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t ruary 1933 ?

Mr. PECORA. Do they contain the amendments which have been referred to ?

Mr. Mills. They are a complete copy of the bylaws as they then bi were.

Mr. PECORA. How many times had they been amended between the time of the resignation of Mr. Ballantyne and the date in Feb

Mr. Mills. To the best of my recollection, only once. There were several amendments to simplify matters. There may have been two, but to the best of my recollection there was one.

Mr. PECORA. Will you produce the bylaws that you now have, Mr. Mills?

Mr. Mills. Yes, sir (producing a document and handing it to Mr. Pecora].

Mr. PECORA, I ask that this be marked for identification.

Mr. MILLs. They were amended and adopted December 6, 1932. There may have been a minor change in the meantime, but if so I do not recall it.

(Document produced by the witness containing bylaws in effect on February 11, 1933, was marked for identification - Committee Exhibit No. 134, Feb. 2, 1934.")

Mr. PECORA. Will you point out by reference to the section of the bylaws the change that was made with respect to the powers, duties, and authority of the executive head of the bank, the chairman of the governing body?

Mr. Mills. All I recall, Mr. Pecora, was this: You would have to compare the two, but the sum and substance of it, according to my recollection, was that the title of chairman of the governing committee was abolished and his functions were assumed by the chairman of the board; and in the redraft where the former had said that the chairman of the governing committee shall do so and so, it now said that the chairman of the board shall do so and so,

Have I made that clear?
Mr. PECORA. I think so.

Mr. MILLS. Article IV seems to be the section in question. I have marked part of it. Section VI seems to be the section—I think it is the same in the original. They can readily be compared.

Mr. PECORA. Section 6, subdivision A, article IV of the bylaws marked for indentification as “Exhibit No. 134", reads as follows [reading]:

The chairman of the board of directors shall be the chief executive officer of the bank and subject to the actual affirmative exercise of the powers by law pertaining to and vested in the board of directors, whether so exerciseil by the board itself or by the governing committee or the executive committee within the scope of the jurisdiction and function of these bylaws vested in ach of said committees, respectively. The chairman of the board of directors hall have general executive control over the conduct of all the business and affairs of the bank and over the functions and activities of all officers and agencies of the bank.

Mr. PECORA. Who was the chairman of the governing committee ust prior to Mr. Ballantyne's resignation from the bank?

Mr. Mills. He was the chairman of the governing committee, and there was none before. As far as I know, the old First National Bank before the consolidation had none. I was not a director of he old First National Bank.

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Mr. PECORA. Who was the chairman of the board of directors while Mr. Ballantyne was chairman of the governing committee of the board ?

Mr. Mills. I was. In general, Mr. Pecora, the ranking of the officers under the bylaws could be summarized, until they were amended by the exhibit which you hold in your hand, as follows: The principal officer was the chairman of the governing committee The second officer was chairman of the board. The third officer was the vice chairman of the board. The fourth officer was chairman of the executive committee. The next one was vice chairman of the executive committee. And then came the president. There was an awful raft of titles which we tried to simplify. That was one purpose for the amendments in the copy which you have.

Mr. PECORA. The president of the bank was really the fifth or sixth ranking officer !

Mr. Mills. Yes. Under the bylaws he had certain duties assigned him.

Mr. PECORA. I wonder if that was the situation that called forth the suggestion, comment, or criticism of Mr. Verhelle in his confidential memorandum to you of May 18, 1932, which is in evidence here, and in which, as I recall it, he alluded to the fact that many of the senior officers of the bank had no special duty or functions of responsibilities.

Mr. Mills. Up to a certain point that was true; but in June or July specific, definite duties and responsibilities attaching were assigned to every officer in the bank.

Mr. PECORA. Šune or July of 1932?
Mr. Mills. Yes.

Mr. PECORA. That was a month or two following the making of that criticism by Mr. Verhelle!

Mr. Mills. Yes, sir. We were working on it at the time.

Mr. PECORA. In your prepared statement you said, among other things, as follows (reading]:

The bank had made many loans predicated upon a tremendous number of shares of stock of the Detroit Bankers Co. (this coming into the bank by virtue of the exchange of stock of unit banks for stock of the Detroit Bankers Co.).

Do you know how many loans, Mr. Mills, had been made by the bank of that category?

