Senator COUZENS. Were the original deposits and your trust balances kept together? Mr. STONE. Yes. Mr. PECORA. The trust deposits were not earmarked? Mr. STONE. No; except on the trust books of the company. That is, the trust ledger would show the amount of cash to the credit of each individual trust. Mr. PECORA. Now, I have here what purports to be a report or statement signed by Mr. Van Every, auditor of the Detroit Trust Co., under date of December 20, 1933. Will you look at it and tell me first if you recognize Mr. Van Every's signature? Mr. STONE. Yes; that is correct. Mr. PECORA. Now will you look at the report itself and tell me if the matters specified therein are within your knowledge or accord with your recollection of the facts? Mr. STONE. I think that is a substantially correct statement. The CHAIRMAN. Let it be admitted. (Report or statement dated Dec. 20, 1933, signed by F. C. Van Every, was thereupon designated "Committee Exhibit No. 108, Jan. 31, 1934", and appears in the record immediately following where read by Mr. Pecora.) Mr. PECORA. The exhibit reads as follows. It is dated December 20, 1933 [reading]: As of March 25, 1931, and prior to that time the Detroit Trust Co. did not earmark in any specific bank account the cash balances in fiduciary trust accounts. On August 8, 1931, the Detroit Trust Co. opened the following bank accounts for the purpose of setting aside deposits equal to the cash balances in fiduciary trust accounts, for which the Detroit Trust Co. issued certificates of deposit: Peoples Wayne County Bank "Fiduciary Account" Detroit Savings Bank...-- $4,500, 000 1, 700, 000 500, 000 6, 700, 000 It is not possible to state, as of August 8th, 1931, that the above total was sufficient to cover Fiduciary Trust balances, because it was necessary to analyze trust agreements in order to determine the accounts which were to fall into the Fiduciary classification. It was later determined that the amount was more than ample. From August 8th, until October 1st, 1931, the above bank accounts were carried on the general books in memorandum only. On October 1st, 1931, at the request of the Michigan State Banking Department the accounts were set up on the General Statement of Condition. On January 5th, 1932 the fiduciary bank deposits were brought into balance with the cash balance as shown in the fiduciary trust accounts, and kept in balance thereafter. Detroit Trust Company, by H. C. Van Every, Auditor. Now, Mr. Stone, in committee's exhibit no. 108 which I have just read there is a statement embodied reading as follow: From August 8 until October 1, 1931 the above bank accounts were carried on the general books in memorandum only. On October 1, 1931 at the request of the Michigan State Banking Department the accounts were set up on the general statement of condition. In view of that I want to show you what purports to be a photostatic reproduction of a letter addressed to the Detroit Trust Co. under date of September 18, 1931, bearing the signature "R. A. Carroll, examiner." Will you look at it and tell me if you recognize it to be a true and correct copy of a letter addressed to the Detroit Trust Co. from the State examiner named Carroll on or about the date which that bears? Mr. STONE (after perusing document). I assume that it is; yes. Mr. PECORA. I offer it in evidence. The CHAIRMAN. Let it be admitted. (Letter dated Sept. 18, 1931, from R. A. Carroll, examiner, to Detroit Trust Co., was thereupon designated "Committee Exhibit No. 109, Jan. 31, 1934", and appears in the record immediately following, where read by Mr. Pecora.) Mr. PECORA. The exhibit marked " Committee's Exhibit No. 109 in Evidence" reads as follows [reading]: DETROIT TRUST COMPANY, Detroit, Michigan. SEPTEMBER 18, 1931. GENTLEMEN: This letter refers to the recent examination of your bank as at the close of business August 31, 1931. The following matters were discussed with Pres. Browning, Vice-Pres. Butler, and Treas. Thomas, and will require your further attention. 1. Loans & discounts.-Classification of your loans is made a part of this report and shows the following classifications. Under-margined loans (16.9%). Slow (5.3%) Doubtful (1.5%). Loss (2.7%). $1,646, 170.19 513,097.10 142, 183.33 258,011,54 Loans secured by Detroit Bankers Co. stock total $1,640,544.86, which with the loan to the Detroit Bankers Co. comprise 31.5% of your total loans & discounts. This Department recommends that in the future no additional loans be extended which are predicated upon Detroit Bankers Co. stock and that your present loans be gradually eliminated whenever possible. 2. Real estate.-Carrying value of $2,322,499.81 with the following losses set-up: Losses not including Int. & Advances. Advances to operations of properties. Total losses set-up-. $343,954.65 73,799.68 57,309.68 474,224.01 Due to these losses and the fact that you have 503 mtges under foreclosure totaling $2,738,251.20 which is classed as potential real estate we believe a Reserve for losses in real estate of at least $500,000 should be set-up at this time, & same increased periodically until a more favorable outlook appears in the real estate situation. 