ing mortgage certificates, were received in evidence and collectively marked Committee Exhibit No. 106, Jan. 31, 1934.")

66

Mr. PECORA. According to Exhibit No. 106, just received in evidence, out of six certain issues of these participating certificates having a face value of $4,250,000, there were sold by the Detroit Trust Co. to itself as trustee for various trust accounts certificates aggregating a face value of $1,508,900, and at the time of the making of those sales to trust accounts defaults had occurred in the payment of principal and interest in the underlying mortgages to a total figure of $141,960.78.

Mr. THOMAS. Principal and interest?

Mr. PECORA. Both principal and interest; yes. Are you familiar with those facts?

Mr. THOMAS. No; but I assume that they are correct.

Mr. PECORA. How do you account for that having been done, now, Mr. Thomas? Here was the Trust Co. acting as trustee for various trust accounts, purchasing from itself as the issuer these participating certificates, charging the trust accounts an investment fee of 1 percent and purchasing those certificates at a time when, according to its own records, there had been defaults in payment of principal and interest in the mortgages underlying the certificates.

Mr. THOMAS. Well, I think you must remember that if you consider a mortgage in default, if the principal payment is not made on the day it is due, there always have been and always will be those defaults.

Mr. PECORA. Don't you consider that a default?

Mr. THOMAS. It is a temporary default; but you know as well as I do that the mortgagors do not always all pay their principal and interest payments on the due date. Is that interest the amount of interest that was not paid the day it was due on the mortgages?

Mr. PECORA. Those defaults, aggregating in amount $141,960, were defaults in both principal and interest, and those defaults are estimated at the expiration of the usual periods of grace.

Mr. THOMAS. What would that be? After a 90-day period or a 60-day period?

Mr. PECORA. Whatever the mortgage provided for that would be fixed by the terms of the underlying mortgage.

Mr. THOMAS. Of course, it is hard to say how serious it was without knowing exactly the facts with respect to the mortgages at that time. I am sure that the Trust Co., as soon as they were cognizant of the fact that a considerable number of mortgages were going into default, would immediately refrain from placing any more of those participation certificates in trusts.

Mr. PECORA. Well, apparently, according to the exhibit last offered in evidence, they sold to trust accounts managed by themselves one million five hundred thousand and odd dollars of these participation certificates at a time when defaults had previously occurred in the payment of both principal and interest on the underlying mortgages. Surely the Trust Co., as the issuer of those certificates, would have a complete record of those defaults if any had occurred, would it not?

Mr. THOMAS. Yes.

Mr. PECORA. And it had all the information and data that it would need in order to enable it to determine whether or not it was selling participating certificates in those mortgage pools that included mortgages that were in default, had it not?

Mr. THOMAS. Yes; they would have that information.

Mr. PECORA. The facts with regard to the sale of these participat ing certificates to trust accounts after defaults had occurred in some of the underlying mortgages have been set forth in an exhibit prepared by the auditor of the Trust Co., Mr. Van Every, in exhibit 106. which is in evidence. How do you account for those things having occurred?

Mr. THOMAS. Well, I think that probably about that time when mortgages generally began to default in substantial amounts, the Trust Co. did make an investigation, or members of the mortgage department did, and I think the policy was discontinued. There may have been a few sales go through during that interim.

Mr. PECORA. A few sales, when the amount shown is $1,508,900 sold to trust accounts alone?

Mr. THOMAS. What was the date of those sales; do you know? Mr. PECORA. Various dates. They all appear in Exhibit No. 106. For instance, let us take the third page of Exhibit 106, signed by both Mr. Colvin and Mr. Van Every. Mr. Colvin, I understand. is attached to the mortgage department of the Trust Co. It says [reading]:

In series F-2 trust participation no. 11,231, the mortgages were delinquent as follows: On October 17, 1931, principal, $19,926.45; interest, $5,620.43. And then, over Mr. Van Every's signature, is the following statement [reading]:

The above date, October 17, 1931, was approximately the date of the last sale of certificates of this issue to trusts. The total par value of certificates of this issue sold to trusts amounted to $185,700 out of a total issue of $1,000,000. The amount of commission or service charges collected from the mortgagors at the time the mortgages were made, at the rate of 2 percent, and 3 percent outside the city, was $20,000.

