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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 ?

Mr. LORD. I would not say so.
Mr. PECORA. Well, is that a misstatement that I am making ?
Mr. LORD. I would not say that was the only reason.

Mr. PECORA. Whether it was the only reason or not, was it a reason?

Mr. LORD. Mr. Pecora, I wanted the earnings of the Grand Rapids National to show accurately for the current period. I cannot answer it any better way than that. I am sorry.

Mr. PECORA. You wanted the earnings to show accurately without their being diminished in amount by reason of write-offs for bad loans?

Mr. LORD. Out of current earnings for previous loans made before 1931.

Mr. PECORA. Can't you answer my question categorically?
Mr. LORD. You mean yes or no?
Mr. PECORA. Yes.
Mr. LORD. Will you repeat the question?
The SHORTHAND REPORTER (Mr. Randolph):
You wanted the earnings to show accurately without their being diminished
in amount by reason of write-offs for bad loans?

Mr. LORD. Yes; I will answer that.
Mr. PECORA. And was that the general policy of the unit banks?

Mr. LORD. I spoke of the policy in setting up reserves and charging losses against reserves as against current performance.

Senator COUZENS. It would appear that the bank at that time did not have any reserves adequate to charge these off!

Mr. LORD. Senator Couzens, I do not know what their reserves were.

Senator COUZENS. It would appear that way.

Mr. LORD. It would appear so if the Group Co. lifted out that $92,000, or that they did not want to disturb the reserves.

Senator COUZENS. In other words, when the bank examiner sent those lists to charge off you had no place to charge off. Then what would happen was to have them lifted out unless you wanted them to affect the current earnings?

Mr. Lord. Part of them were lifted out, and there were charge-offs during that year of 150,000. But there must have been reserves.

Senator Couzens. I am referring to this particular instance at this particular time.

Mr. LORD. Senator, I do not know what in the final charge-off those were charged against, whether they were part of the lifted-out assets or whether they were part of the assets that were charged on the bank's own books.

Senator CouZENS. Yes; but Mr. Brewer, who was president of the bank, was writing you for instructions or suggestions as to how he would handle the bank.

Mr. LORD. All right.

Senator COUZENS. And yet you have testified all along here that these directors had their own independent judgment, which they evidently had not.

Mr. LORD. He asked for suggestions, Senator.

Senator COUZENS. Yes. Well, why did he have to ask for sug. gestions when the whole power and control of the institution was

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assumed to be in the board of directors, based on your assurance before the

Mr. LORD (interposing). He did not have to ask for suggestions. He chose to get outside advice from the Group, which was one of the functions of the Group, to give advice.

Senator Couzens. He did not have independent judgment, then. Mr. PECORA. Mr. Lord, do you recall that sometime in January of this year an arrangement was entered into whereby Mr. Brewer obtained a loan of $15,000 from the Group?

Mr. LORD. Yes.
Mr. PECORA. Tell the committee about that arrangement.

Mr. LORD. Mr. Pecora, I can tell you from hearsay. I would rather that it be handled by someone who knows more about it than I.

Mr. PECORA. You were a party to the conversations in which that arrangement was effected, weren't you !

Mr. LORD. I don't think so. I can tell you the hearsay, if you want.

Mr. PECORA. Let us see what you can tell us.

Mr. LORD. All right. Mr. Brewer had a substantial loan with us. He was carrying substantial life insurance for the protection of his loan and his family.

Mr. PECORA. When you say “ with us”, to whom do you refer? Mr. LORD. I mean the Guardian National Bank of Commerce.

Mr. PECORA. Pardon me—was that loan account created by this transaction whereby 1,601 shares of the Grand Rapids, National Bank stock were acquired in 1929 ?

Mr. LORD. I don't know, Mr. Pecora. That loan had been on the books for sometime. I don't know where it originated from.

Mr. PECORA. How large a loan was it?

Mr. LORD. I would say somewhere between four and five hundred thousand dollars at the end. It had been larger and had been substantially reduced.

Mr. PecoRA. All right; go ahead.

Mr. LORD. Now, speaking of this $15,000 loan, Mr. Brewster was in need of funds, either to pay his life insurance or interest or some other obligations. He came to the Guardian National Bank of Commerce to borrow the money. We felt that our holdings of Mr. Brewer's paper was sufficient and refused to loan him the money. He asked to secure the loan from the Group Co. itself. The Group Co. had certain obligations to meet in New York and Chicago and did not care to disburse their funds. Mr. Brewer was a close personal friend of Mr. Shorts.

Mr. PECORA. Who was Mr. Shorts?

Mr. LORD. President of the Second National Bank & Trust Co. of Saginaw.

Mr. PECORA. That was one of the units in your Group? Mr. LORD. That was one of the units in the Group. Mr. PECORA. Yes. Mr. LORD. Mr. Shorts was very anxious to help Mr. Brewer. He apparently talked it over with his associates up there and suggested that their bank would be willing to declare to the Group Co. a dividend of approximately $15,000 if the Group Co. would help out

Mr. Brewer. Now, the Group Co. did loan that money finally to Mr. Brewer. The exact amount I think was $15,000. Mr. Brewer was the head of the two Grand Rapids institutions. It was felt by the Group Co. that it would be very unfortunate if Mr. Brewer was plunged into financial difficulties. "It would be unfortunate for the institutions in Grand Rapids.