3. Stocks $250,000 The Detroit Co. carrying value.-Our report shows this stock impaired to the extent of $251,730.22. This stock should be entirely eliminated from your assets thru charge to your profit-and-loss account. $4,000,000 First Detroit Co. Carrying value. Our report shows this stock im paired to the extent of $123,517.90. This deficiency should be taken care of by the transfer into a special reserve account from the undivided profits account of enough to fully cover same. 4. Reserves. Your reserves were short $3,406,115.94 upon date of examina tions. We cannot consider your time, C. D's & svgs accounts which amount to $710,040.44 as reserve. Demand funds only can be classified as reserves. It is also our understanding that the bond sinking fund accounts will be segregated & a 100% reserve set up the same as for the fiduciary accounts. This Department frowns upon the plan of building up your reserves through a reciprocal deposit arrangement with other Detroit banks. We realize the present plan of setting up reserves was recently inaugurated, however the plan of reciprocal deposits should be discontinued as fast as the necessary reserves are built up. Kindly advise the status of your reserves on date of reply. RACTICES and tell me er address i Carre assume that The matter of deducting your fiduciary account from your liabilities, and also the 100% reserve for same from your assets in making a published report will be referred to the Commissioner, and you will hear direct from the Office at Lansing, as regards same. This letter, together with your authorized reply, should form a part of your Directors' minutes. Your reply, direct to the office at Lansing, will be expected not later than October 20, 1931. (Signed) R. A. CARROLL, Examiner. What was the stock of the Detroit Co. referred to here, $250,000 A. Cam carrying value, which, according to the examination of the State ted Comm banking department, they found to be impaired to the extent of $251,730? Mr. STONE. Might I say, preliminary to that, as I have several times before, that as chairman of the board I would not have direct knowledge of this-I mean of all the facts in there. Some I have. The letter starts by referring to Mr. Browning, Mr. Butler, and Mr. Thomas, calling these matters to their attention. I do not want to make that statement any more, Mr. Pecora. Mr. PECORA. This letter also specifically requests that it be brought to the attention of the board of directors. Mr. STONE. Yes. Mr. PECORA. You, as chairman of the board, then, must have had this letter brought to your notice, if, in turn, it was brought to the notice of the board. Mr. STONE. I do not mean that at all. The Detroit Co. was a corporation fully owned by the Detroit Trust Co. for the purpose of transacting its bond business outside the State of Michigan, having offices in New York, Chicago, Los Angeles, and San Francisco, the object of incorporating it being to avoid the necessity of making application to the proper authorities in those States to qualify the Trust Co. to transact business in those States. We organized the corporation just for that purpose only. Mr. PECORA. What action was taken by the board with regard to recommendations made by Mr. Carroll in this letter, that this stock of the Detroit Co., which was then being carried on the books of the trust company as an asset valued at $250,000, should be entirely eliminated, through a charge to profit-and-loss account? Mr. STONE. Have you a copy of our answer that I could use? Mr. THOMAS. Was that the examination in 1931? Mr. PECORA. The examination made as of August 31, 1931. This letter is dated September 18, 1931. (Mr. Thomas produces a paper and hands the same to Mr. Stone.) Mr. PECORA. Yes; and it is paragraph 3 of the examiner's letter. Mr. PECORA. Have you a copy of any letter that was sent in behalf of the Detroit Co. as an answer to this letter of the examiner marked in evidence as Committee's Exhibit 109? Mr. STONE. Yes, sir. That is what I am reading from. Mr. PECORA. Will you please produce a copy of the entire letter? Mr. PECORA. Yes, sir. Mr. STONE. Certainly [handing paper to Mr. Pecora]. Mr. PECORA. I offer it in evidence. The CHAIRMAN. Let it be admitted. (Letter, Thomas to Reichert, Oct. 27, 1931, was received in evi dence and marked "Committee Exhibit No. 110, Jan. 31, 1934 ", and portions of the same were subsequently read into the record by Mr. Stone.) Mr. PECORA. Now you may refer to it. Mr. STONE [reading]: 3. Stocks Mr. PECORA. Have you another copy for your own use? Mr. THOMAS. He has it marked. Mr. STONE [reading]: 3. The examiner states in his letter that he believes the stock of the Detroit Company which we are carrying now at the value of $25,000 should be entirely eliminated from our assets through a charge to our profit and loss account. Inasmuch as the stock is still owned by the Detroit Trust Company we do not feel that we should entirely eliminate this item from our assets, but we have charged our undivided profit account and set up a reserve against