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Mr. Pecora. The banking commissioner of Michigan?
Mr. LORD. Yes, sir. They were both State institutions.
Mr. PECORA. Do you think that was sound banking policy?

Do you think it was fair to the depositors of the combined institutions to reduce their deposits by $2,500,000 through the mere process of declaring a dividend in favor of the Group Co., which was paid in the form of United States Government bonds?

Mr. LORD. Yes. I think it was perfectly good from the standpoint of the depositors, because it enabled the bank to save $75,000 a year.

Mr. Pecora. And lost to the depositors $2,500,000 of its capital funds.

Mr. LORD. Capital structure.

Mr. PECORA. Capital funds of the combined institutions, which would have been available to meet claims of depositors and other creditors.

Mr. Lord. It would have, but they had sufficient capital for their deposits after that liquidating dividend was paid.

Mr. PECORA. Was not that a process whereby the Group Co. milked the assets of the capital funds of these combined institutions to the extent of $2,500,000 ?

Mr. LORD. I would not think so, Mr. Pecora. It certainly was not done with that intention.

Mr. PECORA. Regardless of the intention, was not that the effect of that transaction?

Mr. LORD. The effect was to take $2,500,000 of the capital structure of the combined institutions, which institutions had more than was necessary for the deposits, and transfer it to the Group Co.

Mr. PECORA. It had more than was necessary for the depositors at that particular time?

Mr. LORD. Yes, sir.

Mr. PECORA. That gave no regard to a change which might come in the future, and which might jeopardize the interests of the depositors.

Mr. LORD. The change that came, Mr. Pecora, was a further decrease in deposits. If the deposits increased substantially, of course, the company would have had to increase the capital, or should have increased the capital of the two institutions, but the result wastake, for instance, the Guardian National Bank of Commerce. Their capital structure was more than ample, and the Guardian Detroit Bank's capital structure was more than ample, because the deposits kept decreasing

Mr. PECORA. What was the amount of income that would have accrued to the combined banks from $2,500,000 of Government securities?

Mr. LORD. Possibly two and a fraction percent. I do not know what the rate was. I will call it 3 percent.

Mr. PECORA. It would just about have taken care of this tax saving of $75,000 a year, would it not?

Mr. LORD. "Yes; for the bank itself; not for the group as a whole.

Mr. PECORA. But the group, after it got the bonds, drew the income from those bonds, did it not?

Mr. LORD. Yes.

Mr. PECOR). The bank did not.
Mr. LORD. No, sir.

Mr. PECORA. So that when you justify, from the standpoint of the Denetits accruing to the bank, the taking of this $2,500,000 of Government bonds out of the capital assets of the combined bank, because it effected a tax saving of $75,000 a year, you are overlooking the fact, are you not, that the income from those bonds would have taken care of that tax!

Mr. LORD. From the standpoint of the bank itself, yes; but from the standpoint of the group as a whole, no.

Mr. PECORA. What right do you think the Group Co. had to take these capital assets out of onė bank, where they belonged to the depositors and the stockholders of that bank, and were a fund of safety for the depositors, and turn them over to the Group Co.?

Mr. Lord. Mr. Pecora, the stockholders voted on this consolidation, and it was made with the full approval of the banking commissioner.

Mr. PECORA. The stockholders in question, who declared this socalled dividend to the Group Co., were the stockholders of the Group Co.?

Mr. LORD. I did not get that.

Mr. PECORA. I mean they were controlled by the Group Co., were they not, as the sole owner of the capital stock of the two banks?

Nr. LORD. Yes, sir; except directors' shares.

Senator COUZENS. When you took over the Bank of Detroit, were there any bad assets taken out?

Mr. LORD. Some, as I remember it, Senator Couzens. There was a writedown of assets, but I do not remember whether it was partly in the Bank of Detroit and partly in the Guardian. There was a substantial writedown-several hundred thousand dollars, as I remember.

Senator Coczexs. Only several hundred thousand dollars? Is that all?

Mr. LORD. Both banks were examined by the Banking Department, and whatever writeoff they made, they made in accordance with their instructions.

Mr. PECORA. As a result of this reduction of the capital of the combined banks from $9,000,000 to $5,000,000, did not that correspondingly reduce the amount of liability under the double assessment of the stockholders?

