4715
tion in loan accounts of group stock as collateral as caused you to
criticize those loans and that collateral?
Mr. BRYAN. Yes9 sir.
Mr. PECORA. And did you criticize them in the report you made
to the group of your examinations ?
Mr. BRYAN. AS I remember now, I did, Mr. Pecora; but in 1930
our group stock was worth a great deal more, and my examining was
done largely in 1930. Of course, the stock fell very rapidly after
that.
Mr. PECORA. DO you know what action, if any, was taken by the
group or the group banks in which you found such a heavy concentration of group stock as collateral for loans, in order to remedy that
condition ?
Mr. BRYAN. TO my knowledge, no particular action was taken.
Mr. PECORA. Did you find, as a result of subsequent examinations,
that not only was no particular action taken, but that as time went on
the amount of such concentration of group stock as collateral for
loans in the group banks increased ?
Mr. BRYAN. Yes; the stock did increase.
Mr. PECORA. TO a substantial degree?
Mr. BRYAN. Yes, sir.
Mr. PECORA. Did you call attention to that?
Mr, BRYAN. AS I recall, yes; it was in the report.
I cannot remember any specific case now. Of course, they were trying to bolster up
those loans, and in many instances I don't believe the loan itself was
increased, although there may have been more Guardian stock at the
subsequent examination. I believe the records show that the total
amount increased, the aggregate, from the national bank examiner's
report as introduced here.
The CHAIRMAN. Did the employees of these banks acquire this
group stock to a considerable extent?
Mr. BRYAN. Well, yes. Yes; I think so. Of course, for instance,
a stenographer in the bank, she would not attempt to buy 300 or 400
shares, or anything like that. She might buy 10 shares or 20, or
something like that.
The CHAIRMAN. They bought that on time usually ?
Mr. BRYAN. There were many small loans that I think probably
started that way, Senator.
The CHAIRMAN. What did they pay generally for it, do you know ?
Mr. BRYAN. Well, it started pretty high. Some of them paid a
very large price for it, and as the stock went down they may have
acquired it at a lower price, of course. Those who were with the
original organization probably paid pretty high prices for it.
The CHAIRMAN. What do you call " pretty high prices " ?
Mr. BRYAN. Between two and three hundred dollars a share, I
would say was too high.
The CHAIRMAN. Yes.
Mr. PECORA. Did you
find among the loans that you criticized in
your examination of the group banks many loans made to business
concerns or enterprises with which any of the officers or directors of
the unit bank making the loans was connected ?
Mr. BRYAN. Yes. However, in the out-State banks I think most
of those came to the banks before the group acquired the banks.
4716
STOCK EXCHANGE PEACTICES
For instance, the Michigan mortgage loan had been in the Capital
National Bank for years.
Mr. PECORA. Did you discuss with Mr. Lord, as the executive head
of the group, on every occasion when you made reports of your
examinations of the group banks, the conditions that you found and
criticized in the banks?
Mr. BRYAN. NO, sir; I did not.
Mr. PECORA. Then it required some
special occasion to bring you
into contact or discussion with Mr. Lord ?
Mr. BRYAN. Mr. Lord, of course, was very busy and it was not
easy to see him. I submitted my reports to Mr. Patterson, and I
think in every instance he discussed them with Mr. Lord.
Mr. PECORA. In your presence?
Mr. BRYAN. NO, sir. In some instances in my presence.
Mr. PECORA. What were the matters of criticism which you made
which led to a direct discussion by you of those items of criticism
with Mr. Lord?
Mr. BRYAN. Why, the banks that in my judgment had the poorest
assets and the poorest management. I recall discussing Port Huron
with him.
Mr. PECORA. What was the gist of that discussion ?
Mr. BRYAN. I was very much concerned about the condition of
the assets of the bank, and very much dissatisfied with the management. Some time after that Mr. Lord advised me that he wanted
me to go to Port Huron and run the bank.
Mr. PECORA. Did you do that?
Mr. BRYAN. Well, I got all ready to, and then he went up to discuss it with directors, as I understand, and I had been so severe
with the bank that they were not impressed with my ability so
they did not want me.
Mr. PECORA. And hence you did not go there ?
Mr. BRYAN. SO I did not
go.
Mr. PECORA. Did you go to the Iona Bank at any time?
Mr. BRYAN. In the latter part of 1930 I examined the Guardian
Bank, and we met with all the active officers and some of the
directors. Those meetings were held at night and they were very
late, and I severely criticized the bank, the lack of aggressiveness
in correcting the assets, and I was rewarded with being made assistant to the president of the bank, and I was in the bank for 6 months.
My job was to try and collect these slow assets.
Mr. PECORA. With what success did you meet?
Mr. BRYAN. I think it was a dismal failure myself.
Mr. PECORA. Who was the president to whom you were made
assistant ?
Mr. BRYAN. Mr. Lord.
Mr. PECORA. Oh, you mean assistant to the president of the
Group ?
Mr. BRYAN. NO ; he was president of the bank, too.
Mr. PECORA. YOU mean the Guardian Bank of Detroit, too?
Mr. BRYAN. I don't want to alibi myself too much, but I think
there was lack of cooperation among the officers of that bank. I
specifically mention the credit man, Mr. Frank Evans, and Mr.
Cantor. I don't think they liked the arrangement. I believe that
STOCK EXCHANGE PRACTICES
4717
they thought it was a personal affront to them, and I don't think
they were willing to work in harmony. Mr. James Walsh, who was
in the bank, cooperated with me and did everything he could to help
me, and after 6 months I was sent to Ionia.
Mr. PECORA. Tell us under what circumstances you were sent to
the Bank of Ionia.
Mr. BRYAN. Following the examination in May of that year
Mr. PECORA (interposing). That is 1931?
Mr. BRYAN. Yes, sir. By the National Banking Department, they
found the bank in a very poor condition, borrowing money, not
accomplishing what they should, and Mr. Lord asked me to go down
there and get some liquidation, and I went down and went to work
in a quite aggressive manner for Ionia. My one big mistake—there
was quite a large loan to a gentleman down there who was running
the newspaper, and he came in to interview me, and while he was
in there I thought I would interview him about this loan, and it
was not a very happy meeting. I was talking about money.
Mr. PECORA. What was he talking about?
Mr. BRYAN. Well, it was not money.
Mr. PECORA. Lack of money?
Mr. BRYAN. Lack of money, I should say. I later found out
that—at least I was informed that the paper that he was running
was owned by Governor Green, who was president of the bank that
I was in. And Governor Green took exception to my severity in
trying to collect these loans and get security and place the bank
in condition, and I also stopped Governor Green and any of the
directors from borrowing money, and so the paper came out and
tried to discredit me.
Mr. PECORA. YOU mean the local paper?
Mr. BRYAN. The local paper, the man who owed this debt, and
while he did not refer to me directly, he said that " Sandstone Ike
shirt grabber was going to leave Ionia."
Mr. PECORA. " Sandstone Ike, the short grabber " ?
Mr. BRYAN. Ike—I get the " Ike " from this [pointing to his
nose].
Mr. PECORA. YOU assumed he was referring to you ?
Mr. BRYAN. I assumed that; yes.
Mr. PECORA. Had you grabbed his shirt?
Mr, BRYAN. I tried to, but I didn't get ahold of it. But I understand that Governor Green took the matter u]D with Mr. Lord and
wanted to have me removed because of my policies in the matter, and
I prepared to go back to Detroit.
Governor Green at that time—and I presume it is still true—had
a great deal of prestige, and every time something would come up of
an unpleasant nature he would threaten to resign, and that had the
desired effect for the Governor.
Mr. PECORA. What was that desired effect?
Mr. BRYAN. He didn't want to resign.
Mr. PECORA. I mean he didn't have to resign because his complaint
was heeded?
Mr. BRYAN. That is right.
Mr. PECORA. And his complaint was aimed at your activities ?
Mr. BRYAN. That is right. I went into the bank to get what personal things I had there
4718
STOCK EXCHANGE PRACTICES
Mr. PECORA (interposing). Including your shirt?
Mr. BRYAN. Including the other shirt—and Mr. Eobertson was talking to the Governor over the phone, and he said, " Mr. Bryan is here,
and he is just leaving ", and he told Mr. Robertson, he says, " You
get that man out of there within 30 minutes or I will resign ", and
I didn't want to see a catastrophe, so I left town.
Mr. PECORA. DO you recall what the capital and surplus was of
the Ionia Bank in March 1930?
Mr. BRYAN. N O ; I could not answer that at all, Mr. Pecora. I
have seen too many of them since then.
Mr. PECORA. I think it was $326,000, approximately. That includes $26,000 of undivided profits. It was made up of $150,000
capital, surplus $150,000, and undivided profits net $26,252.83, as
appears from a report of condition of the National Bank of Ionia
as of the close of business on March 27, 1930, filed with the Comptroller of the Currency in response to the call of the Comptroller
for a statement of condition, and which report I have before me.
The CHAIRMAN. That was pretty good surplus, wasn't it?
Mr. BRYAN. I would say that was adequate capital for a bank of
that size in Ionia.
Mr. PECORA. Well, I find listed in this report of condition, under
the caption schedule A, w^hich called for the names of officers and
directors, liabilities if any, and shares owned, that liabilities of
various officers and directors in the bank at that time, to the bank,
aggregated $157,928.42, which was close to 50 percent of the capital
and surplus of the bank; that is, with its undivided profits. Did you
find that that condition was generally maintained during the years
1930 and 1931?
Mr. BRYAN. Yes, sir. That bank, particularly the officers and
directors, had used their privileges directly and indirectly.
Mr. PECORA. NOW, I find also in this same report of condition of
the Ionia Bank as of March 27, 1930, in addition to that direct liability on the part of officers and directors, there was a further liability as endorsers or guarantors of other loans, in the aggregate of
$128,821.50. Do you know whether or not that condition was
corrected ?
Mr. BRYAN. Not to any material extent I should say. Governor
Green's company, the Ypsilanti Reed Furniture Co., I think, had a
direct loan and then their employees had many loans in that bank,
collateraled with the stock of the Ypsilanti Reed Furniture Co.
Senator COUZENS. Mr. Green was not the Governor of the State
that year, was he ?
Mr. BRYAN. I do not believe he was, Senator, but he still enjoj^ed
the privileges and all the things that go with that honor. He was
the head man of Ionia.
The CHAIRMAN. What became of that company ?
Mr. BRYAN. I don't know. I understand the Reconstruction Finance Corporation just recently baled them out, but I do not know
that. I just heard it reported. They made reed furniture.
The CHAIRMAN. The R.F.C. did not make the loans directly ?
Mr. BRYAN. I don't know that. I have just heard that as a rumor,
that the R.F.C. had loaned some money to them to clean up their
bank debts. I cannot verify that at all. They certainly needed
some new capital.
STOCK EXCHANGE PRACTICES
4719
Mr. PECORA. HOW long did you remain in the bank at Ionia?
Mr. BRYAN. TWO weeks. I might state that there was a State
bank at Ypsilanti that was closed.
Mr. PECORA. AS of what time are you speaking now %
Mr. BRYAN. I cannot recall. I think it was probably in 1930 or
early in 1931. It was closed, and a bank in which the governor was
heavily interested. I think he owned a small amount of the stock
personally, and then I think he had a corporation that owned a lot
of the stock. It was his corporation. I do not know why he would
do that. And he wanted the group to reorganize that bank and
take it over, and they sent me down to examine the bank. I did
not think it was advisable and did not recommend it, and it was not
done.
Mr. PECORA. NOW, did you have any similar experience with regard to any other unit bank of the group ?
Mr. BRYAN. DO you mean where I went in to work?
Mr. PECORA.
Mr. BRYAN.
Yes.
Mr. BRYAN.
1931.
I did not get to go to Port Huron. I was in the
Guardian for 6 months, and in Ionia 2 weeks, and in Lansing for a
little over a year.
Mr. PECORA. What were the circumstances of your going to the
bank at Lansing?
Mr. BRYAN. It was the night before Christmas, and
[Laughter.] Well, there had been a bank failure in Lansing, about
a $9,000,000 bank, the American. The City National Bank was in
trouble, having withdrawals, and Mr. Lord and Mr. Patterson and
some of the other higher officers of the group went down to see what
could be done, because we had our own bank there. And it was
finally decided to take over the City National Bank.
Mr. PECORA. What year was that?
Mr. PECORA. On December 24, 1931.
Mr. BRYAN. And so, the night of Christmas, they called me to
come down and handle the physical end of the taking over of that
bank. So I took 8 or 10 assistants with me, and on—well, the 26th
was on Saturday, I believe—that deal was closed on Saturday, and
on Sunday we moved the bank from its quarters to the Capital National Bank, and opened up on Monday morning. On December
26—and I brought this all on myself, too—I said to Mr. Lord:
" Mr. Lord, Mr. Gorman is not capable of handling this big bank,
and
"
Mr. PECORA (interposing). Was he then the president of the bank?
Mr. BRYAN. Yes, sir. He was then president of the Capital National Bank. I said, " Someone should be put in here to handle these
loans."
And so Mr. Gorman and Mr. Patterson came into the room, and
Mr. Lord said, " Frank, this is going to be a big bank now, and I
think you should devote your time to holding the deposits. You
know the people and you should devote your time to holding their
business, and I think we ought to take the loans away from you,
and I think we ought to put someone in here to handle them."
There would be about $9,000,000 of loans. Mr. Gorman said that
was perfectly satisfactory to him, and inquired to know who he was
4720
STOCK EXCHANGE PRACTICES
going to put in, and Mr. Lord sprung a surprise and said: "We
will put Mr. Bryan in."
So that day I was elected vice president, and stayed there from
then on.
Senator COUZENS. What was the bank that had some difficulty
about employing a national bank examiner from Chicago to operate it ?
Mr. BRYAN. That was Mr. Rimer. And it was the City National
Bank that we took over. He did not want to take that new job, but
they made it so advantageous to him that he did take it.
Senator COUZENS. Did he take the $25,000 too ?
Mr. BRYAN. Well, that was the contract. He was there 6 weeks.
He knew the condition of the bank, but they insisted that he take
that position.
Senator COUZENS. That was before your group took it over, is
that it?
Mr. BRYAN. Yes, sir. And when we took it over he left. He is
now president of the Live Stock National Bank of Chicago, which is
owned by men down East.
Mr. PECORA. Did you make any examination of any of the unit
banks in 1932?
Mr. BRYAN. Only the Capital National Bank. I was in that.
Senator COUZENS. Yes; but he asked if you made any examination
of unit banks ?
Mr. BRYAN. NO ; I examined no bank.
Mr. PEOORA. DO you know whether anyone made any examination
of unit banks of the group in the year 1932 in behalf of the group ?
Mr. BRYAN. I think not. The examining force was discontinued
in 1931.
Mr. PECORA. DO you know the reason for that ?
Mr. BRYAN. I do not know the reason, but I had my own ideas
about it.
Mr. PECORA. What are they?
Mr. BRYAN. Well, I think that the unit bankers were not in favor
of having their banks examined. I do not think that they felt it was
worth what it was costing them, what it was costing the group.
And, frankly, I do not think they liked to have their condition
disclosed all the time.
Mr. PECORA. Mr. Chairman, I have no further questions to ask
Mr. Bryan. Well, Mr. Bryan, have you any statement or observations you would like to make to the subcommittee ?
Mr." BRYAN. Why, in line with Mr. Leyburn's testimony I should
like to give my own views, Senator Couzens, in regard to the matter that you asked about this morning, about employing national
bank examiners in banks. Probably this is a little bit personal
because I am a national bank examiner, but let us assume I lost
my position as a national bank examiner. I should have to be barred
for 2 years about the work, for I do not know anything other than
banking. I think bank examiners can be of very material aid in
banking work. There have been quite a few successful bankers that
were originally national bank examiners. And I think banks would
be helped in many instances by having the services of such men.
I think Mr. Eimer is an excellent banker. I think that what Mr.
STOCK EXCHANGE PRACTICES
4721
Leyburn suggested, with the approval of the Comptroller of the
Currency, it would be all right.
Senator COUZENS. Of course, you know there has been testimony
introduced here to show that one bank examiner wrote to the
Comptroller of the Currency that Mr. Wiggin was the greatest
banker in America, and that America ought to be proud to have
him at the head of the banking business of America. Then another
bank examiner wrote the Comptroller of the Currency that he ought
to be lenient with a certain bank, and that bank examiner was
afterwards employed by that bank. I do not know how many more
cases there are of that kind.
Mr. BRYAN. Well, Senator Couzens, there are all kinds of bank
examiners, like there is in the case of bankers.
Senator COUZENS. And politicians.
Mr. BRYAN. I should like to see the service put on a basis where
bank examiners would not want to leave it, that they would want
to make it their life work. I think the turn-over has been too
great. I should like to see the salaries increased so that the men
could get along better. I do not think they are paid enough, and
if they were paid higher salaries you could hire better men and
let them stay in it as their life work. I think it would be better
for the banks and better for the Comptroller's office. Under the
fee system which we have, it is self-sustaining.
Senator COUZENS. DO you mean by the fee system that you charge
banks for examinations?
Mr. BRYAN. Yes, sir. And it could be self-sustaining, and I
think in the long run it would be much more beneficial to the bankers if the men were paid properly. We contact prominent men in
this work, and we have to associate with them to some extent.
Senator COUZENS. And that is dangerous.
Mr. BRYAN. Yes; but it cannot always be avoided, and we cannot
live like someone working on the street at a dollar a day. In
regard to the future of banking, I think in the main we have got
to provide much better management. I think the results have
shown that bank management has been very poor.
Mr. PECORA. The management of banks?
Mr. BRYAN. Yes, sir. I had a man in to see me the other day who
was complaining because the Comptroller of the Currency had
written to him saying that he would have to change the management
in the bank. He said:
Why, I don't see any occasion for that. This man is very popular. He is.
the mayor of our town and has been for 14 years.
I replied:
What does he know about the technical side of banking?
He said to me:
Oh, he doesn't know anything.
I said:
What is his business?
And he replied:
He is a plumber.
4722
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, that might qualify him to fix leaks. [Laughter.]
Mr. BRYAN. Yes. I think that within the operation of banks the
policy loans should be discontinued. I think the technical men in
banks fear their positions because directors want to favor their
companies and friends and things of that kind. It has been very
detrimental to the banking business, and I certainly do not want to
see this thing happen again, I mean the thing that has happened
in the last few years.
Senator COUZENS. Don't you think the Comptroller of the Currency ought to be given more power under the law to regulate banks ?
Mr. BRYAN. Yes, sir. I think the laws have not been strict enough,
and there has been a tendency to promise many things, to correct
this and that, and to temporize. I think we have delayed too much
in some cases. And I think with better bank examiners going in and
analyzing the situations they would see that correction is made.
Anyone can go in and examine a bank and write a report, but it is
getting results that counts. And I might say that one makes himself
very unpopular when he is honestly and sincerely trying to properly examine banks.
Mr. PECORA. Unpopular with whom ?
Mr. BRYAN. With bankers.
Mr. PECORA. Have you anything else to present to the subcommittee, Mr. Bryan?
Mr. BRYAN. I think that is all. Am I now excused?
Mr. PECORA. Yes, sir.
Mr. BRYAN. Finally excused?
The CHAIRMAN. Yes; you will
be excused, Mr. Bryan.
(Thereupon the witness was excused).
Mr. PECORA. Call Mr. McKee.
The CHAIRMAN. Mr. McKee, 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 thje
matters now under investigation by the subcommittee. So help
you God.
Mr. MCKEE. I do.
TESTIMONY OF JOHN K. McKEE, CHIEF OF THE EXAMININtJ
DIVISION, RECONSTRUCTION FINANCE CORPORATION, WASHINGTO, D.C.
Mr. PECORA. Mr. McKee, what is your full name, address, and
business or occupation?
Mr. MCKEE. John K. McKee, chief of examining division, Reconstruction Finance Corporation; residence now, Washington, D.C.
Mr. PECORA. HOW long have you been chief of the examining
division of the Reconstruction Finance Corporation?
Mr. MCKEE. Since the spring of 1933.
Senator COUZENS. Did you say the spring of 1933 ?
Mr. MCKEE. Yes,
sir.
Mr. PECORA. Less than a year?
Mr. MCKEE. Yes,
sir.
STOCK EXCHANGE PRACTICES
4723
Mr. PECORA. Were you connected with the R.F.C. prior to your
becoming chief of its examining division ?
Mr. MCKEE. That is correct.
Mr. PECORA. When did your affiliation or connection with the
R.F.C. commerce, and in what capacities have you served the R.F.C. ?
Mr. MCKEE. I began in February of 1932 as an examiner. And
I was assistant chief of the examining division from June of 1932
until May of 1933, when I was made chief of the examining division.
Senator COTJZENS. What was your experience before you went to
theE.F.C?
Mr. MCKEE. I had been in the banking business since 1910, up to
1932.
Senator COTJZENS. Where?
Mr. MCKEE. In Pittsburgh.
Mr. PECORA. Mr. McKee, do you recall an application having been
made to the E.F.C. for a loan to the Union Guardian Trust Co. of
Detroit some time in 1932?
Mr. MCKEE. I do. But I was not familiar with the application.
Mr. PECORA. Did you have anything to do with that initial application ?
Mr. MCKEE. I did not.
Mr. PECORA. Did you have
anything to do as an examiner or as an
official of the Examining Division of the R.F.C, with any applications which were made to the R.F.C. either by the Guardian Detroit
Union Group, Inc., or any of the banking units of that group?
Mr. MCKEE. Not until January of 1933.
Mr. PECORA. Will you tell the committee in your own way the experiences that you had or the actions taken, beginning with January
of 1933 in connection with such application?
Mr. MCKEE. May I first state for your record that the Reconstruction Finance Corporation is privileged to make loans on full and
adequate security. The making of such loans* is through an established agency system throughout the United States, 33 in number.
The procedure for applications for loans is that they shall come
through the medium of the agency division or the agency in that
particular territory. And an application comes in with such recommendation to our office in Washington. In several particular cases,
deserving, probably, ultra-confidential relations, the applicant has
come direct to Washington for relief. That was unusual, however.
On January 26, 1933, I was called into the office of Governor Talley,
about 3 p.m.
Senator COUZENS (interposing). Tell us who Governor Talley is.
Mr. MCKEE. He was assistant to the directors of the Reconstruction Finance Corporation. In a brief way Governor Talley discussed this Detroit situation with me. He had just completed a
conference, lasting the most of the day, with individuals representing the Union Guardian Group, who desired
Mr. PECORA (interposing). You mean the Guardian Detroit Union
Group, don't you?
Mr. MCKEE. That is correct. Who desired that somebody be sent
to Michigan to survey their situation, and to ascertain whether or
4724
STOCK EXCHANGE PRACTICES
not a loan could be made of sufficient size to pay off the depositors
of the Union Guardian Trust Co. Our coversation was brief. I
was instructed by the Board to proceed to Detroit, with full authority
to recommend such loan as I saw fit to make, and to take with me
such men as I deemed necessary to complete the operation. We
started off with a skeleton force that evening, and arrived Saturday
morning, January 27, and about noon on Saturday met with the
principals of this Group in the Union Guardian Trust Building.
Mr. PECORA. Who were those principals?
Mr. MOKEE. Mr. Kanzler, Mr. Lord, and Mr. Longley. It was
confined to those three. Mr. Kanzler and Mr. Longley, together
with Mr. Leyburn, had been with Governor Talley the day before.
Mr. Leyburn joined our little group there, and we started in at
the high points of the situation. Finally we got down to a basis to
decide what was the best thing to do with the entire situation, the
idea in this application being predicated upon the embarrassing condition then existing of the Union Guardian Trust Co. The idea of
the Group representatives was that, due to the size of this bank and
the earning power of its fiduciary capacity, they desired to continue
its identity for that earning power, but they did desire to transfer the
deposit liability of that Group to the Guardian National Bank of
Commerce.
Now, as you gentlemen may know, a trust company institution in
the State of Michigan is not authorized to accept deposits. So that
the only deposit liability of the Union Guardian Trust Go. was that
in the form of trust deposits—I mean trust-company deposits—or
certificates of deposit. The character of the deposits of the Union
Guardian Trust Co., amounting to something like 20 or 25 million
dollars at that time, were corporate funds or municipal funds
deposited with the bank primarily for the interest they paid on
such deposits. In starting into this situation we knew before we
left Washington of the existing commitment the R.F.C. had madet
and the proceeds that had been disbursed for the benefit of this
Union Group. And we did know and did anticipate, although I was
not familiar with it, the office had anticipated probable further loans
to this company, knowing of its embarrassing condition since July
of 1932. So we had well scanned from time to time the collateral
that was pledged to us. Previously we had had two men go to
Detroit and make a very careful examination of the collateral on
the ground; and we had, from the information in our possession,,
the review and were satisfied that the loan on the collateral was
about as much as we could possibly make.
The CHAIRMAN. HOW much was that loan?
Mr. MOKEE. At that time I think it was in the neighborhood of
9 or 10 million dollars. However, a commitment had been made for
a greater amount, but it had not been fully withdrawn. We started
into this problem in a careful way. We discussed it with the principals of the group, who apparently had been doing everything they
could to correct the situation, with which they were familiar. And
through this medium of relief at the time they contemplated correcting the picture of every bank that needed correction in the group.
STOCK EXCHANGE PRACTICES
4725
Their first idea was to transfer or sell assets—undesirable assets—
that had theretofore been criticized by the examiners, from this
group of banks to the Union Guardian Trust Co., and have the Union
Guardian Trust Co. borrow all the money, a sufficient amount to
repay the banks for those assets, as well as to borrow enough money
to discharge their full deposit liability. After a conference of an
hour or so, probably longer, it was then thought it would be a rather
embarrassing thing on that unit to carry such a burden of borrowed
money, and I believe it was my suggestion that they should organize
a mortgage company, a mortgage loan company, which could take
title to those assets
Mr. PECORA (interposing). Of all the banking units?
Mr. MOKEE. Of the units of the group, providing that the assets
would represent mortgage loans at least in excess of 50 percent of
the portfolio, and subscribe to the capital stock of such mortgage
loan company in the amount of 5 million dollars. That seemed to
strike a harmonious chord. I conferred with our board, and they
said they would consider such an application. It was necessary
for them to get in touch with all of the banks of the group, to
present the collateral. The various officers of the banks came in
there with their collateral in pouches, and we attempted, working
night and day there, to prepare a schedule commensurate with our
usual form of application. We had men there, 10 or 12 of them,
grading collateral all through the night. And on February 6th I
arrived back in Washington with the conclusions and that first
application. When those gentlemen had appeared in Washington
they said they had something in the neighborhood of assets of
around 95 or 96 million dollars.
Mr. PECORA. Face value ?
Mr. MCKEE. Face value of assets to pledge for the loan., and that
the loan required would be in the neighborhood of 65 million dollars. Of course, in those assets they had a contingent liability, or
some of them had—well, one in fact was a possible assessment
against the shareholders of the Union Guardian Group, if and
when needed, and they were willing to pledge it. The conclusions
and the grading of those assets in the first form of application,
were brought to Washington and presented to our board.
Mr. PECORA. What was the summary of that conclusion?
Mr. MCKEE. Will you excuse me if I refresh my memory?
Mr. PECORA. Yes.
Mr. MCKEE (after
looking over some papers). The assets offered
at that time had a face value of approximately 49 million dollars;
that is, exclusively assets taken from the banks. In addition thereto,
we would have had 31 million dollars of assets already pledged to us
by the group. They had in addition to that equities in the Union
Building Co., which was the owner of the building which housed
the Union Guardian Trust Co., and three other bank buildings, and
other sundry assets, such assets as those of the Congress Corporation,
and the free assets left of the Union Guardian Group.
Mr. PECORA. What was the total value of those real-estate equities?
Mr. MCKEE. The real-estate equities were the Union Guardian
175541—34—PT 10
10
4726
STOCK EXCHANGE PRACTICES
Building, or the Union Building Co., which owned this bank building. They carried it on their books at four million and some odd
thousand dollars, and it was subject to two prior loans which totaled
about $6,400,000. They had three bank buildings which they acquired through the consolidation, within the limits of Detroit. I
think one was outside of the city. They were also offered as collateral. That collateral, minus two buildings, would amount to some
$64,871,000, including the free collateral and that already pledged
to us.
May I correct that, please ? That was in the neighborhood, counting the buildings in at the face amount as carried on the books, of
about $88,000,000.
Mr. PECORA. That is the face value ?
Mr. MCKEE. Yes,
Senator COUZENS.
sir.
And that included a carrying charge of $4,000,000
on the Union Building ?
Mr. MCKEE. That included that equity; yes.
Senator COTJZENS. And the building has been turned over, according to the press, to the second mortgagees ?
Mr. MCKEE. I am not familiar with what happened to that.
Senator COUZENS. If that is so, the whole $4,000,000 is wiped out.
There is no equity, because it has gone into the charge of the second
mortgagees.
Mr. PECORA. Those real-estate equities included in this gross valuation of $88,000,000 of assets were taken at book value, not actual
market value?
Mr. MCKEE. NO ; at the carrying value.
Mr. PECORA. What proportion of these face-value assets of $88,000,000 or thereabouts was considered as actual or market value at
that time?
Mr. MCKEE. May I answer that question in this way—that we
allocated liberal value to this collateral. In other words, in working
on a loan-value basis and on a liquidating-value basis of this collateral we could only find at that time $20,000,000 in that collateral.
Senator ADAMS. HOW do you differentiate between what you call
liquidating value and loan value?
Mr. MCKEE. On loan value, Senator, we find an appraised value of
the property and take a percentage of that. On liquidating value we
use what we believe the asset will liquidate for.
Senator ADAMS. Right then.
Mr. MCKEE. That is correct.
Mr. PECORA. HOW much of a loan was sought by the group at that
time against these assets that had a liquidating value of about
$20,000,000?
Senator COTJZENS. Before he answers that, Mr. Pecora, I think it
would come better in order if he would tell us what that loan value
was at that time.
Mr. MCKEE. Approximately $20,000,000.
Senator COTTZENS. I thought you said that was the liquidating
value.
Mr. MCKEE. It ran about $17,000,000.
STOCK EXCHANGE PRACTICES
4727
Senator COTJZENS. I do not understand that point. I understood
that the liquidating value was lower than the loan value.
Mr. MCKEE. NO, Senator; maybe I have not made it clear. For
loan value we take the appraisement of an asset. For instance, we
have a mortgage of $4,000 on a house which is worth $6,500. We
will take a percentage, allocate a percentage to it, and call it loan
value; but if that house is actually worth $5,000, that will be the
liquidating value of it, or if it is worth $4,000 that would be the
liquidating value of that asset. In other words
Mr. PECORA. In other words, the loan value is less than the
liquidating value?
Mr. MCKEE. Correct.
Mr. PECORA. Let me ask you this question: How large a loan
was being sought by the Group at that time, to be secured by its
assets, to have a liquidating value of $20,000,000?
Mr. MCKEE. In order to take those assets and make a pledge to
us of them, they required $49,600,000 loaned on those assets to repay
the banks for their capital adjustment.
Mr. PECORA. In other words, about two and a half times the
liquidating value of the assets that they had available for
collateral ?
Mr. MCKEE. Correct.
Senator COUZENS. I am still at a loss, and I want to get this
straight, because it was generally reputed at the time, and as I recall
from the conference, that you were willing to loan some $37,000,000
plus on the securities.
Mr. MCKEE. That was a later transaction, Senator.
Senator COUZENS. Oh. I beg your pardon.
Mr. PECORA. When you came back to Washington on February 6.
last, with this survey of the situation, what took place?
Mr. MCKEE. We had a special board meeting and the gentlemen
representing the units were invited in to tell their story, and then the
board went into executive session. I presented this matter and told
them how much I was willing to recommend that they loan on these
assets.
Senator COTJZENS. How much was it?
Mr. MCKEE. I was willing to recommend at that time $20,000,000.
Senator ADAMS. YOU were going to clear up to the liquidating
value, then;
Mr. MCKEE. Yes, sir; that is correct.
Mr. PECORA. Did you feel that you were as liberal in making such
a recommendation as you possibly could be ?
Mr. MCKEE. I certainly did.
The CHAIRMAN. That included all the assets of all the members of
the Group ?
Mr. MCKEE. Just certain of their assets. The board at that time
made a commitment of—just before I go any further: It was on all
the assets other than those pledged, and then there was $31,000,000
already pledged, face value of assets of the Guardian Union Trust
Co., of which $15,000,000 was borrowed.
Our board made a committment of $45,000,000, taking in the
other assets and repaying the other loan. In other words, they
4728
STOCK EXCHANGE PRACTICES
would make a loan of $45,000,000 if and when the Guardian Trust
Co. loan was fully repaid, principal and interest. Their requirements, as I said, were in the neighborhood of $65,000,000 at that
time. We were not told the difference could be made up, but our
board was led to believe that Mr. Ford, who had on deposit with
the Guardian Trust Co. some seven and a half million dollars, might
be willing to subordinate his deposits; and Mr. Ford was not represented directly, other than we believed that Mr. Longley and Mr.
Kanzler were closely affiliated with Mr. Ford, and although thejr
held out no promises and had nothing in writing to show that, it was
felt at that time that Mr. Ford might subordinate his seven and
a half million dollars. It still left a gap which was more than could
be reached. I telephoned our men to try to exchange these rejected
assets for better assets to see if we could fill up the hole. We did
that. We revamped the application, but there was still a holeFinally, on February 10, I left Washington for Detroit on our final
trip before the holidays. We went up there and revamped the
whole thing. The Group then were convinced that it was impossible to correct as they wanted to the unit banks, and would have
to be satisfied in obtaining sufficient money to bail out the Guardian
Union Trust Co. which had an abnormal deposit liability commensurate with its free assets. Its free assets, as reported to us, were
about $12,000,000 face value, and deposit liabilities in the neighborhood of 20 to 25 million dollars.
Mr. PECORA. What was the liquidating value of those free deposits
having a face value of $12,000,000 ?
Mr. MCKEE. We found later on, Mr. Pecora, that they could not
pledge all of that $12,000,000; that there was only available for
pledge about $7,940,000.
Mr. PECORA. Face value?
Mr. MCKEE. Face value—which had a liquidating value of about
$5,096,000.
The revamping of the last and final application, which we worked
on up until the Michigan bank holiday moratorium was declared,
was on the basis that assets would be pledged from the following
units: the free assets of the Union Trust Co.; the pledged assets of
the Union Trust Co.
Senator COUZENS. YOU mean, the Guardian Trust Co. ?
Mr. MCKEE. Yes, sir; that is correct. The Union Building Co.'s
equity in the building; the assets of the Congress Corporation; certain assets of the National Bank of Commerce, and the free assets of
the Guardian Union Group.
A commitment was made on assets with a total face of $64,871,000.
which included assets already pledged, as well as the assets to be
offered and on which we made a commitment of $37,720,000.
Mr. PECORA. Just a moment: What was the liquidating value of
the $64,000,000 face value of assets?
Mr. MCKEE. $37,762,000.
Mr. PECORA. SO again the Reconstruction Finance Corporation
made a commitment of a loan equal in amount to the full liquidating value of the available assets?
STOCK EXCHANGE PRACTICES
4729
Mr. MCKEE. Correct. The amount required in order to do that
correction was $49,600,000, which left a deficiency of $11,880,000.
Before I left for Detroit I was told by our president, Mr. Miller, at
that time, that there would be a meeting at the White House on Saturday morning; there would be one Friday evening and one on Saturday morning, and for me to take a train and talk to him in the
morning, which I did. Mr. Walter Chrysler and Mr. Alfred Sloan—
one of the Chrysler Corporation and the other of the General Motors
Corporation—were invited to the White House to be advised of the
seriousness of the situation in Detroit. I was advised by Mr. Miller,
by telephone, Saturday morning, that this meeting had occurred and
that Mr. Sloan and Mr. Chrysler both had instructed their local representatives to stand by and meet with me when called, which they
•did.
The CHAIRMAN. Some gentlemen want to catch a train, and we had
better suspend now and have you appear again at the next session.
We will take a recess now until next Monday morning at 10 o'clock.
(Whereupon, at 3:45 p.m., the subcommittee adjourned until
Monday, January 15, 1934, at 10 a.m.)
STOCK EXCHANGE PEACTICES
MONDAY, JANUARY 15, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 2 p.m., pursuant to adjournment on
Friday, January 12, 1934, in Koom No. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman) 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.
TESTIMONY OF JOHN K. McKEE, CHIEF OF EXAMINING DIVISION,
RECONSTRUCTION FINANCE CORPORATION, WASHINGTON,
D.C.—Resumed
Mr. PECORA. Mr. McKee, do you recall at what point in your examination of last Friday we suspended, because if you do not I will
read the last portion of your testimony in order to bring it back to
your mind.
Mr. M C K E E . I think I do, Mr. Pecora.
Mr. PECORA. Well, you had reached the conference or meeting at
the Reconstruction Finance Corporation in Washington on February
6, 1933, at which time you reported the result of the survey that you
had made out in Detroit of the banking situation. Do you recall
that?
Mr. M C K E E . That is correct.
Mr. PECORA. YOU testified that on February 6 you made certain
recommendations to the R.F.C.
Senator COUZENS. Just read where he left off.
Mr. PECORA. All right. I will read the last paragraph or two of
your testimony.
Mr. MCKEE. * * * A commitment was made on assets with a total face of
$64,871,000, which included assets already pledged as well as the assets to be offered
and on which we made a commitment of $37,720,000.
Mr. PECORA. Just a moment. What was the liquidating value of the $64,000,000 face value of assets?
Mr. MCKEE. $37,762,000.
Mr. PECORA. SO again the R.F.C. made a commitment of a loan equal in amount
to the full liquidating value of the available assets?
Mr. MCKEE. Correct. The amount required in order to do that correction
was $49,600,000, which left a deficiency of $11,880,000.
Before I left for Detroit I was told by our president, Mr. Miller, at that time,
that there would be a meeting at the White House on Saturday morning; there
4731
4732
STOCK EXCHANGE PRACTICES
would be one Friday evening and one on Saturday morning, and for me to take a
train and talk to him in the morning, which I did. Mr. Walter Chrysler and Mr.
Alfred Sloan, one of the Chrysler Corporation and the other of the General Motors
Corporation, were invited to the White House to be advised of the seriousness of
the situation in Detroit. I was advised by Mr. Miller, by phone, Saturday
morning, that this meeting had occurred and that Mr. Sloan and Mr. Chrysler
both had instructed their local representatives to stand by and meet with me when
called, which they did.
And that is where you left off. Now, the Saturday morning you
referred to in your testimony at this point was Saturday, February
11, 1933, wasn't it?
Mr. M C K E E . That is right.
Mr. PECORA. Will you resume your narration of events at that
point and proceed?
Mr. M C K E E . About noon on Saturday I was able to get in contact
with Mr. B. E. Hutchison, vice president of the Chrysler Corporation,
and Mr. M. L. Prentiss, treasurer of the General Motors Corporation,
&nd invited them to meet with me at the Union Trust Building—no,
I will correct that, it was at the Guardian National Bank of Commerce, in the executive quarters. We met there with the officials of
the Union Group, and discussed the problem which we had facing us.
Mr. PECORA. Tell the committee the names of the officials of the
Group with whom you had this discussion that you are now going to
tell us about.
Mr. M C K E E . Mr. Longley, Mr. Kanzler, and Mr. Lord, and I
believe at that time Mr. Bodman had been invited in, representing
the Group. As I recall it he was the chairman of the Trust Co. The
idea of that meeting was to impress on those gentlemen who had no
stock interest in those banks, that is, General Motors and the Crysler
Corporation, the seriousness of the situation and the limited time in
which correction had to be made.
We had started Saturday afernoon. The banks were closed. We
had all day Sunday, and Monday was a legal holiday, and by Tuesday
morning at 9 o'clock something had to be done. That conference
lasted all of Saturday, Saturday night, and into Sunday morning, and
was picked up where it left off on Sunday, and was carried through
Sunday and Monday until the time the proclamation was signed by
the Governor of the State of Michigan. Added to that group about
Sunday night at midnight were others from the outside, and
Mr. PECORA (interposing). That is, you mean outside of the
Guardian Detroit Union Group?
Mr. M C K E E . That is correct.
Mr. PECORA. Who did they represent?
Mr. M C K E E . I do not know that they had any direct interest in
the situation. It was Sloan Colt, president of the Bankers Trust Co.
of New York; Mr. Traylor of Chicago, who came over when requested,
together with his assistant, Mr. Brown, and a couple of junior officers
of the Continental Commercial Bank of Chicago.
Senator COUZENS. Who requested Mr. Colt to come over?
Mr. M C K E E . I do not know, Senator Couzens. I believe he was
there Sunday morning. My memory is a little hazy on that.
Senator COUZENS. Who requested Mr. Traylor, of the First
National Bank pf Chicago, to come over?
Mr. M C K E E . I do not know that.
STOCK EXCHANGE PRACTICES
4733
Senator COUZENS. YOU said previously that these gentlemen, as
I understood, had come over when requested. I was wondering who
requested them to come over.
Mr. M C K E E . I don't know.
Mr. PECORA. Had you previously been advised that they were to
participate in those conferences?
Mr. M C K E E . I had not; no.
Senator COUZENS. Why did
you say that they came over when
requested?
Mr. M C K E E . Well, I don't know why I said that, Senator Couzens,
other than it was just hearsay evidence on my part that somebody
had phoned them and requested them to come over. Now, who
did it, I don't know.
The CHAIRMAN. Did they say they were requested to be there?
Mr. M C K E E . Not to me, Senator Fletcher.
Mr. PECORA. Well, now, will you give the substance of the discussion that took place among all of you?
Mr. M C K E E . Well, up to that time, gentlemen of the committee,
we had got down to a definite decision as to what we could do on what
we had to work with. I think it had been very plain in everybody's
mind up to that time, that is, as to those representing the Reconstruction Finance Corporation, and as to those representing the group, that
we could not do the job; I mean the correcting job that was apparently
necessary in the matter of the unit banks at that time, with what
assets they had to offer as collateral. And that was laid aside. We
started to figure on the final application, which I reported to you
the other day, with face value of collateral of $64,871,000. Now, the
proceeds of such a loan was to pay off the entire deposit liability of
the Union Trust Co.
Mr. PECORA (interposing). You mean the Union Guardian Trust
Co., do you?
Mr. M C K E E .
Yes.
Senator COUZENS. Which amounted to what?
Mr. M C K E E . Will you excuse me if I do not get those names
straight. There has been so much over the dam since that time.
They were to get from the proceeds of the loan sufficient cash to pay
off the deposit liability, or to have the National Bank of Commerce
absorb that deposit liability.
Mr. PECORA. What was the aggregate of that deposit liability of
the Union Guardian Trust Co.?
Mr. M C K E E . AS I recall it their class B trust funds were about 5
million dollars, and the certificates of deposit outstanding were in the
neighborhood of 20 million dollars. That may be wrong but that was
my understanding. And they had some cash on hand, and some
undisbursed part of our previous loan to the Union Guardian Trust
Co. So with the proceeds of this loan the Union Guardian Trust Co.
would have gone out of the banking business, and certain money
would have been taken into the Guardian National Bank of Commerce
to further liquify that bank after taking out some notes they were
offering in this security. Now, the amount that we recommended on
that collateral was $37,720,000.
Mr. PECORA. That I believe you testified on last Friday was estimated to be the full liquidating value of the collateral they had tooffer to the Reconstruction Finance Corporation.
4734
STOCK EXCHANGE PRACTICES
Mr. M C K E E . That is right. And with your permission I can very
readity clarify that in your mind at a later time.
Mr. PECORA. All right.
Mr. M C K E E . That money was to go, first, to pay off the present
indebtedness of the Union Guardian Trust Co., 15 million dollars,
and then sufficient to pay off the deposit liability of 20 million dollars.
And then to pay the Guardian National Bank of Commerce for what
assets were taken out of their portfolio and offered as a part of the
collateral on this pledge.
Now, the total amount required was $49,600,000, which left a
deficiency in the amount we could loan compared to the amount
required of $11,880,000. Our board felt that that was the limit which
they could loan on the collateral offered; and there was that gap that
had to be made up if and when the Union Guardian Trust Co. was to
go out of business the following business day.
Mr. PECORA. That is, to go out of the banking business.
Mr. M C K E E . Yes, to go out of the banking business. We had up
until that time—well, I will start with Saturday afternoon. We had
been led to believe that $7,500,000 of the $11,880,000 would be cared
for by the subordination of a deposit already in the Union Guardian
Trust Co.
Mr. PECORA. That was a deposit of the Ford Motor Co.?
Mr. M C K E E . Yes, Ford Motor Co.'s money. That left a deficit
of $4,380,000. Now, in order to get this applicant properly capitalized our board reduced the requirement from $5,000,000 to $2,000,000.
Mr. PECORA. That is, the capital requirement of what you referred
to on last Friday as the proposed mortgage company that was to take
over all the available assets of the Guardian Detroit Union Group,
and pledge them with the Reconstruction Finance Corporation in
return for a loan to be made by the R.F.C. to the proposed mortgage
company, and by that mortgage company in turn allocated among the
various units of the group?
Mr. M C K E E . That is correct. Now, I will pause right there to
clarify in your minds, if necessary, why that mortgage company was
necessary.
Mr. PECORA. All right.
Mr. M C K E E . There were the assets owned by the group. There
were the affiliated companies owning assets, and somebody had to get
title to all those assets in order to pledge them. So it was necessary to
transfer them to some vehicle, whether it be the Union Guardian
Trust Co. or a newly formed mortgage company, which would have
been an eligible applicant under the law.
Mr. PECORA. That was in order to avoid a multiplicity of transactions in obtaining a loan from the R.F.C.?
Mr. M C K E E . That is right, and to get title to the assets that were
being pledged. We arrived at this point, of $4,380,000 deficiency in
cash to put the transaction through. Then add to that the $2,000,000
required capital structure for this vehicle, the mortgage company,
which gets you back to $6,380,000.
We went into the meeting Saturday night short $6,380,000 from
the information then available. That was, of course, counting on
the 7% million dollars. Our endeavors then were to try to sell other
parties interested in the success and continuation of Detroit, to take
some part; to make some contribution toward the $6,380,000. Aad
STOCK EXCHANGE PRACTICES
4735
it was for that purpose that General Motors and Chrysler Corporation
were called in on the situation.
Well, they were very fair and lenient, and were willing to listen to
the story, and willing to go along. We, later Sunday afternoon—
and that was the first time I believe that Wilson Mills, who was the
president of the First National Bank of Detroit, knew directly of the
obligations that the Union Guardian Group were facing. He operated
the largest competitive bank in the city, and he was called in then to
see whether his bank could participate in making up some of this
deficiency. And may I state right here that it was not at my suggestion, but he was called in to see whether or not he could add to
this picture and try to fill up this hole.
Well, that party was made larger Sunday afternoon, and I think
it included some other industrialists of Detroit, but I cannot give you
their names; and they did everything they could to try to aid this
situation. There was in our opinion only a modest amount, compared
to what the total amount was, and the amount involved, as far as the
collateral offered to us as security was concerned, and we had gone
the limit.
Mr. PECORA. DO you recall the names of those other industrial
leaders that came into the conference on that Sunday?
Mr. M C K E E . I do not.
Mr. PECORA. Were they industrial leaders in the city of Detroit?
Mr. M C K E E . Yes; I would say they were.
Mr. PECORA. And the whole situation was canvassed in their
presence, was it?
Mr. M C K E E .
Mr. PECORA.
Mr. M C K E E
Yes.
And they were asked to
(continuing). Now, I might qualify that answer a
bit: Whether they got the whole story I do not know, but they knew
of the emergency and were asked to contribute.
Mr. PECORA. All right. Will you resume your story?
Mr. M C K E E . If I remember correctly, some time Sunday evening
we were informed—well, no; no progress was made as to anybody
ivrxting tickets of what they would do, and so far as the Reconstruction
Finance Corporation was concerned ours was a closed book. We had
just gone the limit. It was either Sunday evening or Monday
morning we were informed that Mr. Ford had a change of thought
about subordination of his deposit. Now, there was no intimation,
there was no suggestion coming from the Reconstruction Finance
Corporation that Mr. Ford should ever subordinate his deposit.
Mr. PECORA. Who first suggested that?
Mr. M C K E E . It was talked of in front of our board when some
members were present representing the group, and while there wasn't
anything in writing, and they made no out-and-out promise that
Mr. Ford would do this, yet they gave us every indication that it was
possible.
Mr. PECORA. They held out the strong hope that it would be accomplished, is that it?
Mr. M C K E E . That it might be accomplished; yes. And we continued? the continuous meeting, as I have said, from Saturday afternoon until late Monday night; and when Mr. Ford decided not to
subordinate his 7}i million dollars, we then got back to $11,880,000.
4736
STOCK EXCHANGE PRACTICES
Mr. PECORA. AS the gap between the amount required to rehabilitate the banks and the full liquidating value of all the assets available
for pledging?
Mr. M C K E E . Yes, sir.
Senator COUZENS. And
that did not include the $2,000,000 capital,
did it?
Mr. M C K E E . NO, sir.
Senator COUZENS. And
if you add that $2,000,000 capital, it made
a total of $13,880,000.
Mr. M C K E E . Yes; then it was $13,880,000. Then the party had
o be made larger. We tried to see how much of this could be taken
by smaller merchants in Detroit, and everybody else, in order to
save a bad situation, and our time was getting very limited, the time
in which to reach a final settlement of the transaction. After every
possible effort made by our board members in Washington, and
ourselves in Detroit, trying to assist where we could, it was impossible
to fill this hole; and we led right up to the hour of the moratorium,
when there just did not seem to be anything else to do.
Mr. PECORA. Mr. McKee, before you leave the testimony with
regard to this rather continuous conference, commencing Saturday
afternoon and terminating Monday night, can you tell the committee the substance of the reasons advanced by those with whom
you conferred, why they could not fill up what you call this gap of
$11,880,000?
Mr. M C K E E . Well, I don't know whether I can give you the reasons, Mr. Pecora, or give the committee the reasons, other than that
there were only two of the larger industrialists who had not anything
at stake, except deposits in the banks, who said they could not see
why we could not take them in on a collateral basis with our loan.
Well, it just meant that they would take a participation in our loan,
which just made that much more loan on the same collateral, and it
would make a bad loan for both of us.
Mr. PECORA. It would have made a loan in excess of the liquidating
value of the available collateral, is that it?
Mr. M C K E E . That is correct. And we were in the position, as T
started out my testimony with, with the fact that the Reconstruction
Finance Corporation is empowered to make loans on full and adequate
security, and they had to stand on that. Now, there was really not
much more to that meeting than the conversation that was carried
on, and we got no place. And the thing finally died by the lack of
$13,880,000.
Mr. PECORA. Well, did any of those present in that long conference,
covering a period of 2 days, offer in any way to raise or to undertake
to raise any part of the $11,880,000 that was needed to bridge the gap?
Senator'CouzENS. It was $13,880,000.
Mr. PECORA. Yes; the $13,880,000 if you exclude from the reckoning the $2,000,000 capital of the proposed mortgage company.
Mr. M C K E E . Everybody made an effort to accomplish this purpose, but as I recall, at about 2 or 3 o'clock in the morning it turned
out that everybody wanted the Reconstruction Finance Corporation
to do more. Then I said I wanted to see somebody write a ticket
of what they were going to do.
Mr. PECORA. YOU had present at that conference representatives
of two of the larger industrial corporations, being General Motors
STOCK EXCHANGE PRACTICES
4737
and the Chrysler Corporation, and then you said there were other
industrial leaders that came into the conference whose names you
cannot give us.
Mr. M C K E E . I cannot recall them.
Mr. PECORA. Did any of those gentlemen indicate any willingness
on their part, or on the part of their respective interests or corporations, to do anything toward raising the additional capital to bridge
this gap of $13,880,000?
Mr. M C K E E . They made no direct commitment to me.
Mr. PECORA. Were they asked to do that?
Mr. M C K E E . Yes; they were.
Mr. PECORA, Well, do you recall whether any of them advanced
any reasons for their unwillingness to commit themselves to raise
this full capital to bridge this gap?
Mr. M C K E E . Not to me; they did not.
Senator COUZENS. Mr. McKee, it has been testified here that prior
to this consolidated application, there was an application made for
a loan to liquidate the deposits in the Union Guardian Trust Co.
alone, and that at the suggestion of you, and perhaps of Mr. Leyburn, and perhaps of Governor Talley, the application was increased
to cover all the units of the Group. Do you recall that?
Mr. M C K E E . I never recall seeing any application for the benefit
of the Union Guardian Trust Co. alone. The original sheet, or
descriptive list, of collateral to be offered was handed me by Governor
Talley before I left for Detroit the first time, which I am glad to offer
as an exhibit if you so desire.
Mr. PECORA. Yes. Will you produce it, please?
Senator COUZENS. While you are getting that exhibit let me ask:
Did you suggest to this group that they increase their application
so as to cover all of the units?
Mr. M C K E E , NO. I never suggested that.
Senator COUZENS. Did you or Governor Talley make such a
suggestion?
Mr. M C K E E . I heard none of the conversation between Governor
Talley and the representatives of the group.
Senator COUZENS. All right.
Mr. PECORA. NOW, this paper that you have handed me is handwritten in lead pencil. Whose handwriting is it?
Mr. M C K E E . It isn't Governor Talley's. But it was he that gave
it to me.
Senator COUZENS. DO you know who wrote it?
Mr. M C K E E , N O ; I do not.
Mr. PECORA. DO you know
who gave the data represented by the
figures shown on this paper?
Mr. M C K E E . It was presented to me that day, January 26 or 27,
in Washington.
Mr. PECORA. By a representative of the Guardian Detroit Union
Group?
Mr. M C K E E . That is right.
Mr. PECORA. What do those figures purport to represent?
Mr. M C K E E . They purport to represent the assets which could be
disposed of by certain unit banks of the group, and how much cash
would have to be replaced by the sale of those assets, for the transfer
of those assets. It gives a complete schedule of how much money
4738
STOCK EXCHANGE PRACTICES
would be required, how much assets they would have to offer. And
that, gentlemen of the committee, is what I took to Detroit with me
as a basis of what I had to work with.
Mr. PECORA. It was given to you to be used by you as a sort of
factual basis for your calculations.
Mr. M C K E E . That is correct.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
Senator COUZENS. May I point out, before you offer the paper in
evidence, that there is written in pencil on the back of the sheet
[reading]:
Original sheet of requirements as prepared by Mr. Kanzler.
The CHAIRMAN. Let it be admitted in evidence.
(The statement in pencil was marked " Committee Exhibit No. 78, Jan. 15,.
1934," and will be found at the end of the day's proceedings, the understanding
being that the original pencil sheet will be returned to the witness for his files,)
Mr. PECORA. NOW, Mr. McKee, you may want to have this paper
before you, it having been marked "Committee Exhibit No. 78",
just received in evidence, for the purpose of giving your testimony
further. So I will return it to you for the time being.
Mr. M C K E E . Thank you.
The CHAIRMAN. Mr. McKee, before that time as I understand the
Union Guardian Trust Co. had obtained a loan.
Mr. M C K E E .
Mr. PECORA.
Yes.
It had obtained a loan from the R.F.C. in the year
1932.
Mr. M C K E E . Yes, sir.
Mr. PECORA. But you had nothing to do with that loan transaction?
Mr. M C K E E . I did not.
The CHAIRMAN. HOW much
Mr. M C K E E . There was a
was that loan?
commitment, Mr. Chairman, made in
the neighborhood of $15,000,000. At the time we are speaking of i
think there were about 9 to 10 million dollars outstanding. I think
more had been withdrawn but some of it had been repaid. I think
at the time I went to Detroit there was a balance outstanding of from
9 to 10 million dollars.
Senator COUZENS. And that collateral is still with the R.F.C. for
the unpaid portion of the loan that the Union Guardian Trust Co.
received?
Mr. M C K E E . That is right.
Mr. PECORA. At the conclusion of this 2-day conference in Detroit
what was the next thing that you did?
Mr. M C K E E . The conclusion of it was the signing of the moratorium
by the Governor of the State of Michigan.
Mr. PECORA. That proclamation was issued on the night of Monday, February 13, as I recall it, becoming effective the morning of
February 14?
Mr. M C K E E . Yes, sir.
Senator COUZENS. Were
you there when the Governor signed the
order?
Mr. M C K E E . I was.
Mr. PECORA. Did you
have any conference with the Governor of
Michigan with respect to the issuance of the moratorium proclamation?
STOCK EXCHANGE PRACTICES
4739
Mr. M C K E E . I did.
Mr. PECORA. What was the substance of it?
Mr. M C K E E . Before the Governor would sign
his proclamation—
and we were all in the committee room in the Union Bank Building
Mr. PECORA (interposing). You say you were all there. Will you
indicate who were there besides you and the Governor?
Mr. M C K E E . That was quite a large party at that time.
Mr. PECORA. Will you give us the names of as many as you can
recall?
Mr. M C K E E . It included the president of the clearing house, the
State bank association chairman, bankers representing the First
National Group, bankers representing the other Detroit banks,
bankers representing the Union Group, and
Mr. PECORA (interposing). That is, the Guardian Detroit Union
Group?
Mr. M C K E E . Yes, sir; and some out of town bankers. In fact,
it was a party of some 30 to 40 people. And it was at that meeting
that the Governor said that before he would sign the proclamation he
wanted a letter from everybody to the effect that it was the thing
for him to do. And it was in that meeting that I, in front of this
group or committee, told the Governor that as far as the Keconstruction Finance Corporation was concerned, or my representing them,
he would have to sign the proclamation on his own responsibility.
Mr. PECORA. That is to say, you told him you could not undertake
to express any opinion with regard to the action he should take so far
as your attempting to speak on behalf of the R.F.C., is that right?
Mr. M C K E E . That is right.
Mr. PECORA. In this conference was the banking situation, as it
immediately affected the Guardian Detroit Union Group, fully
discussed?
Mr. M C K E E . Yes; it
was.
Mr. PECORA. And were there present officers of the Guardian
Detroit Union Group, I mean present at that discussion?
Mr. M C K E E . They were.
Mr. PECORA. And did they participate in it?
Mr. M C K E E . Yes; I think they did.
Mr. PECORA. DO you recall what statements or representations
were made to the Governor by any of the officers of the Guardian
Detroit Union Group with regard to the condition of the group and its
unit banks?
Mr. M C K E E . I believe that was done in the anterooms. I do not
know whether the Governor, in fact I do not think the Governor got
the substance of general conditions in this group meeting. In fact,
he had them before he came in. There were plenty of anterooms
in this Union Guardian Trust Building, and I think possibly when
he came in somebody had fully advised him. And that was not out
of the way at all, because he came in cold and did not know what it
was all about.
Mr. PECORA. What took place after that, I mean after the declaration by the Governor of a banking moratorium?
Mr. M C K E E . Before we go any further, Mr. Pecora, might I make
a suggestion?
4740
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes; go ahead.
Mr. M C K E E . I would like to emphasize the picture of the collateral
offered on that loan before we go too far.
Mr. PECORA. All right.
Mr. M C K E E . And I would be very happy if we get it into the
record, because it is to me quite important, because we have been
criticized in a local investigation up there that we did not do our part.
Mr. PECORA. Well, then you tell this committee all that you can
with regard to the examination you made of the available collateral
or assets of the group, valuation you placed upon it, and any discussion you had about it with officers in the group or anybody else.
Mr. M C K E E . When we get down to the final application, as you
have been told before, the total of the collateral was $64,871,000.
Of that collateral there was a face value of bonds of $13,085,000, of
which we were willing to loan $8,192,000.
There were secured notes of $6,374,000, of which we were willing
to loan $2,639,000.
There were offered unsecured notes in the face value of $730,000,
of which we allocated a loan value of $313,000.
Mortgages were offered with a face value of $12,466,000, of which
we were willing to loan $11,224,000.
Mr. PECORA. Those were real-estate mortgages?
Mr. M C K E E . That is right.
Mr. PECORA. Slow assets?
Mr. M C K E E . That is right.
Mr. PECORA. YOU were willing to loan how much?
Mr. M C K E E . $11,224,000.
Mr. PECORA. AS against a face value of how much?
Mr. M C K E E . Of $12,466,000.
Mr. PECORA. Wasn't that exceptionally liberal?
Mr. M C K E E . It would seem so to me.
There were other assets with a face value of $556,000, of which we
were willing to loan $393,000.
The subtotals of those amounts would represent a face value of
$33,211,600 of additional assets to be pledged, of which we were willing
to loan $22,762,200.
Mr. PECORA. HOW did that amount that you were willing to loan
on those assets compare with the liquidating value of those assets?
Mr. MCKEE., That was liquidating value.
Mr. PECORA. Right up to the limit of the liquidating value?
Mr. M C K E E . That is right.
Now, then we go on and add to that the assets already pledged
to the Reconstruction Finance Corporation, with a face value of
$31,659,000, of which we had already committed for $15,000,000,
which gave us the result of $64,871,000 of face value of collateral,
with a total loan value, with the repayment of the other loan, of
$37,762,200, of which we made a commitment of $37,720,000.
Now, the assets offered in that application represented the free
assets of the Union Trust Co., the pledged assets of the Union Trust
Co., of the assets of the Union Building Co., the Congress Corporation, certain assets from the National Bank of Commerce in Detroit,
and the Union Guardian Group's free assets and five banking buildings owned by the National Bank of Commerce in Detroit.
STOCK EXCHANGE PRACTICES
4741
The free assets of the Union Trust Co. were the balance of their
portfolio. We were told that they had $12,000,000 of face value of
assets. Of this $7,940,000 were all that was available for pledge.
Of those new assets there were bonds of face value of $500,000,
secured notes of $432,000, real-estate mortgages of $3,552,000, and
other assets of $555,000, on which we were willing to loan $5,096,500.
Included in the mortgages coming from that Union Trust Co., as I
recited, $3,552,000, were $2,755,000 of first mortgages, $659,000
second mortgages which were subject to prior liens of $229,000, and
second mortgages to first owned by the Metropolitan Life Insurance
Co. of $138,000 with prior liens of $447,000.
The pledged assets that we had already in our portfolio had been
reviewed from time to time by our examiners, both in Detroit and in
Washington, having in mind that sooner or later we would have to
increase our commitment to this institution, and we were satisfied
that in loan value the amount already committed for was about as
far as we could go.
The Union Building Co. we discussed here the other day, that of
the $4,084,400 book entry of the Union Building Co., being the
equity owned in this building subject to two prior liens totaling
$6,400,000, we had allocated a loan value of $2,042,000.
Mr. PECORA; On what was virtually a third mortgage?
Mr. M C K E E . That is correct.
Senator COUZENS. And it has since developed that that is not
worth anything?
Mr. M C K E E . That is right, although I am not informed of that
positively.
Senator COUZENS. I get that from the report of the press on the
court action.
Mr. M C K E E . This building, I might say by the way, was losing
money right along, and its earning power was very limited. In fact,
it was losing approximately $75,000 a year on abnormal rents paid
by the two institutions who had quarters in the bank buildings.
Then we come to the Congress Corporation who pledged assets
which were formerly criticized assets of banks.
Mr. PECORA. DO VOU know what the Congress Corporation was,
Mr. McKee?
Mr. M C K E E . I could not tell you that.
Mr. PECORA. Were you informed that it was a corporation caused
to be organized by the Guardian Detroit Union Group for the purpose
of enabling the group to take out of its various unit banks from time
to time criticized assets?
p Mr. M C K E E . I think that was right. I never went into the articles
of association of the corporation. I knew that they had assets that
were former bank assets that had developed into criticized assets of
value.
This Congress Corporation had book assets of $4,600,000, and those
assets we could only find a value of $605,000 on.
The assets purchased from the Guardian National Bank of Commerce were assets of value. They were items which were slow at that
time and on which they needed liquidity if and when we were going
through with this proposition and if the Union Trust Co. was to close.
So we took from their portfolio $5,313,000 of first mortgages, and
we were willing to loan $4,782,000 against them.
175541—34—PT 10
11
4742
STOCK EXCHANGE PKAOTICES
They offered us city of Detroit notes. The credit of Detroit was
then in a very serious condition. They needed money. They
needed extension of credit. They offered us $3,214,000 of city of
Detroit notes of which we were willing to loan them $2,893,000.
They offered us the notes of the Fisher Co. with a face value of
$1,119,000 and we allocated a loan value to those notes of $1,007,000.
They offered us Simmons Co. bonds, a bond issue that had not been
sold prior to the break in the market. They had a face value of those
of $2,350,000. We went into the statements carefully and we were
willing to loan them $2,115,000.
Mr. PECORA. On securities that they had not succeeded in floatingprior to the crash?
Mr. M C K E E . They had a participation in some underwriting and
they were not able to dispose of them.
Of the face value of the collateral coming from the Guardian
National Bank of Commerce, with $11,998,000, possibly $12,000,000,
we were willing to loan them $10,798,000.
The Union Guardian Group's free assets that were offered to us
had a market value of $898,000, which included stocks and bonds
listed and unlisted. Some of it included some of the group stock.
And we were willing to loan on these securities $620,000.
Then we had 5 bank buildings that were offered us, 4 in Detroit
and 1 in some outlying place, which, in order to do this, gentlemen,
we just stretched our imagination to the limit and were willing to
loan them $3,600,000 on those five bank buildings. Senator, you
may be familiar with some of them. One I think was across from the
post office in some former bank building, and about town.
But I just wanted to satisfy the records here that the Reconstruction Finance Corporation were as liberal, if not more liberal, in this
situation in Detroit that any others in the United States, trying to
do this job.
Mr. PECORA. NOW will you proceed to tell the committee what
took place after the declaration of the bank moratorium by the
Governor of Michigan?
Before you pass on to that let me ask you this: Do you recall
whether any of the gentlemen that were present at the conference
with the Governor just prior to the issuance of his moratorium
objected to the issuance of the moratorium or advised against it?
Mr. M C K E E . There were some objections to it.
Mr. PECORA. DO you know who they were?
Mr. M C K E E . Who they were I don't know. I believe there was
one in Detroit, the Detroit Savings Bank. I forget his name.
Senator COUZENS. Mr. Dunham?
Mr. M C K E E . Mr. Dunham I believe was against it. I think
there was quite a bit of feeling up-State against it. But generally
speaking I think most of them after they knew the circumstances
could not see anything else except the moratorium.
Mr. PECORA. NOW will you proceed from that point on and tell
the committee if you will in substance what took place after the
declaration of the State moratorium?
Mr. M C K E E . Well, of course, the first steps that were taken were
to try to relieve the suffering caused by the closing of all the banks,
to make available as soon as possible some portion of the funds to the
depositors. The liquidity of the two large national banks was such
STOCK EXCHANGE PRACTICES
4743
that they could make, without further borrowing, and one by some
disposition of Government bonds, available immediately 10 percent
to the depositors. They did it by means of 5 percent once and
5 percent about a week or 10 days later. Everything was done to
try to prepare applications. My instructions were to try to find
out how much money we could loan these two banks.
Mr. PECORA. When you say these two banks you mean the two
groups, don't you?
Mr. M C K E E . That is the Guardian National Bank of Commerce
and the First National Bank of Detroit.
Mr. PECORA. The Guardian National Bank of Commerce was the
largest banking unit owned by the Guardian Detroit Union Group?
Mr. M C K E E . That is right.
Mr. PECORA. And the First National Bank of Detroit was the
largest banking unit owned by the Detroit Bankers Co.?
Mr. M C K E E . That is correct. And in those two banks was where
most of the public's money wxas frozen at that time. And we were
instructed to endeavor to try to find how much we could loan.
Mr. PECORA. By the "Public's money" you don't mean deposits
of public funds; you mean depositors' money?
Mr. M C K E E . N O ; depositors' money. How much we could loan
and how quickly we could loan it to the First National Bank and the
Guardian National Bank of Commerce.
The limits of the Corporation set by the law were, as I recall at
that time, 99 million and some hundred thousand dollars. We could
not loan the First National Bank in excess of that amount. When
we got into the thing a little deeper we discovered that we could not
loan them that much, because we were handicapped by the fact
that some of their units in their group had borrowed previously from
the Corporation and that commitment had to be reduced accordingly.
But efforts were made to loan the First National Bank and the
Guardian National Bank of Commerce as much money as was possible under the act to free as much deposits as possible.
It was then that we got into the organization of new banks. We
were opening old banks, and it was just one controversy after another
that spelled waste of time and energy and one plan after another,
until we got down to a plan where the Comptroller of the Currency's
office appointed the conservator.
The CHAIRMAN. For each of the banks?
Mr. M C K E E . For each of the banks.
The CHAIRMAN. Were any loans made to the conservators?
Mr. M C K E E . There have been since, Senator; yes.
Senator COTTZENS. TO the receiver, not to the conservator?
Mr. M C K E E . They were made to the conservator first, Senator.
Senator COUZENS. Were they?
Mr. M C K E E . And then they were replaced by receivers.
Mr. PECORA. There had been an informal commitment made by
the R.F.C. to loan the $37,720,000 to the Guardian Detroit Union
Group, had there not?
Mr. M C K E E . That is right.
Mr. PECORA. That was made, as I recall your testimony, on Saturday, February 11, 1933?
Mr. M C K E E .
Yes.
4744
STOCK EXCHANGE PEACTICES
Mr. PECORA. NOW, in view of the fact that the Group and the
various interests that it sought to ally with it in meeting the situation were unable to fill the gap of some $11,880,000, or $13,880,000,
was that informal commitment afterwards rescinded by the R.F.C.?
Mr. M C K E E . It
was.
Mr. PECORA. DO you remember on what date that took place?
Mr. M C K E E . I do not; but there was never a formal application
presented to us.
Mr. PECORA. I understand this informal or tentative commitment
was rescinded on February 18, 1933.
Mr. M C K E E . That is probably correct.
Senator COUZENS. And up to that time no formal application had
been made of any kind?
Mr. MCKEE. That is right.
Senator COUZENS. It was just a tentative application?
Mr. M C K E E . It was a conditional commitment made by our board
if and when they could file an application and deposit the collateral.
Mr. PECORA. YOU mentioned something about discussions that
were had in connection with a proposal to the R.F.C. to loan moneys
to the principal banks of these two groups, respectively, namely,
the First National Bank of the Detroit Bankers Co. Group, and the
Guardian National Bank of Commerce of the Guardian Detroit
Union Group. What was the proposal specifically with regard to
that loan?
Mr. M C K E E . I may be a little foggy on that, Mr. Pecora, but we
were attempting to loan up to a hundred million dollars to the First
National Bank and 50 million dollars to the Guardian National
Bank of Commerce.
Mr. PECORA. Wasn't it 35 million dollars to the Guardian National
Bank of Commerce?
Mr. M C K E E . It might have been 35, but in even figures we were
sort of figuring on 150 millions of dollars, in order to reopen their
banks on.a 50-percent basis, as I recall it. But those plans changed
and altered overnight, and there has been so much gone over the dam
since that I am foggy on that.
Mr. PECORA. Well, those discussions did not result in the making
of the contemplated loan?
Mr. M C K E E . They did not.
The CHAIRMAN. What would have happened to the banks if there
had been no holiday declared by the governor?
Mr. M C K E E , Well, that is anybody's opinion, Senator. In my
opinion, the medium of advertising used by the Union Group had
really penalized them when they got to the crucial moment—that
here was one of their strongest units that could not survive, and their
form of advertising that they had carried on in the past was absolutely
going to put the brand on every one of their banks, no matter where
located.
That was the chief worry of the entire group at that time. If and
when they could have let the Union Trust Co. go, it would have been
fine, but due to the medium of advertising it was impossible, without
hurting every other unit in the group, and they just were not in
condition to stand it.
The CHAIRMAN. Then the declaration of the holiday did not help
the situation much, did it?
STOCK EXCHAKGE PRACTICES
4745
Mr. M C K E E . NO; it did not.
The CHAIRMAN. Then perhaps
it was not any worse or any better
alter that than it was before?
Mr. M C K E E . The only thing that I can say by the holiday is this,
that it did not carry on a program of preferring creditors by having
the smart money run out first.
Mr. PECORA. TO that extent you think the closing was advisable
from the standpoint of public policy?
Mr. M C K E E . I certainly do. Because either of those banks
would not have lasted very long, because the smart money was just
ready to hit them on Tuesday morning for everything they had.
Mr. PECORA. That is Tuesday morning, February the 14th?
Mr. M C K E E . The
14th.
Mr. PECORA. NOW, in order possibly to refresh your recollection
concerning the discussions that were had about the proposition to
advance 100 million dollars to the First National Bank and 35 million
dollars to the Guardian National Bank of Commerce, let me read to
you the following extracts from minutes of a special meeting of the
board of directors of the R.F.C. held on February 21, 1933 [reading]:
Mr. McKee, who had returned from W asnm gton to Detroit pursuant to instructions of the board as recorded in the minutes of February 20, 1933, reported the
progress which had been made in Detroit in working out plans for the reorganization of the First National Bank and the Guardian National Bank of Commerce.
Mr. McKee stated that it would require a loan of approximately 100 million dollars to the First National Bank and a loan of approximately 35 million dollars to
the Guardian National Bank of Commerce in order to permit those institutions
to organize new banks and be in a position to pay depositors 50 cents on the
dollar. He said that he had been pressed by representatives of both institutions
to indicate whether the board would be willing to advance the necessary funds.
Mr. McKee indicated that in his opinion these institutions had sufficient acceptable collateral to offer adequately to secure approximately a hundred million
dollars to the First National Bank and approximately 35 million dollars to the
Guardian National Bank of Commerce. He said that he informed representatives of both institutions that he had no authority to make a commitment as to
the amounts which the Board would be willing to lend.
After a full discussion of the situation the Board decided to defer action on the
matter and to convene again later in the day to give it further consideration.
Does the reading of that portion of the minutes of this special meeting of the board of the R.F.C. refresh your recollection concerning
the^discussions you had?
Mr. M C K E E . Yes, it does.
Mr. PECORA. About this proposition to make these loans to the
First National Bank and the Guardian National Bank of Commerce,
respectively?
Mr. M C K E E . Yes, it does.
Mr. PECORA. TO what extent does it refresh your recollection?
Mr. M C K E E . We had a plan offered by Mr. Ford to recapitalize
the two banks, putting so much capital in one and so much in the
other, if and when we could make the loan sufficient to liquefy the
banks to take over 50 percent of the deposit liability. The First
National Bank seemed to upset the program, due to the fact, as I
recall, that our limits as to how much we could loan that bank, who
had the largest deposit liability, in the neighborhood of 440 million
dollars of deposits, that they had to raise 20 million dollars from other
sources, and they offered as collateral certain collateral that the
group had under consideration prior to the moratorium. The entire
4746
STOCK EXCHANGE PRACTICES
program fell through when Mr. Mills was informed by this group
whom he counted on to make this 20-million dollar loan
Mr. PECORA (interposing). Which Mr. Mills was that, Secretary
of the Treasury or the president of the First National Bank?
