STOCK EXCHANGE PRACTICES TUESDAY, JANUARY 16, 1934 UNITED STATES SENATE. SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, The subcommittee met at 10 a.m., pursuant to adjournment on yesterday, in Room No. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams, Townsend, and Couzens. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee. The CHAIRMAN. The subcommittee will come to order, please. Mr. Pecora, who will you have first this morning? Mr. PECORA. Mr. Blair. The CHAIRMAN. Mr. Blair, will you please come forward to the committee table, 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 invesigation by the committee. So help you God. Mr. BLAIR. I do. TESTIMONY OF FRANK W. BLAIR, DETROIT, MICH., PRESIDENT OF THE UNION JOINT STOCK LAND BANK OF DETROIT Mr. PECORA. Mr. Blair, will you kindly give your name, address, and business occupation to the committee reporter? Mr. BLAIR. My name is Frank W. Blair; residence, Lake Orion, Mich.; office, 640 Free Press Building, Detroit. Mr. PECORA. What is your business or occupation? Mr. BLAIR. At the present time and for the past 10 years, since it was organized, I have been president of the Union Joint Stock Land Bank of Detroit. From 1908 until 1930 I was president of the Union Trust Co. of Detroit, and in 1930 and 1931 I was chairman of the board, first of the Union Trust Co. and then of its successor, the Union Guardian Trust Co. Mr. PECORA. Were you also connected as officer or director, or both, with the Guardian Detroit Union Group, Inc.? Mr. BLAIR. Yes. I was chairman of the board of the Guardian Detroit Union Group, Inc., from the time it became the Guardian Detroit Union Group, Inc., until the annual meeting in 1932. Mr. PECORA. Did you continue to serve as a director of the Guardian Detroit Union Group, Inc., after you ceased being chairman of the board? Mr. BLAIR. Yes; for 1 year. The CHAIRMAN. When was the annual meeting in 1932? Mr. BLAIR. Why, it was some time in the latter part of January, and I have forgotten the exact date, Senator Fletcher. Mr. PECORA. It was usually held in January of each year? Mr. PECORA. I want to ask you particularly at this time about the Union Guardian Trust Co., formerly known as the Union Trust Co., of which you have just stated you were president from 1908 up to 1931, both inclusive. Mr. BLAIR. I was president up to Mr. PECORA (interposing). Up to 1930. Mr. BLAIR. Yes; and Mr. PECORA (Continuing). And in 1930 and 1931 you became chairman of the board? Mr. BLAIR. Yes, sir. Mr. PECORA. Do you know when the Union Trust Co. of Detroit was organized? Mr. BLAIR. In 1891. Mr. PECORA. Was it organized or incorporated under the banking laws of the State of Michigan? Mr. BLAIR. No. It was organized under what was known as the "trust company law ", which was a separate law from the banking law. Mr. PECORA. From its inception did it engage in any commercial banking business? Mr. BLAIR. NO. It was prohibited from doing a general banking business. The CHAIRMAN. Did it receive deposits? Mr. BLAIR. It received deposits, yes; on certificates. The CHAIRMAN. All right. Mr. PECORA. I have before me what purports to be a photostatic copy of the articles of association of the Union Trust Co., and I will read from article III therof: The purpose and object of the corporation is to carry on a trust, deposit, and security business, and any other business authorized by the provisions of act 108 of the public acts of 1889 and acts amendatory thereof. Does that confirm your recollection of the fact? Mr. BLAIR. Yes. Mr. PECORA. And act no. 108 of the public acts of 1889 of the State of Michigan were what? Mr. BLAIR. What they called the Trust Company Act. Mr. PECORA. After the organization in 1891 of this trust company' did it, under authority conferred upon it so to do, engage in the banking business as distinguished from the trust business? Mr. BLAIR. It received deposits on certificate. Mr. PECORA. On certificates of deposit? Mr. BLAIR. On certificates of deposit, and it accepted deposits for investment. Mr. PECORA. Were any of those deposits that it received payable on demand? Mr. BLAIR. At first they were not, but latterly practically all of them were payable on demand. Mr. PECORA. Now, when did the Union Trust Co. begin to receive deposits payable on demand? Mr. BLAIR. Prior to my connection with the company. Mr. BLAIR. Yes. Mr. PECORA. And you do not know when it was? Mr. BLAIR. No. Mr. PECORA. Well, from 1908 down it was customary for it to receive demand deposits? Mr. BLAIR. I wouldn't say that it was customary to receive demand deposits, just in that way. It did take deposits payable on demand when it could not get them in some other way. Perhaps I might say that. Mr. PECORA. And issued