Mr. LORD. Yes, it did.

Mr. Pecora. And that also deprived the depositors of the bank of that additional margin of safety?

Mr. LORD. I assume it did; yes, sir.

Mr. PECORA. Is that the transaction that is referred to on page 11 of the printed annual report for the year 1930 issued by the Group Co. to its stockholders, and which is introduced in evidence here as Committee's Exhibit No. 36 of December 20, 1933, and which I will read to you as follows (reading]:

July 1, 1930, upon the consolidation of the Guardiani Detroit Bank and the Bank of Detroit, $2,500,000 from the combined capital of these two banks was transferred to the Group ('0. This amount, invested in highly liquid securities, for the most part United States Government bonds, is now held as a directly owned asset of the Group ('o.

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Mr. LORD. Yes.
Senator COUZENS. Were those securities later used for the

Mr. LORD. Later used for the protection of the loans of the securities company. I say they were. I do not know how much of the liquid funds of the Group Co. were used for that purpose. It is very difficult to earmark it.

Mr. PECORA. Mr. Wilkin testified a few minutes ago, and I presume you heard his testimony?

Mr. LORD. I did, sir.

Mr. PEROCA. He gave some testimony about a set-up, as I believe he called it, of the Group Co., which forbade the Group Co. from exercising any domination or control over the various unit banks of the group.

Mr. LORD. I heard it.
Mr. PECORA. What was that set-up that he referred to!

Mr. LORD. I did not know what he was talking about, except, as I recall it, in the opinion of the attorney general of Michigan, in regard to the right of the Group Co. to own bank stock, as I remember it, he said in the opinion that so long as they did not operate the banks they were entitled under the law to own such stocks. sume that is what Mr. Wilkin was referring to. I may not have the exact language of the attorney general's opinion. I have not a copy of the opinion here. In other words, the Group Co. was organized under the general corporation laws of the State, and not under the banking laws of the State, Mr. Pecora.

Mr. PECORA. Was not that opinion of the attorney general of the State of Michigan rendered somewhat under these circumstances: The Group Co. had been organized under the laws of the State of Michigan, but before its organization some consideration was given to the question of whether or not such corporation, which was to acquire and own the capital stock of various banks, could actually be set up under the laws of the State of Michigan?

Mr. LORD. I do not recall what the circumstance was of the attorney general rendering that opinion. That is something that came into the legal end of it, Mr. Bodman's end of our organization. I cannot tell you the reason that question was raised, or who raised it.

Mr. PECORA. Do you recall that the question was raised, as to whether or not a holding company, under the laws of the State of Michigan, could acquire, as such, the capital stock of banks, because of the fact that the holding company was not engaged in the same kind of business as banks were engaged in?

Mr. LORD. I think that is just what we are talking about.
Mr. PECORA. Yes.

Mr. LORD. I do not know who raised the question, or the occasion for its being raised.

Mr. PECORA. You do recall that the question was raised in some form or other, by somebody or other?

Mr. LORD. Yes; I do.

Mr. PECORA. And the attorney general rendered an opinion, in substance, to the effect that this Group Co., this holding company, which already had been incorporated, could acquire the capital stock of the banks, but should not operate them?

Mr. LORD. That is my understanding, a layman's understanding of a legal matter, Mr. Pecora.

Mr. PECORA. Do you recall that subsequent to the rendition of that opinion by the attorney general an amendment to the corporation laws of the State of Michigan was enacted by the Michigan State Legislature so as to remove all doubt about the question of whether or not the Group Co. could acquire and own the stock of these banks?

Mr. LORD. I do not. I do not recall anything about it.

Mr. PECORA. You said you did not konw what Mr. Wilkin had in mind when he testified this afternoon about the set-up of the Group Co.

Mr. LORD. I did not know what he meant by “set-up.” It was the policy of the group, as stated many times, for the unit banks to be permitted to operate their own business through their own board of directors and officers.

Mr. PECORA. I show you what purports to be a photostatie reproduction of a printed document, under the printed heading of “Guardian Detroit Union Group, Inc.", and entitled "Bulletin No. 1, January 2, 1930_Confidential; for official use only.” Will you look at it and tell me if you recognize it to be a true and correct copy of such a bulletin issued by the Group Co. for the confidential use and information of its officers?