Mr. M C K E E . NO, the president ol the First National Bank, Wilson
Mills—that his request for a $20,000,000 loan was refused.
Mr. PECORA. By these other bankers?
Mr. M C K E E . That is correct.
Mr. PECORA. DO you remember the names of any of the bankers
that had discussed the making of this $20,000,000 loan?
Mr. M C K E E . NO, sir; I do not.
Mr. PECORA. They were New York banks, weren't they?
Mr. M C K E E . I never knew, Mr. Pecora. I knew it was outside
of
Detroit.
Mr. PECORA. DO you recall the name of the Central Hanover
National Bank & Trust Co. ot New York in that connection?
Mr. M C K E E . N O ; I do
not.
Mr. PECORA. Have you at the moment any recolletion of subsequent
proceedings or action or consideration given to the matter of relieving
the Detroit banking sitution?
Mr. M C K E E . By the board of directors of the R.F.C.? Nearly
every morning the papers had a new plan. Following the failure of
that plan, an attempt was made to get a special legislature through at
Lansing in order that they might open these two banks under some
deferred agreement. I don't know what the law was, but they were
attempting then to get it through in time to open these banks, and
this plan offered by Mr. Ford to open the two banks fell through m
absence oi the $20,000,000, and immediately they started on this
other plan ol reorganizing the present bank.
Mr. PECORA. In connection^ with the action subsequently taken
by the R.F.C., for the purpose of refreshing your recollection thereon
let me read to you the following from the minutes of a special meeting
of the board of directors of the R.F.C. held on the afternoon of
February 21, 1933 [reading]:
Mr. McKee presented to the board a copy of a proclamation just issued by
William A. Comstock, Governor of Michigan, which he had received by telephone
from A. R. Leroy, temporarily detailed as examiner of the Washington office,
who was in Detroit. The proclamation is as follows—•
And in view of the importance of the proclamation, for the purposes of this record I will read it into the record in full—
PROCLAMATION
Whereas, the Legislature of the State of Michigan, by Senate Concurrent
Resolution No. 23, has declared an emergency to exist involving the bank and
credit structure of the State of Michigan and has requested that the Governor
of the State proclaim such extensions of a bank holiday heretofore proclaimed as
may in his opinion be necessary, and has further requested that if in his opinion
it is advisable the Governor may restrict and prescribe the conditions under
which deposits, either savings, commercial or reserves of other banks, may be
released from banks and trust companies, and if advisable may vary the restrictions as to such classes of deposits;
Now, therefore, I, William A. Comstock, Governor of the State of Michigan,
hereby proclaim that all banks, trust companies, and other financial institutions
conducting a banking or trust business within the State of Michigan prior to said
holiday, shall be opened for the transaction of business at the regular opening
STOCK EXCHANGE PRACTICES
4747
hour on the morning of Thursday, February 23, 1933; providing, however, that
such business shall be limited to the following functions:
" 1 . Reserve deposits shall be available to depositing banks and may be withdrawn without creating a preference.
"2. Payment to depositors in either commercial or savings departments shall
be limited in amount to the proportion the total individual deposit bears to the
cash on hand, and available reserves in United States Government bonds in each
such department. Such payment shall only be allowed for necessary purposes,
such as pay rolls, bank transit items created on and after February 23, 1933, or
necessary living expenses, tax payments, or other obligations to the State of
Michigan and subdivisions thereof, or to the Federal Government, drafts with
bills of lading attached, Reconstruction Finance Corporation moneys on deposit
for welfare purposes, and such other purposes necessary for the ordinary conduct
of business, providing always that no depositor shall be preferred as against any
other depositor.
"3. Banking institutions may take new deposits, but such deposits shall be
treated as trust deposits, and there shall be opened in each such institution a
trust-deposit department. Such deposits shall be payable on demand without
interest and held solely for the repayment to such depositors.
" Banks and trust companies acting in a fiduciary capacity may perform their
duties and discharge their obligations in such capacity, provided that in the
exercise of such fiduciary functions debtor and creditor relationships shall not be
involved.
"5. Such modifications in the foregoing limitations as may be necessary in
extraordinary cases may be allowed with the consent of the State Banking
Commissioner, provided, however, that no depositor shall be preferred as against
any other depositor.
"The bank holiday heretofore proclaimed by me shall continue in effect,
subject to the foregoing limitations, until otherwise ordered by me.
" Dated February 21, 1933.
"WILLIAM A. COMSTOCK,
Governor of Michigan."
Do you recall presenting a copy of that proclamation to the E.F.C.
board on February 21, 1933?
Mr. M C K E E . I do.
Mr. PECORA. Let me
read to you, for the purpose of refreshing
your recollection, the following excerpt from the minutes of a special
meeting of the board of directors of the R.F.C. held on the morning of
February 22, 1933, regarding an informal commitment of $35,000,000
in connection with the proposed reorganization, subject to the result
of conference with the incoming Secretary of the Treasury [reading]:
At this point, the board went into executive session, the following being present:
Mr. Pomerene, presiding; Mr. Miller, Mr. Mills, Mr. Ballantine, Mr. Couch,
Mr. McCarthy, Mr. Cowles, Mr. Cooksey, secretary, Mr. Reed, general counsel,
Mr. Bethea, assistant secretary, Mr. Talley, assistant to the directors, and Mr.
McKee, assistant chief, examining division.
F. G. Await and Gibbs Lyons, Acting Comptroller of the Currency and Deputy
Comptroller of the Currency, respectively, also were present.
The board considered further the banking situation in Detroit, Mich. Mr.
Miller reported that he had been informed there was considerable uneasiness on
the part of the banks as a result of Governor Comstock's proclamation of yesterday, and that he felt it was desirable for the board to take some action which
would reassure the bankers in that city, who are endeavoring to formulate
reorganization plans with respect to the First National Bank and the Guardian
National Bank of Commerce. Mr. Miller said that there was some uncertainty
as to the proper construction to be placed on certain provisions contained in the
proclamation and that he understood that the Governor was being asked to interpret such controversial provisions.
Mr. McKee read to the board the following resolution, adopted by the Detroit
Clearing House Association late yesterday, which he had received by telegraph:
"We commend the Governor on his decision to continue the Bank Holiday for
the protection of all depositors. Until national and State legislation can clarify
the situation, the Detroit Clearing House banks will make no further distribution
for the time being, but will operate their holiday functions as during the past
4748
STOCK EXCHANGE PRACTICES
week. Everything possible will be done under authority of the present laws to
lighten the inconvenience to the public."
Mr. McKee said that this resolution, which had been made public by the
Detroit Clearing House Association, would make it unnecessary for the Clearing
House banks to concern themselves with the construction of troublesome provisipns of the Governor's proclamation, since the situation had been met by their
decision not to make additional distribution of funds to depositors.
Mr. Mills stated that, in line with his discussions with the board in executive
session yesterday afternoon, he had arranged a conference with William H.
Woodin, who will be the Secretary of the Treasury, in President Roosevelt's
administration, at 8:30 p.m. today at New York.
Departing for a moment from the reading of this excerpt—the Mr.
Mills referred to there was the Secretary of the Treasury, was he
not?
Mr. M C K E E . That is correct.
Mr. PECORA. NOW I will resume my reading of this excerpt from
the minutes [reading further]:
HeMeaning Mr. Mills—
Said that, upon reflection, he was convinced that the Corporation could not
afford at this time to reverse its policy with respect to granting loans to distressed banks, particularly in view of the key situations in Detroit and Cleve.
1 nd, and perhaps other cities, which require careful treatment at this timeHe said that, although it would increase the problem of the Treasury to raise
the large amount of funds which would be necessary, in addition to the normal
requirements of the Corporation, prior to the regular financing which it was
anticipated would be conducted on March 15, 1933, he felt that it was absolutely essential to avert the collapse of the banking structure in the important
cities mentioned. In addition to the shock and harm to the whole credit
structure, he said a collapse at these points at this time might seriously hamper
the Treasury in carrying out its financing operations on the 15th of March and
later. He indicated that, in his opinion, the effect on the Government's credit
would be disastrous if any collapse of such magnitude should occur at this time,
and that in the long run, the Corporation's failure to assist in the present difficult
situations on a large scale would cost the Government many more millions of
dollars.
Mr. Pomerene reported that he had just received a telephone message from Mr.
Jones, who was in New York, to the effect that he had conferred with Presidentelect Roosevelt and with Mr. Woodin, and that it was the consensus that it would
be preferable for the board not to make any definitive action with respect to making loans to the institutions in Detroit until after Mr. Mills' conference tonight
with Mr. Woodin.
After a full discussion of the Detroit situation, it was the sense of the board
that (subject to the results of Mr. Mills' conference with Mr. Woodin tonight),
if the First National Bank and the Guardian National Bank of Commerce proceeded to set up two new institutions with capital funds sufficient to satisfy the
Comptroller of the Currency and satisfactory to him in all other respects, the
board would be disposed to make a loan up to the legal limit to the First National
Bank and a loan up to $35,000,000 to the Guardian National Bank of Commerce,
with the understanding that such loans would be fully and adequately secured,
and that, insofar as possible, adequate provision would be made to take care of
preferred and unknown liabilities of the respective banks. The board authorized
Mr. Miller to advise officials of the two banks referred to as to the board's attitude
in the matter.
That finishes the excerpt from the minutes that I want to read.
Do you recall anything about that item of business transaction by
the board of directors of the R.F.C. on February 22, 1933?
Mr. M C K E E . Yes, I do, in a vague way; I recall everything that
you have read.
Mr. PECORA. YOU recall this action, do you?
Mr. M C K E E . I do.
STOCK EXCHANGE PRACTICES
4749
Mr. PECORA. DO you recall anything else in connection with any
discussion had of this subject? For the purpose of possibly refreshing your recollection as to that, let me read to you the following
excerpt from the minutes of a special meeting of the board of directors
of the R.F.C. held on the morning of February 23, 1933 [reading]:
The board authorized the appointment of A. It. LeRoy, now performing
special temporary duty at Detroit in accordance with the board's previous
authorization, and H. Z: Persons, and It. S. Jones, examiners, Washington
office, to act as a special committee to examine the loan applications of Detroit,
Mich., banks and make recommendations in connection therewith.
Do you know anything about that?
Mr. M C K E E . Yes. Up to the time of the moratorium we have—I
inight say for your record that we have an established agency in the
city of Detroit, and all the negotiations carried on by me and the group
that was with me at Detroit were foreign to our agency prior to the
moratorium. In fact, we never went near our agency and they did
not know we were in town. After that time we took a very active
part in assisting the agency to meet the emergency as it existed in the
entire State of Michigan. It was for that purpose that this committee
was appointed by our board, to act on applications and make recommendations to our board so that commitments might be made readily.
Mr. PECORA. YOU will recall that at the meeting of the board of
the E.F.C. on February 22, last, it was indicated that Secretary Mills
was to have a conference that night, the night of February 22, with
the incoming Secretary of the Treasury, Mr. Woodin. Do you
recall what report was made to the board of the R.F.C. with regard
to the results of such conference?
Mr. M C K E E . I do not. If it was made, it was made in executive
session when I was not present.
Mr. PECORA. For the record here, Mr. Chairman, 1 want to read
an excerpt from the minutes of a special meeting of the board of directors of the R.F.C. ,held at 10:30 a.m. on February 23, 1933, which is
AS follows [reading]:
With respect to the general question of dealing with the present emergency
during the period between now and the advent of the new administration, involving large loans to institutions in large centers, Mr. Miller reported that
Secretary Mills had advised him that, at his conference last night with William
H. Woodin, who will be Secretary of the Treasury in President Roosevelt's
Cabinet, Mr. Woodin said that, while he would be glad to be kept informed of
important developments, the problems now under consideration should be
determined by the board in accordance with its own views and on its own
responsibility.
The CHAIRMAN. IS that part of the records of the R.F.C.?
Mr. PECORA. I read excerpts of minutes of various meetings of the
board of directors of the R.F.C. which have been furnished me,
Mr. Chairman, by the R.F.C. itself. So I do not believe that the
authenticity of these excerpts can be questioned.
Now I want to read, for the purpose of refreshing your recollection,
the following excerpts from the minutes of a special meeting of the
board of directors of the R.F.C. held at 5:45 p.m. on February 25,
1933 [reading]:
Mr. Milford presented the following messages from the board's special committee in Detroit, which will be transmitted by telegraph and which Mr. McKee
read over the telephone in order to expedite delivery to the board:
4750
STOCK EXCHANGE PRACTICES
Then follows a long, detailed, itemized statement, starting as
follows:
In regard to formal application now on file of First National Bank of Detroit
for a loan of $100,000,000, the following information is furnished you in order
that a commitment might be made at once to enable present bank to perfect
plans of reorganization. A commitment of $90,000,000 is recommended by
your special committee to the applicant on the following collateral—
Then follow considerable details of the collateral, which I will not
burden the record with, except to state the total loan value of the
collateral, which is stated to be $90,583,837.
Do you recall that, Mr. McKee?
Mr. M C K E E . I do.
Mr. PECORA. Was that
loan value of $90,583,837 representative
of the full liquidating value of the collateral?
Mr. M C K E E . It was not. It was a fully and adequately secured
loan for that amount of money based on loan value. I think the
collateral was in the neighborhood of $150,000,000 face value or
$160,000,000.
Senator COUZENS. DO you know, Mr. McKee, that considerable
comment has been made about the inability of you and others not
familiar with Detroit values coming to Detroit and attempting to
place values on securities of that class? What have you to say: as
to that?
Mr. M C K E E . Well, Senator, we were most liberal with the valuations, on the information given us—in fact, too much so. Under
normal conditions we certainly would not have been as liberal as
we had been. We took valuations furnished us by the bank and predicated our loan values on those sums.
Senator COUZENS. YOU took the appraisals of the bank officials?
Mr. M C K E E . Am I correct in my belief that annually in Detroit
they have an appraisement of real estate?
Senator COUZENS. An assessment by the assessors; yes.
Mr. M C K E E . That is correct. They had the assessors7 valuations
in every case, especially in the case of the First National Bank. As
to the mortgages in the First National Bank, everybody from our
office that worked on them admitted that they were about as clean a
group of mortgages as we had ever seen, well cared for, well amortized.
The records were in proper shape as to delinquencies as well as to
appraisements. I doubt whether there was any real criticism by
anybody that knew.
Senator COUZENS. YOU did not make any physical valuation of the
properties represented by these mortgages?
Mr. M C K E E . NO, sir.
Senator COUZENS. Did you reduce the valuation as placed on them
by the bank, or did you accept their valuation?
Mr. M C K E E . AS I said, we loaned on the loan value. We took a
percentage of it. I think we loaned as high as 85 and 90 percent on
the face value of some of the mortgages of the First National Bank.
They were good mortgages. They had some fifty thousand mortgages. I think we considered some thirty thousand; and all we had
to do was to take good mortgages, because there was adequate
security for as high-a loan as we could possibly make.
Senator COUZENS. They were all current; there were none in
default?
STOCK EXCHANGE PRACTICES
4751
Mr. M C K E E . There were very few in default.
Senator COUZENS. SO you took the assessed valuation or the bank
valuation—which?
Mr. M C K E E . The assessed valuation.
Senator COUZENS. The assessed valuation could hardly have been
less than the bank value, could it, when the property is supposed to
be assessed at a hundred percent and the loan based on a 50-percent
basis?
Mr. M C K E E . I did not mean to say that the loan was made on the
assessed valuation, but we predicated our loan value on what the
assessed valuation of that property was.
Mr. PECORA. The message which Mr. Milford presented to the
board of the R.F.C. on February 25 last, and which it is stated you
read over the telephone, from Detroit, in order to expedite the delivery of the message which was to be put in telegraphic form, was a
message signed "McKee, LeRoy, Persons." You are the McKee
referred to, are you not?
Mr. M C K E E . That is correct.
Mr. PECORA. Let me read further from the minutes of the meeting
of the board of the R.F.C. on February 25, last. After the conclusion
of the reading of you message in full, the minutes are as follows
[reading]:
After considering all aspects of the matter, it was moved and seconded that the
corporation agree to make loans, upon full and adequate security, to the First
National Bank of Detroit and the Guardian National Bank of Commerce of
Detroit in amounts sufficient to carry out plans for the organization of two new
national banks under which the depositors of the First National Bank and the
Guardian National Bank of Commerce would have 30 percent of their unsecured
deposits assumed by the new national banks, with the understanding that the
First National Bank of Detroit would obtain a loan in the amount of $20,000,000
from New York banks and rediscounts in the amount of $4,441,146.12 from the
Federal Reserve Bank of Chicago.
Mr. Jones moved that the motion be amended so that the said loans would be
made in amounts sufficient to permit 25 percent of the unsecured deposits, instead of 30 percent, to be assumed by the two new national banks.
The chairman put Mr. Jones' amendment to the motion, and the amendment
was lost by a viva voce vote.
The chairman then put the original motion which was adopted by a vote of
5 to 1.
Those loans, the loans contemplated in this motion, were not made,
were they?
Mr. M C K E E . They were not.
Mr. PECORA. They were not made, for the reason, I believe, as
you have already stated, that the loan of $20,000,000 from certain
New York banks and the rediscounts in the amount of over $4,000,000
from the Federal Reserve Bank of Chicago did not become available?
Mr. M C K E E . That is correct.
Mr. PECORA. IS there anything you can add to what you have
already testified to with regard to the efforts made by the R.F.C. to
assist the Detroit banking situation?
Mr. M C K E E . Not specifically, Mr. Pecora, other than we gave our
undivided time to this Michigan situation, and have ever since the
holiday, by keeping special representatives in the State of Michigan
to try to reorganize and assist in any way possible the reestablishment
of the banks in Michigan.
Mr. PECORA. DO you recall that on February 26, 1933, the board
of directors of the R.F.C. made a commitment of a loan of
4752
STOCK EXCHANGE PRACTICES
$24,000,000 to the Guardian National Bank of Commerce in Detroit
upon collateral recommended by the special committee of which you
were a member?
Mr. M C K E E . What was the amount of that?
Mr. PECORA. $24,000,000. If you do not recall it readily, perhaps
I can refresh your recollection by reading an excerpt from the minutes
of the special meeting of the board of directors of the R.F.C. held at
5 p.m. on February 26, 1933 [reading]:
Mr. Talley then presented two other telegrams to Mr. Milford from Mr. McKee
recommending, on behalf of the special committee, a loan not in excess of
$24,000,000 to the Guardian National Bank of Commerce, Detroit, Mich. The
telegrams referred to are as follows:
" Milford.
" I n reference suggested elimination of collateral offered by Guardian National
Bank of Commerce, Detroit, special committee are willing to certify to the adequacy of security on a revised collateral offering as follows:
"Unsecured notes face value original offer $10,800,000, eliminate $2,660,000
with no reduction in loan value.
"Secured notes, original offer $49,200,000 face value, eliminate $16,700,000
with loan value of $3,088,000.
"Other real estate, 5 buildings, face value $3,600,000, 21 parcels of foreclosed
real estate, face value $550,000, and 28 branch bank buildings, face value,
$1,750,000, or total face value of all other real estate of $5,985,000, to which was
allocated loan value of $1,111,000.
"Revise status of collateral with the elimination above proposed will evidence
in the new offering the following collateral: Unsecured notes face value
$8,142,288.53, with loan value $5,430,000; secured notes $32,480,314.61 with
loan value of $18,492,000; bonds face value $10,707,987.22, with loan value of
$4,648,811; mortgages with face value $14,659,518.33, with loan value of
$8,984,000; total collateral pledged in new offering will have face value of
$65,990,108.69, with loan value of $37,555,631. This elimination has reduced
the face amount of collateral $25,428,536.79, to which was allocated loan value
of $4,200,000.
"This collateral free in the hands of the bank offers adequate protection to
creditors not of record. Considerable savings of time of expense to applicant
and our own legal forces by elimination of other real estate as outlined above/'
Another telegram [reading]:
"Milford.
"Reference telegram application of Guardian National Bank of Commence,
forwarded you today, through my error the amount of loan was omitted. The
commitment to this applicant is not to exceed $24,000,000 and which amount is
recommended by the special committee secured by the collateral as outlined in
former wire."
The board agreed to make a loan to the Guardian National Bank of Commerce,
Detroit, Mich., in an amount not in excess of $24,000,000, secured by the collateral
listed in Mr. McKee's telegram.
Upon advice of the acceptance of the board's commitment to make loans in
the amount of $54,000,000 to the First National Bank of Detroit and not in excess
of $24,000,000 to the Guardian National Bank of Commerce, the board instructed
counsel to prepare resolutions authorizing such loans for its consideration.
Do you know, Mr. McKee, whether those loans were consummated?
Mr. M C K E E . A part of those loans were consummated to the conservators of the bank.
Mr. PECORA. Let me read to you, for the purpose of possibly refreshing your recollection, the following excerpt from the minutes of
special meeting of the board of directors of the R.F.C. held at 8 a m .
on March 1, 1933 [reading]:
The Secretary stated that J. K. McKee, assistant chief, examining division, who
is in Detroit, had advised by telephone that the following is a copy of a letter,
signed by Wilson W. Mills, chairman of the board of the First National Bank of
Datroit, which was presented to him at 11:45 p.m., February 28,1933.
STOCK EXCHANGE PEACTIGES
4753
FEBKTJARY 28, 1933.
"Mr. J.K. MCKEE,
Reconstruction Finance Corporation, Detroit, Mich.
"DEAR Mr. MCKEE: I tried to reach you by telephone this evening, without
success.
" At the conclusion of the board meeting today, I was instructed to telephone Mr.
Edsel D. Ford and to state to him that the general opinion of the board is that it
is> inadvisable to go ahead under the proposed plan in which he and his father are
interested. I might add, for your information, that this action of our board was
unanimous.
" Will you be good enough to communicate this action to the board of directors
of the Reconstruction Finance Corporation? I have informed Mr. Ford of the
action of our board.
, "I am sending a copy of this letter to your office at the Reconstruction Finance
Corporation.
" Faithfully yours,
7
"WILSON W. MILLS, Chairman.'
Mr. M C K E E . Mr. Pecora, I would like to change that answer of
mine. Those loans were not made. Similar amounts were in my
head that were made later to the conservator, but were not at that
time.
Mr. PECORA. Have you, Mr. McKee, at my suggestion caused to
be prepared a statement showing the status of loans made by the
Reconstruction Finance Corporation to various banks in the Guardian Detroit Union Group as of December 19, 1933?
Mi*. M C K E E . I think there was such a report prepared.
Mr. PECORA. I show you what purports to be such a report. Will
you please look at it and tell me if you identify it as a correct statement of the status of those loans as of December 19, 1933?
Mr. M C K E E . Although I did not prepare it, this is a copy.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. It will be admitted and made a part of the
record.
(A tabulated statement headed "Status of Loans Made by Reconstruction Finance Corporation to Banks in Guardian Detroit Union
Group as of Dec. 19, 1933," was received in evidence, marked
"Committee Exhibit No. 79, Jan. 15, 1934," and will be found
printed in full at the end of Witness McKee's testimony of this
date.)
Senator COUZENS. AS I recall your reply to Mr. Pecora's question
a0 to what happened after the banks closed, that is, what happened
iti relation to the R.F.C., you stated that the money was applied for,
that certain moneys were applied for to loan to two new banks that
Mr. Ford was to organize; is that correct?
Mr. M C K E E . That is correct—excuse me, Senator; not to the banks
but to the existing banks. The loan was applied for by the existing
banks.
Senator COUZENS. For the organization, however, of two new banks
by Mr. Ford, as I understood?
Mr. M C K E E . Yes; but the new banks would not assume our
Senator COUZENS. Yes; I understand that. If my recollection is*
^direct, from February 14 on until the time Mr. Ford had agreed to
reorganize two new banks, there were negotiations for loans; is not
that correct?
Mr. M C K E E . That is right.
Senator COUZENS. YOU made no reference to those in your reply to*
the question of Mr. Pecora, did you? You started, as I recall the
4754
STOCK EXCHANGE PRACTICES
recital of the events, beginning with the time that Mr. Ford was to
start the two new banks. Were there not some applications prior
to that time?
Mr. M C K E E . There were applications made on Monday, or tentative applications considered on Monday, February 13. In order to
liquidate the First National Bank and the Guardian Bank of Commerce those were considered up until midnight the night of the
13th—that if and when the Union Group would decide to close, the
Union Trust Co. and the other banks would decide, in face of, that
fact, to open for business on February 14, they wanted us to make
emergency loans to those two banks. Those applications were considered in a tentative way. However, I question whether our board
ever acted on them; but we were in position to recommend to our
board from Detroit a loan to the First National Bank, if and when
requested, and a loan to the Guardian National Bank if and when
requested, if those institutions were going to open on February 14.
Senator COUZENS. From February 14 until the time that Mr. Ford
had agreed to establish two new banks, under certain conditions,
were there any applications made by both the Guardian National
Bank of Commerce and the First National Bank?
Mr. M C K E E . Not that I recall, Senator, now.
Senator COUZENS. I think there were.
Mr. M C K E E . YOU may be correct on that, Senator, but I just do
not recall it now. I do not remember that the records of our corporation indicate that anything was presented to our board.
Senator COUZENS. Will you look at the records on that?
Mr. M C K E E . I will be happy to, Senator.
Mr. PECORA. The report or statement of the status of loans made
by the R.F.C. to the Guardian Detroit Union Group as of December
19, 1933, has been received in evidence, marked "Committee Exhibit
No. 79" of this date. It shows loans made by the R.F.C. commencing on May 24, 1932; and the last loan appears to have been made
on December 16, 1933. That is the last loan shown on this statement. The total amount of loans authorized was $80,382,000, of
which amount there was canceled a total of $10,273,204.23. The
total amount disbursed up to December 19, 1933, on account of these
authorized loans, is stated to be $59,472,236.19, of which there has
been repaid $14,377,393.05, leaving a balance due as of December 19,
1933, of $45,094,843.14. Collateral held has an aggregate value of
$147,239,849.10.
Now I presume, Mr. McKee, that the value so given to this collateral is the face value?
Mr. M C K E E . That is correct.
Mr. PECORA. That is the total interest paid on account of these
loans up to December 19, 1933, was $251,822.91.
The CHAIRMAN. AS payments are made, is the collateral surrendered?
Mr. M C K E E . It is usually made from the sale or reduction of the
collateral. In these instances there is no question that most of the
repayments have come from the liquidation of collateral pledged, not
from other sources.
(Witness excused.)
4755
STOCK EXCHANGE PRACTICES
The CHAIEMAN. The committee will now take a recess until 10
o'clock tomorrow morning.
(Whereupon, at 4:15 p.m., the subcommittee took a recess until
tomorrow, Tuesday, January 16, 1934, at 10 a.m.)
COMMITTEE EXHIBIT NO. 78—JANUARY 15, 1934
Funds required
National banks:
Port Huron
Niles
Lansing
_
Kazoo
Jackson..
Ionia
Grand Rapids
Guardian DetroitBattle Creek
_
Total.
State banks:
Flint
Highland Park
Highland Park Trust
Grand Rapids Trust
Union Guardian Trust Co.
Guardian of Royal Oak
Trenton—.
Hamtramck
Dearborn
_
Michigan Industrial Bank_
Total State
National..
Congress Corporation.
New Union Bldg. Co..
Trust Company..
0
1,353,678.94
315,757.62
1,130,896.07
838,914.96
1,420,194.19
286,819.39
1,003,649.41
15,416,837.11
691, 529.17
0
1,366, 530.12
315,757.62
1,171,493.49
980,720.46
1.561,142.14
292,319.39
1.145,226.15
22,868,252.91
759,414.00
22,458,276.86
30,460,856.29
4,022,971.61
0
0
0
20,000,000. 00
0
299,943.84
0
1,133,414.36
0
4,022,971. 61
0
0
0
12,124,794.77
0
299,943.84
0
1,133,414.36
0
25,456,329.81
22,458,276.86
17,582,024.58
30,460,856. 29
47,914,606.67
48,042,880.87
4,070,058.41
4,100,000.00
15,000,000.00
62,914,606.67
Cash guaranty to assure the payment and collection of the double liability on the stock of the Union Guardian Trust Co
(Pencil memorandum on reverse side of exhibit:)
"Original sheet of requirements ijS prepared by Mr. Kanzler."
Collateral
56,212,939.28
33,515,057.97
89,727,997.25
5,000,000.00
94,727,997.25
COMMITTEE EXHIBIT
N O . 79—JANUARY 15,
1934
Ox
Status of loans made by Reconstruction Finance Corporation to banks in Guardian Detroit Union Group as of Dec. 19, 19SS
o
|
Bank
Date
May
Oct.
July
Sept.
Apr.
Oct.
Dec.
June
Oct.
May
May
June
June
24,1932
7,1932
5,1932
14,1932
13,1933
16,1933
16,1933
7,1932
29,1932
19,1933
28,1932
26,1933
15,1932
June 14,1932
July 17,1933
June 8,1932
Mar.
June
3,1933
6,1932
July
Dec.
Feb.
Apr.
Aug.
27,1932
16,1932
27,1933
1,1933
18,1933
Aug.
May
June
July
Aug.
Dec.
Mar.
Mar.
Aug.
9,1932
19,1933
28,1933
5,1933
4,1933
16,1932
9,1933
16,1933
5,1932
Feb. 15,1933
Feb. 27,1933
Aug. 10,1933
Union Guardian Trust Co
do
_ do
do
Guardian National Bank of Commerce-do
do
Capitol National Bank, Lansing
do
_ _ do —City National Bank & Trust Co., Niles.
do
City National Bank & Trust Co., Battle
Creekdo .-_
do
First National Bank & Trust Co., Kalamazoo
. . do - First National Trust & Savings Bank,
Port Huron
do
do
_
do
_ _ do
. -.
Grand Rapids National Bank, Grand
Rapids __
_
Guardian Bank of Dearborn, Dearborn. _
do
do
_
do
_ . do
Bank of Hamtramck, Hamtramck
.__ do
do
Highland Park State Bank, Highland
Park
do
do
-__
_
___._do,-.
.-,-,
-
Amount
Authorized
$4,250,000
400,000
8,733,000
2,767,000
4,391,000
26,000,000
3, 500,000
425,000
325,000
300,000
135,000
150,000
Cancelled
Disbursed
Repaid
Balance Due
Collateral
Held
Maturity
$33,150.94
$4, 616,849. 06
$392, 260. 63
$4,224, 588.43
$8,844,183. 89
Oct. 13,1932
• 3,474,629.45
10, 025,370. 55
4,391,000.00
3,123, 639.32
4,391,000.00
6, 901, 731.23
19,317,641.18
July
17,000, 000. 00
32,590.00
17,000,000.00
86,355,427.05
Oct. 20,1934
32, 590.00
121, 775. 89
139,318. 57
121, 775.89
8,624.94
130,693.63
354,947. 59
Dec. 31,1933
911,300.00
102,406. 77
808,893.23
925,438.30
Nov. 27,1933
fioo. oon. oo
7.000.00
706,689. 25
500, 000.00
7,000.00
706,689. 25
673,001.77
673,661. 77
2,290,755.63
207, 290.08
313,399.53
50,000.00
50,000.00
1,937,869.99
48, 292.73
313,399.53
50,000.00
50,000.00
34, 727.16
48, 292. 73
1, 500,000. 00
1, 500,000.00
8, 877, 696,56
115,638,42
392,410.00
325,000.00
300,000.00
13, 224.11
10,681.43
515,00b
,200/1)00
200,000
3,700.00
145,000
600,000
145,000.00
600,000.00
,675,000
107,000
: 710,000
170,000
900,000
175,000.00
100,000.00
3,310.25
170,000.00
226,998. 23
2,400,000
305,000
120,000
50,000
50,000
2,022,000
56,000
42, 000
15,000
84,130.01
7,707.27
42,000.00
15, 000.00
2, 000,000
2,000,000
1,300,000
9,044,000
2, 000,000.00
500,000.00
1, 300,000.00
166,303,44
111,600.47
6,1933
Interest
Paid
$84, 216. 71
70,891.12
X
G
10, 236. 85
W
>
I
1-9
S
2,083,465. 55
6, 919, 313.89
Feb.
8,1934
1,903,142.83
2,716,968. 35
Feb.
1,1934
8.762,058,14
Ii, 302,862.15
Jan. 31,1934
Oct.
Feb.
June
May
July
May
11,1932
Highland Park Trust Co., Highland
Park
18,1933
do
_
28,1932 National Bank of Ionia, Ionia
14,1932 Union Industrial Trust & Savings Bank,
Flint
s
Total
7, 522. 59
668. 09
100,000.00
97,477. 41
49, 331.91
197, 738.06
100, 014. 04
F e b . 14,1934
F e b . 15,1934
5,247.12
1,619.78
12, 746. 27
1, 760. 47
9,500. 00
10,000.00
39,351.89
1, 400,000.00
712, 253.73
348, 239. 53
340, 500.00
590,000.00
1, 633,333.40
362,660.97
211,705.33
348, 239. 53
340, 500. 00
590,000. 00
37, 760.05
1, 037,339. 03
500, 548.40
2,413,955.12
1, 338,867.81
Oct. 19,1932
Bee. 22,1932
52,651.90
26,959.43
1, 595, 573.35
3,452,491.67
Dec. 12,1933
10,273, 204. 23
59,472, 236.19
14,377,393. 05
45, 094,843.14
147, 239,849.10
1,400,000
15,1932 . . . do._.
725,000
.._
18,1932 Union & Peoples National Bank, Jackson. 350,000
350,000
July 23,1932
do
600, 000
do
1 Feb. 23,1933
1,700,000
do
| July 6,1933
OX
105, 000.00
50,000.00
100,000. 00
105,000
50,000
100,000
80,382,000
251,822. 91
o
o
W
X
o
W
a
i
Crc
STOCK EXCHANGE PRACTICES
TUESDAY, JANUARY 16, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.O.
The subcommittee met at 10 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), Adams, Townsend, and
Couzens.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the comjnittee; and
Prank J. Meehan, chief statistician to the committee.
The CHAIRMAN. The subcommittee will come to order, please.
Mr. Pecora, who will you have first this morning?
Mr. PECORA. Mr. Blair.
The CHAIRMAN. Mr. Blair, will you please come forward to the
committee table, 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 invesigation by the committee. So help you God.
Mr. BLAIR. I
do.
TESTIMONY OF FRANK W. BLAIR, DETROIT, MICH., PRESIDENT
OF THE UNION JOINT STOCK LAND BANK OF DETROIT
Mr. PECORA. Mr. Blair, will you kindly give your name, address,
and business occupation to the committee reporter?
Mr. BLAIR. My name is Frank W. Blair; residence, Lake Orion,
Mich.; office, 640 Free Press Building, Detroit.
Mr. PECORA. What is your business or occupation ?
Mr. BLAIR. At the present time and for the past 10 years, since it
was organized, I have been president of the Union Joint Stock Land
Bank of Detroit. From 1908 until 1930 I was president of the
Union Trust Co. of Detroit, and in 1930 and 1931 I was chairman
of the board, first of the Union Trust Co. and then of its successor,
the Union Guardian Trust Co.
Mr. PECORA. Were you also connected as officer or director, or both,
with the Guardian Detroit Union Group, Inc. ?
Mr. BLAIR. Yes. I was chairman of the board of the Guardian
Detroit Union Group, Inc., from the time it became the Guardian
Detroit Union Group, Inc., until the annual meeting in 1932.
4759
4760
STOCK EXCHANGE PEACTICES
Mr. PECORA. Did you continue to serve as a director of the Guardian Detroit Union Group, Inc., after you ceased being chairman of
the board ?
Mr. BLAIR. Yes; for 1 year.
The CHAIRMAN. When was the annual meeting in 1932?
Mr. BLAIR. Why, it was some time in the latter part of January,
and I have forgotten the exact date, Senator Fletcher.
Mr. PECORA. It was usually held in January of each year?
Mr. BLAIR. Yes.
Mr. PECORA. I want
to ask you particularly at this time about the
Union Guardian Trust Co., formerly known as the Union Trust Co.,
of which you have just stated you were president from 1908 up to
1931, both inclusive.
Mr. BLAIR. I was president up to
Mr. PECORA (interposing). Up to 1930.
Mr. BLAIR. Yes; and
Mr. PECORA (continuing).
And in 1930 and 1931 you became chair-
man of the board ?
Mr. BLAIR. Yes, sir.
Mr. PECORA. DO you
know when the Union Trust Co. of Detroit
was organized ?
Mr. BLAIR. In
1891.
Mr. PECORA. Was it organized or incorporated under the bankinglaws of the State of Michigan ?
Mr. BLAIR. NO. It was organized under what was known as the
" trust company law ", which was a separate law from the banking
law.
Mr. PECORA. From its inception did it engage in any commercial
banking business ?
Mr. BLAIR. NO. It was prohibited from doing a general banking
business.
The CHAIRMAN. Did it receive deposits ?
Mr. BLAIR. It received deposits, yes; on certificates.
The CHAIRMAN. All right.
Mr. PECORA. I have before me what purports to be a photostatic
copy of the articles of association of the Union Trust Co., and I
will read from article I I I therof:
The purpose and object of the corporation is to carry on a trust, deposit,
and security business, and any other business authorized by the provisions of
act 108 of the public acts of 1889 and acts amendatory thereof.
Does that confirm your recollection of the fact ?
Mr. BLAIR. Yes.
Mr. PEOORA. And
act no. 108 of the public acts of 1889 of the
State of Michigan were what?
Mr. BLAIR. What they called the Trust Company Act.
Mr. PECORA. After the organization in 1891 of this trust company
did it, under authority conferred upon it so to do, engage in the
banking business as distinguished from the trust business?
Mr. BLAIR. It received deposits on certificate.
Mr. PECORA. On certificates of deposit?
Mr. BLAIR. On certificates of deposit, and it accepted deposits for
investment.
STOCK EXCHANGE PRACTICES
4761
Mr. PECORA. Were any of those deposits that it received payable
on demand?
Mr. BLAIR. At first they were not, but latterly practically all of
them were payable on demand.
Mr. PECORA. NOW, when did the Union Trust Co. begin to receive
deposits payable on demand?
Mr. BLAIR. Prior to my connection with the company.
Mr. PECORA. Which was prior to 1908 ?
Mr. BLAIR. Yes.
Mr. PECORA. And you do
Mr. BLAIR. NO.
Mr. PECORA. Well, from
not know when it was?
1908 down it was customary for it to
receive demand deposits?
Mr. BLAIR. I wouldn't say that it was customary to receive demand
deposits, just in that way. It did take deposits payable on demand
when it could not get them in some other way. Perhaps I might
say that.
Mr. PECORA. And issued its certificates of deposits?
Mr. BLAIR. Not certificates of deposit, generally, when it received
deposits that way. There were deposits received in open accounts,
not subject however to check.
Mr. PECORA. Well, how were they made payable; on demand? Or,
how was withdrawal effected ?
Mr. BLAIR. By letter, ordinarily.
The CHAIRMAN. By what ?
Mr. BLAIR. By letter, ordinarily.
Mr. PECORA. By letter ordinarily, he said.
Mr. BLAIR. Yes.
Mr. PECORA. Or on oral demand?
Mr. BLAIR. Yes.
The CHAIRMAN. But with no checks drawn?
Mr. BLAIR. NO checks; no.
Mr. PECORA. NOW, Mr. Blair, did the trust company,
after it commenced to receive deposits, both deposits payable on demand and
time deposits, segregate those funds into any classifications?
Mr. BLAIR. I do not know that I get the purpose of the question ?
Mr. PECORA. Well, how were those funds received from depositors,
treated by the trust company?
Mr. BLAIR. AS general funds of the company. Perhaps what is
in your mind is that sometime subsequent to my becoming connected
with the company, we seggregated the balances held for the account
of trusts, in a separate classification, and deposited those balances
in outside banks.
Mr. PECORA. Well, when did it commence to treat and deal with
those deposits in that fashion?
Mr. BLAIR. I should say about 1910, perhaps, but I cannot give
you the exact date.
Mr. PECORA. Did it use any terminology in classifying those
deposit funds in that fashion?
Mr. BLAIR. AS class A funds.
Mr. PECORA. They were class A funds?
Mr. BLAIR. Yes, sir.
*
4762
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, Mr. Blair, did it also maintain a classification,
of deposit funds known as class B funds ?
Mr. BLAIR. Yes.
Mr. PECORA. Will
you describe, briefly, to the committee the attributes of the class A funds and the attributes of the class B funds?
Mr. BLAIR. Class A funds were pure trust funds, where the relationship between the trust company and the owner of the funds was
a purely trust relationship. Class B funds were more in the nature
of deposit funds, or they were balances belonging to so-called
" trusts ", where the owner of the trust maintained the right—or I
should say retained the right to determine to what use the money
should be put and how it should be invested.
Mr. PECORA. Would you agree to the following definition of the
class A funds as contained in the report of the State bank examiner,,
which report is dated November 6, 1931, and in which he referred
to the class A funds as u class A trust funds ", and defined them
as follows:
And a trust is a court trust, executor, administrator, guardian, etc.r
and a collection trust where the funds on deposit are of a fiduciary character
or represent deposits with the company of a temporary nature. It is contended that the trusts classed under this heading have been very carefully
selected and that special care has been taken to place in this classification all
trusts in which the trust company has no right to make use of the cash balances,,
and on these trusts a 100-percent reserve is carried.
Mr. BLAIR. Practically so; yes.
Mr. PECORA. And would you subscribe to this designation or
definition of the class B trust funds, also contained in that same
report of the State bank examiner :
A B trust is a voluntary or revenue trust, in which the trust indenture give&
the company power to invest trust balances. A 10-percent reserve is supposed
to be maintained on these cash balances. According to a recent ruling of thecommissioner, the percentage of reserve on the B funds should be 20 percent.
The A funds are payable on demand, and about 10 percent of the B fund&
are payable on demand.
Mr. BLAIR. I would not subscribe to that part which indicates
that the commissioner has the right to fix the percentage of reserve.
The trust company law of the State of Michigan fixes the reserve
which a trust company shall keep as 20 percent of its matured obligations. Nobody has ever been able to tell me just exactly what
the legislature had in mind when it made that provision for a reserve,
because I never could find, outside of the A funds, any obligation of
the trust company which has matured.
Mr. PECORA. In other respects would you subscribe to this definition of the class B trust funds?
Mr. BLAIR. Very generally; yes, sir.
Mr. PECORA. In addition to these class A and class B trust fundsy
the trust company, if I correctly understood your testimony as it
has been given so far, received on deposit general funds and issued
therefor its certificates of deposit.
Mr. BLAIR. Yes; and for some years in addition to that it had a
form of deposit which was called investment deposits, which were
in a smiall book, with an agreement in the front of the book. Those
funds, however, disappeared from the trust company after the Union
STOCK EXCHANGE PRACTICES
4763
Commerce Corporation was formed, when they were transferred to
the National Bank of Commerce in one block.
Mr. PECORA. When did that happen?
Mr. BLAIR. The transfer?
Mr. PECORA. Yes.
Mr. BLAIR. Oh, I
should say either late in 1928 or perhaps early
in 1929.
Mr. PECORA. NOW, what disposition was made by the trust company during the period of time that you were its president and for
the 2 subsequent years when you were chairman of its board, of the
class A trust funds?
Mr. BLAIR. Well
Mr. PECORA. I believe you said, if I correctly understood you,
those funds were placed on deposit with other banks.
Mr. BLAIR. Yes, sir.
Mr. PECORA. Was that always the case?
Mr. BLAIR. We kept none in the trust company.
Mr. PEOORA. Were they kept in any banks after
the organization
of the Guardian Detroit Union Group, Inc., and its predecessor
than banks that were units of the group ?
Mr. BLAIR. We found ourselves, of course, when the groups were
formed, with balances in banks which became our associates, and
it took some time, and I don't know just when it was entirely done,
to transfer those balances from banks with which the trust company
was closely associated to outside institutions.
Mr. PECORA. By " outside institutions " you mean banks that had
no affiliation with the group ?
Mr. BLAIR. Yes.
Mr. PECORA. When was that
Mr. BLAIR. I don't know.
effected ?
It had not been completely effected
when I left the trust company.
Senator COTTZENS. Didn't Mr. Bodman give an opinion that you
should not have those trust funds in any of your affiliates?
Mr. BLAIR. I don't know. But I should think it very likely he
would, because we all felt that was the correct way.
Mr. PECORA. Had you finished your answer?
Mr. BLAIR. Yes.
Mr. PECORA. Mr.
Bodman was a director of the trust company,
was he not ?
Mr. BLAIR. He was a director of the Guardian Trust Co., and after
the consolidation a director of the Union Guardian Trust Co. He
was not a director of the Union Trust Co.
Mr. PECORA. Well, now, was this transfer of those class A trust
funds by your trust company effected before or after the creation of
the Union Guardian Trust Co. ?
Mr. BLAIR. Afterwards.
Mr. PECORA. YOU say it was afterwards?
Mr. BLAIR. Yes, sir.
Mr. PECORA. When was
the Union Guardian Trust Co. organized,,
or when was it created ?
Mr. BLAIR. Well, the Union Guardian Trust Co. was a continuation of the Union Trust Co. under the name of Union Guardian
4764
STOCK EXCHANGE PRACTICES
Trust Co. After the consolidation was effected—well, as I remember it, that was as of March 31,1930.
Mr. PECORA. Prior to March 31, 1930, did the Union Trust Co.
maintain on deposit in banks connected with the Group, those class A
trust funds ?
Mr. BLAIR. It had some funds of that kind with the National Bank
of Commerce; Yes.
Senator COUZENS. When you issued your statements, Mr. Blair,
did you classify your deposits in your published statements as A and
B deposits?
Mr. BLAIR. ~NO ; we did not.
,
Senator COUZENS. They were just in one gross sum?
Mr. BLAIR. Yes.
Mr. PECORA. NOW,
Mr. Blair, the class A trust funds were those
funds with respect to which the trust company merely bore a fiduciary
or trust relationship ?
Mr. BLAIR. Yes.
Senator COUZENS.
Mr. Blair, or I will ask Mr. Pecora: As I understood the definition given by the State bank examiner, he made some
reference to temporary deposits, deposits outside of those that bore
a fiduciary relationship. Is that correct ?
Mr. PECORA. Yes, Senator Couzens. He said that the A trust is a
court trust, and a collection trust were funds on deposit rather of a
fiduciary character or representing deposits with the company of a
temporary nature.
Senator COUZENS. That is what I thought.
Mr. BLAIR. Oh, then I did not get that when you read it.
Mr. PECORA. Well, that is the definition embodied in his report of
November 6,1931.
Senator COUZENS. That is where I thought you were mistaken,
Mr. Blair. I did not understand that those temporary deposits bore
any fiduciary relationship.
Mr. BLAIR. NO. And I did not get that last part of it when Mr.
Pecora read it.
Mr. PECORA. DO you disagree with that?
Mr. BLAIR. I disagree as far as temporary deposits are concerned.
Mr. PECORA. Deposits of a temporary nature?
Mr. BLAIR. Yes. It is possible we might receive deposits and
arbitrarily put them in class A funds, so that we would not loan
the money, but it was not intended generally to include temporary
deposits in class A funds.
Senator COUZENS. Did you pay interest on temporary deposits?
Mr. BLAIR. Oh, I think that would all depend upon the deposit.
Senator COUZENS. Did you pay interest on some of them?
Mr. BLAIR. Yes.
Senator COUZENS.
For whatever period the deposit remained with
you?
Mr. BLAIR . Yes. We had a constantly changing situation with
respect to trust-company deposits. The rates changed from time to
time by agreement among the trust companies.
Senator COUZENS. Well, you know it has been a practice that deposits are made with a trust company with a stipulation that if
STOCK EXCHANGE PRACTICES
4765
withdrawn in less than 30 days no interest is paid, and if left for
60 days a certain amount of interest is paid, and if left for 90 days
a certain amount of interest is paid, and if left for a year a certain
amount of interest is paid.
Mr. BLAIR. The arrangement for that kind of deposit was one
that was made in later years, not in the earlier years.
Senator COTJZENS. And they were not class A deposits, were they?
Mr. BLAIR. Oh, no.
Senator COUZENS. All right.
Mr. PECORA. Class A trust funds
were as a rule funds that were
entrusted to the trust company for investment purposes, or for
some specified purpose and not for the account of the depositor.
Mr. BLAIR. The most of those funds represented income on trusts
which had been created; that is, it was the cash income received.
Mr. PECORA. In its annual reports it is disclosed that those funds
were carried as a part of the general deposit accounts, isn't it?
Mr. BLAIR. I think they called everything trust funds in the most
of our reports. (After looking through some papers.) I find in
February 1928
Mr. PECORA. What year did you say?
Mr. BLAIR. 1928. We called them trust deposits.
Mr. PECORA. And all deposits, whether they fell under class A
or class B
Mr. BLAIR. Were included.
Mr. PECORA. Were grouped in the reports under the head of trust
deposits ?
Mr. BLAIR. Yes. In the published statements I think the department in Lansing, that is, the banking department, required some
different classification. I have forgotten just what it was.
Mr. PECORA. NOW, was a 100 percent reserve maintained by the
trust company against the class A deposits ?
Mr. BLAIR. Yes, sir.
Mr. PECORA. At all times?
Mr. BLAIR. Yes; from 1910 on.
The CHAIRMAN. What did you
do with those other funds?
did you invest them or loan them?
Mr. BLAIR. The deposits?
How
The CHAIRMAN. Yes.
Mr. BLAIR. In mortgages, collateral loans, bonds
The CHAIRMAN. Mortgages on real estate?
Mr BLAIR. Yes.
The CHAIRMAN. Collateral loans, bonds, and what?
Mr. BLAIR. And bonds.
The CHAIRMAN. NO commercial business?
Mr. BLAIR. Oh, no commercial business whatever.
Mr. PECORA. And to what extent was a reserve maintained
by the
trust company against class B trust funds or deposits ?
Mr. BLAIR (after looking through some papers). We maintained,,
or we attempted to keep, a 10-percent reserve against B funds.
Mr. PECORA. YOU say you attempted to do it. Did you succeed?
Mr. BLAIR. Not always. That was purely a voluntary thing on
our part. The law did not require it.
4766
STOCK EXCHANGE PRACTICES
Mr. PECORA. Referring again to the definition in the statement of
the examiner's report of November 6, 1931, in which he said
[reading] :
A " B " trust is a voluntary or living trust in which the trust indenture gives
the company the power to invest the trust balances. A 10-percent reserve is
supposed to be maintained on these cash balances.
What do you understand by that reference by the State examiner
in his report to the 10-percent reserve being supposed to be maintained on these cash balances?
Mr. BLAIR. That is what I stated just a little while ago, that we
attempted to maintain either cash or quick assets amounting to 10
percent of such funds.
Mr. PECORA. What was the initial capital structure of the Union
Trust Co., do you know?
Mr. BLAIR. It had a capital of $500,000.
Mr. PECORA. Eepresented by 5,000 snares of stock of a par value
of $100?
Mr. BLAIR. I have no doubt that is so.
Mr. PECORA. Subsequently, at various times, there were increases
in the capital structure of the trust company, were there not ?
Mr. BLAIR. Yes,
sir.
Mr. PECORA. Can you give the committee a brief history of those
increases; that is to say, when they were effected, how, and at what
times ?
Mr. BLAIR. May I go to some length in making an answer to that ?
Mr. PECORA. Yes, sir.
Mr. BLAIR. My answer
begins with my first connection with the
company.
Senator COTJZENS. What year was that?
Mr. PECORA. 1908.
Mr. BLAIR. 1908. On the
Mr. PECORA. Pardon me a
last day of
moment, Senator. Mr. Blair has testified that from 1908 to 1930 he was president of the Union Trust Co.,
and in 1930-31 he was chairman of the board; that on March 31,
1930, the trust company consolidated with the Guardian Trust Co.
and became known thereafter as the Union Guardian Trust Co.
Go ahead, Mr. Blair, please.
Mr. BLAIR. On the last day of December 1907 the board of directors of the trust company were in a panic. This is hearsay, of
course, because I was not present at the meeting. A motion was
made to place the company in receivership. Two or three men who
liad been with the trust company for a great many years—I think
all of them, perhaps, from the beginning—asked for time in which
to endeavor to work out the affairs of the trust company. A committee was appointed, of which Mr. Henry Eussel, who was then
general counsel for the Michigan Central Eailroad, was chairman.
Mr. Russell interviewed some members of the board of directors
and secured from them outright gifts to the company amounting to
something like $1,100,000 in securities and property. That money,
or rather those securities and property were turned over without
any strings attached to them whatever. The trust company at that
time had bad assets amounting to its capital and surplus. It had
STOCK EXCHANGE PRACTICES
4767
•uninvested trust funds considerably in excess of its cash on hand.
I n other words, the situation was very bad.
Some time was spent in getting this fund together, and some time
was spent in finding someone to head the trust company. About 20
:men, I think, were asked to take the job before I was asked to take it.
Senator COUZENS. Who was the head of the trust company at the
period 3^ou are describing now?
Mr. BLAIR. Mr. Ferry was president, but inactive. Mr. Hance was
-executive vice president.
Senator COUZENS. Elwood Hance?
Mr. BLAIR. Elwood T. Hance. I went in on February 13, 1908,
.and immediately, with Mr. Eussel's help, began to try to build up
the cash balances. We used the securities which had been given the
company to borrow money. We borrowed most of the money at the
Guaranty Trust Co. in New York. It took 2 years, as I remember it,
for us to get enough money accumulated to make the segregation,
which we carried on after that, of "A" funds from all other funds
of the company.
Having done that, we went to the stockholders in 1912 with a
request that they furnish us with an additional $500,000 capital in
<order that we might return to the people who had given the securities to the company, those securities. That accounts for the increase
in capital in 1912 from $500,000 to $1,000,000.
Mr. PECORA. Was that accomplished through the issuance of 5,000
.additional shares having a pair value of $100?
Mr. BLAIR. Yes.
Mr. PECORA. When
was the next increase in the capital structure
of the trust company ?
Mr. BLAIR. I should say in 1923. The $1,000,000 capital then
existing was doubled.
Senator COUZENS. By what means?
Mr. BLAIR. The sale of an additional amount of capital stock, I
think, at par.
Mr. PECORA. With regard to that, Mr. Blair, let me read to you
what purports to be an extract from the minutes of the meeting of
the stockholders of the Union Trust Co. held on August 29, 1923.
This excerpt is taken from page 213 of the minute book at that
time [reading] :
Whereas it is desirable and beneficial that the capital stock of the
company be increased from $1,000,000 to $2,000,000; now, therefore
be it
Resolved, That we, the stockholders of the Union Trust Co. of
Detroit, Mich., at a special meeting of stockholders duly called and
held this 29th day of August, A.D. 1923, at the office of the company,
do hereby approve and authorize increasing the capital stock of
this company from 10,000 shares of $100 each par value to $2,000,000
in all. such increase to take effect as of the first day of October,
A.D. 1923; and do further authorize and direct the issuance and
execution of all proper documents and certificates and the filing
thereof to carry the said increase into full force and effect: Be it
further
Resolved, That the issuance to the present stockholders of the company of
Tecord at the close of business August 29, 1923, of warrants in the following
4768
STOCK EXCHANGE PRACTICES
form, evidencing their right to subscribe to the increased stock, be and it ishereby authorized and approved.
This was August 29, 1923. Does that accord with your recollection ?
Mr. BLAIR. I think so; yes.
Mr. PECORA. Additional stock was issued to the existing stockholders of record?
Mr. BLAIR. Yes.
The CHAIRMAN. Was there double liability on that stock?
Mr. BLAIR. Yes.
Mr. PECORA. When did the next increase in the capital of
the
trust company take place?
Mr. BLAIR. In 1927 there was a stock dividend of 25 percent.
Mr. PECORA. That is 5,000 shares?
Mr. BLAIR. Yes. Those would be $100 shares.
Mr. PECORA. Still having a par value of $100?
Mr. BLAIR. $100.
Mr. PECORA. That
operated to increase the capital structure to
$2,500,000?
Mr. BLAIR. That is the capital account proper; yes.
Mr. PECORA. According to the minute book of the stockholders of
the Union Trust Co., that took effect on January 12,1927. Does that
accord with your recollection ?
Mr. BLAIR. I think so; yes. I t was during that year.
Mr. PECORA. And that dividend, of course, was declared out of
the company's undivided profits?
Mr. BLAIR. Yes, I think so—or surplus, possibly.
Mr. PECORA. In that connection, let me read to you this excerpt
from the minutes of the stockholders' meeting of the trust company
held on January 12, 1927, pages 53 and 54 of the minute book of
that time. The following resolution was then offered [reading] :
Whereas it appears that a stock dividend of 25 percent may be properly
declared and paid out of the company's undivided profits, it is hereby resolved
that the board of directors of this company be, and are hereby, authorized to
declare at this time a dividend of 25 percent to the stockholders of the company,
payable in the company's stock, on the basis of the par value thereof, and to be
distributed in proportion to their respective stockholdings; and to acquire and
dispose of fractional shares resulting from said distribution in its discretion,
Which resolution was on motion duly supported and unanimously adopted,
That accords with yonr recollection?
Mr. BLAIR. Yes.
The CHAIRMAN.
Apparently you had got the company in better
shape by that time ?
Mr. BLAIR. We thought it was.
The CHAIRMAN. Did your chief difficulty arise out of loans on real
estate ?
Mr. BLAIR. On all loans of all kinds.
Mr. PECORA. When did the next increase in the capital structure
of the trust company take place ?
Mr. BLAIR. Some time in the year 1929.
Mr. PEOORA. January 29 of that year ?
Mr. BLAIR. I do not know. I t might possibly have been.
Mr. PECORA. I have what purports to be an extract from the
minutes of the meeting of the stockholders of the Union Trust Co.?
STOCK EXCHANGE PRACTICES
4769
held on January 29, 1929, pages 228 and 229 of the minute book of
that time, from which it appears that the following resolution was
offered and adopted [reading] :
Be it resolved, That under the provisions of section 2 of the act 108, public
acts of 1889, the capital stock of this corporation be increased in the sum of
$2,500,000, making the total capital $5,000,000; and that the fourth subdivision
of the original articles of incorporation of said corporation be amended so as
to read as follows:
" Fourth. The capital stock of this corporation shall be $5,000,000, and the
same shall be divided into 50,000 shares of $100 each."
Be it further resolved, That said additional stock of said Union Trust Co.
be offered for sale to the stockholders thereof at the close of business on
February 6, 1929, at $300 per share, said offer to be ratably in accordance with
their respective holdings as the same may appear on the books of the corporation, payment therefor to be made to said Union Trust Co. on or before the
31st day of March 1929, and in the event payment at the rate aforesaid is not
made for said stock on or before the said last mentioned date, the right to
subscribe therefor shall cease and terminate.
And be it further resolved that the board of directors of this corporation be,
and they are hereby authorized and directed to sell, at not less than. $300 per
share, such part of said 25,000 shares of stock of said Union Trust Co. as shall
not be subscribed by the stockholders on or before the said 31st day of March
1929.
Be it further resolved, That the officers and directors of this corporation be,
and the same are hereby authorized and directed to take all necessary and appropriate proceedings as may be required by law to advise stockholders to
make provision for calling in and canceling the old and issuing the new certificates of stock, and to otherwise make such increase effective.
Which resolution was, on motion, duly supported and adopted by the unanimous vote of the entire 23,584 shares of stock present or represented at the
meeting.
The following resolution was then offered [reading] :
Be it resolved, That in view of the previous action of the stockholders and
directors of this corporation unifying the shares of stock of this corporation
with the shares of stock of Union Co. of Detroit, in the letter of the secretary
of this company advising stockholders of their rights to subscribe to the increased stock of this company, that said secretary advise said stockholders that
subscriptions to such increase will only be accepted subject to stockholders also
exercising their rights to subscribe to the increased stock of said Union Co. of
Detroit.
Which resolution was on motion duly supported and adopted by unanimous
vote.
Does that accord with your recollection of the fact?
Mr. BLAIR. Yes.
Mr. PECORA. That operated to increase the capital to $5,000,000,
represented by 50,000 shares having a par value of $100 each?
Mr. BLAIR. Yes, sir.
Mr. PECORA. When was the Union Co. of Detroit, referred to in
the resolution that I last read to you, incorporated?
Mr. BLAIR. About 1923. I cannot remember the exact date.
Mr. PECORA. Was it incorporated at the instance of the Union
Trust Co.?
Mr. BLAIR. Yes.
Mr. PECORA. What kind of business was the Union Co. of Detroit
designed to transact?
Mr. BLAIR. There is a little story connected with it.
Mr. PECORA. Well, give it to us.
The CHAIRMAN. Before you take that up, may I ask if, in this
increase of stock, these shares were taken by the stockholders or
sold to the public?
4770
STOCK EXCHANGE PRACTICES
Mr. BLAIR. I cannot tell you whether all of them were taken ornot, but I assume that they were all taken by the people who had
the first right to take them. All the shares were sold. Whether or
not any of them were reoffered after.the first offering, I do not know.
For a year or two prior to 1923 the trust company had been
making loans for insurance companies and other outside companies—
mortgage loans. They were getting some profits from the making:
of those loans.
Mr. PECORA. AS trustee ?
Mr. BLAIR. Not as trustee, but making them as agent for the
lender.
The CHAIRMAN. Getting a commission?
Mr. BLAIR. On a commission. We did not think—and when I
say " we " I refer to the officers and the members of the executive
committee—that it was well to include those earnings as a part of
the general earnings of the trust company, so we established a trust.
I have forgotten what we called it, but as these earnings came in
they were transferred to this trust. They were, we will say, hidden,
profits of the company. About 1923 the banking department objected,
to that way of carrying these profits.
Mr. PECORA. What was the objection, Mr. Blair?
Mr. BLAIR. That possibly some stockholder might transfer his
stock at the market price, without knowing of the existence of thesehidden profits.
Mr. PECORA. What was the purpose of keeping those profits in a
so-called hidden profits account?
Mr. BLAIR. SO that if we had any losses, we could charge then*
direct, without affecting our undivided profits.
Mr. PECORA. Could not that have been done by adding the profits
to the profits account as they accrued and accumulated ?
Mr. BLAIR. Oh, yes. It could have been done that way, but i t
was a general practice with banks in those days to carry hidden
reserves against which losses could be charged, in order that the
undivided-profits account would not show violent fluctuations and
possibly disturb depositors and stockholders.
Mr. PECORA. Were those hidden profits reported in the annual
statements or reports to stockholders?
Mr. BLAIR. We made no reports in written form, but at the annual:
meetings we were very careful to tell them what they as stockholders of the trust company owned.
Mr. PECORA. That practice was objected to by the State banking
department some time in 1923 ?
Mr. BLAIR. I should say so; yes.- We then formed the Union Co.y
with the capital furnished by these profits, and put the Union Co.
certificate on the back of the trust company certificate.
Mr. PECORA. Mr. Blair, let me -interrupt you for a moment, I
have before me what purports to be a photostatic reproduction of
the articles of association of this Union Co. of Detroit. Article &
thereof reads as follows [reading] :
3. The purpose or purposes of this corporation are as follows:
To engage in the business of buying, selling, holding, mortgaging, hypothecating, and pledging of land contracts, stocks, bonds, mortgages, promissory
notes, bills of exchange, trade acceptances, and other commercial paper in
evidence of indebtedness, including invoices and book accounts; and dealing
ARTICLE
STOCK EXCHANGE PRACTICES
4771
in and holding and loaning on securities of every name and nature; and to
engage in the business of buying, improving, holding, selling, and dealing in
real estate, and to do a general building and contracting business.
Mr. BLAIR. If we left anything out, it was not done intentionally.
Mr. PECORA. Does this accord with your recollection of the purposes for which this company was organized, as embodied in its
articles of association?
Mr. BLAIR. If you mean by that question the purpose we had in
mind for using the company, then this authority was a great deal
broader than was necessary; but it was thought well to get authority
to do anything we might find it necessary in future years to do.
The primary purpose, I might say—I won't—the purpose of organizing, but what we had in mind as investments for this company
were second mortgages and land contracts.
About that time, as the Senator will remember, the Detroit Evening News put on a great campaign for the building of homes, and
made an arrangement with us—by " us " I mean the Union Trust
Co.—to make first- and second-mortgage loans to people who wanted
to build homes. We made the first-mortgage loans for the trust company, and took a great many second-mortgage loans for the Union
Co. I think those second-mortgage loans went as high as $1,000,000
at one time.
Senator COUZENS. Was it the Michigan charter you got under those
articles?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Let me
read to you the following extract from the
minutes of the meeting of the stockholders of the Union Trust Co.
held on December 9, 1924. I am reading from an excerpt appearing
at page 301 of the minute book of that time. You were then the
president of the company?
Mr. BLAIR, jfes, sir.
Mr. PECORA. The excerpt reads as follows [reading] :
The president submitted a statement of the earnings and expenses of the
Union Trust Co., of the Union Title & Guaranty Co., the Union Go. of Detroit,
and the so-called " Real Estate Trust", for the month of November, and also
a similar statement for the 11 months ended November 30, 1924, as compared
to the corresponding periods in the preceding year; and also submitted a balance sheet of the Union Co. of Detroit, of the Union Title & Guaranty Go.,
and of the so-called " Real Estate Trust", and briefly explained these several
accounts and the earnings accumulated therein which had not been taken up
in the books of the Union Trust Co.
The president made further reference to the fact that the commissioner of
the banking department had objected to the Union Trust Co. carrying oin,
through the medium of the Union Co. of Detroit, certain activities which it
could not properly carry on in its own name; that, without necessarily accepting the correctness of the commissioner's position, it had been proposed, for
the purpose of meeting his objection, that the stock of the Union Co. of Detroit
be distributed among the shareholders of the Union Trust Co., and that the
executive committee, at its meeting held Friday, December 5, 1924, had recommended to the stockholders that this step be taken.
The president emphasized, however, the extreme importance of
continuing in one ownership the stocks of the Union Trust Co. and
the Union Co. of Detroit.
The following resolution was accordingly introduced:
"Resolved, That the board of directors of this corporation be, and they
are herebj^, requested to distribute to the shareholders of this corporation, in
proportion to their respective holdings, the stock of the Union Co. of Detroit
4772
STOCK EXCHANGE PRACTICES
held by this corporation; that such distribution be made at such time or
times, and to the shareholders of such date, as the board of directors may
deem desirable;
"That the board of directors be given further authority to cause to be
increased or decreased the total capital of the said Union Go. of Detroit, to any
extent they may deem desirable to facilitate its proportional distribution;
that in making such distribution the board are hereby directed to do it
in such manner as to require any transfer, by operation of law or otherwise, of the stock of either corporation to carry with it the stock of the
other, so that at all times the shares of both corporations shall continue
to be held individually in one ownership and in the same relative proportion ; and that they be further authorized and empowered to take all steps
and do all things necessary or appropriate in their judgment to carry into
effect the purpose and intent of this resolution."
On motion duly supported and carried by the unanimous vote of all the
stock of the company present or represented, the said resolution was adopted.
Do you recall those proceedings at the meeting of the stockholders
of the Union Trust Co. held on December 9,1924?
Mr. BLAIR. I do not know that I remember them exactly, but I
have no doubt that that is an exact statement of what took place.
As I re,member now, after we organized the Union Co. out of the
profits, we still held the stock in a trust for the benefit of our stockholders, and the banking commissioner objected to that, as hidden
profits, as well as the other, so we took this method of distributing
this profit to the stockholders.
Senator COUZENS. HOW much money did you take out of the Union
Trust Co. to organize the Union Co. with: do you remember ?
Mr. BLAIR. I suppose there must have been $200,000 of hidden
profits taken in, because one $10 share of Union Co. stock was
printed on the back of a $100 share of trust company stock, so that
it would require, in 1924, $200,000 capital for the Union Co.
Senator COUZENS. That was its capital, was it—$200,000?
Mr. PEOORA. N*O. According to the Articles of Association from
which I heretofore read, a photostatic copy of which I have in my
hand, the total capital stock authorized originally for the Union
Co. was $100,000, represented by 10,000 shares having a par value of
$10 each.
Mr. BLAIR. I think you .will find that when we made the distribution its capital stock was $200,000, because my remembrance is—I am
quite certain it was distributed on the basis of one share for one
share.
Senator COUZENS. I t must have been increased later, after the
articles of incorporation.
Mr. BLAIR. Yes.
The CHAIRMAN.
What was your experience with this $1,000,000
of second mortgages ?
Mr. BLAIR. I have been told that those original mortgages have
been paid down to something less than $100,000. I have no accurate
knowledge myself.
Senator COUZENS. When did you leave as executive officer of the
Union Guardian Trust Co.?
Mr. BLAIR. On January 13, 1932.
Senator COUZENS. Who succeeded you?
Mr. BLAIR. Mr. Bodman succeeded me as chairman, though I
believe there was some change in the bylaws affecting his duties. I
am not just positive about that. I doubt if his duties were the
same as mine.
STOCK EXCHANGE PRACTICES
Senator COUZENS. Did you remain on the
Mr. BLAIR. Yes.
Mr. PECORA. There has been a reference
4773
board after that?
made to a corporation
called the Union Title & Guaranty Co. That was a wholly owned
subsidiary of the Union Trust Co., was it not?
Mr. BLAIR. Yes.
Mr. PECORA. And
will you tell the committee briefly the history
of the Union Title & Guaranty Co.?
Mr. BLAIR. Beginning very early in its career the Union Trust
Co. maintained an abstract business and title guaranty business also.
I don't remember when the Union Title & Guaranty Co. was formed.
Mr. PECORA. My information is it was in 1917.
Mr. BLAIR. Well, I have no doubt that that is correct.
Mr. PECORA. And it was incorporated under the laws of the State
of Michigan.
Mr. BLAIR. Yes.
Mr. PECORA. With an original authorized capital of $500,000.
Mr. BLAIR. Yes. And that company took over the abstract busi-
ness of the trust company, which was paid for with capital of the
company.
Mr. PECORA. Of the trust company?
Mr. BLAIR. N O ; paid for with capital of the title company.
Mr. PECORA. Subsequently the original capitalization of $500,000
was increased to a million dollars?
Mr. BLAIR. Yes. I believe that was increased out of earnings.
as I remember it.
Mr. PECORA. All of the capital stock of the Union Title & Guaranty Co. was owned, with the exception of directors' qualifying
shares, by the trust company ?
Mr. BLAIR. Yes, sir.
Senator COUZENS. And
was the money taken out of the trust
company to create the title company ?
Mr. BLAIR. Originally, you see, the trust company built up the
abstract books and title business and had invested several hundred
thousand dollars in those books and records. The trust company
itself had issued title policies, a great many of them, but I did not
like to have the trust company liable for that sort of a guaranty.
Mr. PECORA. That was a title insurance business?
Mr. BLAIR. Yes; title insurance. And finally I told our people
that we must if we continued the business, publish with our
statements the amount of title insurance which the trust company
made itself responsible for, and that set us all thinking, and we decided then to form this title company to assume those obligations and
to issue title policies in the future.
Senator COUZENS. I was asking how you got the capital or where
you got it to organize the title company.
Mr. BLAIR. Out of the trust company.
Mr. PECORA. This title company had title business covering real
property in three counties, namely, Wayne, Macomb, and Oakland
Counties ?
Mr. BLAIR. Yes.
Mr. PECORA. And
conducted a general title insurance business in
those three counties?
175541—34—PT 10
13
4774
STOCK EXCHANGE PPxACTICES
Mr. BLAIR. And all over Michigan as well, through contracts with
abstract companies in other localities.
Mr. PECORA. When was the consolidation of the National Bank
of Commerce effected?
Mr. BLAIR. I don't know that I like to call it a consolidation.
Mr. PECORA. Well, call it a merger.
Mr. BLAIR. NO.
Mr. PECORA. What would you call it ?
Mr. BLAIR. An affiliation.
Mr. PECORA. When was it effected?
Mr. BLAIR. I think in May 1928.
Mr. PECORA. On what basis? [After a pause:] Pardon me; before you come to that let me ask you this: You have already testified
that in January 1929 the capital structure of the Union Trust Co»
was increased from $2,500,000 to $5,000,000 through the issuance
of 25,000 additional shares having a par value of $100 each, but
which 25,000 additional shares were sold at a price not less than
$300 per share. In other words, sold for $7,500,000. Was 5 million
dollars of that sum set aside and allocated to surplus ?
Mr. BLAIR. I believe it was.
Mr. PECORA. And the other 2% million added to the capital
structure ?
Mr. BLAIR. Yes.
Mr. PECORA. Bringing
the total capital outside of surplus of the
Union Trust Co. up to 5 million dallars ?
Mr. BLAIR. I believe so; yes, sir.
Mr. PECORA. NOW, tell us about the affiliation of the Union Trust
Co. with the National Bank of Commerce in May 1928.
Mr. BLAIR. The talks leading up to the arrangement which we
made culminated on October 24, 1927, in a memorandum, of which
I have a copy, reading like this [reading] :
OoTOBEte 24, 1927.
It is agreed between the signers of this paper that they will recommend to
their respective boards of directors a consolidation of the interests they represent on the basis of pooling of stock on an equal share-for-share basis.
This is signed by Mr. Richard P. Joy, and Frank W. Blair, and
below is a memorandum:
" The interests represented are Union Trust Co. and the National
Bank of Commerce of Detroit."
At that time I believe we had in mind a plan of unification of
stock rather than the formation of a holding company. Of courser
neither Mr. Joy nor myself were lawyers. We turned this point
over to counsel for the bank and for the trust company to work out
a plan which would accomplish our purpose.
Senator COUZENS. Was Mr. Joy a member of the board of directors of the trust company at that time ?
Mr. BLAIR. He was not.
Senator COUZENS. When
did he leave the board of directors of the
trust company, do you remember? He had been at one time a
director.
Mr. BLAIR. Well, Mr. Joy was a director for a few minutes in
1911.
Senator COTIZENS. From that time on he was not a director?
STOCK EXCHANGE PRACTICES
4775
Mr. BLAIR. NO. He became a director after this arrangement.
Senator COTJZENS. Yes.
Mr. BLAIR. He was a director of the Detroit Trust Co. at the time
this arrangement was made.
Senator COUZENS. In 1911; was that the time that Mr. Ledyard
was chairman of your board?
Mr. BLAIR. Yes, sir.