Mr. Mills. I can only answer in this way: That when I went into the bank there were loans in there which were predicated on Banker Co. stock, which in turn had been predicated on individual bank stocks. If I might illustrate this way: Someone in the Dime Savings Banks bought stock of the Dime Savings Bank, and to pay for it be went, we will say, to the Peoples Bank or the Merchants Bank or the Peninsular bank and borrowed on it and put up his stock as collateral. When the Detroit Bankers Co. was formed that stock we exchanged into Detroit Bankers Co. stock, and eventually these banks that I have named were merged in the Peoples Wayne County Bank or the First National Bank, so they ended up with both the collateral and the loan.

Mr. PECORA. When you became the senior officer of the bank, how many such loans were in the bank?

Mr. Mills. There were a large number of loans.

Mr. PECORA. Which were collaterized by stock of the bank?

Mr. Mills. I could not state the number exactly. There was a very substantial amount of them. That amount was later increased by relief collateral. The officers of the bank were instructed, when the collateral back of a loan became low, to go out and get more collateral, and a substantial additional amount of relief collateral was brought in in that way, of the Detroit Bankers Co.

Mr. PECORA. After the formation of the Detroit Bankers Co. and the acquisition by it of the capital stock of these five original unit banks, which included that bank, was not this process of loaning money on the stock of the Detroit Bankers Co. tantamount in substance to the bank loaning upon its own stock?

Mr. Mills. No, Mr. Pecora; I would not agree with that at all. Mr. PECORA. Why not?

Mr. Mills. The Detroit Bankers Co. had other very substantial investments. They owned stock, all the stock-or substantially allof the Detroit Trust Co. They had the First Detroit Co. There was a very substantial amount of other assets that the Detroit Bankers Co. owned outside of the bank.

Mr. PECORA. But the Detroit Bankers Co.'s principal assets consisted of the capital stock of the banking units ?

Mr. Mills. Its principal stock, yes; but not the only assets. Mr. PECORA. What proportion of its assets consisted of stock of other companies or units?

Mr. Mills. If you include the Detroit Trust Co. as a bank-
Mr. PECORA. I am. It did a banking business, did it not?

Mr. Mills. That may be a legal question. I presume it did; but it is a legal question. I do not know.

Mr. PECORA. Lest there be any doubt about it, in the annual reports of the Detroit Bankers Co., which contain a combined statement or balance sheets of all the banking units, so called, was there not included the balance sheet of the Detroit Trust Co.?

Mr. MILLS. Oh, yes.

Mr. PECORA. So that the Detroit Bankers Co. regarded the Detroit Trust Co. as one of its banking units?

Mr. Mills. Obviously I would think that would follow.

Mr. PECORA. That being the fact, namely, that the principal assets by far of the Detroit Bankers Co. being the capital stock that it owned of its unit banks, when these unit banks made loans on stock of the Detroit Bankers Co. they were in substance, if not in form, making loans virtually upon the security of their own stock, were they not?

Mr. Mills. I will say no, for two reasons, Mr. Pecora. In the first place, there were very few loans made. In fact, I only know of one or two loans that were made in my day on Detroit Bankers Co. stock. Most of the loans, as I have tried to explain, were made on_stocks of the constituent banks, which were later exchanged for Detroit Bankers Co. stock, and at the time of the consolidation it was approved by the comptrollers' office. Secondly, I have always understood that there was an opinion from the Attorney General of Michigan-I have never seen it—who stated they were very different things.

Mr. PECORA. I am asking you to ignore form and consider substance in this questioning, Mr. Mills. I appreciate the differences in form and substance, but I will ask you if it is not the fact that in substance these unit banks of the Detroit Bankers Co. that had loans collateralized by stock of the Detroit Bankers Co. were in effect, although not in form, having those loans collateralized by their own capital stock.

Mr. Mills. They were not originally made that way.

Mr. PECORA. Whether they were made that way originally or not, the fact is that when those loans found their way into the unit banks of the group, in effect that is what they were-loans collateralized by the stock of the bank?

Mr. Mills. I am afraid that I am too much of a lawyer to disregard form entirely.

Mr. PECORA. That is one of the weaknesses of lawyers.
Mr. Mills. It is.

Mr. PECORA. They place more stress on form than they do on substance.

Mr. Mills. Very frequently.

