with it. I assume that the principal function was just what I saidin order to put in one basket and under one control the liquidation of the assets that had been lifted out of the unit banks; not while they were still in the unit banks, but after they had been lifted out. Mr. PECORA. How were those assets lifted out of the unit banks prior to the incorporation of the Congress Corporation?

Mr. LORD. By the group paying cash for them at the figures at which they stood on the banks' books.

Mr. PECORA. And by so doing the Group Co. assumed certain contingent liabilities?

Mr. LORD. I do not know how you can assume a contingent liability by buying the note of some borrower or some bonds that are in default. I do not know what contingent liabilities he has in mind.

Mr. PECORA. Mr. Huelsman specifically says that—

In the process of liquidation of these companies and assets-
Meaning the Group Co.-

we will probably encounter from time to time contingent liabilities and possibly
lawsuits, some of which may involve considerable sums of money.

Mr. LORD. I understand he said it, but I do not know what he was referring to.

Senator COUZENS. Were those assets taken out of your constituent banks at what they cost the constituent banks?

Mr. LORD. As they stood on the books, Senator. They might be written part way down by the time we bought them.

Mr. PECORA. And the funds that the Congress Corporation obtained in order to purchase those assets for the purpose of taking them out of the unit banks were received as loans from the Group Co.?

Mr. LORD. That is correct, sir. That is my understanding of it. Mr. PECORA. And the Group Co. received as security for those loans these so-called "undesirable assets"?

Mr. LORD. Yes, sir.

Mr. PECORA. By the process of the Group Co. not taking over those undesirable assets directly from the banks, and by the process of the organization of this Congress Corporation to do that specific thing, the Group Co. placed itself in a position where it was free from incurring contingent liabilities referred to by Mr. Huelsman, did it not?

Mr. LORD. I should say that is a legal question. I would think it did; yes.

Mr. PECORA. As a matter of fact, how much of a loss accrued to the Congress Corporation by taking these undesirable assets from the unit banks?

Mr. LORD. I cannot tell you. I have not the figures. They are still working on the liquidation.

Mr. PECORA. Have you no idea at all?

Mr. LORD. I suppose a very substantial loss.

Mr. PECORA. By that how much do you mean?

Mr. LORD. Several millions.

Mr. PECORA. Can you not give it to us more closely than several millions?

175541-34-PT 10-30

Mr. LORD. I cannot. I know that $8,400,000 of assets were lifted out of the unit banks in a period of 2 or 3 years. How much they have gotten in the way of recoveries or how much there is that is recoverable I do not know.

Senator COUZENS. The group had to borrow the money, however, to lift out those assets?

Mr. LORD. It did. It borrowed the money to protect those banks. Mr. PECORA. Did you notice this expression of Mr. Huelsman's in this memorandum reading as follows [reading]:

The Group Co. then becomes purely a holding or group management company which will direct and coordinate the efforts of all the group units?

Mr. LORD. I heard it.

Mr. PECORA. Apparently, Mr. Huelsman was of the opinion that the Group Co. was directing and coordinating the efforts of all of the units of the group?

Mr. LORD. He was correct as to coordinating, but not as to directing. What is the date of that, Mr. Pecora?

Mr. PECORA. It is dated February 25, 1932.

Mr. LORD. Well, that was very shortly after Mr. Huelsman came with the Group Co., and probably he wasn't acquainted with the policies of the company at that time.

Mr. PECORA. Well, apparently the fact that he had just come there and that he had become imbued with the idea that the Group Co. was directing the efforts of the various unit banks, was due to the fact that it was so readily apparent even to a casual observer, isn't that it!

Mr. LORD. I don't think so.

Senator COUZENS. Well, Mr. Lord, do you know the difference between coordinating and directing?

Mr. LORD. We tried to confer with the banks and to help them, which I would call coordinating. But directing is what I would call running them.

Senator COUZENS. How can you coordinate if you cannot direct! Mr. LORD. We can advise.

Senator COUZENS. That is in the nature of advisory work, then? Mr. LORD. All right.

Senator COUZENS. You are really not capable of coordinating, if you do not direct, as I take it.

Mr. LORD. I think you can help them.

Mr. PECORA. Mr. Lord, I want to show you a typewritten report or statement entitled:

CONGRESS CORPORATION

Assets Purchased from Units

Will you look at it and tell us if you can identify it as being a true and correct statement of the amount of assets purchased from the units by the Congress Corporation at various times?

