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unusual amount of deposits, it might have had very substantial withdrawals in the normal course of business; or, in adjusting its reserve position with the Federal Reserve Bank, it might possibly have made a one-day or a twoday loan. It would seem therefore, that a truer picture could be given to the public if every bank were required to publish not only the figures of a particular date but also, directly alongside of these figures, comparable items showing the average figures for the period from the date of the last preceding published statement. The form of such statement could readily be prepared by the Comptroller's Department or by the Federal Reserve Bank to give the average citizen a reasonably clear picture of the bank and its condition.

I recommend the reduction in the number of members of the Boards of Directors of banks to a point where the Boards are composed of men who can and will give the affairs of the bank their thorough and active attention. Such Board members should be properly compensated and should fully share with the officers of the bank the responsibility of the management. Too often have men been placed upon bank Boards because of the influence of their names and positions rather than for their ability or wisdom in banking affairs. Possibly this cannot be accomplished by any form of legislation. Certainly it could be adopted in policy by the institutions themselves and with resultant improvements in bank management.

In the search for ways and mears of strengthening the banking structure of the nation, there have been suggestions for the sererance of savings banks from commercial banks, or if trust and fiduciary activities from both commercial and savings banks. While there are many arguments both for and against such procedure, I see no immediate reason for any of these moves. If necessary or advisable, savings assets can be clearly segregated from assets of the commercial banking department. The events of the past two years have proved that savings banks must retain a degree of liquidity just as high if not higher than commercial banks. Savings deposits have proven to be even more likely of withdrawal than commercial deposits at a time when fear and panic prevail. Should nation-wide branch banking be permitted, then these aforementioned activities could profitably and properly be segregated but at present in only the very large cities can there be found sufficient business to support an institution doing only a fiduciary business or only a commercial banking business.

Before closing my comments on the question of commercial and savings banking, I want to take the liberty of issuing a word of warning to the members of this committee whose influence is so powerful in shaping banking legislation. This nation of ours—the most progressive in the world in the development of industry and commerce-was without doubt materially aided along these lines by the courage, foresight, and vision of its bankers. I do not in any way condone the rank and unwarranted speculation of 1928 and 1929, and I am heartily in sympathy with any and all sound legislation. My warning is this: That you cannot legislate brains and ability. Do not injert into the business of banking too much governmental interference for you may stifle initiative and vision to such an extent that the harm to the future growth and development of the business of this country may be vastly greater than the moderate losses taken in a proper banking risk. Bank salaries may have in many cases been too high, but do not by legislation or governmental authority so restrict them that real ability and talent will be driven to other lines of endeavor willing to pay for such ability.

I have already mentioned among the four general classes into which banking may be divided one of the most important-"investment banking "-and in its own proper function it is just as vital to the prosperity and business life of the nation as is either commercial banking or savings banking.

The Securities Act of 1933 passed by Congres on May 27, 1933 was an effort to prevent so far as possible a repetition of the excesses and mistakes that occurred in the securities business in the recent speculative period ending in the Fall of 1929. Apparently and very properly the purpose of the Act is to protect the investor by requiring full and complete publicity of all pertinent facts and likewise to fix responsibility. This should not only afford protection to the investor but also to the honest and conscientious investment banker against unfair competition and practices of unscrupulous promoters and dishonest dealers.

Unfortunately, as the Act was drawn certain provisions are so in need of clarification or are either so unworkable or drastic in their effect is to have exactly the opposite result froin the real intention of the law.

There is already evidence that the act is hampering the free flow of capital to industry, thereby retarding the National Recovery Program. As a practical matter, the effect to date has been to almost completely stifle new financing by legitimate business enterprises and seriously interfere with the normal operations of reputable dealers in securities. Underwriting houses have found it impossible, or at least have deemed it inadvisable to make firm commitments in connection with new issues to be registered under the Act. Some corporations faced with the early maturity of an issue of bonds are deeply concerned over their ability to refund the issue through new public financing and as a result face the possibility of receivership. It is probable that there will be an increasing number of such cases. Numerous short-term loans now in com. mercial banks incurred with the expectation that they would be paid through the marketing of an issue of securities have become frozen loans. This has tied up funds otherwise available for commercial credit and has made the banks more cautious in their lending policies to other business enterprises. Trading has also been seriously retarded in securities which were outstanding when the Act was passed and therefore exempt from registration thereunder.

