which we can build up that this stock should be worth within a five-year este period not less than $300 a share, and I, personally, would be very happy to hell see you benefit by holding the stock rather than by selling it at anywhere near present prices. Perhaps you have other securities that could be liquidated so that you would not be carrying quite as heavy a loan against the bank stock. So far as the bank and trust company are concerned, we are willing: to carry you on a substantial loan for any reasonable period, and it would be my suggestion that the notes covering this particular transaction be made out for a period of six months with the idea that they would be renewed for another period of six months, subject, of course, to the understanding that the loan would be placed elsewhere or taken care of in some other way if the Banking Commissioner requires us to take such a loan out of the bank on account of the collateral being represented in too large an amount by Guardian Detroit Union Group stock.

with

I am enclosing herewith a statement prepared by the Guardian Detroit Company which shows the status of the transaction with interest figured up to February 1. This statement also shows, as you will note, the two credits on account of dividends and also the $60 check which you sent covering the sale of one-half share of stock.

If these suggestions which I have made are satisfactory to you, if you will let me know what additional collateral you can substitute for a part of the bank stock, I will be glad to have the notes made out and sent to you so the transaction can be completed by February 1.

I shall be glad to have your ideas on the subject.
Very sincerely,

(Signed) ROBERT O. LORD,

President.

Now, does the reading of this letter refresh your recollection concerning the way this transaction was eventually handled?

Mr. LORD. Well, the reading of that letter refreshes my recollection up to date, but I could not tell you, except that Mr. Joseph H. Brewer finally ended up with a loan with the Guardian Detroit Bank or the Guardian National Bank of Commerce.

Mr. PECORA. Was that because Mr. Brewer finally agreed to take over this stock while it was being carried for him by either the Guardian Detroit Bank or the Guardian Detroit Co.?

Mr. LORD. I don't recall what he took over of the stock, Mr. Pecora. Mr. Brewer had holdings in the Grand Rapids National. He had a loan in the Guardian National Bank of Commerce. He put up Guardian stock. He put up outside collateral.

The CHAIRMAN. Do you recall, Mr. Lord, that the notes referred to in this letter were actually executed by Mr. Brewer?

Mr. LORD. Well, I do recall that Mr. Brewer had a loan in the Guardian Bank, and whether it originated in this transaction or from some later transaction I could not swear to it. I suppose in connection with this transaction.

it was

The CHAIRMAN. Do you remember the amount of that loan?
Mr. LORD. No: I don't have the figure.

Mr. PECORA. Now, I want to go back for a moment, Mr. Lord, to your letter to Mr. Brewer of November 18, 1929, marked "Committee's Exhibit No. 19." In the concluding paragraph of that letter you make this statement:

In further reference to that certain loan in the Grand Rapids National about which I spoke to you, I feel very strongly that if I were in your position I would arrange to have the loan paid at this time. I have information on the outside which leads me to believe that the company's business is in far from good shape and that their prospects for the coming year are not very encouraging.

What was that "certain loan" that you refer to in this letter? Mr. LORD. I cannot tell you the name of the corporation, but it was the loan to an industrial company in Grand Rapids; had nothing to do with this transaction whatever.

Mr. PECORA. Now will you look at this document which I now show you and which purports to be a photostatic reproduction of a letter from Mr. Brewer addressed to Mr. B. K. Patterson, vice presi dent of the group, under date of April 13, 1931, to which is attached and in which reference is made to a letter addressed to Mr. Brewer as President of the Grand Rapids National Bank under date of April 10, 1931, signed by Henry F. Quinn, national bank examiner? Will you look at those documents and tell me if they refresh your recollection in any way with regard to the subject matter thereof! Mr. LORD. I don't recall having seen this before, but I can identify this as Mr. Brewer's signature, sir.

Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Memorandum dated April 13, 1931, from Joseph H. Brewer to B. K. Patterson, together with attached letter dated April 10, 1931, from Henry F. Quinn, national bank examiner, to Joseph H. Brewer and also attached tabulation of loans and discounts and bonds and securities was thereupon designated "Committee Exhibit No. 22. Dec. 20, 1933 ", and the same appear immediately following as read by Mr. Pecora.)

Mr. PECORA. The letter that has been received in evidence and marked "Committee's Exhibit No. 22" of this date, reads as follows [reading]:

GUARDIAN DETROIT UNION GROUP

Intra-Group Memorandum

Date April 13, 1931.

To Mr. B. K. Patterson, Vice President, Guardian Detroit Union Group, Inc From Mr. Joseph H. Brewer, President, Grand Rapids National Bank DEAR MR. PATTERSON: I enclose herewith copy of letter from Mr. Henry F. Quinn.

What are your suggestions?

Very truly yours,

(Signed) Jos. H. BREWER,

President.

There is a stamped and hand-written memorandum in the lower right-hand corner of this letter reading as follows:

"To Mr. Waldo from B. K. Patterson, date 4-17.

"We must

must being underscored "charge these off. R. O. L. does not "-" does not" being underscored- want to disturb the earnings picture. What shall all do?"

Accompanying the letter to Mr. Patterson from Mr. Brewer is a copy of a letter addressed to Mr. Brewer reading as follows [reading]:

Mr. JOSEPH H. BREWER,

President Grand Rapids National Bank,

Grand Rapids, Mich.

APRIL 10, 1931.

DEAR SIR: There is herewith attached a schedule of estimated losses resultant from the examination of the Grand Rapids National Bank, Grand Rapids, Michigan, as of March 27, 1931.

Included in this list, as you will note, are certain items listed in the previous examination as losses that were not absorbed by the bank.

