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ants came to me and made preliminary arrangements to conduct an examination. The bank was quite a large one, Mr. Pecora

Mr. Pecora. Which bank are you referring to?

Mr. PATTERSON. The Guardian National Bank of Commerce, of Detroit, Mich. The bank had 28 branches, and part of its operations were conducted in what we call the Union Guardian Trust Building, and a part of its operations were conducted in the Penobscot Building. It was his first examination of the bank, and he came to see me to learn what the physical layout of the institution was, to determine where the branches were located, where the loans and discounts were handled, and with regard to the large office in the Boulevard District, in the General Motors Building.

Mr. PECORA. Is that the only instance that you recall?

Mr. PATTERSON. I do not remember any other. I believe we participated with the national bank examiners—I am referring now to the examiners of the Group corporation--I believe we partieipated with the national bank examiners an examination of the Grand Rapids National Bank at one time.

Mr. PECORA. Under what circumstances was that done?

Mr. PATTERSON. After the national bank examiners had taken charge of the bank for examination we were notified and sent men over there to participate with them rather than to discommode the bank with two examinations.

Mr. PECORA. Do you recall receiving a letter dated December 17, 1931, from Mr. Leyburn, then chief national bank examiner, a photostatic copy of which I now show you?

Mr. PATTERSON. Yes; I recall this letter.

Mr. Pecora. That was another instance, was it not, where you received notice in advance that an examination was going to be made of the bank on a certain date?

Mr. PATTERSON. Yes, apparently; although it does not state that an examination is to be made.

Mr. PECORA. What does it state? Suppose you read the letter, yourself, into the record while you have it before you.

Mr. PATTERSON. It is addressed to me. [Reading:]

Hopkins will be in Detroit Saturday morning with Norsen and McLean to line the work up and start it off. He will have to be away Monday and then he will return and he will have some more help.

Mr. PECORA. What did you think these examiners were coming there for?

Mr. PATTERSON. I would think now it was for the purpose of some examination; but I do not just recall what this particular instance was.

Mr. PECORA. Will you look at this document which I now show you and which purports to be a photostatic reproduction of an intraGroup memorandum addressed by you to Messrs. Lord, Kanzler, Covington, and Walsh, under date of December 18, 1931, and tell me if you recognize it to be a correct copy of such a memorandum prepared and sent by you to the gentlemen to whom it is addressed?

Mr. PATTERSON. Yes; I recall it.
Mr. PECORA. I want to offer that memorandum in evidence.
The CHAIRMAN. Let it be admitted.

(Photostatic copy of memorandum dated Dec. 18, 1931, addressed by Mr. Patterson to Messrs. Lord, Kanzler, Covington, and

Walsh, was received in evidence, marked "Committee Exhibit No. 57, Jan. 3, 1934.")

Mr. PECORA. The memorandum in question that has just been received in evidence as Committee Exhibit No. 57 is on the letterhead of the Guardian Detroit Union Group, Inc., an Intra-Group memorandum to Messrs. Lord, Kanzler, Covington, and Walsh from B. K. Patterson, dated December 18, 1931, and reading as follows (reading):

You are advised that the chief national bank examiner informs me, under date of December 17, that National Bank Examiner Hopkins and two assistants will be in Detroit Saturday a.m., December 19, for the purpose of beginning the work of the examination of the Guardian Detroit Bank. Mr. Hopkins cannot be here on Monday, December 21, but will leave his assistants here to continue the work of examination, and Mr. Hopkins is to return on Tuesday to finish the job.

What were you going to say about it?

Mr. PATTERSON. I was going to say this, that arrangements had been made for a consolidation of the National Bank of Commerce and the Guardian Detroit Bank, the latter being a State bank, and we had made arrangements with the Comptroller's office and had requested, in fact, that an examination of the Guardian Detroit Bank be made, and I had contacted Mr. Leyburn to ascertain when the examiner and his crew of men would be over to the State bank, the Guardian Detroit Bank, for that purpose. We had ordered the examination ourselves incident to the consolidation of the two banks.

The CHAIRMAN. Which bank was it that you said had 28 branches?
Mr. PATTERSON. The National Bank of Commerce.
The CHAIRMAN. They were all in Detroit?
Mr. PATTERSON. Yes, sir.