Now, that is very largely hearsay. I did not handle the loan. It was a matter either with Mr. Shorts or with Mr. Brewer.

Mr. PECORA. Are you sure that that is all hearsay?

Mr. LORD. I would say most of it. I knew that the loan was made. But according to my recollection it was—I may have had some part in part of it.

Mr. PECORA. Now, the reason I asked you that question is because I have copy of what purports to be a memorandum dated January 13, 1933, and which is captioned "Memorandum of understanding between Messrs. Shorts, Bodman, Brewer, Kanzler, Longley, and Lord.” For your information I will read that memorandum and see if it refreshes your recollection.

Mr. LORD. It may.
Mr. PECORA [reading]:

Upon the representation of Mr. Brewer that he was unable to meet interest payments on his obligations in Grand Rapids with the Grand Rapids National Bank, the Grand Rapids Savings Bank, and the old Kent Bank and with the Manufacturers Trust Co. of New York, and that he had requirements from the beginning of the year until September of some $38,000 to maintain his life insurance and his interest payments, and upon a further showing that he needed $15,000 at once to carry him until April 1, and by the further statement that he felt he could take care of these interest and insurance obligations out of receipts that he would acquire from his two hotel properties, the Pantland Hotel and the Morton House in Grand Rapids, it was decided that $15,000 would be loaned to Mr. Brewer upon Pantland Hotel stock, value $45,000.

It was a further part of this arrangement that Mr. Shorts would arrange to have the dividend of the Second National Bank & Trust Co. declared at as early a date as possible in order to reimburse the Group Co. for this disbursement.

This whole loan is made on the sole basis that it is to the interest of the Group Co. that, particularly at this time, no disturbance arises in Grand Rapids as a result of Mr. Brewer's being unable to meet these payments, which disturbance it is agreed is very likely to arise and seriously affect our Grand Rapids unit. It is felt that this arrangement is to the interest of the New York and Chicago banks who have a large interest in the Group Co.'s units continuing without any unnecessary disturbance, particularly at this time, while other major matters are being arranged for.

Mr. LORD. That is in line with my statement to you, is it not!
Mr. PECORA. Yes; substantially so.
Mr. LORD. That is my understanding.

Mr. PECORA. Yes; I would be disposed to compliment you on your recollection of this.

Mr. LORD. Thank you, sir.

Mr. PECORA. Now, it is clear, is it not, that in January of this year the situation presented by this memoraudum was that Mr. Brewer needed immediately $15,000 to take care of certain pressing obligations; that the Group made him a loan of $15,000 to accommodate Mr. Brewer and enable him to take care of his private obligations, but that the Group, as part of the arrangement for the making of that loan to Mr. Brewer, had arranged with Mr. Shorts,

the head of the Saginaw bank, the Second National Bank & Trust Co., to have that bank declare a special dividend which would be paid to the Group as a stockholder of the Saginaw bank in an amount that would more than cover the $15,000 loan which the Group made to Mr. Brewer?

Mr. LORD. I think that is so, and I see nothing out of the way with it. If the Saginaw bank's earnings were sufficient to declare a special dividend of $15,000 to the Group and the Group cared to loan it to Mr. Brewer on his security, I see nothing out of the way about it.

Mr. PECORA. You see nothing wrong with a unit bank declaring a special dividend !

Mr. LORD. No.
Mr. PECORA. Which was to be paid to the Group?
Mr. LORD. Yes.

Mr. PECORA. In order to reimburse the Group for the making of a loan to Mr. Brewer?

Mr. LORD. With security as collateral.

Mr. PECORA. You thought that was a proper exercise of the Group's influence over its unit bank, did you?

Mr. LORD. Do you think it was the Group's influence ?
Mr. PECORA. What is that?

Mr. LORD. I don't think it was the Group's influence. I think this suggestion probably came from Mr. Shorts.

Mr. Pecora. Did Mr. Shorts suggest that the Group make this loan to Mr. Brewer and in return for the making of such loan his bank would declare a special dividend which would be paid to the Group and the amount of which would more than cover the loan?

Mr. LORD. Mr. Pecora, I am quite certain that nobody in the oper: ating heads, either Mr. Kanzler or myself, of the Group, suggested to the Saginaw bank that they declare the dividend to help Mr. Brewer. The suggestion must have come from Mr. Shorts.

Mr. PECORA. Well now, this memorandum that I have read to you is entitled, I repeat, “ The memorandum of understanding between Messrs. Shorts, Bodman, Brewer, Kanzler, Longley, and Lord.”

Mr. LORD. Yes. Mr. PECORA. Now, Mr. Shorts was the executive head of the Saginaw bank, was he not? Mr. LORD. Yes, sir. Mr. PECORA. Mr. Bodman was not connected with the Saginaw bank, was he? Mr. LORD. No, sir. Mr. PECORA. Mr. Brewer was not connected with the Saginaw bank, was he? Mr. LORD. No, sir.

Mr. PECORA. Mr. Kanzler was not connected with the Saginaw bank, was he? Mr. LORD. No, sir. Mr. PECORA. Mr. Longley was not, was he? Mr. LORD. No, sir. Mr. Pecora. And you were not ? Mr. LORD. No, sir.

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