Mr. PECORA. It is a happy thing to notice that the United States Supreme Court only very recently saw fit to cut through form and consider substance.

Mr. Mills. I was delighted to see that decision.

Mr. PECORA. I hope the legal profession will follow in the wake of that decision.

When you became the executive head of the bank in 1932, the fact that the bank found itself with this heavy concentration of Detroit Bankers Co. stock presented a problem to you, did it not !

Mr. MILLS. It did, sir.

Mr. PECORA. What were the essential features of that problem as you recognized it to be a problem?

Mr. Mills. I recognized the problem that there was too much of a concentration of loans in the bank predicated upon Detroit Bankers Co. stock to be, in my view, good banking practice. Please understand that I do not wish to blame any predecessor or anybody connected with the old banks. That is not the purpose of my statement. But I recognized that due to these consolidations, in my judgment there was too much concentration of Detroit Bankers Co. stock. We also had too much concentration of various stocks of various other corporations; and the officers were instructed to do what they could to lessen those concentrations.

Mr. PECORA. That is what I was coming to. What was done by you as the chief executive officer of the bank to solve the problem when you found yourself confronted with that particular problem.

Mr. Mills. First, I recommended to the board or to the governing comimttee that we make practically no more loans upon Detroit Bankers Co, stock.

Mr. PECORA. That did not solve the problem itself. You still found the problem there, did you not? You simply resorted to methods which prevented the aggravation of that problem?

Mr. Mills. That is only one of the things I did. I do not wish to have the problem aggravated. It was already a severe problem. Secondly, the officers were instructed to do everything they could to have the Detroit Bankers Co. stock substituted by other collateral.

Mr. PECORA. Was that done? Was anything done along those lines?

Mr. Mills. Reports were made to me from time to time. Unfortunately, I do not think that a tremendous amount of progress was made, because a large part of the wealth of Detroit was represented by bank stocks.

Mr. PECORA. Was any progress at all made along that line?
Mr. Mills. Oh, yes.

Mr. PECORA. Was there a reduction of that concentration of collateral from that time on?

Mr. Mills. Please do not misunderstand me. I stated or interpolated in my statement this morning that the amount of collateral held by the banks in the Detroit Bankers Co. stock actually increased. That increase came about where loans became dangerously low or “ under water” or where we could not get out of these loans, when the debtors could not pay and we insisted on more collateral, and all they had was Detroit Bankers Co. stock, and we took it in to sweeten the loan.

Mr. PECORA. To that extent the solution of one problem of undercollateralized loans was practically checked by an aggravation of another form, namely, that of increasing this concentration of Detroit Bankers Co, stock?

Mr. Mills. Oh, no, Mr. Pecora; because if a man had nothing else, certainly it did not harm our position to take in more Detroit Bankers Co. stock.

Mr. PECORA. Taking more of the Detroit Bankers Co. stock did not relieve the problem that was existent because of the presence of that heavy concentration of Detroit Bankers' Co. stock?

Mr. Mills. No. We had two problems—more than two; but two of them were that some of these loans became under-collateralized. Other securities became under-collateralized, and it was to sweeten them that the Detroit Bankers Co. stock was taken as relief collateral.

Mr. PECORA. Let us pass on to the next paragraph in your prepared statement, which reads as follows, referring to another problem [reading]:

The Detroit Bankers Co. had obligated itself to pay some $7,000,000 of debts of subsidiaries and had directly borrowed funds in the neighborhood of an additional million dollars to acquire compete ownership of seven small banks in one country.

The obligation of the Detroit Bankers Co. referred to therein was this obligation that was incurred or had been incurred by the First Detroit Co.?

Mr. Mills. The First National Co., I believe.

Mr. PECORA. That is the indebtedness of $7,200,000 that has already been referred to in the evidence here?

Mr. Mills. That is the item that I first referred to, of some 7 millions of dollars. My recollection is that the Detroit Bankers Co. had directly borrowed $1,000,000 mentioned in the second portion.

Mr. Pecora. The third problem specified by you in your prepared statement is referred to as follows (reading]:

A subsidiary of the Detroit Bankers Co. had acquired partial ownership of some 10 banks throughout the State of Michigan.

Which subsidiary was that?
Mr. Mills. I was informed, the First National Co.
Mr. PECORA. Which were the 10 banks alluded to in that statement?

175541—34-PT 12

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