its certificates of deposits? Mr. BLAIR. Not certificates of deposit, generally, when it received deposits that way. There were deposits received in open accounts, not subject however to check. Mr. PECORA. Well, how were they made payable; on demand? Or, how was withdrawal effected? Mr. BLAIR. By letter, ordinarily. The CHAIRMAN. By what? Mr. BLAIR. By letter, ordinarily. Mr. PECORA. By letter ordinarily, he said. Mr. BLAIR. Yes. Mr. PECORA. Or on oral demand? Mr. BLAIR. Yes. The CHAIRMAN. But with no checks drawn? Mr. BLAIR. No checks; no. Mr. PECORA. Now, Mr. Blair, did the trust company, after it commenced to receive deposits, both deposits payable on demand and time deposits, segregate those funds into any classifications? Mr. BLAIR. I do not know that I get the purpose of the question? Mr. PECORA. Well, how were those funds received from depositors, treated by the trust company? Mr. BLAIR. As general funds of the company. Perhaps what is in your mind is that sometime subsequent to my becoming connected with the company, we seggregated the balances held for the account. of trusts, in a separate classification, and deposited those balances in outside banks. Mr. PECORA. Well, when did it commence to treat and deal with those deposits in that fashion? Mr. BLAIR. I should say about 1910, perhaps, but I cannot give you the exact date. Mr. PECORA. Did it use any terminology in classifying those deposit funds in that fashion? Mr. BLAIR. As class A funds. Mr. PECORA. They were class A funds? Mr. BLAIR. Yes, sir. Mr. PECORA. Now, Mr. Blair, did it also maintain a classification of deposit funds known as class B funds? Mr. BLAIR. Yes. Mr. PECORA. Will you describe, briefly, to the committee the attributes of the class A funds and the attributes of the class B funds? Mr. BLAIR. Class A funds were pure trust funds, where the relationship between the trust company and the owner of the funds was a purely trust relationship. Class B funds were more in the nature of deposit funds, or they were balances belonging to so-called trusts", where the owner of the trust maintained the right-or I should say retained the right to determine to what use the money should be put and how it should be invested. 66 Mr. PECORA. Would you agree to the following definition of the class A funds as contained in the report of the State bank examiner, which report is dated November 6, 1931, and in which he referred to the class A funds as "class A trust funds ", and defined them as follows: And a trust is a court trust, executor, administrator, guardian, etc., and a collection trust where the funds on deposit are of a fiduciary character or represent deposits with the company of a temporary nature. It is contended that the trusts classed under this heading have been very carefully selected and that special care has been taken to place in this classification all trusts in which the trust company has no right to make use of the cash balances, and on these trusts a 100-percent reserve is carried. Mr. BLAIR. Practically so; yes. Mr. PECORA. And would you subscribe to this designation or definition of the class B trust funds, also contained in that same report of the State bank examiner: A B trust is a voluntary or revenue trust, in which the trust indenture gives the company power to invest trust balances. A 10-percent reserve is supposed to be maintained on these cash balances. According to a recent ruling of the commissioner, the percentage of reserve on the B funds should be 20 percent. The A funds are payable on demand, and about 10 percent of the B funds are payable on demand. Mr. BLAIR. I would not subscribe to that part which indicates that the commissioner has the right to fix the percentage of reserve. The trust company law of the State of Michigan fixes the reserve which a trust company shall keep as 20 percent of its matured obligations. Nobody has ever been able to tell me just exactly what the legislature had in mind when it made that provision for a reserve. because I never could find, outside of the A funds, any obligation of the trust company which has matured. Mr. PECORA. In other respects would you subscribe to this definition of the class B trust funds? Mr. BLAIR. Very generally; yes, sir. Mr. PECORA. In addition to these class A and class B trust funds, the trust company, if I correctly understood your testimony as it has been given so far, received on deposit general funds and issued therefor its certificates of deposit. Mr. BLAIR. Yes; and for some years in addition to that it had a form of deposit which was called investment deposits, which were in a small book, with an agreement in the front of the book. Those funds, however, disappeared from the trust company after the Union |