Mr. PECORA. That affiliation between the National Bank of Commerce and the Union Trust Co. was effected in the manner that you
have just indicated?
Mr. BLAIR. By the formation of a holding company, yes.
Mr. PECORA. And what was the name of that holding company?
Mr. BLAIR. Originally it was called the Union Commerce Investment Co. The name was later changed.
Mr. PECORA. TO Union Commerce Investment Corporation?
Mr. BLAIR. I don't remember that. It was later changed to Union
Commerce Corporation, I believe.
Mr. PECORA. When was the Union Commerce Investment Corporation organized or incorporated?
Mr. BLAIR. The only way I have of guessing at that is by looking:
at the subpena, which says May 24, 1928, and I rather suspect that is
the date of organization. I have no records to show it.
Mr. PECORA. On May 17, 1928, according to the certificate of incorporation of the Union Commerce Investment Co.
Mr. BLAIR. That is probably correct.
Mr. PECORA. That was incorporated under the laws of the State
of Delaware, was it not?
Mr. BLAIR. Yes.
Mr. PECORA. I have
before me what purports to be a photostatie
copy of the certificate of incorporation of the Union Commerce Investment Co., and in the third paragraph thereof the nature of the
business or the object or purposes for which it was incorporated are
referred to as follows [reading] :
Third. The nature of the business or objects or purposes proposed to be
transacted, promoted, or carried on, a r e :
To subscribe for, purchase, acquire, invest in, hold for investment or otherwise, own, trade, and generally deal in, and to use, sell, assign, transfer, pledge,.
mortgage, exchange, or otherwise dispose of, stocks, bonds, and' other evidences of indebtedness of any corporation, domestic or foreign, public, quisipublic, or private, and to possess and exercise in respect thereof all rights,
powers, and privileges of individual owners or holders of such stock, including,
the right to vote thereon and to execute proxies therefor.
Senator COUZENS. Just what was the purpose of that? Pardon
me; I did not mean to interrupt.
Mr. PECORA. I have not finished. There is quite an enumeration
of powers, objects, and purposes. I might just as well complete
the record with respect thereto [reading] :
To do any and all things for the protection, improvement, and enhancement"
in value of such securities or evidences of indebtedness or of any thereof,, o r
designed to accomplish any such purposes, to issue in exchange therefor itsown stocks, bonds, or other obligations or securities, or otherwise pay therefor..
To aid by loan, subsidy, or in any other lawful manner whatsoever those
issuing, creating, or responsible for any such securities and to do any and'
all lawful acts and things designed to protect, preserve, improve,, or enhance
the value of the property or enterprise represented by such securities or evidences of indebtedness.
4776
STOCK EXCHANGE PEACTICES
To protect and assist, financially or otherwise, corporations, domestic or
foreign, public, quasi-public, or private, firms, syndicates, associations, individuals, and otherwise, and to the extent permitted by law to give any guarantee
in connection therewith for the payment of money or for the performance of
any other undertaking or obligation.
To manufacture, purchase, or otherwise acquire, own, mortgage, pledge, sell,
assign, transfer, or otherwise dispose of; to invest, trade, deal in, and deal
with goods, wares, and merchandise, and real and personal property of every
class and description.
To acquire and pay for cash, stock, or bonds of this corporation, or otherwise,
the goodwill, rights, assets, and property, and to undertake or assume the
whole or any part of the obligations or liabilities of any person, firm, association or corporation.
To issue bonds, debentures, or obligations of this corporation from time to
time for any of the objects or purposes of the crporation and to secure the
same by mortgage, pledge, deed of trust, or otherwise.
To purchase, hold, sell, and transfer the shares of its own capital stock,
provided it shall not use its funds or property for the purchase of its own
shares of capital stock when such use would cause any impairment of its
capital, and provided further that shares of its own capital stock belonging
to it shall not be voted upon directly or indirectly.
To have one or more offices to carry on all or any of its operations and business without restrictions or limit, as to amount, to purchase or otherwise
aqquire, hold, own, mortgage, sell, or otherwise dispose of, real and personal
property of every class and description, in any of the States, Districts, Territories, or possessions of the United States and any and all foreign countries,
subject to the laws of such State, District, territorial possession, or country.
In general, to carry on any other business in connection with the foregoing,
and to have and exercise all the powers conferred by the laws of Delaware
upon corporations formed under the act hereinafter referred to, and to do
any or all of the things hereinbefore set forth to the same extent as natural
persons might or could do.
The foregoing clauses shall be construed both as objeqts and powers; and
it is hereby expressly provided that the foregoing enumeration of specific
powers shall not be held to limit or restrict in any manner the powers of
this corporation.
Pretty broad.
Mr. BLAIR. We left it up to our lawyers to get for us a charter, and
I find usually that when we leave such matter to lawyers they take
care of us.
Mr. PECORA. YOU could do almost anything under this charter but
solemnize marriages or hold religious services ?
Mr. BLAIR. Yes, sir.
Senator COTTZENS. Who drew that, Mr. Blair %
Mr. BLAIR. That was drawn by Messrs. Warren,
Hill & Hamblen,
representing the National Bank of Commerce, and I think the firm
was then called, probably, Campbell, Buckley & Ledyard, attorneys
for the Union Trust Co.
Mr. PECORA. NOW, Mr. Blair, will you be good enough to tell this
committee why this corporation was incorporated under the laws
of the State of Delaware?
Mr, BLAIR. I don't think I can. I rather have an idea that it was
not thought that the Michigan corporation law authorized the formation of a corporation which could do what we wanted to do.
Mr. PECORA. What were the actual purposes which were effected by
the Union Commerce Investment Co. on and after its incorporation ?
I mean what business did it actually transact? What kind of business did it conduct ?
Mr. BLAIR. YOU mean the Union Commerce Corporation itself ?
Mr. PEOORA. Yes.
STOCK EXCHANGE PRACTICES
4777
Mr. BLAIR. It simply held the stocks of its subsidiary companies.
Mr. PECORA. What were its subsidiary companies ?
Mr. BLAIR. Originally the Union Trust Co., the Union Co. of
Detroit, and the National Bank of Commerce. Of course, the Union
Trust Co. owned all of the capital of the Union Title & Guaranty
Co. Some time later the stock of the Griswold First State Bank
was acquired.
Mr. PECORA. By this Union Commerce Investment Co. ?
Mr. BLAIR. Yes.
Mr. PECORA. Through an exchange of stock?
Mr. BLAIR. Yes.
Mr. PECORA. HOW
did this Union Commerce Investment Co.
acquire the Union Trust Co. ?
Mr. BLAIR. By an exchange of stock.
Mr. PECORA. And did it also acquire the Union Co. of Detroit iim
the same manner ?
Mr. BLAIR. Yes.
Mr. PECORA. Isn't
it a fact, Mr. Blair, that this Union Commerce
Investment Co., incorporated under the laws of the State of Delaware, was the beginning of the adoption of group banking in the
State of Michigan ?
Mr. BLAIR. I don't think any other company had been formed
prior to that time.
Mr. PECORA. Then would you say that it marked the origin of
group banking in the State of Michigan ?
Mr. BLAIR. Yes.
Mr. PECORA. And
it was essentially designed to effectuate that,,
wasn't it ?
Mr. BLAIR. It was so designed but at the time it was organized
its organizers had no intention of going outside of the city of Detroit
and Wayne Coiinty.
Mr. PECORA. It did eventually?
Mr. BLAIR. Yes, sir.
Senator COTJZENS. Will
you let him proceed with his other acquisitions outside of the Griswold ?
Mr. PECORA. Yes.
Mr. BLAIR. I don't
know, Senator, that I have anything to show
that [after referring to papers] : I find that on March 19, 1930,.
it owned the Union Trust Co. of Detroit, the Union Co. of Detroit,,
the National Bank of Commerce of Detroit. That can't be right,,
because the Union Commerce Corporation was out of business in
March 1930.
Mr. PECORA. It had merged in December 1929 ?
Mr. BLAIR. Yes.
Mr. PECORA. With the Guardian Detroit Co.,
MR. BLAIR. It merged in December 1929
had it not?
with the Guardian
Detroit Group.
Mr. PECORA. It merged in May 1929 with the Guardian Detroit
Co., Inc.
Mr. BLAIR. NO.
Mr. PECORA. Under
Inc.?
the title of the Guardian Detroit Union Groupv
4778
STOCK EXCHANGE PRACTICES
Mr. BLAIR. That was clone in either December of 1929 or 1930.
Mr. PECORA. December 16, 1929.
Mr. BLAIR. Yes.
Mr. PECORA. I t
was merged then with what was then known as
the Guardian Detroit Grouj), Inc.?
Mr. BLAIR. Yes; that is right.
Mr. PECORA. Under the name of the Guardian Detroit Union
Group, Inc.?
Mr. BLAIR. Yes.
Mr. PECORA. All
right. Now, prior to that merger or consolidation
what banks, trust companies, and other kinds of corporations had
been acquired by this holding company originally incorporated as the
Union Commerce Investment Co.?
Mr. BLAIR. Prior to that time it owned 49,475 shares of the Union
Trust Co. of Detroit and the same number of shares of the Union
Co. of Detroit. It owned 49,660 shares of the National Bank of
Commerce, 4,727 shares of Michigan Industrial Bank, 1,887 shares
-of the Union State Bank of Dearborn, 1,875 shares of the Bank of
Commerce of Dearborn, 390 shares of the Trenton State Bank, 910
.shares of the Jefferson Savings Bank, 5,963 shares of the Union
Joint Stock Land Bank, 7,676 shares of the Ohio-Pennsylvania Joint
Stock Land Bank, 56,264 shares of the City National Bank &
Trust Co. of Battle Creek, 100,000 shares of Keane, Higbie & Co.,
19,559 shares of the Union Industrial Bank of Flint, and 2,695.35
shares of the Union Industrial Trust Co. of Flint. It owned minority interests in the following banks
Mr. PECORA. Pardon me before you get to the minority interests
there. With regard to the banks or corporations that you have just
enumerated, do the holdings of stock that you have given us represent practically all of the capital stock of those various banks and
corporations with the exception of directors' qualifying shares?
Mr. BLAIR. In all cases except the City National Bank & Trust
Co. of Battle Creek. There was quite a strong minority interest in
that. We owned 56,264 shares, and there were 2,230 snares owned
by outsiders and 1,500 shares owned by directors.
Senator COUZENS. YOU did not mention the Griswold Co. When
was that acquired, the Griswold Bank?
Mr. BLAIR. The Griswold Bank was acquired in 1928 and had
been merged prior to this time with the National Bank of Commerce.
Senator COUZENS. It had gone out of business, disposed of its
charter ?
Mr. BLAIR. Yes.
Mr. PECORA. Who
conceived the idea of this holding company
called originally the Union Commerce Investment Co. ?
Mr. BLAIR. DO you mean, Mr. Pecora, who conceived the idea of
consolidating the interests of the stockholders, or who conceived the
idea of putting those interests in the form of a corporation?
Mr. PECORA. Yes; who conceived the idea of the creation or organization of a holding company to acquire through the stock ownership
the banks and other corporations that it subsequently did acquire?
Mr. BLAIR. Still I am not just sure what you want, whether you
want to distinguish as between a unification of stock and the holding
company idea.
STOCK EXCHANGE PRACTICES
4779
Mr. PECORA. I am confining myself for the time being to the
holding company idea, represented by the incorporation of the
Union Commerce Investment Co. in May 1928.
Mr. BLAIR. That was done by our counsel.
Mr. PECORA. Who conceived the idea of it? I t was effectuated,
as I understand, that is, the legal details were handled by counsel.
Who conceived the idea of such a holding company?
Mr. BLAIR. Of merging the interests of the two institutions? Is
that what your question is?
Mr. PECORA. NO. AS I understand it, shortly after the Union
Commerce Investment Co. was created it acquired various banks
and other corporations through the exchange of its stock for the
capital stock of such banks and other corporations; isn't that so ?
Mr. BLAIR. Yes.
Mr. PECORA. This
Union Commerce Investment Co. was organized
or designed eventually for that purpose, was it not?
Mr. BLAIR. Yes.
Mr. PECORA. Who conceived
Mr. BLAIR. A group of men
that idea?
who were directors of the trust company and the directors of the bank.
Mr. PECORA. Were you one of that group ?
Mr. BLAIR. Yes, sir.
Mr. PECORA. NOW, tell
us what advantages in the minds, or what
were the opinions of the members of that group, lay in the organization of this kind of a holding company ?
Mr. BLAIR. I can tell you what was in my mind as a trust company
man.
Mr. PECORA. All right, sir.
Mr. BLAIR. I will have to go back some time to show you how
the idea grew.
Mr. PECORA. All right. No doubt that will be interesting.
Mr. BLAIR. In 1913 when the new Federal Reserve Act was passed
a change was made in the National Bank Act permitting national
banks to do a trust business providing they should get the permission of the Federal Reserve Board. Sometime after that a
charter was granted to the First National Bank of Bay City to do
a trust business. The Union Trust Co. attacked that in the courts
and carried it to the United States Supreme Court. This authority
was given under what we call section 11 (k). The United States
Supreme Court upheld the right of a national bank to do a trust
business even in a State like Michigan where State banks were prohibited from doing a trust business, and trust companies were prohibited from doing a general banking business.
We then attempted, with the State banks, to get our State laws
so amended that we could meet on an equal competitive basis with
national banks. Quite a campaign was carried on, and in 1925 State
banks received certain limited trust powers, but the companion bill,
beaten in the State Senate or vetoed by the Governor, I have forgotten which.
Well, the Union Trust Co. and other trust companies in the State
of Michigan found themselves then in more difficulties than before
so far as competition was concerned, because they had as competitors
not only national banks, which could do a general banking business
4780
STOCK EXCHANGE PRACTICES
and take care of the many needs of customers, but also the State
banks. We went back to the legislature of 1927 and again asked
that trust companies be authorized to do a banking business. That
legislature gave State banks additional trust powers—well, they
were given full trust powers at that time, and the companion bill
was defeated.
We found ourselves then, as trust companies, in imminent danger
of having a great deal of our business taken away from us, and
Mr. PECORA (interposing). Now, in what year had that stage been
reached ?
Mr. BLAIR. In 1927.
Mr. PECORA. All right.
Mr. BLAIR. In the city
You may proceed.
of Detroit the National Bank of Commerce had received authority to do some trust business, but had
not taken many trusts. I think it was acting as trustee in some
cases. Along in June of 1927, that is, after the adjournment of the
State legislature, it so happened that Mr. John Russel, who was a
director both of the Union Trust Co. and of the National Bank of
Commerce, Mr. Harry Sanger, who was vice president of the National Bank of Commerce, and myself, went to Europe together.
I do not know how it came up, but during that trip we three decided
that it would be greatly to the advantage of the stockholders of both
the bank and the trust company if an affiliation could be brought
about in such a way that the stockholders could receive the benefit
of our being able to give to customers full financial service.
When we came back to the United States
Mr. PECORA (interposing). By "full financial service" do you
mean doing a general banking business and a trust company business as well?
Mr. BLAIR. AS well as a savings business; yes, sir.
Mr. PECORA. All right.
Mr. BLAIR. When we came back Mr. Russel, particularly, became
quite active in that direction, and approached Mr. Joy, who was
president of the National Bank of Commerce, and other directors
both of the bank and of the trust company. Eventually, in Octobery
this arrangement, or this agreement [pointing to a paper] was
signed by Mr. Joy and myself, and
Mr. PECORA (interposing). That is, the agreement that brought
about the affiliation between the Trust Co. and the National Bank
of Commerce?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Well, then,
that was followed in the following
spring, that is to say, in May of 1928, by the incorporation of the
Union Commerce Investment Co.?
Mr. BLAIR. Yes,
sir.
Mr. PECORA. NOW, would you say that you, Mr. Sanger, and Mr.
Russel originated, among the three of you on this European trip,
the idea of a holding company signalizing the advent of group
banking in Michigan?
Mr. BLAIR. NO, because we did not have a holding company in
mind at that time. We had in mind the unification of stock, the
printing of certificates of stock of
Mr. PECORA (interposing). Representing a proportionate interest
in the affiliated companies or banks; is that right ?
STOCK EXCHANGE PEACTICES
Mr. BLAIR. Yes,
4781
sir.
Mr. PECORA. That was the so-called " unified trust plan", or
unified stock plan, was it?
Mr. BLAIR. Yes. And that had been in operation in Michigan
for several years.
Mr. PECORA. Who were the trustees who held the unified stock, or
wasn't it put in the names of trustees?
Mr. BLAIR. NO.
Mr. PECORA. Well, was that plan actually consummated?
Mr. BLAIR. DO you mean for a unification?
Mr. PECORA. Yes.
Mr. BLAIR. NO. A S I tried
Mr. PECORA (interposing). Well, tell us what took place, then.
Mr. BLAIR. AS I tried to explain earlier, we put the matter up
to
our lawyers, and they saw obstacles in the way. I don't know what
those obstacles were, but they proposed the organization of a corporation holding the shares, rather than to have unified stock certificates
issued.
Mr. PECORA. DO you recall who those lawyers were ?
Mr. BLAIR. Well, it was the members of those two firms whose
names I gave earlier, Warren, Hill & Hamblin and Campbell, Bulkley
& Ledyard.
The CHAIRMAN. Was there any voting trust connected with that
plan?
Mr. BLAIR. NO.
Mr. PECORA. Was that how this holding company was born?
Mr. BLAIR. That is the way.
Senator COUZENS. When you came to an exchange of shares
for
this holding-company stock, were there any stockholders in the
original banks or trust companies who declined to exchange their
stock for holding-company stock ?
Mr. BLAIR. NO ; I think not. I think there was some delay, but I
don't think—well, I am sure that there were none.
Senator COTJZENS. Everybody was willing to exchange bank and
trust company stock foi* holding-company stock?
Mr. BLAIR. Yes.
Mr. PECORA. NOW,
Mr. Blair, do you recall what the original
capital structure was of the Union Commerce Investment Co. ?
Mr. BLAIR. I do not.
Mr. PECORA. According
to the photostatic copy I have of the certificate of incorporation of the Union Commerce Investment Co., the
authorized capital stock is referred to in paragraph 4 of such articles,
reading as follows :
4. The amount of total authorized capital stock of this corporation is 5 million
dollars, divided into 50,000 shares of the par value of $100 each.
Is that according to your recollection?
Mr. BLAIR. I think that is probably true, because the capital of each
of the institutions entering the original company was 2y2 million
dollars.
Mr. PECORA. And according to paragraph 5 of these articles of incorporation of the Union Commerce Investment Co., the provision
was as follows:
The amount of capital with which this corporation will commence business
business is $242,400 and upwards.
4782
STOCK EXCHANGE PRACTICES
Do you recall that?
Mr. BLAIR. I do not remember that part of it. I cannot imagine
why that amount should be put in.
Mr. PECORA. NOW, the incorporators, or rather the original subscribers, to the capital stock of the Union Commerce Investment Co.,
are named in paragraph 6 of the articles of incorporation, to be as
follows, together with the number of shares subscribed by them
respectively:
Frank W. Blair, 740 shares; Richard P. Joy, 718 shares; Charles B. Warren,
508 shares; Joel H. Prescott, 80 shares; Harry C. Bulkley, 90 shares; H. H.
Sanger, 288 shares.
Mr. BLAIR. Yes; I imagine that is the amount of stock that each of
us owned in our institutions, less qualifying shares.
Mr. PECORA. And this investment holding company was to have
a perpetual existence under the terms of its charter, do you recall
that?
Mr. BLAIR. I don't remember that.
Mr. PEOORA. Well, that appears from paragraph 7 of the articles
of incorporation, reading as follows:
7. This corporation is to have a perpetual existence.
Now, do you recall the following provision of the articles of incorporation of this Union Commerce Investment Co.:
8. Private property of the stockholders shall not be subject to the payment
of corporate debts, except that the holder of each share of the stock of this
corporation shall be individually and severally liable for such stockholders'
ratable and proportionate part (determined on the basis of their respective
holdings of the total issued and outstanding stock of this corporation) of any
statutory liability which may be determined, imposed upon, or assessed against,
this corporation.
(a) By reason of its ownership of any stock in any bank now or hereafter
organized and existing under the National Bank Act of the United States of
America, and any amendment thereto, and/or under any present or future law
or laws of the United States of America governing and controlling the organization and regulation of capitalized national banks.
(&) By reason of its ownership of any stock in any trust company now or
hereafter organized and existing under the Trust, Deposit, and Security Companies Act of the State of Michigan, and any amendment thereto, and/or under
any present or future law or laws of the State of Michigan governing and controlling the organization and regulation of trust companies.
(c) By reason of its ownership of any stock in any bank now or hereafter
organized and existing under the law of the State of Michigan authorizing the
business of banking and to establish a banking department for the supervision
of such business and any amendment thereto, and/or under any present or
future law or laws of the State of Michigan governing and controlling the
organization and regulation of banks.
Do you recall that provision?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Was any
reference to this pro'vision made upon the
certificates of stock of this investment or holding company ?
Mr. BLAIR. I believe so; yes.
Mr. PECORA. NOW, do you recall a company known as the new
Union Building Co.?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Did the
Union Trust Co. have anything to do with
this new Union Building Co. ?
Mr. BLAIR. I t originally owned its capital.
STOCK EXCHANGE PRACTICES
4783
Mr. PECORA. Did it cause that new Union Building Co. to be
incorporated ?
Mr. BLAIR. Yes.
Mr. PECORA. DO you remember when it was
Mr. BLAIR. I do not.
Mr. PECORA. I understand that it was on or
Mr. BLAIR. That is probably so.
Mr. PECORA. And it was incorporated under
incorporated?
about June 1, 1927.
the laws of the State
of Michigan ?
Mr. BLAIR. I think so.
Mr. PECORA. NOW, Mr. Blair, what were the purposes for which
the New Union Building Co. was formed at the instance or by the
Union Trust Co in 1927?
Mr. BLAIR. The building occupied by the trust company prior ta
that time had become entirely inadequate for its needs, and it was
renting another building to take care of some of its departments,
making it very hard to do business. Some time, I should say, after
that corporation—or I should say in 1925, or perhaps 2 years
before
Mr. PECORA (interposing). In 1927 that was.
Mr. BLAIR. I meant in 1927, and perhaps 2 years before that I
asked the board of directors of the trust company to appoint a building committee, or a committee which should look into the matter of
housing the trust company. That committee, of which- Mr, Warren
was chairman, made quite an extensive investigation, and finally
recommended that the trust company acquire a part of the block
of land immediately south of the old trust company building. That
property was acquired with the thought in mind of constructing OB
it a new building.
Mr. PECORA. And such new building was eventually erected on that
block?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Was that building known as the Aztec Tower?
Mr. BLAIR. Not officially; no.
Mr. PECORA. Well, is it commonly known as the Aztec Tower?
Mr. BLAIR. I think it is commonly known as the Union Guardian
Building. But I think there is a restaurant in the tower which called
itself the Aztec Tower Restaurant. However, I do not think anybody around Detroit called the building the Aztec Tower Building.
Mr. PECORA. This New Union Building Co., in other words, was
virtually organized for the purpose of enabling the Union Trust
Co. to acquire real estate and to construct upon it a building for
its home?
Mr. BLAIR. Yes.
Mr. PECORA. NOW,
what did that investment cost, I mean the investment in land and building?
Mr. BLAIR. Eventually, do you mean?
Mr. PECORA. Yes.
Mr. BLAIR. Including
the equipment my remembrance is somewhere between 11 and 12 million dollars.
Mr. PECORA. HOW did it raise the money with which to acquire
that plot of ground and erect the building thereon ?
4784
STOCK EXCHANGE PRACTICES
Mr. BLAIR. A first mortgage to the Metropolitan Trust Co. of
$5,000,000, second-mortgage bonds, which were offered to the stockholders of the trust company, of $2,000,000, and
Mr. PECORA (interposing). Were they taken by the stockholders?
Mr. BLAIR. Practically all of them were.
Mr. PECORA. All right.
Mr. BLAIR. And the capital, which was originally $2,000,000 but
afterwards increased to $5,000,000, owned by the trust company
itself.
Mr. PECORA. That increase of capital was necessary in order to
meet the increased cost of the building, wasn't it ?
Mr. BLAIR. Yes, and some changes were made after the building
was started.
Senator COTJZENS. For that $5,000,000 of stock, was the money
taken out of the trust company?
Mr. BLAIR. It was furnished by the stockholders of the trust
company; yes.
Mr. DECORA. It was not taken out of the funds of the trust
company, was it?
Mr. BLAIR. Oh, no. But the trust company stockholders increased
their holdings—well, it was a part of this $7,500,000—no, let me
see, three times—yes, it was a part of the $7,500,000 subscribed by
stockholders in 1929.
Senator COTJZENS. I understood you to say the building was owned
by the trust company. It was really owned by the stockholders, then,
wasn't it?
Mr. BLAIR. NO ; it was owned by the trust company as a corporation. That is, the trust company owned all of the stock of the
building company.
Mr. PECORA. Of the New Union Building Co. ?
Mr. BLAIR. Yes, sir.
Senator COTJZENS. But
the stock was subscribed for separately by
each stockholder in order to augment the stock of the trust company?
Mr. BLAIR. Not just the way that sounds.
Mr. PECORA. It was through the issuance and sale of second mortgage bonds in part?
Mr. BLAIR. NO.
The CHAIRMAN.
It was stock in the trust company, and the proceeds of that stock went into this building.
Mr. BLAIR. The increased capital of the trust company was used
partly to carry this stock of the building company.
Senator COTTZENS. What portion of that which it did not carry
was carried by others ? In other words, did the trust company carry
the stock in the amount of the excess of what you were able to
raise ?
Mr. BLAIR. We raised all of it.
Senator COTJZENS. By additional sales of stock to your stockholders ?
Mr. BLAIR. Yes.
Senator COUZENS.
Mr. BLAIR. Yes.
Mr. PECORA. But
All of it ?
the stockholders of the trust company purchased the $2,000,000 of second-mortgage bonds ?
STOCK EXCHANGE PRACTICES
Mr. BLAIR. Yes.
Mr. PECORA. That were issued
Mr. BLAIR. Yes.
Mr. PECORA. I see. Now, Mr.
4785
by the new Union Building Co.?
Blair, you have already referred
to the fact, in passing, that on or about December 16, 1929, there
was a merger or consolidation, whichever you are pleased to call it.
of the Union Commerce Investment Co. and the Guardian Detroit
Co. Inc.?
Mr. BLAIR. The Guardian Detroit group. The Guardian Detroit
Co. was a separate corporation.
Mr. PECORA. The Guardian Detroit Group, Inc., was a holding
company generally similar in scope and purposes and formation ta
the Union Commerce Investment Co., was it not?
Mr. BLAIR. Yes, except that it was a Michigan corporation, the
Michigan law having been changed, as I understand, early in 1929.
Mr. PECORA. TO make it feasible and practicable and legal under
the laws of Michigan for the incorporation of a company such as
the Union Commercial Investment Co. ?
Mr. BLAIR. Yes.
Mr. PECORA. NOW, the record here already shows that the Guardian Detroit Group, Inc., was incorporated in May of 1929 under
the laws of the State of Michigan, and that the Union Commerce
Investment Co. was incorporated in 1928 under the laws of Delaware. Now, who initiated the proceedings or negotiations that resulted in the consolidation in December of 1929 of these two holding
companies under the name and title of the Guardian Detroit Union
Group, Inc.?
Mr. BLAIR. DO you mean, who did the talking?
Mr. PECORA. Well, who initiated the proposition which resulted'
in the consolidation of the two companies?
Mr. BLAIR. AS I remember it, the first suggestion which came to
me was from Mr. Lord.
Mr. PECORA. Mr. Lord was then the president of the Guardian
Detroit Group, Inc., was he not?
Mr. BLAIR. Yes.
Mr. PECORA. HOW
long prior to the effecting of the consolidation
on December 16, 1929, was the proposition for such consolidation
first submitted, proposed, or advanced?
Mr. BLAIR. Well, my memory may be a little bit faulty on that ?
but as I remember we had some talks about it in the early summer,
but those talks came to nothing. Then along about midsummer the
subject came up again, and we didn't get anywhere; but finally,
along some time in the middle or latter part of September, we earne
to an agreement. I remember quite well that the agreement was
reached at a meeting held at my house out in the country.
Senator COUZENS. Were you the chief negotiator for your groups
and was Mr. Lord the chief negotiator for his group ?
Mr. BLAIR. Yes.
Mr. PECORA. Well,
the proposition must have originated, theny
very, very, shortly after the birth of the Guardian Detroit Groupy
Inc., which took place in May of 1929.
Mr. BLAIR. AS we look back it would seem that it did r but: the
way things were going then I suppose we thought it was a. long
time afterward.
4786
STOCK EXCHANGE PRACTICES*
Mr. PECORA. On what terms was the consolidation effected ?
Mr. BLAIR. On a share-for-share basis after the Guardian Detroit
Group stockholders received a 20 percent dividend,
Mr. PECORA. NOW, before this consolidation was effected had there
been any competition between those two groups or holding companies, known respectively as the Guardian Detroit Group, Inc.,
and the Union Commerce Investment Co., in the matter of acquiring, through purchase of capital stock, bank units in the State of
Michigan ?
Mr. BLAIR. Only in one case.
Mr. PECORA. In which case was that?
Mr. BLAIR. At Flint.
Mr. PECORA. In the case of the Flint bank?
Mr. BLAIR. Yes; and I don't know that that was serious competition at all.
Mr. PECORA. What were the advantages that were claimed for
the consolidation of those two holding companies?
Mr. BLAIR. Well, I think we felt that there could be quite a saving through the merging of the two trust companies in Detroit and
the two commercial banks, and also of the two investment houses.
Mr. PECORA. What were those two investment houses?
Mr. BLAIR. The Guardian Detroit Co. and Keane, Higbie & Co.
Mr. PECORA. Keane, Higbie & Co. had been acquired by your
original holding company?
Mr. BLAIR. Yes,
sir.
Mr. PECORA. Namely, the Union Commerce Investment Co. ?
Mr. BLAIR. Yes.
Mr. PECORA. When was that done ?
Mr. BLAIR. About the 1st of September.
Mr. PECORA. Of 1929?
Mr. BLAIR. Of 1929; yes.
Mr. PECORA. NOW, what was the business
of Keane, Higbie & Co.
at that time?
Mr. BLAIR. Keane, Higbie & Co. have been referred to in these
hearings two or three times as a brokerage house. That is not a
proper designation of that firm. It had some brokerage business,
but by far the larger part of its business was investment banking.
Senator COUZENS. The buying and selling of securities?
Mr. BLAIR. The buying and selling of securities, yes.
Senator COUZENS. They held considerable securities in their portfolio, didn't they?
Mr. BLAIR. Yes. But most investment houses did, of course.
Mr. PECORA. NOW, Mr. Blair, you took an active part, didn't you,
in the negotiations that led to the acquisition of Keane, Higbie &
Co., Inc., by the Union Commerce Corporation?
Mr. BLAIR. I
Mr. PECORA.
did.
What advantages did you see in your corporation
acquiring Keane, Higbie & Co. at that time ?
Mr. BLAIR. May I read a statement I have prepared? I rather
expected I would be asked that very question; and then I will be
very glad to answer any questions.
Mr, PECORA. Well, have you a copy of that statement ?
STOCK EXCHANGE PRACTICES
4787
Mr. BLAIR. I will give this to you.
Mr. PECORA. I mean, if you could let me have a copy so that I
might follow you through.
Mr. BLAIR. I am not sure that I have a copy. I will look. [After
looking through his papers]. I do not seem to have another copy,
Mr. Pecora.
Mr. PECORA. I will be with you in just a moment.
Senator COUZENS. When was the Guardian Trust Co. organized,
Mr. Blair?
Mr. BLAIR. I think in the year 1925.
Senator COUZENS. That belonged to your group at the time of the
consolidation now under discussion, the Guardian Trust Co.?
Mr. BLAIR. N O ; it belonged to the Guardian Detroit Group, not
to our group.
Senator COUZENS. Oh, the Union belonged to your group?
Mr. BLAIR. Yes.
Senator COUZENS.
Who organized the Guardian Trust Co.? That
was organized after I left, and I do not recall it.
Mr. BLAIR. Well, I would not dare to say who did that. I remember that Fred Murphy and Harry Bodman were among the men
associated with it in early days, but I would not attempt to say who
were responsible for its formation.
The CHAIRMAN. Did this combination have the effect of reducing
overhead and saving expense?
Mr. BLAIR. Yes.
Senator COUZENS.
Why did you resign as the head of the Union
Trust Co.?
Mr. BLAIR. Well, in the fall of 1931 I found my own financial
position, because of endorsements I had made, to be such as to give
me a good deal of worry, and I did not think that it was proper for
me to continue.
Senator COUZENS. And your resignation from the
Mr. BLAIR. I did not resign, Senator; I was retired.
Senator COUZENS. Voluntarily?
Mr. BLAIR. Yes; I asked to be retired.
Senator COUZENS. That was the time that Mr. Bodman succeeded
you?
Mr. BLAIR. Yes.
Mr. PECORA. Will
you let me look at the statement that you had
prepared in order to enable you to answer questions concerning the
acquisition of Keane, Higbie & Co., by the Union Commerce Co.?
Mr. BLAIR. Certainly [handing a paper to Mr. Pecora].
Mr. PECORA. YOU say you have not a copy of this statement?
Mr. BLAIR. I thought I had, Mr. Pecora, but I have not here.
Mr. PECORA. May I ask you who prepared it ?
Mr. BLAIR. I did.
Mr. PECORA. Without any assistance from anyone else?
Mr. BLAIR. Without any assistance.
Senator COUZENS. When did you prepare it ?
Mr. BLAIR. Oh, I suppose
Senator COUZENS. At the beginning of these hearings ?
Mr. BLAIR. It was after two gentlemen representing Mr.
called on me at my office in Detroit.
Pecora
4788
STOCK EXCHANGE PRACTICES
Mr. PECORA. Prior to the commencement of these hearings and
after you had learned that this committee was going to inquire into
the Detroit banking situation?
Mr. BLAIR. Yes, sir; and these gentlemen asked me about Keane,
Higbie & Co., and I said that deal was carried on entirely between
Mr. Higbie and myself as far as the preliminary negotiations were
concerned; and then I thought it well to bring my thoughts together on it and try to get them marshaled.
Mr. PECORA. Unless you have any reason to object to it, I would
like to read this statement of yours into the record.
Mr. BLAIR. I have no objection whatever.
Mr. PECORA. And I will assure you that I will read every word
of it just as it appears.
Mr. BLAIR. I have no objection.
Mr. PECORA. The only reason I propose doing that is that I will
be able to have it before me in black and white as I read it, and can
make notations for subsequent questions.
Mr. BLAIR. That is alright.
Mr. PECORA. The statement presented by the witness reads as
follows [reading] :
Because a more thorough understanding may be had of each deal, by treating the two together, I propose, with your permission to so treat, the Goldman,
Sachs and Keane, Higbie transactions.
I want to explain at the outset that I have no records or correspondence
relative to either deal except some rough memorandums and must rely largely
on memory. In general, the facts, as I remember them, are that some time
during the midsummer of 1929, probably in July, word came to me through
Mr. Covington, one of the vice presidents of the National Bank of Commerce,
that he had been approached by a gentleman representing a large New York
banking house with the suggestion that that house, or some allied interest,
would be interested in making a purchase of a good-sized block of Union Commerce Corporation stock. It was represented that the house referred to was in
position to influence a considerable volume of deposits in our direction if it
should acquire a stock interest in the Union Commerce Corporation, and the
oames of a number of large corporations were mentioned. Through Mr. Covington, an interview was arranged and the suggestion was discussed more in
detail between Mr. Covington, the other gentleman (who proved to be Clarence
M. Bitting), and myself. At this interview it developed that
the New York
firm to which Mr. Covington referred was Goldman, Sachs1 and Co. At the
conclusion of this interview, a meeting in the office of Goldman, Sachs in
New York was arranged for. Some days later such a meeting was held at
which there were present Messrs. C'atchings and Wineberg representing Goldman, Sachs & Co., and Messrs. Sanger, Covington and myself representing the
Union Commerce Corporation. This conference lasted throughout most of
1 day and at its conclusion we who represented the Union Commerce Corporation received a definite offer from the Goldman, Sachs Trading Corporation
of $120 per share for 30,000' shares of Union Commerce stock. The bid price
of the stock, which was inactive on the Detroit Stock Exchange, was on that
day, as I remember it, about $110 per share.
Mr. Sanger and I were staying at the Biltmore Hotel and while eating
breakfast there the next morning with Harry Finkenstaedt, a vice president
of the bank, saw Carl M. Higbie, president of Keane, Higbie & Co., and a
director of the Union Commerce Corporation and of the National Bank of
Commerce, come into the dining room. We called him and he sat with us.
During breakfast we told him of the Goldman, Sachs offer and asked him
to think it over and give us some advice regarding it when he returned to
Detroit. I gained the impression he thought well of the connection and the
offer.
Just as we left the table Mr. Higbie said to me in a jocular way:
"Why don't you buy Keane, Higbie & Co.?" To which I replied:
" Give us a chance. Come and see me "
STOCK EXCHANGE PRACTICES
4789
Mr. Sanger, Mr. Oovington, and I returned to Detroit and discussed the
Goldman, Sachs offer with several associates and then submitted it to the
board of directors of the Union Commerce Corporation, by whom it was
approved, subject, of course, to stockholders waiving their rights to subscribe
to the increased capital which would have to be provided for. Following this,
the market for Union Commerce stock, which had been rather dormant, became
quite active and the stock was bid up to something more than $120 per share.
Meantime, Mr. Higbie returned to Detroit and came to see me. After some
verbal sparring he came out with the suggestion that Keane, Higbie & Co.
might be a valuable addition to the Union Commerce Corporation as an
affiliate which would be able to contribute trusteeships from the companies they
financed, bank accounts from industries with which they were in close relationship, and lastly as one which would contribute very substantial earning
power under conditions as they then prevailed. As I remember, we had two
interviews before I told Mr. Higbie that if he wished to submit a proposal I
would take it up with our people and that I was sure it would be considered
on its merits.
We then went into the matter of book values and earnings. As I remember,
the book value of Union Commercial stock was about $52 and that of Keane,
Higbie & Co. about $64 or $65 per share. During the first 6 months of the
year 1929 the Union Commerce Corporation had earned about $2.50 and Keane,
Higbie & Co. about $17 per share. There was a good deal of discussion, and
finally Mr. Higbie proposed a trade on the basis of share for share, i.e., 100,000
shares of Union Commerce stock to be given to the shareholders of Keane,
Higbie & Co. for all of the stock of that company, no cash to be involved in
the transaction.
I told Mr. Higbie I would recommend the deal if the stockholders of Keane,
Higbie & Co. would sell, out of the Union Commerce Corporation stock going
to them, 30,000 shares to the Goldman, Sachs Trading Corporation to fulfill
the terms of our tentative contract. He agreed to this and subsequently, after
interviewing many of the members individually and getting universally favorable reactions, I submitted the matter to the board of directors of the Union
Commerce Corporation, which in turn submitted it to the stockholders. The
latter approved the transaction by waiving their rights to subscribe to the
increase of capital necessary to put it through.
During the time which elapsed between the origination of negotiations and
the public announcement of their completion, the news leaked out and the
public's reception of it was indicated by the avidity with which it pushed the
market price of Union Commerce Corporation stock up day after day until
at the time the transaction was completed, the bid price of stock was $240
or $250 a share.
During the conversations which were had prior to the arrangement whereby
the Union Commerce Corporation and the Guardian Group were consolidated
it developed that inasmuch as the Guardian Detroit Co. had a large investment banking business which extended throughout the United States and had
developed certain affiliations with a number of strong New York investment
banking houses, its officers felt that a definite affiliation with a single New
York house, Goldman, Sachs Co. would be distinctly disadvantageous to the
Guardian Detroit Co. They felt that the ownership of such a large block of
stock by Goldman, Sachs would be looked upon as giving the latter a preferred position as against other New York houses even though it did not in
fact do so.
In the merger, therefore, it was made a condition that the effort should be
made to reacquire the stock owned by the Goldman, Sachs Trading Corporation for distribution to Detroit and Michigan people.
Mr. Higbie consented to negotiate • with the Goldman, Sachs people, and I
believe made a trip to New York for that purpose. What took place at the
interview I do not know except as reported by Mr. Higbie.
Inasmuch as he is to give testimony at this hearing, I would rather he
would speak for himself.
Some days after Mr. Higbie told me of his trip to New York I was called
on the long-distance phone from New York by Mr. Covington, who said he
had had an interview with Mr. Wineberg. I told Covington I would rather
he should talk with Mr. Higbie and called the latter to my office. We then
called Covington, who told us he had induced Wineberg to agree to sell
175541—34—PT 10
14
4790
STOCK EXCHANGE PRACTICES
25,000 shares of the stock at $184 per share but that Wineberg wanted to keep
the other 5,000 for investment.
I have no accurate remembrance of the manner in which the repurchase
was accomplished but I am sure the records of Keane, Higbie & Co. and
for the Guardian Detroit) Go. will show.
That is the end of the statement; and I will offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The statement referred to, prepared by the witness, and read
into the record by Mr. Pecora as appears above, was received in
evidence as " Committee Exhibit No. 80, January 16, 1934.")
Mr. PECORA. When did the acquisition of Keane, Higbie & Co.
by the Union Commerce Corporation take place?
Mr. BLAIR. I have sort of a rough memorandum here which
indicates that it was put up to the board of directors of the Union
Commerce Corporation on the 3d of September; I am not sure.
Mr. PECORA. Of 1929?
Mr. BLAIR. Yes.
Mr. PECORA. And it was approved
Mr. BLAIR. Yes.
Mr. PECORA. And the acquisition
by the board ?
took place later that month, or
some time later?
Mr. BLAIR. Some time later.
Mr. PECORA. In order to effect that acquisition it was found necessary to increase the outstanding capital stock of the Union Commerce Corporation, was it not?
Mr. BLAIR. Yes, sir.
Mr. PECORA. And such
an increase was effected to the extent of and
by the issuance of 121,500 new shares ?
Mr. BLAIR. I do not remember the amount. One hundred thousand, of course, was the amount which was received by Keane,
Higbie & Co.
Mr. PECORA. One hundred thousand of those new shares were
issued to the stockholders of Keane, Higbie & Co. for all of the
capital stock of Keane, Higbie & Co., which also amounted to
100,000 shares?
Mr. BLAIR. Yes.
Mr. PECORA. The
par value of the Union Commerce Corporation
stock was
Mr. BLAIR. At that time it was $20; and Keane & Higbie was $10.
Mr. PECORA. And the par value of the Keane, Higbie & Co. stock
was $10?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Can you recall
any other facts or circumstances involving the acquisition of Keane, Higbie & Co. by Union Commerce
Corporation than those set forth in your prepared statement which
has been received in evidence as " Committee's Exhibit No. 80 " ?
Mr. BLAIR. I cannot, except that I have here, as I said, a rough
memorandum, which apparently was made at the time, of the profits
of Keane, Higbie & Co. for the first 6 months of 1929.
Mr. PECORA. I show you what purports to be a photostatic copy of
a letter bearing your signature as president of the Union Commerce
Corporation, addressed to the stockholders of the Union Commerce
Corporation, dated Detroit, Mich., August 21, 1929. Will you look
at it and tell me if you recognize it to be a true and correct copy
STOCK EXCHANGE PRACTICES
4791
of such a letter which you as president of the Union Commerce Corporation at that time caused to be addressed to the stockholders of
that corporation?
Mr. BLAIR. I do not remember it, but I have no doubt of it.
Mr. PECORA. YOU recognize the signature of Frank W. Blair as
being your signature?
Mr. BLAIR. Yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted
and entered on the record.
(Photostatic copy of letter dated Aug. 21, 1929, from Frank W.
Blair to the stockholders of the Union Commerce Corporation was
received in evidence, marked " Committee's Exhibit No. 81, January 16, 1934.")
Mr. PECORA. The letter written on the letterhead of the Union
Commerce Corporation, received in evidence as " Committee's Exhibit No. 81 ", reads as follows [reading] :
To accomplish the above and also to make provision for taking over other
institutions from time to time, if such course may seem desirable, the authorized capital stock of the company should be substantially increased.
Your company has also made tentative arrangements to take over the following banks on bases of exchange which are bslieved to be advantageous for
us in each case, namely, the Union Joint Stock Land Bank of Detroit, Union
State Bank of Dearborn, Bank of Commerce of Dearborn, Trenton State Bank
of Trenton and Jefferson Savings Bank of Grosse Pointe Park. To make these
transactions possible and others of a similar character, it is necessary that
your Board of Directors should have authority to make exchanges from our
unissued capital for the stock of the institution to be acquired without first
securing waivers from our stockholders. We are accordingly asking the stockholders to confer upon ^fche Board of Directors authority for so issuing stock in
the case of the acquisition of banks and trust companies, but in the case of
other corporations only with the approval of a majority of the stockholders.
A notice of the special meeting of the stockholders to be held September
10th for the purpose of taking the necessary corporate action is herewith
enclosed in proper legal form. We also enclose a form of proxy and waiver,
which latter, it it meets with your approval, should be promptly executed and
returned in the enclosed stamped envelope. Your prompt attention will be
personally appreciated by the undersigned.
FRANK W. BLAIR, President.
COMMITTEE EXHIBIT NO. 81
UNION COMMERCE CORPORATION,
Detroit, Mich., August 21, 1929.
To the Stockholders of the Union Commerce Corporation:
With no small pleasure and gratification, we beg to lay before you certain
plans, which we believe will add greatly to the growth and prosperity of your
company.
A financial group such as ours to be thoroughly rounded out must be equipped
to hand 7 e stock issues and underwritings. To this end we have made arrangements for the affiliation with our company of Keane, Higbee & Company, one of
the foremost financial houses in this section of the country, by the exchange of
stock of that company for stock of the Union Commerce Corporation on a
share for share basis. Both from the standpoint of book value and earning
power, this exchange is presently advantageous to the Union Commerce Corporation and its potential advantages for the future are very apparent. The
immediate response of our stock in the market to the rumors and final announcement of this prospective affiliation are sufficient indication as to how it is
regarded in financial circles.
In order to have stock available to make this exchange, it is desired that the
stockholders of the Union Commerce Corporation waive their subscription rights
thereto. The officers of the constituent companies have agreed to do so as have
also the directors insofar as the latter have been seen. There is no doubt
in my mind that they will all waive.
4792
STOCK EXCHANGE PEACTICES
Mr. PECORA. I show you what purports to be a photostatic copy of
a letter referred to in committee's Exhibit No. 81 as the accompanying
or enclosed letter. Will you look at it and tell me if you recognize
it to be a true and correct copy of such an enclosure which accompanied the letter marked in evidence as " Committee's Exhibit No.
81?"
Mr. BLAIR. I do not remember it, but I think it is correct; I have no
doubt about it whatever.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Photostatic copy of letter dated August 21, 1929, on letterhead of
Union Commerce Corporation, signed by John N. Stalker, Secretary,
and addressed to the stockholders of the Union Commerce Corporation, was received in evidence, marked " Committee Exhibit No. 82,
January 16, 1934.")
Mr. PECORA. The letter received in evidence as " Committee's Exhibit No. 82 " is written on the letterhead of the Union Commerce
Corporation, and reads as follows—it seems to be a printed copy
[reading] :
COMMITTEE EXHIBIT NO. 82
UNION COMMERCE CORPORATION
DETROIT, MICH., August 21,
1929.
To the stockholders of the Union Commerce Corporation:
By order of the Board of Directors of this corporation, a special meeting of
the stockholders of the Union Commerce Corporation will be held in the Directors' Room of the Union Trust Company, on the Sixth Floor of the Union
Trust Building, Detroit, Michigan, on the 10th day of September, 1929, at oneo'clock p.m., Eastern Standard Time, on said day.
This meeting is called for the following purposes:
(1) To consider and act upon recommendation of the Board of Directors of"
this corporation to amend the corporation's Certificate of Incorporation by
striking out all of Article Fourth thereof and inserting in lieu thereof a new
Article Fourth to be and to read as follows:
" Fourth: The amount of the total authorized Capita} Stock of this corporation is Twenty-Five Million Dollars ($25,000,000.00), divided into One Million
Two Hundred Fifty Thousand (1,250,000) shares of the par value of Twenty
Dollars ($20.00) each.
" No stockholder of this corporation shall have any preemptive or preferential right of subscription to any share of any stock of this corporation or to
any obligations convertible into stock of this corporation, except as herein provided, and this corporation reserves, and shall have the right from time to
time, upon the affirmative vote of a majority of all 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 stock so to be issued and
disposed of. This corporation further reserves and shall have the right, from
time to time, if recommended by the affirmative vote of a majority of all of
its Directors, upon the affirmative vote of a majority in amount of its stockholders, to issue and dispose of all or any part of its unissued or increased
stock for the purpose of acquiring the capital stock of corporations other than
banks or trust companies without offering to the stockholders of this corporation for subscription any of the stock so to be issued and disposed of."
and to call in all outstanding certificates of stock for cancellation and to issue
and deliver to the holders thereof new certificates of stock containing statement of the revised aapitalization of the corporation and other endorsements
defining the stockholders' rights.
(2) To present to the stockholders of this corporation for ratification and
approval, the matter of the acquisition, by this corporation, of the capital
stock of Keane, Higbie & Company of Detroit, Michigan, from its stockholders,.
STOCK EXCHANGE PRACTICES
4793
or at least seventy-five percent (75%) of said capital stock, by the exchange of
one share of the capital stock of this corporation, having a par value of Twenty
Dollars ($20.00) for one share of the capital stock of Keane, Higbie & Company,
having a par value of Ten Dollars ($10.00) and to secure the waiver by the
stockholders of this corporation of the special right to subscribe for the stock
of this corporation required in effecting such exchange.
If you are unable to be present in person, will you please promptly sign and
return the enclosed proxy and waiver.
Yours respectfully,
JOHN N. STALKER, Secretary.
Now, on September 10,1929, the stockholders, at the meeting called
for and referred to in this letter, approved the acquisition of the
Keane, Higbie & Co. stock on a share-for-share exchange basis?
Mr. BLAIR. I believe they did.
Mr. PECQRA. And that exchange was thereupon effected ?
Mr. BLAIR. Yes.
Mr. PECORA. Who
were the stockholders of Keane, Higbie & Co.
at that time ?
Mr. BLAIR. I do not think I can say.
Mr. PECORA. DO you recall the names of any of the largest in*
dividual stockholders of Keane, Higbie & Co. at that time?
Mr. BLAIR. Mr. Higbie was by far the largest stockholder; I am
sure of that.
Mr. PECORA. DO you recall the extent of his holdings of Keane,
Higbie & Co. stock at that time?
Mr. BLAIR. NO, but I am quite sure it was much more than half.
Mr. PECORA. He was a large majority stockholder?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Mr. Higbie
was also one of the officers of Keane,
Higbie & Co at that time, was he not, or a director ?
Mr. BLAIR. He was either president or chairman; I have forgotten
which.
Mr. PECORA. The first time it was proposed to you as the executive
head of the Union Commerce Corporation that that corporation
acquire Keane, Higbie & Co. was when you were having breakfast
at the Hotel Biltmore in New York City, some time in the summer
of 1929?
Mr. BLAIR. Yes.
Mr. PECORA. YOU
had gone to New York on that occasion to confer
with representatives of Goldman-Sachs & Co.?
Mr. BLAIR. Yes.
Mr. PECORA. Goldman-Sachs & Co. had indicated to you previously
its desire to acquire something like 30,000 shares of the capital stock
of the Union Commerce Corporation?
Mr. BLAIR. Yes.
Mr. PECORA. Did
the Union Commerce Corporation at that time
have authority to issue those 30,000 shares?
Mr. BLAIR. I t did
not.
Mr. PECORA. Did you tell that to the representatives of GoldmanSachs & Co.?
Mr. BLAIR. Certainly.
Mr. PECORA. What specific offer did Goldman-Sachs & Co. make
to you for those 30,000 shares?
Mr. BLAIR. $120 a share.
4794
STOCK EXCHANGE PRACTICES
Mr. PECORA. And that was made some time in July 1929, if I correctly understand your prepared statement which is marked " Committee's Exhibit No. 80"?
Mr. BLAIR. I do not remember exactly, but I should think it was
some time in July. I could not say definitely. I remember the
occasion but not the date.
Mr. PECORA. That offer was originally suggested to you by Mr.
Covington, one of the vice presidents of the National Bank of Commerce at that time?
Mr. BLAIR. He did not suggest the offer; he suggested that a man
whom he knew was in touch with or a representative of a New York
banking house. He gave me no information as to the name of the
house or the individual he referred to.
Mr. PECORA. Well, it subsequently developed that the New York
banking house he referred to was Goldman-Sachs & Co.?
Mr. BLAIR. Yes,
sir.
Mr. PECORA. Did the individual that he referred to meet you in
connection with this offer?
Mr. BLAIR. Oh, yes; we met in his office.
Mr. PECORA. Who
was
it?
Mr. BLAIR. Mr. Clarence M. Bitting.
Senator COTTZENS. Was he with the Fisher Co. at that time?
Mr. BLAIR. Yes, sir.
Mr. PECORA. What was
the total amount of capital stock which
the Union Commerce Corporation had issued and outstanding at
that time when you received this offer for 30,000 shares at $120 a
share ?
Mr. BLAIR. Of course it was1 something more than half a million
shares, because the original amount as stated here was 500,000 shares.
Mr. PECORA. I think it was just about 478,866 shares, was it not—
the total number of shares outstanding ?
Mr. BLAIR. I rather think it was more than that, because we had
taken in the Griswold First State Bank prior to that, and something
like 20,000 shares had been issued at that time.
Mr. PECORA. Was Mr. Carl Higbie a director at that time of the
Union Commerce Corporation?
Mr. BLAIR. Yes.
Mr. PECORA. And a large stockholder ?
Mr. BLAIR. NO.
Mr. PECORA. YOU
say in your prepared statement which is marked
" Committee's Exhibit No. 80," referring to your original conversation with Mr. Higbie in which he first suggested that the Union
Commerce Corporation acquire Keane, Higbie & Co., that " Mr,
Sanger and I were staying at the Biltmore Hotel, and while eatingbreakfast there the next morning " and Mr. Higbie came into the
dining room; that " we called him and he sat with us. During breakfast we told him of the Goldman-Sachs offer and asked him to think
it over and give us some advice regarding it when he returned to Detroit. I gained the impression he thought well of the connection and
the offer."
You gained that impression, I presume, from the conversation you
had at breakfast that morning with Mr. Higbie ?
Mr. BLAIR. Yes.
STOCK EXCHANGE PRACTICES
4795
Mr. PECORA. Did he indicate that the first he knew of this offer
of Goldman-Sachs & Co. was when you told him that morning?
Mr. BLAIR. I do not think he could have known anything about
it before that, because we did not receive the offer until late in the
afternoon of the day before.
Mr. PECORA. Well, after you and Mr. Sanger returned to Detroit
from New York following this conference you had with representatives of Goldman-Sachs & Co., did you meet Mr. Higbie in Detroit?
Mr. BLAIR. He came to see me sometime after; I don't know how
long after.
Mr. PECORA. Did he then express to you his opinion of the offer
that you had received from Goldman-Sachs & Co. for these 30,000
shares of Union Commerce Corporation stock ?
Mr. BLAIR. I do not remember. I know that he never opposed
Mr. PECORA. YOU say in your prepared statement from that point
on as follows:
" Just as we left the table "—meaning the breakfast table—" Mr.
Higbie said to me in a jocular way,4 ' Why don't you buy Keane,
Higbie & Co.?' To which I replied, Give us a chance. Come and
see me.'"
Was that the first time anyone had ever proposed to you that the
Union Commerce Corporation acquire all the capital stock of Keane,
Higbie & Co.?
Mr. BLAIR. AS far as I remember; yes.
Mr. PECORA. YOU said in your prepared statement that Higbie
asked you in a jocular way, "Why don't you buy Keane, Higbie
&Co.?"
Mr. BLAIR. That is the way Mr. Higbie would approach any business proposition.
Mr. PECORA. Did you answer him, equally in a jocular way, " Give
us a chance. Come and see me " ?
Mr. BLAIR. I think probably I did. We were both smiling, but
both probably thinking a lot of things.
Mr. PECORA. Did you attach any seriousness to his jocular way
of asking you why you did not buy Keane, Higbie & Co. ?
Mr. BLAIR. I think I did. I expected he would come and see me,
and he did come.
Mr. PECORA. He came?
Mr. BLAIR. Yes.
Mr. PECORA. Shortly after you returned to Detroit?
Mr. BLAIR. I don't remember just how long after; I should say
2 or 3 weeks.
Mr. PECORA. Then did you and he discuss in full detail the matter
or plan of Union Commerce Corporation acquiring all of the capital
stock of Keane, Higbie & Co. ?
Mr. BLAIR. Before we got through with our negotiations we did;
yes.
Mr. PECORA. Will you give this committee as briefly as you can
the substance of the negotiations and conversation that took place
between you as the representative of the Union Commerce Corporation and Mr. Higbie as the representative of Keane, Higbie & Co.
which led ultimately to the acquisition of the capital stock of Keane,
Higbie & Co. by the Union Commerce Co.?
4796
STOCK EXCHANGE PRACTICES
Mr. BLAIR. I do not believe I can remember the details of the
conversation.
Mr. PECORA. YOU conducted those negotiations actively in behalf
of the Union Commerce Corporation, did you not ?
Mr. BLAIR. I did. I remember this, that during these negotiations
Mr. Higbie submitted a balance sheet and an inventory of the company's holdings. I remember we took the latest quotations of the
securities and fixed from that a book value on Keane, Higbie & Co.'s
stock. My remembrance is that that book value was something like
63 or 64 or 65 dollars. I remember that Mr. Higbie submitted a
statement of the earnings for the first 6 months. I think that statement was made by Ernst & Ernst; he had some Ernst & Ernst
statement with him at that time. Whether it was for the prior year or
for that 6 months I do not remember. I do remember that I said to
him, " Where did you make these earnings ? Where did you get
all of them? " And he went down through some papers he had;
and I find this slip (indicating) with my papers, which I probably
made at the time, indicating approximately where the earnings for
the prior 6 months had come. Following all that we came down
to the question of price and method of payment, and Mr. Higbie's
suggestion was, as I stated. Whether that was his first suggestion
or final one I cannot remember at this time. I rather think it was
"the first suggestion he made.
Mr. PECORA. What was it ?
Mr. BLAIR. That we had reached a point where our minds met
closely enough so that he proposed that we make an exchange on a
share-for-share basis. Then I had been somewhat concerned about
the Goldman-Sachs matter as to whether or not our stockholders
would agree to waive; and I made it a part of the proposition that
if our stockholders agreed to this, the stockholders of Keane, Higbie
& Co. would assume that—I will not call it a contract; it was not
a contract, but that arrangement which the directors had approved
of with Goldman-Sachs & Co.
Mr. PECORA. The stock of Keane, Higbie & Co. outstanding at
that time was very closely held, was it not?
Mr. BLAIR. I rather think so; yes. I never knew exactly, Mr.
Pecora, how it was held. I never concerned myself with that particularly.
Mr. PECORA. DO you know how many stockholders there were at
the time, of Keane, Higbie & Co. ?
Mr. BLAIR. I had an impression in some way that there were not
more than a dozen, but I do not know that. I do not think I ever
knew accurately. I was not concerned so much with individuals
as I was with the proposition itself.
The CHAIRMAN. The committee will now take a recess until 2
o'clock.
(Whereupon, at 1 p.m., a recess was taken until 2 p.m. of the same
day, Tuesday, Jan. 16, 1934.)
AFTERNOON SESSION
The subcommittee reconvened at the expiration of the recess at 2
p.m., Tuesday, January 16, 1934.
STOCK EXCHANGE PRACTICES
4797
TESTIMONY OF FKANK W. BLAIE—Eesumed
Mr. PECORA. When did you bring to the notice of the board of
directors of the Union Commerce Corporation the proposition that
that corporation acquire the capital stock of Keane, Higbie & Co. on
a share-f or-share basis ?
Mr. BLAIR. I cannot give the date, Mr. Pecora. After the conversations with Mr. Higbie I talked with several of the directors..
I do not ever remember the ones I talked with now, but we arranged
for a meeting of the board very soon after that. I think it would be
a very few days.
Mr. PECORA. I think it was on August 20,1929.
Mr. BLAIR. Possibly that is so.
Mr. PECORA. Was the Keane, Higbie & Co. stock actively traded in
at that time ?
Mr. BLAIR. Oh, no; I do not think so. I think it was very closely
held, and I do not think it was on the market at all.
Mr. PECORA. HOW did you determine, for the purpose of submitting a proposal for the acquisition of the stock to your board, the
value of the Keane, Higbie & Co. capital stock ?
Mr. BLAIR. We took the statement of Keane, Higbie & Co. and
the inventory of Keane, Higbie & Co., applied the prices prevailingy
as near as we could determine at the date we made the computation,
and in that way arrived at what we thought was the book value of
the company, and, as I remember, it was somewhere around $63 or
$64 or $65 a share.
Mr. PECORA. Did its book value at that time, computed by that
method, approximate the book value of the Union Commerce Corporation stock?
Mr. BLAIR. It was, as I remember, $10 or $12 a share more than
the Union Commerce.
Mr. PECORA. What did Mr. Higbie indicate to you, at the outset of
the negotiations, would be the advantages accruing to the stockholders of Keane, Higbie & Co. from this contemplated sale, did he
say?
Mr. BLAIR. NO. I doubt if he would tell me what advantage he
thought they might receive. I think he would tell me what advantage he thought our stockholders might receive.
Mr. PECORA. What advantage did he say your stockholders would
receive ?
Mr. BLAIR. Well, he said that Keane, Higbie & Co. could bring to<
us, that is, to the trust company, trusteeships in corporations in
which Keane, Higbie & Co. had a part in refinancing. He could
bring to the bank bank accounts from these corporations; and that
they could provide considerable earnings to the stockholders.
. Mr. PECORA. Did he say by what methods those earnings would be
obtained—what kind of business?
Mr. BLAIR. Oh, yes; through the investment banking business.
Mr. PECORA. Were those results achieved after the acquisition of
Keane, Higbie & Co. by your Union Commerce Corporation?
Mr. BLAIR. For perhaps 2 or 3 months, and then the cataclysm
came that made it impossible for any investment house to make any
money.
4798
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you cause any independent audit to be made of
the books of Keane, Higbie & Co. before you agreed upon the exchange basis?
Mr. BLAIR. Yes; not an audit. An audit of the company by Ernst
*& Ernst was submitted by Mr. Higbie. Whether that audit was for
the 6 months' period ending June 30, 1929, or for the year ending
December 31,1928,1 cannot say. However, Mr. Stalker was selected
by me to go over the affairs of Keane, Higbie & Co. and satisfy himself that the assets were there, and he did that.
Mr. PECORA. Were the stockholders of the Union Commerce Corporation ever told at any time before the stockholders approved the
plan of consolidation, that Mr. Higbie was the majority stockholder
of Keane, Higbie & Co.?
Mr. BLAIR. I think the press carried the story, but I am not sure.
Mr. PECORA. Before the stockholders' meeting or after?
Mr. BLAIR. I think if the press missed anything of that story, I am
disappointed in Detroit newspapermen, because they were around us
like flies for 2 or 3 days after the announcement came out.
Mr. PECORA. In any communication that you, as president, caused
to be sent to the stockholders of the Union Commerce Corporation,
in which reference was made to this contemplated acquisition of
Keane, Higbie's capital stock by that corporation, did you mention
the fact that Mr. Higbie individually owned the large majority
of the outstanding capital stock of Keane, Higbie & Co. ?
Mr. BLAIR. I do not think I would do that. I do not think I
would think it was necessary to do that.
Mr. PECORA. Mr. Higbie was a director of the Union Commerce
Corporation at that time, was he not?
Mr. BLAIR. Yes, sir.
Mr. PECORA. Did you
not think it would be well to tell your
stockholders, in asking them to approve a certain transaction, that
the principal beneficiary of that transaction on the other side was
a man who was a director of the Union Commerce Corporation at
the time ?
Mr. BLAIR. That was told at both the directors' meeting, and
at the stockholders' meeting, and Mr. Higbie was present and asked
if we thought that he had better go out of the room while the vote
was taken.
Mr. PECORA. That was at the directors' meeting that that occurred,
was it not?
Mr. BLAIR. And I believe the stockholders' meeting also, I remember it happened on one occasion.
Mr. PECORA. That occasion, according to the minute book of
the directors' meeting, was at the meeting of the directors held on
August 20, 1929—the directors of the Union Commerce Corporation.
Mr. BLAIR. I might say, in passing, that the directors of the Union
Commerce Corporation represented directly a large percentage of
the stock. The stock of the bank and the trust company was not
widely distributed. The trust company, at the time of the association of the National Bank of Commerce, had only about 300 stockholders.
Mr. PECORA. HOW many stockholders did the Union Commerce
Corporation have in August 1929? It had then been in existence
more than a year.
STOCK EXCHANGE PKACTICES
4799
Mr. BLAIR. That would be purely a guess, Mr. Pecora, but I should
say 700 or 800. That is purely a guess, however.
Mr. PECORA. DO you recall what the market quotation was for the
capital stock of the Union Commerce Corporation on August 20,
1929, when this plan of acquiring Keane, Higbie & Co. was approved by the board of directors of the Union Commerce Corporation ?
Mr. BLAIR. No; I do not.
Mr. PECORA. I understand
that the Union Commerce Corporation stock, in June 1929, sold in the open market, principally
through the Detroit Stock Exchange, for between $120 and $130
a share.
Mr. BLAIR. I thought it was a little lower than that, but I am not
positive.
Mr. PECORA. And that on August 20, or thereabouts, at the time
the plan was approved by the board of directors of the Union Commerce Corporation, it had gone up to $180 a share.
Mr. BLAIR. Can you say when it went up ? I t went up about $60
one day. I think that was right after I began to talk to the directors, prior to the meeting of the board, and some of them
" leaked."
Mr. PECORA. Was that the increase that you had in mind when
you said, in your letter to the stockholders of the Union Commerce
Corporation of August 21, 1929, which is marked " Exhibit No. 8 1 "
in evidence here, as follows [reading] :
The immediate response of our stock in the market to the rumors and final
announcement of this prospective affiliation was sufficient indication as to
how it is regarded in financial circles.
Mr. BLAIR. Yes, sir.
Mr. PECORA. Then it had that effect?
Mr. BLAIR. I t had that effect on the market; yes.
Mr. PECORA. The increase had taken place by that time?
Mr. BLAIR. Yes, sir.
Mr. PECORA. The transfer of the stock of the Union Commerce
Corporation to Keane, Higbie & Co. was actually consummated in
September 1929, was it not? I think September 10 is the precise
date.
Mr. BLAIR. I cannot say definitely, but I should say something
like that.
Mr. PECORA. DO you recall what the stock of the Union Commerce
Corporation was then quoted at?
Mr. BLAIR. I do not. I t went up.
Mr. PECORA. YOU recall it had undergone a tremendous increase.
Mr. BLAIR. Yes; I think $240 or $250 a share. One day it went to
the high point, I think, of $320.
Mr. PECORA. That was between August 20 and September 10,
which was the date when the exchange was made.
Mr. BLAIR. I cannot give dates, Mr. Pecora, but it was along about
that time.
Mr. PECORA. Can you account for that very substantial sudden increase in the market quotation?
Mr. BLAIR. Only by saying that the speculating public thought
that was a chance for a killing.
4800
STOCK EXCHANGE PRACTICES
Senator COUZENS. There was, was there not?
Mr. PECORA. But the speculating public were those that were led
to the slaughter.
Mr. BLAIR. I would not say that they were led. They were just
ahead of everybody else. They surely were not led by any officers of
the Union Commerce Corporation.
The CHAIRMAN. There was no pool or syndicate formed for stock
manipulation?
Mr. BLAIR. NO, sir.
Mr. PECORA. YOU referred
previously to a report of examination
or audit of Keane, Higbie & Co., made by Ernst & Ernst.
Mr. BLAIR. Yes, sir.
Mr. PECORA. A copy
of which was submitted to you in the course
of your conferences with Mr. Higbie.
Mr. BLAIR. Yes, sir.
Mr. PECORA. I have what
purports to be a copy of that report. I t
is made as of April 30, 1929, and it would give a book value to the
capital stock of Keane, Higbie & Co., of $30.93 a share, approximately, instead of $60 or $65 a share.
Mr. BLAIR. Possibly the statement would show that way. As I
remember, the book value as shown by the statement at the time we
made the deal was something around $35 a share, or perhaps $40, but
when we took the inventory and applied the values of securities, the
market values of securities of that time
Mr. PECORA. Securities in the portfolio of Keane, Higbie & Co. ?
Mr. BLAIR. Yes. This value greatly increased, though it had not
been entered on the books.
Mr. PECORA. YOU said before that in your transaction with Keane,
Higbie & Co., or in your negotiations which culminated in the
transaction, you made it, informally at least, a condition that Keane,
Higbie & Co., in the event of this acquisition of its capital stock by
the Union Commerce Corporation, would take care of your informal
commitment to Goldman, Sachs & Co. to sell it 30,000 shares of the
capital stock of the Union Commerce Corporation.
Mr. BLAIR. Not Keane, Higbie & Co., but the stockholders of
Keane, Higbie & Co.
Mr. PECORA. That meant principally Mr. Higbie himself, as the
majority stockholder.
Mr. BLAIR. Yes.
Mr. PECORA. Was
that imposed actually as a condition to the
acquisition of the stock of Keane, Higbie & Co. by the Union Commerce Corporation?
Mr. BLAIR. Yes.
Mr. PECORA. Was any written agreement entered into ?
Mr. BLAIR. I cannot remember. I doubt if there was
a written
agreement entered into between Keane, Higbie & Co. and the Union
Commerce Corporation. There may have been. If there was I do
not remember.
Mr. PECORA. Was anything said to the board of directors or to
the stockholders of the Union Commerce Corporation about that
part of the transaction, namely, that the stockholders of Keane, Higbie & Co. would take care of your informal commitment to Goldman,
Sachs & Co.?
STOCK EXCHANGE PRACTICES
4801
Mr. BLAIR. Oh, yes; certainly. That certainly would have been
told.
Mr. PECORA. I S that indicated by anything in the minute book,
either of the board of directors of the Union Commerce Corporation,
or the minute book of its stockholders ?
Mr. BLAIR. I do not know.
Mr. PECORA. I show you what purports to be a photostatic copy
of the minutes of the adjourned special meeting of the stockholders
of the Union Commerce Corporation held on September 12, 1929,
at which meeting the proposal to acquire the capital stock of Keane,
Higbie & Co. was approved and ratified by the stockholders. Will
you look through it and see if you can find any reference whatsoever to any transaction whereby the stockholders of Keane, Higbie
& Co. were to take care of this informal commitment to Goldman,
Sachs & Co.?
Mr. BLAIR (after examining document). I see nothing in there.
You understand, of course, that the proposition of Goldman-Sachs
had never been submitted to the stockholders.
Mr. PECORA. Was that a firm contract?
Mr. BLAIR. NO. It was an agreement on our part to submit the
matter first to the board of directors and then to the stockholders
if the board of directors approved.
Mr. PECORA. It never reached the stage where it was submitted
either to the board of directors or to the stockholders of the Union
Commerce Corporation, did it?
Mr. BLAIR. It reached the board of directors; yes.
Mr. PECORA. Did they approve it?
Mr. BLAIR. Yes; I am quite sure of that.
Mr. PECORA. I might say that we have been unable to find any
reference to it in the minutes of the board of directors.
Mr. BLAIR. It was discussed with many of them. That is 4 years
.ago, and I may have forgotten the details.
Mr. PECORA. Was any written offer ever made by or on behalf of
Goldman, Sachs & Co. ?
Mr. BLAIR. NO.
Mr. PECORA. Or
any agent or representative of it, to purchase from
your company 30,000 shares of its capital stock at $120 a share?
Mr. BLAIR. There was some correspondence, but the offer itself
was made by Mr. Catchings and Mr. Weinberg to the three of us,
Messrs. Sanger, Covington, and myself, across the table.
Mr. PECORA. Did you regard it as an offer directed to you and
the other two individuals, or as an offer directed to your corporation ?
Mr. BLAIR, TO the corporation. We could not, as individuals,
<enter into any deal of that kind—not honestly.
Mr. PECORA. DO you know whether Goldman, Sachs & Co.
eventually acquired those 30,000 shares of the Union Commerce
^Corporation?
Mr. BLAIR. I cannot say of my own knowledge, but I am sure they
did. I think the trading corporation got the stock.
Mr. PECORA. That is, the Goldman, Sachs Trading Corporation?
Mr. BLAIR. Yes. I think that was the corporation which got the
:stock.
Mr. PECORA. Were you in any way a party to the transaction or
negotiations whereby that trading company got that stock?
4802
STOCK EXCHANGE PRACTICES
Mr. BLAIR. What do you mean by that? I was a party—I was
present when the offer was made.
Mr. PECORA. Were you a party to the negotiations or transaction
whereby Goldman-Sachs Trading Corporation actually eventually
acquired those 30,000 shares?
Mr. BLAIR. NO.
Mr. PECORA. SO
far as you know, from whom did the GoldmanSachs Trading Corporation acquire those 30,000 shares of the Uniop
Commerce Corporation?
Mr. BLAIR. I always assumed that they got it pro rata from the
stockholders of Keane, Higbie & Co., but I cannot say of my own
knowledge. That is simply an assumption on my part.
Mr. PECORA. Among the Keane, Higbie & Co. assets in its portfolio at the time of the acquisition of its capital stock by your company there was a block of over 7,800 shares of the Union Commerce
Co.'s stock, was there not?
Mr. BLAIR. I remember that Keane, Higbie & Co. held some stock;
yes.
Mr. PECORA. And, of course, that came into the ownership of your
corporation through the acquisition of the capital stock ?
Mr. BLAIR. Indirectly; yes.
Senator COUZENS. Why do you say " indirectly " ?
Mr. BLAIR. Well, it was not owned directly by the corporation; it
was owned by the subsidiary of the corporation.
Senator COUZENS. What was the subsidiary?
Mr. BLAIR. Keane, Higbie & Co.
Senator COUZENS. Yes; but when you acquired Keane, Higbie &.
Co. it came into your possession, didn't it ?
Mr. BLAIR. We acquired the stock of Keane, Higbie & Co. It
maintained its status as a corporation.
