Mr. PECORA. Now, the opinion is very lengthy, but at this time I will read

Mr. BODMAN (interposing). May I have the letters I read to the attorney general and his reply, which you have received in evidence also?

Mr. PECORA. Certainly. Here they are.

The CHAIRMAN. They have already been read and have become a part of the record.

Mr. BODMAN. I would like to have them on your record.

Mr. PECORA. Mr. Bodman, the only advantage that accrued to the group in the writing of those surety bonds, instead of having them written by an independent surety company, was the saving effected in the payment of premiums, wasn't it?

Mr. BODMAN. Mr. Pecora, I cannot answer that question. There was a saving, of course, but later on it became almost impossible to get surety bonds for public funds, and in 1932 the Michigan Legislature passed on act dispensing with surety bonds for some public funds.

Mr. PECORA. Let me bring to your attention the following extract from the minutes of a meeting of the executive committee of the board of directors of the Guardian Detroit Union Group, Inc., held on February 3, 1930, at which meeting you as chairman of the executive committee presided, according to the minutes. And have you that record?

Mr. BODMAN. No; I do not think I have that here. There was something else among my papers I was going to look at.

Mr. PECORA. I want to read the following excerpt therefrom:

Mr. Stalker brought to the attention of the executive committee that from time to time certain of our units were called upon to furnish bonds covering deposits of public funds, and suggested that the group could effect considerable savings by acting as surety instead of furnishing bonds through a surety company.

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It was the sense of the meeting that until such time as the board of directors meet no general procedure should be determined upon, but in order to provide for the case presented, in the case of the Union State Bank of Dearborn the following resolution should be presented to the executive committee Resolved, That the proper officers of the Guardian Detroit Union Group. Inc., be and they are hereby authorized to execute in the corporate name of said company and under its corporate seal, a bond in the amount of $500,000 as surety for the Union State Bank of Dearborn, Dearborn, Mich., covering the deposit in said bank, of public funds of the city of Dearborn, Mich." The foregoing resolution being duly offered and seconded, was unanimously adopted.

I understand that according to the minutes of either the executive committee of the board of directors or of the board of directors of the Guardian Detroit Union Group, Inc., this was the first time that any action was taken with respect to the group writing surety bonds for any of its unit banks. Now, does that accord with your recollection?

Mr. BODMAN. I have no recollection as to when it began whatever, but if you say that you have looked up the minutes and that is shown, I will be perfectly willing to state that that is the fact.

Mr. PECORA. Now, I have before me what purports to be an excerpt from the minutes of the meeting of the board of directors of the group, held on March 12, 1930, a little over a month after the meeting of the executive committee from the minutes of which I have just read, and this excerpt from the minutes of the meeting of the board on March 12, 1930, reads as follows, and it appears at page 10 of the minute book [reading]:

Resolved that in the discretion and with the approval of the executive committee, the proper officers of the Guardian Detroit Union Group, Inc., be and they are hereby authorized to execute from time to time, in the corporate name of said company and under its corporate seal, surety bonds for public or other funds on deposit with any unit of the group.

Have you any recollection of that action?

Mr. BODMAN. I know that such action was taken, but I haven't any definite recollection of that particular meeting. I know that that was done, however.

Mr. PECORA. Mr. Bodman, you have called attention here to the letter that you wrote some time in 1931 to the attorney general of the State of Michigan, and in response to which you received a copy of the opinion rendered by the attorney general to the commissioner of insurance.

Mr. PECORA. As a matter of fact, didn't you express your opinion, as the legal adviser of the company, that the group had the right to execute and furnish the surety bonds for its unit banks in order to secure deposits of public funds?

Mr. BODMAN. Yes, sir.

Mr. PECORA. And that was long before the date of the letter you wrote to the attorney general of Michigan?

Mr. BODMAN. I do not know how long before, but I had expressed a legal opinion to that effect.

Mr. PECORA. For the purpose of refreshing your recollection thereon I show you what purports to be a photostatic copy of a letter written by you under date of June 17, 1930, addressed to the Hon. Paul H. King, referee in bankruptcy, Detroit, Mich. Will you look at it and tell me if you recognize that as a photostat of such a letter sent by you?

Mr. BODMAN. I will.

Mr. PECORA. And it is such a letter?

Mr. BODMAN. Yes; it is.