Mr. PECORA. Did you know with reference to the dividend that was declared for the last quarter of 1932 by the Guardian National Bank of Commerce that in his report on the bank as of November 9, 1932, the national bank examiner said, in answer to the question, “State reason, if any, why bank should not declare a dividend at the end of current dividend period”, as follows: Statutory bad debts, doubtful assets and bond depreciation prohibit. Did you know that?

Mr. PATTERSON. No, sir; I have never seen that report, Mr. Pecora.

Mr. PECORA. Let me read to you from the report of the National Bank Examiner as of November 9, 1932, on the condition of the Guardian National Bank of Commerce, as follows: (reading):

At the present time a cooperative spirit toward the Department is evident throughout this bank and their credit department and loan information is far above the average. Also asset values are frankly discussed with the Department's representatives. This same spirit is not reflected in the Group by President Lord. It is believed that Vice President Covington of the bank should be given full credit for the attitude in the bank, the improved condition of its loans, and its very material improvement in its liquidity which is now 40.5 or better on an average. However, in considering its liquidity full consideration should be given to the vulnerable position of the bank as reflected in the attached list. The real-estate situation in the bank is serious, and at the present time it is very difficult to determine values of any Detroit property. It is felt that eventually substantial losses will develop in some of these assets. The concentration in collateral of Guardian Detroit Union Group and Detroit Bankers Co. stocks is outFageous, and little if any value is given to either of these stocks by the examiner. Some time ago the Detroit banks took over the American State Bank to avert closing, and proportionately guaranteed the First National Bank, the absorbing bank, against loss. This bank's share is 18 percent. The reserve fund upon the books of the bank has unquestionably lost $1,600,000, and an arbitrary default classification of an additional $1,500,000 is estimated at this examination, although even this figure is believed to be a generous classification.

Much depends in this institution on how much confidence the public will continue to place in the connection of Edsel Ford and C. S. Mott with this bank and whether they will continue to assist. This will depend upon the trend of business at the present time.

Under the caption of "General Remarks" let me read the following from this report as of November 9, 1932 (reading]:

The condition of this bank is very unsatisfactory, and the stock ownership by the Guardian Detroit Union Group adds nothing to strengthen the picture. "The Group has heavy debts of its own, approximately $14,000,000, and it is necessary for them to find ways and means to liquidate some of their own debts and have no funds nor assets with which to assist the member banks. The Group assets consist almost entirely of bank stocks which are not productive of dividends. It was frankly stated that the Group were very much interested in national legislation in hopes that state-wide branch banking will be legalized and in that way rearrange their capital structure in such a way as to provide substantially for elimination of losses in their member banks. Just how far its capital structure will go toward the accomplishment of this end is a problem, but it should only be permitted to be done under the direct supervision of the Department. The losses of this bank as estimated at this examination are nominal as compared with the very questionable assets that it was desired to eliminate, and it was felt that in view of impending legislation it would be the most desirable thing from the Department's viewpoint to postpone such classification until some future time when the possibility of using a portion of the Group's capital structure can be determined.

Under the circumstances reflected by this report, do you think the declaration of a dividend for the final quarter of 1932 by this bank was advisable or justifiable?

Mr. PATTERSON. No, sir.

Mr. PECORA. In the light of the condition of the bank as disclosed by these reports of the national bank examiners throughout the year 1931 and the year 1932, do you agree with the opinion expressed here by Mr. Lord before this committee week before last, that this bank should not have been closed when it was closed, in February 1933?

Mr. PATTERSON. Yes, sir; I do.
Mr. PECORA. You do?
Mr. PATTERSON. Yes, sir.

Mr. PECORA. Do you disagree with the report of the national bank examiners that I have read to you this afternoon?

Mr. PATTERSON. I think that their classifications were pretty drastic at that time, throughout 1931 and 1932.

The CHAIRMAN. What do you mean by “classifications”?

Mr. PATTERSON. I mean the classification of its assets, as to slow and doubtful, or loss. I think that that is borne out pretty much by what has happened since the bank has been in the hands of a receiver, and what is very likely to happen in the final liquidation of the bank.

The CHAIRMAN. In other words, you think the bank was solvent when it was closed?

Mr. PATTERSON. I think it was; yes, sir.

Mr. PECORA. And that despite the fact that doubtful loans, the item of doubtful loans alone, as of November 9, 1932, exceeded in amount the entire capital funds of the bank?

year 1932?