Mr. PECORA. Were you one of the officers of the Union Guardian
Trust Co, which in the year 1932, commencing about May of that
year, sought to obtain and did obtain a loan for the trust company
from the Eeconstruction Finance Corporation ?
Mr. BLAIR. I was not. I was a director at that time, but not an
officer.
Mr. PECORA. Did you take any part in the conferences which were
held by representatives of the Union Guardian Trust Co. with representatives of the R.F.C. with regard to such loan or loans ?
Mr. BLAIR. I did not.
Mr. PECORA. When, so
far as you know, as either an officer or
director of the Union Guardian Trust Co. or its predecessor, the
Union Trust Co. of Detroit, had that trust company first begun;
to experience difficulties ?
Mr. BLAIR. I don't think we realized that we were having much
difficulty until as late as the fall of 1930, maybe a little later than
that.
Mr. PECORA. That was about a year after the merger of your
holding company with the Guardian Detroit Group ?
Mr. BLAIR. Yes.
Mr. PECORA. What
caused those difficulties when they were first
manifested, in your opinion ?
Mr. BLAIR. Withdrawal of deposits.
STOCK EXCHANGE PEACTICES
480S
Mr. PECORA. Isn't it a fact that a large percentage of the total
resources of the trust company had been invested in real-fctate
mortgages or other real-estate obligations?
Mr. BLAIR. A large percentage; yes; but that percentage became
larger as the deposits became smaller; and when the deposits became quite small, why, we began to experience the most difficulty,
of course. I find here that between December 31, 1928, and December 31, 1930, there had been a decrease of $11,000,000.
Mr. PECORA. By withdrawals?
Mr. BLAIR. Yes. That decreased in 1931 by another 7 millions
and by '32 by another 11 millions.
Mr. PECORA. During those years 1930, '31, and '32 what was the
dividend policy of the trust company ?
Mr. BLAIR. The trust company paid in the first half of 1930 a
dividend at the rate of
Senator COUZENS (interposing). Twenty percent?
Mr. BLAIR. Twenty percent, I believe.
Mr. PECORA. And the second half of that year at what rate—16
percent ?
Mr. BLAIR. I believe 16 percent; yes.
Mr. PECORA. It disbursed in cash dividends to its stockholders,,
which were the Group, Guardian Detroit Union Group, Inc., in
the year 1930 dividends aggregating $950,000, didn't it?
Mr. BLAIR. I believe that is correct.
Mr. PECORA. Did you sanction the declaration of those dividends ?
Mr. BLAIR. I
did.
Mr. PECORA. Did you think it was good policy ?
Mr. BLAIR. I did at that time.
Mr. PECORA. YOU already noticed that during 1930 there was a
gradual and steadily growing withdrawal of deposits, did you not?
Mr. BLAIR. Not large at all.
Mr. PECORA. HOW much of a withdrawal took place during the
year 1930, actual withdrawal?
Mr. BLAIR. Three millions of dollars, which was not—three
millions.
Mr. PECORA. Out of a total of how much ?
Mr. BLAIR. Forty-seven. And I am not sure that that was not
accounted for largely by the transfer of the investment deposit
accounts to the National Bank of Commerce. I won't speak positively about that.
The CHAIRMAN. It seems to me you gave the decrease in deposits
much more than that.
Mr. BLAIR. I spoke about the year following, Senator. The year
following, 1931, was larger.
Mr. PECORA. What was the extent of the withdrawals for the year
1931?
Mr. BLAIR. Seven millions.
Mr. PECORA. And what dividends were paid by the Trust Co. for
that year ?
Mr. BLAIR. I do not remember. They were considerably reduced,
I know.
Mr. PECORA. Perhaps I can give it to you.
Mr. BLAIR. I believe it was 10 percent, was it not? It may have
been 8.
4804
STOCK EXCHANGE PRACTICES
Mr. PECORA. $500,000.
Mr. BLAIR. That would be 10 percent on 5 millions of capital.
Mr. PECORA. Did you think that was sound policy ?
Mr. BLAIR. I did at the time.
Mr. PECORA. Why?
Mr. BLAIR. In the 8 years prior to 1930 the Trust' Co. and its
subsidiaries had earned $6,030,000. It had disbursed as dividends,
exclusive of a stock dividend of $500,000, $2,300,000. It had accumulated in that period for the strengthening of the trust company
and for the payment of dividends out of undivided profits if necessary at any time, nearly $3,750,000.
Mr. PECORA. During what period of time had that accumulation
taken place?
Mr. BLAIR. That was in 8 years.
Mr. PECORA. Eight years prior to 1931?
Mr. BLAIR. Prior to 1930. I felt that the depression was not going
to last forever, and I surely thought that after the pick-up in the
spring of 1930 it was over.
Mr. PECORA. YOU saw by the end of 1930 that it was not over ?
Mr. BLAIR. Yes; but I was not ready to believe it.
Mr. PECORA. Rather that it had become aggravated?
Mr. BLAIR. I was not ready to believe that it had become aggravated.
Mr. PECORA. It had been, hadn't it, by the end of the year 1930 ?
Mr. BLAIR. Yes; it had become some worse. But I still had faith
that the turn would come.
Mr. PECORA. Why didn't you adopt a dividend-paying policy based
not upon faith but upon the actual events at the time, on the actual
conditions that prevailed?
Mr. BLAIR. Are you asking me that question personally or the
board of directors?
Mr. PECORA. NO ; you. You were a member of the board and you
had been president for a number of years.
Mr. BLAIR. I can speak only for myself. I could not speak for
the other members of the board. Our dividends were declared after
thorough discussion, and the motion always came from the floor.
Mr. PECORA. I am asking you individually why you did not favor
the adoption of a dividend policy based upon actual current conditions rather than upon hopes for the future or a record for 8 years
prior to 1930?
Mr. BLAIR. I thought that a dividend of that amount was justified
by the current earnings.
The CHAIRMAN. HOW about the earnings? Did your earnings
justify it or did you pay it out of undivided profits or surplus or
what?
Mr. BLAIR. I think that part of the dividends in 1930 were paid
out of undivided profits, a small amount, as I remember it, about
$60,000.
Mr. PECORA. The earnings of the trust company, according to my
records, for the year 1929 were $745,179.11, and during that year
and for that year the company paid dividends in cash of $850,000;
in other words, more than a hundred thousand dollars in excess of
its earnings.
STOCK EXCHANGE PRACTICES
4805
Mr. BLAIR. Remember this, that does not include the earnings of
either the Union Title & Guaranty Co. or of the Union Co. The
earnings of the trust company and its subsidiaries were $821,000
that year.
Mr. PECORA. Whom do you get that from?
Mr. BLAIR. These are from memorandums I had.
Mr. PECORA. Had the subsidiaries paid any dividend for that year
to the parent corporation?
Mr. BLAIR. NO.
Mr. PECORA. But the earnings of the trust company itself were
seven hundred and forty-five thousand and odd dollars for the year
1929, were they not?
Mr. BLAIR. If you do not count the earnings of what the trust
company owned.
Mr. PECORA. But those earnings had not been realized by the trust
company ?
Mr. BLAIR. They had not been transferred.
Mr. PECORA. The dividends paid out in 1929 of $850,000 were paid
out of actually accrued earnings of $745,000; is that right?
Mr. BLAIR. Yes,
sir.
Mr. PECORA. NOW, in 1930 what was the relative proportion of
dividends paid to the actual earnings of the trust company?
Mr. BLAIR. My remembrance is that they were about $60,000.
That is, the dividends were about $60,000 more than the earnings.
Mr. PECORA. SO to that extent dividends were paid out of undivided profits?
Mr. BLAIR. Yes.
Mi*. PECORA. For
the year 1930 what reserves against losses had
been set tip by the trust company ?
Mr. BLAIR. I do not remember.
Mr. PECORA. What was the policy of the trust company in that
year with respect to the setting up of the reserves against losses?
Mr. BLAIR. I think it set up some small amounts, but I don't
remember.
Mr. PECORA. Nothing proportionate to the actual losses, was it?
Mr. BLAIR. When the two companies were merged at the beginning
of that year, 31st of the month, something like $700,000 was taken
out of the assets and transferred, as I remember it, to an account
which we called the " securities in suspense " or something like that
out of which losses were taken. So that we had gotten the trust
company pretty clear "as far as its assets were concerned. That was
done when the two were consolidated.
Mr. PECORA. YOU were in attendance before this committee when
Mr. Stalker was examined here, weren't you?
Mr. BLAIR. Yes.
Mr. PECORA. DO
you recall that there were introduced in evidence
at that time certain letters, correspondence, that passed between Mr.
Stalker and Mr. Lord or other executive officers of the Guardian
Detroit Union Group, Inc. ?
Mr. BLAIR. Yes.
Mr. PECORA. YOU
recall that in those letters Mr. Stalker called
attention to the fact that the dividends which the group had been
suggesting be declared by the trust company had not been earned?
Mr. BLAIR. Yes.
175541—34—PT 10
15
4806
STOCK EXCHANGE PRACTICES
Mr. PECORA. And that furthermore the trust company had not
made adequate or proper provision for setting up reserves against
losses ?
Mr. BLAIR. Yes.
Mr. PECORA. That
was the situation existent at that time, wasn't
it, with regard to the policy of the trust company respecting setting
up of reserves ?
Mr. BLAIR. The trust company was not setting up reserves in
comparison with what it had done in prior years.
Mr. PECORA. In prior years it had set up adequate reserves, had
it not?
Mr. BLAIR. More than adequate.
Mr. PECORA. When did it commence to depart from that practice ?
Mr. BLAIR. Well, I wouldn't say, but it evidently definitely departed from the practice when it found it impossible in later years
to do what it had been possible to do in the earlier years.
Mr. PECORA. When was that stage reached, when it found impossible in later years what it had done before ?
Mr. BLAIR. I should say in the latter part of 1930.
Mr. PECORA. Wasn't it also in 1929 ?
Mr. BLAIR. Oh, no. You called attention to the fact that $850,000
dividend was paid. As a matter of fact, $200,000 of that was an
extra dividend paid in to the Union Commerce Corporation to pay
for the acquiring of some assets. I think, as I remember it—well,
I wouldn't attempt to say what those disbursements were. But a
considerable amount of cash had been disbursed by the Union Commerce Corporation to acquire some of its units, and this was to
eliminate the indebtedness of the Union Commerce Corporation to
the trust company. I think a similar dividend was paid by the
National Bank of Commerce.
Mr. PECORA. Isn't it a fact that between the years 1925 and 1928
your trust company increased its mortgage loans by almost 300 percent, from about 7 million dollars in 1925 to lSy2 million dollars in
1928?
Mr. BLAIR. I have not doubt that is true. I t increased its deposits
from 17 millions to 42.
Mr. PECORA. These mortgage loans were made out of the demand
and short-time deposits the trust company received principally, were
they not?
Mr. BLAIR. They were made out of deposits; yes.
Mr. PECORA. And those were demand and short-time deposits principally ?
Mr. BLAIR. Yes.
Mr. PECORA. In
1927 the trust company through the New Union
Building Co. built this office building that was its home and which
I previously referred to as the Aztec Tower?
Mr. BLAIR. Yes.
Mr. PECORA. That was financed in part through the issue of
$2,000,000 of second-mortgage bonds?
Mr. BLAIR. Yes.
Mr. PECORA. Which
company ?
Mr. BLAIR. Yes.
were sold to the stockholders of the trust
STOCK EXCHANGE PEACTICES
4807
Mr. PECORA. At par?
Mr. BLAIR. Yes.
Mr. PECORA. And it was
also financed in part through the declaration of a 5 million dollar dividend payable in stock ?
Mr. BLAIR. NO.
Mr. PECORA. Was it
Mr. BLAIR. NO. It
payable in cash ?
was financed in part by the purchase by the
trust company of 5 millions of capital of the building company with
money which it received
Mr. PECORA (interposing). From the sale of the 25,000 additional
shares of capital stock ?
Mr. BLAIR. Yes.
Mr. PECORA. At $300
Mr. BLAIR. Yes.
Mr. PECORA. In other
a share?
words, these 25,000 additional shares were issued at $300 a share or for a total of 7% million dollars; Of the proceeds of the sale of that stock 2y2 million dollars went to capital and
5 million dollars went to surplus of the trust company ?
Mr. BLAIR. Yes.
Mr. PECORA. And
that 5 million dollars was used to buy the capital
stock of the New Union Building Co. ?
Mr. BLAIR. Yes.
Mr. PECORA. IS Mr. Longley here ?
Mr. LONGLEY. Eight here.
Mr. PECORA. I am through with you,
Mr. Blair. Is there anything
you want to say to the committee ?
Mr. BLAIR. I think not.
The CHAIRMAN. YOU will be excused for the present then, Mr.
Blair.
Mr. BLAIR. Does that mean permanently or just temporarily ?
Mr. PECORA. I will let you know later in the day.
Mr. BLAIR. All right.
TESTIMONY OF CLIFFORD B. LONGLEY, GROSSE P0INTE
FARMS, MICH.
The CHAIRMAN. Mr. Longley, you solemnly swear that the testimony you will give in the matters now under investigation by the
committee will be the truth, the whole truth, and nothing but the
truth, so help you God?
Mr. LONGLEY. I do.
Mr. PECORA. Mr. Longley,
will you give your full name, address^
and business or occupation to the reporter for the record?
Mr. LONGLEY. Clifford B. Longley, attorney, residence 412 Grosse
Pointe Boulevard, Grosse Pointe Farms, Mich.
Mr. PECORA. Were you at one time the president of the Union
Guardian Trust Co. of Detroit,, Mich. ?
Mr. LONGLEY. I
was.
Mr. PECORA. When did you become its president?
Mr. LONGLEY. January 1932 j I don't remember the eXact date.
Mr. PECORA. Prior to that time were you a director of the company?
4808
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. For several months; 4 or 5 months. 1 doii5t
remember just when I became a director.
Mr. PECORA. Had you been connected with its predecessor company, the Union Trust Co.?
Mr. LONGLEY. No.
Mr. PECORA. Until what date did you continue as president of
the Union Trust Co.?
Mr. LONGLEY. Until after the holiday.
Mr. PECORA. That is the banking holiday that was declared on
February 13 ?
Mr. LONGLEY. Well, of course, until after that. The trust company did not go into the hands of the conservator until, oh, possibly
a month to 6 weeks afterwards; I have forgotten the date. We had
to wait until certain legislation was passed in Michigan before the
conservator could be appointed. Until that time the officers and
directors continued to function. The holiday continued, of course.
You understand that.
The CHAIRMAN. The banks were not open ?
Mr. LONGLEY. Oh, no; the holiday continued from the 14th of
February onward.
Mr. PECORA. The bank has not been reopened sijice, has it ?
Mr. LONGLEY. It is under conservatorship; yes. It is operating
Its fiduciary department fully.
Mr. PECORA. Yes; but it has departed from its general banking
activities ?
Mr. LONGLEY. Oh, no; that is under the conservatorship. That is
on a restricted basis. The deposits are tied up.
Mr. PECORA. During the year 1932 an application was made to the
R.F.C. in behalf of the Union Guardian Tri^t Co. for a loan, was
it not?
Mr. LONGLEY. There are two applications.
Mr. PECORA. I am talking about the first one,
Mr. LONGLEY. Yes.
Mr. PECOEA. When
Mr. LONGLEY. Just
was that made?
a minute. Let me get my memorandum here.
(After referring to data.) I don't believe I have anything that
shows the date of the first loan, but, as I remember it, it was early in
the spring, and the first funds were received from the E.F.C., perhaps
in April, but it was early in the spring.
Mr. PECORA. DO you remember the amount of the loan for which
application was first made?
Mr. LONGLEY. Yes; I have that.
Mr. PECORA. What was that?
Mr. LONGLEY. That was $4,650,000, and for which was pledged
$1,116,650 of bonds and $8,086,351 in mortgages.
Mr. PECORA. YOU are giving the face value of those assets, are
you not:?
Mr. LONGLEY. I am giving the face value of the security. The
$4,650,000 was the amount we received from the R.F.C. iya CBsh,
Mr. PECORA. What was the condition of the Trust Co, at that
time which necessitated the obtaining of this loan from the R.^.C. ?
Mr. LONGLEY. Lack of liquidity. It lacked liquidity very much.
STOCK EXCHANGE PRACTICES
4809
Mr. PECORA. That lack of liquidity was due. in large part to the
fact that a large proportion, about 72 percent, as I recall it, of its
resources were tied up in real-estate mortgages and other obligations
secured by real estate ?
Mr. LoNGiiEY. That was my understanding. A computation was
made at my request some time about that time, and that is the figure
that sticks in my mind. It is approximately 72 percent, and that is
the figure that I testified to in Detroit before the grand jury.
Mr. PECORA. Thereafter was another application made in behalf of
tiie Union Guardian Trust Co. to the R.F.C. for an additional loan?
Mr. LONGLEY. There was.
Mr. PECORA. DO you recall when that was made?
Mr. LONGLEY. As I remember, it was in July. I haven't that date
either, I am sorry to say.
Mr. PECORA. 1932?
Mr. LONGLEY. 1932.
Mr. PECORA. Wasn't the application
Mr. LONGLEY. In June?
Mr. PECORA. 1932?
Mr. LONGLEY. It might have been.
made originally in June ?
It might has been. I haven't
a thing here to indicate what those dates were. I think we got the
money in July, so possibly it was in June.
Mr. PECORA. Prior to your obtaining money from the Keconstruction Finance Corporation in July, did you and other officers and
directors of the Trust Co. have conferences with Mr. Congdon representing the E.F.C. with respect to those loans ?
Mr. LONGLEY. Yes, sir; I did.
Mr. PECORA. What other officers
joined you in those conferences
with Mr. Congdon, do you recall ?
Mr. LONGLEY. Well, I do not think there were a great many with
Mr. Congdon and myself. I think they were the officers who were
familiar with the assets, and in charge of the books perhaps, the
treasurer and the heads of departments in charge of assets that
came from the particular departments.
Mr. PECORA. Were you joined in those conferences by officers and
directors of the Guardian Detroit Union Group, Inc. ?
Mr. LONGLEY. I do not think so. Mr. Patterson might have been
on the fringe of things, or Mr. Hillsman, who were connected with
the Group, but I don't think they had anything to do with either
the examination or the discussions in connection with the assets.
At least I do nqt remember it. Possibly they did.
Mr. PECORA. HOW much of a loan from the R.F.C. did }^our Trust
Co. seek to obtain in June of 1932 ?
Mr. LONGLEY. I do not recall how much was sought to be obtained.
Mr. PECORA. It was approximately $28,000,000, wasn't it?
Mr. LONGLEY. It was approximately $28,000,000, did you ask?
Mr. PECORA. Yes.
Mr. LONGLEY. I do
not know. I do not think so. We finally got
$15,000,000 altogether.
Mr. PECORA. HOW much do you think it was ?
Mr. LONGLEY. I don't remember. Have you a copy of that application?
4810
STOCK EXCHANGE PRACTICES
Mr. PECORA, Well, I have before me excerpts from the minutes of
the meeting of the executive committee of the R.F.C. held on June
29, 1932, which is headed:
Re a conference concerning the proposed application for a loan of $28,000,000.
Mr. LONGLEY. Well, that might easily be so. I do not remember
the details of that application.
Mr. PECORA. Let me read excerpts from the minutes of the executive committee of the board of the E.F.C. held on June 29, 1932, and
that may possibly refresh your recollection.
Mr. LONGLEY. All right.
Mr. PECORA. I t says:
IVlr. Congdon reported that the following officers of the Union Guardian Trust
Co. of Detroit, and of the Guardian Detroit Union Group, Inc., had conferred
with him concerning a proposed application on the part of the Union Guardian
Trust Co. for a loan of approximately $28,000,000 for the purpose of liquidating
in full its liability for deposits, except certain trust deposits and its bills payable, permitting the company to continue business along fiduciary lines only:
C. B. Longley, president of the Union Guardian Trust Co.
E. C. Harris, vice president of the Union Guardian Trust Co.
Robert O. Lord, president of the Guardian Detroit Union Group, Inc., and
the Guardian National Bank of Commerce.
James L. Walsh, executive vice president of the Union Guardian Group,
Inc., and vice president of the Guardian National Bank of Commerce.
B. K. Patterson, executive vice president of the Guardian Detroit Union
Group, Inc.
Mr. Congdon said that these gentlemen had represented! that the trust company, because of uncertainty as to its ability to meet anticipated withdrawals of
deposits, was in imminent danger of suspension, and that its closing would
undoubtedly be followed by the suspension of the entire Guardian Union Group,
and probably that of other banks in Detroit and eastern Michigan.
The first proposal of the trust company, he said, was that in order to avoid
showing large bills payable, the loan be made to a trustee, to which the trust
company would transfer assets which would be offered as security. The
general counsel advised that the corporation could not under the law make a
loan to a trustee as proposed.
Mr. LONGLEY. Yes; I think that is right.
Mr. PECORA. DO you think that is a fair representation of the
facts that had developed up to that time ?
Mr. LONGLEY. Probably so. I do not remember them myself, but
as I look back at it that is probably quite correct.
Mr. PECORA. Then it is correct to say that prior to June 29, 1932,
you, Mr. Harris, a vice president of your Trust Co., and Mr. Lord,
Mr. Walsh, and Mr. Patterson, executive officers of the Guardian
Detroit Union Group, had entered into conferences with the R.F.C.'s
representative, Mr. Congdon?
Mr. LONGLEY. That is right.
Mr. PECORA. Looking toward the obtaining of a loan of approximately $28,000,000 from the E.F.C; for the Union Guardian Trust
Co.?
^ Mr. LONGLEY. I do not recall the amount, but if that is a copy of
fine application, undoubtedly it is true.
Mr. PECORA. NO. I am reading from the minutes of the B-.F.C,
and not; from the application.
Mr. LONGLEY. Oh, I see. Well, unless you can get some document
that comes from the Trust Co., I don't know. I suppose that is right,
although the other day when you were reading from the minutes oi
the R.F.C. I disagreed strongly with what you read. But this may be
STOCK EXCHANGE PEACTICES
4811
true. I would say that it probably was or near the amount as I
recollect it.
Mr. PECORA. Well, do you recall that during the spring of 1932
the Trust Co. reached a situation where it desired or thought it
best to liquidate in full its liability for deposits and its bills payable,
and to have the Trust Co. continue in business only along fiduciary
lines ?
Mr. LONGLEY. Yes, sir; I do.
Mr. PECORA. What were the
circumstances that brought you, as
president of the Trust Co., to that frame of mind in the spring
of 1932?
Mr. LONGLEY. Principally the condition of the trust company.
Mr. PECORA. Will you tell us what that was ?
Mr. LONGLEY. It was in what I found, or at least believed to be, a
frozen condition. That is, the assets, or a large part of the credits,
were based upon real estate just as I have already said. And the
real-estate market in Detroit, and in Michigan, was such—well, there
just wasn't any such thing at the time. The properties were valuable, of course. There were many, many very valuable properties
that they had in their list of items. I felt that if the trust companj'
could be protected on its deposit liability there should be no trouble
at all in its ultimately coming through and protecting that business
for the stockholders.
Mr. PECORA. That is, you mean the trust business?
Mr. LONGLEY. Protecting that, and taking care of these assets that
belonged to the trust company, and ultimately paying off their debts,
which involved paying off those deposits.
Mr. PECORA. When had the real estate market begun to slump ?
Mr. LONGLEY. Well, Mr. Pecora, I have never been in the realestate business, and I am just guessing when I say this, but I should
say approximately 1927; perhaps in 1926, although it was not very
noticeable, perhaps, until 1927 or 1928. I am not exactly sure about
that in my own mind.
Mr. PECORA. Had you and, the other gentlemen who participated
with you in those conferences with Mr. Congdon, whose names I
have read to you from the minutes of the R.F.C., represented to Mr.
Condon, in substance, that your trust company, because of the uncertainty as to its ability to meet anticipated withdrwals of deposits,
was then in imminent danger of suspension ?
Mr. LONGLEY. Well, I do not know the language that was used at
all. But I do not believe that we used that language.
Mr. PECORA. Well, what do you recall was said by any of you to
Mr. Congdon on that score ?
Mr. LONGLEY. I do not remember what was said to Mr. Congdon,
but somewhere you will find the application, and in that application
we set up the condition as we saw it as to those assets, that they could
not be liquidated quickly enough to take care of the deposit liability, and our fear that unless relief was had through loans the deposit liability on some future date could not be met. Now, that application is available it seems to me, and that will show the language
we usect.
Mr. PECORA. The language you used in the application would be
different from the language you used in the conference with Mr.
4812
STOCK EXCHANGE PRACTICES
Congdon, wouldn't it ? It would be much more terse and much more
concise.
Mr. LONGLEY. Probably. The thing I am trying to stress is that
at no time did we have any question about the value of those assets.
I t was a question of unfreezing them and getting liquidity. And
that was pointed out very carefully and in very careful language.
That is why I go back to the application.
Mr. PECORA. Don't you recall the substance of the conferences with
Mr. Congdon?
Mr. LONGLEY. Yes, sir.
Mr. PECORA. Prior to the filing of the formal application?
Mr. LONGLEY. Well, we had a good many of them.
Mr. PECORA. I am not confining you to any one particular
conference, now, but to the general course of them.
Mr. LONGLEY. We talked all these things over, and I haven't the
slightest recollection of just what was said. However, it is all
covered in substance by our application.
The CHAIRMAN. HOW much was that application for ?
Mr. LONGLEY. I suppose that it was for the amount mentioned
by Mr. Pecora in those minutes. I do not remember myself, Senator
Fletcher.
The CHAIRMAN. It was for 28 million dollars ?
Mr. LONGLEY. I think it was an application to take care of the
deposit liability of the trust company.
The CHAIRMAN. And do you know what that liability was ?
Mr. LONGLEY. It was around 28 million dollars, I think.
The CHAIRMAN. What became of it?
Mr. LONGLEY. The application?
The CHAIRMAN. Yes.
Mr. LONGLEY. They finally
made a loan with the E.F.C. officials
that would take care of us, as they thought. At least Mr. Congdon
and Mr. Sheehan thought so, or they hoped it would, anyway.
The CHAIRMAN. HOW much was it?
Mr. LONGLEY. Wait a minute and I can give you that. (Looking
through some papers.)
Mr. PECORA. DO you recall that it was said to Mr.
Mr. LONGLEY (interposing). One minute, Mr. Pecora. I am trying
to answer Senator Fletcher's question if I can.
Mr. PECORA. Pardon me.
Mr. LONGLEY. It seems to be 11% million dollars, Senator Fletcher,
on the second application.
The CHAIRMAN. That is in addition to the $4,750,000?
Mr. LONGLEY. Yes, sir.
Mr. PECORA. DO you recall
that it was stated, in substance, to Mr.
Congdon in those conferences prior to June 29, 1932, that the closing
of the Union Guardian Trust Co., if it should become closed, would
be followed undoubtedly by the suspension of the entire Guardian
Detroit Union Group banks?
Mr. LONGLEY. Yes, sir; that is right.
Kji% PECORA. That was stated to him, wasn't it?
Mr. LONGLEY, Why, I think so. That is what I thought.
Mr. PECORA. Will you tell the committee on what you based your
judgment that if the Union Guardian Trust Co. had to suspend
STOCK EXCHANGE PEACTICES
4813
in the spring or summer of 1932, its suspension would be followed
undoubtedly by the suspension of other banking units of the
Guardian Detroit Union Group?
Mr. LONGLEY. I felt that with the close association of those institutions through their holding company, the publicity that had been
given since its organization, and the fact that these institutions
were affiliated companies would undoubtedly react on the other
companies in the group. And with conditions as they were, and
the lack of liquidity in all the banks at that time, I did not believe,
if the largest trust company in the city of Detroit were to be closed,
there would be other than a very serious reaction against the others,
if not a fatal one. At least I felt it would probably be fatal. Perhaps others did not think so, but I don't know about that.
Mr. PECORA. Mr. Chairman, with regard to the information you
sought of the witness a moment or two ago, may I call your attention to the fact that there was introduced in evidence on yesterday
a statement showing the status of the loans made by the R.F.C.
to banks in the Guardian Detroit Union Group as of December 19,
1933; and that that statement shows the following loans authorized
to the Union Guardian Trust Co.:
$4,250,000, May 24, 1932; $400,000, October 7, 1932; $8,733,000, July 5, 1932;
$2,767,000, September 14, 1932.
The CHAIRMAN. All right.
Mr. LONGLEY. That makes a total of $16,000,000, doesn't it?
Mr. PECORA. About that.
Mr. LONGLEY. All right.
Mr. PECORA. While of those various loans the following amounts
were canceled: $33,150.96, $3,474,629.45.
Mr. LONGLEY. I have a letter from the local Eeconstruction Finance Corporation agency in Detroit, which shows the state of the
second application on February 8, if that is any aid to you.
The CHAIRMAN. All of the stock of the Union Guardian Trust
Co. at that time was held by the holding company, wasn't it?
Mr. LONGLEY. Yes; Senator Fletcher, by the Guardian Detroit
Union group, except for qualifying shares.
Mr. PECORA. DO you recall appearing before the board of directors of the Reconstruction Finance Corporation at its meeting held
on July 5, 1932, in company with, the following gentlemen: Henry
Bodman, who then was chairman of the Board of the Union Guardian Trust Co.; Ernest Kanzler, chairman of the board of the Guardian Detroit Union group, Inc.; Robert O. Lord, president of the
Guardian Detroit Union Group, Inc.; James L. Wash, executive
vice president of the Guardian Union group, Inc.
Mr. LONGLEY. Yes, sir; I do.
Mr. PECORA. What representations
were made to the directors of
the R.F.C. at that time concerning the condition of the Union
Guardian Trust Co. and of the Guardian Detroit Union Group, Inc.,
and its unit banks?
Mr. LONGLEY. I do not know that any representations weig| made
about the. Guardian Detroit Union Group. I think out* <lis<kL&Sion
surrounded the trust company, and in that connection it Was pointed
out very clearly that with the unliquid condition of the assets of the
corporation, and the necessity for meeting withdrawals on time—
4814
STOCK EXCHANGE PRACTICES
well, the consequences of closing the institution, and all those things,
were pointed out in some detail.
The CHAIRMAN. HOW much have the depositors received ?
Mr. LONGLEY. How much had they received?
The CHAIRMAN. HOW much have they now received?
Mr. LONGLEY. SO far the general depositors have not received anything. As to the A funds that you were talking about this morning,
I do not know how much they have received, but there is available
somewhere between 80 and 90 percent of that in cash.
Mr. PECORA. Of the A funds?
Mr. LONGLEY. Yes, sir.
Mr. PECORA. Those were
the funds against a 100 percent reserve
that was required to be set up by the trust company ?
Mr. LONGLEY. That is right.
Mr. PECORA. Let me read to you the following excerpt from the
board meeting of the R.F.C. held on the 5th of July 1932, at which
you were present, together with Mr. Bodman, Mr. Kanzler, Mr.
Lord, and Mr. Walsh:
Mr. Bodman explained the problems confronting the 21 banks in Detroit
and vicinity controlled by the Guardian Group, and stressed the seriousness
of the situation. The Board informed the bank officers present of its action
in authorizing an emergency loan to the Union Guardian Trust Co. in the
amount of $8,733,000, which it understood would relieve the situation temporarily, and indicated that it would consider making additional advances after
the special committee had completed an examination of the collateral.. The
board, however, expressed the view that the stockholders, large depositors,
and others interested in these institutions, should be consulted by the management of the banks concerned and an effort made to formulate a program
designed to meet the problems presented and to strengthen the position of
the banks.
Do you recall that?
Mr. LONGLEY. I remember one large depositor that was mentioned.
Mr. PECORA. DO you recall that general discussion?
Mr. LONGLEY. Yes; but I don't remember that there was more than
one depositor that was mentioned.
Mr. PECORA. More than one what?
Mr. LONGLEY. Depositor.
Mr. PECORA. And that was the Ford Motor Co. ?
Mr. LONGLEY. That is right,
Mr. PECORA. When the board of the Eeconstruction Finance Corporation expressed its view to you gentlemen that the stockholders,
large depositors, and others interested in these banks of the Guardian Detroit Group, should be consulted by the management of the
banks concerned, and an effort made to formulate a program designed to meet the problems presented and to strengthen the position of the banks what, if anything, do you recall was done by the
board and the officers of the Guardian Detroit Union Group ?
Mr. LONGLEY. Well, about that time or a little after that time
Mr. Hillsman of the Group Co. was loaned to the trust company
for the purpose of working out some method of balancing our
budget, and to see what we could do in getting a little faster liquidation if possible, cutting expenses, and doing those things that we
felt were necessary to do to bring the thing through.
STOCK EXCHANGE PRACTICES
4815
Mr. PECORA. Well, that is using rather general terms as you must
recognize.
Mr. LONGLEY. I do not know that I could be more specific. Somewhere you will find in the files of the trust company a carefully
drawn plan that we laid out. It was a list of items that we tried:
to cover. I do not know whether you have that paper there or not.
If you have that it will give you a pretty clear idea of what we
tried to do.
Mr. PECORA. Can you give the substance of it to us without having
that statement before you ?
Mr. LONGLEY. I cannot give you the figures.
Mr. PECORA. Give us your general plan.
Mr. LONGLEY. I t was a reorganization of departments; a doubling
up in some instances, an effort to cut down overhead; an effort to cut
interest, which of course we were a little bit afraid to do. With
certificates of deposit that had been drawing 4-percent interest in an
institution for a good many years', we were afraid of cutting the
interest, for fear that there might be drastic withdrawals, which
we did not want. We tried to meet the expense side of the question
as drastically as we could. At the same time we tried to build up
the earnings side. That is the main picture.
The CHAIRMAN. What was the total amount of those A funds at
the time of the bank holiday ?
Mr. LONGLEY. (after looking through some papers). Five million
four hundred ninety-three thousand dollars.
The CHAIRMAN. They had been deposited in banks not related to
the group, as I understand, and was there any interest paid to the
trust company on those deposits?
Mr. LONGLEY. A very small rate of interest. I don't remember
what it was. But I think there was in some instances a very small
rate, one half percent or one quarter percent perhaps.
Mr. PECORA. A S a matter of fact were those class A funds deposited, in the years 1930, 1931, and 1932, mainly in banks not affiliated or connected with the group ?
Mr. LONGLEY. In 1930, 1931, and 1932?
Mr. PECORA. Yes.
Mr. LONGLEY. I do not believe I could tell you whether they were
or not, or where they were then. But in 1932 I think they were
mainly deposited in the Guardian, in an affiliated bank.
Mr. PECORA. Yes; and do you know if they were withdrawn from
that deposit account and placed on deposit in any bank unaffiliated
with the Guardian Detroit Union Group ?
Mr. LONGLEY. Yes. We tried to place them in banks that were
entirely unaffiliated. And we tried to place all of them that way*
Perhaps I have something here on that. (Beginning to look through
some papers.)
Mr. PECORA. When was that policy pursued ?
Mr. LONGLEY. When Mr. Bodman became chairman one of the
first things that he did was to—or one of the things early in the
year, and I don't know whether it Was first or not, but early in 1932
he wrote me a letter in which he stated l^e felt that the funds belonging to the trust company, that-is, that Were segregated funds of the
trust company, with this 100 percent reserve which, would take care
of the trust moneys, should not be deposited in any of the affiliated
4816
STOCK EXCHANGE PRACTICES
institutions where they might be making earnings on them. I think
somewhere there is that letter. I don't know whether you have it
or not.
Mr. PECORA. I show you, Mr. Longley, what purports to be a
photostatic copy of a letter addressed to you as president of the
Union Guardian Trust Co., by Mr. Henry E. Bodman, dated April
26, 1932. Will you please look at it and tell me if you recognize it
to be a true and correct copy of such a letter that you received
from Mr. Bodman on about the date it bears ?
Mr. LONGLEY. Yes; this is a copy of that letter.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(A letter dated Apr. 26,1932, addressed by Henry E. Bodman, to
Clifford B. Longley, president of the Union Guardian Trust Co.,
Detroit, was marked " Committee exhibit no. 83, January 16, 1934 ",
and will be found immediately following where read by Mr. Pecora.)
Mr. LONGLEY. May I read that before you read it ?
Mr. PECORA. DO you want to read it to yourself, do you mean?
Mr. LONGLEY. Yes.
Mr. PECORA. All right.
Mr. PECORA. The letter
You may do so.
received in evidence as " Committee Exhibit No. 83 " is on the letterhead of Henry E. Bodman, attorney and
counsellor at law, Detroit, and reads as follows [reading] :
COMMITTEE EXHIBIT NO. 83
APRIL 26,
Mr.
1932.
CLIFFORD LONGLEY,
President Union Guardian Trust Co., Detroit, Mich.
DEAE ME. LONGLEY : I want to bring up again the matter that I suggested
to you some time ago which relates to the deposit by the Trust Company of
trust funds in Guardian National Bank of Commerce or any other bank wTith
which the Company is affiliated in the Group. I am not questioning the advisability of such a deposit if these institutions were not affiliated but it seems
to me that in view of their affiliation another depositary or depositaries ought
to be found. I think it is much better for any trust company to select an
independent depositary in which it has no financial interest, either directly
or through the common stock ownership.
Yours very truly,
HENRY E. BODMAN.
You will notice, Mr. Longley, that in this letter to you, which
is dated April 26, 1932, Mr. Bodman calls attention to the fact that
the subject matter of this letter related to a suggestion that he had
made to you some time prior to April 26, 1932.
Mr. LONGLEY. That is right; he had, verbally.
Mr. PECORA. About how long prior to April 26, 1932, had he
made such a suggestion?
Mr. LONGLEY. I do not remember that.
Mr. PECORA. Was it a matter of months before?
Mr. LONGLEY. Oh, no; it was after both he and I went in to the
trust company; I would say, possibly a few weeks before, or two or
ihrfee weeks, or possibly a month before.
Mr. PECORA. When did you begin to act on the suggestion embodied in tHis letter of Mr. Bodman's?
Mr. LONGLEY. Not until probably November.
Mr.
PECORA.
Of 1932?
STOCK EXCHANGE PRACTICES
4817
Mr. LONGLEY. Yes.
Mr. PECORA. Why the delay?
Mr. LONGLEY. Because I had
too much else to do. I was under
great pressure at the time. I felt that those funds had ridden in
that way for all time past, as far as I knew, and it was not until
finally I turned the matter over to Mr. Maurice, our executive vice
president, that it was done. He did not even get at it until late
in December or early in January.
Mr. PECORA. Of the following year?
Mr. LONGLEY. Yes.
Mr. PECORA. DO you
see on the face of exhibit no. 83 any stamp or
date indicating when this letter was filed among the records of the
Union Guardian Trust Co. ?
Mr. LONGLEY. There is an " O.K. File " and " M. G. H."
Mr. PECORA. Any date of filing ?
Mr. LONGLEY. I do not see any date.
Mr. PECORA. YOU do not see any date of filing on the face of that
exhibit ?
Mr. LONGLEY. NO ; I do not.
Mr. PECORA. Will you hold it up to the light now ?
Mr. LONGLEY [holding exhibit no. 83 to the light as suggested].
Yes; I do.
Mr. PECORA. NOW you see it, do you ?
Mr. LONGLEY. Yes.
Mr. PECORA. What date is shown there?
Mr. LONGLEY. I cannot make it out.
Mr. PECORA. Hold it up to the light.
It is some date in April
1933, is it not?
Mr. LONGLEY [again holding the letter to the light]. That might
be. It might be that that was in my file, and Miss Hand, whose
initials are " M. G. H.", my secretary at that time, turned it over to
the files of the trust company.
Mr. PECORA. She turned it over about a year after the letter was
received ?
Mr. LONGLEY. N O ; she turned it over when I left the trust company.
Mr. PECORA. The date of filing shown by that stamp, which is
visible only by holding the document up to the light, is in April
1933?
Mr. LONGLEY. YOU will find it far more visible on the original.
Mr. PECORA. I have no doubt of that. But the date of filing, as I
make it out, is April 12, 1933, or April 19, 1933.
Mr. LONGLEY. That might very easily be. Such letters as were addressed to me personally went into my own file in the Trust Co. office,
and when I left they were turned over to the secretary to file in the
general file. That is probably how that date came on there.
Mr. PECORA. At the time of the writing of this letter, or the date
which it bore, namely, April 26, 1932, these class B trust funds of
your trust company were carried in a deposit account together with
the general funds of the Trust Co. at the Guardian National Bank of
Commerce, were they not?
Mr. LONGLEY. At what date did you say ?
Mr. PECORA. In April 1932.
4818
STOCK EXCHANGE PRACTICES
Senator COTJZENS. Are you referring to the B funds f
Mr. PECORA. The B funds and the general funds.
Mr. LONGLEY. Surely; as were most of the others.
Mr. PECORA. The A funds as well?
Mr. LONGLEY. I think so.
The CHAIRMAN. What did you do with the proceeds of the loan*
from the R.F.C.?
Mr. LONGLEY. During 1932 ?
The CHAIRMAN. Yes.
Mr. LONGLEY. We used it to pay depositors.
The CHAIRMAN. At that time?
Mr. LONGLEY. During 1932. We liquidated approximately $5,000,000 of our own assets, as I remember, and—wait just a minute
[referring to memoranda]. We paid off $11,000,000 deposits in 1932
and we borrowed $9,400,000.
The CHAIRMAN. Were there constant withdrawals?
Mr. LONGLEY. Yes.
The CHAIRMAN. NO runs?
Mr. LONGLEY. NO runs; but approximately a million a month.
The CHAIRMAN. YOU did not bolster up the reserve out of these
funds?
Mr. LONGLEY. They were already taken care of 100 percent, and
t a d been since 1910, as Mr. Blair already testified to. That money
liad been set aside 10,0 percent.
The CHAIRMAN. YOU only got about 80 or 90 percent?
Mr. LONGLEY. Because there is a certain amount of it in the First
National Batik of Detroit. We had taken it out of our own banks
and we left some in Detroit.
Mr. PECORA. The B funds and the general funds for the most
part, at thejtime Mr. Bodman wrote you this letter, were carried on
deposit in the downtown branch of the Guardian National Bank of
Commerce, were they not?
Mr. LONGLEY. Yes; and they were at the time of the holiday.
There was no change.
Mr. PECORA. At that same time were not the class A trust funds
deposited by your trust company in three separate accounts, the principal one being maintained at the uptown branch of the Guardian
National Bank of Commerce?
Mr. LONGLEY. This was in 1932, you mean?
Mr. PECORA. Yes,
sir.
Mr. LONGLEY. Yes; I think that is correct.
Mr. PECORA. And the balance of these class A trust funds were
deposited in two other accounts, one of which was maintained at
the First National Bank of Detroit and the other of which was
maintained at the Continental Illinois Bank & Trust Co., of Chicago;
is that not so?
Mr. LONGLEY. Yes; as I recollect it, that is true.
Mr. PECORA. When was the withdrawal made of these funds out
«of the account maintained in the Guardian National Bank 6i Commerce in pursuance of the suggestion made in Mr. Bodni^n's letter
to you of April 26, 1932?
Mr. LONGLEY. The A funds ?
Mr. PEOQRA. Not only the A funds, but the B funds as well.
STOCK EXCHANGE PEACTICES
4819
Mr. LONGLEY. The B funds were not turned over, as far as I know.
Mr. PECORA. HOW about the A funds ?
,
Mr. LONGLEY. Some time in January. Although I think Mr.
Maurice went to Cleveland and to Chicago to look into the question of depositories in November or December, the actual moves
were not made until January.
Mr. PECORA. Why were they withdrawn in January 1933?
Mr. LONGLEY. In furtherance of this policy that we decided on.
Mr. PECORA. This policy had been urged upon you back in April
1932, by Mr. Bodman?
Mr. LONGLEY. Yes, sir.
Mr. PECORA. Who was not
only the attorney for the bank, but also
on its board of directors ?
Mr. LONGLEY. N O ; he was not attorney for the bank. Mr. Hill
was attorney for the bank.
Mr. PECORA. But he was attorney for the group ?
Mr. LONGLEY. That is right.
Mr. PECORA. Why was action taken on this suggestion of Mr.
Bodman in January 1933 and not before ?
Mr. LONGLEY. SO as to get the job done finally.
Mr. PECORA. Why was it not done before that date?
Mr. LONGLEY. Because I just didn't do it, probably. I finally
turned it over to Mr. Maurice, as I say, some time later in the year,
and he handled the matter from then on. I just didn't do it.
Mr. PECORA. What focused your attention on the matter late in
the year 1932?
Mr. LONGLEY. Mr. Bodman repeatedly brought it to my attention
later in the year.
Mr. PECORA. He kept reminding you of it ?
Mr. LONGLEY. He did, finally.
Mr. PECORA. I t was a matter of importance, was it not?
Mr. LONGLEY. I suppose; but there were a lot of matters of importance right at that particular time, if you remember the period.
Mr. PECORA. Was your decision to transfer this account from the
Guardian National Bank of Commerce to banks unaffiliated with
the Guardian Detroit Union Group arrived at in January 1933 because of some consciousness you then had of the imminent suspension of the Trust Co. and its consequent effect upon the unit banks
of the group?
Mr. LONGLEY. NO, sir.
Mr. PECORA. That had nothing to do with it ?
Mr. LONGLEY. That had absolutely nothing to
do with it. Even
on February 10, or something of that sort, there was a deposit of A
funds made in the First National Bank of Detroit. That would not
indicate such a thing as you are intimating.
Mr. PECORA. Have you any records or knowledge which would
enable you to tell this committee the date when these withdrawals of
funds took place from the Guardian National Bank of Commerce;
that is, of the, class A trust funds?
Mr. LQJS"GLEY. N O ; I have no records.
Mr. PECORA. Our records show that on January 12, 1933, the sum
of $1,233,000 was withdrawn from the Guardian National Bank
of Commerce and deposited in the following institutions in the
respective amounts which I will state:
4820
STOCK EXCHANGE PRACTICES
$200,000 deposited in the National City Bank of Cleveland; $260,000 deposited in the Farmers' Deposit National Bank of Pittsburgh;
$43,000 deposited in Union Trust Co. of Pittsburgh; $500,000 deposited in Bankers Trust Co. of New York, and $230,000 deposited
in the Chemical Bank & Trust Co. of Detroit.
Does that accord with your recollections of the facts, Mr. Longley ?
Mr. LONGLEY. I have no recollection of it, but I have a note here
that I secured of these transactions from the trust company before I
left, and that accords exactly with the note that I have.
Mr. PECORA. I asked you just before I gave you this information
if you had any record or information.
Mr. LONGLEY. Oh, well, I have no records of the trust company—
none of the trust company records. I just have a memorandum
made for my own benefit here. I am sorry.
Mr. PECORA. That is all right. Who selected these depositaries?
Mr. LONGLEY. Mr. Maurice.
Mr. PECORA. I notice they were all located outside of the State of
Michigan.
Mr. LONGLEY. NO. I do not think so. Oh, those were, yes; but I
think the First National
Mr. PECORA. I am talking now about these withdrawals of
$1,233,000 on January 12 and the distribution of them, in the
amounts stated, among the other depositaries named.
Mr. LONGLEY. YOU are right.
The CHAIRMAN. Those were A funds?
Mr. PECORA. Those were all A funds; yes, sir.
Who selected these depositaries from outside the State of Michigan?
Mr. LONGLEY. Mr. Frank Maurice, our executive vice president.
Mr. PECORA. DO you know the reason for selecting depositaries
outside of the State of Michigan for those funds on January 12,
1933?
Mr. LONGLEY. Only that we were selecting nonaffiliated banks.
As I said before, you will finally come to where deposits were made
in the First National Bank, which is inside the State of Michigan.
Mr. PECORA. I am going to come to that. Was that the first time
the trust company had any banking transactions, involving the making of deposits, with any of these out-of-the-State banks?
Mr. LONGLEY. I do not know that; I could not tell you that without checking the list of banks. There are a great many of them,
and I do not know. I do not think all these were new depositories.
Mr. PECORA. Prior to January 12, 1933, had your trust company
or the Guardian Detroit Union Group, Inc., obtained any loans
from any of the 5 banks in which it made these deposits of January
12, 1933?
Mr. LONGLEY. Obtained any loans?
Mr. PECORA. Yes.
Mr. LONGLEY. YOU say, the Group Co. or the affiliates?
Mr. PECORA. I say, the Group Co. or the trust company.
Mr. LONGLEY. Yes.
Mr. PECORA. From which banks?
Mr. LONGLEY. The Group Co. had a loan from the Bankers
Co.
Trust
STOCK EXCHANGE PRACTICES
4821
Mr. PECORA. That was a loan of 4^4 million dollars; that was a
loan that was obtained upon 5 million dollars' worth of collateral
which Edsel Ford had loaned to the group for the purpose of obtaining some loan?
Mr. LONGLEY. Yes. I think you will find—I may be wrong in
this, but it is my recollection—that that collateral was used to
strengthen the collateral behind that loan. I t was not a new loan
that was made on that 5 million dollars' worth of securities, but
that was injected into the loan as additional collateral. I may be
wrong, but that is my understanding; and that it was a much larger
loan than 4% millions.
Mr. PECORA. There has been evidence presented to this committee
about that, and it is already in the record.
On the following day, namely, January 13, 1933, did not your
trust company withdraw $500,000 that you had deposited, representing these class A trust funds, from the First National Bank of
Detroit and deposit it in the Central Hanover Bank & Trust Co.
in New York?
Mr. LONGLEY. That is the way my memorandum reads. I have
no recollection of my own about it.
By the way, Mr. Pecora, you did not finish up this previous
question.
Mr. PECORA. What was that ?
Mr. LONGLEY. In the list of depositories on January 12, 1933, you
mentioned the Chemical Bank & Trust Co.
Mr. PECORA. Yes.
Mr. LONGLEY. I believe the trust company itself had had a loan
with them some months previous, not at this time—if that is of any
interest to you.
Senator COUZENS. May I ask why you withdrew $500,000 from
the First National Bank and transferred it to another bank?
Mr. LONGLEY. I do not know, Senator. You would have to ask
Mr. Maurice. He undertook to select those depositories, and I was
out of it; I had too much else to do.
The CHAIRMAN. The committee will take a recess until 10 o'clock
tomorrow morning.
(Whereupon, at 4.05 p.m., the committee took a recess until tomorrow, Wednesday, Jan. 17, 1933, at 10 a.m.)
175541—34—PT 10
16
STOCK-EXCHANGE PEACTICES
WEDNESDAY, JANUARY 17, 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 yesterday, in Koom No. 301, of the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams, 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.
TESTIMONY OF CLIFFORD B. LONGLEY, GKOSSE POINTE FARMS,
MICH.—Resumed
Mr. PECORA. Mr. Longley, just before adjournment yesterday afternoon you were asked by Senator Couzens the question as to why the
sum of $500,000 of capital A trust funds which were on deposit to
the credit and account of the Union Guardian Trust Co. in the First
National Bank of Detroit, were withdrawn! and transferred to
another bank. You answered as follows [reading] :
I do not know, Senator. You would have to ask Mr. Maurice. He undertook to select those depositories, and I was out of it. I had too much else to do.
Mr. LONGLEY. In that connection, let me state this further: That
question of Senator Couzens is as to why he passed it from one
bank to another.
Mr. PECORA. Yes.
Mr. LONGLEY. I cannot
tell you that. But I can tell you this:
The deposits on February 11, of A funds in that particular bank
were greater than they had been, on an average, for the 6 months
preceding.
Mr. PECORA. On February 11, 1933 ?
Mr. LONGLEY. That is right. The deposits, if you would like to
have them, in the First National Bank of Detroit, for June, July,
August, September, October, November, and December were as
follows^-and I can give them to you as they appear on the 10th, 20th,
and the last day of the month.
Mr. PECORA. All right.
Mr. LONGLEY. Only July 10 they were $853,000; July 20 they were
$860,000; July 31, $881,000.
Mr. PECORA. AS of what year*?
4823
4824
STOCK EXCHANGE PKACTICES
Mr. LONGLEY. This is 1932. The preceding 6 months—no; it
does not include January. I have not got those figures, but that was
when the movement was taking place. On August 10 there was
$617,000; August 20 there was $417,000; August 31, $421,000; September 10, $561,000; September 20, $306,000; September 30, $307,000; October 10, $611,000; October 20, $406,000; October 31, $580,000; November 10, $626,000; November 20, $495,000; November 30,
$287,000. On December 10 there was $513,000; December 20, $651,000; December 31, $692,000. On February 11, in that same, depository, there was $702,213.48. The average for those deposits that
I have given you is something less than $600,000.
I would like to say this also in connection with this thing. On
February 11
Mr. PECORA. 1933?
Mr. LONGLEY. 1933—there was total cash shown on the statement
of $7,313,000.
Senator COUZENS. What statement?
Mr. LONGLEY. Shown on the statement of condition of the Union
Guardian Trust Co. as of February 11, 1933, $7,313,000. Of that,
$2,346,000 was in Detroit banks.
Mr. PECORA. TWO million
Mr. LONGLEY. I am talking about A and B funds.
Mr. PECORA. TWO million
Mr. LONGLEY. $2,346,000.
Senator COUZENS. Can you separate them?
Mr. LONGLEY. Yes, sir. Would you like to have them in all the
banks, or just in the Detroit banks?
Mr. PECORA. Separate them as to class A and class B funds.
Mr. LONGLEY. Yes. I can do that.
Senator COUZENS. YOU said there were $7,000,000 in your own
trust company?
Mr. LONGLEY. Oh, no. They are deposits of the trust company
in Detroit banks.
Senator COUZENS. In Detroit banks?
Mr. LONGLEY. N O ; deposits of the trust company in all banks on
that date were $7,313,000.
Senator COUZENS. Divide that figure as between A and B.
Mr. LONGLEY. All right. Of the total cash, $7,313,000 on February 11, there was $5,493,061.92 in A money, A cash. In B cash there
was $1,820,978.25. Of that total of $7,313,000 there was $2,346,000
still in Detroit, and that is made up in this way. In the First
National Bank
Mr. PECORA. Pardon me. Can you separate that $2,346,000 into
class A and class B funds?
Mr. LONGLEY. That is what I am doing now.
Senator COUZENS. That last $5,000,000 is class B, is it not?
Mr. LONGLEY. NO, indeed. I am going to give you the figures
right now. In the A funds which were deposited in the First NationaLBank of Detroit, there was $702,213.48. Those are the A
funds. There was $1,644,450.97 of B funds, and those wWe in )the
Guardian National Bank of Commerce.
There was also an account of $2,500 in the Highland Park St&fe
Bank, a special account of some sort which, by the way, I did not
add in there. If you want to add that in, it is all right.
STOCK EXCHANGE PRACTICES
4825
So, we have, as a consequence, after this transfer, more A funds
in the First National Bank of Detroit than had previously been deposited there, and we have further, out of the whole of the funds of
the trust company, $2,300,000 out of $7,300,000 still in Detroit banks
on February 11.
Mr. PECORA. Can you explain, then, any reason why $500,000 on
deposit on January 13, 1933, in the First National Bank of Detroit
was withdrawn and deposited in the Central Hanover Bank & Trust
Co. of New York?
Mr. LONGLEY. I can tell you this, that it was the custom to withdraw funds from out-of-town banks and put them through the local
depositories before transferring them to other depositories. We
did not care to have some of these out-of-State banks know just
where the funds were going, and so we transferred them through
Detroit depositories. My answer to Senator Couzens last night was
that I did not know just why, and that is the nearest I can come
to explaining. Mr. Maurice could probably tell you about that, if
it is important.
Mr. PECORA. When you refer to out-of-State banks do you mean
banks outside the State of Michigan?
Mr. LONGLEY. Yes. If you would care to have it, I would be glad
to introduce this statement as of February 11, showing the funds in
these various banks.
Mr. PECORA. Yes.
Mr. LONGLEY. This is a copy of it [producing paper],
Mr. PECORA. DO you know that it is correct ?
Mr. LONGLEY. I only know that I asked for it and got it.
Mr. PECORA. Who prepared it?
Mr. LONGLEY. The treasurer of the trust company. At
least, I
got it from him. I would also be glad to introduce the statement
as of December 31,1932, if that is of any interest.
Mr. PECORA. All right.
Mr. LONGLEY. I would like to use them.
Mr. PECORA. I will offer the first statement in evidence, entitled
"General journal and statement of condition " of the Union Guardian
Trust Co., as of February 11, 1933.
The CHAIRMAN. Let it be admitted.
(Statement entitled, " General journal and statement of condition "
Union Guardian Trust Co., Feb. 11, 1933, was received in evidence, marked " Committee Exhibit No. 84, Jan. 17, 1934", and
the same will be found at the conclusion of today's proceedings.)
Mr. PECORA. I also offer in evidence the other statement produced
by the witness, entitled " General journal and statement of condition " of the Union Guardian Trust Co. as of December 31, 1932.
Mr. LONGLEY. YOU will find on the back the list of these depositories, with amounts.
Mr. PECORA. Yes.
Mr. LONGLEY. That is where I take my figures.
The CHAIRMAN. Let it be admitted.
(Statement entitled " General journal and statement of condition "
Union Guardian Trust Co., Dec. 31, 1932, was received in evidence,
marked " Committee Exhibit No. 85, Jan. 17, 1934 ", and the same
willbe found at the conclusion of today's proceedings.)
4826
STOCK EXCHANGE PRACTICES
Mr. PECORA. Are you familiar with the transaction whereby, on
January 17, 1933, the sum of $125,501 was withdrawn by the Union
Guardian Trust Co. from the National City Bank of Cleveland, and
certificates of deposit purchased ?
Mr. LONGLEY. Yes. That was in the course of the same series of
transfers of these "A" funds, which resulted, as I have already
stated, in the deposits being as they were on February 11.
Mr. PECORA. And on the same date, namely, January 17, 1933,,
$227,681.82 was withdrawn by the Union Guardian Trust Co. from
the Farmers Deposit National Bank of Pittsburgh?
Mr. LONGLEY. That is right.
Mr. PECORA. And certificates of deposit purchased.
Mr. LONGLEY. That is right.
Mr. PECORA. That was part of the same plan?
Mr. LONGLEY. Part of the same plan. It was a readjustment of
all those accounts with the old depositories and the new depositories.
Mr. PECORA. On January 18, 1933, the sum of $400,000 was deposited in the Union Trust Co. of Pittsburgh ?
Mr. LONGLEY. That is true.
Mr. PECORA. Those were "A" funds ?
Mr. LONGLEY. Those were "A" funds; yes, sir. Those were all
part of this same series of transfers.
Mr. PECORA. On the same date $81,731.70 was deposited in the
First National Bank—there were two deposits.
Mr. LONGLEY. That ife right.
Mr. PECORA. One of $81,731.70, and another of $250,000 were made
in the First National Bank of Detroit.
Mr. LONGLEY. That is right; a total of $331,731.70, brought back
to Detroit.
Mr. PECORA. On the same day $250,000 was withdrawn from the
Continental,Illinois Bank &> Trust Co. of Chicago.
Mr. LONGLEY. That is right.
Mr. PECORA. IS that the $250,000 that was deposited in the First
National Bank of Detroit that day ?
Mr. LONGLEY. I could not tell where that went. You cannot tell
that from these figures. You would have to follow the course of
each one of these checks through the Various channels. This really
does not mean anything, so far as the course that money followed
is concerned.
Mr. PECORA. Let us see. On that same date, January 18, 1933,
$481,731.70 was withdrawn from the Guardian National Bank of
Commerce of Detroit; isn't that so?
Mr. LONGLEY. That is right. That probably checks up there very
nicely.
Mr. PECORA. That is the aggregate of the two items of deposits,
respectively, of $400,000 deposited in the Union Trust Co. of Pittsburgh, and $81,731.70 deposited in the First National Bank of
Detroit.
Mr. LONGLEY. That is right.
Mr. PECORA. Would not that indicate the withdrawal of $481,731.70 from the Guardian National Bank of Commerce in Detroit
on that day?
STOCK EXCHANGE PEACTICES
4827
Mr. LONGLEY. Probably; yes. I would say so.
Mr. PECORA. That amount was deposited, in the proportions I
have stated, in the Union Trust Co. of Pittsburgh and the First
National Bank of Detroit.
Mr. LONGLEY. Yes. I think that is right.
Mr. PECORA. I S it not also correct to infer that the $250,000 withdrawn on January 18, 1933, from the Continental Illinois Bank &
Trust Co. of Chicago was the $250,000 deposited that same day in
the First National Bank of Detroit?
Mr. LONGLEY. Yes; I think that is true.
Mr. PECORA. What occasioned that particular shifting of funds
on that date?
Mr. LONGLEY. January 18 ?
Mr. PECORA. Yes.
Mr. LONGLEY. Oh,
I do not know. It was in the course of this
same process of readjusting those deposits. There were some new
depositories, three of them, I think, and funds were adjusted from
the old depositories to the new, and the A funds from the Guardian
were adjusted throughout these depositories.
Senator COUZENS. Was it not done on the recommendation of Mr.
Bodman, and in view of the letter he sent you ?
Mr. LONGLEY. Yes. It was all done in furtherance of that, and
his verbal request to do so.
Mr. PECORA. On January 19, 1933, $200,000 was withdrawn from
the First National Bank of Detroit, and a similar sum deposited in
the Northern Trust Co., of Chicago.
Mr. LONGLEY. Yes.
Mr. PECORA. That
was not done in pursuance of Mr. Bodman's
suggestion made many months prior, was it?
Mr. LONGLEY. It was not.
Mr. PECORA. What was the reason for
Mr. LONGLEY. Except that it was in the
that transfer?
course of this same process.
Why wasn't it ? I don't understand.
Mr. PECORA. Because Mr. Bodman's suggestion was that moneys
be withdrawn from banks affiliated with the Group with which
the Union Guardian Trust Co. was affiliated. In this particular case^
on January 19, 1933, $200,000 was withdrawn from one bank not
affiliated with the Group, and deposited in another bank not affiliated
with the Group.
Mr. LONGLEY. I S there any other reason
Mr. PECORA. Which other bank was outside the State of Michigan.
Mr. LONGLEY. That is quite true; but is there any other reason why
the officer in charge of adjusting these deposits cannot keep his
deposit in the First National Bank, where he wants it, and why he
cannot, if it is high there, put some over in Chicago, Pittsburgh, or
New York?
Mr. PECORA. I am trying to find out from you what the reason
was for this so-called " readjustment" ?
Mr. LONGLEY. I am only supposing that, because I did not handle
the1 transfers, but I assume that the officer who was, handling this
did not want that deposit in the First National Bank to be a great;
deal greater than it had been. He had his own reasons for that.
I suppose, but it was higher on February 11 than it had been.
4828
STOCK EXCHANGE PRACTICES
Mr. PECORA. But, my dear man, only the day before your bank
withdrew funds from one bank and deposited portions thereof,
aggregating $331,731.70, in this First National Bank of Detroit.
Mr. LONGLEY. That is true.
Mr. PECORA. And the following day withdrew $200,000 from the
First National Bank of Detroit and deposited it in a Chicago bank.
Mr. LONGLEY. That is true. That is perfectly all right. He was
adjusting those accounts and bringing them to the level that he
wanted them to be, I suppose. You would have to ask him in order
to get exactly what he had in his mind, because I cannot guess that,
but from my general knowledge of it, I think that is what he had
in mind. I think the best picture you will have will be on that
sheet of February 11, which shows where they finally wound up.
Mr. PECORA. On January 20, 1933, the sum of $400,000 was withdrawn from the regular account, so called, which your Trust Co.
had with the Continental Illinois Bank & Trust Co. of Chicago,
and deposited in the Continental Illinois Bank & Trust Co. of
Chicago in an account called "Account No. 2."
Mr. LONGLEY. Yes.
Mr. PECORA. DO you know the reason for that?
Mr. LONGLEY. No; I do not, except that it was in the course of
this general readjustment of "A" fund accounts.
Mr. PECORA. What was the reason for maintaining a regular
account and an account no. 2 in the Continental Illinois Bank &
Trust Co. ?
Mr. LONGLEY. I do not know. I do not know what that particular
designation means.
Senator COTTZENS. I S Mr. Maurice here?
Mr. LONGLEY. NO. YOU did not subpena him, did you?
Mr. PECORA. NO. I thought you could answer these questions.
Mr. LONGLEY. Well, I will do my best.
Mr. PECORA. On January 26, 1933, $350,000 was withdrawn from
the Union Trust Co. of Pittsburgh and certificates of deposit
purchased.
Mr. LONGLEY. Yes.
Mr. PECORA. YOU cannot give the reason for that?
Mr. LONGLEY. NO ; other than it was in the same course.
Mr. PECORA. On January 27, 1933, the sum of $241,000
was withdrawn from the Chemical Bank & Trust Co. of New York, and a
deposit of the same amount made that same day in the Guaranty
Trust Co. of New York.
Mr. LONGLEY. That is true, apparently.
Mr. PECORA. On January 28, 1933, the sum of $400,000 was withdrawn from the regular account, so-called^ which your trust company
had with the Bankers Trust Co., and deposited in account no. 2,
in the same bank.
Mr. LONGLEY. Yes; that is apparently true. That is what memorandum shows.
Senator COTTZENS. DO you know what account no. 2 was?
Mr. EONGLEY: I have not the slightest idea. It was v Ae same
designation, apparently, that was in the Continental Illinois Bank,
STOCK EXCHANGE PEACTICES
4829
Senator COUZENS. YOU do not know what account no. 2 meant?
Mr. LONGLEY. No; I do not.
Mr. PECORA. On February 7, 1933, $400,000 was withdrawn from
the First National Bank of Detroit, and the following deposits
were made on the same day: One of $200,000 in the Bankers Trust
Co. of New York, and one of $200,000 in the Union Trust Co. of
Pittsburgh, presumably the same funds.
Mr. LONGLEY. Presumably.
Mr. PECORA. On February 11, 1933, $116,000 was withdrawn from
the Continental Illinois Bank & Trust Co. of Chicago, and a
corresponding sum deposited in the First National Bank of Detroit.
Is that correct?
Mr. LONGLEY. Yes; apparently.
Mr. PECORA. On February 15, 1933, $55,000 was withdrawn from
the Chemical Bank & Trust Co. of New York. Do you know what
disposition was made of those funds?
Mr. LONGLEY. N O ; I do not. You say February 15?
Mr. PECORA. Yes.
Senator COUZENS. The bank
Mr. LONGLEY. Mr. Pecora,
was closed at that time, was it not ?
that amount was withdrawn by the
bank from its account in the Chemical Bank & Trust Co. of New
York.
• Mr. LONGLEY. I do not know about it. I would suppose that the
institution was closed up tight on that day.
Mr. PECORA. And on February 23,1933, the following withdrawals
were made from the banks which I will name, in the respective
sums which I will also name: From the Central Hanover Bank &
Trust Co. of New York, $500,000; from the Bankers Trust Co. of
New York, $825,069.11; from the Union Trust Co. of Pittsburgh,
$250,000.
Mr. LONGLEY. Were those all "A" funds ?
Mr. PECORA. I was going to ask you what those funds were.
Mr. LONGLEY. I think that I know.
Mr. PECORA. They are not marked here.
Mr. LONGLEY. Pardon me. Go ahead.
Mr. PECORA. From the Guaranty Trust Co. of New York, $250,000;
from the Continental Illinois National Bank & Trust Co. of Chicago,
$600,000; from the Farmers Deposit National Bank & Trust Co. of
Pittsburgh, $120,000; from the Northern Trust Co. of Chicago,
$200,000.
On the following day, February 24, 1933, the following withdrawals of funds were made: From the Chemical Bank & Trust Co.
of New York, $375,000; from the Union Trust Co. of Pittsburgh,
$350,000.
The aggregate amount of all these withdrawals commencing on
February 15, 1933, and ending on February 24, 1933, was $3,525,069.11. Do you know the reason for that?
Mr. LONGLEY. Yes.
Mr. PECORA, What?
Mr. LQNGLEY. I think I know the reason. After the holiday
things became very, very serious in Detroit, with all the banks
4830
STOCK EXCHANGE PRACTICES
closed, and our trust depositors were having difficulty, and were
in needs of funds, and the trust funds were withdrawn and put
in cash.
Mr. PECORA. The "A" trust funds?
Mr. LONGLEY. The "A" trust funds were withdrawn, as far as they
could be, and put in cash in the vault in the Trust Co. for the
benefit of the trust depositors.
The CHAIRMAN. When were they paid out?
Mr. LONGLEY. Since then, as the people applied. I do not know
just what the conservator has done. The first disbursement, as I
remember, was 50 cents on the dollar of the total amount of their
claim. That I think was raised, and I think now they have somewhere around 70 or 80 cents. There is still, of course, a large and
substantial sum in the closed bank in Detroit, but actually that
reserve protected those trust depositors to the extent of about 90
cents on the dollar.
The CHAIRMAN. The 50 percent was paid by whom ?
Mr. LONGLEY. By the conservator or the Trust Co. I have forgotten whether it happened before the conservator took hold or not.
The CHAIRMAN. These funds were turned over to the conservator?
Mr. LONGLEY. Oh, yes. The conservator has possession of everything.
Senator COUZENS. When was the conservator appointed?
Mr. LONGLEY. I do not remember that date. I would say it was
late in March.
Senator COUZENS. Then, between the time of these withdrawals,
February 15 up to February 24, 1933, and the time the conservator
was appointed, these funds were in your charge ?
Mr. LONGLEY. That is right. I think there was something paid
out, but I have forgotten what it was.
Senator COUZENS. Was that paid out on a percentage basis?
Mr. LONGLEY. I do not think so. I think that they were allowed
up to a certain percentage.
Senator COUZENS. DO you know what the percentage was?
Mr. LONGLEY. NO ; I have forgotten.
Senator COUZENS. Was it not possible, between the dates of those
withdrawals and the appointment of the conservator, for some of
those trust funds to be withdrawn to the extent of 100 percent?
Mr. LONGLEY. NO ; there never would have been 100 percent for
them, because of the sum still in the closed Detroit bank.
Senator COUZENS. I mean of that amount which was in your
vaults, which you withdrew and put in your vaults.
Mr. LONGLEY. Yes.
Senator COUZENS. Were
not some of those trust funds paid out to
the extent of 100 percent ?
Mr. LONGLEY. Not that I know of.
Senator COUZENS. YOU are quite sure of that, are you ?
Mr. LONGLEY. My recollection is otherwise. I do not remember it.
I do not think so.
STOCK EXCHANGE PEACTICES
4831
Senator COUZENS. I am trying to get at whether there would be
^ny rule or mandatory provision by any governmental agency to distribute those trust funds on a percentage basis at that time.
Mr. LONGLEY. No; there was no rule, but, as I remember, you will
find a resolution of the board, or the executive committee, authorizing the officers to continue with the business, but using due care as
t& any possible preference that might arise—some such language as
that.
Senator COUZENS. Can you give reference as to the date of that
resolution ?
Mr. LONGLEY. NO ; I do not have it. In fact, I have a very hazy
recollection as to the resolution.
Senator COTTZENS. AS a matter of fact, you cannot testify that
there were no 100-percent withdrawals of that trust fund between
the time of the withdrawals from these depositories and the time of
the appointment of the conservator?
Mr. LONGLEY. NO; I cannot testify to it absolutely, but I think
there were not.
The CHAIRMAN. YOU do know that there was some distribution
made at that time?
Mr. LONGLEY. I think so; yes.
Mr. PECORA. Mr. Longley, I show you what purports to be a
photostatic reproduction of an intragroup and interoffice memorandum, so styled, dated January 16, 1933, addressed to Mr. Frank
Maurice by Mr. E. C. Harris, on the subject of " Becommendations
re bank account set-up."
Will you please look at it and tell me if you recognize it to be
a true and correct copy of such memorandum that passed from Mr.
Harris to Mr. Maurice?
Mr. LONGLEY (after reading paper to near the end). Yes; this
seems to be what you designate it as.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Mr. Longley continues reading the paper.)
Mr. PECORA. Mr. Longley, will you just give it to the committee
reporter when you are through reading it?
* Mr. LONGLEY. Yes. [And after a few moments longer, having completed the reading of the paper, the witness handed it to the committee reporter.]
(The Intra-group and Inter-Office memorandum, dated Jan. 16,
1933, from E. C. Harris to Frank Maurice, was marked " Committee
Exhibit No. 86, Jan. 17, 1934 ", and will be found immediately following where read by Mr. Pecora.)
Mr. PECORA. The memorandum just received in evidence, and
marked " Committee Exhibit No. 86 " as of this date, being on the
letterhead of the Guardian Detroit Union Group, Inc., and being
styled an Intra-group and Inter-Office memorandum, reads as follows
[reading] :
4832
STOCK EXCHANGE PRACTICES
GUARDIAN DETROIT UNION GROUP
Incorporated
INTRA-GROUP AND INTEROFFICE MEMORANDUM
Jan. 16, 1933.
To Mr. Frank Maurice 30
From Mr. E. O. Harris 251
Subject RECOMMENDATIONS RE-BANK ACCOUNT SET-UP
BANK ACCOUNTS—TRUST FUNDS CLASS A
New York
Central Hanover Bank & Trust Co.—On deposit $500,000. Rate of interest
on open account Y2%. Inasmuch as this will be an inactive account, ,it is
recommended that we purchase a Certificate of Deposit in that Institution
for $400,000 and leave $100,000 in open account. Recommendation for the
purchase of a Certificate of Deposit on this inactive money is to increase
interest yield.
Chemical Bank & Trust Co.—On deposit $706,124. Rate of interest %#>:
Inasmuch as this is the account on which all our bond trading transactions
are cleared, it seems advisable to make this our general active New York
account. For this purpose, we should leave about $100,000 and distribute the
balance as follows:
Chemical Bank & Trust Co. Certificate of Deposit, $400,000,.
Transfer to the Guaranty Trust Co., N.Y., $200,000, which will become our
active Class A account in New York.
Manufacturers' Trust Co.—Suggest that this balance be left as it is until
disposition has been made of some of the large balances on open account in
other institutions. This account is presently paying us 1%.
Bankers Trust Co.—On deposit $500,000. Interest rate % % . It does not appear that we can leave as large a sum of money on deposit in open account at
this small interest rate. Mr. Jackson informs us that they do not issue
Certificates of Deposit. If this is the case, negotiations should be made for
an arrangement which will allow us a better interest rate or transfer be
effected to some other account.
Chicago
Continental Illinois National Bank & Trust Co.—Amount on deposit $778,154.
Inasmuch as it seems to be the intent to keep a large sum on deposit with the
Continental Illinois! Bank, it is suggested that $500,000 of this amount be
converted into one of their Certificates of Deposit with a larger interest return
than we are now getting. The remaining $278,000 will be sufficient monies to
have on open account in Chicago.
