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Mr. PECORA. The letter is on the letterhead of Price, Waterhouse & Co., Penobscot Building, Detroit, and is as follows [reading]:
JANUARY 8, 1934. Mr. ROBERT O. LORD,
Detroit, Michigan. DEAR SIR: Our attention has been directed to newspaper accounts of your testimony in Washington on Thursday, January 4, 1934, before the Senate Committee on Stock Exchange Practices in which the statement was made that our Mr. Bonthron approved the form in which the annual accounts of GuardianDetroit Union Group, Incorporated, and its subsidiary companies were reported to its stockholders.
Since the statement as made by you may be misinterpreted and you have expressed readiness to make further explanations or amplification so that your testimony may be made entirely clear we are addressing this letter to you.
The exact facts are as follows: We have not at any time made any examination of the accounts of the company or any of its subsidiaries, and we there. fore have no knowledge of any of the figures contained in the annual reports. The only time that the matter was before us was when you discussed it with Mr. Bonthron about 2 weeks ago. At that time he merely stated that the form of the consolidated statement of earnings, such as was adopted by you in 1929 when the company was formed, was an appropriate statement to the stockholders of the company.
We shall appreciate your bringing this matter promptly to the attention of the chairman of the committee, so that the necessary clarification may be made in the record. Yours very truly,
PRICE, WATERHOUSE & Co. Now, Mr. Lord, you have given me a rather voluminous document purporting to be a statement of views and opinions which you were good enough to reduce to writing at a suggestion made by me and attachés of the investigating staff of this committee.
Mr. LORD. Yes, sir.
Mr. PECORA. I show you what purports to be a copy thereof, and ask you if you can identify it as such true and correct copy?
Mr. LORD. It looks like it.
Mr. PECORA. No; this will suffice for me. Now, Mr. Chairman, I offer it in evidence.
Senator COUZENS (presiding). It will be received and spread on the record, if that is what you wish, Mr. Pecora ?
Mr. PECORA. No; it is too lengthy, but for the information of the committee I will read a part of it, because it contains what, in my opinion, are very interesting views, and perhaps some members of the committee will want to question Mr. Lord about some of those views.
Senator COUZENS (presiding). The entire statement will be received and marked as an exhibit, and therefore become a part of the records of the subcommittee, without being spread in full upon the record.
(The statement of views and opinions prepared by Robert 0. Lord, was marked “ Committee Exhibit No. 116, Jan. 23, 1934," and will be held in the files of the subcommittee, only that portion which Mr. Pecora read later on in the proceedings, being spread on the record.)
Mr. PECORA. The first part relates to conversations in which the witness was asked to prepare the statement of recommendations, and so forth, for this subcommittee; and then follow the witness recommendations, which I will read for the benefit of the members of the committee, as follows: The business of banking may be divided into four general classifications:
Fourth-Fiduciary or Trust Company Activities
First--Safety of deposits
sible extent to aid industry, commerce, agriculture, the individual, and
the community Third-Safety of investments and the greatest possible protection to the
investor Fourth-Capable fiduciary management, for the conservation and manage
ment of the property of estates and individuals. Banks and Trust Companies may be classified as unit banks, group banks, or branch banks, with a substantial proportion of the institutions in the United States included in each class, and with arguments in favor of each. To attempt to discourse upon the advantages or disadvantages of each of these types would involve an endless discussion.
What we are all of us seeking is a better, stronger, and safer banking structure which can not only function smoothly and effectively in periods of normal business prosperity, but with the strength and flexibility to withstand the shocks of a severe depression and with the ability to contribute its full share toward a recovery in business from the depths of our present depression or any similar one in the future.
It would seem to me that one of the most important steps to be taken would be the inclusion of all banks in the nation in a single system under the national laws and under competent national supervision-operating under one banking law, rather than as at present having 48 separate state banking laws and one national banking law—49 in all.
Possibly the Banking Act of 1933 which, through its guaranty of deposits provisions, forces membership in the Federal Reserve system, is the first step in such direction. The ability of the separate states to tax banks and trust companies incorporated under state laws seems to be one of the principal reasons for the states' objection to a single national system, but this question could undoubtedly be satisfactorily settled by the national government taxing the national banks on an equitable basis and turning over the receipts of some portion of them to the respective states in which the banks are located. The question of branch banking, within state lines, within trade areas, within Federal Reserve districts, and nation-wide, has been hotly argued for the past three years and longer. The strength of the British and ('anadian systems is a strong argument in favor of a nation-wide or even state-wide branch banking. Personally, I believe we shall eventually come to branch banking over extended areas-even though not so far-flung as nation-wide-within the next decade.
The curtailing of some of the functions formerly carried on by banking institutions--and very properly so—-has made it increasingly difficult for the bank of small or even moderate size to earn a reasonable return on its invested capital and at the same time set aside ample reserves for losses. A branch with deposits of as small an amount as $1,000,000 can be made to pay, whereas, as a unit bank, such an amount of deposits makes it difficult if not impossible of operation at a profit. The small community is entitled to the same degree of safety, the same quality of service, and the same ability in management as the large city, and this can more likely be secured through branch banking than through the unit banks. I do not mean in any way to reflect upon the well-run and conservative small bank that is occasionally seen.