Losses as herein estimated should, of course, be promptly eliminated from the banks assets.

Yours very truly,

(Signed) HENRY F. QUINN National Bank Examiner.

And attached to Mr. Quinn's letter is a schedule entitled "Loans and Discounts", and then follows enumeration of various loans, the aggregate amount of which is $111,196.46.

Senator TOWNSEND. What is the date of the letter?

Mr. PECORA. The date of the bank examiner's letter is April 10, 1931, and it is forwarded by Mr. Brewer to Mr. Patterson, vice president of the Group, on April 13, 1931.

The schedule is as follows:

Mr. PECORA. Now, referring to the memorandum in the lower right-hand corner of Mr. Brewer's letter to Mr. Patterson [reading]: R. O. L. does not want to disturb the earnings picture

The reference to "R. O. L." is a reference to you, is it not, Mr. Lord?

Mr. LORD. I would assume so; yes.

Mr. PECORA. What is conveyed to your mind by that memorandum "R. O. L. does not want to disturb the earnings picture?"

Mr. LORD. I suppose that the charge-off should be made either by lift-outs or by charges to reserves. Now, the record shows 1 have given you this morning that in 1931 the Group Co. lifted out ninety-two thousand and odd also.

Mr. PECORA. Ninety-two thousand and odd dollars?
Mr. LORD. Dollars of assets.

Mr. PECORA. And that was at the end of the year in which the bank declared ninety-nine thousand and odd dollars of dividends! Mr. LORD. Yes. And during that year also, according to the figures I have here, the bank wrote off on its own books 153,000 plus. Mr. PECORA. NO; but what I want particularly to have you tell us, Mr. Lord, is what you had in mind when you indicated that you did not want to "disturb the earnings picture."

Mr. LORD. I suppose it was the suggestion that those assets be taken out without charging them against current earnings.

Mr. PECORA. Was that a general policy that was followed in these unit banks?

Mr. LORD. What, the general policy?

Mr. PECORA. Take out slow or doubtful assets or bad loans in a fashion that would not disturb the earnings picture.

Mr. LORD. Mr. Pecora, the practice of banks

Mr. PECORA (interposing). No, no; not the practice of banks: the practice of these banks is what I want.

Mr. LORD. All right, the practice of these banks and other banks

Mr. PECORA (interposing). No; please confine yourself to the prac tice of the unit banks. "Sufficient unto the day is the evil thereof."

Mr. LORD. The practice of these unit banks was to accumulate reserves for just such a time as we ran into in 1930, 1931, and 1932, accumulate undivided profits for the protection of that bank and its depositors, and to take care of such necessary write-offs as took place.

Now, you know and I know that the banks during the past 3 years, few if any banks in the United States have been able to make their charge-offs out of current earnings. They have made the charge-offs out of reserves built up in former years, out of undivided profits, or from some other part of their capital structure.

Mr. PECORA, Did the Grand Rapids Bank have any such reserves available to absorb these bad loans?

Mr. LORD. They must have had

Mr. PECORA. At the end of 1931?

Mr. LORD. They must have had a capital structure that absorbed the 153,000.

Mr. PECORA. I asked you about reserves, not capital structure. Mr. LORD. I haven't the figures on the reserves.

Mr. PECORA. Well, I am still uncertain as to what you meant by your desire "not to disturb the earnings picture."

Mr. LORD. I thought I answered that question when I said not to charge those losses which perhaps were incurred from loans made in previous years to the current year's earnings but rather to reserves or undivided profits.

Mr. PECORA, How do you know that the loans referred to by Bank Examiner Quinn were loans made in previous years? The date of those loans is not given.

Mr. LORD. No loss would develop in 3 months, and that letter was written in April, was it?

Mr. PECORA. April 1931. Now, I ask you again, was it the general policy of the banks that were units of your group to so handle bad loans as not to disturb the earnings statements or pictures of those banks?

Mr. LORD. The general policy of the banks is to set aside reserves out of earnings, to charge losses againt reserves rather than directly against earnings. Now, in some years certain charges are made directly against earnings and in addition against reserves or against undivided profits.

Mr. PECORA. Doesn't that tend to give an inaccurate picture of earnings?

Mr. LORD. No. I think an operating earning statement, of earnings from operations, gives the most accurate picture of a bank's earning capacity.

Mr. PECORA. Now, where a bank, we would say, made earnings or had earnings from operations of $500,000 in a given period of time, and where during that given period of time it became necessary for the bank to make some dispostion of bad loans amounting to, say, $250,000, and the disposition made was a write-off or a take-out as you call it

Mr. LORD (interposing). Well, there is a big difference between a write-off and a take-out.

Mr. PECORA. No, I am not referring to the two things as the same. You say "take-out." I will withdraw that question.

Where the bad loans are taken care of by a write-off or by the setting up of reserves that has the effect of preserving the appearance of the bank having actually earned from operations $500,000? Mr. LORD. Not if the reserves statement is given also as it is shown in the balance sheet of any bank. I don't think there is any misconception from the standpoint of presenting the figures. Mr. PECORA. Then what did you have in mind when you indicated to Patterson that you did not want to disturb the earnings picture?

Mr. LORD. I wanted an accurate picture of the operating earnings of the Grand Rapids National Bank to be shown. These losses were losses picked up from previous years' operations.

Mr. PECORA. You wanted the earnings to remain unimpaired or undiminished by reason of these write-offs, didn't you?

Mr. LORD. I wanted the earnings to be shown on the basis of the current year's operations.

Mr. PECORA. You wanted those earnings so shown that they would not be diminished by reason of these write-offs?