written. They were express or implied, the specific duties were. I think all of them were manifestly good. Mr. PECORA. I show you what purports to be a photostatic reproduction of that so-called "service contract" that you have referred to. This photostatic copy purports to be a copy of a service contract entered into between the Detroit Bankers Co. and the People's Wayne County Bank of Detroit. Will you look at it and tell me if that is a true and correct copy of the service contract to which you have referred? Mr. BALLANTYNE. Yes; that is a copy. Mr. PECORA. I ask that it be marked in evidence. Senator COUZENS. The same will be marked in evidence without being spread upon the record. (Photostatic copy of service contract referred to and identified by the witness was received in evidence, marked "Committee Exhibit No. 8, Jan. 24, 1934.") Senator COUZENS. The subcommittee will take a recess until 2 o'clock. (Whereupon, at 12:40 p.m., a recess was taken until 2 o'clock of the same day, Jan. 24, 1934.) AFTERNOON SESSION Upon the expiration of the noon recess, the committee resumed the hearing at 2 p.m. Senator COUZENS (presiding). I desire to announce that Chairman Fletcher has charge of the gold bill on the floor of the Senate and has asked me to preside while he has charge of that bill on the floor of the Senate. The meeting will come to order, please. TESTIMONY OF JOHN BALLANTYNE, DETROIT, MICH., PRESIDENT OF MANUFACTURERS' NATIONAL BANK OF DETROIT AT THE PRESENT TIME-Resumed Mr. PECORA. Mr. Ballantyne, were these service contracts, of which committee's exhibit no. 8 is a sample copy, entered into between the Detroit Bankers Co. and each and every one of the banking units of that holding group? Mr. BALLANTYNE. Mr. Pecora, I wonder if you would mind if I would transfer that question to Mr. Verhelle, who is under oath? Mr. PECORA. All right. Mr. BALLANTYNE. I think perhaps he will answer it a little more intelligently than I will. Mr. PECORA. Are you unable to tell us anything about these service contracts? Mr. BALLANTYNE. I know in a very general way about them, as I spoke about them to you. Mr. PECORA. Suppose you tell us first what you know of them, even if it be only in a general way. Mr. BALLANTYNE. The terms of the contracts, the service contracts, the express terms, are mentioned in the contract. Mr. PECORA. Yes. Mr. BALLANTYNE. I think there were changes, some implied terms, something was done that was not expressed; but there was obviously some-for example, immediately after the write-off that you are coming to perhaps in the situation we established a claims or recovery department, out of which we hoped to realize a lot of money, and that was put into this Detroit Bankers Co. operation, as well as those expressed duties. But that is something I am sure you would approve of yourself. It was done for a very manifest purpose and for the very best of results. Mr. PECORA. What were those very best purposes and results that were sought to be attained through the medium of the rendition of these services under these contracts of the holding company and various unit banks? Mr. BALLANTYNE. Oh, largely economies. I think there was purchasing, one of them. Now, you can purchase more Mr. PECORA (interposing). Purchasing of what; supplies? Mr. PECORA. Office equipment? Mr. BALLANTYNE. Office equipment and what-not. Mr. PECORA. What other kind of service was rendered, actually rendered under these contracts? Mr. BALLANTYNE. Everything, I think, that was expressed there. Could I see the contract again, Mr. Pecora? Mr. PECORA. Surely [handing document to Mr. Ballantyne]. Mr. BALLANTYNE. The auditing was not attended to by the bankers. We thought that was a very desirable thing, to have the auditing staff outside of the bank. Senator COUZENS. Did you then dispense with auditors within the units? Mr. BALLANTYNE. Within the units; yes, sir. Accounting, credits Mr. PECORA. Would not accounting come under the general heading Mr. BALLANTYNE. The credits were not passed on by the Mr. PECORA. Would not accounting come under the general heading of auditing? Mr. BALLANTYNE. Yes; largely. Advertising was one of them, business promotion, purchasing, printing, rental of buildings; I presume that would have come under it. I