Group banking with all its faults and weaknesses has contributed in no smail measure to the strength of the banking structure during these past three years. Group banking might be classed as the intermediate step between the unit banking system and branch banking.
The Banking Act of 1933 was a most constructive piece of legislation and without doubt materially strengthened the banking structure of the nation. The complete separation of commercial and investment banking was both wise and necessary, as time will unquestionably prove.
The guaranty of bank deposits by the nation and by the banks subscribing to the Federal Bank Deposit Insurance Corporation is an experiment-probably successful if prosperity returns in the reasonably near future and if government supervision and examination can offset the possibility of additional bank failures in case this depression continues for a further extended period, and the usual mortality due to inefficient management or other causes. If this is to be made permanent, there should be a definitely known and reasonable maximum liability for the guaranteeing banks. For any bank to assume an unknown and unlimited liability for losses occasioned through the fault or mismanage ment of other institutions and not of their own-offers a hazard harmful to the depositor and unfair to the stockholder. Furthermore, if this guaranty should continue indefinitely, it would seem only proper that the Postal Savings System ultimately be abolished and its competition with savings banks be removed.
On November 29, 1933, Mr. Winthrop W. Aldrich presented to your committee a very comprehensive and carefully prepared statement on the Banking Act of 1933 and on certain other phases of the banking situation. His statement contained many suggestions, the value of which this committee undoubtedly recognize. To Mr. Aldrich's suggestions, I might add for your consideration four more, as follows:
(1) That no employee of the Comptroller's Department, of any State Banking Department, of the Examining Department of any bank clearing house association shall borrow from any member bank without the prior written consent of the Governor of the Federal Reserve Bank of the district in which the proposed lending bank is located; nor shall any such employee participate directly or indirectly in syndicates which are offering securities to the public, or in trading accounts or pool operations in securities which are dealt in publicly.
(2) No bank officer or employee shall serve as a director of any corporation other than his own bank without the prior consent of the Board of Directors of his own institution. When such consent has been given, advice thereof shall be sent to the Governor of the Federal Reserve Bank of the district in which such bank is located. The Governor of the Federal Reserve Bank, after re ceiving such advice, shall have the right to cancel the approval given by the Board of Directors of the institution by which such officer or employee is employed in case, in the opinion of said Governor of the Federal Reserve Bank, it is unwise or against the best interest of the bank that such officer or employee accept such directorship. Promotional schemes of types both good and bad have in the past sought the directorship of men occupying important positions in banking institutions, sometimes with resultant embarrassment or harm to the standing and prestige of the bank itself.
(3) That any director of a national bank or a state bank member of the Federal Reserve System, who shall fail to attend meetings of the Board for a period of four (or six) consecutive months, shall be automatically disqualified and shall cease to be such director; and, furthermore, that such director shall not be qualified for re-election to said Board for a period of six months from the date of his disqualification.
Such a provision, or one similar in tenor would, I believe, assure more regular attendance of bank directors.
(4) It seems to me that one point of criticism, entirely justified, was the form of condensed published statement issued by banks from time to time upon the call of the Comptroller of the Currency or of the State Banking Departments. Necessarily these statements had to be condensed as much as possible, but in most cases they failed to give a really intelligible picture of the facts. Furthermore, the statement of a single day might fail to give the full story. On that particular day a bank might happen to have an anusual amount of deposits, it might have had very substantial withdrawals in the normal course of business; or, in adjusting its reserve position with the Federal Reserve Bank, it might possibly have made a one-day or a twoday loan. It would seem therefore, that a truer picture could be given to the public if every bank were required to publish not only the figures of a particular date but also, directly alongside of these figures, comparable items showing the average figures for the period from the date of the last preceding published statement. The form of such statement could readily be prepared by the Comptroller's Department or by the Federal Reserve Bank to give the average citizen a reasonably clear picture of the bank and its condition.
I recommend the reduction in the number of members of the Boards of Directors of banks to a point where the Boards are composed of men who can and will give the affairs of the bank their thorough and active attention. Such Board members should be properly compensated and should fully share with the officers of the bank the responsibility of the management. Too often have men been placed upon bank Boards because of the influence of their names and positio:s rather than for their ability or wisdom in banking affairs. Possibly this cannot be accomplished by any form of legislation. Certainly it could be adopted in policy by the institutions themselves and with resultant improvements in bank management.
In the search for ways and means of strengthening the banking structure of the nation, there have been suggestions for the severance of savings banks from commercial banks, or if trust and fiduciary activities from both commercial and savings banks. While there are many arguments both for and against such procedure, I see no immediate reason for any of these moves. If necessary or advisable, savings assets can be clearly segregated from assets of the commercial banking department. The events of the past two years have proved that savings banks must retain a degree of liquidity just as high if not higher than commercial banks. Savings deposits have proven to be even more likely of withdrawal than commercial deposits at a time when fear and panic prevail. Should nation-wide branch banking be permitted, then these aforementioned activities could profitably and properly be segregated but at present in only the very large cities can there be found sufficient business to support an institution doing only a fiduciary business or only a commercial banking business.