First National Bank—This, is a new depositary and it looks as though there
would be available for an initial deposit about $200,000. This should be placed
in the form of a Certificate of Deposit instead of an open account.
Northern Trust Co.—About $200,000 will be available for opening an initial
account in this Bank. This should be in the form of a Certificate of Deposit
rather than an open account.
Pittsburgh
Farmers Deposit National Bank—We have purchased here $227,681 in Certificates of Deposit for trust accounts and have on open account $32,318, making a
total of $260,000. Open account pays 1%% and Certificates of Deposit 2%.
Suggest leaving as is.
Union Trust Company—Balance here has been $50,498, on which we are getting 1%%. Suggest that we leave as is in open account.
Cleveland
National City Bank—We have purchased at this Institution $125,501 in Certificates of Deposit leaving $74,499 in open account. On open account we are to
receive 2% and on Certificates of Deposit 2%%.
Detroit
Guardian National Bank of Commerce—Uptown Office. Our account here
will be entirely wiped out with the opening of the two additional bank accounts
in Chicago. On deposit $411,722, rate of interest 1%.
STOCK EXCHANGE PRACTICES
4833
First National Bank—On deposit—$565,263, interest rate 1%. This will be
continued as our active Class A Trust Fund Account in Detroit. It is advisable
that we maintain a balance of about this amount.
Windsor
Canadian Bank of Commerce—On deposit $19,145, interest rate 1%%. To be
left as is inasmuch as it is necessary to the conduct of certain Trust Accounts.
Pontiac
First National Bank & Trust Co.—On deposit $6,970, interest rate 1%%. To
be left as is inasmuch as it is the active account for the Title Company in
Kontiac.
Grosse Pointe
Grosse Pointe Savings Bank—On deposit $17,207, interest rate 1%. To be
left as is because it is the active operating account for the Grosse Pointe
School.
SUNDKY CERTIFICATES OF DEPOSIT
This is made up of Certificates of Deposits as follows:
Detroit Trust Company
$235,000
Michigan Industrial Bank:
144, 000
As soon as our Certificates of Deposit are cashed at the Michigan Industrial
Bank this sum will be available for disposition elsewhere. Certificates of
Deposit at the Detroit Trust Company can remain as is.
BANK ACCOUNTS GENERAL FUNDS
New York
J. P. Morgan Co.—On deposit $3,557. This is a hangover from an old
deposit relationship with the Guardian Trust Company. It is suggested that
this account be closed out.
Guaranty Trust Co.—As before referred to, it is suggested that this be
made our Class A General Account in New York and that $200,000 be transferred from the Chemical Bank & Trust Company which will build this
balance up to $216,166. Interest rate is %%.
National City Bank & Trust Co.—On deposit $5,765, interest rate y2%.
Unless there are good reasons to the contrary, it would seem that this account
could be closed out.
Chicago
City National Bank & Trust Co.—On deposit $5,227, interest rate V2%.
"This is our active B Account in Chicago. It seems that borrowing relationships at times in the past have been very satisfactory with this Institution.
_As soon as our B Funds become a little more plentiful, perhaps it would be well
to build this balance up to possibly $25,000.
Detroit
Guardian National Bank oti Commerce—On deposit $617,204, rate of interest
1%. This represents our general working account on Class B accounts in
Detroit. Unless there are serious objections to the contrary, perhaps it should
remain as is.
"Mt. Clemens
Mt. Clemens Savings Bank—On deposit $5,986. Inasmuch as this Bank is
closed, it is recommended that the balance be transferred to Accounts
TBeceivable.
Highland Park
Highland Park State Bank—Running balance in this account seldom exceeds
. $2,500 inasmuch as it is only used for our pay roll account.
Monroe
Dansard State Bank—This Bank is closed. It is recommended that the balance of $1,909 be transferred to Accounts Receivable.
Birmingham
First State Savings Bank—On deposit $11,838. Bank Closed, recommend
itransfer of balance to Accounts Receivable.
4834
STOCK EXCHANGE PRACTICES
Fowlerville
Commercial State Bank of Fowlerville—Balance $4,500. Should be transferred to Accounts Receivable.
(Signed) E. C. Harris
ECH: EMB
CC—Messrs. C. Longley
J. Stalker.
Senator COUZENS. Mr. Longley, what was Mr. Stalker's position
in the Trust Co.?
Mr. LONGLEY. What was the date of that memorandum, Mr.
Pecora?
Mr. PECORA. The date is January 16, 1933.
Mr. LONGLEY. I think he had just become vice chairman, Senator
Couzens. I don't know whether that memorandum was before or
after the meeting, but at any rate in January he became vice chairman of the board.
The CHAIRMAN. And what was Mr. Harris' position?
Mr. LONGLEY. He was treasurer at that time. Doesn't the memorandum indicate that fact?
Mr. PECORA. DO you mean of the Union Guardian Trust Co. ?
Mr. LONGLEY. Yes.
Senator COUZENS. And you were chairman at that time?
Mr. LONGLEY. N O ; I was president.
Senator COUZENS. Who was the president; was it Mr. Bodman?
Mr. LONGLEY. If it was after the January meeting he was the
chairman, and I was the president. I think the meeting was held
on the 13th of January.
Mr. PECORA. NOW, Mr. Longley, I show you what purports to be
a photostatic copy of another so-called " intra-group and interoffice memorandum ", addressed to Mr. Frank J. Maurice, from Mr,
E. C. Harris, dated January 12, 1933. Will you kindly look at it
and tell me if you recognize it to be a true and correct copy of such
memorandum passing from Mr. Harris to Mr. Maurice on or about
that date.
Mr. LONGLEY (after reading the memorandum). I t seems to be.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The memorandum referred to, dated Jan. 12, 1933, to Mr. Frank
J. Maurice from Mr. E. C. Harris, was marked " Committee Exhibit
No. 87, Jan. 17, 1934", and will be found immediately following
where read by Mr. Pecora.)
Mr. LONGLEY. Mr. Pecora, might I see that other paper ?
Mr. PECORA. DO you mean the one already received in evidence?
Mr. LONGLEY. Yes.
Mr. PECORA. Here it is.
Mr. LONGLEY. Mr. Pecora,
I cannot make out this date of filing on
this particular paper.
Mr. PECORA. Which exhibit do you now refer to ?
Mr. LONGLEY. TO committee exhibit no. 86.
Mr. PECORA. DO you mean the one I have just read?
Mr. LONGLEY. Yes. If possible I should like to know whether
this is [and then holding up paper to the light]—It is April 19, I
believe.
STOCK EXCHANGE PRACTICES
4835
Mr. PECOEA. Of 1933?
Mr. LONGLEY. Yes. I am trying to bring out that probably,
among other papers, this letter that you spoke of on yesterday was
filed with a great many other papers of mine when I left the trust
company.
Mr. PECORA. The letter you now refer to is the one that
Mr. LONGLEY. I am just wondering whether that paper was taken
from my copy. That seems to be about that date. You will find,
Mr. Pecora, if you examine those files, that a large number of my
letters were filed on one day in April of 1933.
Mr. PECORA. Which would indicate, I take it, that as you received
those letters and reports, addressed to you, you kept them for a
while and that then, on April 16, or some date in April of 1933,
they were all transferred to the office files of the trust company.
Mr. LONGLEY. No. When these memoranda came up to me, when
these copies of communications came to me, my secretary filed a
great many of them in my own private file in my office, without
sending them to the general file. And then, when I left the trust
company, I cleaned out that file, and everything belonging to the
trust company went on that date, or about that date, to their files.
Senator COUZENS. Mr. Pecora, what was the last thing that you
put in evidence ?
Mr. PECORA. This intragroup and interoffice memorandum, dated
January 12, 1933, marked " Committee Exhibit No. 87 " as of this
date, and which appears on the letterhead of the Guardian Detroit
Union Group, Inc. It reads as follows [reading] :
GUARDIAN DETROIT UNION .GROUP, INCORPORATED
INTRA-GROUP AND INTER-OFFICE MEMORANDUM
To Mr. Frank J. Maurice 30
Date Jan. 12, 1933
From Mr. E. C. Harris 251
Accomplishments in the transfer of Class A funds are reported for today
as follows:
FARMERS DEPOSIT NATIONAL BANK OF PITTSBURGH
Account opened:
Certificates of Deposit (Trust Accts.) purchased
Open account
Total
$227,681.82
32, 318.18
$260, 000. 00
CHEMICAL BANK & TRUST COMPANY—NEW YORK
This deposit raised to $500,000 by a transfer of funds today in the amount
of $230,000.
And right opposite that last sentence, which sentence appears in
typewriting, there also appears the following handwritten notation:
Are these A Fund earmarked?
And I continue reading the exhibit:
4836
STOCK EXCHANGE PEACTICES
BANKERS TRUST COMPANY
NEW YORK
Deposited $500,000.
NATIONAL CITY BANK OF CLEVELAND
Certificates of Deposit purchased (Trust Accts.)
Open account
$125,501.00
74, 499. 00
Total
$200,000. 00
THE UNION TRUST CO. OF PITTSBURGH
Account increased to $50,000 by transfer of $43,000.
All of the above resulted in a withdrawal from the Guardian National Bank
of Commerce, uptown office, of $1,233,000; certificates of deposit (trust accts.)
in Guardian National Bank of Commerce in the amount of $363,082.82 were
cashed and placed in our general account in the Guardian National Bank
of Commerce. Transfer of these funds will be made tomorrow morning to
class A account in the uptown office from which further transfers of funds can
be made as decided.
(Signed)
E. C. HARRIS.
ECH: EMB.
Mr. LONGLEY. May I see that paper again for a minute, Mr.
Pecora?
Mr. PECORA. Yes. Here it is.
Mr. LONGJLEY (after looking at the paper again). I thank you.
Mr. PECORA. I show you what purports to be a photostatic copy
of another so-called " intragroup and interoffice memorandum",
addressed to Mr. F. J. Maurice by Mr. E. C. Harris, dated January
24, 1933. Will you look at it and tell me if you recognize it to be a
true and correct copy of such memorandum ?
Mr. LONGLEY (after reading the paper). I t seems to be, Mr.
Pecora.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(The photostat of Intra-group and Inter-Office memorandum,
dated Jan. 24, 1933, from E. C. Harris to F. J. Maurice, was marked
"Committee Exhibit No. 88, Jan. 17, 1934", and will be found
immediately following where read by Mr. Pecora.)
Mr. PECORA. The exhibit just received in evidence as no. 88 of
this date, being on the letterhead of the Guardian Detroit Union
Group, Inc., reads as follows [reading] :
GUARDIAN DETROIT UNION GROUP INCORPORATED
INTKA-GROUP AND INTER-OFFICE MEMORANDUM
To Mr. F. J. Maurice
30
From Mr. E. O. Harris 251
Dated January 24, 1933
NEW YORK ACCOUNTS AS OF THE OPENING OF BUSINESS THIS MORNING WERE AS
FOLLOWS :
Class A Accounts:
Guaranty Trust Co.—$9,000. This; has been our active general account in
New York and there is presently on deposit only $9,000. Mr. Badger made ,ar
rangements here through Mr. Edward H. Rawls, Vice President, to purchase
Certificates of Deposit at one-half of one per cent on time and one-quarter of
one per cent on demand basis. This Bank should, accordingly, be made a Class
A Account Bank and the balance should be built up to $250,000. This will be
STOCK EXCHANGE PRACTICES
4837
considered an active account and will necessarily carry the open demand rate
balance of one-quarter of one per cent. It should be designated as " Trust
Funds Class A" and to presently build up the balance here, it is suggested that
we be allowed to transfer from the Chemical Bank & Trust Co.
Chemical Bank & Trust Co., N.Y.—$641,000. Suggest the transfer of $250,000
to Guaranty Trust Co. as above. We will then open an account to be used as
our regular Class B General Fund Account in New York in the amount of
$100,000. This will be done by a transfer of money from Detroit. This will
leave $390,000 to which we will add $10,000 which can be left in a dormant
account to be known as * Trust Funds Class A ' at the highest rate of interest
obtainable. It is desirable that this $400,000 be left in dormant account as the
$100,000 General Account will be quite active and our balance in it will be
comparatively small and would not justify the service to be performed by the
Bank otherwise.
Central Hanover Bank & Trust Co., N.Y.—$500,000. This can be left as a
dormant deposit at the best rate obtainable.
Manufacturers' Trust Co., NJ.-$8,000. If this balance is built up it will
necessarily have to be done by a transfer of funds from either the Central
Hanover Bank & Trust Co. or the Bankers Trust Co.
" Bankers Trust Co., N.Y.—$500,000. Inasmuch as Mr. Badger made arrangements through Mr. B. Thompkins, vice president, to purchase Certificates of
Deposit for trust accounts here, this money should be distributed in two
accounts both of which will be Trust Funds Class A. Number one account
should be for $100,000 to take care of our Certificate of Deposit traffic and
number two account may be for $400,000 (unless there is a draw down to build
up Manufacturers' Trust which can be left in dormant account at the best
rate obtainable.
J. P. Morgan & Co, N.Y.—$3,000. To be left as is.
National City Bank, N.Y.—$5,000. To remain as is.
ECH:EMB
(Signed) E. C. HAEEIS.
The CHAIRMAN. Mr. Longley, there is where you get your reference
to the " No. 1 account ", and the " No. 2 account."
Mr. PECORA. NO, that is the general account and account no. 2.
Isn't that so, Mr. Longley?
Mr. LONGLEY. Yes.
Senator COUZENS. And
apparently the No. 2 account was a trust
account.
Mr. LONGLEY. I would think so from that letter.
The CHAIRMAN. I t says a transfer of A funds.
Mr. PECORA. Mr. Longley, does it seem to you that the three exhibits last offered in evidence, respectively committee exhibits 86,
87, and 88, and consisting of these intra-group and inter-office memoranda, are explanation of the reasons for some of the transfers of
funds regarding which I questioned you this morning?
Mr. LONGLEY. Yes, I think so.
Mr. PECORA. NOW, Mr. Longley, I show you what purports to be
a photostatic copy of a memoranda addressed to Mr. Henry E.
Bodman by Mr. E. C. Harris, dated January 17, 1933, entitled
" Present Distribution of Funds of Union Guardian Trust Co. as of
January 16, 1933."
Will you look at it and tell me if you recognize it as being a true
and correct copy of such memorandum or communication.
Mr. LONGLEY (after reading the paper). It seems to be, Mr.
Pecora.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
Senator COUZENS. Let it be admitted.
(The photostat of paper dated Jan. 17, 1933, to Henry E. Bodman
from E. C. Harris, was marked " Committee Exhibit No. 89, Jan.
175541—34—PT 10
17
4838
STOCK EXCHANGE PRACTICES
17, 1934," and appears immediately following where read by Mr.
Pecora.)
Mr. LoNGLEY. I was looking for the date on that paper but did
not find it.
Mr. PECORA. The paper just received in evidence as committee
exhibit no. 89, reads as follows [reading] :
Mr.
Mr.
HENRY E. BODMAN.
E. O. HARRIS.
PRESENT DISTRIBUTION OF FUNDS OF UNION GUARDIAN TRUST
COMPANY (as of 1/16/33)
TRUST FUNDS, class A:
New York:
Central Hanover Bk. & Tr. Co
$500, 000.00
Chemical Bk. & Tr. Co
735,133.17
Manufacturers' Trust Co
8,273.59
Bankers Trust Co
500,000.00
Chicago: Continental 111. Nat. Bk. & Tr. Co
778,755.03
Pittsburgh:
Farmers Deposit National Bk
260, 000.00
Union Trust Co
50,498.22
Cleveland: The Nat'l City Bk. of Cleveland
200,000.00
Detroit:
Gdn. Nat'l. Bk. of Com. (uptown). (This
acct. will be closed out on Jan. 17, 1933, by
placing $200,000 each in the Northern Tru.
Co. and First National Bank, Chicago.
(Both new depositaries)
480,739.66
First National Bk
527, 343. 31
Windsor: Canadian Bk. of Commerce
19,733.04
Pontiac: First Nat'l Bk. & Tr. Co
7, 088.34
Grosse Pointe:
Grosse Pointe Savings Bk
17r468. 30
Special C/D's & Accts. (See detail attached)
596, 242. 58
Sundry Certificates of Dep. (See detail attached)
379, 000. CO
Total
GENERAL FUNDS, class B :
New York:
J. P. Morgan Co
Guaranty Trust Co
National City Bank
Chicago : City Natl. Bk. & Tr. Co
Detroit: Guardian Nat'l. Bk. of Com
Mt. Clemens: Mt. Clemens Savings Bk
Highland Park: Highland Park St. Bk. Spec a/c_
Monroe: Dansard State Bk
Birmingham:
First State Savings Bank
Sundry Banks and Bankers
Sundry Certificates of Dep. (See detail attached)
$5, 060, 275. 24
3, 557. 42
15,656.55
5,765.06
5, 211. 35
808, 950. 59
5, 986. 70
2, 500: 00
1,909. 49
11,838.62
155,799.20
24, 500.00
Total
(Signed)
1, 041, 674. 98
E. C. H.
E. C. HARRIS.
ECH: EMB
Then there are attached two additional sheets itemizing some of
the details, that is, with regard to some of the items that I have just
read [reading] :
STOCK EXCHANGE PRACTICES
4839
Mr. Henry E. Bodman,
Mr. E. 0. Harris.
Jaa. 17, 1933.
PRESENT DISTRIBUTION OF FUNDS OF UNION GUARDIAN TRUST CO.
(as of 1/16/33) Sheet # 2 2
Detail—Special O/D's & Accts. Glass A Units of
Group:
Guardian National Bk. of Com
$289, 907. 30
Michigan Industrial Bk
18, 000.00
First National Tr. & Savings Bk., Port Huron___
2, 336.45
Total
$310,243.75
All of the above funds will be out of the Guardian National
Bk. of Com. by the close of business today with the following
exceptions:
M. B. Mills, Savings Acct, $43,490.10. This is a savings account
which it is desirable not to close out until the end of the interest
period on account of loss of. interest. At that time it will be
placed in the form of a Certificate of Deposit.
Troy Syndicate, Commercial Acct., $398.00. There are several
reasons why this account should not be disturbed at this time due
to the unsettled relations among syndicate members.
John Hancock Life Insurance Co., $78.89. Under Trustees
Agreement with this Insurance Company, the Guardian National
Bank of Commerce was specifically designated as Depositary.
Others:
Detroit:
Commonwealth Commercial St. Bk
$1,100.00
Detroit Savings Bk
783,40
Detroit Trust Co
220,213.75
First National Bk
37,105.49
Northwestern St. Bk. (Closed)
207.89
United Savings Bk
3, 371.37
Iplay City: Peoples St. Bk. (Closed)
331.38
Northville: Lapham St. Savings Bk. (Closed)
4,364.50
Pontiac: First Nat'l Bk. & Tr. Co
121.02
St. Clair: Commercial & Savings Bk
2.57
Walkerville: Royal Bk. of Can
2,480.38
Windsor: Canadian Bk. of Com
9,855.36
Imperial Bk. of Can
6,061.72
Total
285,99a 83
Grand total
598,242.58
Detail—Sundry Certificates of Deposit Class A :
Michigan Industrial Bank
Detroit Trust Company
144,000.00
235,000.00
379,000.00
Detail—Sundry Certificates of Deposit Class B :
Fowlerville: Commercial State Bank (Closed)—
Marlette: Commercial St. Bk
Pigeon: State Bk. of Pigeon
4,500.00
15,000.00
5,000.00
24,500.00
ECH:EMB
(Signed)
E. C. H.
E. C. HARRIS.
Mr. PECORA. NOW, Mr. Longley, I want to show yon what purports to be a photostatic copy of a statement or report found among
the files of the Union Guardian Trust Co. entitled " Union Guardian
Trust Co., withdrawals and deposits, January 1, 1933, to January 28,
1933."
Will you look at it and tell me if you recognize it as being a true
and correct copy of such report or statement contained among the
files and records of the Trust Co. ?
4840
STOCK EXCHANGE PRACTICES
Mr. LONGLEY (after reading the paper). I never saw it before, Mr.
Pecora, but I wouldn't—just a minute ?
Mr. PECORA. YOU would not question the authenticity of it, would
you ?
Mr. LONGLEY. I would not think so. I think probably it is correct. But I do not know anything about it.
Mr. PECORA. At any rate, you do not question the authenticity of
it, do you?
Mr. LONGLEY. No; not if you got it from the files of the Trust Co.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
Senator COTJZENS. I t will be admitted.
(The statement entitled " Union Guardian Trust Coi, withdrawals
and deposits, Jan. 1,1933, to Jan. 28,1933 ", was received in evidence
and marked " Committee Exhibit No. 90, Jan. 17, 1934 ", and will be
found immediately following where read by Mr. Pecora.)
Mr. PECORA. The paper just received in evidence and marked
" Committee Exhibit No. 90 " as of this date, reads as follows
Mr. LONGLEY (interposing). Mr. Pecora, can you tell me where
that paper came from? If so, that might refresh my recollection
somewhat.
Mr. PECORA. From among the records andfilesof the Union Guardian Trust Co.
Mr. LONGLEY. YOU do not know from what particular file, I take
it? I notice it is a copy coming, apparently, from, a book of some
sort.
Mr. PECORA. I do not see anything on the document which would
identify the particular file in which it had been placed.
Mr. LONGLEY. All right.
Mr. PECORA. NOW, this exhibit reads as follows [reading] :
UNION GUARDIAN TRUST COMPANY
Withdrawals and Deposits January 1, 1933 to January 28, 1933
Certificates of deposit:
Balance December 31, 1932
Balance January 28, 1933
Decrease
$17, 576, 090.45
L.—__ 16, 219, 292. 83
•_-
.
^'"
Due to withdrawals:
B. H. Scranton
Sidney D. Waldron
U. G. T. Co. Agt. Geo. W. Trendle
Mr. LONGLEY (interposing). That
1, 356, 797.62
' ' ' .
20, 000. 00
10, 0<X>. 00
49, 500.00
means Union Guardian Trust
Co.
Mr. PECORA. HOW was that?
Mr. LONGLEY. I say the initials U. G. T. Co. mean Union Guardian
Trust Co.
Senator COTTZENS. And about Mr. Trendle, was he one of your
directors ?
Mr. LONGLEY. Yes,
Mr. PECORA. That
sir.
is, Mr. Trendle was one of your Trust Co.
directors ?
Mr. LONGLEY. Yes,
sir.
Mr. PECORA. I continue reading:
STOCK EXCHANGE PRACTICES
Janet Jones Caulk
George W. Trendle
Conductors Protective Assurance Co
Detroit Trust Co., Ex. C. C. Thompson
Edsel B. Ford
Estate of William H. Murphy
Guardian National Bank of Commerce
Continental Bank, city
F. E. Martin
4841
$15,000.00
10, 000.00
10, 000.00
10,000.00
104,459.00
30,000.00
700,000.00
11, 307. 00
25, 000. 00
Senator COUZENS. That should be P. E. Martin.
Mr. LONGLEY. No; I think that is F. E. Martin.
Senator COUZENS. On my memorandum it is shown as P. E.
Martin.
Mr. LONGLEY. Well, I do not believe it is. I did not know that
he had any funds in there. I wouldn't swear to that, however.
Senator COUZENS. It shows P. E. Martin on my memorandum.
Mr. LONGLEY. All right.
Mr. PECORA. And where we have the initials " U. G. T. Co." that
refers to the Union Guardian Trust Co., as I understand it.
Mr. LONGLEY. Yes, sir.
Mr, PECORA. I continue
reading:
U. G. T. Co., Agt. W. S. Knudsen
Crowley Milner Company
General Foods Corporation
Campbell Ewald Company
H. P. Cristy
Pacific Steel Boiler Corp
Allied Jewish Campaign
Detroit Auto Club
Sundry Items
$40,300.00
50,000. 00
'_ 50, 000. 00
170,000.00
10,000.00
180, 000. 00
10,000. 00
10,000.00
61,231. 62
Total
$1, 576; 797. 62
Less deposits:
Booth Newspapers' Ins
75, 000. 00
Detroit Trust Co., Rec. for Minn. Atlantic
Trans. Co
100,000. 00
Cranbrook Foundation
35, 000. 00
Detroit Trust Co., Executor W. O. Russell
10, 000. 00
Total
220, 000.00
Decrease
Trust funds, class B :
Balance Dec. 31, 1932
Balance Jan. 28, 1933
1, 356, 797.62
- — =
9,031,717.92
7,613,099.20
Decrease;
Due to withdrawals:
City of Detroit
Bank of Hamtramck
1, 418, 618.72
=====
Total
Less deposits:
Times Pub. Co
Hemlock State Bank
Sundry items
Decrease
1, 454, 646. 00
60, 000. 00
1, 514, 646.00
43,344.00
22,883.00
29, 800. 28
_
96,027.28
1,418,618.72
Mr. PECORA. NOW, among the names that I have read from this
committee exhibit no. 90, do you recognize the names of any officers
or directors of the Trust Co. ?
4842
STOCK EXCHANGE PEACTICES
Mr. LONGOIY. Yes. There is Mr. Trendle's name, and Mr. Ford's
name.
Mr. PECOEA. Mr. Trendle and Mr. Ford?
Mr. LONGI^EY. Let me see [reaching out for the exhibit]. Possibly there are some others. I did not examine it for that purpose.
Mr. PECOEA. Look it over and see if there are any others.
Mr. LONGLEY [after looking the paper over]. No; I think that
is all.
Mr. PEOOSA. Just Mr. Trendle and Mr. Ford.
Mr. LONGLEY. Mr. Trendle and Mr. Ford; yes.
Mr. PECOEA. NOW, do you know whether or not any corporate
depositors listed among the withdrawals on this exhibit are corporations that had among their officers and directors any officers and
directors of the Union Guardian Trust Co. ?
Mr. LONGLEY. I don't think so. But I will look at the exhibit
again.
Mr. PECOEA. Here it is. Please look at it.
Senator COUZENS. Was Ewald a director of the Trust Co.?
Mr. LONGLEY. I will have to check that exhibit over and see.
Senator COUZENS. I wish you would do so.
Mr. LONGLEY (after looking again at the exhibit). No. I think
he was just on the group and on the bank. He does not seem to be
on this list that I have here among my papers, npt on this list at all.
Mr. PECOEA. Are you now referring to Mr. Ewald ?
Mr. LONGLEY. Yes,
Mr. PECOEA. Was
sir.
he a director of the Guardian Detroit Union
Group, Inc. ?
Mr. LONGLEY. I think he was a director of the group, and was
on the bank. But he is not a director shown here on my paper.
Mr. PECOEA. Are there any other depositors whose names are listed
on that exhibit as having made withdrawals, who are officers or
directors of the group; I mean as of that time ?
Mr. LONGLEY. No, sir; I don't think so. Here is the estate of
William H. Murphy. I don't know whether Dr. Murphy was connected with that matter or not. Do you, Senator Couzens?
Senator COUZENS. Dr. Murphy had a part of that estate, didn't he ?
Mr. LONGLEY. Well, I don't know about that. I say, I don't know
just what the estate of William H. Murphy is. That is the only
possibility there.
Senator COUZENS. Why was $700,000 taken out by the Guardian
National Bank of Commerce at that time?
Mr. LONGLEY. Well, they just withdrew it to cut down their
deposit in the Trust Co., and whether because they needed the money
I don't know.
Senator COUZENS. Of course, they were getting more liquid all
the time. Was that withdrawn to make them more liquid?
Mr. LONGLEY. Well, I don't know. That had been there for quite
a while, that account.
Senator COUZENS. It is a very substantial withdrawal from one
of your associates at a time when you were in great distress.
Mr. LONGLEY. Well, I don't remember any particular reason that
was given.
Mr. PECOEA. W a s a n y inquiry made by you to ascertain the reason
for this heavy withdrawal at that particular time?
STOCK EXCHANGE PRACTICES
4843
Mr. LONGLEY. No; I didn't make any inquiry. There wasn't
much discussion about it so far as I know.
Senator COUZENS. Was there any discussion about it?
Mr. LONGLEY. I suppose it was in connection with the adjustment
of deposit accounts, the withdrawal of large amounts from the
Guardian. No; I don't remember any particular discussion about it.
But I would assume that was it, that they withdrew that money
when they were withdrawing such large amounts from their deposits.
Senator COUZENS. May I draw your attention to a question propounded by Mr. Pecora on yesterday, which appears on page 1279
of the stenographic transcript of testimony, in which Mr. Pecora
asked
Mr. LONGLEY (interposing). Propounded to me?
Senator COUZENS. Propounded to you; yes. [Reading:]
When the board of the R.F.C. expressed its. view to you gentlemen that the
stockholders, large depositors, and others interested in those banks of the
Guardian Detroit Group should be consulted by the management of the banks
concerned, and an effort made to formulate a program designed to meet the
problems presented and to strengthen the position of the banks, what, if
anything, do you recall was done by the board and the officers of the Guardian
Detroit Union Group, Inc.
Then you made a somewhat lengthy, or perhaps it is a brief, explanation of what was done, which appears on page 1280. Now,
what I want to ask you is this: When this condition existed, and you
were advised by the Reconstruction Finance Corporation to consult
the large depositors and stockholders, one of your large depositors
deliberately withdrew $700,000 at the very time yen were pleading
for loans from the R.F.C.
Mr. LONGLEY. Yes. But we were just withdrawing from them a
million and some two hundred thousand dollars, I believe.
Mr. PECORA. Well, those were class A trust funds.
Mr. LONGLEY. That is true, but we were taking it out of their
deposits.
Senator COUZENS. I do not understand even now what you mean
by that.
Mr. LONGLEY. Well, we were withdrawing from the Guardian
National Bank of Commerce something like—have you that total
amount, Mr. Pecora ? It was a million two hundred and something.
Senator COUZENS. Withdrawing that money for what purpose?
Mr. LONGLEY. For this readjustment of deposits of the A funds.
Senator COUZENS. But when you went before the Reconstruction
Finance Corporation in June or July of 1932, you were then stating that the Union Guardian Trust Co. was in very bad condition,
in a frozen condition, and that you were afraid if nothing happened
to help the situation or, at least, if anything happened to the Trust
Co., the whole group of units would be affected. Is that correct?
Mr. LONGLEY. Substantially so; yes.
Senator COUZENS. And then following that, your Guardian National Bank of Commerce withdrew $700,000 from your deposits
and further embarrassed the condition of the Trust Co.
Mr. LONGLEY. NO. At the same time we were withdrawing from
them a million two hundred thousand dollars, or something of that
sort, of A funds.
4844
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes; but you transferred those withdrawals to other
banks. You did not keep them in the Union Guardian Trust Co.
Mr. LONGLEY. That is true enough. But we withdrew from the
bank, and the bank withdrew from us.
Senator COUZENS. Yes; but you did not keep those funds in the
Trust Co. There was a diminution in the aggregate of deposits
of the Trust Co. through this transaction, and that is what I am
trying to get explained, because these photostatic copies specifically
show a diminution; and there was an even greater diminution in
the deposits of the Union Guardian Trust Co. after this transaction than there was before, a lesser amount remaining. I find no
evidence in your testimony, Mr. Longley, given on yesterday, to
show that there was any attempt to take that matter up with the
stockholders or large depositors; I mean the suggestion made by
the directors of the Reconstruction Finance Corporation when you
were applying to them for a loan.
Mr. LONGLEY. Well, the suggestion to me was not to take it up
with any other than the Ford Motor Co.
Senator COUZENS. Well, that is not according to the record as it
was read by Mr. Pecora on yesterday.
Mr. LONGLEY. Yes, but
Senator COUZENS (interposing).
Nor is it in accordance with the
questions propounded.
Mr. LONGLEY. Well, that is as I recall, what happened. As I
remember it, I was asked why the Ford Motor Co. should not take
care of this. I do not remember anybody else being mentioned in
the way of depositors.
Senator COUZENS. And I am not saying there was any other one
mentioned, but according to the testimony read from the E..F.C.
record it appeared in the plural.
Mr. LONGLEY. That is right.
Senator COUZENS. It stated " stockholders and large depositors ",
and there was no specific reference made to any particular company.
Mr. LONGLEY. That is right.
Senator COUZENS. SO there would be no limitation upon the suggestion made by the R.F.C. that large depositors and stockholders
should be consulted so as to put the Trust Co. in a sound condition.
Mr. LONGLEY. Well, I do not know myself whether those minutes
are correct or not. As I remember what happened, they are not
correct. Possibly they put the word " depositor" in the plural.
But the only thing that stuck in my mind was the word " depositor n
in the singular, and that happened over and over again.
Senator COUZENS. Well, was there any attempt made between June
of 1932 and the time of closing in February of 1933 to reorganize
the trust company or to adjust its financial condition so that it
might be relieved from its duties as a banker and remain only as a
fiduciary institution?
Mr. LONGLEY. N O ; not quite that. The Ford Motor Co., however, gave its aid at the end of the year 1932. And we were still
hoping that in some way we could work out this deposit liability
through a loan from the R.F.C.
Senator COUZENS. AS I understand it, there was no particular attempt made from the time of the large loan you got in July until
STOCK EXCHANGE PRACTICES
4845
January of 1933 to work out any plan of relieving the trust company
of its deposit liability.
Mr. LONGLEY. Yes; there was the plan I spoke of on yesterday.
You will find it somewhere in the records of the trust company,
a very careful budget plan, to cut down expenses, to cut down interest, to build up income, whereby we could try to balance the
budget and work the thing out.
Senator COUZENS. Yes; that may be in the minutes, but that does
not give a record of any consultation that you had with depositors
or stockholders.
Mr. LONGLEY. I had plenty of conversation with one large depositor,
j
Senator COUZENS. Did you have any with the stockholders of the
Union Group?
Mr. LONGLEY. I was continually talking to stockholders of the
trust company, which was the Guardian Detroit Union Group. We
were very much together, all of us. They, quite naturally, would
be concerned. We spent hours and hours and Sundays and did
everything else we could trying to work it out.
Mr. PECORA. Mr. Longley, following up the line of examination
by Senator Couzens, let me specifically recall to your attention at
this moment what took place before the board of directors of the
Reconstruction Finance Corporation at its meeting on July 5, 1932,
which was attended by you, Mr. Bodman, Mr. Kanzler, Mr. Lord,
and Mr. Walsh, as officers and directors not only of the Guardian
Detroit Union Group, but also of some of the unit banks of the
Group.
Mr. LONGLEY. That is right.
Mr. PECORA. I will read again to you from the
Mr. LONGLEY (interposing). Wait a minute. Did you say some
of the unit banks ?
Mr. PECORA. Well, the Guardian National Bank of Commerce was
represented.
Mr. LONGLEY. I see. Well, I think they were Group and .Trust
Co. representatives, perhaps. Perhaps others were not interested.
Mr. PECORA. I will read again to you a portion of the excerpt
from the minutes of the regular meeting of the board of directors of
the Eeconstruction Finance Corporation held on July 5, 1932, which
I read on yesterday, and which is as follows:
Mr. Bodman explained the problems confronting the 21 banks in Detroit and
vicinity controlled by the Guardian Group, and stressed the seriousness of the
situation. The board informed the bank officers present of its action in authorizing an emergency loan to the Union Guardian Trust Co. in the amount of
$8,733,000, which it understood would relieve the situation temporarily, and
indicated that it would consider making additional advances after the special
committee had completed an examination of the collateral. The board, however—•
And that means the board of the Eeconstruction Finance Corporation—
expressed the view that the stockholders, large depositors, and others interested
in these institutions, should be consulted by the management of the banks
concerned and an effort made to formulate a program designed to meet the
problems presented and to strengthen the position of the banks.
4846
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. Well, now, there is one place, Mr. Pecora, that I take
issue on the correctness of those minutes. I do not believe we talked
about banks at all. At that .meeting it was a matter of the trust
company.
Mr. DECORA. Well, Mr. Bodman said
Mr. LONGLEY (interposing). No, I don't think Mr. Bodman talked
about banks. He can tell you better, but I don't remember about
that. We had just one thing in our mindk.
Mr PECORA. YOU are not suggesting, are you, that these minutes
are incorrect?
Mr LONGLEY. I am not suggesting that, no. But it is not the way
I remember it.
Mr. PECORA. IS your memory or recollection of this discussion with
the directors of the R.F.C. clear?
Mr. LONGLEY. In a general way, yes.
Mr. PECORA. NOW, isn't it a fact——
Mr. LONGLEY (interposing). That is why in this particular connection it is clear: We were talking about the trust company. I
do not believe any amount of discussion came into that connection
with the condition of the banks. Now, it might have occurred and
I might not have been attentive to it, but as I remember the situation
we did not talk about the condition of the banks in that particular
meeting.
Mr. PECORA. What did you talk about?
Mr. LONGLEY. We talked about the trust company, and we talked
about the consequences.
Mr. PECORA. What consequences were referred to by anyone ?^
Mr. LONGLEY. What would occur if it was impossible to get liquidity in that bank, and be able to keep that institution open.
Mr. PECORA. Well, will you tell us more in detail what was said
about that?
Mr. LONGLEY. Well, that was it generally.
Mr. PECORA. What was it?
Mr. LONGLEY. We emphasized lack of liquidity.
Mr I PECORA. Of what bank?
Mr. LONGLEY. The Union Guardian Trust Co.
Mr. PECORA. And what consequences were specifically stated would
ensue in event the condition of the Union Guardian Trust Co. were
not improved?
Mr. LONGLEY. That you would have a reaction on every group
bank, and every bank in Michigan in fact.
Mr. PECORA. Isn't that practically what these minutes say?
Mr. LONGLEY. NO. YOU speak in those minutes, or whoever made
them speaks of the condition of the banks, other than the trust
company. And I don't think that was done.
Mr. PECORA. Let me read:
Mr. Bodman explained the problems confronting the 21 banks in Detroit
* * * and expressed the seriousness of the situation.
The situation was serious, was it not?
Mr. LONGLEY. Yes, indeed.
Mr. PECORA. And the seriousness of the situation extended to all
of the unit banks of the group, did it not?
STOCK EXCHANGE PEACTICES
4847
Mr. LONGLEY. Yes; but that does not cover the discussion of the
condition of those other units at all. That is what I am getting at.
Senator COUZENS. I believe I see the distinction.
Mr. PECORA. There may not have been any detailed discussion in
regard to the condition of any other unit bank than the Union
Guardian Trust Co. on this occasion; is that what you inean?
Mr. LONGLEY. Yes.
Mr. PECORA. But the
seriousness of the situation with respect to
the; Union Guardian Trust Co. was discussed in detail, was it not?
Mr. LONGLEY. Right.
Mr. PECORA. And the discussion included the expression of the
view or the fear that unless relief were given to the Union Guardian
Trust Co. it would have to suspend ?
Mr. LONGLEY. Yes; it was possible that that might eventuate.
Mr. PECORA. Was not the view further expressed at this meeting
with the directors of the R.F.C. that, in the event of the suspension
of the Union Guardian Trust Co., the other unit banks of the Guardian Detroit Union Group would be so affected by such suspension
that they, too, would have to suspend ?
Mr. LONGLEY. I do not know how far you can go on that. The
reaction would have been so serious; that that might occur; yes.
I think, we can say that. We did not know just what the consequences might be, to tell the truth.
Mr. PECORA. Did not that discussion lead to the expression of
the view or opinion by the board of the R.F.C. that the stockholders,
large depositors, and others interested in these various bank units
of the group, should be consulted by the management of the banks
concerned and an effort made to formulate a program designed to
meet 1the problems presentedvto strengthen the position of the banks?
Mr . LONGLEY. Well, this is what sticks in my mind. We were
asked why Mr. Ford should not take care of this. I think he was
the depositor that was mentioned, as far as I know. I do not remember anything further than that. There might have been.
Senator COUZENS. Was any reference made to stockholders ?
Mr. LONGLEY. I do not recall that. It is quite possible.
Mr. PECORA. What, if anything, was done after the board of the
R.F.C. expressed those views, by you and the others who met with
the R.F.C. on July 5 to carry out the suggestion made by the R.F.C.
that day?
Mr. LONGLEY. I talked with the Ford people about this thing—
not in furtherance of that, but in connection with the trust company,
and a loan was made in furtherance of this application, but not of
the amount we were applying for.
Mr. PECORA. YOU were then applying for a $28,000,000 loan?
Mr. LONGLEY. Yes; enough to take care of deposit liability, and
an amount was finally given us by the R.F.C. with the thought that
it would be sufficient, and we proceeded to do our best to balance
the budget and carry it out with that loan.
Senator COUZENS. Of course a mere balancing of the budget
would not have put you in position to pay out your deposit liability,
would it?
Mr. LONGLEY. Why not, if your assets are ultimately good?
Senator COUZENS. Yes; but they were frozen, you said.
4848
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. Yes; they were frozen. It was lack of liquidity
and we could not get liquidation fast enough to take care of the
depositors.
Senator COUZENS. SO if you had closed up entirely and wiped
out all your budgetary expense, you could not possibly have paid
out your deposit liability?
Mr. LONGLEY. I do not know. That is what we were trying to
work out, exactly.
Senator COTJZENS. But that did not work out, did it?
Mr. LONGLEY. No; it did not.
Mr. PECORA. It could not possibly
have worked out through the
mere process of balancing the budget, could it?
Mr. LONGLEY. Not through the mere process of balancing the
budget, no; but if we could, through our further efforts, get some
liquidation in some way and get enough liquidity to take care of
those depositors, and cut our expense and increase our income in
some way, we thought possibly we might do it; we believed we
could at the time.
Mr. PECORA. What specific efforts do you recall were made to
unfreeze your assets or thaw them out?
Mr. LONGLEY. We put some special men on the work of liquidation, old, experienced men who we believed could do that job. You
are just talking about that angle of it?
Mr. PECORA. Yes.
Mr. LONGLEY. I believe we got some better results in that way.
Mr. PECORA. DO you recall what results were obtained along those
lines?
Mr. LONGLEY. No; I have not the figures.
Mr. PECORA. Were they substantial?
Mr. LONGLEY. I cannot give you the figures. No; I would not
say that there was any great amount of liquidation that came from
those efforts, but we tried hard enough. I would not say what it
was; I do not remember. If they had been very substantial, I think
probably they would have shown themselves more.
Mr. PECORA. In 1932, this very year in which application was
made for loans from the R.F.C. for the immediate use and availability of the Union Guardian Trust Co., the Union Guardian Trust
Co. declared a dividend, did it not?
Mr. LONGLEY. For the first quarter of 1932.
Mr. PECORA. Some time during the year?
Mr. LONGLEY. I t was the first quarter of 1932.
Mr. PECORA. A dividend of $50,000?
Mr. LONGLEY. In the amount of $50,000.
Mr. PECORA. And that was paid to the group as the sole stockholder?
Mr. LONGLEY. That is right.
Mr. PECORA. What prompted the declaration of that dividend, in
view of the then condition of the trust company?
Mr. LONGLEY. A very careful program had been laid out by the
group company, to budget their requirements, and it was thought
that the earnings of the trust company would permit that $50,000
dividend.
Mr. PECORA. Was it done in order to accommodate or respond to
the wishes and plans of the group ?
STOCK EXCHANGE PRACTICES
4849
Mr. LONGLEY. Why, I do not know that you can say that. Of
course, the requirements of the group had something to do with. it.
Mr. PECORA. Did it not have everything to do with it, as a matter
of fact?
Mr. LONGLEY. I do not know that I can say that it had everything
to do with it.
Mr. PECORA. What sound business consideration, apart from the
desire of the group to increase its income, justified the declaration
of this dividend by the Union Guardian Trust Co. in 1932?
Mr. LONGLEY. I do not know that there was any. They just injected $4,000,000 into the trust company. It was thought that the
$4,000,000 would go a long way toward putting the assets in better
condition; and $50,000 was such a small part of what they had
just put in that they felt entitled to that amount, and the directors
of the trust company agreed with them, some of them.
Mr. PECORA. There has been testimony given to this committee in
the course of these hearings that during the years 1929, 1930, 1931,
and 1932 the group received in cash dividends from various unit
banks an aggregate of over $9,000,000, and that in the same period
of time the group put back into various unit banks an aggregate
sum of about $8,400,000. Are you familiar with those facts?
Mr. LONGLEY. No, not very. I know something, of course, about
the amounts the group put back, some of the items that the group
put back, because a large part of that came to the trust company.
Mr. PECORA. That is just what I was coming to. Is it not a fact
that approximately seven and a half millions of dollars of that
eight million four hundred thousand and odd dollars that the group
put back into unit banks went to the Union Guardian Trust Co.
alone ?
Mr. LONGLEY. Four millions at the close of 1931 and three and a
half millions at the close of 1932. Seven and a half millions; that
is correct.
Mr. PECORA. Which is an indication ,of the distress then being
suffered by the Union Guardian Trust Co as compared with the
distress being felt by all the other unit banks of the group; is that
right?
Mr. LONGLEY. That is right.
Mr. PECORA. And notwithstanding that distress, the trust company in 1932 declared this $50,000 cash dividend which was received
by the group?
Mr. LONGLEY. That is right.
Mr. PECORA. Were you a director of the group from its inception,
Mr. Longley?
Mr. LONGLEY. NO.
Mr. PECORA. When
Mr. LONGLEY. Late
did you first become a director of the group ?
in 1931—no; wait a minute. Of the group ? I
think that was early in 1932. I can give you that accurately. (After
referring to memoranda) December 14, 1931, I was elected to the
board of directors of the Guardian Detroit Union Group.
Mr. PECORA. Was that your first affiliation in any way, shape or
form with the group ?
Mr. LONGLEY. Yes; I think so.
Mr. PECORA. Had you been connected with it in any professional
capacity, as an attorney, prior to that time ?
4850
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. No.
Senator COUZENS. Were you a substantial stockholder at that time.
Mr. LONGLEY. I would not call myself a substantial stockholder. I
had, I think, 120 shares, perhaps a little more. I think my holdings
finally ran up to 320 shares.
Senator COUZENS. YOU heard Mr. Stalker's testimony, did you not,
as to how he came to be relieved of the presidency of the Union
Guardian Trust Co.?
Mr. LONGLEY. Yes; I think so.
Senator COUZENS. He testified, as I remember it—perhaps at the
suggestion of Mr. Pecora—that a lawyer would make a better banker
than he would.
Mr. LONGLEY. I do not know just how he put it. I think perhaps
he said that a good lawyer would do a better job than a poor banker.
But John Stalker was a good banker. He has worked with me
very closely.
Senator COUZENS. Why was he removed, if he was a good banker?
Mr. LONGLEY. He was not removed from the organization.
Senator COUZENS. N O ; but he was removed from the presidency
of it and you were put in his place.
Mr. LONGLEY. Yes.
Senator COUZENS. Why did that happen?
Mr. LONGLEY. His services were not lost to the slightest degree.
Senator COUZENS. He was demoted, was he not?
Mr. LONGLEY. Would you call the vice chairmanship of the board
a demotion ? I would say it was a promotion.
Senator COUZENS. Not if I understand the general processes of
the operation of the minds of those directors, I would not call it
a promotion.
Mr. LONGLEY. Well, I cannot follow those fellows.
Senator COUZENS. What is your interpretation? Is that really a
demotion or a promotion ?
Mr. LONGLEY. I do not think it was regarded as a demotion.
Mr. Stalker went right on with his work as he had. I do not know
whether he thought it was a demotion or not.
Senator COUZENS. His testimony so indicated; and I remember
that Mr. Harriman of the Harriman National was made chairman
as a demotion to take him out of the active management of the
Harriman National Bank.
Mr. LONGLEY. I do not think I would call it a demotion in Mr.
Stalker's case.
Senator COUZENS. He felt it was, because he said he thought a
good lawyer would make a better banker than a poor banker would.
Mr. LONGLEY. I do not think it made very much difference in the
services that he rendered and continued to render to the trust
company.
Mr. PECORA. Mr. Longley, I show you what purports to be a photostatic copy of another statement or report obtained from the files
and archives of the Union Guardian Trust Co., entitled " Certificate of deposit withdrawals (Feb. 1 to Feb. 11, inclusive, 1933)."
Will you look at it and tell me if you recognize it to be an authentic
or true and correct copy of such a report or statement from the
files and records of the Trust Co. ?
STOCK EXCHANGE PRACTICES
4851
Mr. LONGLEY. Yes; I think that is.
Mr. PECORA. I offer it in evidence.
Senator COTTZENS. The same will be admitted.
(Photostatic copy of sheet entitled " Certificate of deposit withdrawals (Feb. 1 to Feb. 11, inclusive, 1933)" was received in evidence, marked " Committee Exhibit No. 91, Jan. 17, 1934.") (See
p. 5056.)
Mr. LONGLEY. I am assuming it is correct, if you got it from the
records.
Mr. PECORA. Yes. Will you look at this exhibit which has just
been marked " Committee Exhibit No. 9 1 " as of this date, and see
if you recognize any of the names of the depositors withdrawing
their certificate of deposit accounts between February 1 and February 11, 1933—the names of any directors or officers either of the
Union Guardian Trust Co. or of the group ?
Mr. LONGLEY. George W. Trendle is the only director on this list.
I might say in that connection that Mr. Trendle had placed large
sums on deposit in the A funds for investment, and I take it that
these are withdrawals for the purpose of investing. Then above, on
February 2, in the name of the Murray W. Sales Co. Of course that
is a corporation of which Murray W. Sales was a director at that
time. I do not see any others on here directly or indirectly connected
with those withdrawals. Mr. Sales' withdrawal is apparently a
normal one, $25,000. Mr. Trendle's seems to be quite a normal one.
Mr. PECORA. A S I recall it, you became president of this trust
company in the early part of the year 1932, at the annual meeting
of the stockholders and directors ?
Mr. LONGLEY. That is right,
Mr. PECORA. Are you familiar with the condition, reported by the
State bank examiner, of the trust company, as result of his examination made as of August 8, 1932?
Mr. LONGLEY. In a general way, I think so.
Mr. PECORA. DO you know that at that time Mr. It. I. Hudson, who
was the gentleman who made the examination for the Banking
Commission of the State of Michigan, among other things reported
as follows concerning the condition of the bank as of August 8,
1932? [Beading:]
It is practically impossible to determine the liquidity of this company. They
have an authorized loan of $15,000,000 with the R.F.O. and, at the time of
examination, had already obtained $7,426,685.44.
Mr. LONGLEY. I do not remember that, but if it was found in his
report it is probably true. I have no question about it.
Mr. PECORA. That comment was based on the facts, you think?
Mr. LONGLEY. I think it was based on his examination.
Mr. PECORA. YOU think it is a fair comment?
Mr. LONGLEY. Let me take it just a minute and see. (After referring to paper:) Well, I think that is a fair comment. It was a
most difficult thing.
Mr. PECORA. Did you know that the State bank examiner, in his
report of examination of the bank made as of August 8, 1932,
showed a net deficiency in the bank's condition of $2,915,889.34?
Mr. LONGLEY. That is not quite the way I would put it.
Mr. PECORA. That is the way he put it.
Mr. LONGLEY. NO. I S it not stated—have you a photostat of it?
4852
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes.
Mr. LONGLEY. I think
it is stated as estimated, is it not—the losses
he suggests there?
Mr. PECORA. Under the caption of " Examiner's Estimate of
Bank's Condition."
Mr. LONGLEY. So that was his estimate of the deficiency ?
Mr. PECORA. Yes. Don't you think the estimate was accurate?
Mr. LONGLEY. No; I dp not.
Mr. PECORA. What do you think it was?
Mr. LONGLEY. We finally worked it out on a different basis.
Mr. PECORA. YOU know that he said, in reviewing the assets
he
found in the bank at that time, as follows:
Summary of assets just includes doubtful and loss, as practically all assets
are slow and undesirable.
Mr. LONGLEY. I do not remember that note, but it may have been
in there.
Mr. PECORA. DO you know that he stated as follows in that report:
The figures set up in this summary give a fairly complete picture of this
company. An effort has been made to set out in a fair manner the losses and
doubtful items of the various departments. At the present time a complete,
analysis of the mortgage department is impossible, and many losses are apt to
show up in the future. The company is in a very serious position, and final
disposition is left to the office.
Meaning the office of the banking commission.
Mr. LONGLEY. I suppose; yes.
Mr. PECORA. Are you familiar with that ?
Mr. LONGLEY. I remember it, generally. I have not seen it for
some time, but I think it is probably just as he turned it in.
Mr. PECORA. That is, that is a fair report—a fair characterization ?
Mr. LONGLEY. I think that is his opinion, all right. We had some
differences on our final work-out of the thing; it was so difficult at
that time to fix values, so difficult to determine what man could and
what man could not take care of his future payments, and employment was very, very poor in Detroit, and the curve on mortgage
collections follows the curve of employment almost exactly.
Mr. PECORA. DO you know that he made the following comment
in his report of that examination:
Credit files on loans and discounts very unsatisfactory. The few statements
in files are mostly on corporations, hardly any on individuals, and the few
statements are in most cases obsolete. No attempt appears to be made to
have adequate credit information on short collateral lines.
Mr. LONGLEY. We were making every effort to correct that at that
time.
Mr. PECORA. HOW had the credit files on loans and discounts been
permitted to lapse into a condition where the examiner, as of
August 1932, reports them as being very unsatisfactory and " the
few statements in the files are mostly on corporations, hardly any
on individuals, and the few statements are in most cases obsolete " ?
Mr. LONGLEY. Well, I do not know how it happened in the past,
but I do know that these new men that we put to work on that
liquidation were making every effort to get those credit files as
they should be. They were very strenuously attacking that job.
Senator COTJZENS. Did they get into that condition under Mr.
Stalker's administration?
STOCK EXCHANGE PRACTICES
4853
Mr. LONGLEY. They were in that condition when I took hold of
it, as that report, of course, indicates.
Mr. PEOORA. DO you recall that shortly after Mr. Hudson, the
State examiner, completed this examination, he and Mr. M. C.
Taylor, deputy commissioner of banking for the State- of Michigan,
attended a conference with a number of the directors of the trust
company with regard to the condition of the trust company and the
losses to be written off ?
Mr. LONGLEY. What date was that ?
Mr. PECORA. Well, it was some time shortly after the completion
of this examination.
Mr. LONGLEY. Oh. This same examination?
Mr. PECORA. Yes.
Mr. LONGLEY. Yes; I remember.
Mr. PECORA. Were you one of the directors with whom that conference was held by Mr. Hudson, the examiner, and Mr. Taylor,
deputy banking commissioner?
Mr. LONGLEY. Yes.
Mr. PECORA. What
was the substance of the discussion in that
conference ?
Mr. LONGLEY. These write-offs and estimated losses.
Mr. PECORA. What write-offs were agreed upon should be made?
Do you remember the aggregate amount?
Mr. LONGLEY. It was finally determined by the Department that
we should write off somewhere around Zy2 million dollars.
Mr. PECORA. HOW was that accomplished?
Mr. LONGLEY. The officers wrote off thos& items, picking out what
they considered, with the banking department,
were the losses that
should be written down and out of the books1.
Mr. PECORA. Was it in order to enable the trust company to make
these write-offs of about 3y2 million dollars that the trust company
about that time obtained a loan of 3% million dollars from the
Board?
Mr. LONGLEY. Yes—well, no; the loan was made to the group.
Mr. PECORA. The loan was made to the group ?
Mr. LONGLEY. That is right.
Mr. PECORA. And the group then made it to the Trust Co.?
Mr. LONGLEY. Yes.
Senator COTJZENS. Was
that the only State bank examination "that
was made while you were president of the Trust Co.?
Mr. LONGLEY. I think there was one—let me see [After referring
to data.] Yes; I guess that is right; that wTas the only one.
Senator COUZENS. The only examination made while you were
president ?
Mr. LONGLEY. Yes; that is the only one.
Mr. PECORA. DO you know a corporation called the Congress
Corporation ?
Mr. LONGLEY. I knowT of it.
Mr. PECORA. And is that a subsidiary or affiliate of the group?
Mr. LONGLEY. Yes.
Mr. PECORA. It was organized by
Mr. LONGLEY. I think so.
Mr. PECORA. For what purpose?
175511—34
the group, was it not ?
4854
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. I do not know; I never saw the documents in connection with that company. I know that these assets that were
lifted out of the Trust Co. were sold to the Congress Corporation.
Mr. PECORA. By the group?
Mr. LONGLEY. N O ; by the trust company itself; and I am assuming that the function of the Congress Corporation at that time was
for the purpose of taking these assets that were written off.
Mr. PECORA. In other words, the Congress Corporation was used,
to speak in the vernacular, as a sort of " dumping ground " for the
bad assets that were taken out of the trust company, was it not ?
Mr. LONGLEY. Well, they took those assets of the trust company.
What else they took I do not know, because I was not connected
with the Congress Corporation.
Mr. PECORA. YOU were connected with the group, were you not?
Mr.
LONGLEY.
Yes.
Mr. PECORA. And that was all done at the instance of the group
and in furtherance of the group's policy?
Mr. LONGLEY. That is right; but I would not like to try to tell
you what the business of the Congress Corporation was, because I
do not believe I ever found out, even by hearsay. I know they took
those assets.
Mr. PECORA. AS a director of the group, were you not kept posted
or informed currently as to the activities of business transactions
of the group ?
Mr.
LONGLEY.
Yes.
Mr. PECORA. In that fashion did you not learn the uses and purposes to which the Congress Corporation was being applied by the
group ?
Mr. LONGLEY. In a general way; yes.
Mr. PECORA. And what were they, in a general way?
Mr. LONGLEY. I do not remember having any particular business
with the Congress Corporation brought to my attention other than
these things that had to do with the Trust Co.
Mr. PECORA. With your Trust Co. ?
Mr. LONGLEY. I suppose I was not particularly attentive and was
not interested in anything except what had to do with the Trust Co.
at that time, so far as the Congress Corporation was concerned.
Mr. PECORA. During the year 1932 did the board of directors of
the Trust Co. appoint an examining committee to make an examination of the Trust Co., as of December 13, 1932?
Mr. LONGLEY. Yes.
Mr. PECORA. Did that
examining committee make a report of its
examination ?
Mr. LONGLEY. Yes; after the holiday was concluded.
Mr. PECORA. Have you a copy of it?
Mr. LONGLEY. N O ; I have not.
Mr. PECORA. DO you remember who the members of that examining
committee of the board were?
Mr. LONGLEY. I remember some of them; I do not know that I
can tell you all; but Mr. George Klein and Mr. Walker and others.
Have you a copy of it ? That will show.
Mr. PECORA. DO you recall that Mr. Clark^on Wormer was chairman of the examining committee?
STOCK EXCHANGE PRACTICES
4855
Mr. LONGLEY. I do not know that he was on that committee. He
made a report on real estate.
Mr. PECOKA. I show you what purports to be a photostatic copy
of the report of this examining committee of the Union Guardian
Trust Co. as of December 13, 1932, which report is signed on March
10, 1932. Will you look at it and tell me if you recognize it to be
a true and correct copy of such report?
Mr. LONGLEY. This would appear to be, from what I remember
of it. If you took it from the records, I will assume so.
Mr. PECORA. It was so taken from the records. I offer it in evidence; but in view of its voluminous character I do not think it
necessary at this time, at least, to spread it in full on the minutes.
I wish to make references to portions of the text thereof from time
to time.
Senator COTJZENS. The same may be admitted, but not printed in
the record. Just mark it as an exhibit.
(Photostatic copy of report of examining committee of Union
Guardian Trust Co. as of Dec. 13, 1932, was received in evidence,
marked " Committee Exhibit No. 92, Jan. 17, 1934.")
Mr. LONGLEY. Mr. Pecora, I do not find Mr. Wormer's name on
the committee. I wonder if he was not just a member of the subcommittee that this committee appointed to examine real estate?
Mr. PECORA. I understand the original was signed by him as chairman of the committee.
Mr. LONGLEY. On page 2 of this report which is marked " Exhibit
92 " I find this [reading] :
Partly as a matter of expediency and partly as a method of obtaining the
most accurate information, the committee—
that is, the examining committee—
authorized its chairman to appoint a subcommittee of directors to examine
real-estate mortgages and land contracts owned by the Trust Co. The following
subcommittee was accordingly appointed:
And it names Mr. Wormer, Mr. Trowbridge, Mr. Deming, Dr.
George E. Andrews, Mr. Alger Sheldon; and none of those gentlemen seem to be on the committee itself. So apparently they were
directors taken from elsewhere and not on that committee.
Mr. PECORA. Let me read the following from the report just
received in evidence and marked " Committee Exhibit No. 92." I am
reading from pages 4 and 5 thereof
Senator COUZENS. Have you a record of who signed that report,
before you start to read that ?
Mr. PECORA. Yes, sir; Mr. Wormer.
Mr. LONGLEY. I think you are mistaken, Mr. Pecora, on that. He
signed that subcommittee report that is attached, I believe. I think
all of the members of the committee signed this examination.
Mr. PECORA. The only name that appears on this copy is Mr.
Wormer, Jr.
Mr. LONGLEY. NO.
Mr. PECORA. Unless
I have overlooked something. The report is
signed by William K. Muir, H. B. Hoyt, Eobert Oakland, George B.
Eussell, George H. Klein, C. H. Murphy, Fred C. Austin, and H. H.
Walker.
4856
STOCK EXCHANGE PKACTICES
Mr. LONGLEY. That is right. That is the committee. The subcommittee report is attached as an exhibit.
Mr. PECORA. The subcommittee report is the one signed by Mr.
Wormer ?
Mr. LONGLEY. That is right; and that is the report on the real
estate.
Mr. PECORA. NOW, reading from pages 4 and 5 of the report [reading] :
The assets referred to in the foregoing have been classified in four columns,
" Good ", " Slow "y" Doubtful", and " Loss " (Except bonds and securities, land
contracts and real estate, which only appear in "Good" and " L o s s " ) . Detailed schedules accompany the report, with the exception of items classified 100
percent good. These are not listed. Items marked " Slow " are considered by
the committee to be eventually good. " Doubtful" does not indicate a probable
100 percent loss of the total in the column. No doubt many of such items will
eventually pay out, at least in part, and in some cases perhaps substantially. A
50 percent reserve is later recommended. The committee feels that there is a
definite loss which should be charged off of items in the loss column.
Since the date as of which this examination is made you have listened to the
president's report covering the result of the Trust Co.'s business in the year
1932 in which it was stated that late in December the Group made provision for
" lifting o u t " about 3% million dollars of questionable assets. Explaining more
in detail, this figure represented what we consider to be fair charge-off items as
determined by the officers of this company and of the Group company, and these
were sold at face value to the Congress Corporation, a holding company wholly
owned by the Group company, the consideration being the cancelation of the
Trust Co.'s liability on a like amount of certificates of deposit owned by the
Ford interests "—
And so forth.
Mr. Longley, you referred in your testimony this forenoon, among
other things, to. the withdrawal by the Trust Co. from deposit
accounts which it maintained in various other banks of sums aggregating a little more than Sy2 million dollars, which withdrawals you
said were in cash, and the cash was placed in the vaults of the company ?
Mr. LONGLEY. Yes; after the holiday.
Mr. PECORA. That is between February 15 and February 23, 1932?
Mr. LONGLEY. In there somewhere.
Mr. PECORA. Can you tell this committee what disposition was
made of any of the cash so withdrawn and stored in the vaults of
the Trust Co.?
Mr. LONGLEY. Well, what was not paid to the trust depositors is
still there, I suppose.
Mr. PECORA. What trust depositors received any payment therefrom?
Mr. LONGLEY. I have no idea, without seeing the records. The
A fund depositors that are on the records of the company, and who
applied, undoubtedly were paid something; but I do not know who
they were, now, without referring again to the books.
Mr. PECORA. DO you know how much of the 3 ^ million dollars
approximately was so paid out?
Mr. LONGLEY. I have not the slightest idea. I think, probably no
more than normal.
Mr. PECORA. What would be normal?
Mr. LONGLEY. Well, that account maintained itself around between 4 and 6 millions. I think probably that account maintained
STOCK EXCHANGE PEACTICES
4857
itself even after the holiday; I don't know; I am just guessing, but
I would suppose so.
Senator COUZENS. From the time of the closing of the Trust Co.
to the time of the appointment of the conservator, you have had no
access to the records?
Mr. LONGLEY. No, sir; I have not. I think I can get information
by calling Mr. Harris. He probably would give it to me. Whenever I have asked him for information I have received it.
Senator COUZENS. That is, the conservator has no objection to giving you access to the records he has in his possession?
Mr. LONGLEY. He has not turned me loose in the records, but
whenever I have asked questions he has given me information.
Senator COUZENS. I think the committee would like to have a
record of the withdrawals of those A funds from the time the three
million and odd dollars was withdrawn from banks and placed in the
vaults, up to the time of the appointment of the conservator, if you
can get that information.
Mr. LONGLEY. Would you like me to get it by mail ?
Senator COUZENS. Well, I think if you can get by telephone we
would like it better—or by wire.
Mr. LONGLEY. I will try to, Senator.
Mr. PECORA. Mr. Longley, do you recall a meeting of the executive committee of the board of directors of the Union Guardian
Trust Co. which was held on February 23, 1933 ?
Mr. LONGLEY. Not just by that description; no.
Mr. PECORA. DO you recall a meeting at which took place the
adoption of the following resolution, according to the minute book
[reading] :
Resolved, That the officers be and they hereby are directed to withdraw
all funds held by depositaries in Chicago for the account of and on behalf of
this company;
2. Resolved, That anticipated requrements for disbursement of trust accounts for 30 days be withdrawn from the depositaries of the bank in cash
and held in the vaults of the bank;
Further resolved, That 90 percent of the balance then on deposit be withdrawn and invested in short-term United States Government obligations,
preferably Treasury bills or retained in cash or both.
Further resolved, That the balance on deposit after such withdrawals be
carried on deposit in the New York and Pittsburgh depositaries of the company
or withdrawn at any time, held in cash or invested in short-term obligations
of the United States Government, preferably Treasury bills.
The officers and directors are to do all things necessary to carry the foregoing into effect.
Resolved, That the officers be and they are hereby authorized to conduct the
fiduciary business of the company (with a very considerable degree of freedom of action), provided that in so doing the company's debtor and creditor
relationships and its own status as regards assets and liabilities are not
affected.
Mr. LONGLEY. Yes; I remember that meeting.
Mr. PECORA. YOU attended the meeting as a member of the executive committee of the board?
Mr. LONGLEY. I am not certain. Does it show that I attended it.
Mr. PECORA. We have not the minute book here. I have only
certain extracts.
Mr. LONGLEY. I am not sure I attended it, but I am familiar
with the adoption of that resolution.
4858
STOCK EXCHANGE PRACTICES
Senator COUZENS. DO you know who were there ?
Mr. LONGLEY. No, sir; not without checking up on the minutes*
That is what I was wondering about.
Mr. PECORA. DO you recall that 2 days after this meeting of the
executive committee of the board there was a meeting of the board
oi; directors of the Trust Co. at which, among other things, the following action was taken—and I am reading, now, from what purports to be a copy of page 118 of the minute book in use at that
time [reading] :
The minutes of the regular meeting of the executive committee held Thursday, February 23, 1933, were r'ead and after discussion the following resolution was duly made, supported and unanimously carried:
"Resolved, That the action of the executive committee at its meeting held
February 23, 1933,. be ratified- and approved, except that the clause contained
in Resolution 7, reading as follows: ' with a very considerable degree of freedom of action' be stricken out, and that the officers be, and they are hereby,,
directed to continue the trust business of the company until further instruction,
from the board, provided that no debtor or creditor relation of the bank be
affected.
"Further resolved, That the officers be and they are hereby directed to call
the board together from day to day if any new changes in the situation take
place."
It was the consensus that the banking commissioner be further informed of
the company's present operations through presentation to him of a copy of
the minutes of the meeting of the executive committee held February 23, 1933*
together with a copy of the minutes of this meeting.
You note that the resolution styled " Resolution No. 7 ", adopted
by the executive committee on February 23, 1933, was amended at
the board meeting held 2 days later by striking out the words " with
a very considerable degree of freedom of action ? "
Mr. LONGLEY. Yes.
Mr. PECORA. DO you
recall the discussion that was had at the
meeting of the board on February 25, 1933, at which that action
was taken?
Mr. LONGLEY. No; I do not. I do not know just why that was.
I would assume it was because the directors were being supercautious about the operations of the company during the holiday.
Senator COUZENS. I would like to have your interpretation, Mr.
Longley, of the meaning of this resolution which has been designated as " no. 1", where it says that you may have freedom of
action, " provided, that in so doing the company's debtor and creditor relationships and its own status as regards assets and liabilities
are not effected." What does that mean?
Mr. LONGLEY. I do not know exactly what that latter part means,
but the thought, as I remember it, was that during that period of
lack of knowledge of what our situation was going to be, the termination of the holiday or wlien the new legislation was worked
out, the directors were trying to be as careful as they could on all
questions concerning debtor and creditor relationships. I think
that was a very sensible thing to do.
Senator COUZENS. HOW could you conduct the fiduciary business
of the company with a very considerable degree of f reedoin
Mr. LONGLEY. That was the part that was stricken.
Senator COUZENS. Yes; but it was in operation 2 days before. I t
was in there when the resolution was adopted. I am just wonder
STOCK EXCHANGE PKACTICES
4859
ing how you could conduct any business without " the company's
debtor and creditor relationships and its own status in regard to
liabilities and assets being affected." That is such a ridiculous resolution, to me, that I do not understand it.
Mr. LONGLEY. I am not sure that I fully appreciate the meaning
of it, myself; but we were trying to be as exceedingly cautious as
we could, as far as the creditors were concerned, and the depositors,
and the R.F.C.; but at the same time we thought it absolutely
necessary to preserve our fiduciary business and to protect those
trust papers of the company, and we did that as best we could. I
think that is about as far as it went during that period.
Senator COUZENS. Any withdrawal of any of those funds by one
of your clients or customers would affect the debtor and creditor
relationships. It seems to me that it is contradictory. In one place
you say you can go ahead and in another place you say you must stop,
Mr. LONGLEY. I would not like to try to say what that meant. I
know what we did.
Senator COTJZENS. What you did was to pay out some of those trust
funds?
Mr. LONGLEY. Yes; we did; exactly.
Senator COUZENS. Right up to the time that the conservator was
appointed ?
Mr. LONGLEY. That is right. I do not know what the amounts
were. I only know we did it.
Senator COTJZENS. That is the information that you are going to
get for the committee?
Mr. LONGLEY. Yes,
sir.
Mr. PECORA. For the purpose of refreshing your recollection, let
me read further from the minute book this extract of the minutes of a
meeting held on February 25, last, at page 119 of the minute book
[reading] :
Upon inquiry the board was informed that the last examination of the bank
indicated liabilities in excess of $7,000,000 over the assets of the company, that
of this amount 3% million dollars had been written off through arrangement
with the depositors and would be approved by the banking commissioner.
Upon inquiry the board was informed that substantially all of the class A
trust fund deposits had been withdrawn from the depositaries of the company
outside of the State of Michigan; that currency approximating #$3,463,000 is
held in the vaults in the bank and that the balance remaining in* depositaries
outside the State of Michigan is approximately $189,000.
Do you recall that those proceedings took place at the board
meeting?
Mr. LONGLEY. I think that is probably true.
Senator COUZENS. We will recess at this time until 2 o'clock.
(Whereupon, at 1:05 p.m., the subcommittee took a recess until 2
p.m., Jan. 17, 1934.)
AFTER RECESS
The subcommittee resumed at 2 p.m. on the expiration of the
recess.
The CHAIRMAN. The subcommittee will come to order and resume
its hearing.
4860
STOCK: EXCHANGE PRACTICES
TESTIMONY OP CLIFFOKD B. LONGLEY—Kesumed
Mr. PECORA. Mr. Longley, referring to the exhibit known as
" Committee Exhibit No. 92 ", of this date, which was received in
evidence this morning, and which consists of a copy of the report
of the examining committee of the Union Guardian Detroit Co.,
as of December 13, 1932
Mr. LONGLEY (interposing). You mean of the Union Guardian
Trust Co. ?
Mr. PECORA. Yes; of the Union Guardian Trust Co. I want to
call your attention to schedule no. 6 attached to this report and
forming a part thereof, showing the liability of officers and directors
of the bank as of December 13, 1932. And is shows that as of that
date the liability of the different officers and directors of the bank,
on their respective individual accounts, aggregated $2,477,040.45;
and that the aggregate of their liabilities as endorsers or guarantors
was $136,010. Do you know whether anything has been done toward
liquidating these liabilities of officers and directors?
Mr. LONGLEY. Since that report?
Mr. PECORA. Yes.
Mr. LONGLEY. I do
not know how much; no. I think every effort
has been made, on the part of the conservator principally, to collect
those loans.
Mr. PECORA. Well, now, many of these loans were of long standing, weren't they ?
Mr. LONGLEY. Oh, yes. They were old accounts rather than loans
of long standing. They would change from time to time, for
instance, take the Oakman loan
Mr. PECORA (interposing). The Robert Oakman loan is a direct
liability of the payer, in the aggregate as of December 13, 1932, according to this report, of $1,653,412.65; and in addition to which
Mr. LONGLEY (interposing). Yes.
Mr. PECORA (continuing). He was liable as endorser or guarantor
to the extent of $105,000.
Mr. LONGLEY. Yes, sir.
Mr. PECORA. Both these
items are exclusive of mortgage loans.
And what were you going to say a moment ago about the Oakman
loan account?
Mr. LONGLEY. Well, that was paid down and increased again. It
was a more or less open account, or an open loan on account of those
advances, I mean that part that pertains to the advances.
Mr. PECORA. Yes. Anything else?
Mr. LONGLEY. I think that is it.
Senator COUZENS. And for that reason you do not call it an old
loan?
Mr. LONGLEY. Well, it is an old loan. His business goes back, I
believe, to the year 1916. But he has gotten loans from the trust
company and then they have been paid off, and then new loans have
been made, as he developed his real-estate business, over the question of the ye&rs he had been a customer of the trust company, I
think since approximately 1916. Of course, real estate isn't liquid,
or is not liquidating very fast now, nor was it in 1932.
Mr. PECORA. Was that the principal kind of collateral that he
gave for those loans, real estate?
STOCK EXCHANGE PEACTICES
4861
Mr. LONGLEY. Yes, sir. He was in the real-estate business, a large
real-estate operator in the city of Detroit.
Mr. PECORA. In addition to this personal liability, what mortgage
loans were made to him, I mean loans that are not included in this
aggregate of $1,653,412.65?
Mr. LONGLEY. I do not know. At the end of the year my memorandum shows we had $144,426 in mortgage loans.
