Mr. PECORA. They were both directors of the Group, weren't they? Senator COUZENS. What did the initials K.F.H. represent? Mr. PECORA. Mr. Lord in his testimony yesterday before this committee gave the following answer, which I will read to you from pages 689 and 690 of the stenographic transcript of the minutes of the hearing: Mr. PECORA. And the amount of cash that otherwise should have been available to pay depositors has been reduced by that policy, has it not? Mr. LORD. Mr. Pecora Mr. PECORA. No. Is it or is it not? Mr. LORD. It is in some respects; but don't forget that during the years 1930, 1931, and 1932 the Group Co. put back into those banks $8,400,000 in cash. Senator ADAMS. How does that compare with the amount of dividends taken out in those years? Mr. LORD. It was more. Mr. PECORA. What? Mr. LORD. It was more than was taken out during those years. Mr. PECORA. Oh, just look at your figures, and I think you will come to a different conclusion about that. During those years the amount of dividends received by the group totaled $9,744,064.09, according to committee's exhibit no. 32 of December 20 last. Mr. LORD. I was talking about the years 1930, 1931, and 1932. Mr. PECORA. Well, I am adding the year 1929, which was one of the years. Mr. LORD. All right. We will take that, of course. The Group Co. then took out $1,300,000 in dividends over four and a fraction years less than they put in. They put in $8,414,000, as I remember the figure. Mr. PECORA. And took out how much? Mr. LORD. $9,789,000. Senator ADAMS. In what way was the money put back? Mr. LORD. Paying for undesirable or slow assets. Now, Mr. Kanzler, was that done in pursuance of a policy determined upon by the officers and directors of the group? Mr. KANZLER. Well, I remember a meeting in December of 1931, I think it was Mr. PECORA (interposing). Yes. Mr. KANZLER (Continuing). In which the group directors agreed to discontinue and liquidate the securities companies. And also to lift out undesirable assets from the banks and trust companies. I think that was approved at that meeting. Mr. PECORA. What was the reason for doing that? Mr. PECORA. To strengthen the unit institutions, but it was done at the expense of the parent company, wasn't it? Mr. KANZLER. Yes, sir; but with the units being strong, or rather without the units being strong there was no strength in the parent company. Mr. PECORA. And if the parent was not strong the units were correspondingly weak, weren't they? Mr. KANZLER. Within limits, yes, sir. Naturally the stronger the parent would be, the stronger the units would be. Mr. PECORA. Wasn't the group in determining upon this policy and following it, virtually traveling in a circle; that is, covering a lot of ground but getting nowhere? Mr. KANZLER. I think not. If it had been able to turn the corner, it would have worked itself out. Mr. PECORA. But they did not turn the corner. They kept going round in a circle, didn't they? Mr. KANZLER. No, sir. I think that the stockholders, in the interest of the depositors, were putting the money into the banking institutions. Mr. PECORA. They were putting back a part of the money that they took out of the banks through the dividend policy that was pursued. Isn't that what it amounted to in substance? Mr. KANZLER. Yes; but those were not simultaneous transactions. Mr. PECORA. Oh! I know that. Mr. KANZLER. And what seemed to be the judgment at one time in putting back assets, seemed to be the judgment at another time of paying dividends. Mr. PECORA. Now, reference has been made here in the evidence to a criticism embodied in a report by the national bank examiner, of the Guardian National Bank of Commerce to the effect that the group, which was the parent company, itself owed something like 14 million dollars upon which it had to pay very heavy interest charges annually. Do you recall that reference? Mr. KANZLER. I think I do. Mr. PECORA. For what purposes was that indebtedness of over 14 million dollars contracted by the group? Mr. KANZLER. I think 7 million dollars of it was in order to enable the securities companies to carry their inventories, and the other 71⁄2 million dollars, or whatever the figure was, was to purchase those undesirable assets from the various units of the group, in order that they would be in a more liquid and cleaner condition. I think those purchases in large measure account for the strength of our units throughout the State. Mr. PECORA. So that the group contracted a very heavy indebtedness, as the parent of the banking units, in order to enable the banking units to put on a better public appearance. Mr. KANZLER. No, sir; not to put on a better public appearance, but