So that as far back as October 1931 according to these records compiled by representatives and employees and officers of the Trust Co., sales of participating certificates were made by the Trust Co. to itself as trustee to trust accounts at a time when underlying mortgages represented by the certificates were in default both as to principal and interest.

We find a similar situation existing on March 2, 1932. according to Exhibit No. 106. Suppose you study that exhibit, Mr. Thomas. for your present purposes.

Mr. THOMAS. That is a very small percentage of defaults, Mr. Pecora, as to the principal of the mortgage in each series compared with the total of the mortgages.

Mr. PECORA. Whether it is small or large, Mr. Thomas, the prac tice itself is one which should not have been permitted to occur in any one instance, is it?

Mr. THOMAS. Yes; you are right. I do not think that if the trust investment department had knowledge of these mortgages being in default they would have put them in the trust. I agree with you that they should not have.

Mr. PECORA. The trust department should have had knowledge. All the material and all the data giving such knowledge and information were in the Trust Co.?

Mr. THOMAS. The mortgage department. Possibly they had not made an examination of these various mortgages behind the series and had not conveyed the information to the trust investment department at this time. I do not know as to that.

Mr. PECORA. There is now no market value for any of these participating certificates, is there?

Mr. THOMAS. There is very little market. I guess there are a few traded in.

Mr. PECORA. According to Mr. Van Every's statement embodied in exhibit no. 105, there is no market with regard to all of the 35 series of participating certificates issued.

Mr. THOMAS. I think he means there is no general market, which is

true.

Mr. PECORA. In every instance, in answer to the question "Present market value of certificates" his comment is, "No market." That covers all 35 series.

Mr. THOMAS. Of course, we have hopes and expectations that those mortgage-participation certificates will work out very well. If we are able to get the assistance that we hope to from the Home Loan Corporation we feel that the ultimate work-out of these participation certificates will be very favorable; at least, as well as the average.

The CHAIRMAN. Are you accepting, where you have mortgages, the bonds of the Home Loan Corporation?

Mr. THOMAS. We have not yet. We are considering that with respect to all of our mortgages, Mr. Chairman.

Mr. PECORA. Mr. Thomas, a statement has been prepared based upon an analysis of the data embodied in Exhibit No. 105 purporting to show, with regard to the 35 series of mortgage-participation certificates issued by the Trust Co. for the aggregate amount of $25,000,000, that, as already indicated, the amount sold to trusts administered by the Trust Co. was $5,589,500; that as of January 1 of this year the amount in default of those certificates as to principal was $6,918.698.56, and as to interest, $823,639.74; that the amount of commission or service charge made and collected by the Trust Co. in connection with the making of the mortgage loans underlying these certificates for all these 35 series aggregated $526,575.62; that as of January 1, 1934, the principal amount of certificates past due was $8,176,700, and the amount of interest on these certificates past due on that date was $1,168,104.01.

Will you look at this statement that has been so prepared and based upon that exhibit and see if you have any critical comments to make about it? For that purpose you may also compare it with the underlying and supporting data consisting of exhibit no. 105. Mr. THOMAS. I believe the record is incorrect in respect to the first part of your statement.

Mr. PECORA, What is that?

Mr. THOMAS. You started out by referring to the $5,000,000, approximately, in trusts.

Mr. PECORA, Sold to trust accounts.

Mr. THOMAS. But you said in respect to those that there is over $6,000,000 in default.

Mr. PECORA. No; I meant the aggregate amount of the issue. Mr. THOMAS. I was afraid the record would read in respect to the 52 million that there was over 6 million in default.

Mr. PECORA. Thank you for the correction. No; the default was with respect to $25,000,000 of such certificates issued.

Mr. THOMAS. As far as I can tell, that seems to be correct. Mr. PECORA. I offer it in evidence as a compilation in a very convenient form.

The CHAIRMAN. Let it be admitted.

(Tabulation headed "Detroit Trust Co., Certificates of Participa tion as of Jan. 1, 1934 ", was received in evidence, marked "Committee Exhibit No. 107, Jan. 31, 1934 ", and will be found at the end of this record.)