Mr. LORD. Well, that is the approximate figure. I do not remember each one, whether it is correct, or not.

Mr. PECORA. Is that approximately correct, at least?

Mr. LORD. That is my recollection.

Mr. PECORA. Mr. Chairman, I offer it in evidence.

Senator COUZENS (presiding). Without objection it will be received and placed in the record.

(The statement entitled "Congress Corporation; assets purchased from units", was marked "Committee Exhibit No. 114, January 23, 1934", and will be found at the end of the day's proceedings.)

Mr. PECORA. This statement has been received as committee's exhibit no. 114, and shows that the total amounts paid in the purchase of assets from the different banking units was $8,414,501.28. Now, Mr. Lord, entirely apart from this statement, when you first appeared before the committee you gave some testimony relative to the approval that Mr. Bonthron, of Price, Waterhouse & Co. had expressed of the form of consolidated statements of conditions which the Guardian Detroit Union Group had issued at various times. Do you recall that?

Mr. LORD. I think the question was, including the consolidated earnings statement, as against the separate statement of the Group Corporation that we were discussing at that time.

Mr. PECORA. And you stated that the method adopted by the Group Co. had received the approval of Mr. Bonthron, and I then asked you to have Mr. Bonthron, or any other representative of Price, Waterhouse & Co. come before this committee to testify to that? Do you remember that request?

Mr. LORD. No. I think you said you might want him. You didn't ask me to get him.

Mr. PECORA. Oh, no. I made the suggestion to you to bring him. Mr. LORD. Well, I am sorry.

Mr. PECORA. Have you received, since you gave that testimony, a letter from Price, Waterhouse & Co., addressed to you, and dated January 8, 1934, and which letter I now show you?

Mr. LORD. I did. That letter was written to me at my suggestion. When I returned to Detroit after I had testified about that matter, I saw Mr. Bonthron, and he said that apparently there was some misunderstanding on the part of some of his partners as to just what advice they had given us. I then said to Mr. Bonthron: "Will you write me a letter and state exactly what you have done? Then I will be glad to put it before the committee." And this is the letter he wrote. My discussion with Mr. Bonthron was exactly as stated in this letter, as to the propriety and correctness of making a consolidated statement of all the units of the group, including the Group Co. itself. That is the reason for this letter.

Mr. PECORA. In that letter Price, Waterhouse & Co. have expressed the wish that the statement be brought to the attention of his committee.

Mr. LORD. Yes, sir; and that is why I have brought the letter. Mr. PECORA. In view of that situation, I think the letter should be offered in evidence, Mr. Chairman.

Senator COUZENS (presiding). The letter will be received in evidence.

(A letter dated Jan. 8, 1934, written by Price, Waterhouse & Co., and addressed to Robert O. Lord, Detroit, Mich., was marked "Committee Exhibit No. 115, Jan. 23, 1934 ", and will be found immediately following where read by Mr. Pecora.)

Mr. PECORA. The letter is on the letterhead of Price, Waterhouse & Co., Penobscot Building, Detroit, and is as follows [reading]:

Mr. ROBERT O. LORD,

Detroit, Michigan.

JANUARY 8, 1934.

DEAR SIR: Our attention has been directed to newspaper accounts of your testimony in Washington on Thursday, January 4, 1934, before the Senate Committee on Stock Exchange Practices in which the statement was made that our Mr. Bonthron approved the form in which the annual accounts of Guardian Detroit Union Group, Incorporated, and its subsidiary companies were reported to its stockholders.

Since the statement as made by you may be misinterpreted and you have expressed readiness to make further explanations or amplification so that your testimony may be made entirely clear we are addressing this letter to you.

The exact facts are as follows: We have not at any time made any examination of the accounts of the company or any of its subsidiaries, and we there fore have no knowledge of any of the figures contained in the annual reports. The only time that the matter was before us was when you discussed it with Mr. Bonthron about 2 weeks ago. At that time he merely stated that the form of the consolidated statement of earnings, such as was adopted by you in 1929 when the company was formed, was an appropriate statement to the stockholders of the company.

We shall appreciate your bringing this matter promptly to the attention of the chairman of the committee, so that the necessary clarification may be made in the record.