don't recall. no. Mr. PECORA. Talk a little louder, please. Mr. BALLANTYNE. Fidelity bonds; that was included. Insurance Mr. PECORA. You mean surety bonds? Mr. BALLANTYNE. Yes. I think that is the extent of it, with the possible addition of that recovery operation. Senator CouZENS. Then to the extent that the Detroit bankers did those jobs the board of directors did not operate the units, did they? Mr. PECORA. The board of directors of the various units? Senator CoUZENS. Yes. Mr. BALLANTYNE. Well, I suppose it is rather a fine point, but I think we were perfectly willing it should be done, and of course in nearly every case any operation was performed. For instance, take this recovery department or claims department. Nothing was done that was not authorized and agreed to by the officer in charge of the thing. There was no contest of the power there at all, Senator. I can assure you of that. Mr. PECORA. What actual facilities did the Detroit Bankers Co. have among its personnel to render all these services to all these unit banks? Mr. BALLANTYNE. Well, we had a very excellent staff, experts in their line. That recovery department was chosen with great care. I think we had a man named Bratton, who is perhaps the most able man in Detroit on that kind of work. We had him and others. We had a man named Stead who was an expert on tax problems. We had really expert men in nearly every job. Mr. PECORA. Do you know the aggregate amount that was paid annually by the various unit banks to the Detroit Bankers Co. under these service contracts? Mr. BALLANTYNE. Well, I would just guess two or three hundred thousand dollars. Mr. PECORA. I understand the sum is approximately $400,000. Mr. BALLANTYNE. Well [addressing Mr. Verhelle] would you know, Joe? Mr. VERHELLE. No. Mr. BALLANTYNE. You probably have it exact. I don't recall. It is pretty hard to remember all these details. Mr. PECORA. Do you know whether, out of the moneys that the holding company received from the unit banks under these service contracts, the holding company realized a substantial profit, out of these services charges? Mr. BALLANTYNE. It would be an indirect profit, I would say; yes. Mr. PECORA. A substantial profit? Mr. BALLANTYNE. I would say yes. Mr. PECORA. Do you know what proportion of the total fees paid by the holding company by the unit banks annually under these service charges represented profit to the holding company? Mr. BALLANTYNE. Well, now, you take the accounting department in the holding company. If they had not had it the banks would have had it. That was divorced from the banking units proper, and it was very wise; that thing was very wise, Mr. Pecora. Mr. PECORA. I am not calling for that. I am asking you to give us if you can Mr. BALLANTYNE (interposing). I cannot give you the detail. Mr. PECORA (continuing). The proportion of the charges or commissions, fees, received by the holding company under these service contracts with the unit banks which represented profit. Mr. BALLANTYNE. It was not fees or commissions. It was simply disbursements, salaries, and what not to employees. There were no fees or commissions involved. Mr. PECORA. As a matter of fact, the holding company charged for these services? Mr. BALLANTYNE. Just what they cost. Mr. PECORA. Just what they cost? Mr. BALLANTYNE. Yes. Mr. PECORA. Then, you say there was no profit to the holding company? Mr. BALLANTYNE. None to the holding company; no. Mr. PECORA. How is that? Mr. BALLANTYNE. I didn't understand your question. None to the holding company. Mr. PECORA. Are you sure of that? Mr. BALLANTYNE. Well, I am very confident. I am very confident there was no profit to the holding company on that. I think demands were made just to immediately cover disbursements. You may have something there that denotes differently, but that is my memory. Mr. PECORA. Do you know anything about an indebtedness of $7,200,000 which was incurred by the Detroit Bankers Co. in connection with its acquisition of the First National Co., which was one of the investment affiliates of the Detroit Bankers Co.? Mr. BALLANTYNE. I certainly do. Mr. PECORA. You do? Mr. BALLANTYNE. Oh, yes. Mr. PECORA. Out of the several hundred thousands of dollars a year which the holding company received under these