to be better. Mr. PECORA. Well, that would be reflected in their appearance before the public, wouldn't it? Mr. KANZLER. Well, it is not only an appearance but a fact. Mr. KANZLER. Yes, sir. Mr. PECORA. What do you know about the policy that has been testified to here that was adopted by the group of having its unit banks make certain adjustments of transactions, which would enable the unit banks to show that they owed no bills payable at various times when statements were made by the banks in response to the call of the Comptroller of the Currency? Mr. KANZLER. Well, I know that we always tried to increase deposits during times when one would normally expect statements. I think the records of the Federal Reserve will show that bills payable usually diminish around December 31, and then become increased right after January 1. And I think that was the general practice. And we did everything we could to get increased deposits. Mr. PECORA. Wasn't that calling for window dressing? Mr. PECORA. Wasn't that in fact simply a scheme for window dressing? Mr. KANZLER. It was not a scheme. Mr. PECORA. What was it? Mr. KANZLER. It was a program to show that the group within itself had the strength to be able to get the funds to pay their bills. Mr. PECORA. Wasn't that a false show of strength? Mr. KANZLER. No, sir. The strength was there. Mr. PECORA. Wasn't it a false show of strength, Mr. Kanzler, by that bank through the medium of a shifting of deposits in order to show no bills payable, and then only to have the indebtedness restored after the statement was made in response to the Comptroller's call? Mr. KANZLER. In my opinion it showed that that bank had the accounts and the resources; showing it could get the deposits if it needed them to pay bills payable. It was not a misrepresentation but a fact. Mr. PECORA. And you say that even though the indebtedness was restored almost immediately after the statement was made in response to the call of the Comptroller of the Currency? Mr. Kanzler. But still it showed it had the power to pay those bills. Mr. PECORA. Even though it was done in that fashion you say it was not a false showing of strength? Mr. KANZLER. No, sir. I think it showed it had that power. Mr. PECORA. Do you think it showed a true, faithful, and accurate picture of conditions? Mr. KANZLER. It showed it had the power to pay those bills. Mr. PECORA. I asked you: Do you think it showed a true, faithful, and accurate picture of conditions? Mr. KANZLER. Yes, sir. Mr. PECORA. In other words, if A owes B a note of $1,000 falling due on, say, the 1st of June, and A pays that note by borrowing money from C and giving C his note, he has relieved himself of that indebtedness, has he? Mr. KANZLER. Well, if A and B are brother and sister, and somebody is giving credit to the other, you know the credit is there. Mr. PECORA. The indebtedness temporarily disappears, doesn't it? Mr. KANZLER. That is right, sir. Mr. PECORA. It disappears only for the period of time covered by the making of the statement in response to the Comptroller's call, doesn't it? Mr. KANZLER. Yes, sir. Mr. PECORA. And then almost immediately afterward the indebtedness reappears? Mr. KANZLER. That is right. Mr. PECORA. And you say that is not putting on a false appearance? Mr. KANZLER. It shows the power to pay the bill. Mr. PECORA. I asked you: You say it is not putting on a false appearance? Mr. KANZLER. Yes, I say that. The CHAIRMAN. When the units transferred to the group securities, and the group took up securities from the units, did the units assign and transfer those securities without recourse? 175541-34-PT 10 Mr. KANZLER. They were sold without recourse. It was an outand-out sale as between two different persons. Senator COUZENS. Mr. Kanzler, I was exceedingly interested in your answer to Mr. Pecora's question just now, and let me ask you this question: Assuming that I was applying to your bank for a loan, and that I furnished a statement to you dated as of January 1, 1933, in which statement I showed that I did not owe anything and that I was in good financial condition; but 2 days prior to that time let us assume that my uncle paid off all my debts, and he afterward came in and put in his claim for having advanced the money, would you consider such a statement as obtaining money under false pretenses? Mr. KANZLER. Well, I would think that would not be right. Senator COUZENS. You would think that was obtaining money under false pretenses? Mr. KANZLER. I would think that would be wrong. Senator COUZENS. All right. Mr. PECORA. Mr. Kanzler, is there any difference in principle between such a transaction and the policy of the group banks in