Mr. PECORA. Exclusive of this liability on his part of $1,653,412.65.
Mr. LONGLEY. Yes; outside of that. Now, wait a minute! What
did you say ?
Mr. PECORA. According to the report of the examining committee
as of December 13, 1932, the liability as payer of Robert Oakman, a
director, was $1,653,412.65, except mortgage loans.
Mr. LONGLEY. Well, if that report says that, that is probably so.
Mr. PECORA. Weren't you familiar with the loan account of Mr.
Oakman ?
Mr. LONGLEY. Somewhat; yes.
Mr. PECORA. TO what extent? What can you tell the committee
about it? How was it secured, among other things?
Mr. LONGLEY. I t was secured by real estate owned by Mr. Oakman,
running south from Grand Biver Avenue, we will say. And I believe
he reduced his loan towards
Mr. PECORA (interposing). Was it improved real estate?
Mr. LONGLEY. Oh, yes. He put a great deal of money into that
real estate. It ran into the millions of dollars, I think, over those
years.
Mr. PECORA. Had he financed those real-estate operations largefy
by means of loans made to him by the trust company?
Mr. LONGLEY. I think so. There was also a piece of real estate
that ran south of this parcel adjoining Grand River Avenue, nearly
as far down as the River Rouge plant. Then there was another
piece that he had and that is covered by those loans, that ran north
from Grand River Avenue, and around close to Third Avenue,
nearly to the Ford plant at Highland Park. I do not know how
many miles that is, but it was adjoining what is called the Oakman
Boulevard, running approximately from one plant to the other.
In all probability—and this is a figure that has been given to me
as an estimate—he had an investment of perhaps 10 millions of
dollars in those properties. Some of it, of course, had been paid
back. But his total investment, perhaps, would aggregate that sum.
Mr. PECORA. TO what extent, if you can tell this committee, had
this Oakman loan account been liquidated during the year 1932?
That is, during the period of the year prior to December 13, 1932,
which would take in the greater part of the year ?
Mr. LONGLEY. There were a good many payments on the account,
but I think as a whole the loan increased rather than decreased.
Mr. PEOORA. During the year 1932 ?
Mr. LONGLEY. I think so. He had to take care of taxes and certain
other things that had to be met.
Mr. PECORA. NOW, according to the report of the State bank
examiner made as of September 14, 1931, on that date Mr. Oakman
owed the bank on account of loans upon which he was directly liable
an aggregate of $1,283,000, the entire amount of which was classi
4862
STOCK EXCHANGE PRACTICES
fied as " slow " in the analysis made of the loan accounts of the
trust company at that time. That was about a year and a quarter
prior to December 13, 1932, so it would seem that his loan account
had increased by something like $400,000 during the year 1932.
Mr. LONGLEY. I do not think so. I think there has been something left out there. I may be wrong about that, but
Mr. PECORA (interposing). Well, if it was left out, it was left
out by your examining committee.
Mr. LONGLEY. Well, that might be, but I don't know. As I remember that loan, when I first became acquainted with it it was
about what it is now, or what it was in February of 1933. There
wasn't much change in it.
Senator COTJZENS. This State bank examination was as of September 1931 and you were not there with the trust company then?
Mr. LONGLEY. No.
Senator COTTZENS. Mr.
Mr. PECORA. I was not
Pecora, the witness was not there in 1931.
there then, but when I first became familiar
with that account it was around $1,500,000 or $1,600,000, or that is
my recollection.
Mr. PECORA. Toward the end of 1932 it was $1,653,000.
Mr. LONGLEY. I am talking about the end of 1931. My first recollection of that loan was that it was approximately what it was
in February of 1933.
Senator COTJZENS. DO you mean by that to say that it was not
increased after you became president 1 of the trust company?
Mr. PECORA. Oh, no. He said it was increased.
#
Mr. LONGLEY. Yes; it was as I remember it. We advanced some
funjds for his income taxes, and for other taxes, and things such
as that, that he had to meet in order to protect the properties.
Senator COTTZENS. That was after you became president of the
trust company ?
Mr. LONGLEY. Yes, sir. Without looking at the account, Mr.
Pecora, I could not tell you just what it was.
Mr. PECORA. What was that ?
Mr. LONGLEY. Without looking at the account I could not tell you
what it was increased to as compared to the period of 1931.
Mr. PECORA. The next largest loan account of a director or officer
as shown by the report of the examining committee of the trust comany as of December 13, 1932, appears to be that of J. Walter
)rake, a director. It amounted to $159,712.50. Do you know
whether anything has been done toward the liquidation of that loan ?
Mr. LONGLEY. I don't believe that there was very much done.
The CHAIRMAN. Was it secured?
?
Mr. LONGLEY. In a way;
yes.
Mr. PECORA. In what way ?
Mr. LONGLEY. There are $100,000
of Union Trust Building bonds,
and 14,700 shares of Hupp Motor Co. stock.
Mr. PECORA. What kind of stock?
Mr. LONGLEY. Hupp Motor Co*, stock.
Mr. PECORA. Oh. I understand now. Hupp Motor Co. stock.
Mr. LONGLEY. Yes. Mr. Drake was connected with that company.
It was thought that there would be some recovery in that security.
I do not know whether they have sold any of it since then or not.
STOCK EXCHANGE PRACTICES
4863
Mr. PECORA. The next largest loan account of an officer or director
as of December 13, 1932, appears to be that of Mr. Frank W. Blair
jointly with C. L., Ayers.
Mr. LONGLEY. That is right.
Mr. PECORA. It amounted to $124,640.34. What can you tell us
about that ?
Mr. LONGLEY. That is a joint obligation with Mr. Ayers. And I
do not believe there has been any great amount of liquidation of it.
Senator COUZENS. What was that secured by?
Mr. LONGLEY. By an agreement of Paris Adams covering the purchase of 500 shares of American Life Insurance Co. stock. And it
is my understanding that Mr. Adams has made his payments regularly. There has been that amount, at least, of liquidation.
Mr. PECORA. NOW, apparently that loan account was created subsequent to September 14, 1931.
Mr. LONGLEY. NO. That is not according to my memory on it.
Mr. PECORA. Well, I do not see Mr. Blair's name in this report.
Mr. LONGLEY. I think if you will look
Mr. PECORA (interposing). I mean in the report as of September
14, 1931.
Mr. LONGLEY. The date I have is July 16,1929.
Mr. PECORA. I do find in the analysis of loans, in the report of
September 14, 1931, a loan account of one Clarence L. Ayers of
$429,946.87, all of which was classified as " slow ". Is that the loan
account to which Mr. Blair's liability attached
Mr. LONGLEY (interposing). I don't think so.
Mr. PECORA (continuing). As of December 13, 1932?
Mr. LONGLEY. I don't think so. I think that is a separate loan.
I think that Mr. Ayers' obligation would ultimately be good.
Senator COUZENS. What was the size of it when the trust company
closed? Do you know? Have you any records of it?
Mr. LONGLEY. N O ; I have not.
Mr. PECORA. NOW, the next largest loan account of a director or
officer as of December 13, 1932, appears to be that of S. L. Deacon,
a vice president of the trust company.
Mr. LONGLEY. E. L. Deacon that should be.
Mr. PECORA. Yes; E. L. Deacon, amounting to $79,000. Do you
know anything about that loan ?
Mr. LONGLEY. I t was originally made in 1928 when Mr. Deacon
was employed.
Mr. PECORA. DO you know what the genesis was of that loan?
Mr. LONGLEY. Yes, sir; that was the genesis of it. Mr. Deacon
had some properties in Detroit at the time, and he was employed
by George L. Fuller & Co. The trust company, as I remember it—
and this is all hearsay, but it is what I have been told about this
loan—the trust company wanted to employ Mr. Deacon, and offered
him the salary, which he refused, and he explained that the salary
was not large enough to take care of his needs, that he had been
conducting this business, and I believe it was that of some apartment houses that he was purchasing and operating at the same time,
and that in order for him to come with the trust company the trust
company would have to make some arrangements so that he could
handle those apartments. So they took over the loans when they
employed him.
4864
STOCK EXCHANGE PRACTICES
Mr. PECORA. What security did the trust company have for that
loan account?
Mr. LONGLEY. Well, it was really, I would say, a second mortgage
I believe there was a bond issue on the properties. I haven't any
note of that, but I believe there was a bond issue on the properties,
and the trust company was given a deed, which was recorded as a
mortgage until repayment.
Mr. PECORA. A second mortgage ?
Mr. LONGLEY. That is what it would amount to. But there was
a deed recorded behind those bonds.
Mr. PECORA, In the report by the State bank examiner, as of September 14, 1931, the loan of E. L. Deacon and wife was $79,000,
which corresponds to the amount found by the examining committee
as of December 13, 1932. So, apparently, there had been no liquidation of any part of that loan between those dates.
Mr. LONGLEY. During 1932 there was some of it charged off. I
think you will find it was charged off around to $38,000. I don't
know whether that happened in the last charge-off or not.
Mr. PECORA. The next largest loan account reported by the examining committee of an officer or director is that of Harry C. Bulkley,
a director, amounting to $63,500.
Mr. LONGLEY. A S of what date is that ?
Mr. PECORA. AS of December 13, 1932, according to the report of
the examining committee of the trust company.
Mr. LONGLEY. Well, they are probably correct. My memorandum
shows that it is $69,000.
Mr. PECORA. It is $63,500 according to the report marked in evidence as exhibit no. 92.
Senator COTJZENS. What date are those figures that you have, Mr.
Longley ?
Mr. LONGLEY. It is " 12-20-33." The balance of the loan was
$59,370. Apparently he had paid something on it.
Senator COTTZENS. That was over a year afterwards.
Mr. LONGLEY. Oh, yes.
Senator COTTZENS. That probably explains it.
Mr. PECORA. What was that loan secured by?
Mr. LONGLEY. There is a lot of Guardian Detroit
Union Group
stock, and there was a large amount of Machine Co. stock, and 700
shares of the Detroit Local News, and 500 shares of another stock,
and 75 shares of Packard Motor Co. and 312 shares of River Rouge
Improvement Co. and 200 shares of Lorillard Co. common stock, and
the assignment of certain life insurance that he had, and the assignment of an interest in a certain mortgage.
Mr. PECORA. DO you know when Mr. Bulkley's loan liability was
first created?
Mr. LONGLEY. It was 10-25-29,.according to my memorandum. I t
was increased in May of 1931.
Mr. PECORA. From what amount to what amount?
Mr. LONGLEY. From $26,000 to $69,000. He added $43,000 to it.
I think that loan undoubtedly will be paid.
Mr. PECORA. HOW was that?
Mr. LONGLEY. I say, I think that loan undoubtedly will be paid.
STOCK EXCHANGE PEACTICES
4865
Mr. PECORA. The next largest loan to an officer or director, as set
out in this report of December 13, 1932, was to Luther S. Trowbridge, a director, $62,000. What do you know about that?
Mr. LONGLEY. Yes; that is true. That loan was originally made
in 1930.
The CHAIRMAN. Have you the total loans made to officers and
directors ?
Mr. PECORA. I have the total shown in this report of December
13, 1932. It is $2,477,040.45, excepting mortgage loans.
Mr. LONGLEY. And approximately one and one-sixth million of
that to one of the directors.
Senator COTJZENS. Have you any record, Mr. Pecora, of any other
large loans that are criticized by the examiner ?
Mr. PECORA. I was looking to see if this Trowbridge loan was
mentioned in the examiner's report of September 1931. In the report
of examination of state examiner as of September 14,1931, it appears
that this Trowbridge loan account was then $62,000, which corresponds to the amount on December 13, 1932, and that the entire lot
was classified in September 1931 as slow.
What collateral was against that loan?
Senator COUZENS. YOU just read that, did you not?
Mr. LONGLEY. NO ; I do not think I read the Trowbridge collateral.
There was 45% shares of Guardian Detroit Union Group stock;
there were 708 shares of the capital stock of the Village Homes
Co., of Grosse Pointe; 144 shares of the capital stock of the Detroit
JLegal News. That seems to be all.
Mr. PECORA. The next largest loan to a director seems to have
been George B. Russell. According to the examining committee's
report as of December 13, 1932, that amounts to $43,700. What do
you know about that?
Mr. LONGLEY. The balance on December 20, 1933, seems to have
been $40,000, according to the memorandum that was given to me.
This was originally made in 1922. It was increased in 1929 to
$83,000. The collateral was: 717 shares of McChord Radiator; 118
shares of Russell Steel Construction Co.; 214 shares of Republic
Gear Co.; 200 shares of Vortex Cup Co.; 800 shares of SparksWithington; 150 shares Detroit Bankers; 46 shares United States
Steel; 520 shares Claud Neon Lights; 300 shares Detroit Aircraft;
109 shares Walker & Co. A, and 278 shares Walker & Co. B; certificate of beneficial interest covering 638 shares of Michigan Steel
Corporation; a demand note of Raymond Russell, in the amount
of $7,100; assignment of one-ninth interest in the estate of George
H. Russell; and an assignment of $45,000 life insurance policies.
Mr. PECORA. The next largest loan account to a director is that of
Clarkson C. Wormer, Jr., amounting to $31,500, according to the
examining committee's report as of December 13, 1932.
Mr. LONGLEY. That has since been replaced by cash, through the
^Congress Corporation.
Mr. PECORA. The next largest is a loan account of $26,500 to
Fred T. Moran, a director.
Mr. LONGLEY. $25,000, did you say?
Mr. PECORA. $26,500.
Mr. LONGLEY. That, at the present time, or in December, had been
charged off, down to $10,000. The present collateral is: 620 shares
4866
STOCK EXCHANGE PRACTICES
of Guardian Detroit Union Group; and 150 shares of Central West
Casualty Co.
Mr. PECORA. The next largest is a loan to Hobart B. Hoyt, a director, amounting to $25,000, as of December 13, 1932.
Mr. LONGLEY. That was made in 1929, and the collateral is: 100
shares of General Motors, 37 shares Detroit Edison, 139 shares of
Michigan Steel Castings, and an assignment of the interest in the
estate of Helen N. Hoyt.
Mr. PECORA. There is a joint loan liability of Fred T. Moran, a
director, with one John Dwyer, that I notice in the examining committee's report as of December 13, 1932, mounting to $158,327.86.
What do you know about that ?
Mr. LONGLEY. I cannot give you the details of that. I t was
$160,000, did you say?
Mr. PECORA. One hundred and fifty-eight thousand three hundred
and twenty-seven dollars and some cents.
Mr. LONGLEY. Approximately that. I t was a loan that was made
some time ago—1931. I cannot give you the details of what is
behind that. I have no memorandum of it.
Mr. PECORA. The next largest appears to be a loan of $11,436.72,
to Eugene A. Miller, vice president and comptroller of the trust
company, according to the report of the examining committee as of
December 13, 1932.
Mr. LONGLEY. I have no memorandum of that. I remember the
loan.
Mr. PECORA. DO you know the genesis of that loan ?
Mr. LONGLEY. No; I do not. It was an old loan, long before my
time.
Mr. PECORA. All the other loans of officers and directors shown
on schedule 6 attached to the report of the examining committee of
December 13, 1932, are for various amounts, all of them being less
than $10,000 each.
Mr. LONGLEY. Yes; I think so; and most of them to officers. I
do not know that there are any other directors; are there ?
Mr. PECORA. Most of them appear to have been junior officers.
Mr. LONGLEY. Yes. (After conferring with an associate.) Mr.
Pecora, there is one thing that ought to be stated about the Oakman
loan. Mr. Oakman was not a director of the Trust Co. until perhaps
10 years or better after he first began business with the Trust Co.
Mr. PECORA. He first began business in 1916?
Mr. LONGBEY. In 1916. I think he did not become a director until
1926 or 1927, something of that sort, long, long after.
Mr. PECORA. From that time on his loan account increased, did it
not?
Mr. LONGLEY. NO ; I think you will find the high point even before
that. I never looked it up, but I believe that is what you will find.
I have been told that is true.
Mr. PECORA. I note this statement in the body of this report of
the examining committee as of December 13, 1932 [reading] :
The Trust Co.'s loan with Reconstruction Finance Corporation December 13,
1932, was $7,300,540.20, secured by several hundred items of collateral having
a total face value of approximately $31,000,000. It would perhaps be interesting to report the committee's total appraisal of this collateral, but the committee did not feel justified in taking additional time to segregate these items
from the general classification list, all of which are included therein.
STOCK EXCHANGE PBACTICES
4867
Mr. LONGLEY. Yes.
Mr. PECORA. DO you
know any special reason why the committee
did not take the time to appraise the market value, or the liquidating
value of this collateral pledged with the K.F.C. ?
Mr. LONGLEY. They started that job in December, as I remember, and they spent days and days and days at it, away from their
own businesses. There was a hold-up on it during the declaration
of the holiday, and then afterwards they decided to complete it.
When they had finished with that, they felt that they did not want
to take the time—these particular men—to segregate those particular
items that were pledged, go through them, and appraise them. I am
sorry they did not do it now, myself; I wish very much that they
had.
Mr. PEOORA. Did they ever make such an appraisal and report
thereon to the officers and directors of the bank?
Mr. LONGLEY. N O ; they did not, I am very sorry to say, because
the personal opinion of one of the directors, George Klein, was
expressed before the grand jury in Detroit, as I remember, as to
his examination. As I remember, he stated that he felt that these
assets would liquidate the Trust Co. deposits, and creditors.
Mr. PECORA. Did he give anything more detailed than that?
Mr. LONGLEY. I do not remember what it was. I t is in his
testimony.
Senator COTTZENS. DO you think they would liquidate the deposit
liability of the Trust Co. ?
Mr. LONGLEY. I do not know, now. At the time we closed I fully
believed that it would. I felt certain that if we could preserve that
fiduciary business through this loan, that business would, in time,
pay out every creditor and every depositor.
Senator COTTZENS. Have they not now arranged to conduct the
fiduciary business ?
Mr. LONGLEY. They are in process of arranging it. I have not
heard for the last 3 or 4 weeks.
Mr. PECORA. Let me read to you the following from this report
of the examining committee of the Trust Co. as of December 13,
1932, under the title of " Liquidation, 1932 ", appearing at pages 14
and 15 of the report in question [reading] :
Your committee recognizes that since the date of the previous examination
conditions have made it extremely difficult for the officers to effect substantial
liquidation of assets. In cases where loans are not supported by marketable
securities every effort has been made to obtain statements of the company
whose stock is held as collateral, and/or the maker of the note.
Loans and discounts as of January 1, 1932, amounted to $11,387,906.48, and
as of the date of this examination, $9,809,752.43, showing a net reduction of
$1,578,244.05.
Do you know how that reduction was obtained ?
Mr. LONGLEY. NO ; I do not.
Mr. PECORA. This is what your examining committee said about it.
Mr. LONGLEY. Yes.
Mr. PECORA. I read further from the report
Mr. LONGLEY. I do know that during the year 1932 there was
approximately $5,000,000 liquidation.
Mr.. PECORA. This is what the examining committee found to have
been the principal method of producing that net reduction in the
4868
STOCK EXCHANGE PRACTICES
loans and discounts as between January 1, 1932, and December 13,
1932 [reading] :
$915,479.88 represented charge-offs, and $362,764.17 liquidation.
So that nearly two thirds of the reduction was brought about by
charge-offs.
Mr. LONGLEY. That was one particular item, was it not ?
Mr. PECORA. What is that?
Mr. LONGLEY. That was one particular item.
Mr. PECORA. What was that one particular item?
Mr. LONGLEY. I do not know. You read it—loans and discounts,
wasn't it?
Mr. PECORA. Yes.
Mr. LONGLEY, For
the whole Trust Co. during that year, we got
approximate liquidation of around $5,000,000.
Senator COTJZENS. What was that particular item of $915,000
charge-off under loans and discounts?
Mr. LONGLEY. I do not know without checking up.
Mr. PECORA. Let me read to you the following from page 8 of the
examining committee's report of December 13, 1932, under the caption of " Charge-off losses column ":
In view of what has been reported in the foregoing, your committee recommends either charging off th3 items under net loss, totaling $4,789,689.89, or
setting up an appropriate special reserve to which these items of loss, when
taken, may be charged.
Senator COUZENS. IS there any indication what those items are?
Do you know what they are, Mr. Longley?
Mr. LONGLEY. NO ; not without checking the report. That was
the report, you see, that came after the holiday, and I never had
much of an opportunity to study out what should be done with it.
Mr. PECORA. On page 20 of this examining committee's report,
under the caption " Summary of Charge-offs, Etc.", I read as follows:
Capital structure, December 13, 1932: Capital surplus and undivided profits,
$7,394,891.87; reserves for balance sheet, $1,034,187.45; less rent reserve, not
allowed, $87,864.63; total, $946,322.82.
Of the above reserves, there were used for write-off purposes, prior to the
date of this report, $90,372.72, of which $7,000 was for items not covered by
the committee's recommendations.
Charges as recommended: Losses, $4,789,689.89. Doubtful, one half of $2,924,131.97, amounting to $1,462,065.98. For loans of less than $5,000, $79,184.
For trust account advances of less than $2,000, $17,691.94. Reserves for American State bank guarantees, $420,442.53. Reserves for items in litigation,
$155,428.50. C. W. Harrah, $61,750. Childrens' fund, $60,000, making a total
of charge-offs of $7,046,252.84.
Mr. LONGLEY. Charge-offs and reserves.
Mr. PECORA. Charge-offs and reserves, leaving a resulting capital
of $1,287,961.85.
Senator COUZENS. Have you a copy of this report, Mr. Longley?
Mr. LONGLEY. NO, sir.
Senator COUZENS. YOU
will notice on the bottom of that report that Mr. Pecora just read, the item " Childrens' fund." That
does not mean the childrens' fund of Michigan, does it? There
could not be any charge-offs for that?
Mr. LONGLEY. Yes; I think it does, as I remember. Let us see if
I can find it here.
STOCK EXCHANGE PEACTICES
4869
Senator COUZENS. They never had any loans. How could there be
charge-offs ?
Mr. LONGLEY. It was not that. It was liability of the Trust Co.
Shall I read it?
Mr. PECORA. Please.
Mr. LONGLEY (reading) :
In December of 1929 the Guardian Trust Go. had sold the childrens' fund
of Michigan $1,560,000 in mortgages. The Trust Go. agreed that if payments
on the principal of the same should in any year be less than $150,000 it would
repurchase from the fund sufficient mortgages to bring the principal payments
received during the year up to that amount.
It also agreed to substitute new mortgages in good standing for any on
which interest payments were 3 months or more in arrears, or principal 6
months or more in arrears.
At the present time the principal balance due under the mortgages held by
the fund is approximately $1,200,000.
A working agreement was effected in August 1932 to the effect that the
Trust Co. pay, and continue to pay all delinquent interest and taxes, and repurchase from time to time mortgages in default, it being expressly stipulated by
the childrens' fund that this forbearance waives none of their rights under the
original agreement.
In the year 1934 something like $800,000 of mortgages mature. Under the
arrangement last mentioned, however, and for so long as it continues, the
Trust Co. is relieved of finding the amounts in cash required under the
original guarantee. However, we are obliged to take up defaulted mortgages
and pay delinquent interest and taxes, so that there is the question of some
shrinkage in the fund.
That is the loss, possibly, on that guarantee.
Senator COUZENS. That is an estimated loss.
Mr. LONGLEY. It goes on, Senator. [Continuing reading:]
It is reported to your committee that the particular mortgages which were
put into that account were the very best at the time. Therefore, the shrinkage
should, perhaps, be less than in the general average of mortgages. Your committee recommends a reserve of 5 percent of the present face value, or $60,000,
to be set up in the reserve.
That is how they came to figure it up.
Mr. PECORA. Mr. Longley, do you recall a conference that you had
with the Commissioner of the State Banking Department of Michigan shortly prior to March 15, 1933?
Mr. LONGLEY. Yes.
Mr. PECORA. What took place at that conference?
Mr. LONGLEY. We are looking for instructions from
the banking
department, really. There were several of us—counsel for the Trust
Co. and the treasurer and one or two of the more influential
directors, called upon Mr. Eeichert and discussed the situation with
him. We tried to explain our problems, which he said he was very
familiar with. He stated that as far as he was concerned, until
that banking holiday was ended there was not anything that he
could do. The Trust Co. felt that it had been very badly hurt
over the publicity in connection with the holiday and in connection
with our general position, but we met with Mr. Keichert, the banking commissioner. I think there is something in the minutes that
will give you that more in detail. That is my general recollection.
Mr. PECORA. I have before me an extract of the minutes of the
meeting of the executive committee of the board of directors of
the Union Guardian Trust Co., held on March 15, 1933, from which
it appears that at that meeting you made a report to the executive
175541—34
4870
STOCK EXCHANGE PRACTICES
committee of your conference with the banking commissioner. I
will read the following excerpt from the minute book of that meeting of the executive committee:
Mr. Longley stated that the report of the examining committee of our board
was presented to the commissioner of the State banking department. That
there were also present his deputy, Mr. Taylor, and Mr. Gorman, an assistant
attorney general.
Mr. Longley stated that he was accompanied by Mr. Haberkorn, Jr., Mr.
Maurice, Mr. Harris, and Mr. Bulkley. That the commissioner and his deputy
examined the report briefly and asked what the representatives of the company
wanted to discuss with him.
Mr. LONGLEY. I was thinking of another meeting.
Mr. PECORA. Let me finish.
Mr. LONGLEY. All right.
Mr. PECORA (continuing reading) :
Then Mr. Longley, Mr. Maurice, and Mr. Bulkley presented the problems
confronting the Trust Go. under the present conditions, and the lack of cash
for operations, with which situation the commissioner said he was familiar.
The representatives of the company told him that they would like to go into
the whole situation in detail, and had come out for that purpose. That Mr
Harris had prepared the figures showing the cash deficit resulting from operations in February, which figures showed a cash deficit of approximately
$56,789: The commissioner then made a statement that his position was
that he would do nothing to interfere with the operation of the banks or
trust companies during the Governor's holiday, nor would he consider, in any
event, the appointment of a receiver for any such institutions, giving as his
reason that he was advised by counsel that he had no power to do so. He
then stated that he would receive our report, and in the usual course w^ould
examine it and have his staff make an examination of the Trust Co., but not
during the holiday. He stated that he was familiar with the Trust Co.'s
operations as they had been carried on under the restrictons of the holiday,
and that the company should continue to function in this way for the present,
stating the he was assured the Governor would not permit the holiday to
end until remedial legislation wias enacted by the legislature, under which
the banking commissioner could take some definite action.
This closed the conference.
Mr. LONGLEY. That is right.
Mr. PECORA. What was the other conference you had in mind?
Mr. LONGLEY. A conference later in connection with the conserva-
torship, after the law was passed.
Mr. PECORA. What was the substance of that conference?
Mr. LONGLEY. A general discussion, and finally a discussion as to
the appointment of a conservator for the Trust Co. under the
new legislation which had been finally passed by the Michigan
Legislature.
Mr. PECORA. At that time you and the other officers and directors of
the Trust Co. were interested in the enactment of remedial legislation by the Michigan State Legislature, were you not ?
Mr. LONGLEY. YOU mean at the time of the first meeting, you
spoke of?
Mr. PECORA. About this general period, in the early part of 1933 ?
Mr. LONGLEY. Yes, indeed. That is exactly what we were interested in, very much.
Mr. PECORA. What particular legislation were you desirous of
having enacted?
Mr. LONGLEY. It finally culminated in that Payne-McNitt bill,
which permitted opening under restrictions and operating under restrictions. It permitted a conservator.
STOCK EXCHANGE PRACTICES
4871
Mr. PECORA. Did you trust company, for the purpose of furthering
its interest in legislation, employ anybody to represent it at the State
capitol ?
Mr. LONGLEY. No; not that I know of. Judge Lacy, who was one
of the directors of the bank—I do not think he was a director of the
group. I think he was a director of the Group Co.—spent a great
deal of time in Lansing, and I believe had a great deal to do with
writing that bill, and getting it through. That is the general understanding around Detroit, that he did.
Mr. PECORA. I have before me what purports to be a photostatie
copy of a memorandum transmitted to you by Mr. John N. Stalker
under date of February 1, 1933, which reads as follows [reading]:
Our executive committee, as you know, is of the opinion that some arrangement should be made to keep this company posted on pending legislative matters,
and it seems to us that other units of the group would desire to be similarly
informed. There is also at least one piece of legislation relating to the taxability
of life insurance, which we would like to see put through at the present session.
The attached memorandum indicates comments from Mr. Henry Bulkley, Mr,
Hal H. Smith, and Mr. George H. Klein.
My own idea and recommendation would be as follows:
1. That the arrangement should be a group arrangement.
2. That Mr..Klein's recommendation as to the manner of handling the problem
should be adopted in principal.
I believe that a man of the type Mr. Klein suggests would be far more
effective than a young lawyer, who might be sent to Lansing to live during
the continuance of the session. The latter arrangement, it seems to me, would
cost a good deal—a lawyer of the experience and force necessary to accomplish
what we have in mind being necessarily quite expensive. A less-expensive man
would perhaps not be able to accomplish a great deal. It may be questioned
as to whether it would be desirable to have our employee a lawyer a t all.
The man selected would be retained primarily as a fact finder, which would
leave us entirely free to deal with any specific problems in the manner suggested by Mr. Smith or in any other way that seemed wise. At the same time
a man of the type proposed would, by special arrangement with us, be able ta
exert no small degree of influence in the molding of prospective legislation and
in obtaining the passage of the same, or perhaps the contrary. It seems to me
that the group, if it should approve the general idea, might advantageously
inquire through Mr. Gorman or other channels as to Dr. Webber or any othes
available' material.
As you know, it is the view of the committee that a conclusion ought to be
reached at the very earliest possible date.
Do you recall that memorandum?
Mr. LONGLEY. I remember the letter; yes.
Mr. PECORA. Who is the Mr. Gorman referred to here?
Mr. LONGLEY. I suppose it was Mr. Gorman in Lansing.
Mr. PECORA. An assistant attorney general?
Mr. LONGLEY. NO.
Mr. PECORA. Who?
Mr. LONGLEY. I don't know. It might have been Mr. Gorman.
Whether it was he or his brother I do not know.
Mr. PECORA. Who is Mr. Gorman that you refer to ?
Mr. LONGLEY. There is a Mr. Gorman in Lansing in connection!
with the Lansing bank.
Mr. PECORA. Who is his brother?
Mr. LONGLEY. That is a unit of the Guardian Group. His brother
was—he is since dead—in the attorney general's office.
Mr. PECORA. Was he the assistant attorney general referred to im
your report to the executive committee of March 15 last of your
conference with the State banking commissioner?
4872
STOCK EXCHANGE PRACTICES
Mr. LONGLEY. Yes; that is right; he was.
Mr. PECORA. I have before me what purports to be a photostatie
copy of another memorandum addressed to you by Mr. John N.
Stalker under date of February 6, 1933, reading as follows
Mr. LONGLEY (interposing). Pardon me. What was the date of
the other one ?
Mr. PECORA. February 1, 1933. This one of February 6, 1933, reads
as follows [reading] :
Referring further to my memorandum of February 1 with respect to the
proposed arrangements to be made by the Group at Lansing, Dr. Louis
Webber referred to therein was in town today discussing with Mr. Klein
certain matters relating to the real estate mortgage bond commission, of which
both he and Mr. Klein are members. I met Dr. Webber in Mr. Klein's office,
and without any implied commitment of any sort, discussed with him the
possibility of getting him to represent the Group. As previously stated, Dr.
Webber is secretary of the Real Estate Association, is a small-town man anc\
is so regarded, and is a resident in Lansing, and though other activities already"
has or is getting the various contacts necessary to do a good job.
Dr. Webber's idea of compensation would be a retainer of $500 and payment
of $160 a month during the period that the legislature is in session, plus
out-of-pocket disbursements for telephone calls, traveling expenses, etc. Any
entertainment which he might see fit to do (and he said that there would be
some) would be taken care of out of the retainer or monthly payment.
Should we desire Dr. Webber's active assistance either in getting proper
legislation passed or in preventing improper legislation from being passed, he
suggested $500 per bill—that matter could, of course, be left entirely open
and would be subject to negotiation should his assistance be desired.
I would suggest that it might be desirable and helpful to get in touch
with Mr. Klein both as to the wisdom or necessity of some such arrangement
as that proposed and as to Dr. Webber's qualifications. While I have known
Dr. Webber slightly and have seen something of his work through the Michigan
Association, Mr. Klein knows him a good deal better than I do.
(Signed)
JOHN N. STALKER,
Vice Chairman.
Do you recall that memorandum, Mr. Longley?
Mr. LONGLEY. Yes; I recall it.
Mr. PECORA. Was any arrangement made with Dr. Webber to
represent either the trust company or the Guardian Detroit Union
Group ?
Mr. LONGLEY. NO, sir; as far as I know.
Mr. PECORA. In securing legislation that was desired or preventing
the enactment of legislation that was regarded as improper?
Mr. LONGLEY. Not as far as I know, Mr. Pecora.
Mr. PECORA. Did you have any contact with Dr. Webber for the
purpose of arriving at a judgment as to whether or not he should
be retained by either the trust company or the Group as per Mr.
Stalker's suggestion ?
Mr. LONGLEY. I was not even interested. As far as I know, it
died right there.
Mr. PECORA. YOU mean upon receipt of Mr. Stalker's memorandums to you which I have just read the matter went no further?
Mr. LONGLEY. Yes; as far as I am concerned.
Mr. PECORA. Well, so far as anyone else in the Group was concerned, what, if anything, was done about it ?
Mr. LONGLEY. I don't think anything, or I would have known
about it. But I never heard anything more about it after that
&eao:nd communication.
STOCK EXCHANGE PRACTICES
4873?
Mr. PECORA. Did the group engage anybody to look after its
interests insofar as they might be affected by pending legislation?-'
Mr. LONGLEY. Not that I know of. I think that our own officers
kept in close contact with the Lansing situation, that went very
slowly, and it dragged and dragged, and we were very anxious to
have some remedial legislation that would permit us to operate:
under a conservatorship in some limited way. I think that that was
what Mr. Stalker had in mind when he wrote those communicationsHe was anxious to see if things could not be pushed along and.
some action secured.
However, I think that most of it was worked out through Judge
Lacy, whom I have already mentioned, and Mr. Maurice spent a.
good deal of time in Lansing in connection with general thingsy
and some of the other officers.
Mr. PECORA. Who is Mr. A. Quay Beyer?
Mr. LONGLEY. Who is he now?
Mr. PECORA. Who was
Mr. LONGLEY. He is
he?
living at Detroit. At one time he was a
junior officer of the Guardian National Bank of Commerce,- I
believe.
Mr. PECORA. YOU knew him, didn't you ?
Mr. LONGLEY. Oh, yes; very well.
Mr. PECORA. YOU say he was a junior officer of the Guardian
National Bank of Commerce ?
Mr. LONGLEY. I think so. I don't know just exactly what his
official position was; but he had to do with mortgages, I know that.
Mr. PECORA. Mr. Frank Maurice was an officer of the Union
Guardian Trust Co. ?
Mr. LONGLEY. Yes.
Mr. PECORA. I show
you what purports to be a photostatic reproduction of an intra-group and interoffice memorandum on the letterhead of the Guardian Detroit Union Group, Inc., addressed to Mr.
Frank Maurice from Quay Beyer. Will you look at it and tell me
if you recognize it as a true and correct copy of such a communication sent by Mr. Beyer to Mr. Maurice ?
Mr. LONGLEY (after perusing document). Yes. I don't know that
I ever saw that before, but I think that is Mr. Beyer's writing, and
if you found it in the files it is probably his.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Photostat of hand-written memorandum from A. Quay Beyer
to Frank Maurice, filed Apr. 18, 1933, was thereupon designated
" Committee Exhibit No. 93, Jan. 17, 1934 ", and same appears immediately following where read by Mr. Pecora.)
Mr. PECORA. The document received in evidence as committee'^
exhibit no. 93 of this date reads as follows [reading] :
To Mr. Frank Maurice
From Quay Beyer
Supplementing my memo, of March 18 I would like to set forth briefly a few
of the other things I have in mind which might work in with the plan outlined..
When the deadlock on the mortgages is broken then there will be the property to be disposed of. If I may go back for a moment to the beginning of the*
decline and imagine that someone designated by the trust company were tvelfc
4874
STOCK EXCHANGE PRACTICES
acquainted with, say, 10 of the larger corporation's employment managers
and that this man had been introduced under very favorable circumstances by
the president of the corporation who sits on our board. If the man designated
had had a list of our mortgages and land contract purchasers and could have
interceded for them, would it not have made a material difference in the amount
of collections and income
It seems to me the people against whom we have mortgages should be the
first ones to be permitted the opportunity of repurchasing perhaps on land
contract. If we can secure jobs for them we can start to thaw out a lot of the
so-called frozen assets. We cannot get them all, of course, but I am wondering
if it is not worth a trial. We are not getting any now and I certainly would
not be afraid to tackle the job, which could be worked in with new business
calls, and in that way would not be any additional expense—or to get started
some overtime work could be done.
For example, let's assume Chrysler Co. employ 30,000 men at the peak and
5,000 at low ebb because they are compelled to keep a number for maintenance,
etc. Let's say we secured an infinitely small percentage of these. Would it not
be an advantage gained?
I don't think it would be a very elaborate program from an expense standpoint. After the contact had been properly made with the employment managers, then periodic check-ups could be made even when conditions are improved.
Understand, if you please, it is not my idea to create an employment agency
or a welfare department (however, I do think it would automatically do worlds
of good for a lot of deserving people and perhaps save a lifetime of savings for
some), and for that reason the individual for whom we would intercede should
not even know of it.
Some of these details will of course work themselves out. I would like very
much to get your reaction on the above?
I really think our shop is in a better position to do this than any othe"
organization in town, because we have so many industrialists on our board
and I am sure they would be willing to cooperate.
We have in many instances contacted the purchasing agents to secure orders
for firms that we hoped would give us accounts. Now why not the employment managers to keep men who theoretically will give us an account by
paying on their accounts?
A. QUAY BErrER.
Was there anything done about that?
Mr. LONGLEY. Yes;* I think Mr. Beyer went ahead and tried to
get some of these poor chaps who could not pay on their mortgages
jobs. I don't know how far he got with it, but I know he worked
hard on it trying to get them employment. I thought it was a pretty
good scheme. Jobs were pretty scarce at that time, however, and
nothing very important happened.
Mr. PECORA. Eeferring again to the examination of the trust company made by the State examiner as of September 14,1931, it appears
in his report that Mr. Hudson, the examiner, prepared that there
is a liquidating statement of condition which is entitled " Examiner's
Estimate of Bank's Condition ", and in this estimate or purported
estimate he set up surplus, undivided profits, and reserve accounts,
from which he deducted estimated losses which he believed the bank
might have to sustain, and reached a net deficiency of
Mr. LONGLEY (interposing). What was the date of that examination?
Mr. PECORA. The examination of September 14, 1931. He reached
a net deficiency of $478,241.54. That was taking into account capital
stock of the bank $5,000,000, undivided profits $591,345, and other
items carrying the total up to $5,963,919.85, from which he deducted
estimated losses aggregating $6,442,169.39, leaving a net deficiency
of $478,249.54. Are you familiar with that report?
Mr. LONGLEY. I am not; no.
STOCK EXCHANGE PRACTICES
4875
Mr. PECORA. What is that?
Mr. LONGLEY. I am not.
Mr. PECORA. Have you a copy of
Mr. LONGLEY. NO, I have not.
the report of September 14, 1931 ?
In fact, my memorandum of it
shows that no report was ever received from the banking department. I wondered whether you were talking about the 1932 report.
Mr. PECORA. NO; the report as of September 14, 1931, by Mr.
Hudson, the same State examiner.
Mr. LONGLEY. This is what my memorandum says, that the trust
company gave me:
Probably check of directors' examination.
the banking department.
No report being received from
I never saw it.
Mr. PECORA. In Mr. Hudson's report of his examination of the
trust company as of August 8, 1932, he reported a net deficiency
arrived at in the same way of $2,915,889.34, as I read to you before.
Mr. LONGLEY. Yes; that is right.
Mr. PECORA. Which compared with the net deficiency as of September of the preceding year of $478,000 odd.
Mr. LONGLEY. Of course, after the report of September i4, 1931,
I do not believe I have ever seen the report of the banking department, but on our own investigations we made charge-offs at the
end of the year of $2,162,746.64 and added certain reserves in the
amount of $50,60.0. That was not in furtherance of the State banking department examination, but in furtherance of our own investigations.
Mr. PECORA. I think that is all, Mr. Longley.
Senator COTTZENS. I would like to ask a question before Mr. Longley leaves the stand.
When the banks closed Saturday noon on February 11, that was
the usual closing time, was it not ?
Mr. LONGLEY. Yes, sir.
Senator COUZENS. When
they closed they had been operating
normally up to then, had they not ?
Mr. LONGLEY. Exactly.
Senator COUZENS. What happened between February 11 at 12
o'clock noon and midnight of the 13th when the Governor issued
his closing order, to make you believe it was necessary to close?
Mr. LONGLEY. It did not all happen between those dates.
Senator COUZENS. Then you were not operating normally at noon
on the 11th, were you?
Mr. LONGLEY. Yes; we were operating normally, but during the
previous week, while we wTere in Washington, we would get continually calls, repeated calls from people in New York and Chicago,
which gave us a great deal of concern.
Senator COUZENS. What were they?
Mr. LONGLEY. Oh, inquiries that indicated that there was this
very large application; the news was out that the trust company
was making this very large application.
Senator COUZENS. That was not quite the fact, because it was the
group that was making the application.
Mr. LONGLEY. That is true. But we had been showing large bills
payable, and I think that the depositors generally recognized the
4876
STOCK EXCHANGE PEACTICES
fact of the lack of liquidity of the trust company at that time, and
we felt that we did not dare to go further with it.
Senator COTJZENS. SO up until noon on February 11 you were not
particularly afraid of large withdrawals?
Mr. LONGLEY. I do not think there were an}^ that amounted to
anything.
Senator COUZENS. I say, you were not afraid of them at that time,
because you were operating and paying the depositors?
Mr. LONGLEY. That is right.
Senator COUZENS. Then between noon of the 11th and the night
of the 13th of February you got more rumors and reports that if
you opened up there might be withdrawals ?
Mr. LONGLEY. Oh, yes. It was well known around Detroit what
the situation was, because we took so many people into our confidence. We necessarily had to, to try to get those funds; and our
directors of course could not keep it entirely to themselves, and it
was talked around. There just wasn't a chance after our meeting
over that week end.
Senator COUZENS. SO that most of the fear, then, and the rumors
developed from noon of the 11th until midnight of the 13th; is
that correct?
Mr. LONGLEY. A large part of it; yes. I cannot say quite most
of it, because
Senator COUZENS. I said " most of it," because, as a matter of fact,
there were no large withdrawals demanded before that.
Mr. LONGLEY. That is true.
Senator COUZENS. There is just one question that is not particularly important for the record, but Mr. Leyburn testified to some
statements that I was alleged to have made to you and Mr. Walsh,
I think it was, when you came to the Senate to see me on February
6 or 7
Mr. LONGLEY. It was Thursday, February 9.
Senator COUZENS. Can you tell the committee just what I said at
that time, if you recall it?
Mr. LONGLEY. Well, I recall some of the things you said; yes.
Senator COUZENS. Will you tell the committee all of it, if you can
tell all of it?
Mr. LONGLEY. I do not know that I can remember them alL
Colonel Walsh and I called upon you outside the Senate chamber,,
and we tried to describe the situation and w^e tried to explain what
our application was to the R.F.C., and the seriousness of the situation in Detroit. You stated to us that you had heard that we had
asked the E.F.C. people not to let you know about the application.
I remember I tried to explain to you that that was the first I had
heard of it, if it were true, and I tried to tell you that we were very
carefully not asking you or Mr. Chapin or any oi our Congressmen
or other official people here in Washington to participate in this
thing, due to the fact that I had in my bag at the time this article
by Mr. Flynn in Harper's Magazine, criticizing Mr. Chapin for having secured a loan for the Union Guardian Trust Co., and I guess
Mr. Chapin had probably never heard of it. We felt that with Mr.
Leyburn's participation in that application—he really gave as much
to the conception of that plan as anyone else—we had strong sup
STOCK EXCHANGE PRACTICES
4877
port. We also felt that the seriousness of the situation and the
necessity for the loan going through made it just something that
could not be turned down. I tried to explain that to you, as I
remember, and you were not very interested. We asked if you
would speak to Senator Vandenburg, and we proceeded to tell him
the whole story.
Senator COUZENS. I want to say that, so far as I was concerned,
I thought you were entirely right in not coming to any political
representatives in Washington, and I thought that I ought not to
have been approached, and so I did not find 7any fault with yon for
that reason; but what I wanted particular!} was to have you .say
as to whether or not I ever said to you that I would condemn the
loan from the housetops.
Mr. LONGLEY. Oh, no; you did not say that to me.
Senator COUZENS. That is what Mr. Leyburn testified to the other
day.
Mr. LONGLEY. Oh; I did not understand that.
Senator COUZENS. That is what I wanted to straighten up, because I thought he was mistaken; he was depending upon rumor.
Mr. LONGLEY. I understood that you said that later.
Senator COUZENS. I said that in the White House, but not to you.
Mr. LONGLEY. Not to me, no; you did not indicate what you would
do. You said you were in a quandary as to whether you should go
one way in support of these institutions or let things slide the other
~way and let them go. I have forgotten what your language was.
Senator COUZENS. I guess it was printable, was it not?
Mr. LONGLEY. Oh, yes; quite printable.
(Witness excused.)
TESTIMONY OF CHAKLES S. MOTT, FLINT, MICH.
The CHAIRMAN. YOU do 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. MOTT. I do.
Mr. PECORA. Please state your full name.
Mr. MOTT. Charles S. Mott.
Mr. PECORA. Your address, Mr. Mott?
Mr. MOTT. Flint, Mich.
Mr. PECORA. And your business or occupation ?
Mr. MOTT. What I have been doing practically for the past year?
Mr. PECORA. What you regard as your business or occupation.
Mr. MOTT. I don't know.
The CHAIRMAN. What has; it been ?
Mr. MOTT. Most of my time during the past year has been defend-
ing myself in lawsuits.
Senator COUZENS. SO that your occupation is that of a defendant ?
(No response.)
Mr. PECORA. What is your most active business affiliation ? I will
put it that way.
Mr. MOTT. Well, I am a director of General Motors and a member
of the executive committee, but I am not active in that corporation.
Mr. PECORA. YOU were an officer or director of the Guardian
Detroit Union Group, were you not?
4878
STOCK EXCHANGE PRACTICES
Mr. MOTT. I was a director, not an officer.
Mr. PECORA. YOU were a director from its inception ?
Mr. MOTT. From the beginning of the Guardian Group.
Mr. PECORA. That was in 1929?
Mr. MOTT. Yes.
Mr. PECORA. AS
a director were you a member of any of the
standing or special committees of the board of directors of the
group ?
Mr. MOTT. I was.
Mr. PECORA. Which committee or committees thereof?
Mr. MOTT. If I recollect correctly, I think it was the
executive
committee and the so-called " adrisor}^ committee."
Mr. PECORA. Did you attend meetings of the board of the group
with any degree of regularity?
Mr. MOTT. Yes, sir.
Mr. PECORA. And also of the executive committee of the board?
Mr. MOTT. Yes, sir.
Mr. PECORA. And the advisory committee of the board?
Mr. MOTT. Yes, sir. There were very few meetings of the latter,
though.
Mr. PECORA. Mr. Mott, I want to examine you particularly with
respect to a certain transaction concerning which you gave some
testimony before the so-called " one-man grand jury " investigation
held in the past year in Detroit; and the transaction I have in mind
is one in which there was involved a transfer by you to Mr. Covington of 30,000 shares of the stock of the group. Do you recall
the transaction?
Mr. MOTT. Yes, sir.
Mr. PECORA. YOU did
transfer that 30,000 shares to Mr. Covington ?
Mr. MOTT. I sold him 30,000 shares; yes, sir.
Mr. PECORA. On what date ?
Mr. MOTT. I think it was about December.
Mr. PECORA. Of what year?
Mr. MOTT. 1932.
Mr. PECORA. 1932?
Mr. MOTT. Yes.
Mr. PECORA. Will you
give the committee briefly the terms of the
sale of that stock by you to Mr. Covington ?
Mr. MOTT. I made a very complete statement concerning the transaction at the so-called " grand jury " hearing in Detroit. I wrote it
out very fully and completely. May I read it ?
Mr. PECORA. Can you not give the committee the essential facts
with regard to that sale of the stock to Mr. Covington, without doing
so from a prepared statement, Mr. Mott?
Mr. MOTT. Well, it really covers so much that I would have to begin at the beginning to really cover the ground.
Mr. PECORA. YOU do recall that the sale took place on December 14,
1932?
Mr. MOTT. I think that was the date.
Mr. PECORA. And that it involved 30,000 shares of Group stock?
Mr. MOTT. Yes, sir.
Mr. PECORA. And that
the purchaser was Mr. Covington ?
STOCK EXCHANGE PEACTICES
4879
Mr. MOTT. Yes, sir.
Mr. PEOORA. At that
time Mr. Covington was executive vice president of the Guardian National Bank of Commerce, was he not?
Mr. MOTT. Yes, sir.
Mr. PECORA. And the
Guardian National Bank of Commerce was
the largest banking unit of the Guardian Detroit Union Group, was
it not?
Mr. MOTT. Yes, sir.
Mr. PECORA. And was
Mr. Covington also at that time a director
of the group as well as executive vice president of the Guardian
National Bank of Commerce?
Mr. MOTT. I believe he was.
Mr. PECORA. Mr. Mott, how did that sale originate ?
Mr. MOTT. AS I say, I will have to go back to the beginning in
order to cover the point. I became acquainted with Mr. Covington
especially when he came with the National Bank of Commerce at
the Boulevard office up in the north end of Detroit. He was put in
charge of that office there.
Senator COUZENS. What year?
Mr. PECORA. 1929.
Senator COUZENS, Was it 1929 ?
Mr. MOTT. Probably at the time that
Talbott left. I t was several
years ago, when he conducted the affairs of that office so well that he
received the commendation of all those who were in contact with
his work; and I was fairly closely in contact with it, because I was
a member of a committee which went over the loans that were made
from that office before they went to the board down town, and I
was so impressed with his work that I was anxious to see him placed
in a responsible position at the main office of the National Bank
of Commerce located in the Union Trust Building, and ultimately
he was placed there as operating vice president or executive vice
president at the main office.
Subsequently the National Bank of Commerce and the Detroit
Guardian Bank were combined. That was in the early part of 1932;
and Mr. Covington, by virtue of the record that he had made up to
date, was made executive vice president of the National Guardian
Bank of Commerce and he made a splendid record there. I had
great confidence in his ability and integrity. A great many other
things happened in the course of time. I had had sad experience
in banking in Flint in 1929 and had been desirous ever since of reducing my investment and the time I had to give to the banking
business, because I wanted to get out of the presidency of the bank
at Flint and these various other connections in Detroit that were
taking a great deal of time, and I had explained that to Mr. Covington; and along in December he asked me if I wanted to sell him
some of my stock.
Mr. PECORA. Along in December 1932 Covington asked you if you
would sellhim some of your stock?
Mr. MOTT. Yes, sir; because he knew that I wanted to lessen my
interest in banking.
Mr. PECORA. Could you not have lessened your activities in banking without reducing your stock holdings in the Group?
Mr. MOTT. Well, naturally I could have resigned from any position or activity at any time.
4880
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW many shares of Group stock did you own at
the time Mr. Covington came to you and asked you, as you said,
.sometime in December of 1932, if you would sell him part of your
holdings in the Group stock?
Mr. MOTT. Approximately 42,000 shares.
Mr. PECORA. When Mr. Covington came to you and asked you
that question, what was your reaction to it?
Mr. MOTT. I felt that Mr. Covington was well qualified to carry
on the interests of the bank and that I would be very glad to
abdicate in his favor, as it were, and sell him a large block of stock.
Mr. PECORA. Were the terms of sale discussed between you ?
Mr. MOTT. Yes.
Mr. PECORA. What was the substance of the discussion?
Mr. MOTT. I sold it to him at the market.
Mr. PECORA. Which was then what?
Mr. MOTT. Eight.
Mr. PECORA. $8 a share?
Mr. MOTT. Yes.
Mr. PECORA. HOW was the stock paid for by him?
Mr. MOTT. With a note.
Mr. PECORA. For the full amount?
Mr. MOTT. Yes, sir.
Mr. PECCRA. And that was on the initiative of Mr. Covington?
Mr. MOTT. That was what?
Mr. PECORA. On Mr. Covington's initiative that that transaction
Tvas had ?
Mr. MOTT. Yes.
PECORA. Not on yours ?
Mr. MOTT. NO, sir.
Mr. PECORA. Mr. Covington
Mr.
was desirous of buying a large block
of that Group stock and you accommodated him by selling him
.30,000 shares of your stock and received from him his note for the
full purchase price?
Mr. MOTT. Yes, sir.
Mr. PECORA. That was a note, then, for $240,000?
Mr. MOTT. Yes, sir.
Mr. PECORA. Did the note bear interest ?
Mr. MOTT. Yes, sir.
Mr. PECORA. For what period of time was the note made?
Mr. MOTT. I have the note here. I have forgotten right
now.
I After referring to note:] It was a demand note.
Mr. PECORA. Has any interest been paid on account of that note?
Mr. MOTT. NO, sir.
Mr. PECORA. Has any
demand been made for payment by you in
whole or in part?
Mr. MOTT. NO, sir.
The CHAIRMAN. The
committee will take a recess until tomorrow
morning at 10 o'clock.
(Whereupon, at 4:05 p.m., a recess was taken until tomorrow,
Thursday, Jan. 18, 1934, at 10 a.m.)
4881
STOCK EXCHANGE PRACTICES
Union Guardian Trust Company, Detroit, Mich., General Journal and Statement
of Condition, December 31, 1932
COMMITTEE EXHIBIT NO. 84, JANIJAKY 17,
Resources
Cash
Cash Items
Due from Units of Group... __ Due from Other Banks
1931
Debits
Credits
Balances
$12,477.81
$18,392.19
294, 277.15
391,935. 51
$10,906.81
1,571,00'
3,722,409. 03
2, 539,190.23
547, 602. 41
284,815.90
7, 929. 21
959, 236. 63
Total Cash and Due from Banks .
6, 274,077.07
Dfimanri Loans—Secured
Demand Loans—Unsecured _ ____
__
Time Loans—Secured
Time Loans—Unsecured
- Past Due Bills
Rent Notes Receivable _ _ _
_
Advances to Trusts—Class A
Advances to Trusts—Class B
_ _
Mortgage Loans in Office
Mortgage Loans Made for Trust Acc'ts
Mortgage Loans with State Treasurer
Mortgage Loans—Miscellaneous.
Mortgage Loans in Office Pledged " R "
Mortgage Loans in Office Pledged " R " #2
Mortgage Loans—Metro. Certificates
Mortgage Loans—Assgts. Misc
_
Second Mortgage Loans in Office
Land Contracts
___ _
Total Loans
__ _
_ _ _
1,344, 939.17
7, 354.39 4,197,926.89
3,696. 21 1,105, 582.42
50.00
5,303,335.31
30.00
7.00
161. 08
_
98, 793.12
1,347, 681. 66
1,446,474 78
Other Real Estate
Leasehold Improvements (Less Dep. $—)
Furn. & Fixtures (Less Dep. $—)
Mechanical Eqpt. (Less Dep. $—)
Mechanical Eqpt. Bldg. (Less Dep. $—)
Customer Liab. under Letters of Credit
_
Rent Receivable
Accounts Receivable_
Other Resources.
Accrued Income Receivable
Debits & Credits Fwd
-
__
2,283.46
5,534.86
______
200.00
16,893.19
3,373. 62
2,082.87
9,429. 34
3,610. 26
1, 621. 67
4, 277. 50
14,192. 87
7,628, 518. 31 9,801, 680.17
5,115,318. 61
57, 044. 07
199,875. 24
53,252.89
3, 776. 88
22, 225. OG'
74,424.66
64, 092. 20
2,281,954.66
50,915,939.34
_-
Unpledged Eligible Paper.
Unpledged U.S. Securities
___ _
Unpledged Other Securities
Total
Total Non-Accrual Loans
__
Total Non-Accrual Securities
__ _
Pledged Assets (For Bills Payable) :
Coll. Loans
_
_________
___
Mtge Loans
Land Contracts
- _ - _ __ _
Loans Sold, 12-30-32
Interim Certificates, 12-30-32
103,973. 50
415, 467. 78
1.00
3,908, 093.12
4, 427, 535.40
Total Securities
Total Resources
8, 043,205.10'
5,303,328. 31
138,037.18
589,784. 39
655, 565.40
2, 111, 409.55
32,342, 362. 66
_
U.S. Securities
Municipal and Other nontaxable Sec
Other securities
Capital Stock Subsidiaries
Securities Pledged
242,549.8520,200.00
6,025,640.94
97,569.17
1,337, 767.41
18,704,19
2,358,681.45
393,935.47
3,903,849.37
884,188. 57
217, 946. 33
103,000. 00
415,000. 00
518,000.00
22, 763,000. 00
1,358,000. 00
6,388,000.00
13,346,000. 00
1,791,000.00
1,223,000.00
96, 000. 00
4882
STOCK EXCHANGE PKACTICES
Union Guardian Trust Company, Detroit, Mich., General Journal and
of Condition, December 31, 1932—Continued
COMMITTEE EXHIBIT NO. 84, JANUARY 17
Liabilities
Debits and credits forwarded
Capital
.. _
Surplus...
______
Undivided Profits
Current Period Profits.
Total Capital Funds_
Reserves:
Loans __
_ _ _
Securities
Contingencies _ __ _____
Interest...
Total Reserves..
Debits
_____
19S4
Credits-
500,000. 00
869,888.19
500,000.00
$5,000,000.00)
2,000,000.00
382,059. 21
7,382, 059. 21
27,942.32
536, 352.89
313,731.22
1,099,317.02
___ _
1,977,343.45
_
_
59.10
9, 068.22
498,968. 71
9,793.62
435,309.58,
1,015,127.42
3,719,753.64
4, 734,940.16
13, 781,649. 39 11, 726,732.26
3,840,871.35
86,426 00
203,048.00
4,901, 372. 57
9,031, 717.92
13, 766,658.08
__ _
Savings Deposits—Individual
Certificates of Deposit—Time
State Funds
___ _
Other Public Funds
Due to Banks
Due to Units of Group
Due to Others
Total Time Deposits
Bills Payable—R.F.C.:
#1
#2 _
Bills Payable & Rediscounts—Units ofG
Bills Payable—Other
Mortgages Payable
Bonds Sold under Rep. Agt.__
Total Borrowed Money
Uncollected Rent
Liability under Letters of Credit
Accounts Payable
Other Liabilities:
Accrued Expense Payable _
Accrued Ledger Control (T.B. F.) _ _
Net Suspense Balance
Total Debits and Credits
18,834. 59
9, 523.28
736.60
123.00
Accts. Pay. Real Est. Comm
Key Deposits—Employees
Key Deposits—Tenants
__ _
Craft, cpns. redeemable
Electricity tax
Tr. Co. Emp. Locker Key Dep. a/c
850,000.00
16,000.00
734,297. 51
1,376,008.15
13,064,784.79
28,807,748.53
95,361.16
135,000. 00
1, 400,491.60
1,630,852. 76
1, 568.52
4,421,131.18
5, 057,770. 28
_
352,145. 00
9,831,046. 64
60, 771.17
3,610.26
392. 51
355.05
74,424. 66
22, 225. 00
5,140. 04
185,099. 23
132,245.24 /
\
869,888.19
145,626.04
23, 502,641.45 23,502,641.45
Total Liabilities
Balances
$7,628, 518.31 $9,801,680.17
_
Collns. on Assigned Loans
Trust Funds:
Trust Funds Specially Deposited.Class "A"
Total Class "A" Funds
Class " B " :
State Funds.
Other Public Funds
Due to Banks
Due to Units of Group
Due to Others
Total Class " B " Funds
Total Trust Funds
Certificates of Deposit—Demand:
State Funds
Other Public Funds _
Due to Banks
Due to Units of Group __ _ _
Due to Others
Total Demand Deposits
statement
50,915,939. 34
55.00
8.50
211.80
125.71
.55
346.00
2. 908.87
53.00
1,095.14
615. 45
121.58
346.00
5,140. 40
4883
STOCK EXCHANGE PEACTICBS
Union Guardian Trust Company, Detroit, Mich., General Journal and
of Condition, December SI, 1932—Continued
COMMITTEE EXHIBIT NO. 84, JANTTAKY 17,
Statement
1934
DUE FROM BANKS
Bank
Debit
Credit
$24, 674.32
$6,848.98
Balance
Trust accounts
Central Hanover Bk. & Tr. Co., New York
Chemical Bk. & Tr. Co., New York
Manufacturers' Trust Co., New York
Cont'l Illinois National Bk. & Tr. Co., Chicago..
Straus Nat'l Bk. & Tr. Co., Chicago, 111.
First Nat'l Bank, Detroit
1st Wayne Nat'l Bk., Det. Rec. Bldg. A/C.
Guard Nat'l Bk. of Com. (uptown off.), Detroit.
Can'd'n Bk. of Commerce, Windsor, Ont
Dansard State Bank. Monroe, Mich.
1st Nat'l Bk. & Tr. Co., Flint, Mich.
1st Nat'l Bk. & Tr. Co., Pontiac, Mich
1st St. Savings Bank, Birmingham, Mich.
Grosse Pointe Svg's Bk., Grosse Pointe, M i c h —
Mt. Clemens Svg's Bank, Mt. Clemens, Mich.
Special C/D's & Accounts
'
Sundry Cert, of Deposit
75.80
l66.~8O~
102, 748.27
51,138. 32
692,862.95
2, 781. 82 136,196. 27
44.55
23.73
1,505, 681.93
18,365.89
28.16
Total.
$10,212. 51
295,483. 52
8, 263.38
756,330.33
6, 087.66
131. 25
17,624.57
9, 793.62
9,068. 22
1,015,127.42
408,900.00
140,146.54
203,507.57
4,734,940.16
12.95
1,012.49
General Accounts
J. P. Morgan & Co., New York
_.
Guaranty Trust Co., New York
Nat'l. City Bank, New York
City National Bank & Trust Co., Chicago
Union Trust Co., Pittsburgh, Pa
Mt. Clemens Svgs. Bk., Mt. Clemens, MichiganHighland Pk. St. Bk. Special account
Guard. Nat'l. Bk. of Com., Detroit
Dansard State Bank, Monroe, Michigan
1st St. Svgs. Bank, Birmingham, Michigan.
Items in Transit.
Sundry Bks. & Bkrs
__
Sundry Cert, of Deposit.
Total
-
12.13
3,557.42
870.40
5,763.00
5,576.31
7,498.22
5,962.11
2,500.00
1,339,215.66
1,909.49
11,838.62
486.62
139,554.56
486.62
181,963.37
14,064.35
4,965.46
116,967.87
154,130.61
188,427.94
1,526,659.10
RESERVE POSITION
Account
Amount
Required
Certificates of Deposit—Demand
Certificates of Deposit—Time
Trust Funds—Class B
Special Deposits
Monthly Payment Mtge. Deposits..
4,010,272.61
76,774.58
903,171.79
11,443.34
Total Reserve RequiredTotal Reserve Held
5,001,662.32
1,539,136.91
Deficit, Reserve..
3,462,525.41
4884
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 85
General journal and statement of condition of Union Guardian Trust Co.,
Detroit, Mich., Feb. 11, 1933
Resources
Cash
Cash Items
Due from Units of Group
Due from Other Banks
_
-_
-
Debits
Credits
Balances
$15,024.04
$14,175. 04
768,116. 68
555,804. 23
$13, 793.02
1, 231.02
1, 790, 915.03
5,523,125.14
Total Cash and Due from Banks
7,329,064. 21
Demand Loans—Secured
Demand Loans—Unsecured . . - _~
Time Loans—Secured.Time Loans—Unsecured
__
Past Due Bills
Rent Notes Receivable
Advances to Trusts—Class A
Advances to Trusts—Class B
_
Mortgage Loans in Office
Mortgage Loans Made for Trust Acc'ts
Mortgage Loans with State Treasurer
Mortgage Loans—Miscellaneous
___
Mortgage Loans in Office Pledged " R "
.
Mortgage Loans in Office Pledged " R " #2
Mortgage Loans—Metro. Certificates
Mortgage Loans—Assgts. Misc
.- Second Mortgage Loans in Office
Land Contracts
Total Loans
-
-
58,086. 63
58,086.63
_-
3,100.00
217, 946. 33
2, 507. 22
70.88
-
102, 036.00
406, 982. 78
1.00
3, 908,093.12
Total Securities
Total Resources..
8,025, 063. 24
6,431,932. 49
138,037.18
589, 784. 39
662, 773. 31
2,159, 728.12
32, 288, 701. 43
U S. Securities
___
Municipal and Other nontaxable Sec.
Other Securities
_
Capital Stock Subsidiaries..
Securities Pledged
Other Real Estate
Leasehold Improvements (Less Dep. $
Furn. & Fixtures (Less Dep $
)
Mechanical Eqpt. (Less Dep. $
)
Mechanical Eqpt.-Bldg. (Less Dep. $
Customer Liab. under Letters of Credit
Rent Receivable..
_ _ . _ __ ._
Accounts Receivable
Other Resources
Debits & Credits Fwd
245,497. 74
20,000. 00
5,319,064. 76
93,994.17
1,837,057. 51
17, 373.10
2,324,185. 97
330,954. 27
3,875, 308. 85
4, 417,112. 90
)
------
)
604. 29
7,910. 86
.25
844, 931. 61
638, 555.11
5,160, 993. 58
56,806. 38
197,034. 05
51, 449. 99
3, 644. 48
12, 675. 00
97,329. 92
93,015. 60
2,363, 925. 50
52, 071, 753.04
4885
STOCK EXCHANGE PRACTICES
General journal and statement of condition of Union Guardian Trust Co.,
Detroit, Mich., Feb. 11, 193$—Continued
COMMITTEE EXHIBIT NO. 85
Liabilities
Debits and credits forwarded
Capital
Surplus
__
Undivided Profits
Current Period Profits
Debits
$844,931. 64
_
__
Credits
$638,555.11
___
_
7,200,870.87
Reserves:
Bonds
C ontingencies
Interest
_
__
536,352.89
276,066.85
1, 231,174. 54
__
2,043,594. 28
Trust Funds:
Trust Funds Specially Deposited
Class " A "
27,433.42
121,821. 63
18,133. 33
400, 536. 51
Total Class " A " Funds
900,021. 24
4,593,040.68
5,493,061.92
Class " B ^ Other Public Funds
Due to Banks
___ _
Due to Units of Group
Due to Others
70,997. 55
72,182. 26
Total Class " B " Funds
3,657,668.42
75,636. 56
73,255. 72
4,865,268.39
8, 671,829.09
Total Trust Funds
14,164,891.01
Certificates of Deposit—Demand:
State Funds
Other Public Funds
Due to Banks __ _
Due to Units of Group
Due to Others
-- -- _-
850,000.00
16,000.00
740,255.61
676,008.15
12,183,443.98
_
3, 350.00
Total Demand Deposits
_
Savings Deposits, Individual
Certificates of Deposit—Time:
Due to banks Due to others
28,630,598.75
331. 71
-
50.00
_- _
101,043.63
142,000.00
1,278,096.23
Total Time Deposits
1,521,139.86
Bills Payable—R.F.C. #1
Bills Payable and Rediscounts—Units of G. #2. __
Mortgages Payable
_
Bonds Sold under Rep. Agt _
__ _ _ _
Total Borrowed Money
Uncollected rent
Liability under Letters of Credit-.
Accounts Payable
Other Liabilities
Accrual Ledger Control (T.B.F.)
Total Debits and Credits
$5,000,000.00
2,000,000.00
382,059. 21
181,188.34
Total Capital Funds
Total Reserves
Balances
_ _
64,911. 57
4,405,803.48
7, 566,019. 42
349,230.00
_
12,321,052.90
_ _
-
271. 53
1,644. 35
1,135, 693. 40
8.86
127,113. 01
12,675.00
4,727.32
209,981. 05
6, 227. 33
1,135,693. 40
Total Liabilities
52,071, 753. 04
Loans Sold 2-10-33
Interim Certificates 2-10
_____
Accts. Pay.:
Real Est Comm
Key Deposits—Employees
Key Deposits—Tenants
Caft. Opns. redeemable
Electricity tax
Tr Co. Emp. Locker Key Dep. a/c
89,000. 00
5.50
266. 03
8.86
2, 545.33
52.00
1,096.39
491.06
198. 54
344. 00
4,727. 32
175541—34—PT 10
20
4886
STOCK EXCHANGE PRACTICES
General journal and statement of condition of Union Guardian Trust Go.,
Detroit, Mich., Feb. 11, 19S3—Continued
COMMITTEE E X H I B I T N O .
85
DUE FROM BANKS
Bank
Debit
Credit
Balance
Trust accounts
Central Hanover Bk. & Tr. Co., New York
Chemical Bk. & Tr. Co., New York
Manufacturers' Trust Co., New York
Bkrs. Tr. Co., N.Y. National
Cont'l Illinois Bk. & Tr. Co., Chicago
Straus Nat'l Bk. & Tr. Co., Chicago, 111.
Farmers Dep. Nat. Bk., Pittsburgh, Pa
Union Trust Co., Pittsburgh, Pa
First Wayne Nat'l Bank, Detroit
1st Wayne Nat'l Bk., Det. Rec. Bldg. A/C.
Guard Nat'l Bk. of Com. (Uptown Off.), Detroit.
Contl. 111. Nat. Bk. & Tr. Co., Chi. a/c #2
Northern Trust Co., Chicago, Illinois
Guaranty Trust Co., New York, New York
Natl. City Bank of Cleveland, Ohio
Can'd'n Bk. of Commerce, Windsor, Ont
Dansard State Bank, Monroe, Mich.
1st Nat'l. Bk. & Tr. Co., Flint, Mich.
1st Nat'l Bk. & Tt. Co., Pontiac, Mich
1st St; Savings I^ank, Birmingham, Mich.
Grosse Pointe Svg's Bk., Grosse Pointe, Mich
Mt. Clemens Svg's Bank, Mt. Clemens, Mich.
Bankers Trust Co., New York, New York #2
Special C/D's & Accounts. ._
Sundry Cert, of Deposit
Totals-
$2,879.61
$170. 00
117, 562.90
$500,000.00
400,000.00
8,280. 31
309, 686. 49
202,032. 57
416,953.78
17,493.10
124,910. 45
293,404. 24
702, 213.48
400, 000.00
200,019.16
250,000.00
77,051.34
20, 576. 65
46.00
6,479. 86
154. 6i
13, 386.13
18,133. 33
27,433.42
400,000.00
900,021. 24
685,000. 00
432,167. 37
162, 629. 42
5, 493, 061. 92
General accounts
J. P. Morgan & Co., New York
Guaranty Trust Co., New York.
Nat'l City Bank, New York
Chem. Bk. & Tr. Co., N.Y
City National Ba^nk & Trust Co., ChicagoUnion Trust Co., Pittsburgh, Pa.
Highland Pk. St. Bk., Special Account
Guard. Nat'l Bk. of Com., Detroit
Items in Transit:
Sundry Bks. & Bkrs
Sundry Cert, of Deposit
Totals.
3, 557. 42
8, 564. 51
7, 661.01
73.49
5,677.15
57, 725. 73
5,785.19
504. 29
305, 734. 66
504. 29
376, 632. 66
2,500. 00
1, 644, 450. 97
21,145. 85
8,303. 36
86,281. 79
15,000.00
335,949. 31
393,174. 81
1, 820,978. 25
RESERVE POSITION
Account
Certificates of Deposit—Demand
Certificates of Deposit—Time
Trust Funds—Class B
Special Deposits
Monthly Payment Mtge. Deposits..
Total Reserve Required.
Total Reserve Held
Deficit, Reserve..
Percent
Amount
Required
$3,616,426.94
71,004.81
867,182.90
\
12,125. 23
4,566,739.88
1,836,002. 29
2, 730, 737. 59
STOCK EXCHANGE PRACTICES
THURSDAY, JANUARY 18, 1934
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
W ashing ton, D.C.
The subcommittee met at 10 a.m. pursuant to adjournment on yesterday, in room no. 301, of the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams, 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. I
see that Mr. Mott has resumed the witness seat at the committee
table.
TESTIMONY OF CHAELES S. MOTT, FLINT, MICH.—Besumed
Mr. PECORA. Mr. Mott——
Mr. MOTT (interposing). Mr. Pecora, may I correct my last
answer ?
Mr. PECORA. Yes.
Mr. MOTT. Due to
the confusion I forgot for
make a demand on Mr. Covington for payment
Mr. PECORA. In October of 1933?
Mr. MOTT. In October of 1933; yes; a written
Mr. PECORA. Have you a copy of the written
Mr. MOTT. I haven't it here.
Mr. PECORA. IS it in the form of a letter ?
the moment. I did
in October.
demand.
demand?
Mr. MOTT. Yes.
Mr. PECORA. What reply did you get to it ?
Mr. MOTT. That he was unable to make payment at this time.
Mr. PECORA. When were the interest installments due and payable
on the note ?
Mr. MOTT. The note did not specify. The note simply specified
that it was a demand note.
Mr. PECORA. Will you produce the note if you have it, Mr. Mott?
Mr. MOTT. I have it right here.
Mr. PECORA. All right.
Mr. MOTT. Here it is.
4887
4888
STOCK EXCHANGE PRACTICES
Mr. PECORA. A eoliateraled note produced by the witness. I will
read into the record, it being an original demand note, I do not think
the committee reporter should mark it as an exhibit. [Reading:]
DETROIT, MICH., December 1J{, 1933.
On demand after date I promise to pay to 0. S. Mott, or order two hundred
and forty thousand and no/100 dollars, at the Guardian National Bank of
Commerce, Detroit, Mich. Value received. With 6 percent interest per annum
from date.
HARRY S. COVINGTON.
Then there is a marginal notation on the face of the note, reading
as follows:
Collateraled by 30,000 shares of Guardian Detroit Union Group, Inc., stock.
No endorsements of any kind appear on the note. I now return,
the note to you, Mr. Mott.
Mr. MOTT. I thank you.
The CHAIRMAN. DO you still have the collateral, Mr. Mott?
Mr. MOTT. The collateral was attached to the note.
The CHAIRMAN. And you still have it?