Yours very truly,

PRICE, WATERHOUSE & Co.

Now, Mr. Lord, you have given me a rather voluminous document purporting to be a statement of views and opinions which you were good enough to reduce to writing at a suggestion made by me and attachés of the investigating staff of this committee.

Mr. LORD. Yes, sir.

Mr. PECORA, I show you what purports to be a copy thereof, and ask you if you can identify it as such true and correct copy? Mr. LORD. It looks like it.

Mr. PECORA. Have you another copy of it?

Mr. LORD. Yes; I have. Do you want another one?

Mr. PECORA. No; this will suffice for me. Now, Mr. Chairman. I offer it in evidence.

Senator COUZENS (presiding). It will be received and spread on the record, if that is what you wish, Mr. Pecora ?

Mr. PECORA. No; it is too lengthy, but for the information of the committee I will read a part of it, because it contains what, in my opinion, are very interesting views, and perhaps some members of the committee will want to question Mr. Lord about some of those

views.

Senator COUZENS (presiding). The entire statement will be received and marked as an exhibit, and therefore become a part of the records of the subcommittee, without being spread in full upon the record.

(The statement of views and opinions prepared by Robert O. Lord, was marked "Committee Exhibit No. 116, Jan. 23, 1934," and will be held in the files of the subcommittee, only that portion which Mr. Pecora read later on in the proceedings, being spread on the record.)

Mr. PECORA. The first part relates to conversations in which the witness was asked to prepare the statement of recommendations, and so forth, for this subcommittee; and then follow the witness' recommendations, which I will read for the benefit of the members of the committee, as follows:

The business of banking may be divided into four general classifications: First-Commercial Banking

Second Savings Banking
Third-Investment Banking

Fourth-Fiduciary or Trust Company Activities

If I sense the needs in these four types of banking and the aims of this Committee and of legislators, it is to provide in their order of importanceFirst-Safety of deposits

Second-Ability of financial institutions to function to the greatest possible extent to aid industry, commerce, agriculture, the individual, and the community

Third-Safety of investments and the greatest possible protection to the investor

Fourth-Capable fiduciary management, for the conservation and management of the property of estates and individuals.

Banks and Trust Companies may be classified as unit banks, group banks, or branch banks, with a substantial proportion of the institutions in the United States included in each class, and with arguments in favor of each. To attempt to discourse upon the advantages or disadvantages of each of these types would involve an endless discussion.

What we are all of us seeking is a better, stronger, and safer banking structure which can not only function smoothly and effectively in periods of normal business prosperity, but with the strength and flexibility to withstand the shocks of a severe depression and with the ability to contribute its full share toward a recovery in business from the depths of our present depression or any similar one in the future.

It would seem to me that one of the most important steps to be taken would be the inclusion of all banks in the nation in a single system under the national laws and under competent national supervision-operating under one banking law, rather than as at present having 48 separate state banking laws and one national banking law-49 in all.

Possibly the Banking Act of 1933 which, through its guaranty of deposits provisions, forces membership in the Federal Reserve system, is the first step in such direction. The ability of the separate states to tax banks and trust companies incorporated under state laws seems to be one of the principal reasons for the states' objection to a single national system, but this question could undoubtedly be satisfactorily settled by the national government taxing the national banks on an equitable basis and turning over the receipts of some portion of them to the respective states in which the banks are located.

The question of branch banking, within state lines, within trade areas, within Federal Reserve districts, and nation-wide, has been hotly argued for the past three years and longer. The strength of the British and Canadian systems is a strong argument in favor of a nation-wide or even state-wide branch banking. Personally, I believe we shall eventually come to branch banking over extended areas even though not so far-flung as nation-wide-within the next decade. The curtailing of some of the functions formerly carried on by banking institutions and very properly so-has made it increasingly difficult for the bank of small or even moderate size to earn a reasonable return on its invested capital and at the same time set aside ample reserves for losses. A branch with deposits of as small an amount as $1,000,000 can be made to pay, whereas, as a unit bank, such an amount of deposits makes it difficult if not impossible of operation at a profit. The small community is entitled to the same degree of safety, the same quality of service, and the same ability in management as the large city, and this can more likely be secured through branch banking than through the unit banks. I do not mean in any way to reflect upon the well-run and conservative small bank that is occasionally seen.