service contracts from the unit banks did not the holding company pay its interest charges on that $7,200,000 indebtedness? Mr. BALLANTYNE. No. Mr. PECORA. Are you sure of that, Mr. Ballantyne? Mr. BALLANTYNE. Well, I am very confident. Mr. Verhelle is here. I think he will substantiate that. Mr. VERHELLE. To the best of my knowledge there never has been. Mr. BALLANTYNE. To the best of Mr. Verhelle's knowledge it did not. Mr. PECORA. How did this indebtedness of $7,200,000 that we spoke of a moment ago originate? Mr. BALLANTYNE. Mr. Pecora, that was all done prior to the formation of the company, and we only got in at the end of it, at the end of the discussion probably. I have opposed the purchase of these State banks religiously from the beginning of time. I am opposed to them now. Senator COUZENS. I understood you to say a while ago that you knew all about this indebtedness of $7,200,000 for the acquisition of the First National Co. Will you tell us about that? Mr. BALLANTYNE. That is what he is asking me, I think. Mr. BALLANTYNE. Yes. Senator COUZENS. Will you tell us what you know about it? Mr. BALLANTYNE. It originated through the First National Bank buying portions of stock in State banks throughout the Michigan peninsula. Mr. PECORA. The First National Bank prior to the acquisition of its capital stock by the Detroit Bankers Co. had acquired minority holdings in the stock of various State banks, had it not? Mr. BALLANTYNE. You have them all listed there. Yes. Mr. PECORA. And it acquired those minority stockholdings in those other banks through its investment affiliate, a company called the First National Co.? Mr. BALLANTYNE. Yes. Mr. PECORA. And in the process of the acquisition of those minority holdings Mr. BALLANTYNE. Yes. Mr. PECORA. In these other banks the First National Co. incurred an indebtedness aggregating $7,200,000, did it not? Mr. BALLANTYNE. Yes. Mr. PECORA. The Detroit Bankers Co., which was formed on January 8, 1930, shortly thereafter took over the First National Bank in Detroit and its affiliate, the First National Co., did it not? Mr. BALLANTYNE. A certificate of stock of the affiliate of that thing and the First National Bank stock were on the same certificate. Mr. PECORA. Yes. Mr. BALLANTYNE. Mr. Pecora, you are asking me a very difficult question. Mr. PECORA. Why is it difficult, Mr. Ballantyne? Mr. BALLANTYNE. Well, I will tell you why it is difficult. I did not know then and I do not know now. It is a legal matter; it is not a matter that I can pass on as to who owns or is responsible for those stocks. I never was at a meeting that I did not damn those stocks. Mr. PECORA. What stocks are you talking about now, the minority holdings of these various banks? Mr. BALLANTYNE. Precisely. Mr. PECORA. Yes. Why did you damn them at every meeting? Mr. BALLANTYNE. Because I did not like them, obviously. Mr. PECORA. They had been acquired by the First National Bank in Detroit prior to the time that that bank came into the holding company? Mr. BALLANTYNE. Precisely. Mr. PECORA. Through an exchange of stock? Mr. BALLANTYNE. Yes, sir. Mr. PECORA. If you did not like that feature of the First National Bank in Detroit did you as one of the directors and trustees of the Detroit Bankers Co. protest against and vote against― Mr. BALLANTYNE. Absolutely. Mr. PECORA. The acquisition of the First National Bank and its security affiliate by the Detroit Bankers Co.? Mr. BALLANTYNE. I had no choice in the buying of them. They were bought before I had anything to do with the damn thing, but I didn't ever miss an opportunity of protesting against it, Mr. Pecora. Senator COUZENS. Are those protests recorded in the minutes? Mr. BALLANTYNE. I don't know. I don't know whether they are or not, but anybody here-(After conferring with Mr. Verhelle) January 1 I think there is a protest mentioned there. Mr. PECORA. For what year? Mr. BALLANTYNE. January 1 of the year of our merger. Mr. BALLANTYNE. I made a motion at that time that the whole matter be tabled until the First National Bank with all its subsidiaries be re-examined. I think that is a matter of record in the minutes. Mr. PECORA. Mr. Ballantyne, the Bank of Michigan, which was the bank in which you held the office of chairman of the Board of Directors |