Mr. PECORA. Mr. Chairman, I offer it in evidence.

The CHAIRMAN. Let it be admitted and entered on the record. (A photostat of a letter written June 17, 1930, by Henry E. Bodman to Paul H. King, referee in bankruptcy, Detroit, Mich., was marked "Committee Exhibit No. 96, Jan. 19, 1934", and will be found immediately following where read by Mr. Pecora.)

Mr. BODMAN. May I now look at that photostat for a moment? Mr. PECORA. Yes.

Mr. BODMAN (after reading the letter). All right.

Mr. PECORA. The letter received in evidence as committee exhibit no. 96, being on the letterhead of Henry E. Bodman, attorney and. counselor at law, is as follows [reading]:

Hon. PAUL H. KING,

Referee in Bankruptcy, Detroit, Mich.

DETROIT, June 17, 1939.

DEAR SIR: The question has been submitted to me whether Guardian Detroit Union Group, Inc., has power to become surety on bonds guaranteeing deposit of bankruptcy funds deposited with banks of which the Group Co. owns substantially all of the stock.

Of the National Bank of Commerce, Guardian Detroit Bank, Second National Bank of Saginaw, and various other banks, the Group Co, owns all except directors qualifying shares. Under the well-known doctrine that corporations have the power to become surety and to guarantee the obligations of subsidiary companies, which doctrine has been recognized in Michigan, the Guardian Detroit Union Group can, in my opinion, legally assume the obligations of such suretyship.

The Group Co. is not organized specifically to engage in the business of becoming surety, but it has full power to own the stocks of other corporations, including the stock of banks and trust companies, and I have no doubt of its power to become surety under the circumstances above referred to.

Yours very truly,

HENRY E. BODMAN.

Mr. Bodman, the contention you advanced in this letter, or the opinion expressed in this letter, was based upon the fundamental principle upon which you advised the group that it had the legal power to execute and furnish the surety bonds to its unit banks; is that it?

Mr. BODMAN. That is right.

The CHAIRMAN. What is the date of that letter, Mr. Pecora ? Mr. PECORA. June 17, 1930.

The CHAIRMAN. All right.

Mr. PECORA. Mr. Bodman, it was not based upon any specific ground contained in the charter of the company, was it?

Mr. BODMAN. It was not.

Mr. PECORA. Did you first learn of the rendition of the Attorney General's opinion to the Commissioner of Insurance, a copy of which has been marked in evidence as "Committee's Exhibit No. 95 ", when you received that letter from the Attorney General in response to your letter to him, which you have read into the record?

Mr. BODMAN. No. I don't remember when, but I think not. I think I had heard that the question had been raised and that he had rendered such an opinion. I had written prior thereto for his opinion. Am I right about that?

Mr. PECORA. I think you wrote some time in March of 1931 originally.

Mr. BODMAN. I think my letter will show that.

Mr. PECORA. I want to call your attention to the following excerpt from the Attorney General's opinion to the Commissioner of Insur

ance.

Mr. BODMAN. May I look at my copy of the paper again?

Mr. PECORA. Certainly. It is next to the last page of the opinion, which opinion is rather a lengthy one. It is as follows:

It is my conclusion, therefore, that as long as a holding company limits its guaranty and surety undertakings to its subsidiary units upon whose business it depends for the success of its own existence, there can be no legal objection to such action. There must in all such cases, however, be a direct relationship between the guaranty and the business of the guaranteeing company.

I feel called upon, however, by motives of public policy, to caution depositors, especially municipal corporations, against the too-liberal exercise of the rule here announced. While not, strictly speaking, a legal question, there is, however, an important question of policy to which I must allude. The purpose of a guaranty is to insure the faithful performance of an undertaking by the principal, in default of which the person identified or the obligee may resort to the liability assumed by the guarantor. Applied to the instant case, it means simply that if a municipal corporation should deposit funds in a bank and the security of those deposits should be guaranteed by a mercantile corporation organized to hold the stock of that bank and of other banks, and the bank should fail, the depositor would have recourse against the assets of the holding company as the guarantor. However, as already pointed out, the assets of the holding company consist chiefly, if not entirely, of stocks including the stock of the defunct bank. The value of the holding company's assets is therefore no greater than the total value of all of the stock in its portfolio, except, of course, for such cash assets which it may own in the way of undivided profits, etc. It is entirely conceivable, however, that the failure of a bank may directly result in the failure of a holding company, or at least result in serious impairment of the holding company's assets. In such a case the situation would be one where the bank in effect guaranteed its own obligations, and the depositor would find himself without secondary protection of any kind. In fact, if the sole assets of the holding company should be the stock of the defunct bank, the guaranty would fall with the principal obligation. There is, therefore, an element of danger in the practical application of the holding reached above, to which attention should be directed.