Mr. PATTERSON. That classification was made at the very lowest point in all price history, almost, of this country; and in addition to that I still say that the classifications were quite drastic. I think that bank could have been saved.

Mr. PECORA. What report had your own examiners made to you for the year 1932 concerning this bank?

Mr. PATTERSON. We had not been able to get into the bank in the year 1932 with our own examiners.

Mr. PECORA. Why not? Mr. PATTERSON. Because in the spring of that year, in March, it became necessary to economize more and more in the Group Corporation, and all the examiners attached to the Group Corporation were assigned to other duties, and practically no examination work was done during that year by the Group Corporation.

Mr. PECORA. This bank was one of the most important units in the group, was it not?

Mr. PATTERSON. That is true.

Mr. PECORA. Why were you not able to obtain a report from your own examiners of the condition of the bank for the entire

Mr. PATTERSON. I just said, Mr. Pecora, that in the interests of economy we had detached all the examiners from the Group Corporation and assigned them to other duties, and all examination work on the part of the group was discontinued approximately the 1st of March 1932.

Mr. PECORA. Then how were you informed as to the condition of the bank in 1932?

Mr. PATTERSON. Only by contact with the officers of the bank. Mr. PECORA. That contact, or that information, did not consist of any information you got from any of the national bank reports for that year, because you have acknowledged this afternoon that you are learning of the contents of these reports for the first time this afternoon.

Mr. PATTERSON. Yes.

Mr. PECORA. It did not consist, either, of any information you got from examinations made by your own men, did it?

Mr. PATTERSON. No, sir.

The CHAIRMAN. In other words, you had not made any classifications of your own?

Mr. PATTERSON. No, sir.
The CHAIRMAN. You were not in a position to criticize?
Mr. PATTERSON. We had not made any examinations during 1932.

Mr. PECORA. Was not that the time when, in view of existing conditions, it seemed most imperative to you that such examinations be made?

Mr. PATTERSON. Yes, sir.

Mr. PECORA. And in the interests of economy those examinations were not made?

Mr. PATTERSON. Apparently.
Mr. PECORA. Well, actually?
Mr. PATTERSON. Actually, yes, sir.

Mr. Pecora. Mr. Chairman, that completes this phase of the examination.

175541-34—PT 9. -21

But, Mr. Chairman, I think this letter, which was read, in part at least, into the record by Mr. Patterson, should be marked as an exhibit.

The CHAIRMAN. Let it be appropriately marked.

(Thereupon the letter dated Jan. 10, 1929, from Mr. Proctor to National Bank Examiner Moon, was marked " Committee Exhibit No. 58," and will be found at the end of the day's proceedings.)

The CHAIRMAN. The committee stands adjourned until 10 o'clock tomorrow morning.

Mr. PECORA. Witnesses now in attendance will be here at that time.

(Whereupon, at 4:30 p.m. Wednesday, Jan. 3, 1934, an adjournment was taken until tomorrow, Thursday, Jan. 4, 1934, at 10:30 a.m.)

COMMITTEE Exhibit No. 58 JANUARY 3, 1934

TREASURY DEPARTMENT,

January 10, 1929. Mr. EARL W. MOON, National Bank Examiner,

164 West Jackson Blv'd., Room 1203, Chicago, Illinois. DEAR SIR: Your letter of January 4, is received, requesting an answer to your letter of December 19.

You state that the officers, directors, and stockholders interested in the Union Trust Company, the Griswold-First State Bank, and the National Bank of Commerce, all of Detroit, Michigan, have organized a corporation known as the Union Commerce Investment Company; that this corporation is in reality a holding company for the stock of these three institutions; that the assets of the Union Commerce Investment Company consist of the total capital stock of these three institutions except the directors' qualifying shares, and request to be advised whether the National Bank of Commerce may lawfully, and without criticism, hold stock of the Union Commerce Investment Company as collateral to loans.

The stock of the corporation referred to is not capital stock of the bank within the meaning of Section 5201, U. S. R. S., even though a part of its assets consist of stock of the bank. The matter of accepting stock of the company as collateral to a loan is one for the determination of the management of the bank, although this office does not look with favor on loans secured by stock of a company so closely allied to the bank and having little or no assets other than stock in banks, national and state.

Your letter of December 19 was inadvertently placed in the files before being answered. Respectfully,

John S. PROCTOR,

Deputy Comptroller.

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