Mr. PECORA. Now, Mr. Stone, I want to ask you about the declaration of that special dividend on or about December 1, 1931, by the Detroit Trust Co., which was paid in the form of the 30,000 shares of the capital stock of the First Detroit Co., which the Detroit Trust Co. at that time owned. You recall the declaration of that special dividend, don't you?

Mr. STONE. Yes.

Mr. PECORA. You as chairman of the board at that time participated in the discussion at the meeting of the board of directors at which that dividend was declared?

Mr. STONE. Yes, sir; I believe I presided at the meeting.

Mr. PECORA. Now, will you give the committee the facts and circumstances involving that declaration of special dividend?

Mr. STONE. The recommendation that the dividend be made came from the directors of the Detroit Bankers Co. Mr. John Ballantyne, president of the Detroit Bankers Co., was present at the meeting and read a statement with respect to the consolidation of the Peoples Wayne County Bank and the First National Bank. At the end of that statement he said that the directors of the Detroit Bankers recommended the declaring of this dividend.

Mr. Browning then, I believe, offered the resolution for the declaration of the dividend and explained the purpose for which the dividend was to be declared.

Mr. PECORA. What was that purpose?

Mr. STONE. I will state it in a general way. I haven't the exact language of the minutes. The proceeds of the dividend, in other words, the assets which would go with the declaration of the stock of the First Detroit Co., were to be used to retire indebtedness of the First National Co. which it had incurred. I think perhaps to get the background of that it might be necessary to go back to the time prior to the organization of the Detroit Bankers Co.

Mr. PECORA. All right; will you do that?

Mr. STONE. I should say about some time the latter part of August or early in September, when the principal officers of the four banks and the Trust Co. which were contemplating organization into the Detroit Bankers Co. held meetings, it appeared that the First National Co. had been making purchases of outstate bank stocks for the First National Co. account, and it was stated at one of those meetings,

one of those early meetings, that the amount, I don't recall exactly, but I think it was three million to three and one half million. Subsequent to that letters went out, I think in October, to the stockholders of the four banks and the Trust Co.

Mr. PECORA. Those are the five original banking units of the Detroit Bankers Co.?

Mr. STONE. Yes-describing the terms for the exchange of stock and the formation of the Detroit Bankers Co.

Mr. PECORA. That is the circular letter that was put in evidence here last week?

Mr. STONE. I believe so.

Mr. PECORA. Dated October 5, 1929?

Mr. STONE. Yes; that is correct. Then, I think in November sometime, about the middle of November, at a meeting of the organization committee report was made that these purchases of outstate bank stocks amounted to the sum of about $7,200,000.

I should go back and say that at the early meetings to which I referred the opinion was generally expressed that no more of these State bank stocks should be purchased. It was not the intention of the organizers to purchase-I mean when they came together as a group-outstate bank stocks. Their intention was to limit their ownership of the national institutions to Detroit and the metropolitan district. But the First National Co. had started on it and those in charge of it were requested to discontinue those purchases. Then, in November, about the middle of November, when the meeting to which I have referred was held of the organization committee

Mr. PECORA (interposing). That is November 1929?

Mr. STONE. 1929; yes. It was reported that the amount had reached, for the purchase of these stocks, about $7,200,000, and, of course, I am frank to say that most of us were surprised that the purchases had been continued. But upon inquiry of the First National Co. the statement was made by them that they had made commitments which in honor bound they felt they should carry through, and that resulted in the purchases to this extent.

The CHAIRMAN. Were those purchases made in cash?

Mr. STONE. I assume so; but I had no knowledge of that. The stocks were pledged to banks, I think, in New York. It seems to me the Guaranty Trust. Whether any others or not I do not know. And they were accepted as collateral, I believe, for the full amount of the loan and in November, I imagine, were in the hands of those banks. The letters having gone to the stockholders of the five institutions to form the Bankers Co., and I do not know as a fact now, but I imagine it would be found that the minimum was 66% percent in the case of each institution, consents to the exchange of the stock had come in, so that the organization of the Bankers Co. was an assured fact.

Mr. PECORA. That is because more than 66% percent of the stockholders of the five original unit banks to which that circular letter was addressed had deposited their stock, indicating their willingness to exchange their stock in those five unit banks for the capital stock of the Detroit Bankers Co.?

Mr. STONE. That is correct; at the time of which I spoke-the middle of November.