Before closing my comments on the question of commercial and savings banking, I want to take the liberty of issuing a word of warning to the members of this committee whose influence is so powerful in shaping banking legislation. This nation of ours—the most progressive in the world in the development of industry and commerce-was without doubt materially aided along these lines by the courage, foresight, and vision of its bankers. I do not in any way condone the rank and unwarranted speculation of 1928 and 1929, and I am heartily in sympathy with any and all sound legislation. My warning is this: That you cannot legislate brains and ability. Do not inject into the business of banking too much governmental interference for you may stifle initiative and vision to such an extent that the harm to the future growth and development of the business of this country may be vastly greater than the moderate losses taken in a proper banking risk. Bank salaries may have in many cases been too high, but do not by legislation or governmental authority so restrict them that real ability and talent will be driven to other lines of endeavor willing to pay for such ability.
I have already mentioned among the four general classes into which banking may be divided one of the most important-"investment banking”-and in its own proper function it is just as vital to the prosperity and business life of the nation as is either commercial banking or savings banking.
The Securities Act of 1933 passed by Congres on May 27, 1933 was an effort to prevent so far as possible a repetition of the excesses and mistakes that occurred in the securities business in the recent speculative period ending in the Fall of 1929. Apparently and very properly the purpose of the Act is to protect the investor by requiring full and complete publicity of all pertinent facts and likewise to fix responsibility. This should not only afford protection to the investor but also to the honest and conscientious investment banker against unfair competition and practices of unscrupulous promoters and dishonest
Unfortunately, as the Act was drawn certain provisions are so in need of clarification or are either so unworkable or drastic in their effect as to have exactly the opposite result from the real intention of the law.
There is already evidence that the act is hampering the free flow of capital to industry, thereby retarding the National Recovery Program. As a practical matter, the effect to date has been to almost completely stifle new financing by legitimate business enterprises and seriously interfere with the normal operations of reputable dealers in securities. Underwriting houses have found it impossible, or at least have deemed it inadvisable to make firm commitments in connection with new issues to be registered under the Act. Some corporations faced with the early maturity of an issue of bonds are deeply concerned over their ability to refund the issue through new public financing and as a result face the possibility of receivership. It is probable that there will be ap increasing number of such cases. Numerous short-term loans now in commercial banks incurred with the expectation that they would be paid through the marketing of an issue of securities have become frozen loans. This has tied up funds otherwise available for commercial credit and has made the banks more cautious in their lending policies to other business enterprises. Trading has also been seriously retarded in securities which were outstanding when the Act was passed and therefore exempt from registration thereunder.
In addition to the underwriting and distributing of new securities issues, a substantial part of the business of investment dealers has in the past consisted of the purchase and resale of securities already outstanding, which issues the house in question has previously handled. Purchase of these securities from investors desiring to sell them and their redistribution to other investors provides about the only market available for many issues which are not listed on the Exchange. Almost without exception reputable and responsible investment dealers have found it necessary to refuse to give out to customers owning securities such information as the investor in the normal course of business would be entitled to have regarding the Company's operations and earnings, these investment dealers being unwilling to assume the unknown liabilities involved in furnishing information to investors.
While it is conceded that no particular piece of legislation of this type can ever be entirely satisfactory to everyone concerned, without doubt the present Act can and should be reviewed so that its primary purpose can still be carried out and at the same time some of the objectionable features eliminated or modified so as to permit responsible investment dealers to discharge their duties to their customers and to render a satisfacory investment banking business to the corporation whose financing they have handled in the past.
Statements have recently appeared in the press to the effect that there is a more or less concerted strike on the part of investment dealers in a deliberate effort to show that the Securities Art is unworkable to the end that a revision of the Act can be obtained. It would seem to me that these statements are far-fetched and unwarranted. It is, of course, true that both conservative investment dealers and responsible issuers have been reluctant to incur the liab'lities involved in doing new financing under the Securities Act in its present form. Unfortunately, it is the new promoters and high speculative companies that have no financial background that find it easiest to comply with the technical requirements of the Act. Many of the largest corporations which now enjoy the highest credit standing would probably find the greatest difficulty in complying with the present law. As a result, most of the issues which have been registered to date with the Federal Trade Commission have consisted of stocks of investment trusts, new mining and oil companies, and new distillery or brewery company.
Similarly, the promotional and financially irresponsible investment dealer has little or nothing to fear from the liabilities imposed by the Act and investors are not likely to find such protection offered by the Act in case they buy securities from this class of dealer. On the other hand, the most conservative and financially responsible investment banking firm would find the greatest difficulty in conducting a normal securities business under the Act, and naturally until a number of decisions have been handed down in the courts clarify. ing and interpreting the various provisions of the Statute, these firms are the ones which are most likely to be the subject of annoying and expensive suits brought by “sharpshooters and shyster lawyers."