the Detroit Company deficiency, of $250,000, the total amount at which we are carrying this stock. In other words, I understand that we carried out his instructions. Mr. PECORA. In his letter of September 18, 1931, Examiner Carroll makes a further recommendation under the caption of "Stocks" with regard to setting up a special reserve to cover the impairment in the value of the capital stock of the First Detroit Co. Was that done? Mr. STONE. Further reading from paragraph 3 [reading]: In this same paragraph the examiner states that they find the $4,000,000 book value at which we are carrying the stock of the First Detroit Company to be impaired to the extent of $123,517.90. To take care of this deficiency we are charging undivided profits $200,000 and crediting this amount to the reserve against depreciation on First Detroit Company Stock. I am not reading now, but there was about $77,000 more charged off than the examiner recommended. Mr. PECORA. May I have a copy of that letter to the Commis sioner? (Mr. Stone handed exhibit 110 to Mr. Pecora.) Mr. PECORA. You observe that Examiner Carroll in his letter of September 18, 1931, called attention to the fact that total loans of the trust company as of August 31, 1931, secured by Detroit Bankers Co. stock, plus a loan to the Detroit Bankers Co., comprised 31 percent of the total loans and discounts of the trust company at that time. You notice that, do you not? Mr. STONE. I do not know that I get that clearly in my head. What made up the 31 percent? Mr. PECORA. The loans secured by Detroit Bankers Co. stock, plus a loan to the Detroit Bankers Co., the specific amount of which is not given in Examiner Carroll's letter. He calls attention to the fact that those loans aggregate 312 percent of the total outstanding loans and discounts shown by the examination of August 31, 1931. Mr. STONE. That refers only to our collateral loans. Mr. STONE. Not to mortgage loans or any other kind. I have no reason to doubt the statement, but I do not know about the fact. Mr. PECORA. In your reply, or in the reply of the trust company to this letter of September 18, 1931, on the subject of loans and discounts, you said as follows (reading): In compliance with your recommendation we have discontinued for the present making loans secured by Detroit Bankers Company stock and will gradually reduce the present loans which we have predicated on this stock. However, there will be one exception to this. Recently each of the units of the Detroit Bankers Company agreed to carry the loans of all officers and employes of that unit. This will mean a transfer of officers' and employes' loans between the various units. A great many of these loans are secured by Detroit Bankers Company stock, and under this plan we shall be obliged to take over from other units loans in the approximate amount of $275,000, whereas the other units will take up from us loans in the amount of $110,000. This will mean a net increase of approximately $165,000 face amount of loans, many of which are predicated on Detroit Bankers Company stock. Was it not known to you currently, as chairman of the board of the trust company, that the trust company was carrying a large amount of collateral against loans which consisted of stock of the Detroit Bankers Co.? Mr. STONE. Yes, in a general way. Mr. PECORA. Was that regarded by you as sound banking policy, for the bank to have that large concentration of collateral? Mr. STONE. Not if it could be prevented, but those loans, I think, were made up largely, if not entirely of loans formerly made on stock of the bank units, which afterwards went into the holding company, and when they exchanged their stock in the banks they naturally received Detroit Bankers Co. stock, which remained as collateral to these loans. Mr. PECORA. The market value of that Detroit Bankers Co. stock would be affected by any change in the dividends paid on that stock, would it not? Mr. STONE. Yes. Mr. PECORA. Don't you know, as a director of the Detroit Bankers Co. at that time, that all the other unit banks of the Detroit Bankers Co. carried heavy concentrations of collateral against loans, consisting of Detroit Bankers Co. stock? In other words, do you not know that that condition prevailed generally throughout the unit banks of the company? Mr. STONE. I do not know. I do not recall that any report was made to the directors of the Detroit Bankers Co., but I think it is fair to say that I knew of the fact in a general way. Mr. PECORA. Any depreciation in the market value of the Detroit Bankers Co. stock would, to the extent of such depreciation, undercollateralize the loans which the various unit banks held, and which were secured by Detroit Bankers Co. stock, would it not? Mr. STONE. It would reduce the collateral value. Whether it would render them undercollateralized or not would depend upon the facts in each case, the amount of stock pledged, and whether they had other securities pledged. Mr. PECORA. You know as a matter of fact, Mr. Stone, that most of the loans carried by the unit banks, and which were secured 175541-34-PT 11-19 |