Mr. LORD (after examining papers). Yes; that looks familiar,

Mr. PECORA. I offer it in evidence, but in view of its voluminous character I do not think it is necessary to spread it in full on the minutes. It will refer to certain excerpts from it.

The CHAIRMAN. Let it be admitted and filed.

(Bull. no. 2, Jan. 2, 1930, Guardian Detroit Union Group, Inc., was received in evidence, marked “Committee's Exhibit No. 106, January 24, 1934 ", and the same is not printed in full here for the reasons stated above.)

Mr. PECORA. Before I proceed to question you about this bulletin, which has been received in evidence as committee's exhibit no. 106 of this date, let me ask you whether or not, in connection with that merger of the Guardian Detroit Bank with the Bank of Detroit, that was consummated on June 30, 1930, any statement was ever issued, or information given to the stockholders of those two banks, with regard to the action of the group in taking this $2,500,000 in Government bonds out of the combined capital resources of the bank, and turning it over the Group Co.?

Mr. LORD. Mr. Pecora, I think there was a public announcement in the newspaper at the time of the consolidation, as to the capital structure of the new bank. There was no direct letter sent to the depositors.

Mr. PECORA. In that announcement was the statement made that $2,500,000 of Government bonds were given to the Group Co. out of the combined capital resources of those two banks?

Mr. LORD. No, sir, but the published statement of the combined bank, which must have followed after June 30, or certainly in the September call, would have shown the new capitalization, from which it was evident that the capital structure had been reduced by $2,500,000.

Mr. PECORA. The fact of the reduction of the capital structure would be evident, but it would not be evident from any statement published that that $2,500,000 went to the Group Co.

Mr. Lord. Not to the depositor, unless he got one of the annual reports.

Mr. PECORA. Was it stated in any annual report!
Mr. Lord. In the 1930 report, does it not state it!

Mr. PECORA. That is the report of the Group Co. to its stockholders, not a report to the depositors.

Mr. LORD. That is what I was referring to.

Mr. PECORA. You were referring to the report of the Group Co. to its stockholders?

Mr. LORD. Yes.

Mr. PECORA. Not to any report given to the depositors of those two banks.

I want to read the following excerpt from this bulletin no. 1, received in evidence as committee's exhibit no. 106. The bulletin is captioned “ Basic Policies". [Reading:]

President Hoover, in his recent message to Congress, referred to the Group Banking Movement as “A groping for stronger support to the banks and a more secure basis for these institutions,"

Parenthetically, I want to say that the word here appears “groping”. Probably it was intended to be “grouping”.

Mr. LORD. No; I think it was groping”.
Mr. PECORA. Was it “groping”?
Mr. Lord. I think so.
Mr. PECORA. It was a well-chosen word, then.
Senator COUZENS. Do you know who wrote that, Mr. Lord ?
Mr. LORD. Who wrote that bulletin ?
Senator CouZENS. Yes.

Mr. Lord. I think it came out of Mr. Walsh's department. He handled most of the publicity. I do not recall who wrote it all.

Senator COUZENS. Did you participate in the writing?
Mr. LORD. I went over it after it was prepared.

Senator Couzens. I thought I recognized the word “groping” in chere because of the testimony you gave before the committee of the House of Representatives.

Mr. Pecons. To read further from this excerpt [reading]:

However, he also raised the quest on as to whether the development of group banking might not (concentrate control of credit) and enunciated as one of the fundamentals of the American credit system that “credit which is based upon banking deposits should be controlled by persons within those areas which furnished these profits, and thus be subject to the restraints of local interest and public opinion in these areas."

The President has stated briefly but completely the advantages to be sought and the disadvantages to be avoided in any program of group banking.

In this bulletin are included various extracts or excerpts from the by-laws of the Group Co., I notice. Mr. LORD. I think so.

Mr. Pecora. And these quotations from the bylaws of the Group Co. relate to bylaws which declare, as a principle, that the unit banks of the group should be left to the management of their own individual policies and affairs, do they not?

Mr. LORD. They do, sir.

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