taking care of temporarily bills payable in the fashion that has been disclosed here? Mr. KANZLER. I feel there is; yes. Mr. PECORA. A real difference in principle? Mr. KANZLER. I think so, because those are commercial transactions, that are handled as a matter of course in that way by institutions generally. And I think the proof of that would be found in an examination of the records of the Federal Reserve. I think you could there find proof of that fact. Senator ADAMS. Mr. Kanzler, I do not think you are justified in saying that that is a general practice among banks. Mr. KANZLER. Well, from my experience; I know that they come and ask us for deposits right along toward the end of the year. Senator ADAMS. Aren't you talking about a limited locality? Mr. KANZLER. No. I think that is generally true, because nationally we get requests for substantial balances toward the end of the year. Senator ADAMS. Well, I do not believe you are justified in saying that is a general practice. Senator COUZENS. Well, I simply want to say that I should hate to think it is a general practice; to say that here is a group, for instance, that can switch deposits from any place it likes, in order to make any kind of showing; that the Highland Park Bank can loan to the Industrial Bank of Flint, and that the Industrial Bank of Flint can put that in the Guardian Bank, and so on, for that would simply be going round in a circle. Mr. KANZLER. No, sir. Senator COUZENS. It would be simply doing that to make a showing And that substantially was done between the Highland Park Bank the Industrial Bank and the Guardian National Bank of Commerce. Mr. KANZLER. I do not understand that there was any kiting of checks where each would give the other reciprocal checks and build up accounts. I wouldn't think that was right. Senator COUZENS. Well, the effect would be the same if you exchanged certificates of deposit because certificates of deposit were issued from one bank to the other in order to liquidate indebtedness; and instead of showing in bills payable it would show as deposits from other banks. A deposit from a bank is the same as a bill payable in practice. In other words, you have to pay it when the other bank calls for it, so, in effect, it is a bill payable, but it just doesn't look so good on a statement if shown as a bill payable. It is not borrowed money, but is a clean-up, the same as a demand bill payable may be a clean-up. In effect when you make a statement showing no bills payable, and you have wiped them out with a temporary deposit from one of your constituent companies, you invite depositors to come in and put in money on the theory that you do not owe anything, that you are in good, sound, financial condition. For instance, say that I read your statement as of December 31, and a day or two afterward when I go to your bank and deposit money, your bills payable are reinstated. I consider that as much a fraud upon the public as though I were to make the kind of statement for an industrial loan that I just detailed to you. Mr. PECORA. Mr. Chairman, I want to withdraw the witness for the time being and call another witness, Mr. Leyburn. You are not excused from further attendance on the committee, Mr. Kanzler. Mr. KANZLER. I understand. The CHAIRMAN. Mr. Leyburn, please stand, hold up your right hand, and be sworn: You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee. So help you God. Mr. LEYBURN. I do. TESTIMONY OF ALFRED P. LEYBURN, LAKESHORE HOTEL, CLEVELAND, OHIO; CHIEF NATIONAL-BANK Mr. PECORA. Mr. Leyburn, give your full name, address, and business or occupation to the committee reporter for the record. Mr. LEYBURN. My name is Alfred P. Leyburn, Lakeshore Hotel, Cleveland, Ohio; chief national-bank examiner, Fourth Federal Reserve district. Mr. PECORA. What section is comprehended within that Federal Reserve district? Mr. LEYBURN. The State of Ohio, western Pennsylvania, eastern Kentucky, and five counties in West Virginia. Mr. PECORA. Were you at one time chief national-bank examiner for the seventh district? Mr. LEYBURN. Yes; and also a national-bank examiner out there prior to that time. Mr. PECORA. How long have you been connected as examiner or otherwise with the Department of the Comptroller of the Currency? Mr. LEYBURN. Since 1919. Mr. PECORA. Will you give the committee, briefly, a history of your connection with the Department of the Comptroller of the Currency. Mr. LEYBURN. I was a clerk in the office of the Comptroller of the Currency from November of 1919 to May 31, 1921. I was assistant national bank examiner, Fourth Federal Reserve District from May 31 to September 1, 1921. I was national bank examiner |