Mr. PECORA. You agree with the observation of the Attorney General that I have just quoted, do you not?

Mr. BODMAN. I do not say that I agree with it. I think he overlooked the fact that in the stock of the holding company was the provision for the liability of the surety, which I think did add an element of additional safety to depositors.

Mr. PECORA. Well, that liability attached anyway because of the surety bond given by the holding company?

Mr. BODMAN. Yes; it attached anyway.

Mr. PECORA. The fact is, as events have since transpired and developed, that the observation of the Attorney General which I have just read to you from his opinion seems to have been fairly a forecast of what happened?

Mr. BODMAN. The events certainly did not turn out as anybody anticipated at that time. I think, looking back, it was a forecast. Mr. PECORA. When this opinion of the Attorney General was brought to your attention in 1931, did you do anything about calling it to the attention of the group?

Mr. BODMAN. I do not recall.

Mr. PECORA. So far as you know, did the group continue to write surety bonds for its various unit banks?

Mr. BODMAN. I think it did.

Mr. PECORA. And continued to do until an amendment of the law of the State of Michigan deprived it of the legal power to do so? Mr. BODMAN. That is right.

Mr. PECORA. But right up to the last minute, right up to the time when the amendatory act became effective, the group continued to write these surety bonds?

Mr. BODMAN. That is right.

Mr. PECORA. Do you know how many of these bonds had been written and were outstanding and in effect?

Mr. BODMAN. I do not know. I know there was a large amount. Mr. PECORA. Over 12 million dollars?

Mr. BODMAN. If you say that is So, I would not hesitate to admit it. Mr. PECORA. Do you know the amount of claims, in dollars and cents, that have been made under these surety bonds against the group?

Mr. BODMAN. I do not.

Mr. PECORA. Do you know that they aggregated over 7 million dollars?

Mr. BODMAN. No; I do not know that.

Mr. PECORA. But you are cognizant of the fact that while these surety bonds were being written by the group for its unit banks the Group Co. was executing these surety bonds and furnishing them from time to time as occasion required?

Mr. BODMAN. That is correct.

Mr. PECORA. Did you not recognize that there was a contingent liability attaching to the Group Co. under those surety bonds? Mr. BODMAN. Did I recognize there was a contingent liability?

Mr. PECORA. Yes.

Mr. BODMAN. I suppose I did.

Mr. PECORA. Do you know whether or not in any statement of financial condition or report of financial condition made by the Group Co. that contingent liability was shown?

Mr. BODMAN. I do not know of any.

Mr. PECORA. You know that the fact is that it was never shown in any such report, do you not?

Mr. BODMAN. I would say yes; it was not, to my knowledge.

Mr. PECORA. Do you consider that that was sound practice, not to include in its reports or statements any mention at all of the contingent liability represented by the surety companies?

Mr. BODMAN. I do not think the question ever presented itself to me in connection with those reports.

Mr. PECORA. You were a director continuously in this Group Co. from the time of its inception up to the time a receiver was appointed, were you not?

Mr. BODMAN. That is correct.

Mr. PECORA. You were also legal adviser to the group?

Mr. BODMAN. I was.

Mr. PECORA. You read, I assume, the reports that were issued from time to time to the stockholders by the executive officers of the group? Mr. BODMAN. I did.

Mr. PECORA. Did you have anything to do with the preparation of any of those reports?

Mr. BODMAN. I will say that in preliminary drafts of those reports-I will not say as to all of them, but as to some of themthey were submitted in draft form to one or two of the members of the executive committee, including Dr. Murphy and myself. I do not know who else. I know there were others.

Mr. PECORA. Were the drafts of the tentative or proposed reports so submitted to you in such form as to show or give a complete statement of the financial condition of the group as a whole?

Mr. BODMAN. Well, so far as the form of the reports is concerned, I do not think I ever considered anything about the form. I assumed that they did correctly state the condition and position of the Group Co. when they were sent out.