In addition to the underwriting and distributing of new securities issues, a substantial part of the business of investment dealers has in the past consisted of the purchase and resale of securities already outstanding, which issues the house in question has previously handled. Purchase of these securities from investors desiring to sell them and their redistribution to other investors provides about the only market available for many issues which are not listed on the Exchange. Almost without exception reputable and responsible investment dealers have found it necessary to refuse to give out to customers owning securities such information as the investor in the normal course of business would be entitled to have regarding the Company's operations and earning, these investment dealers being unwilling to assume the unknown liabilities involved in furnishing information to investors.

While it is conceded that no particular piece of legislation of this type can ever be entirely satisfactory to everyone concerned, without doubt the present Art can and should be reviewed so that its primary purpose can still be carried out and at the same time some of the objectionable features eliminated or modified so as to perimit responsible investment dealers to discharge their duties to their customers and to render a satisfacory investment banking busiuess to the corporation whose financing they have handled in the past.

Statements have recently appeared in the press to the effect that there is a more or less concerted strike on the part of investment dealers in a deliberate effort to show that the Securities Act is unworkable to the end that a revision of the Act can be obtained. It would seem to me that these statements are far-fetched and unwarranted. It is, of course, true that both conservative investment dealers and responsible issuers have been reluctant to incur the liabilities involved in doing new financing under the Securities Act in its present form. Unfortunately, it is the new promoters and high speculative companies that have no financial background that tind it easiest to comply with the technical requirements of the Act. Many of the largest corporations which now enjoy the highest credit standing would probably find the greatest difficulty in complying with the present law. As a result, most of the issues which have been registered to date with the Federal Trade Commission have consisted of stocks of investment trusts, new mining and oil companies, and new distillery or brewery company.

Similarly, the promotional and financially irresponsible investment dealer has little or nothing to fear from the liabilities imposed by the Act and investors are not likely to find such protection offered by the Act in case they buy securities from this class of dealer. On the other hand, the most conservative and financially responsible investment banking firm would find the greatest difficulty in conducting a normal securities business under the Act, and naturally until a number of decisions have been handed down in the courts clarify. ing and interpreting the various provisions of the Statute, these firms are the ones which are most likely to be the subject of annoying and expensive suits brought by “sharpshooters and shyster lawyers."

I have attached to this written statement detailed suggestions on the various provisions of the Act. In view of the time of this committee which I have already consumed, I will not attempt to read into the records of this committee all of these details which are, however, available if desired.

Then follows a so-callled “exhibit A”, entitled “ Specific Recommendations for Amedment to the Securities Act of 1933."

Senator Couzexs. Mr. Pecora, do you want to read them!

Mr. PECORA. I will not take the time to read them. They will be made available to the committee.

Senator COUzexs. Very well.

Mr. Pecora. Now, Mr. Lord, is there anything that you particularly want to call attention to?

Mr. LORD. No. I tried to cover it briefly.

Mr. PECORA. There are a number of views expressed by Mr. Lord in this prepared statement of his that, if time permitted, I should like to question him about. But perhaps that might be reserved for some future time. However, I do want to call his attention to this statement contained in his prepared statement:

This Nation of ours—the most progressive in the world in the develop ment of industry and commerce_was without doubt materially aided along these lines by the courage, foresight, and vision of its bankers.

Mr. Lord, don't you think that a very substantial responsibility rests at the door of bankers, so-called, for the debacle of 1929 and what has followed since?

Mr. LORD. I think it might be equally divided between the public and the bankers, Mr. Pecora. I do not think that any single class, industry or business or individuals, can be handed that responsibility or that blame. I think we were all at fault, bankers as well as others.

Mr. PECORA. Wasn't the policy of banks and bankers such as to advertise that they would advise their depositors and customers with regard to the making of investments ?

Mr. LORD. Yes, I think it was generally so. And some gave good advice and some gave bad advice.

Senator TowxSEND. And some advice that ther thought was good turned out bad, and

Mr. LORD (interposing). Yes, sir.

Senator TOWNSEND (continuing). And some that they thought was bad might have turned out good?

Mr. LORD. Well, I don't know about that.

Mr. PECORA. At any rate, securities affiliates of banks, organized selling campaigns to sell securities which they issued and underwrote, and which they underwrote under circumstances that charged them with knowledge as a result of reports made to them by their own observers and experts, and that put a very full responsibility upon them. For instance, in the case of Peruvian bonds, issued by J. & W. Seligman & Co. and the National City Co., evidence of that was presented to this committee last February, as you will recall, when 90 million dollars of bonds of the Peruvian Government were sold to the American public by the National City Co. and J. & W. Seligman & Co.