Mr. MOTT. Yes; it is right here.
The CHAIRMAN. All right.
Mr. PECORA. Have you the stock certificates that were the subject
of this transaction ?
Mr. MOTT. Yes. Here it is.
Mr. PECORA. The certificate produced by the witness was issued
by the Guardian Detroit Union Group, Inc., to Harry S. Covington,.
for 30,000 shares of the capital stock of the Group.
Senator COUZENS. Does it state the par value of the stock?
Mr. PECORA. It has a par value of $20 a share. I should like to
read for the purpose of the record the following description which
is printed on the back of the stock certificate:
Article 9 of articles of association: The holders of 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, 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 manner that statutory liability
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 Comptroller of the Currency whenever
requested by either of these officers.
This corporation reserves and shall have the right from time to time, upon
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, trust companies, and other corporations, without offering to the stockholders of this corporation for subscription any of the stock so to be disposed of.
The certificate is endorsed in blank by Harry S. Covington under
date of December 14, 1932. Now, Mr. Mott, will you tell me in
whose handwriting appears the filled-in matter on the face of the
note that you received from Mr. Covington and which has been
read into the record?
Mr. MOTT. That is Mr. Covington's handwriting, I believe.
At least, I believe it is. He handed me the note. I do not remember
that I saw him make the note out.
STOCK EXCHANGE PRACTICES
4889
Mr. PECORA. In whose handwriting is the date reading i4 December
14, 1932 ", which appears on the back of the certificate of stock that
you have produced here and which appears directly over the endorsement of Harry S. Covington ?
Mr. MOTT. Really, not being a handwriting expert, I hardly feel
that I would be very well qualified to answer that question. If it
was similar to Mr. Covington's handwriting, I would suppose he
wrote it.
Mr. PECORA. It does not appear to be similar to Mr. Covington's
handwriting, does it?
Mr. MOTT. NO. But Mr. Covington is here and Mr. Covington
can probably swear to who did put it in there, and when.
Mr. PECORA. That date, reading " December 14, 1933 ", is not in
your handwriting, is it?
Mr. MOTT. NO. I will swear to that.
Mr. PECORA. All right. Now, Mr. Mott, did you have more than
one conversation with Mr. Covington about your selling to him these
30,000 shares of stock before you sold them to him ?
Mr. MOTT. Possibly twice.
Mr. PECORA. HOW far apart were the two conversations?
Mr. MOTT. Not very far apart. It would be a matter of days or so.
Mr. PECORA. Well, now, was it at the first conversation that Mr,
Covington expressed to you a desire to purchase a substantial block
of shares of the group stock?
Mr. MOTT. AS far as I recollect; yes.
Mr. PECORA. And did Mr. Covington say anything to you at that
time, that you now recall, other than the fact that he wanted to
acquire a large block of stock of the group ?
Mr. MOTT. Well, he told me of his interest in the institution, his
confidence in it, and that an ownership of a larger block of stock
would enable him to speak with more authority in the bank as a
larger stockholder.
Mr. PECORA. Did you think that his ownership of a larger number
of shares of stock of the group would reenforce or enhance his
authority as an officer of the bank?
Mr. MOTT. I felt very sure that it would; and I felt that it would
be a very good thing for the other stockholders, including myself, in
regard to the value of the stock that we held.
Mr. PECORA. Well, now, Mr. Mott, when did Mr. Covington first
speak to you about his desire to acquire a larger block of stock of the
group; or, I mean, when he first spoke to you, did he say how large
a block he would like to acquire ?
Mr. MOTT. I do not know whether it was the first or the second
time. It was one of the times that he mentioned it; yes.
Mr. PECORA. HOW large a quantity of stock did he~ indicate, if it
was the first or the second time that he spoke to you on the subject,
that he wanted to acquire ?
Mr. MOTT. He said anything up to 30,000 shares.
Mr. PECORA. Did he specify that number, 30,000 shares?
Mr. MOTT. He did.
Mr. PECORA. Did he
tell you whether or not he had made any
effort up to that time to increase his holdings of stock of the group ?
4890
STOCK EXCHANGE PRACTICES
Mr. MOTT. I do not think so.
Mr. PECORA. Did ke ask you specifically if you would sell him any
of your holdings of stock of the group ?
Mr. MOTT. Yes.
Mr. PECORA. The
first time he spoke to you on the subject did he
ask you that?
Mr. MOTT. I do not know whether it was the first or the second
lime.
Mr. PECORA. What led to the second conversation between you on
the subject?
Mr. MOTT. I don't know.
Mr. PECORA. Was it the fact that a» a result of the first conversation there had been no indication given by you to him that you would
sell him any of your holdings of stock of the group ?
Mr. MOTT. Probably. The first time he mentioned the thing it was
a new suggestion to me, and it was a matter that was the subject of
consideration, as is natural with a person when somebody suggests
buying an amount of stock or property to that amount. I t is quite
unusual for the person to turn around and say: "All right, I will do
that." A man has to consider it some.
Mr. PECORA. Did you indicate to him at the first conversation that
you would give the suggestion that you sell him some of your holdings, consideration?
Mr. MOTT. Yes.
Mr. PECORA. Was the price discussed at the first conversation?
Mr. MOTT. NO.
Mr, PECORA. Why not, in view of the fact that you told him you
would give consideration to his suggestion that you sell him some of
your stock ?
Mr. MOTT. Well, I say the price was not mentioned, it was undoubtedly mentioned that it would be at the market.
Mr. PECORA. Was anything said in the first conversation on the
subject between you, concerning how he would pay for the stock
if you sold him any of your holdings ?
Mr. MOTT. I could not tell you whether it was ihe first or the
second time. But I understood, anyway, that he would have to
pay, that it would have to be paid for, with a note.
Mr. PECORA. Did you understand that at the outset?
Mr. MOTT. Yes.
Mr. PECORA. YOU
understood at the outset of the negotiations
between you and Mr. Covington
Mr. MOTT. Yes.
Mr. PECORA. That
he would pay for the stock entirely by note, or
with a note ?
Mr. MOTT. Yes.
Mr. PECORA. And
you were readily agreeable to selling him the
stock on those terms of payment?
Mr. MOTT. Yes. I had done that same thing many times before
in the case of stock in companies in which I had been interested;
and it is being done every day. It is standard practice.
Mr. PECORA. Were you familiar with the conditions of the group
at that time? That is to say, in December'of 1932, when you had
these conversations or negotiations with Mr Covington?
STOCK EXCHANGE PRACTICES
4891
Mr. MOTT. Not as they are understood today.
Mr. PECORA. YOU were a member of the executive committee right
down to the time that a receiver was appointed for the groupy
weren't you?
Mr. MOTT. I was a member of the executive committee; yes.
Mr. PECORA. And as such you endeavored to keep yourself posted
as to the condition of the company, didn't you ?
Mr. MOTT. I did.
The CHAIRMAN. HOW
many shares of stock did you have in the
group ?
Mr. MOTT. AS I testified on yesterday, before the sale to Mr.
Covington I had approximately 42,000 shares.
Mr. PECORA. And you were aware of the provisions in the articles
of association of the group which is printed on the back of the stock
certificate that has been produced here, weren't you ?
Mr. MOTT. I have read that, and I took it for what it was worthMr. PECORA. What did you think it was worth ?
Mr. MOTT. Nothing.
Mr. PECORA. That is, you did not think it meant anything?
Mr. MOTT. It meant something, yes; but I had received advice
that it would not stand up under the law.
Mr. PECORA. When did you receive such advice ?
Mr. MOTT. Well, I don't know. I cannot state any specific date,,
but during the past 6 or 8 months—say, 6 months—the matter has
been built up in law and by briefs, and that sort of thing, so that
it would indicate quite clearly that that was the fact. As a matter
of fact, I understand that in Missouri the Federal district court
rendered an opinion that would substantiate that. And then in Wisconsin, in the district court; and also in the court of appeals, which
affirmed the same idea—that, apparently, a corporation, not a banking corporation, could not write into its—whatever you call it, articles of association or anything else, that which was not provided for
under the corporate law.
Mr. PECORA. YOU are not a lawyer, are you ?
Mr. MOTT. NO. But I have read a terrible lot of it during the past
6 months.
Mr. PECORA. When for the first time did you reach the conclusion
that that provision of the articles of association which is inscribed
or printed on the stock certificates of the group, with respect to
statutory^ law affecting holders of stock, under tne banking laws,
was meaningless ?
Mr. MOTT. That I cannot say. I was not very much interested
in that for the reason that I had already loaned the group 2y2
million dollars, which was more than any possible assessment that
could be made against me. And I had figured that I had put up
more than three times the amount of any possible assessed liability.
So I dismissed the matter from my mind, feeling that I was not
liable.
Mr. PECORA. NOW, Mr.. Mott, do you regard yourself as having
been one of the " founders ", so-called, of this group ?
Mr. MOTT. Absolutely not.
Mr. PECORA. Were you a stockholder of the group from its inception ?
4892
STOCK EXCHANGE PRACTICES
Mr. MOTT. Let me explain it in my own way: I was a stockholder
in the Industrial Bank in Flint, which later combined with the
Union bank there and was called the Union Industrial. And I
was also a stockholder in the National Bank of Commerce, which
combined with the Union Trust Co., and took in the Griswold.
Then the Union Commerce Corporation took over the Union Industrial Bank. And later the Guardian Detroit Bank combined
with the Union Commerce Corporation. I was not active in the
formation of the combinations in any way at all. My stock was
transferred along with others, but I had nothing to do with the
formation of any of them.
Mr. PECORA. That is, the stock that you had in the banks that you
have mentioned, was exchanged for stock of the Guardian Detroit
Union Group, Inc., when that company took over those banks?
Mr. MOTT. Yes, sir.
Mr. PECORA. Was that
the time when you first became a stockholder
of the group ?
Mr. MOTT. Yes.
Mr. PECORA. Did
you at that time observe that provision of the
articles of association of the group which is inscribed on the certificates of stock of the group ?
Mr. MOTT. NO. I never knew anything about that until about a
year ago.
Senator ADAMS. Mr. Mott, I do not know whether Mr. Pecora has
called your attention to this provision, but I notice on the face of the
certificate a provision that this certificate is issued subject to all of
the provisions of the company's articles of association, as indicated
by article 9, and so forth, which refers to the very part that is on
the back of the certificate. So it seems to me that constitutes a contract with the stockholder, Mr. Pecora.
Mr. PECORA. That is the legal question that is now in the courts
of Michigan, I understand.
Mr. MOTT. On the other hand, we have the courts of Missouri, the
Federal court of Missouri, and the district court and the court of
appeals in Wisconsin, saying to the contrary.
Senator ADAMS. Of course, I am curious, Mr. Mott, to know upon
what ground they would say to a man that he could not make a
contract with a corporation when he buys the stock. I can see where
they would say that the corporation could not impose it on him by
amending the bylaws, but when he accepts it, why, it seems to me
that it comes awfully close to being a contract.
Mr. MOTT. A lot of things seem like contracts. It seemed like a
contract when we bought the United States Government bonds payable in gold, but we found they were different. We found it was
something else. Now I don't know. I am not passing on that.
Senator ADAMS. The fact that one man violates his contract is no
excuse for another.
Mr. MOTT. I don't say that the Government violated its contract.
T lay it on the table.
Senator COUZENS. Did you not consider, Mr. Mott, that there was
a moral obligation after you accepted and signed for that certificate?
Mr. MOTT. I never read that thing. There are very few people, I
believe, who do read the provisions on their stock certificates.
STOCK EXCHANGE PRACTICES
4893-
Mr. PECORA. When did you first know that that provision was
printed on the stock certificates ?
Mr. MOTT. Well, probably about a year ago.
Mr. PECORA. Not until then?
Mr. MOTT. NO.
Mr. PECORA. And
what brought it to your attention then, Mr. Mott,.
in view of the fact that for 2 or 3 or more years prior to that time
while you were a stockholder it had steadily escaped your observation ?
Mr. MOTT. I don't know. There must have been some general
discussion, some discussion somewhere.
Mr. PECORA. And your memory about that is not clear ?
Mr. MOTT. NO.
Senator ADAMS.
Mr. Pecora, may I intrude a moment? Mr. Mott
was making some comment on the Government obligations. It seems
to me there was a suggestion in that. You know the provisions in
Government bonds to which you refer were, I think, not authorized
by any statute of the United States. I think they were put in at the
time by the Treasury of the United States. I think there is a very
serious question whether or not the Treasury of the United States
ever had any right to put those provisions in the bonds. In this
case those provisions are put in by the very fundamental law of the
corporation itself.
Mr. MOTT. NOW, you hit on exactly the thing that I think is
spoken of by the courts that I mentioned, the question as to whether
or not a corporation, the Guardian Group Corporation, had any
right to put in there a provision of assessibility which was not
provided for under the law, and your answer to me regarding the
other thing is exactly the answer on this thing here, as I understand
it.
Senator COUZENS. AS a matter of fact, did the attorney general of
the State of Michigan approve of this holding company procedure
based on that very article that you referred to on the certificate ?
Mr. MOTT. YOU would know more about that than I would.
Senator COUZENS. I understood that there was some issue raised
at one time in Michigan as to the right of the holding company to
organize and hold banks' stocks and trust companies' stock, and
that the attorney general of the State of Michigan gave an opinion
that it was all right with that provision in the articles.
Mr. MOTT. The attorney general of the State of Michigan recommended to the Burgess Hospital that they start suit against me a
short time ago, on which the circuit court handed down an opinion
that I was neither legally nor morally responsible for the complaint made, and that was affirmed by the Supreme Court, and
yet it was recommended by the attorney general's department that
I be gone after.
Senator COUZENS. YOU think that is an alibi for this case, then?
Mr. MOTT. NO, no. I get terribly confused by what
Senator COUZENS (interposing). Lawyers say?
Mr. MOTT. Lawyers say, and what the facts are. I don't know.
Senator COUZENS. YOU are no more confused than I am in that
regard.
4894
STOCK EXCHANGE PRACTICES
Senator ADAMS. YOU know, every once in a while someone confuses the opinion of an attorney general with the decisions of the
court. It is not always quite as final.
Mr. PECORA. Mr. Mott, while you were a stockholder of the banks
that subsequently became units of the group, did you have any
opinion of your own as to whether or not, as such a stockholder,
you were subject to statutory liability as a stockholder of the bank?
Mr. MOTT. Yes; as a stockholder of the Union Industrial Bank,
I realized that I was subject to assessment liability. There was no
question on that. And I even went further and voluntarily in 1929
contributed to the Union Industrial Bank far more than my assessed
liability.
Mr. PECORA. We know about that, Mr. "Mott, but it hardly has
any relationship to the subject of this examination. When you exchanged your bank shares for the shares of the capital stock of the
group, on the occasion of the acquisition of those banks by the group,
did you feel thereupon that that liability had fallen away from
you ?
Mr. MOTT. I did not give it any thought.
Mr. PECORA. YOU gave it no thought at all ?
Mr. MOTT. NO.
Mr. PECORA. Did you feel that you were under that liability?
Mr. MOTT. I gave it no thought at all at that time.
Mr. PECORA. When for the first time did you give the subject any
thought as to whether or not any liability attached to you as a stockholder of the group stock, under the banking laws and the other
l&ws of the State of Michigan or the United States?
Mr. MOTT. Well, when I first thought of the possibility of liability
I came to the instant conclusion that by virtue of my having loaned,
advanced money, 2% millions, to the group, that if there was any
liability it would come out of that.
Mr. PECORA. When was that? When did you give thought to
that?
Mr. MOTT. I cannot say.
Mr. PECORA. Was it before the sale of this 30,000 shares to Mr.
Covington in December of 1932 ?
Mr. MOTT. Yes.
Mr. PECORA. Did
you before that sale feel that you under any
liability
Mr. MOTT. NO.
PECORA. AS an owner of group stock
Mr. MOTT. NO.
Mr. PECORA. TO assessment?
Mr. MOTT. When I sold him the stock I
Mr.
didn't feel that I was
relieving myself of any liability, assessed liability. I didn't think
I had any assessed liability then.
Mr. PECORA. That is what I am coming to. When are you conscious of having first firmly developed the thought in your own
mind that you were not liable as an, owner or holder of group stock
for assessment in the event of failure of any of the banks that were
controlled and owned by^the group?
Mr. MOTT. Well, I cannot say. I t was some time previous to
December 1932.
STOCK EXCHANGE PBACTICES
4895
Mr. PECORA. What happened at that time that you say was some
time prior to December 1932 that brought home to you the thought
or the belief that you were not under any such liability as an owner
of group stock?
Mr. MOTT. Because I make a practice of more or less listing my
liabilities, actual and contingent, not in a book, but I take a piece
of paper, for instance, scrap paper, and write those things down.
Mr. PECORA. And do you recall having written down a memorandum which is to the effect that you were not under any liability
as an owner of the group stock ?
Mr. MOTT. It omitted liability as an owner of the stock.
Mr. PECORA. Well now, let us see, Mr. Mott. You said a few
minutes ago that the first timie you observed the provision of article
9 of the articles of association of the group which are printed on
the back of the stock certificates was about a year ago ?
Mr. MOTT. Yes.
Mr. PECORA. Which
would make it after the sale to Mr. Covington of this 30,000 shares?
Mr. MOTT. Yes.
Mr. PECORA. What
was the occasion for your making a memorandum some time prior to December 1932 that you were not liable
as a holder of group stock?
Mr. MOTT. Let me state this again. I said that I have for years
inade a practice of making memorandums simply to get the thing
set in my mind as to my actual and contingent liabilities, the actual
money that I owed on notes, contingent liabilities, endorsements of
notes for others, and contracts or anything else, for the purpose of
telling what my maximum liabilities were, and I did not write down
on the paper that regarding Guardian Group stock I have no liability. It just did not appear. I did not consider that I had a
liability there.
Mr. PECORA. At that time what had caused you to feel that yon
did not have any such liabilities?
Mr. MOTT. The principal reason, as I remember it, was the fact
that I had loaned the group 2y2 million dollars.
Mr. PECORA. Well, you felt that because you had made that loan
the amount of the loan far exceeded any statutory liability that you
might be under as an owner of group stock, didn't you?
Mr. MOTT. Yes.
Mr. PECORA. But connotes the fact that you were cognizant of
l)eing under a liability ?
Mr. MOTT. Not necessarily.
Mr. PECORA. The amount of which, however, was exceeded by the
loan that you had made to the Flint bank?
Mr. MOTT. NO. If there was a question—if Mr. Brown over here
had some kind of a claim against me for a thousand dollars and
I had loaned him $10,000, I would not have to be very greatly concerned about whether or not his claim of $1,000 was any good or
not. I would not have to figure that out at all.
Senator ADAMS. Mr. Mott, I suppose that you have had legal
advice on those things, but I do not believe that if this is a valid
provision you could differentiate that from the situation of a direct
assessment on the part of the bank when you were a depositor.
4896
STOCK EXCHANGE PRACTICES
Now, as I understand the rule, Mr. Mott, you can not offset the
liability or an assessment on stock against your deposit. What
you have to do is to pay your assessment and then simply take your
prorata payment. That is, they do not offset each other. That
is the repeated holdings of the courts.
Mr. MOTT. I do not contradict you in any way at all. I would
not be able to anyhow.
Senator ADAMS. Oh, don't hesitate.
Mr. MOTT. I am not questioning that at all. That may all be so.
[ was asked as to how and why I did these things. I have done a
lot of things that were entirely wrong.
Senator ADAMS. If you have not, you are most remarkable.
Mr. PECORA. Mr. Mott, while you were an owner of the capital
stock of the bank or banks that subsequently became units of this
group you knew that you were under the statutory liability as such
stockholder, didn't you?
Mr, MOTT. Yes.
Mr. PECORA. When
you transferred those bank shares for shares
of the group what was your feeling about whether or not you were
liable as a stockholder of the group ?
Mr. MOTT. I was not conscious of any feeling.
Mr. PECORA. YOU gave it no thought at all ?
Mr. MOTT. NO.
Mr. PECORA. Did
you still think you were under a corresponding
liability?
Mr. MOTT. NO ; it did not occur to me.
Mr. PECORA. When did you first come to the conclusion that you
were not liable as a stockholder of the group ?
Mr. MOTT. I don't know.
Mr. PECORA. Was it before your sale of the 30,000 shares to Mr.
Covington in December 1932 ?
Mr. MOTT. Yes.
Mr. PECORA. That you are sure of ?
Mr. MOTT. Yes.
Mr. PECORA. Can you tell the committee
what it was that happened
prior to December 1932 that first made you aAvare of the fact, as you
thought it to be the fact, that you were not liable as a stockholder
of the group?
Mr. MOTT. I cannot sa}^.
Mr. PECORA. YOU said that you were not aware of the provision
inscribed on the back of these stock certificates with regard to article
9 of the articles of association until about a year ago.
Mr. MOTT. That is correct.
Mr. PECORA. Which is after the sale to Covington ?
Mr. MOTT. Correct.
Mr. PECORA. NOW, did you ask anything of Mr. Covington when
you agreed to sell your 30,000 shares of group stock to him for
$240,000, about his ability to pay the note which he gave you for
the stock?
Mr. MOTT. NO.
Mr. PECORA. Well,
the note was for a very substantial amount,
nearly a quarter of a million dollars ?
Mr. MOTT.
Yes.
STOCK EXCHANGE PRACTICES
4897
Mr. PECORA. And j^ou took his note without any inquiry of any
kind on your part as to his ability to meet it ?
Mr. MOTT. Yes. He held a very responsible position and got a
good salary, a very substantial salary.
Mr. PECORA. What was the salary ?
Mr. MOTT. I cannot tell exactly, but I think it was about $25,000
a year.
Mr. PECORA. YOU thought that his being in receipt of that salary
was an assurance to you of his responsibility or ability to meet the
note for $240,000?
Mr. MOTT. I felt that the note would be paid in the course of
time. The market price on the stock was very low.
Mr. PECORA. But the aggregate amount that he agreed to pay
was pretty large, wasn't it?
Mr. MOTT. Ye,s; but with a slight advance in the stock it would
have been possible to have paid off part or maybe all of the note.
Mr. PECORA. Were you looking to an advance in the stock to enable Mr. Covington to meet his note?
Mr. MOTT. I thought that was easily possible.
Mr. PECORA. Were you looking to it as a means of enabling Mr.
Covington to pay you his note of $240,000?
Mr. MOTT. Well, that is hard to say. I have sold other stock
Mr. PECORA (interposing). Let us confine ourselves to thi,s one
transaction, Mr. Mott.
Mr. MOTT. I cannot answer that.
Mr. PECORA. Had you any assurances whatsoever as to Mr. Covington's financial responsibility to enable him to meet this note
for $240,000 when you sold your stock to him?
Mr. MOTT. Only his position" and hi(s salary.
Mr. PECORA. Were you acquainted with any facts that would
reflect the financial position of Mr. Covington when you agreed to
sell him for $240,000 your 30,000 shares of stock and took his note
for full purchase price?
Mr. MOTT. I don't think so.
Mr. PECORA. YOU knew that the stock had been steadily declining
in market value for a long period of time prior to December 14,
1932, didn't you?
Mr. MOTT. Just as every other stock did.
Mr. PECORA. JSTO ; let us confine ourselves to this stock, Mr. Mott.
You knew that, didn't you ?
Mr. MOTT. Yes.
Mr. PECORA. And
on December 14, 1932 had conditions appreciably
improved over what they had been for any period of time before
that?
Mr. MOTT. I cannot tell from recollection.
Mr. PECORA. YOU knew that general business conditions were at an
exceedingly low ebb in December 1932 at the time of this transaction ?
Mr. MOTT. For quite a period; yes.
Mr. PECORA. And were getting worse?
Mr. MOTT. It did not occur to me that they were getting worse.
Mr. PECORA. What knowledge did you possess at that time of the
financial condition of the group which indicated to you that the price
4898
STOCK EXCHANGE PRACTICES
of $8 a share for the group stock was a fair and reasonable price anct
one that you were willing to sell your stock for ?
Mr. MOTT. I t is hard for me to answer that directly. I was optimistic regarding the future of the group. I thought that conditions
were going to improve.
Mr. PECORA. YOU had been thinking that for some time, hadn't yo%
prior to December 1932?
Mr. MOTT.
Yes.
Mr. PECOEA. And instead of their improving during that period
of time that you thought they were going to improve, they got steadily worse, didn't they?
Mr. MOTT. For a certain period.
Mr. PECORA. Did you know the condition of the group in December
1932 when you had this transaction with Covington?
Mr. MOTT. Not as I know it now.
Mr. PECORA. What do you know it to be now ?
Mr. MOTT. I know very little except what I have seen in the papers
and discussed.
Mr. PECORA. What did you know it to be on December 14, 1932, or
about that time?
Mr. MOTT. Well, that is a rather large order to answer.
Mr. PECORA. YOU were a member of the board of the group and a
member of the executive committee of the board ?
Mr. MOTT. Yes.
Mr. PECORA. Didn't
that put you in a position where you could
inform yourself fully as to the condition of the group and its various
units ?
Mr. MOTT. I lacked a lot of information that my position might
have enabled me to have ascertained if there had been enough hours
in the day to have done it.
Mr. PECORA. When Covington came to you and offered to buy your
stock for the market price which you knew then to be $8, did you
think of making a specific inquiry of your own that would inform
you as to the actual value of the stock before you agreed to sell it
for $8 a share to Covington?
Mr. MOTT. NO.
Mr. PECORA. What can you tell this committee you knew as to the
condition of the group at about the time you sold this stock to
Covington ?
Mr. MOTT. I don't think I could give a satisfactory explanation
on that.
Mr. PECORA. Why not?
Mr; MOTT. Well, because, as I said, apparently I did not know all
the conditions that existed.
Mr. PECORA. What did you know in December 1932 concerning
the condition of the group.
Mr. MOTT. I knew that there had been a very considerable liquidation in deposits; that there had been criticism, and so on.
Mr. PECORA. Of what kind?
Mr. MOTT. Well, I attended the meeting with Chief Examiner Leyburn and tried to get as much information as I could from him,
follow his advice, and so on.
STOCK EXCHANGE PEACTICES
4899
Mr. PECORA. Didn't all that inform you that the condition of the
Group was pretty desperate in December 1932, prior to your sale of
the stock to Co vington ?
Mr. MOTT. I t was
difficult; yes. It was in a difficult position.
Mr. PECORA. Yolu knew that the Union Guardian Trust Co. had
had to go to the E.F.C. for large loans in order to keep it from
suspending ?
Mr. MOTT. Yes; and I also knew that it applied for 7% million
dollars, of which I loaned 2 ^ , but I was not alarmed by that.
Mr. PECORA. YOU knew that much earlier than December 1932 the
Group had found it necessary to borrow millions of dollars in order
to enable it to carry on? Didn't you know that?
Mr. MOTT. Yes.
Mr. PECORA. YOU
knew that it had outstanding obligations of
around fourteen or fifteen million dollars?
Mr. MOTT.
Yes.
Mr. PECORA. What else did you know about its condition that made
it seem to be desperate, or " difficult", to use your words?
Mr. MOTT. Well, those were the principal things.
Mr. PECORA. Did you feel at that time that any of the unit banks
might need to close?
Mr. MOTT. NO.
Mr. PECORA. Did you think they would have to close ?
Mr. MOTT. I thought the would not have to close.
Mr. PECORA. Hadn't you attended conferences as a director
with
officers of the group and various of the banks at which there was
discussed the difficult situation of the group and its unit banks prior
to December 14, 1932?
Mr. MOTT. The only one I remember is the discussion of the
Trust Co.
Mr. PECORA. The Union Guardian Trust Co. ?
Mr. MOTT. Yes.
Mr. PECORA. I S
that the only discussion you ever participated in
as a director of the group with regard to the condition of the group
during the year 1932?
Mr. MOTT. Only one that seemed to be in considerable difficulties.
Mr. PECORA. When did you make this demand upon Covington for
the payment of this note?
Mr. MOTT. In October.
Mr. PECORA. DO you know the date?
Mr. MOTT. Oh, I think it was about a little after the middle of
October.
Senator COUZENS. Last year?
Mr. MOTT. Yes; 1933.
Mr. PECORA. And I believe
you said before that you made that
demand in writing?
Mr. MOTT. Yes.
Mr. PECORA. Through the medium of a letter?
Mr. MOTT. Yes.
Mr. PECORA. YOU haven't a copy of the letter?
Mr. MOTT. Not here.
Mr. PECORA. What reply did you get to it ?
4900
STOCK EXCHANGE PRACTICES
Mr. MOTT. That due to circumstances over which he had no control he was not able at this time to meet the demand.
Mr. PECORA. Did you do anything about it?
Mr. MOTT. Nothing further.
The CHAIRMAN. Did you ever trade in this stock, Mr. Mott, but
.and sell group stock?
Mr. MOTT. NO. I practically—no; I did not.
The CHAIRMAN. Were you a member of any syndicate that undertook to boost the price of the stock up by buying and selling ?
Mr. MOTT. YOU can call it anything you want. I don't know what
you would call it. Back in
Senator COTJZENS (interposing). Were you in the syndicate that
Mr. Kanzler testified about?
Mr. MOTT. Well, I don't know what—let me tell you what I was
in. I am not sure. I don't want to try to identify it that way.
I find here that on December 11, 1930, I paid for i,250 shares of
stock at 60, and January 9, 1931, 750 shares.
Senator COTTZENS. At what?
Mr. MOTT. At 53.81; and May 9, 1931, 500 shares at 42; and that
there were delivered to me later 500 shares at an average cost of
'31.68, which was a result of my having agreed to buy, together with
other directors, 3,000 shares at a price not to exceed 60, which wTas
not for the purpose of speculation but was for the purpose of taking the stock oft the market, and believing that if the stock should
suddenly drop, keep dropping further and further, it would affect
confidence in the units.
Senator ADAMS. Mr. Mott, you speak of the market. What is the
type of market upon which this stock was traded ?
Mr. MOTT I don't understand.
Senator COTJZENS. Detroit Stock Exchange, wasn't it?
Mr. MOTT. Detroit Stock Exchange; yes.
Senator ADAMS. It was listed upon that exchange?
Mr. MOTT. Yes. And then subsequently I find that I paid for
another 3,000 shares. On September 18, 1931, there was 2,240 shares
at 24.64; October 1, 1931, 760 shares at 23.70.'
Senator COTTZENS. Those later purchases were by the second purchasing1 syndicate ?
Mr. MOTT. That was the second proposition.
Mr. PECORA. Did you know when you sold these 30,000 shares of
stock to Covington that at that time Covington was substantially
indebted to the Union Guardian Trust Co. ?
Mr. MOTT. I didn't know it then, and I don't know it now.
Mr. PECORA. YOU don't even know it now ?
Mr. MOTT. NO.
Mr. PECORA. That
is how much or how little you knew of Covington's financial responsibility when you made the sale to him, is
that it?
Mr. MOTT. Well, I say I don't know it now. I presume I might
not ask if you know it or whether it is a fact. Is it presented as a
fact?
Mr. PECORA. YOU were a director of the Union Guardian Trust
Co., were you not?
Mr. MOTT.
Yes.
STOCK EXCHANGE PEACTICES
4901
Mr. PECORA. YOU do not know whether or not Mr. Covington was
a borrower at the bank ?
Mr. MOTT. I will put it this way, that I did not know that he
was, and I do not know now. I assume it is intended to infer by
the question that he is; but I do not know that.
Senator COUZENS. Did you deduct from your income tax return of
1932 the difference in the price you paid for those 30,000 shares and
the price you sold them for to Mr. Covington ?
Mr. MOTT. I did.
Senator COTJZENS. YOU deducted
Mr. MOTT. Yes.
Mr. PECORA. Was anything said
it as a loss ?
between you and Mr. Covington,
in any conversation you had with him with respect to your selling
him the stock, about liability?
Mr. MOTT. NO.
Mr. PECCRA. Not a word ?
Mr. MOTT. NO.
Mr. PECORA. Did you know
at any time while you were a director
of the group that in the years 1930, 1931, and 1932 the business
operation of the group resulted in a deficit for each of those years
to the group ?
Mr. MOIT. I was informed by statements and otherwise that the
units made money from an operating standpoint
Mr. PECORA. That was not my question.
Mr. MOTT (continuing). But as to how much the charge-offs and
reserves were to offset in whole or in part, that I do not recollect.
Mr. PECORA. Did you know that in those years that I have mentioned the group itself operated at a deficit ?
Mr. MOIT. No.
Mr. PECORA. Or,
rather, at a deficit at the end of each of those
years ?
Mr. MOTT. NO ; that was not my understanding.
Senator COTJZENS. When you made this deal with Mr. Covington
did you have in mind that it was at the close of the year and you
might be able to deduct that loss from your income tax for 1932 ?
Mr. MOTT. I assume if I had sold it at a loss it would be deducted.
Senator COTTZENS. Yes; but did you have that in contemplation
when you made the deal?
Mr. MOTT. I probably had it in mind as a possibility.
Mr. PECORA. Mr. Mott, you spoke before of some loan made to
the Flint bank. What was the amount of that ?
Mr. MOTT. Ill 1929?
Mr. PECORA. Yes.
Mr. MOTT. Over 3% millions.
Mr. PECORA. That was in order
to make good some heavy loss that
the bank sustained because of the misconduct of somebody or other?
Mr. MOTT. Yes.
Mr. PECORA. Was any of that money afterwards repaid to you?
Mr. MOTT. Yes.
Mr. PECORA. HOW much ?
Mr. MOTT. My own loss in that was something like a million and
a quarter. Of that Sy2 million dollars or more which was put up,
that was reduced by recoveries through the securities that were ob175541—34—PT 10
21
4902
STOCK EXCHANGE PEACTICES
tained back from brokers and from the defaulters and certain payments by the bonding company, which reduced it to something in
the neighborhood of a million dollars; and then other directors and
stockholders participated later in the return of about half of that;
so that my net contribution was about a million and a quarter
dollars.
Mr. PECORA. AS a matter of fact, these other officers and directors
of the bank bound themselves by agreement, did they not, to pay
back to you the moneys that you had advanced to the bank?
Mr. MOTT. After I had provided money, yes; not before.
Senator COUZENS. Then after the matter was concluded, had you
stood more than your share of the obligations of the stockholders
and directors?
Mr. MOTT. Yes; because there were quite a number of stockholders
who did not participate in the thing, and we had to make that up.
Furthermore, there was still something like $35,000 of the obligation that I had personally to take care of because it was not taken
up by anybody else.
Mr. PECORA. At the time you made this advance of approximately
3y2 million dollars in 1929 you were the largest individual stockholder in that bank, were you not ?
Mr. MOTT. £fo; I was not. The Union Commerce Corporation was
the largest stockholder.
Mr. PECORA. But you were a large stockholder in the Union Commerce Corporation?
Mr. MOTT. I had exchanged my stock for the Union Commerce
stock; yes.
Senator COUZENS. Did the Union Commerce Co. as a stockholder
pay its contribution for the defalcation?
Mr. MOTT. They did not; they were not even asked to.
Senator COUZENS. When the final accounting was concluded, what
amount had you paid in excess of your proper quota ?
Mr. MOTT. It depends upon what you call my proper quota.
Senator COUZENS. I mean, as based on the stockholdings you had.
Mr. MOTT. Based on the stockholdings, I cannot tell exactly, because I would have to give you the number of shares on which other
stockholders did not contribute.
Senator COUZENS. But based on the stockholdings which you yourself had, you must have known to what extent you exceeded your
contribution, based on your own stock, notwithstanding what other
sto kholders may have defaulted.
Mr. MOTT. Well, I could get the information for you. We worked
out a schedule which would indicate that each share of stock should
be paid a certain amount.
Senator COUZENS. What amount?
Mr. MOTT. Well, I can't remember offhand the dollars per share.
That was a matter of record and is easily ascertainable. A certain
number of stockholders did pay that and a large number of other
stockholders did not pay; and what they did not pay was contributed by directors, including myself, in proportion to what we had.
Senator COUZENS. SO that there were other directors than yourself that exceeded the quota in their payment ?
Mr. MOTT. Yes, sir. But over and beyond that, as I say, I suffered a loss of still $35,000.
STOCK EXCHANGE PEACTICES
4903
Senator COUZENS. SO your contention is that over and above your
legitimate obligations you contributed about $35,000 ?
Mr. MOTT. God knows what my legitimate obligations were. I
never stopped to figure that out.
The CHAIRMAN. HOW many shares did you have in that bank ?
Mr. MOTT. Maybe I can tell you; I don't know.
The CHAIRMAN. Out of the entire capital stock of the bank, how
many shares did you have ?
Mr. MOTT. I think I had about—let me see if I have got the figures
here. [After referring to memoranda:] I hed about 25 percent
of the stock in the Union Industrial; about 25,000 shares.
The CHAIRMAN. What was the par value?
Mr. MOTT. $20—wait a minute; I am not sure whether it wag
$20 or $100.
The CHAIRMAN. That makes a little difference.
Mr. PECORA. The difference between $500,000 and 2y2 millions.
Mr. MOTT. There was 100,000 shares. At $20 that would be
$2,000,000. It must have been $20 share.
Senator COUZENS. In addition to that, did you have any holdings
in the Industrial Holding Co., or whatever it was?
Mr. MOTT. YOU mean the Union Commerce Co. ?
Senator COUZENS. Yes.
Mr. MOTT. Oh, yes. Apparently I had about 10,000 shares of
Union Commerce.
Senator COUZENS. Were any of the stockholders of the Union
Commerce asked to contribute on account of defalcations ?
Mr. MOTT. NO, sir.
Senator COUZENS. Why were
Mr. MOTT. Well, because the
they not asked?
stock of the Union Industrial Bank
had just been turned over, and, as a matter of fact, while I—well,
I did not in any way arrange for the exchange of stock or set the
price or value or anything of that sort. That was done by the president of the bank, Mr. Brown. I was present when Mr. Brown
came down there and showed his figures on the Union Industrial
Bank to Mr. Blair who was the head of the Union Commerce, and
the question was brought up—we had audits by our own people;
and I think there was an audit by some certified accountant, if I
remember rightly—but the question was brought up regarding an
audit by the Union Commerce people, and I told Mr. Blair that I
would undertake to see that the assets were as stated, and that
was accepted; and when some 2 months afterwards it appeared
that the assets were depleted by some millions of dollars it hardly
a logical thing to ask the people to whom you transferred the stock
to make good on it. I t was up to those who had received the stock
of the Union Commerce in exchange for the Union Industri al stock.
What the legal set-up was never entered into the picture at alL
Mr. PECORA. When you sold 30,000 shares of group stock to Covington for $240,000 and took his note therefor, you were firmly of
the opinion then that Mr. Covington was financially responsible for
the amount of the note, were you not?
Mr. MOTT. Well, it depends on what you mean. I considered him
financially responsible; yes.
Mr. PECORA. Why did you defer the making of a demand for the
payment of that note until October 1933, in view of that ?
4904
STOCK EXCHANGE PEACTICES
Mr. MOTT. Because I had not expected, if he gave a note, that he
was going to be able to pay that within 30 or 60 days, and when all
this trouble eventuated it became very clear that it was going to be
difficult for him to pay the note.
Mr. PECORA. IS that why you made the demand—because you knew
it was going to be difficult to pay it?
Mr. MOTT. The demand had to be made sometime.
Mr. PECORA. Why did you wait until October 1933 before making
any demand, if in December 1932 you felt that he was financially
responsible for the amount of the note ?
Mr. MOTT. I do not know.
Mr. PECORA. Neither do I.
Mr. MOTT. Why do I go out one door when I could have gone out
by another door? I don't know. I might have made it—it would
have been just as easy to have done it 6 months previously.
Senator ADAMS. Did you have any anticipation or expectation
that Covington couid pay the note in 1933 when you made the
demand ?
Mr. MOTT. NO.
Senator ADAMS. Why did you make it then ?
Mr. MOTT. AS a matter of record.
Mr. PECORA. HOW big a loss did that sale represent
to you approximately ?
Mr. MOTT. I think that 25,000 shares out of what I sold would cost
about $36 a share.
Mr. PECORA. HOW much of a loss on account of that sale did you
deduct from your taxable income for the year 1932?
Mr. MOTT. I could multiply it out; I would have to multiply it out.
Something like $30 a share, I presume. It would be a capital loss of
$900,000 or $1,000,000—something of that sort, I assume.
Mr. PECORA. That is all, Mr. Mott.
The CHAIRMAN. YOU are excused.
(Witness excused.)
TESTIMONY OF HARRY & COVINGTON, NEW YORK, N.Y,
The CHAIRMAN. DO you solemnly swear that the testimony you
will give in this hearing will be the truth, the whole truth, and nothing but the truth, so help you God ?
Mr. COVINGTON. I do.
Mr. PECORA. Your full
Mr. COVINGTON. Harry
name, address, and present occupation?
S. Covington; 60 East Ninety-sixth Street,
New York. I work for a sugar company.
Mr. PECORA. In what capacity?
Mr. COVINGTON. Vice president.
Mr. PECORA. What is the name of the company ?
Mr. COVINGTON. United States Sugar Corporation.
Mr. PECORA. IS Mr. Mott, the preceding witness, in any way identified with that company?
Mr. COVINGTON. He is recorded as a large stockholder in that company ; yes, sir.
Mr. PECORA. Did you obtain your position there through Mr. Mott?
Mr, COVINGTON. I did not,
sir.
STOCK EXCHANGE PRACTICES
4905
Mr. PECORA. YOU have heard the testimony that was given before
this committee by Mr. Mott this morning, have you not?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you hear
also the testimony he gave before this
committee yesterday afternoon?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. And you are familiar with everything he testified
Mr. COVINGTON. AS much as my memory will permit; yes.
Mr. PECORA. Mr. Covington, were you an officer or director of
to ?
the
Guardian Detroit Union Group, Inc.?
Mr. COVINGTON. I was not an officer; I was an officer at one time
at no salary, in the early stages, with no active part. I t was an
inactive position, and later those positions were dropped. Therewere a number of men who were made officers in units, but they
were all dropped, and, as I recall it, none of them drew any salaries..
I did not. I was a director of the Group Co., the Guardian Detroit
Union Group, at its inception, and then I was off the board whem
another gentleman took my place that they wanted; and for about
a year I was not a director, and then I was elected again as a director
of the Group Co.
Mr. PECORA. When did you first cease to be a director of theGroup Co. ? You said you were a director at the outset.
Mr. COVINGTON. Yes, sir.
Mr. PECORA. HOW long did you continue to be a director ?
Mr. COVINGTON. Until about the first of the year.
Mr. PECORA. Of what year?
Mr. COVINGTON. Of the organization or the merger between
the
Union Commerce Corporation
Mr. PECORA. That merger or consolidation became effective on
December 16,1929, did it not?
Mr. COVINGTON. I assume that is correct.
Mr. PECORA. YOU were a director at that time ?
Mr. COVINGTON. Yesy sir.
Mr. PECORA. And you remained as a director for a year thereafter ?
Mr. COVINGTON. I remained a director, as I recall it, until about
the first of that year. In 1930 I was not a director until the end of
that year, or until the first of 1931.
Mr. PECORA. Did you continue to be a director from either the
end of 1930 or the beginning of 1931 until the receiver for the group
was appointed last year ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. And as such
director, were you a regular attendant
at meetings of the board ?
Mr. COVINGTON. Yes, sir; fairly regular.
Mr. PECORA. Were you also, while a director of the group, a member of any committee of the board of the group ?
Mr. COVINGTON. There was an operating committee at the early
stages of which I was a member. I wasi not on the executive committee nor on the advisory committee. I continued as a member of
the operating committee, I believe, until the time I was reelected as
a director. The records will have to show this, Mr. Pecora. I was
4906
STOCK EXCHANGE PRACTICES
reelected a director and, I believe, made a member of the executive
committee, upon my reelection to the board.
Mr. PECORA. While you were a member of the operating committee of the board did you attend its meetings ?
Mr. COVINGTON. Yes.
Mr. PECORA. And when
you became a member of the executive
committee of the board of the group, did you attend all meetings of
such executive committee with regularity?
Mr. COVINGTON. Yes; I believe I would call it with regularity—as
often as I could go.
Mr. PECORA. Were you also an officer or director of any unit
bank or banks of the group ?
Mr.
COVINGTON. Yes,
sir.
Mr. PECORA. Of which bank or banks were you an officer or
director ?
Mr. COVINGTON. I was a director of the Union Bank of Commerce.
I later became a director of the Guardian National Bank of Commerce at the time of the merger, and I was a director of the bank
in Flint.
Mr. PECORA. That is the bank in Flint that Mr. Mott referred to
in the course of his testimony?
Mr. COVINGTON. Yes, sir. I was elected director there, I believe,
shortly after the episode that Mr. Mott talked about.
Mr. PECORA. In addition to being a director of those banks were
you an officr of any of them?
Mr. COVINGTON. I was an officer of the Guardian National Bank of
Commerce.
Mr. PECORA. What office did you hold?
Mr. COVINGTON. I was executive vice president.
Mr. PECORA. Were you also an officer of the bank at Flint at any
time?
Mr.
COVINGTON. NO, sir.
The CHAIRMAN. What is the name of the Flint bank?
Mr. COVINGTON. The Union Industrial Bank.
The CHAIRMAN. It is not a national bank?
Mr. COVINGTON. NO, sir.
Senator COUZENS. Were
you an officer of the National Bank of
Commerce before the consolidation with the Guardian Detroit?
Mr. COVINGTON. Yes, sir.
Senator COUZENS. What office
did you hold in the National Bank
of Commerce?
Mr. COVINGTON. There were three executive vice presidents. I was
one of them, the third ranking one of them.
Senator COUZENS. YOU were next to Mr. Sanger, were you ?
Mr. COVINGTON. NO, sir; not at the early stages, Senator. I was
in the uptown office up until 1931, as I recall it, when they brought
me down town. I was in charge of the uptown office in the General
Motors Building.
Mr. PECORA. When did you first become a stockholder of the
Guardian Detroit Union Group, Inc. ?
Mr. COVINGTON. When the exchange took place between the Union
Commerce Corporation and the Guardian Detroit Union Group.
Mr. PECORA. That was in December 1929 ?
STOCK EXCHANGE PBACTICES
4907
Mr. COVINGTON. That was stock I had previously held.
Mr. PECORA. But you continued to be a stockholder from that
time on?
Mr. COVENGITON. Yes, sir.
Mr. PECORA. Did you, from
December 1929, increase your holdings
of capital stock of the group ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you steadily increase them?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. What were they at the start ?
Mr. COVINGTON. I should think about 50 shares, all told.
Mr. PECORA. Up to December 14, 1932, to what extent had
you
increased your holdings of group stock?
Mr. COVINGTON. TO an average, I would say, around 900 to 1,000
shares that I was interested in directly and indirectly.
Mr. PECORA. In December 1932, did you have any transaction
with the preceding witness, Mr. Mott, with respect to capital stock
of the group ?
Mr. COVINGTON. I do not understand the question, if you please.
Mr. PECORA. In December 1932, did you have any transaction with
the preceding witness, Mr. Mott, with respect to any stock of the
group?
Mr. COVINGTON. I purchased some stock for Mr. Mott once.
Mr. PECORA. When?
Mr. COVINGTON. In
1931.
Mr. PECORA. HOW many shares?
Mr; COVINGTON. About 3,000, for Mr. Mott?
Mr. PECORA. Oh, you purchased them for him?
Mr. COVINGTON. Yes, sir; for him.
Mr. PECORA. Did you have any other
transaction with Mr. Mott
involving the capital stock of the group, prior to or up to December
14, 1932?
Mr. COVINGTON. NO, sir.
Mr. PECORA. Did you have
a transaction with him on or about
December 14, 1932?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. What did that involve ?
Mr. COVINGTON. It involved the purchase of 30,000 shares of stock.
Mr. PECORA. Of the group?
Mr. COVINGTON. Of the group.
Mr. PECORA. By you from him ?
Mr. COVINGTON. Yes.
Mr. PECORA. Who initiated that transaction?
Mr. COVINGTON. I did, sir.
Mr. PECORA. What prompted you to do it ?
Mr. COVINGTON. My desire to get a larger holding in the institu-
tion.
Mr. PECORA. Was it your desire to acquire 30,000 additional
shares ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Was that due
to the fact in any way that you felt
at the time that the acquisition of 30,000 shares of the group stock
would be a good business transaction for you ?
4908
STOCK EXCHANGE PRACTICES
Mr. COVINGTON. Yes, sir.
Mr. PECORA. YOU were convinced
of that quite firmly at that timey
were you?
Mr. COVINGTON. At that time; yes, sir.
Mr. PECORA. What was the condition of the group at that tirne^
Mr. Covington?
Mr. COVINGTON. Well, I was very busy in the bank and I thought
the bank was improving very materially.
Mr. PECORA. What bank are you referring to ?
Mr. COVINGTON. The Guardian National Bank of Commerce.
That was where my main activity was.
Mr. PECORA. That was only one unit?
Mr. COVINGTON. That was the largest unit.
Mr. PECORA. What did you know to be the condition of the group
at the time you negotiated to buy 30,000 shares of stock from Mr.
Mott in December 1932?
Mr. COVINGTON. I felt that the officers in the other units, as I came
in contact with them, were doing a very good job. The indications
were that while we were in a depression, in the whirlwind of a
depression, naturally the hope was that each day it would be over
and the turn would come; and I had a feeling that America had
reached about its bottom ebb; and that was my feeling in relation
to the group. I had seen Mr. Mott advance $2,500,000 and I had
indications of what Mr. Ford was doing, and with the backing
that it apparently had I had a feeling that it was in strong hands
and that regardless of the troubles which I was having in the bank—
I was having troubles in the bank, as a matter of fact, but I felt
that from indications in certain lines and the way people were
paying off, the way they stood up and paid off their obligations in
good faith, it would weather any storm that would come up; and
I was very much surprised and shocked within 60 days afterwards.
Mr. PECORA. NOW, as a member of the executive committee of the
Group during the year 1932 and during the year 1931, did you know
of the deficit incurred by the group at the end of each of those
years ?
Mr. COVINGTON. I suppose I did, Mr. Pecora, but I was more
interested in earnings
Mr. PECORA. N O ; did you know, without any suppositions? Did
you know as a matter of fact ?
Mr. COVINGTON. The only way I can answer you is that I have
seen it in the newspapers, and the only thing that I can remember
is that that was a Group Co.
Mr. PECORA. YOU were buying the stock of the Group Co., were
you not ?
Mr. COVINGTON. Yes; but it was the earnings of the units which
was the basic thing. That was my point of view. The operation
of a holding company which got its earnings from its units, owning
the stock of the units, was like a stockholder to me, as if a man
owned stock in three concerns, and those three concerns were contributing to him. Whether that man individually was making
money, it was not anything in comparison to the amount of funds
that you would—let me stop and think just a minute. It was in
relation to the earnings of each individual unit.
STOCK EXCHANGE PEACTICES
4909
Mr. PECORA. Mr. Covington, I asked you if you knew that the
group, as a company, in the year 1931 and again in the year 1932,
developed a deficit in, each of those years ?
Mr. COVINGTON. I will have to say yes, sir.
Mr. PECORA. YOU did know it. You knew it currently. You
knew it at the time.
Mr. COVINGTON. AS I remember it, Mr. Pecora; but I did not pay
so much attention to those particular figures. I really did not pay
any attention to those figures.
Mr. PECORA. Were you familiar with the condition, in December
1932, of each and every unit of the group ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. YOU were not ?
Mr. COVINGTON. NO, sir. I could
not be, with the amount of work
I was doing in the largest unit, the amount of time it took. I could
not physically possibly know the details of every unit in the group.
I was doing my job. I had faith in the people that were doing their
job, and I still have faith in them.
Mr. PECORA. YOU knew that in the early part of the year 1932 the
Union Guardian Trust Co. was in serious difficulty?
Mr. COVINGTON. What was the date, if you please ?
Mr. PECORA. The early part of 1932—say, in the spring of 1932.
Mr. COVINGTON. I did not consider it serious difficulty, sir.
Mr. PECORA. Did you know it was in any difficulty ?
Mr. COVINGTON. I knew that it needed to borrow funds; yes, sir.
Mr. PECORA. Didn't that reflect a serious condition ?
Mr. COVINGTON. AS it has come up to now, it does, but at that time
it did not reflect it, because I believed that the ownership—the units
that were owned by the group would earn its way out.
Mr. PECORA. I am talking about the one bank of the group, the
Union Guardian Trust Co.
Mr. COVINGTON. I was not a director and officer of the Union
Guardian Trust Co. I was so busy on my own job that I felt that
things were going along. I knew that they had borrowed money.
I knew that there was a depreciation in real estate, but, coupled with
that, I believed that they would have the proper backing to weather
the storm.
Mr. PECORA. Did you know that in the spring of 1932 the Union
Guardian Trust Co. was in such difficulties that it sought and obtained a loan from the Reconstruction Finance Corporation of several million dollars?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you know
that still during the spring of 1932,
the difficulties of the Union Guardian Trust Co. had increased to the
point where it sought a loan of approximately $28,000,000 in addition
to the loan which it had previously received from the K.F.C.?
Mr. COVINGTON. What was the date of that, Mr. Pecora ?
Mr. PECORA. In June 1932.
Mr. COVINGTON. I do not recall knowing the exact amount of that
loan; no, sir.
Mr. PECORA. Did you know that it was seeking a very large loan,
many millions of dollars, from the R.F.C. in June 1932?
Mr. COVINGTON. I knew that they were endeavoring to increase
the amount of loan that they had; yes, sir.
4910
STOCK EXCHANGE PRACTICES
Mr. PECORA. By what amount?
Mr. COVINGTON. I do not remember the amount.
Mr. PECORA. Did you take part in any conferences held by the
officers and directors of the group with officers and directors of the
Trust Co. in connection with the Trust Co.'s application to the
R.F.C. for this large loan ?
Mr. COVINGTON. I probably did, sir.
Mr. PECORA. Were you one of the gentlemen who came to Washington in connection with that application for a loan from the
R.F.C.?
Mr. COVINGTON. No, sir.
Mr. PECORA. AS a result
of the conferences which you attended
with respect to the application of the Trust Co. for a loan from the
R.F.C. did you learn something more definitely than you previously
knew concerning the financial difficulties of the Trust Co. in 1932 ?
Mr. COVINGTON. It was the feeling that they had sufficient collateral to borrow the money.
Mr. PECORA. Feeling on whose part?
Mr. COVINGTON. On the part of the officers of the Trust Co.
Mr. PECORA. What was the feeling on the part of the examiners
for the R.F.C. about that?
Mr. COVINGTON. I do not know, Mr. Pecora.
Mr. PECORA. Was not that made known to you in these conferences you had ?
Mr. COVINGTON. The real conferences with the R.F.C. examiners,
where there was any real declining of the loan, were in 1933. I was
not so active. I tried to explain to you, sir, that I was spending
all my time within my own bank, that I was! working for, and I
probably was—the records may show that I attended meetings, but
there were a great many meetings that I did not attend because I
was busy.
Mr. PECORA. Were you not giving attention to your duties and
responsibilities as a director of the group as well as a member of the
executive committee of the board of the group at that time ?
Mr. COVINGTON. I felt that I was, Mr. Pecora.
Mr. PECORA. Were you familiar with the provision known as "article 9 " in the articles of association or incorporation of the Guardian
Detroit Union Group, Inc. ?
Mr. COVINGTON. I knew about it; yes, sir.
Mr. PECORA. YOU knew about it from the start ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you feel
that that was a valid provision at that
time?
Mr. COVINGTON. I never gave it any real consideration, because I
never anticipated: that it would ever have to be put into operation,
or any question come up about it.
Mr. PECORA. Did you feel that the stockholders of the group were
under this statutory liability that is referred to in article 9 ?
Mr. COVINGTON. I felt the Group Co. probably was.
Mr. PECORA. HOW about the stockholders of the group? That is
what I am asking.
Mr. COVINGTON. That is a legal question.
STOCK EXCHANGE PRACTICES
4911
Mr. PECOKA. What was your feeling about it when you became
originally a stockholder of the group ?
Mr. COVINGTON. I did not give it a great deal of consideration.
Mr. PECORA. Whatever consideration you gave, whether it was
much or little, what conclusion did you come to at that time about it?
Mr. COVINGTON. I do not think I came to any conclusion, because
I did not give it any real consideration.
Mr. PECORA. YOU saw the provision ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Printed on the certificates of
Mr. COVINGTON. I do not know whether
stock of the group.
I saw the provision or
read the provision back at the time you refer to or not. I know
that I have seen it, and the date that I have seen it I could not from
memory tell you.
Mr. PECORA. When you first saw it, did you think it was meaningless ?
Mr. COVINGTON. NO, sir. I never think anything is meaningless.
Mr. PECORA. Did you feel that the liability referred to therein was
imposed upon the holders of the stock of the group ?
Mr. COVINGTON. I felt it was imposed upon the Group Co.
Mr. PECORA. Did you feel that it was imposed upon the stockholders of the group ?
Mr. COVINGTON. I did not think about it, Mr. Pecora.
Mr. PECORA. YOU had no opinion at all about it ?
Mr. COVINGTON. I had no opinion; no, sir.
Mr. PECORA. YOU had given it no consideration ?
Mr. COVINGTON. Only the consideration that one would give
casually.
Mr. PECORA. Was that only a casual thing for you to think about
as a stockholder of the group? Was that matter of slight importance to you, to know whether or not, as a stockholder, you were
under the statutory liability referred to not only in article 9 of the
articles of association of the group but also shown on the stock
certificates of the group ?
Mr. COVINGTON. I think I can best answer you this way, that my
faith was paramount, and so paramount that it just did not occur
to me to give it any great consideration, because I did not believe
anything was going to happen to the institution.
Mr. PECORA. AS a stockholder of any of the unit banks, or any of
the banks which subsequently were acquired by the group, you knew
and you were familiar with this statutory liability, were you not?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you think
that liability continued when you became a stockholder of the group?
Mr. COVINGTON. Would you mind repeating that ? I cannot understand.
Mr. PECORA. Did you think that liability continued when you became a stockholder of the group?
Mr. COVINGTON. I suppose I did, sir.
Mr. PECORA. HOW long prior to December 14, 1932, did you first
approach Mr. Mott on the subject of buying from him a large block
of the group stock?
4912
STOCK EXCHANGE PEACTICES
Mr. CQVINGTON. HOW long before December 14,1932 ? About 2 or
3 days before that, Mr. Pecora.
Mr. PECORA. When you first spoke to him about it, did you mention to him the number of shares of the group that you would like
to buy ?
Mr. COVINGTON. Yes,
sir.
Mr. PECORA. Did you fix that at 30,000 shares?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. What was your financial position at that time?
Mr. COVINGTON. I owed money.
Mr. PECORA: YOU owed money?
Mr. COVINGTON. Yes.
Mr. PECORA. Would you say you were solvent at that time?
Mr. COVINGTON. I felt that I was.
Mr. PECORA. TO what extent? What did you think, in other
words, was your net worth at that time ?
Mr. COVINGTON. I thought that my earning capacity
Mr. PECORA. NO ; not your earning capacity. What did you think
was your net worth at that time ?
Mr. COVINGTON. I had not analyzed it.
Mr. PECORA. Suppose you do.
Mr. COVINGTON. Well, from a cold analysis standpoint, I had no
net worth, except my earning capacity.
Mr. PECORA. YOU had no net worth at all, but you believed you
were solvent.
Mr. COVINGTON. I believed I could pay, Mr. Pecora.
Mr. PECORA. Did you think you were solvent at that time?
Mr. COVINGTON. YOU could not call it solvent; no, sir.
Mr. PECORA. What indebtedness did you owe at that time, when
you went to Mr. Mott and negotiated with him to buy 30,000 shares
of the capital stock of the Group Co. ?
Mr. COVINGTON. I owed $97,500 to the Union Co., and I owed
about $30,000 besides, as I recall it.
Mr. PECORA. That is around $127,000 you owed at that time?
Mr. COVINGTON. Something around that figure; yes, sir.
Mr. PECORA. Were those loans in any way secured at that time ?
Mr. COVINGTON. Yes, sir; they were secured. They had collateral
on them.
Mr. PECORA. Were they undercollateralized ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. TO what extent?
Mr. COVINGTON. Very badly.
Mr. PECORA. Very badly undercollateralized?
Knowing that to
be your financial condition at that time, you thought of acquiring
30,000 shares of group stock?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Knowing at that time you
Mr. COVINGTON. I had the collateral to
could not pay for them?
pay for it in buying the
30,000 shares. There was 30,000 share3 to pay for it with.
Mr. PECORA. IS that what you call paying for it?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. YOU could
jou?
buy anything on those terms, couldn't
STOCK EXCHANGE PRACTICES
4915
Mr. COVINGTON. Mr. Mott, apparently
Mr. PECORA. N O ; I say, you could buy anything on those terms,,
could you not, and consider yourself in a position to pay for it?
Mr. COVINGTON. I had an earning capacity, Mr. Pecora.
Mr. PECORA. What was your earning capacity? What was your
earning power, your actual income, in December 1932 ?
Mr. COVINGTON. $25,000 a year.
Mr. PECORA. When you first spoke to Mr. Mott, 2 or 3 days prior
to December 14, 1932, you told him, in substance, that you wanted to.
buy 30,000 shares of the group stock ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you discuss
Mr. COVINGTON. Not on the
the price with him?
first meeting; no, sir. I asked Mr.
Mott—I said I would like to increase my holdings in the bank or in
the Group Co.
Mr. PECORA. By 30,000 shares? ^
Mr. COVINGTON. I picked out—just said 30,000 shares. As to why
I said 30,C00 shares I do not know myself. I just said 30,000 shares.
Mr. PECORA. YOU do not know why you wanted as many as 30,000*'
additional shares; it was just an arbitrary amount?
Mr. COVINGTON. Because it wa*fe a substantial amount.
Mr. PECORA. A thousand shares would have been a substantial
amount, would it not, in view of the fact that during all the time
prior to that the maximum interest you had in any stock of the
group did not exceed 900 shares?
Mr. COVINGTON. Well, it was a case of me feeling that Mr. Mott
had a great interest in my future, which he expressed many, many
times, and I felt that if I asked him to sell me 30,000 shares he might
do it. I did not know whether he wou d or not, and he did.
Mr. PECORA. When you first asked him, did he give you his
answer ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. What did he say ?
Mr. COVINGTON. He said, " I will let you know ", or words to that
effect.
Mr. PECORA. But no price was discussed at that first time ?
Mr. COVINGTON. Not that I remember.
Mr. PECORA. NO terms of payment were discussed either?
Mr. COVINGTON. I told him I would have to give him a note for it.
Mr. PECORA. YOU told him that the first time ?
Mr. COVINGTON. I think it was the first time. I do not recall
whether it was the first time or the second time, but I believe it
was the first time.
Mr. PECORA. YOU told him you would have to give him a note
for the full amount of the purchase price ?
Mr. COVINGTON. Yes,
sir.
Mr. PECORA. Did you tell him what your financial condition was.
then?
Mr* COVINGTON. NO, sir. That was not discussed.
Mr. PECORA. YOU knew you were insolvent?
Mr. COVINGTON. I did not feel insolvency.
Mr. PECORA. YOU knew you owed around $127,000, which yout
said was very, very substantially undercollateralized ?
4914
STOCK EXCHANGE PEACTICES
Mr. COVINGTON. Yes, sir.
Mr. PECORA. YOU did not
did you?
Mr. COVINGTON. No,
say anything about that to Mr. Motty
sir.
Mr. PECORA. He did not ask you any questions about your ability
to pay the note?
Mr. COVINGTON. No, sir.
Mr. PECORA. Did you know
at that time how many shares of
stock of the group Mr. Mott owned in his own right ?
Mr. COVINGTON. I did not know exactly; no, sir.
Mr. PECORA. Did you know that he owned as many as 30,000
shares ?
Mr. COVINGTON. I knew that from conversation. I never looked
it up.
Mr. PECORA. Conversation with whom?
Mr. COVXNGTON. Because it was well known that Mr. Mott and Mr.
Ford were large owners of sto k in the Group Co.
Mr. PECORA. When you had your second conversation with Mr.
Mott on that subject of buying the stock from him, was the sale concluded as a result of the second conversation ?
Mr. COVINGTON. Yes,
sir.
Mr. PECORA. On the second conversation, did you acquaint Mr.
Mott with your financial condition at that time ?
Mr. COVINGTON. No, sir. It never came up.
Mr. PECORA. It never came up, either by any questions asked by
Mr. Mott, or by any information you volunteered on the subject?
Mr. COVINGTON. No, sir.
Senator COUZENS. Was there
any paper passed between you and
Mr. Mott other than that note that Mr. Mott produced today?
Mr. COVINGTON. That is all.
Mr. PECORA. Were you in a position at that time to pay interest
on that note for $240,000?
Mr. COVINGTON. The interest on that note amounted to $14,400
a year.
Mr. PECORA. Which was more than half your salary ?
Mr. MOTT. It was; yes, sir. I felt that if I went to Mr. Mott—
I figured it was about a half a point a year on the stock, and that
in a year the stock would be 8y2. This was an investment I had
made for my future, and I felt that if I went to Mr. Mott and talked
to him, and he said anything about interest to me, that I would not
have any great difficulty in getting him to renew the note for me
with the interest added. I am trying to tell you, Mr. Pecora, that
Mr. Mott had expressed a great interest in my future—a great interest. He had brought me from uptown downtown. That is, he
had recommended me. He had recommended me in the merger,
and I was endeavoring to do a very good job. I do not know what
your records will show, but I thought that I had.
Mr. PECORA. Mr. Covington, is there any reason why you did not
tell Mr. Mott anything at all about your financial responsibility
at the time of this stock transaction ?
Mr. COVINGTON. There was no particular reason. I just did not
discuss it, was all. I never have discussed it.
STOCK EXCHANGE PEACTICES
4915
Mr. PECORA. Did you think that was fair to Mr. Mott, to buy
from him, for $240,000, these shares of stock when you knew at the
time you were not in a position to pay for it ?
Mr. COVINGTON. Unless you take into consideration how Mr.
Mott indicated that he felt toward me, and how I was striving to
accumulate something for the future, you can so consider it, as not
being fair.
Mr. PECORA. Had Mr. Mott's interest in you up to that time been
of a character that indicated to you that he would sell you approximately a quarter of a million dollars worth of property on your
note at a time when you knew you were not in a position to pay
that?
Mr. COVINGTON. I do not understand.
Mr. PECORA. Suppose you listen to the reporter while he reads it.
(The reporter read the pending question.)
Mr. COVINGTON. Our relations had been very pleasant, yes, sir; and
I felt—I took a shot in the dark, so to speak. I thought I would
ask him, and he told me he would do it.
Mr. PECORA. And he took a shot in the dark, and gave you $240,000
of the stock without asking any questions about your financial
responsibility?
Mr. COVINGTON. But he had the stock as collateral, Mr. Pecora,
and that stock had sold around $300 a share.
Mr. PECORA. We know all about that, Mr. Covington. And it had
been steadily declining in value from that high-water mark of around
$300 a share to around $8 a share in December 1932, to your knowledge, had it not?
Mr. COVINGTON. Yes, sir; and I felt that it was cheap.
Mr. PECORA. Did you feel it was cheap when it was selling for
$300 a share?
Mr. COVINGTON. I did not know whether it was cheap or not. Apparently it was not. It proved that it was not; so that has an effect
upon my answer.
Mr. PECORA. AS a matter of fact, your financial position today is
such that you could not respond to any statutory liability ?
Mr. COVINGTON. That is true, sir.
Mr. PECORA. AS the owner of more than 30,000 shares of the group
stock, assuming that you are under such liability ?
Mr. COVINGTON. Assuming that.
Mr. PECORA. YOU knew that in December 1932?
Mr. COVINGTON. I did not think of the statutory liability in December 1932 when I purchased the stock. If I had known or thought
that there would be a statutory liability, I would not have purchased
the stock.
Senator COUZENS. That is interesting.
Mr. PECORA. When did you first come to the conclusion that you
would not be under any such statutory liability ?
Mr. COVINGTON. When did I come to the conclusion that I would
not be?
Mr. PECORA. Yes; that you would not be.
Mr. COVINGTON. I am not under any conclusion yet that I will
not be.
4916
STOCK EXCHANGE PEACTICES
Mr. PECOKA. YOU just said that if you had known in December
1932 that you would become liable as a stockholder of the group,
you would not have purchased these 30,000 shares.
Mr. COVINGTON. What I meant to say, Mr. Pecora, was that if I
had known that these events would take place, I certainly would
not have purchased the stock. That is what I meant to say.
Mr. PECORA. What you meant to say and what you did say are
two entirely different things, Mr. Covington.
Mr. COVINGTON. That is what I meant to say.
Mr. PECOKA. What understanding was there between you and Mr.
Mott at the time of this transaction regarding the payment of interest by you on this note of yours ?
Mr. COVINGTON. There was none.
Mr. PECORA. That was not even discussed, when interest was to
be paid?
Mr. COVINGTON. The interest was put at 6 percent.
Mr. PECORA. With no understanding as to the time of payment?
Mr. COVINGTON. NO, sir.
Senator COUZENS. Where
did you first get your banking experience,
Mr. Covington?
Mr. COVINGTON. I started out in Lexington, Ky.
Senator COUZENS. When did you go to Detroit?
Mr. COVINGTON. I came to Detroit about Sy2 years prior to February 11.
Senator COUZENS. What was your occupation when you first came
to Detroit?
Mr. COVINGTON. I had been working in a bank. Mr. Sanger came
to New York and was looking for a vice president, and I was recommended at the time.
Senator COUZENS. Was there any discussion between you and Mr.
Mott as to what would become of any dividends on these 30,000
shares if they were paid?
Mr. COVINGTON. NO, sir.
Senator COUZENS. In other
words, you could go on and collect the
dividends ?
Mr. COVINGTON. I imagine if I collected the dividends I would
apply them on the interest on the note.
Senator COUZENS. There was no discussion about it?
Mr. COVINGTON. NO, sir.
Mr. PECORA. In December
1932 when you bought this stock, you
held a position in the bank which paid you a salary of $25,000 m
year.
Mr. COVINGTON. Yes.
Mr. PECORA. That was practically your sole source of income?
Mr. COVINGTON. Practically.
Mr. PECORA. YOU are a man of family?
Mr. COVINGTON. Yes, sir. I have a wife.
Mr. PECORA. At that time you owed around $127,000, which was
very substantially undercollateralized ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. And you were
$14,000 a year interest, was it?
Mr. COVINGTON. NO, sir.
under an obligation to pay around
STOCK EXCHANGE PEACTICES
4917
Mr. PECORA. What was the interest? What were your interest
obligations on that transaction?
Mr. COVINGTON. They ran about $7,000.
Mr. PECORA. That left you, say, with $18,000 available for all
purposes ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. $18,000 a year?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Knowing that, in
December 1932 you had this transaction with Mr. Mott, in the course of which you purchased from
him this stock at $240,000, and gave him your note bearing 6 percent interest for the full amount of the purchase price, which carried with an obligation to pay the interest in the sum of $14,400 a
year, out of the $18,000 a year that was available to you, is that right?
Mr. COVINGTON. That is right; but I had felt that I could renew
the note at half a point, half a point a year, which would make
8^2? and I figured that the improvement would come, and that I
could dispose of some of the stock, and when I got through I would
have a substantial amount of stock and would have paid off Mr.
Mott.
Mr. PECORA. AS an executive officer of the bank, did you make
loans to borrowers or customers of the bank on the same sort of
busines basis that was the foundation of this transaction of yours
with Mr. Mott?
Mr. COVINGTON. I think the records will prove to you that the
answer is no.
Mr. PECORA. YOU would not think of such a loan^
Mr. COVINGTON. This was a personal transaction.
Mr. PECORA. YOU would not think such a transaction would be a
sound one for the bank, is that right ?
Mr. COVINGTON. It would not be. An even collateral loan would
not be a sound transaction.
Mr. PECORA. Did you ever offer to pay any interest on this note
to Mr. Mott?
Mr. COVINGTON. SO many things happened within 60 or 90 days
that I was not in a position to pay any interest.
Mr. PECORA. Did he ever ask you to pay any interest ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. When, for
the first time, did he ask you to pay the
principal, or any part thereof?
Mr. COVINGTON. Around the latter part of October or the first of
November 1933.
Mr. PECORA. Have you the letter?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Will you please
Senator COUZENS. 'While you
produce it^
are looking that up, where did you
owe this $127,000?
Mr. COVINGTON. I owed $97,000 of it to the Union Co.
Senator COTTZENS. The Union Guardian Trust Co.?
Mr. COVINGTON. N O ; the Union Co.
Mr. PECORA. That was one of the units of the Guardian Detroit
Union Group, was it not?
Mr. COVINGTON. Yes,
175541—34—PT 10
sir.
22
4918
STOCK EXCHANGE PRACTICES
Senator COTJZENS. What security did you have for that?
Mr. COVINGTON. I had 500 shares of group stock. Later I gave
them my home.
Mr. PECORA. That is, you gave them a mortgage on your home?
Mr. COVINGTON. I had a mortgage on my home, but it had been
paid down, Mr. Pecora, and I gave them the equity in my home,
which has since been sold, and applied on the note.
Senator COTJZENS. I t is now down to what?
Mr. COVINGTON. It just happened the other day that my house was
sold, and I have not a record of it.
Do you want this, Mr. Pecora ? [Handing paper to Mr. Pecora.]
Mr. PECORA. Yes. I offer in evidence the letter produced by the
witness.
The CHAIRMAN. Let it be admitted.
(Letter Oct. 23, 1933, Mott to Covington, was received in evidence, marked " Committee's Exhibit No. 94, Jan. 18, 1934 ", and the
same was subsequently read into the record by Mr. Pecora.)
Mr. PECORA. The letter just received in evidence as Committee
Exhibit No. 94, of this date, written on the letter-head of Charles
Stewart Mott, 1400 East Kearsley Street, Flint, Mich., is as follows:
OCTOBER 23,
1933.
Mr. HARRY COVINGTON.
% Bitting, Inc., 20 Exchange Place,
New York City, N.Y.
DEAR SIR : I hold your demand note, dated December 14, 1932, for $240,000,
given in purchase of 30,000 shares of Guardian Group stock. Please take this
as formal demand for payment, with interest, and advise me promptly in regard
to same.
Very truly yours,
O. S. MOTT.
And in handwriting, in ink, is the following inscription on the
foot of the letter:
Received by hand from Mr. Mott between 10:30 and 11 a.m., Wednesday,
November 1, 1933, at Sugar Co.'s New York manager's office.
H. C.
Mr. COVINGTON. It is " H . S. C."