Senator TOWNSEND. Oh, that was indefensible.

Mr. PECORA. As I recall the evidence introduced last February, the National City Co. had been advised by its own experts that it was a bad risk.

Senator TOWNSEND. Well, that was indefensible.
Mr. PECORA. I think that is all, Mr. Lord.

Senator COUZENS. I want to ask Mr. Lord one thing with respect to group banking. It appears that when the Group Co. was organized in Michigan, there was specifically drawn to the attention of the Group Co. that they were not to direct the banks but that the banks would be left to unit direction; is that right!

Mr. LORD. That is my recollection, or at least at the time of the opinion by the attorney general of Michigan, and I don't remember the date of it.

Senator COUZENS. What is the advantage of group banking if they are not to interfere with the direction of the unit banks!

Mr. LORD. Well, I think there are educational advantages that are very considerable. Now, if I should talk about our own situation in the light of subsequent events it might sound to you foolish, and I know there were defects, but there was the advantage of educational work, and we helped in adopting beneficial methods, and there were banks that were more carefully run as members of the group than before. They were run by their own boards, and it was our idea to get that local atmosphere present for the benefit of the local institution.

Senator Couzens. Of course, the maintenance of a group organization was rather an extensive undertaking, was it not?

Mr. LORD. It was; but I think it would have been worth the expense of operation under normal conditions. In our own situation, as I said in my opening statement, the biggest mistake we made was to have a group at the top of the hill instead of at the bottom of the hill. For instance, Senator, with separate group banking, there is no question in my mind that that whole northwest country has been protected and saved through those groups there. With all the bank failures that took place beginning in 1920 and 1921 in Iowa, Nebraska, the Dakotas, and Montana, even the banks that are a part of those 2 groups up there, or those 3 or 4 groups--I do not believe they could have survived this last.

Senator COUZENS. How was it they survived and you could not survive?

Mr. LORD. I think they have gone through their worst times. In June 1932 was the low point of nearly all time in this country in the value of securities, and certainly Detroit was the low point in this country, when this country was at its low point.

Senator COUZENS. Was it not true, in the case of the Northwest group, that the stockholders and directors got together and rehabilitated the corporation?

Mr. LORD. Not that I know of; although I do not know. I do not know anything about their internal workings. I know the institution and know the men in it. I do not know what they did financially.

Senator COUZENS. As I remember, former Secretary of State Kellogg told me that they had called upon all of their directors and stockholders to put up a lot more money to rehabilitate the group. Mr. LORD. I do not know the circumstances at all.

Senator COUZENS. How many other groups are there operating besides the Northwest Co.?

Mr. Lord. There is the Marine Midland, which is a group in New York State with a big bank in Buffalo, and the Marine Trust Co. in New York, and a string of banks all through the State. There are smaller groups. There is a group around Seattle. There is a group around Ogden, Utah, and there are other smaller groups. This man Bremer, whose son was just kidnaped, has a small group of banks.

Senator COUZENS. There is some difference between chain banking and group banking, is there not?

Mr. LORD. Yes, I think there is, Senator. As I recall the definition of chain banking, there is the question of a single ownership of an individual, where, perhaps, one bank owns an interest in another bank instead of all centering in one holding company without any bank relationship.

Senator Couzens. Which do you think the safer practice, chain banking or group banking!

Mr. Lord. I do not like chain banking at all, because I think there is an overlapping. There was quite a chain down in Arkansas, as I remember it, that failed several years ago. Senator TOWNSEND. There was a chain down in Florida, too.

Mr. Lord. Yes. I will admit that there are weaknesses in group banking. There is no question about it. The only answer in this country to the banking situation is branch banking. It has got to come, because the small community cannot support a unit bank with the safety the community ought to have.

Senator Couzens. Do you have anything else to say, Mr. Lord ! Mr. LORD. No, sir. Mr. PECORA. You come very close to favoring the nationalization of banks.

Mr. Lord. I do; under one single system-not State systems but a national system.

Senator TOWNSEND. That is very nearly accomplished, is it not, under the guaranty plan?

Mr. LORD. To a great extent I think it is.
Mr. PECORA. That is all I have.

Senator COUZENS. The committee will adjourn until tomorrow morning at 10 o'clock.

(Thereupon, at 5 p.m., Tuesday, Jan. 23, 1934, the subcommittee adjourned to meet Wednesday, Jan. 24, 1934, at 10a.m.)

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