Mr. PECORA. Yes, H. S. C. Is that handwritten inscription in your
handwriting ?
Mr. COVINGTON. Yes, sir; I wrote that.
Mr. PECORA. And it was placed by you there on the date you received the letter from Mr. Mott?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. I notice this
letter is addressed to you care of Bitting,
Inc., 20 Exchange Place, New York City. Is that the Mr. Bitting
whose name has been mentioned before this committee in the last 2
days, I think during the testimony given by Mr. Blair, as someone
that he met in connection with a transaction with Goldman, Sachs &
Co., or the Goldman-Sachs Trading Corporation?
Mr. COVINGTON. I think so; yes, sir.
Mr. PECORA. Did you know Mr. Bitting when Mr. Blair had that
transaction with him?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you have
Mr. Covington?
anything to do with that transaction,
STOCK EXCHANGE PEACTICES
4919
Mr. COVINGTON. I do not recall, Mr. Pecora. I read a part of
that testimony, and I don't recall
Mr. PECORA. YOU mean that you read a part of Mr. Blair's testimony given before this committee?
Mr. COVINGTON. I just read that part of it. I don't recall whether
.Mr. Bitting is the one that he referred to there, or who he was. I
spoke to Mr. Blair, and I have a hazy remembrance of the early part
of that. I spoke to Mr. Blair about the fact that Goldman-Sachs
were buying an interest in some banks. It came to my attention in
some way. And then Mr. Blair went to New York, and, as he
testified here, the event took place.
Mr. PECORA. YOU met Mr. Blair in New York at that time in connection with that transaction, didn't you?
Mr. COVINGTON. I either went down on the train with him or met
him.
Mr. PECORA. YOU had breakfast with him in the Hotel Biltmore
on the occasion that he testified about here, didn't you ?
Mr. COVINGTON. No, sir. I was not at that breakfast.
Mr. PECORA. Were you in any way an intermediary between Goldman, Sachs & Co., or their representative, and Mr. Blair, or anyone
representing the company that Mr. Blair was an officer of, in connection with that transaction?
Mr. COVINGTON. I don't know what your definition of " intermediary " is, but
Mr. PECORA. Well, did you help in the negotiations that had for
their purpose the acquisition
Mr. COVINGTON. No, sir.
Mr. PECORA. Of a large block of stock of the group, by Goldman,
Sachs & Co.?
Mr. COVINGTON. I was with Mr. Blair, not with Goldman, Sachs
& Co.
Mr. PECORA. I know that you were with Mr. Blair. And did you
have any part in the negotiations that had for their objective the
purchase by Goldman, Sachs & Co. at that time of 30,000 shares of
stock of the group ?
Mr. COVINGTON. I was at the first and second meeting; yes, sir.
Mr. PECORA. What part did you have in those negotiations?
Mr. COVINGTON. I was in the room. Mr. Blair conducted those
negotiations. Mr. Sanger was with Mr. Blair, and as I recall it that
was at the second meeting with Goldman-Sachs, and Mr. Blair and
Mr. Sanger conducted mainly the negotiations.
Mr. PECORA. Why was your presence in New York rendered necessary at that time in connection with those negotiations?
Mr. COVINGTON. I suppose Mr. Blair felt he wanted me with him.
Mr. PECORA. Was that all ? Just because Mr. Blair felt he wanted
you with him?
Mr. COVINGTON. That is the only reason I know of. I sat, as any
man will, in the room, and listened to the deal being made, and if
I have any ideas I suggest them.
Mr. PECORA. YOU know that eventually Goldman, Sachs & Co. acquired 30,000 shares of the group stock, don't you?
Mr. COVINGTON. It is my understanding that they did.
Mr. PECORA. AS a result of those negotiations.
4920
STOCK EXCHANGE PRACTICES
Mr. COVINGTON. It is my understanding that they did.
Mr. PECORA. And do you know from whom Goldman-Sachs people
acquired those 30,000 shares of group stock ?
Mr. COVINGTON. I think it was Keane-Higbie; from them, through
them.
Mr. PECORA. Through Keane, Higbie & Co. ?
Mr. COVINGTON. Yes, sir; I think so.
Mr. PECORA. And it was shortly after Keane, Higbee & Co.'s capital
stock was purchased by the group ?
Mr. COVINGTON. I think it was during that time, but I don't know.
Mr. PECORA. DO you know that shortly after Goldman, Sachs & Co..
so acquired those 30,000 shares of group stock, they sold them again?
Mr. COVINGTON. I understand that they did; yes, sir.
Mr. PECORA. DO you recall to whom they sold them ?
Mr. COVINGTON. I don't know.
Mr. PECORA. YOU say you don't know ?
Mr. COVINGTON. I don't know.
Mr. PECORA. YOU never heard ?
Mr. COVINGTON. I don't know.
Mr. PECORA. DO you know what profit Goldman, Sachs & Comade in that transaction ?
Mr. COVINGTON. I don't. I only know from just—well, the price,
as I recall it, at which they sold, which according to my memory
was around 184 or 185. That figure came into the
Mr. PECORA (interposing). You have no independent recollection
that it was 184?
Mr. COVINGTON. I don't know. I saw it yesterday in Mr. Blair's
testimony.
Mr. PECORA. DO you know for what price they bought those
30,000 shares?
Mr. COVINGTON. I believe it was around 120.
Mr. PECORA. That is right. Did you get any commission of any
kind as a result of that transaction, from anybody ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. Did you get
any moneys at all, whether by way of
fees, commissions, or for any service whatsoever as a result of that
transaction ?
Mr. COVINGTON. NO, sir. I received no money.
Mr. PECORA. Did you receive property of any kind or of any value
whatsoever ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. Did anybody else, to your knowledge ?
Mr. COVINGTON. I don't know of any.
Mr. PECORA. What was that answer ?
Mr. COVINGTON. NO, sir.
Mr. PECORA. Who handled that transaction in behalf
of Goldman,,
Sachs & Co.? Was it your friend Mr. Bitting?
Mr. COVINGTON. NO, sir.
Mr. PECORA. Who, then?
Mr. COVINGTON. Mr. Weinburg, as I recall it, was in the room with.
Mr. Blair and Mr. Sanger.
Mr. PECORA. What part did Mr. Bitting play in the transaction
or in the negotiations that culminated in the transaction ?
STOCK EXCHAKGE PRACTICES
4921
Mr. COVINGTON. I don't think he played any important part, or
not that I know of.
Mr. PECORA. Well, whether an important part or not, what part
did he play?
Mr. COVINGTON. I do not recall him playing any part of any consequence in it.
Mr. PECORA. Didn't you and Mr. Blair and Mr. Sanger meet him
in connection with the transaction in New York?
Mr. COVINGTON. I don't believe we met Mr. Bitting; no, sir. I
liave no recollection of meeting him there.
Senator COUZENS. YOU said a while ago it came to your attention
that Goldman, Sachs & Co. were buying some banks or bank stocks.
Did that come to your attention from Mr. Bitting ?
Mr. COVINGTON. It might have, but I cannot recall definitely, and
so I cannot say.
Senator COUZENS. YOU do not deny that it came to your attention
through Mr. Bitting, do you ?
Mr. COVENGTON. I do
not.
Mr. PECORA. When it came to your attention did you speak to
any officer of the Group about it ?
Mr. COVINGTON. To Mr. Blair.
Mr. PECORA. You spoke to Mr. Blair?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. Did you succeed
in arousing his interest in the
matter ?
Mr. COVINGTOK. Yes, sir.
Mr. PECORA. And his interest
was aroused to the point where the
transaction was concluded eventually?
Mr. COVINGTON". Yes, sir.
Mr. PECORA. DO you know
how long Goldman, Sachs & Co. held
those 30,000 shares of stock after they had purchased them at $120
a share?
Mr. COVINGTON. I don't remember; no.
Mr. PECORA. It was a very short period of time; wasn't it?
Mr. COVTNGTON. I don't remember. I would have to look back in
the records in order to find out.
Mr. PECORA. DO you know the circumstances under which those
30,000 shares were repurchased from Goldman, Sachs & Co. at $184
a" share?
Mr. COVINGTON. That is the figure that I take it—or that I saw in
the testimony.
Mr. PECORA. I asked you: Do you know anything about the cir€umstances under which those 30,000 shares were purchased back
from Goldman, Sachs & Co., for $184 a share?
Mr. COVINGTON. I was asked to go down and see Mr. Weinburg,
by, I believe, Mr. Blair. They felt that they did not want to have
such a large holding in New York, as I recall it.
Mr. PECORA. Who felt that way, Mr. Blair ?
Mr. COVINGTON. A number of people.
Mr. PECORA. And who were they?
Mr. COVINGTOJST. I can't remember all of them.
Mr. PECORA. Was Mr. Blair one of them?
4922
STOCK EXCHANGE PRACTICES
Mr. COVINGTON. I could not say. I could not sit here and say
that Mr. Blair was one of them; no.
Mr. PECORA. Were those people who had that feeling officers or
directors of the group ?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. All right.
Now you may go ahead and tell us
about it.
Senator COUZENS. Just one minute, Mr. Pecora. He said he could
not remember all of their names. Mr. Covington, can you remember
any of them?
Mr. COVINGTON. Well, as I recall, it was Mr. Blair and Mr. Higbie..
Those are the main ones that I remember.
Senator COTJZENS. YOU remember those men as raising the question
whether it was desirable to hold as much group stock in New York
as was being bought by Goldman, Sachs & Co.; is that right?
Mr. COVINGTON. I have a faint recollection, Senator Couzens; and
it was back in 1929 I think, or as I recall it.
Mr. PECORA. It was in 1930.
Mr. COVINGTON. It was in 1930?
Mr. PECORA. Yes.
Mr. COVINGTON. The early part of 1930?
Mr. PEGORA. Not the early part of 1930.
It was in the fall of
1930.
Mr. COVINGTON. Well, I don't remember it exactly.
Senator COUZENS. Did I understand Mr. Pecora to ask the witness
if he knew anything about who purchased the stock ?
Mr. PECORA. I asked him if he knew anything about the circumstances under which the stock was repurchased at $184 a share from
Goldman, Sachs & Co.
Mr. COVINGTON. I think Mr. Blair would have told me that.
Mr. PECORA. Tell me what you know about it.
Mr. COVINGTON. All that I know about it is, I went to New York
at their suggestion. Well, I was going down there anyway, and they
asked me if I would ask Goldman, Sachs & Co. if they wanted to sell
some of their stock back. I did. Mr. Weinburg was the man who
negotiated it, as I recall. Mr. Weinburg said he was interested and
that he would do it. There was a call on the telephone, I believe,
and they talked either to Mr. Blair or Mr. Higbie—yes; it was
Mr. Blair or Mr. Higbie—and he said he would sell it, and that is
the way the purchase came about.
Senator COUZENS. Sell all of it?
Mr. COVINGTON. Sell 25,000 shares, I believe, was the amount, but
I am not certain about the amount.
Mr. PECORA. YOU are right; 25,000 shares were purchased back.
The CHAIRMAN. Was that repurchased at the market?
Mr. COVINGTON. I am confused somewhat, Senator Fletcher, because I saw the price of 184 in the testimony. Whether the price
was 180 or 190 or 184, or somewhere in between, I could not testify,
because I did not see the transaction completed.
The CHAIRMAN. DO you know what the market was for the stock
at that time ?
Mr. COVINGTON. I would have to look that up. I don't remember
exactly what the market was then. It was higher than that.
STOCK EXCHANGE PRACTICES
4923
Mr. PECORA. I S Mr. Higbie here ?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. Take the stand, please.
Senator COUZENS. Just one minute, Mr. Pecora.
Mr. PECORA. Certainly, Senator Couzens.
Senator COUZENS. Mr. Covington, you have not overlooked
the fact
that you are under oath here? And you have not overlooked the fact
that you testified that you know of no commissions being paid and
that you received no money or property or anything of value in this
Goldman-Sachs transaction ?
Mr. COVINGTON. NO, sir. I was to receive something but I never
did.
Mr. PECORA. Well, sit down, Mr. Covington, and tell us about that.
What were you to receive ?
Mr. COVINGTON. I was to receive—well, after the transaction was
over I was to receive $25,000.
Mr. PECORA. From whom?
Mr. COVINGTON. From Mr. Higbie.
Mr. PECORA. For what ?
Mr. COVINGTON. For services rendered.
Mr. PECORA. What were those services ?
Mr. COVINGTON. Because I had spoken to Mr. Weinburg, and he
had agreed to sell the stock back.
Mr. PECORA. At $184 a share?
Mr. COVINGTON. Yes, sir.
Mr. PECORA. And you had that understanding with Higbie?
Mr. COVINGTON. I did not have any understanding until after-
ward, Mr. Pecora.
Mr. PECORA. Well, when did you have that understanding with
Mr. Higbie?
Mr. COVINGTON. It was after the transaction had been completed
by Mr. Higbie.
Mr. PECORA. That, is, the transaction involving the repurchase of
25,000 of the 30,000 shares from Goldman, Sachs & Co. ?
Mr. COVINGTON. Yes, sir; afterward. He felt that I had done a
good job, was my understanding. And I was to get $25,000, which
1 never got. It was all forgotten, and nothing ever came out of it.
Mr. PECORA. What job had you done that you called a good job
or that he called a good job ?
Mr. COVINGTON. The fact that I went down and spoke to M>.
Weinburg, and asked Mr. Weinburg if he wanted to sell the stock
back, and he agreed to do it, and when he agreed to do it, it was my
understanding that they thought I had done a good job. That was
all there was to it. I never received it, and never asked for it, and
it just passed by the door.
Mr. PECORA. Did anyone else promise to give you any money or
anything of value, orCOVINGTON (interposing). Not a thing.
Mr. PECORA (continuing). Or anything else for services you rendered in connection with the transaction by which there was a purchase of 30,000 shares by Goldman, Sachs & Co., or the transaction
by which there was a sale of 25,000 of the 30,000 shares held by
Goldman, Sachs & Co. ?
4924
STOCK EXCHANGE PKACTICES
Mr. COVINGTON. No, sir.
Senator COTTZENS. Did you
when in New York have any connection
with any other group or company with respect to this transaction?
Mr. COVINGTON. NO, sir.
Senator COUZENS. Did you
ever hear of the firm of H. G. Lapham
A Co.?
Mr. COVINGTON. I have heard of them; yes, sir.
Senator COTJZENS. DO you know any of the partners of that firm?
Mr. COVINGTON. I don't know that I do. I don't know that I knew
them then.
Senator COUZENS. Did you ever have any discussion with them?
Mr. COVINGTON. NO, sir.
Senator COUZENS. YOU
never met any of their partners or
employees ?
Mr. COVINGTON. I don't know who their partners were at that time.
I don't know, and therefore I could not answer that question. I certainly have nothing that sticks in my mind. But I would like to get
this into your record: That I did not receive 1 cent in that
transaction.
Senator COUZENS. All right.
The CHAIRMAN. Did you call on the firm of H. G. Lapham & Co.
about this matter ?
Mr. COVINGTON. NO, sir. I never talked to Lapham & Co. that I
have any recollection of at all. If I did, it was about something that
did not have anything to do with this particular matter.
Mr. PECORA. What was the business that H. G. Lapham & Co.
conducted at that time ?
Mr. COVINGTON. I don't know. I only know of the name in a
casual way. I imagine it was a bond and brokerage business, but I
don't know. I never had any contact with Lapham & Co. of any kind
to my knowledge or that I know of.
Mr. PECORA. All right.
Mr. COVINGTON. Am I now excused?
Mr. PECORA. YOU better wait because I am going to examine Mr.
Higbie and you might be interested in his testimony.
The CHAIRMAN. We are just excusing you for the present. We
may want you later.
Mr. COVINGTON. All right.
(Thereupon the witness was temporarily excused.)
Mr. HIGBIE. DO you want me?
The CHAIRMAN. Yes. 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. HIGBIE. I do,
sir.
TESTIMONY OF CARLTON Iff. HIGBIE, INVESTMENT BROKER,
DETROIT, MICH.
Mr. PECORA. Will you please give your name, address, and occupation to the committee reporter?
Mr. HIGBIE. My name is Carlton M. Higbie, Detroit, and I am an
investment broker.
STOCK EXCHANGE PEACTICES
4925
Mr. PECOEA. HOW long have you been engaged in that business ?
Mr. HIGBIE. Since I was 18 years old, and I am 43 now.
Senator COUZENS. DO you consider the selling of commercial
paper as being in the investment-brokerage business?
Mr. HIGBIE. It is a phase of it, Senator Couzens, and probably
the best phase.
The CHAIRMAN. What is the general scope and what are the functions of an investment banker?
Mr. HIGBIE. Well, sir, the purchase and sale of securities, and
probably there are many adjuncts, such as the brokerage end of the
business, and bonds, equities, and such as that.
The CHAIRMAN. DO investment bankers conduct a brokerage business in connection with their work?
Mr. HIGBIE. I think they do as ^ rule, Senator Fletcher, either
for their own account or for their secondary markets.
Mr. PECORA. NOW, Mr. Higbie, did you hear the testimony of the
last witness, Mr. Covington?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. DO you
recall the transaction in the course of which
30,000 shares of the capital stock of the Guardian Detroit Union
Group, Inc., were sold to Goldman, Sachs & Co., or their agent or
representative, for $120 a share ?
Mr. HIGBIE. Very well.
Mr. PECORA. Did you have anything to do with that transaction ?
Mr. HIGBIE. With the purchase of the stock ?
Mr. PECORA. By Goldman, Sachs & Co.; yes.
Mr. HIGBIE. May I have the question again, because I did not quite
catch it.
Mr. PECORA. Did you have anything to do with that transaction?
Mr. HIGBIE. With the purchase of the stock ?
Mr. PECORA. Yes; by Goldman, Sachs & Co.
Mr. HIGBIE. By Goldman, Sachs & Co. ?
Mr. PECORA. That is right.
Mr. HIGBIE. Well, I came into the thing after the stock had been
sold to Goldman, Sachs & Co.
Mr. PECORA. Who had sold it to Goldman, Sachs & Co ?
Mr. HIGBIE. Mr. Blair, Mr. Covington, and Mr. Sanger.
Mr. PECORA. When?
Mr. HIGBIE. I think it was probably the latter part of July or
early in August.
Mr. PECORA. Of 1930?
Mr. HIGBIE. It was 1929.
Mr. PECORA. Of 1929?
Mr. HIGBIE. Yes, sir.
The CHAIRMAN. DO you mean
that they had agreed to sell or that,
they had actually sold it ?
Mr. HIGBIE. They had agreed to sell it. I think Sidney Weinburg was a pretty good trader, and he probably had more in the
form of a commitment on it than they could make good on.
Mr. PECORA. YOU say you came into the picture after the sale was
made. How long after the sale to Goldman, Sachs & Co. did you
come into the picture ?
Mr. HIGBIE. I was in New York on other business, and was taking
breakfast in the Biltmore Hotel one morning and had finished, and
4926
STOCK EXCHANGE PRACTICES
I saw over in the corner three or four of my friends of the Union
Commerce Corporation, and
Mr. PECORA (interposing). Who were they?
Mr. HIGBIE. As I remember it, they were Mr. Sanger, Frank Blair,
Harry Finkenstaedt, and I wouldn't be sure whether Covington was
there or not. He had been with them before, but I wouldn't swear
that he was there then.
Senator COUZENS. IS that the time when they told you they had
sold 30,000 shares?
Mr. HIGBIE. We chatted all through breakfast, and then finally
Harry told me about it, that they had made this arrangement, and
he thought it was a grand thing because Goldman, Sachs & Co. had
all these friends, and, as you know, they used to be in the commercial
paper business. I knew how many companies they controlled and
the balances they had and their general position in the United
States, and I thought it was a fine idea.
Mr. PECORA. During that conference did they tell you where
they were going to get the 30,000 shares ?
Mr. HIGBIE. NO, sir; that was not discussed.
Mr. PECORA. Did they tell you that they had actually sold the
30,000 shares or that they were committed to sell them ?
Mr. HIGBIE. AS I remember it they did.
Mr. PECORA. They told you what ?
Mr. HIGBIE. That they had sold the stock.
Mr. PECORA. Had the stock been delivered when you talked to
them?
Mr. HIGBIE. Oh, no. They had only seen them in the afternoon
and this was the following morning at breakfast.
Mr. PECORA. NOW, you had learned of it while you were in New
York at the Biltmore Hotel?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. And you
first learned of it through Mr. Covington,
whom you saw in New York at that time ?
Mr. HIGBIE, NO. YOU see, I learned of it at breakfast that morning, when with these other gentlemen, you see.
Mr. PECORA. With what other gentlemen ?
Mr. HIGBIE. With Mr. Frank Blair, and Harry Sanger, and Harry
Finkenstaedt, and what they said first I don't remember now.
Mr. PECORA. What did they say about that matter that indicated
to you they had sold or agreed to sell those 30,000 shares to Goldman, Sachs & Co. ?
Mr. HIGBIE. Well, they said they had had a conference with Catchings and Weinburg the day before,
Mr. PECORA. Yes. Go ahead.
Mr. HIGBIE. That they had indicated an interest in owning this
block of stock, and that they had told them they could have it at
$120 a share.
Senator COUZENS. What block of stock?
Mr. HIGBIE. Thirty thousand shares of stock of the Union Commerce Investment Corporation.
Senator COUZENS. Where was that stock? You said, " This block
of stock " .or something of that kind, and what block of stock were
you talking about?
STOCK EXCHANGE PRACTICES
4927
Mr. HIGBIE. Well, I am just using the language of the Street.
Those 30,000 shares. I am not saying any specific block of stock.
Mr. PECORA. Shortly after that Keane, Higbie & Co., Inc., had
a transaction with the Union Commerce Investment Corporation
whereby the latter acquired all of the capital stock of Keane, Higbie
& Co., Inc.; isn't that so ?
Mr. HIGBIE. Yes, sir; that is true.
Mr. PECORA. And at the time of that transaction between the
Union Commerce Investment Co. and Keane, Higbie & Co., were
you a large stockholder of Keane, Higbie & Co. ?
Mr. HIGBIE. Yes, sir; I was.
Mr. PECORA. Were you the largest
individual stockholder of it at
that time ?
Mr. HIGBIE. I had not been up to that time, but I acquired that
interest over the previous 2 years because my partner wanted to
retire, and he made an arrangement with me whereby he sold to me
half of his stock, and that put me up to the 60-percent class and
him down to 20 percent.
Mr. PECORA. And that had made you the owner of more than 60
percent ?
Mr. HIGBIE. Of 60,500 shares of stock.
Mr. PECORA. Of the capital stock of Keane, Higbie & Co.?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. And the
total number of shares outstanding was
100,000?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. HOW long
after you were told by Blair, Finkenstaedt, Stanger, and Covington, in New York, that they had sold
£0,000 shares of Union Commerce Investment Co. stock to Goldman,
Sachs & Co. was this transaction had between Keane, Higbie & Co.
and the Union Commerce Investment Co. ?
Mr. HIGBIE. I would say 20 days, roughly.
Mr. PECORA. AS a result of that transaction you parted with all
of your shares of capital stock of Keane, Higbie & Co. in favor of
Union Commerce Investment Co. stock, didn't you ?
Mr. HIGBIE. In exchange of stock; yes, sir.
Mr. PECORA. HOW many shares of stock of the latter corporation
did you get for your 60-odd thousand shares of Keane, Higbee &
Co. stock?
Mr. HIGBEE. I got 60,500 shares of stock of the Union Commerce
Investment Co., of which I had agreed to dispose of 30 percent.
Mr. PECORA. It was an exchange, share for share of stock?
Mr. HIGBIE. Yes, sir. And 30 percent to them, which as I recall
it was 18,000 shares.
Senator COUZENS. Thirty percent to them, you say. Who is that ?
Mr. HIGBIE. The Goldman, Sachs Co. In the deal they did not
have any stock available in their treasury, I mean the Union Commerce Investment Co., to deliver to Goldman, Sachs & Co., for which
they had arranged to make delivery, and consequently in our negotiation we agreed that we would give up 30 percent of our stock for
delivery to Goldman, Sachs & Co.
Senator COUZENS. Who are " we " that you speak of ?
Mr. HIGBIE. That is, the stockholders of Keane, Higbie & Co.
Senator COUZENS. SO that it was 30,000 of the 100,000 shares?
4928
STOCK EXCHANGE PRACTICES
Mr. HIGBIE. That is where 30,000 shares went. We did not wind
up with the 100,000 shares. We wound up with the difference,
70,000 shares.
Mr. PECORA. In order to enable the Union Commerce Investment
Corporation to conclude this transaction with Keane, Higbie & Co.,
Inc., it was necessary for the Union Commerce Investment Corporation to increase its capital stock, wasn't it?
Mr. HIGBIE. Yes, sir; it was.
Mr. PECORA. DO you know of
any reason why the increase was not
made sufficiently large to enable the Union Commerce Investment
Corporation to deliver directly to Goldman, Sachs & Co. the 30,000
shares which you say Blair and his associates told you they had
agreed to sell to Goldman, Sachs & Co. ?
Mr. HIGBIE. Yes, sir; I do.
Mr. PECORA. NOW, what was it ?
Mr. HIGBIE. That reason was: That due to the fact that GoldmanSachs was a national figure in finance, as you probably can recall,
and that their stock was gyrating around and doing all sorts of
things on the up side, it was considered very definitely an advantageous acquisition to the stockholders. So the minute that particular deal leaked out, and the fact that our deal was also under
consideration, the stock went above the price of $120 a share at
which they had contracted to deliver it. Consequently, had they
made it any large amount of stock when they presented the matter to
their stockholders, the stockholders wouldn't have waived their
rights to subscribe at 120 but would have taken over the stock as it
was offered. That is perfectly logical, you see. A stockholder would
not waive his right to sell at 120 if the stock was then selling at
140, would he ? Anyway, they don't usually do it.
Mr. PECORA. Did the stockholders of the Union Commerce Investment Corporation wraive their preemptive right to subscribe for this
additional stock?
4 Mr. HIGBIE. NO, sir. Well, they might have subsequently, but not
at that time. I think subsequently there was something about that,
and I think I saw it printed in Mr. Blair's testimony, that they had
all their preemptive rights at the time of those two transactions,
at the time the Keane, Higbie & Co. transaction took place, and our
sale to Goldman, Sachs & Co.
Mr. PECORA. Did they subscribe for the additional stock in the
exercise oi;their preemptive rights ?
Mr. HIGBIE. On the 100,000 shares?
Mr. PECORA. Yes.
Mr. HIGBIE. NO.
Well, some did, but the bulk of them did not.
I think only one or two people did.
The CHAIRMAN. What stock was this block of 30,000 shares in—
in what corporation ?
Mr. PECORA. The Union Commerce Investment Corporation.
Mr. HIGBIE. Yes; the Union Commerce Investment Corporation.
It was this way: An equal transfer of our assets, or it called for a
transfer of our assets for shares of their stock, and we had agreed
to relinquish to Goldman, Sachs & Co. 30,000 shares in order to
enable them to fulfill their contract.
The CHAIRMAN. What were you paying for the Union Commerce
stock?
STOCK EXCHANGE PRACTICES
4929
Mr. HIGBIE. We didn't buy it, sir. We took it in exchange.
Mr. PECORA. Exchanged the shares.
Mr. HIGBIE. NO money changed hands.
The CHAIRMAN. What did you value it at? You estimated it at
some figure?
Mr. HIGBIE. What did we think our stock was worth ?
The CHAIRMAN. Yes.
Mr. HIGBIE. Well, we
thought it was worth a lot; that it was our
whole life. We were doing very well. We were making a couple of
millions a year. We made, I think, over 2 million dollars the first
8 months of that year alone.
Mr. PECORA. That does not answer the chairman's question as to
what you thought it was worth.
Mr. HIGBIE. Well, I doubt very much if I would have sold it for
money.
Mr. PECORA. What did you think it was worth—is the question,
Mr. Higbie.
The CHAIRMAN. YOU must have had some estimate of its value
that you made in the exchange. You made the exchange on some
basis, and that basis must have been the value of the stock.
Mr. HIGBIE. It was worth as much as—I don't want to parry your
question, Senator. I don't intend to do that at all. But it is pretty
hard to state. In exchanging stock of a corporation for stock of
another corporation in which you will participate and share in the
management and contribute what you think is your ability, you
know then that you are going to get a part of your own activity and
result of your own efforts. Isn't that so, Senator?
The CHAIRMAN. That is quite true; but in doing that you estimate
the value of the shares of stock in both corporations in making such
an exchange.
Mr. HIGBIE. I thought that my stock was probably worth—I had
not put a dollar of value on it. I had made a few sales of stock
to friends who could do me some good, and I never made a sale
of Keane-Higbie stock for literally money, as such, in my life, any
more than I would have sold my home and my children. That was
my attitude toward that company.
The CHAIRMAN. What did you get for the stock when you sold it ?
Mr. HIGBIE. YOU mean prior to the Keane-Higbie transaction ?
The CHAIRMAN. Yes.
Mr. HIGBIE. The last
sale made was 2,000 shares to a friend of
mine at $100 a share, back in June or July.
The CHAIRMAN. What was the par value of your stock?
Mr. HIGBIE. $10.
The CHAIRMAN. $10?
Mr. HIGBIE. Yes, sir.
I never delivered that stock, because this
deal came off, and he was going to come in as a partner, and he
never did. I finally paid him the $40,000 premium to drop out of
the picture and take delivery of $14,000 that he had paid me down
on the transaction, as it was not a completed transaction.
Mr. PECORA. Mr. Higbie, who initiated the negotiations that led
to the acquisition of all of the capital stock of Keane, Higbie & Co.
by the Union Commerce Investment Co. ?
Mr. HIGBIE. I
did.
4930
STOCK EXCHANGE PRACTICES
Mr. PECORA. And when did you do that?
Mr. HIGBIE. Well, actually initiating it—I might have made the
comment to Mr. Blair that morning.
Mr. PECORA. That morning in New York ?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. At the hotel where you were ?
Mr. HIGBIE. The thing that actuated that was
the fact that Bancamerica had bought Blair & Co., or one of the big banks, I think
it was the American Trust Co. out in Los Angeles, that had known
one of my friends in our line of business out there, and the Continental had the Chicago corporation, and it seemed to be the order
of the day that banks were getting affiliates that had to do with
financing.
Mr. PECORA. YOU initiated those negotiations after you had been
told by Blair and others of the transaction whereby Blair had
agreed to sell 30,000 shares?
Mr. HIGBIE. Yes,
Mr. PECORA. TO
sir.
Goldman, Sachs & Co. of the Union CommerceInvestment Corporation stock?
Mr. HIGBIE. Yes, sir; I did.
The CHAIRMAN. And you thought
it was a desirable thing to get
Goldman-Sachs in and there were advantages of hoving them in^.
and yet within a couple of weeks or so you paid them $40,000 to
get out?
Mr. HIGBIE. I think I did not make myself clear, Senator. I did.
not make myself clear on that point.
Mr. PECORA. At the time you initiated these negotiations to sell
the Keane, Higbie & Co. stock to the Union Commerce Investment
Co. you were perfectly satisfied with Keane, Higbie & Co. as a corporation doing a flourishing and profitable business ?
Mr. HIGBIE. Yes; I was.
Mr. PECORA. And you were
the largest and majority stockholder
of Keane, Higbie & Co. ?
Mr. HIGBIE. That is right.
Mr. PECORA. YOU say you regarded it more or less as your life
work?
Mr. HIGBIE. That is right.
Mr. PECORA. YOU looked upon it not only as a good business association but with a great deal of personal pride and sentimental
affection ?
Mr. HIGBIE. Very definitely; yes, sir.
Mr. PECORA. Under those circumstances what prompted you to propose to Blair, then the head of the Union Commerce Investment
Corporation, to sell to him this corporate creature of yours in which
you took such great pride and which you said you would not have
sold for money any more than you would have sold a member of
your family?
Mr. HIGBIE. That is right. The general picture was that they were
in a larger business. They had more lines of business than we had?,
and it ^ave me an opportunity to participate in what I considered
one of the greatest developments in Michigan at the time.
The CHAIRMAN. Let me understand this
STOCK EXCHANGE PRACTICES
4931
Mr. HIGBIE. I made a mistake, sir. You asked me a question about
the $40,000.
The CHAIRMAN. Yes.
Mr. HIGBIE. I sold to one of my close personal friends who wanted
to come into business with me 2,000 shares of the stock in June or
July.
The CHAIRMAN. Yes.
Mr. HIGBIE. He didn't want to make the definite sale, but he said
that he would buy the stock, and he would like to pay me so much
money as he had and it would not be considered part of the whole,
but he would like that honorable right on my part to take delivery
as it came along, and he wanted to come in and work for me, so
he paid me $14,000; and then this bank matter came along and
he said he would not work for a bank because he knew that they
were a small stockholder in the whole as far as the bank was concerned, and he asked me to do something about canceling the transaction, and on account of the fact that the stock was selling at a
higher price then I paid him $40,000 to let me out of that transaction and delivered him $140,000 worth of Keane-Higbie stock at a
hundred dollars a share.
The CHAIRMAN. Yes. That is what I wanted to get.
Mr. HIGBIE. That is entirely different from the Goldman-Sachs,
had nothing to do with it at all.
The CHAIRMAN. Certainly; that is entirely different.
Mr. HIGBIE. That is right.
The CHAIRMAN. Because Goldman-Sachs, whom you were anxious
to get into the corporation
Mr. HIGBIE. I will explain that.
The CHAIRMAN. Then got out in a short time, and they made an
actual profit of a million dollars?
Mr. HIGBIE. I can explain that just as clearly as can be.
The CHAIRMAN. That is the explanation itself. They made a
profit, didn't they, of a million dollars cash?
Mr. HIGBIE. Sir? Goldman?
The CHAIRMAN. Yes.
Mr. HIGBIE. I think they did; or more.
Mr. PECORA. A million dollars cash and 5,000 shares?
Mr. HTGBIE. Of stock.
Mr. PECORA. At the time that you spoke to Blair and proposed to
him that the Union Commerce Investment Corporation acquire all
of the capital stock of this Keane, Higbie & Co. that was your life
work, what did you consider was the fair and reasonable value of
the stock of Keane, Higbie & Co.?
Mr. HIGBIE. Dollar value?
Mr. PECORA* Yes.
Mr. HIGBIE. I never made an estimate of it in that light.
Mr. PECORA. Did you consider it was worth as much at that time
as the capital stock of the Union Commerce Investment Co. ?
Mr. HIGBIE. I certainly thought that its intrinsic worth, regardless of market value, was fully equal to that other.
Mr. PECORA. Did you consider it was worth more than the other
at that time ?
Mr. HIGBIE. I don't know as I ever put that interpretation on
it, sir.
4932
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well now, wasn't it necessary for you as the owner
of 60,500 shares, or 6 0 ^ percent of the total outstanding capital
stock of Keane, Higbie & Co., to reach some conclusion as to whether
or not, in exchanging that stock on a share-for-share basis for the
stock of the Union Commerce Co., you were making a profitable
business deal for yourself?
Mr. HIGBIE. Not necessarily, Mr. Pecora, I was worth 5 or 10
million^dollars at that time, and another million more or less didn't
make a bit of difference to me.
Mr. PECORA. Didn't make much difference to you ?
Mr. HIGBIE. YOU can look at my tax record and see where I paid
nearly $800 000 in taxes in those 3 years. That was assessed, and I
paid something like $702,000.
Mr. PECORA. YOU felt that it was so much money that it was not of
any consequence to you whether or not, when you proposed to exchange your 60,500 shares of the stock of this favorite corporation
of yours for an equal number share of Union Commerce Co., you
were making a good business transaction for yourself?
Mr. HIGBIE. I guess I did.
Senator COUZENS. YOU made the comment a moment ago that you
paid $800,000 of income tax, and then you modified it and said you
were assessed.
Mr. HIGBIE. I became insolvent, Senator, and some of the taxes
are still levied, and the Government has elected to take a lien on all
my land and real estate and everything else I have, I guess, to pay
the balance, and it is secured several times, many, many times,
according to what I paid for the land.
Senator COUZENS. That was over what years ?
Mr. HIGBIE. 1928, 1929, and 1930.
Mr. PECORA. NOW, Mr. Higbie, you
had a pretty well defined idea
of the value of Keane, Higbie & Co. stock when you proposed to
sell it to the Union Commerce in exchange for its own shares ?
Mr. HIGBIE. Yes,
sir.
Mr. PECORA. What did you think it was worth at that time?
Mr. HIGBIE. What did I think Keane-Higbie was worth?
Mr. PECORA. Yes, stock, how much a share?
Mr. HIGBIE. Well, I would not be able to answer specifically that
question.
Mr. PECORA. My goodness, Mr. Higbie; you are a broker, you are
an investment dealer and have been for years. This corporation
called Keane, Higbie & Co. was your favorite child.
Mr. HIGBIE. Yes.
Mr. PECORA. YOU
had such a sentimental affection for it that you
said that you would not sell it for money any more than you would
sell a member of your family for money. Now, didn't' you have
some idea of what that stock was worth ?
Mr. HIGBIE. I will give you an idea. I sold this 2,000 shares to
one of my closest personal friends at a hundred, and I didn't want
to sell it to him, but he teased me and begged me to sell it a couple
of months before.
Mr. PECORA. YOU did him a favor by selling it to him ?
Mr. HIGBIE. I did him a favor, yes.
Mr. PECORA. What did you think was the fair, reasonable, intrinsic
value or market value of the stock in that summer ?
STOCK EXCHANGE PRACTICES
4933
Mr. HIGBIE. I would not be able to answer it.
The CHAIRMAN. Was it listed on the market?
Mr. HIGBIE. Oh, Lord, no, sir.
Mr. PECORA. It was very closely held, wasn't it?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. There were only 19 stockholders of record ?
Mr. HIGBEE. Something like that; I don't remember.
Mr. PECORA. YOU were the majority owner?
Mr. HIGBIE. That is right.
Senator COUZENS. When you said you were worth between
5 and
10 million dollars and a million didn't make much difference, what
did you include Keane-Higbie's firm as a whole worth in that picture
of your value of 5 or 10 million dollars ?
Mr. HIGBIE. Well, it would all depend on the time that you set, you
see.
Senator COUZENS. I am talking about the time that Mr. Pecora is
asking you about.
Mr. HIGBIE. Well I would say a hundred and forty or fifty dollars
a share would have been cheap for it.
Mr. PECORA. $140 or $150 would have been cheap ?
Mr. HIGBIE. Let's see. Now, we can figure it out this way: The
stocks, the worst ones, were selling at 10 times their earnings. On
that basis our stock was worth $200 a share, wasn't it ? I will have to
figure it out.
Mr. PECORA. I don't know. I was never a stockholder of it, and it
was never a baby of mine.
Mr. HIGBIE. I know it, Here, we made $20 a share the first 8 or 9
months. I haven't the figures right in my hand here. Ten times
that would be two hundred.
Mr. PECORA. Yes. So you thought $200 a share was a fair value for
it, didn't you ?
Mr. HIGBIE. NOW, Mr. Pecora, I would not say that.
Mr. PECORA. I am asking you to tell us.
Mr. HIGBIE. I could not answer you.
Mr. PECORA. YOU don't know what the value of the stock was of
your own company, this favorite child of yours ?
Mr. HIGBIE. NO, sir.
The CHAIRMAN. YOU
knew the value of the Union Commerce
stock ?
Mr. HIGBIE. Yes. I knew what its book value was and what its
earnings were, sir.
The CHAIRMAN. What was its value at the time you exchanged
the stock?
Mr. HIGBIE. I think its book value was 52, and it was earning
about $2.54 a share or $2.50 a share in the first 6 months.
The CHAIRMAN. YOU now say that you valued the Keane-Higbie
stock at $200 and you were willing to take share for share at 50?
Mr. HIGBIE. Yes, sir. The reason for that was that they had
possibilities, coupled with our business, and the other things that
they were doing, that might lead them a long way.
Mr. PECORA. YOU were a director of the Union Commerce Investment Co. at the time that you proposed to Blair, its head, that it
acquire all of the capital stock of Keane, Higbie & Co., weren't you?
175541—34—PT 10
23
4934
STOCK EXCHANGE PRACTICES
Mr. HIGBIE. I think I was, I doubt if I had ever attended a
meeting, but I think I was a director. I think when they merged
the National Bank of Commerce and the Union Trust Co., I believe
that that automatically elected all the directors to the combined
company, and I spent a good deal of my time around the country
working on deals and things like that and didn't pay much attention
to detail and seldom attended any directors' meetings of any kind.
Mr. PECORA. And you were also at that same time not only the
majority stockholder but an officer and director of Keane, Higbie &
Co., weren't you?
Mr. HIGBIE. Yes,
The CHAIRMAN.
sir.
The committee will take a recess until 2 o'clock.
(Accordingly, at 1 p.m., a recess was taken until 2 p.m. of the
same day.)
AFTERNOON SESSION
The hearing was resumed at the expiration of the recess.
TESTIMONY OF CABLTOtf M. HIGBIE—Besumed
Senator COTJZENS (presiding). You niay proceed, Mr. Pecora.
Mr. PECORA. In connection with the negotiations that led to the
purchase of all of the capital stock of Keane, Higbie & Co. by
the Union Commerce Investment Co., did you cause to be prepared
a balance sheet or audit showing the condition of Keane, Higbie &
Co. at that time?
Mr. HIGBIE. In answer to that, the board of directors of the group
designated John Stalker to investigate the affairs of Keane, Higbie
& Co. and I designated one of my associates, or partners, as we
call theni, and they went over the affairs of our company in quite
some detail and appraised all of our assets and approved them for
the group.
Mr. PEOORA. AS a result of that, what was ascertained to be the
book value of Keane, Higbie & Co.'s stock?
Mr. HIGBIE. My memory is that it was in excess of $60 a share.
(The chairman entered the room and presided to the conclusion
of the session.)
Mr. PECORA. What was ascertained at that time to be the book
value of the capital stock of the Union Commerce Investment
Corporation?
Mr. HIGBIE. I believe $52 a share, if my memory serves nie
rightly.
Mr. PECORA. And that was made known to you ?
Mr. HIGBIE. Yes.
Mr. PECORA. YOU
were willing to exchange your 60,500 shares, having a book value of something in excess of $60 a share, for an equal
number of shares of the Union Commerce Co., having a book value
of around $50 a share, were you ?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. That proposal
to acquire the capital stock of Keane,
Higbie & Co. was in due course submitted to the directors of Union
Commerce Investment Co., was it not?
STOCK EXCHANGE PKACTICES
4935
Mr, HIGBIE* It was, sir; and I believe it was taken up individually
with the directors first, and then we called a directors' meeting, and
I think there was practically the full board of directors, at which
time it was ratified without dissent and subsequently submitted to
the ^tockholdeirs, of course.
Mr. PEOORA. At that time you have already told us you felt your
stock was worth about $200 a share, the Keane, Higbie & Co. stock
you then owned ?
Mr. HIGBIE. I would say, if you treated it as you would any other
stocks at the time, it would be worth 8 to 10 times earnings or more r
and that would have made it from $150 to $200 a share at least. ^
Mr, PECGRA. DO you know what was the market value at that time
of the Union Commerce Co.'s stock?
Mr. HIGBIE. Yes. When we started to negotiate it was around
$320. When we got the negotiations a little further ahead I think
it was selling in the neighborhood of $138 to $140.
Mr. PECORA. Knowing that, you still were willing to part with
your 60,500 shares of Keane, Higbie & Co. stock, which you thought
were worth around $200 a share, for an equal number of shares of
the other company worth in the market then around $138.
Mr. HIGBIE. That is right.
Mr. PEOOEA. Were you present at a meeting of the board of directors of the Union Commerce Corporation that was held in the
summer of 1929 at which there was presented to the board the proposition to acquire the capital stock of Keane, Higbie & Co. ?
Mr. HIGBIE. I went to the meeting and offered to leave the room.
Mr. PECORA. Offered to what?
Mr. HIGBIE. TO leave.
Mr. PECORA. Did you leave?
Mr. HIGBIE. They requested me not to leave—the directors.
Mr. PECORA. That meeting was held on August 20,1929, was it not?
Mr. HIGBIE. Yes,
Mr. PECORA. Let
sir.
me read to you from a photostatic copy which X
have before me of the minute book of the board of directors of the
Union Commerce Co. the following excerpts from the minutes of the
meeting of the board held on that date, August 20, 1929 [reading] :
The President submitted a proposal for the acquisition by Union Commerce
Corporation of the capital stock, or at least 75 percent thereof, of Keane, Higbie
& Co., a corporation organized under the laws of the State of Michigan, in
exchange for its own shares. There were submitted for the consideration of
the board, financial statements of both Keane, Higbie & Co. and of this corporation showing the book value ofT the stock of the respective institutions and
their earnings, and consideration w as then given to the advantages and benefits
to be derived by this corporation from the acquisition of the capital stock of
said Keane, Higbie & Co., and after a full discussion the following resolution
was presented:
" Whereas the board of directors of Union Commerce Corporation declare it
to be advisable and expedient that this corporation acquire the capital stock
of Keane, Higbie & Co., a corporation of Detroit, Mich., according to the
proposition presented by the president; that is, to exchange the stock of this
corporation for the stock of said Keane, Higbie & Co. upon the basis of 1 share
of stock of this corporation, having a par value of $20 each, for 1 share of the
stock of said Keane, Higbie & Co., said shares having a par value of $10 each,
provided that at least 75 percent of the outstanding capital stock of said
Keane, Higbie & Co. be so acquired: Now, therefore, be it
"Resolved, (a) That the board of directors hereby authorize the officers of
this corporation to offer to exchange the capital stock of said Union Commerce
4936
STOCK EXCHANGE PBACTICES
Corporation for the capital stock of said Keane, Higbie & Co. on the basis of 1
share of the capital stock of Union Commerce Corporation, having a par value
of $20 each, for 1 share of the capital stock of Keane, Higbie & Co., having a
par value of $10 each.
(&) that subject to the necessary increase in the authorized capital stock
of this corporation, the officers of this corporation be, and they are hereby,
authorized to issue not in excess of 100,000 shares of the capital stock of this
corporation of the par value of $20 each (using for that purpose all of the
heretofore authorized capital stock of this corporation, now unissued, together
with a sufficient number of shares of its new authorized capital stock when
the same has been made available by the increase in the authorized capital
stock in this corporation) in exchange on the basis aforesaid for 100,000 shares
of the capital stock of said Keane, Higbie & Co., said 100,000 shares being the
entire outstanding capital stock of said company, provided that such exchange
involves the exchange of at least 75 percent of the entire outstanding capital
stock of said1 Keane, Higbie & Co., and subject to all of the conditions of this
resolution, and that a special right be granted to the stockholders of this
corporation of record at a date to be fixed by the directors to subscribe to
their pro rata part of said 100,000 shares of the stock of this corporation, and
provided that subscriptions for fractional shares shall not be accepted and
that all subscription rights to any fractional share resulting from the exercise
of said subscription rights aforesaid shall be represented by fractional share
subscription warrants in form and substance to be adopted by the directors,
and that the stockholders of this corporation shall be requested to waive their
right to subscribe for any part of saidi 100,000 shares of the stock of this
corporation.
" In the event that any stockholders shall not waive, but shall exercise this
special right of subscription, that the officers of this corporation be authorized
to offer for sale to such nonwaiving stockholders their original respective pro
rata allotment of said 100,000 shares of stock at a price to be determined by
the directors, payable at such reasonable time as may be determined upon, and
to the extent of the number of shares so subscribed for, the officers of this
corporation are authorized to issue additional shares out of the remaining
newly authorized stock, equivalent to the number of shares of stock so subscribed for, to the end that 100,000 shares of stock of this corporation shall
be available for exchange on the basis aforesaid for the stock of said Keane,
Higbie & Co.
"(e) That in no case shall less than 75 percent of the capital stock
of said Keane, Higbie & Co. be acquired in exchange for the capital stock of
this corporation on the basis aforesaid and that the Union Trust Co. be requested to act as trustee for the purpose of receiving deposits of the capital
stock of said Keane, Higbie & Co. and to issue and exchange therefor its
negotiable certificates; the deposit agreement and depositary's negotiable certificates being in the form presented at this meeting, which will provide:
"(1) In the event the holders of at least 75 percent of the capital stock
of Keane, Higbie & Co. deposit their stock with the Union Trust Co. on or
before the 17th day of September 1929, the Union Trust Co. is authorized to
receive stock of Union Commerce Corporation from its officers for exchange
for stock of said Keane, Higbie & Co. on the basis of 1 share of stock of
said Union Commerce Corporation for 1 share of the deposited stock of said
Keane, Higbie & Co.
"(2) In the event that less than 75 percent of the capital stock of the said
Keane, Higbie & Co. are deposited with the Union Trust Co. on or before
the 17th day of September 1929, the stock of said Keane, Higbie & Co. so
deposited shall be returned by said Union Trust Co. to the respective depositing stockholders or to the legal holders of the negotiable certificates issued
therefor upon the surrender thereof."
Which resolution, upon motion made and seconded, was unanimously adopted.
Do you recall the adoption of that resolution at that meeting of
the board, Mr. Higbie ?
Mr. HIGBIE. I believe I do, sir.
May I ask how many directors attention that meeting, Mr. Pecora ?
Mr. PECORA. According to the minutes of the meeting which I
have before me, the following directors were present:
STOCK EXCHANGE PRACTICES
4937
Frank W. Blair, Frederick G. Austin, Harry C. Bulkley, George
W. Carter, Harry S. Covington, Aaron DeRoy, George R. Fink,
Harry S. Finkenstaedt, Burch Foraker, A. B. C. Hardy, Carlton M.
Higbie, Hobart B. Hoyt, James Inglis, Samuel R. Kingston, Charles
A. Kinney, George H. Kirchner, Henry Ledyard, Dwight B. Lee,
F. L. Lowrie, Edward M. Mancourt, B. H. Manning, Fred T. Moran,
Charles S. Mott, W. Howie Muir, Edwin H. Nelson, Robert Oakman,
Jerome H. Remick, Herbert S. Reynolds, John R, Russel, Henry H.
Sanger, A. A. Schantz, Oscar W. Smith, B. F. Stephenson, George
W. Trendle, C. C. Winningham, and L. A. Young.
There were also present by special invitation, members of the
boards of directors of Union Trust Co. and the National Bank of
Commerce, as follows:
John A. Bryant, Adolph Finsterwald, Charles F. Lambert, T. W.
P. Livingstone, George B. Russel, M. B. Whittlesey, and John N.
Stalker, secretary.
This meeting of the board of directors of the Union Commerce
Corporation was followed shortly thereafter by a special meeting of
the stockholders of the Union Commerce Corporation, was it not?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. At which there was considered the subject matter of
this resolution that I have just read?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. That was held on September
Mr. HIGBIE. The 10th or 12th.
Mr. PECORA. It was originally held on the
12, 1929, was it not ?
10th and was adjourned
for final action to the 12th.
Mr. HIGBIE. Yes.
Mr. PECORA. Did
you attend that meeting of the stockholders held
on the 12th of September 1929?
Mr. HIGBIE. I do not remember, Mr. Pecora.
Mr. PECORA. Let me read to you, for possibly refreshing your
recollection, the following from a photostatic copy which I have of
the minutes of the adjourned special meeting of the stockholders of
Union Commerce Corporation held on September 12, 1929 [reading] :
The president reported that at a meeting of the board of directors held on
August 20, 1929, a proposal was submitted for the acquisition by this corporation of the capital stock, or at least 75 percent thereof, of Keane, Higbie & Co.,
a Michigan corporation, of Detroit, Mich., from the stockholders of that company in exchange for shares of the capital stock of this corporation upon the
basis of one share of the stock of this corporation having a par value of $20
each for one share of the stock of said Keane, Higbie & Co. having a par value
of $10 each.
The president further reported that the officers of this corporation, after
a careful examination of the assets and properties of said Keane, Higbie &
Co., its financial statement and an investigation, determined to their satisfaction that the acquisition of the capital stock of said Keane, Higbie & Co. upon
the proposed basis of exchange for the stock of this corporation is desirable,
and that they recommend the acquisition of the capital stock of said Keane,
Higbie & Co. upon said basis.
Whereupon the following lesolution was presented:
" Whereas the board of directors of this corporation has heretofore determined to assign and deliver shares of the capital stock of this corporation
for and in exchange for all or any part of the outstanding capital stock of
Keane, Higbie & Co., a Michigan corporation, but not less than 75 percent of the stock of said Keane, Higbie & Co. by the exchange of one
-4938
STOCK EXCHANGE PRACTICES
share of the capital stock of this corporation having a par value of $20 each
for one share of the capital stock of said Keane, Higbie & Company having
a par value of $10 each, that in accordance with and subject to the terms
and conditions contained in the resolution of said board duly adopted at its
meeting held on the 20th day of August, 1929, a copy of which was duly
presented to the stockholders at this meeting, and whereas, after due and
careful consideration it was deemed advantageous and to the best interests
of this corporation and the stockholders thereof that the acquisition of the
capital stock of said Keane, Higbie & Co. as determined upon by a majority
of all the directors of this corporation be carried out; now, therefore, be it
Resolved, That said- action of the board of directors be and the same is
iiereby ratified and approved, and that the proper officers of this corporation be
and they are hereby authorized and directed to issue not in excess of 100,000
shares of this corporation of a par value of $20 each, using for that purpose
all of the heretofore authorized capital stock of this corporation * * *
provided that such exchange involve the exchange of at least 75 percent of the
entire outstanding capital stock of said Keane, Higbie & Co. and that such
exchange be further subject to all the terms and conditions contained in the
resolution of the board of directors adopted on the 20th day of August, 1929,
as supplemented by this resolution."
1 will not read the portion of the resolution that states the form.
Mr. HIGBIE. I remember the circumstances.
Mr. PECORA (reading) :
Which resolution, upon motion duly made and seconded, was unanimously
adopted.
Do you recall that action taken at that special adjourned meeting
of the stockholders ?
Mr. HIGBIE. Yes, sir; I do.
Mr. PECORA. NOW, thereafter the exchange of shares was made
upon and under the terms and conditions provided for in this resolution ; is that right %
Mr. HIGBIE. That is right.
Mr. PECORA. And as a consequence and as result thereof the Union
Commerce Corporation acquired all of the capital stock of Keane.
Higbie & Co., consisting of 100,000 shares ?
Mr. HIGBIE. Yes.
Mr. PECORA. And
issued therefor in exchange 100,000 shares of its
own capital stock?
Mr. HIGBIE. That is right.
Mr. PECORA. YOU at that time were still the owner of 60,500
shares of the capital stock of Keane, Higbie & Co. ?
JMr. HIGBIE. That is right.
Mr. PECORA. After the consummation of this transaction did you
sell 30,000 shares of the 60,500 shares of the Union Commerce Corporation stock which you received in exchange for your shares of
Keane, Higbie & Co. to anybody ?
Mr. HIGBIE. I and the other stockholders, a few of us, as you have
said, sold 30,000 shares of the stock to Goldman-Sachs at $120 a
share in accordance with an agreement we had with the Union Commerce group to do so.
Mr. PECORA. Have you observed in the resolution which I have
read to you, and which was adopted by the board of directors of
the Union Commerce Corporation on August 20, 1929, or in the resolution which I have read to you, which was adopted by the stockholders of the Union Commerce Corporation at the meeting held
STOCK EXCHANGE PRACTICES
4939
September 12, 1929, there is absolutely no mention made of such an
agreement ?
Mr. HIGBIE. I observed that there was not.
Mr. PECORA. Why did you say that there was such an agreement?
Mr. HIGBIE. Because there was.
Mr. PECORA. Where is the evidence of it?
Mr. HIGBIE. Well, the evidence is the word of Mr. Blair, Mr. Covington, Mr. Sanger, Mr. Finkenstaedt, Mr. Catchings, and Mr.
Weinburg.
Mr. PECORA. Was that agreement ever put in written form at any
time?
Mr. HIGBIE, Not to my knowledge, sir. I did not make the agreement.
Mr. PECORA. What is that?
Mr. HIGBIE. I did not make the agreement to sell the stock, but
I agreed with Mr. Blair and his group that we would fulfill our
verbal contract.
Mr. PECORA. By MY. Blair's group, whom do you specifically
mean ?
Mr. HIGBIE. The Union Commerce.
Mr. PECORA. YOU mean you made an agreement with Mr. Blair's
corporation, that is, the corporation of which he was the executive
head, the Union Commerce Corporation ?
Mr. HIGBIE. Well, I made the agreement with him, sir.
Mr. PECORA. With whom ?
Mr. HIGBIE. Mr. Blair.
Mr. PECORA. Individually?
Mr. HIGBIE, I made it with him individually; for whom I do not
know. I assume it was all a part of the total transaction that involved the benefits to the corporation.
Mr. PECORA. The corporation you refer to now is the Union Commerce Corporation?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. When did
you reach that understanding or agreement with Mr. Blair ?
Mr. HIGBIE. About the 30,000 shares?
Mr. PECORA. Yes.
Mr. HIGBIE. Sometime when we were well into the negotiations for
the acquisition of Keane, Higbie & Co.
Mr. PECORA. That was prior to August 20, 1929, was it not ?
Mr. HIGBIE. I assume so, sir—yes; no doubt.
Mr. PECORA. HOW long did the negotiations last ?
Mr. HIGBIE. They dragged over 2 or 3 weeks; probably some time,
if my memory serves me correctly, it was the latter part of July.
The figures would show when they were in Goldman-Sachs' office,
and they dragged from that day until we put the deal through.
Mr. PECORA. At any time in the course of those negotiations was
any written offer made by Keane, Higbie & Co. or to its stockholders
to sell the capital stock of that company to the Union Commerce ?
Mr. HIGBIE. I could not tell you.
Mr. PECORA. At any time during those negotiations was any
written offer made by the Union Commerce Corporation or anyone
4940
STOCK EXCHANGE PRACTICES
in its behalf to purchase the outstanding capital stock, or at least
75 percent thereof, of Keane, Higbie & Co. ?
Mr. HIGBIE. A written offer to us?
Mr. PECORA. The stockholders of Keane, Higbie & Co.
Mr. HIGBIE. I doubt it, sir.
Mr. PECORA. YOU have no recollection of such an offer?
Mr. HIGBIE. NO, sir; I have not.
Mr. PECORA. Have you any recollection of any memorandum of
agreement or understanding having ever been made in the course
of those negotiations by either party?
Mr. HIGBIE. NO. I think it was largely verbal.
Mr. PECORA. It was entirely verbal, was it not?
Mr. HIGBIE. Yes; that is right.
Mr. PECORA. Was it in the course of those negotiations that you
reached an understanding or agreement to turn over 30,000 shares
of the Union Commerce Corporation stock, as, if, and when you
received it, in exchange for your shares of the Keane, Higbie & Co.
stock to Goldman, Sacks & Co. ?
Mr. HIGBIE. While you were talking, Mr. Pecora, I was thinking
of something else, refreshing my memory. If you do not mind,
I will go back to this question.
Mr. PECORA. All right.
Mr. HIGBIE. It stands in my mind that sometime between the
1st of July and the 20th of August I dropped Blair a line and
told him that I thought I could round up my stockholders to work
this thing out.
Mr. PECORA. TO work what thing out?
Mr. HIGBIE. The sale of Keane, Higbie & Co. in its entirety to
the Union Commerce Corporation. I have thought about it since
I knew I was subpenaed and have searched my files but could find
nothing, and I do not know of any record of it.
Mr. PECORA. NOW, I will have the reporter read to you the question that I last asked you.
Mr. HIGBIE. Thank you.
(The reporter read the question referred to as follows:)
Mr. PECORA. Was it in the course of those negotiations that you reached an
understanding or agreement to turn over 30,000 shares of the Union Commerce
Corporation stock as, if, and when you received it in exchange for your shares
of the Keane, Higbie & Co. stock to Goldman-Sachs .& Co. ?
Mr. HIGBIE. Yes; definitely.
Mr. PECORA. Was the price at which you were to turn over those
30,000 shares agreed upon at the same time ?
Mr. HIGBIE. Definitely.
Mr. PECORA. That was $120 a share ?
Mr. HIGBIE. Yes, sir.
Mr. PECORA. Did you
personally undertake to turn over those
30,000 shares to Goldman-Sachs & Co. for $120 a share out of your
shares of the Union Commerce Corporation stock that you were to
receive ?
Mr. HIGBIE. I undertook to deliver my group to do such a thing,
and if they did not I would have been responsible.
Mr. PECORA. And that was also done entirely on the basis of an
oral understanding or agreement?
STOCK EXCHANGE PRACTICES
Mr. HIGBIE. Yes, sir.
Mr. PECORA. Were you
4941
informed by Mr. Blair or anybody else in
connection with that that Mr. Blair had made a firm agreement
with Goldman-Sachs & Co. to sell to Goldman-Sachs & Co. 30,000
shares of the capital stock of the Union Commerce Co.?
Mr. HIGBIE. I was under that impression, sir.
Mr. PECORA.- Were you told so by Mr. Blair or anyone else representing the Union Commerce Co. ?
Mr. HIGBIE. I would not remember specifically. I assume so, or
I certainly would not have gone through with an agreement that
was not an agreement.
Mr. PECORA. When did you first become a director of the Union
Commerce Investment Co. ?
Mr. HIGBIE. I looked it up the other day. I thought it was in
December of 1928. As I said this morning, it probably was automatic, whether I wanted to or not. When they put the bank and
the trust company together I believe for political reasons they put
us all on that board.
Mr. PECORA. DO you recall at any time prior to August 20, 1929,
that the board of directors of the Union Commerce Corporation
were told by Mr. Blair or by anyone else that a transaction had
been agreed upon between the Union Commerce Corporation and
Goldman-Sachs & Co., under the terms of which the Union Commerce was to sell 30,000 of its shares to Goldman-Sachs & Co. for
$120 a share?
Mr. HIGBIE. N O ; but I have a feeling—I recall that he did tell
certain of the directors privately that such a thing was going on,
because of the fact that he felt it was such a strong thing for the
company, and I believe he had been asked to keep the matter a
business secret, a proper business secret.
Mr. PECORA. DO you recall any resolution or action ever adopted
or taken by the board of directors of the Union Commerce Corporation at any time prior to August 20, 1929, in which the corporation
was committed to sell or became committed to sell 30,000 shares of
its capital stock to Goldman-Sachs & Co. for $120 a share, or for any
price ?
Mr. HIGBIE. I don't know, but I have a feeling that GoldmanSachs had something in writing from Mr. Blair. I don't know that.
Mr. PECORA. I have not asked you about what Goldman-Sachs <&
Co. may have had. I have asked you if you, as a director of the
Union Commerce Co., know of any action or resolution that was
taken or adopted by the board of directors of that company involving
or committing that company to sell 30,000 shares of its stock to
Goldman-Sachs & Co.?
Mr. HIGBIE. I don't remember, sir; I don't know of any.
Mr. PECORA. YOU have told us, if I have correctly understood your
testimony today, that when you delivered, subsequent to September
12, 1929," to Goldman, Sachs & Co. 30,000 shares of the stock of the
Union Commerce Co. which you had received in return for your
shares of Keane, Higbie & Co., that you were required to do that
as part and parcel of the transaction or agreement under which the
Union Commerce Co. purchased, in exchange for its own stock, on
a share-for-share basis, 100,000 shares of the capital stock of Keane,
4942
STOCK EXCHANGE PRACTICES
Higbie & Co. Have I correctly understood your testimony to that
effect?
Mr. HIGBIE. DO you mean to say that the delivery of the stock
to Goldman-Sachs was made a condition of our merging the two
companies?
Mr. PECORA. IS that what you have tried to tell us ?
Mr. HIGBIE. I will say to you that that was not the primary condition, but it was made a condition of the deal.
Mr. PECORA. I t was made a condition ?
Mr. HIGBIE. Yes.
Mr. PECORA. And you so understood it to be ?
Mr. HIGBIE. Yes.
Mr. PECORA. AS
a director of the Union Commerce Corporation
you had no knowledge that the company had ever committed itself
to sell any of its shares to Goldman, Sachs & Co., had you?
Mr. HIGBIE. Well, I think that is going far afield. How would I
know?
Mr. PECORA. IS it a fact?
Mr. HIGBIE. AS a director and as an individual ?
Mr. PECORA. AS a director, your approval would be sought to such
a transaction, would it not?
Mr. HIGBIE. Mr. Pecora, as an individual I knew it, because they
told me so.
Mr. PECORA. Who told you ?
Mr. HIGBIE, But they did not tell me in a directors' meeting.
Mr. PECORA. DO you know that no action of any kind, no formal
action of any kind, was ever taken by the Union Commerce Corporation ?
Mr. HIGBIE. I am convinced that that is the truth.
Mr. PECORA. Committing it to sell 30,000 shares of its stock to
Goldman, Sachs & Co. ?
Mr. HIGBIE. Yes, sir; I am convinced £hat that is so.
Mr. PECORA. YOU know that that is so, don't you?
Mr. HIGBIE. I am sure of it.
Mr. PECORA. YOU know, from your attendance at the meeting of
the board held on August 20, 1929, that nothing at all was said to
the directors at that meeting that referred in any way to any arrangement which the Union Commerce Corporation had made to sell
Goldman, Sachs & Co. 30,000 shares of its stock, do you not?
Mr. HIGBIE. NO ; I do not. I t might have been said. As you know,
in many directors' meetings many things are discussed, and they are
not always recorded in the minutes. I do not believe that there was
1 director out of 10 that did not know about the Goldman, Sachs
transaction, possibly never officially, or on the record, but it was
discussed.
Mr. PECORA. Did you ever discuss it prior to August 20, 1929, with
any other director of the Union Commerce Corporation ?
Mr. HIGBIE. I do not remember, sir.
Mr. PECORA. Were you present at any such discussion had between
other directors of that company prior to August 20, 1929?
Mr. HIGBIE. I do not remember.
The CHAIRMAN. Who paid for these 30,000 shares transferred to
Goldman, Sachs?
STOCK EXCHANGE PRACTICES
4943
Mr. HIBGIE. I suppose Goldman, Sachs & Co., sir.
The CHAIRMAN. YOU suppose so. You don't know? Do you
know to whom the payment was made?
Mr. HIGBIE. I do not. I know that we delivered the stock.
The CHAIRMAN. YOU delivered the stock, and you were to get
$120 a share for your stock. Can you not tell how much was paid
for it and to whom ?
Mr. HIGBIE. Oh, yes; we got $120 a share for it.
The CHAIRMAN. Who got
it?
Mr. HIGBIE. The stockholders that owned it.
Mr. PECORA. Who were they ?
Mr. HIGBIE. I was one, for 18,150 shares, and there were various
stockholders. I think you have them on the record there in a list.
Keane, Higbie & Co. is now in the Guardian group, and I have no
access to the files.
Mr. PECORA. Out of the 30,000 shares you contributed 18,100 shares
for the purpose of selling them and delivering them to Goldman,
Sachs?
Mr. HIGBIE. Yes. Goldman, Sachs must have paid for the stock
ultimately—to answer your question.
Mr. PECORA. From whom did you get payment for those 18,100
shares at the rate of $120 a share ?
Mr. HIGBIE. We delivered our stock, and I think Keane, Higbie
& Co. cleared the transaction.
Mr. PECORA. From whom did you get your payment for your
18,100 shares?
Mr. HIGBIE. I think I got it from Keane, Higbie & Co. I do not
know how the mechanics of the deal were handled, but I remember
they gave me credit for whatever my amount was.
Mr. PECORA. They gave you a credit?
Mr. HIGBIE. Yes, sir. I never got into the bookkeeping end of the
business, but I think they delivered the stock to Goldman, Sachs in
New York.
Mr. PECORA. HOW long after September 12, 1929, were those
30,000 shares delivered, sold to Goldman, Sachs & Co. ?
Mr. HIGBIE. HOW long after September 12 ?
Mr. PECORA. Yes.
Mr. HIGBIE. Were they sold back to the group ?
Mr. PECORA. NO ; were they sold and delivered to Goldman, Sachs
& Co.?
Mr. HIGBIE. I do not remember.
Mr. PECORA. Was it shortly afterward?
Mr. HIGBIE. It must have been, because I know we had delivered
them just as quickly as possible.
Mr. PECORA. What was the market price in September 1929 of the
capital stock of the Union Commerce Co. which you sold ?
Mr. HIGBIE. When they got it?
Mr. PECORA. When Goldman, Sachs & Co. got it for $120 from
you and your associates.
Mr. HIGBIE. When they got it for $120 a share, the stock was
selling around $240 or $250 a share.
Mr. PECORA. They got it for about half its then market value?
Mr. HIGBIE. That is right.
4944
STOCK EXCHANGE PRACTICES
Mr. PECORA. And you voluntarily parted with 18,100 shares at a
price which was half the market value, because Blair had told you
informally and orally that he had reached some understanding with
Goldman, Sachs & Co. ?
Mr. HIGBIE. It was not a casual understanding. It was a very
definite one, sir?
Mr. PECORA. It was an understanding that, to your knowledge up
to this moment, has never been evidenced by a writing.
Mr. HIGBIE. That is true.
Mr. PECORA. In September of 1929, were you still so careless about
millions that the difference of $120 or $130 a share for 18,100
shares was of slight consequence to you?
Mr. HIGBIE. DO you mean to say that I Would have demanded any
man's word in writing before trading? You see, Mr. Pecora, we do
all these things
Mr. PECORA. Let me answer your question as to what I mean to
say. I will tell you exactly what I mean to say.
Mr. HIGBIE. Yes, sir.
Mr. PECORA. I mean to
say this: That you were a director of the
Union Commerce Corporation during the year 1929, and had been
such from some time in the year 1928.
Mr. HIGBIE. The beginning of 1929.
Mr. PECORA. That as such director you never got any knowledge
of your company, that is, the Union Commerce Co., having committed itself by a firm commitment to sell and deliver 30,000 of its
shares of capital stock to Goldman, Sachs & Co. That is what I mean
to say. Is my statement at variance with the fact ?
Mr. HIGBIE. I think not, Mr. Pecora.
Mr. PECORA. I mean further to say this: Take up one step at a
time.
Mr. HIGBIE. Yes.
Mr. PECORA. That
in the summer of 1929, during a 2 or 3 weeks'
period, which you have said was the period in which the negotiations took place that culminated in the purchase by th& Union
Commerce Co. of all the outstanding capital stock of Keane, Higbie
& Co. on a share-for-share basis of exchange, there never was a
writing between you or your company, Keane, Higbie & Co., and the
Union Commerce Corporation, with regard to the terms of that
sale. Is that at variance with the facts ?
Mr. HIGBIE. With regard to the terms of the 30,000 share sale?
Mr. PECORA. Exactly. Is that at variance with the facts?
Mr. HIGBIE. In my memory, there never was a writing in connection with it, and I can recall very distinctly standing in Mr.
Blair's office—and I think others were with him—and Mr. Blair
said tu me that he would have to take my word, which had always
been darned good, for the fact that I would deliver to him, regardless of market price, the 30,000 shares of stock at $120, to fulfill
their commitment to Goldman-Sachs & Co. I told him that if
I did not do it, it would be the first time I had fallen down on a
contract.
Mr. PECORA. Have you any proof to this day of the making of any
firm commitment by the Union Commerce Corporation with Goldman, Sachs & Co., to sell to the latter 30,000 shares of its capital
stock?
STOCK EXCHANGE PRACTICES
4945
Mr. HIGBIE. All I know is that they told me they sold it, or they
would endeavor to get it, but I could not testify to something that
happened at a meeting that I did not attend, and I did not even
know was being held.
Mr. PECOKA. What meeting are you referring to ?
Mr. HIGBIE. I mean the meeting that Mr. Catchings and Mr.
Weinburg had with Sanger and Blair and Covington.
Mr. PECORA. Can you give this committee today any proof that
the Union Commerce Corporation ever entered into a firm contract
or agreement to sell 30,000 of its shares to Goldman, Sachs & Co.
for $120 a share?
Mr. HIGBIE. NO, sir.
Mr. PECORA. After you
and your associates who made up this
block of 30,000 shares of stock which was sold and delivered to
Goldman, Sachs & Co., for $120 a share, made that sale, did you
repurchase any part of those 30,000 shares ?
Mr. HIGBIE. From whom?
Mr. PECORA. From anybody.
Mr. HIGBIE. NO. Oh, yes; we did, of course. Pardon me.
Mr. PECOJRA. When did you do that.
Mr. HIGBIE. There were two entirely separate transactions.
Mr. PECORA. Let us have the first one.
Mr. HIGBIE. I will give you the story, and then you can understand it.
Mr. PECORA. Let us have the story.
Mr. HIGBIE. After this whole thing took place, some time after it
all took place, Union Commerce and Guardian started talking
merger, and consummated a merger.
Mr. PECORA. When was that merger effected?
Mr. HIGBIE. I think that was in the fall of 1929, because it was
out at Mr. Blair's house, and we were out there all one Sunday. In
connection with it, the Guardian Detroit Co. did not like the fact
that the Union Commerce Corporation had as a large stockholder
an individual New York banking house, because of the fact that
they dealt with Kuhn-Loeb, and they dealt with Morgan, and they
dealt with Hornblower & Weeks, and they dealt with Lee-Higginson
and others.
Mr. PECORA. What was the matter with the Guardian Group?
Were they trying to boycott those bankers?
Mr. HIGBIE. NO ; I say that they did not want one big group to
own so much stock, because they felt it would alienate the others in
giving them syndicate participations, and other things, so in the
merger they said, " We don't like to have you tied in with one New
York banking house. We think it would be better if you could
work it out to repurchase that stock." That did not appeal to me
particularly, because I was on the other side of the fence at that
point.
Mr. PECORA. What side of the fence do you mean?
Mr. HIGBIE. Union Commerce. Weinburg was a good friend of
mine, and so was Mr. Catchings.
Mr. PECORA. Weinburg was a representative of Goldman, Sachs.
Mr. HIGBIE. Yes, sir. But it was made a condition, and it seemed
a very sound thing for those two groups to merge, so I went to New
York and I saw Sidney.
4946
STOCK EXCHANGE PKACTICES
Mr. PECORA. What was made a condition?
Mr. HIGBIE. It was made a verbal condition of the merger that
we would attempt to work out a repurchase of enough of that stock
so that it would not be a block that would be considered a major
block.
Mr. PECORA. That was made a condition in the negotiations that
led eventually to the consolidation of the Guardian Detroit group
Mr. HIGBIE. A conversational condition.
Mr. PECORA (continuing). With the Union Commerce?
Mr. HIGBIE. Yes,
sir.
Mr. PECORA. IS that right
@FedFRASER