Mr. PECORA. And the greater part of those losses were incurred during the year 1931, were they not? Mr. BALLANTYNE. Oh, no. Mr. PECORA. Do you know how much of them were incurred during 1931? Mr. BALLANTYNE. No; I could not attempt to tell you that. Mr. PECORA. Why do you say, then, that the greater part was not incurred during the year 1931? Mr. BALLANTYNE. No; it was not. Mr. PECORA. Why do you say the greater part of those $23,000,000 depreciation of the capital assets of the Detroit Bankers Co. and its units was not due to losses sustained during the year 1931? Mr. BALLANTYNE. Because I know they were not. Mr. PECORA. How much of them were, or what proportion of them even approximately were incurred during the year 1931? Mr. BALLANTYNE. I am not going to hazard a guess on that. Mr. PECORA. Aren't you hazarding a guess when you say the greater part of those $23,000,000, or that approximate figures, was not incurred and did not represent losses during the year 1931? Mr. BALLANTYNE. No; I am not hazarding a guess there. Mr. PECORA. You know that? Mr. BALLANTYNE. Yes, sir. Mr. PECORA. You have personal knowledge of that? Mr. PECORA. Now, from whom did you get the figures that caused you to say in your annual report to stockholders of the Detroit Bankers Co. for the year 1931 that the net operating income, after customary reserves, was $7,475,293.47, equal to $4.21 a share? Mr. BALLANTYNE. From the comptroller of the bank, Mr. Verhelle. Mr. PECORA. You got them from Mr. Verhelle? Mr. BALLANTYNE. Yes, sir. Mr. PECORA. Do you know how he arrived at that figure? Mr. BALLANTYNE. Well, he accepted the statements furnished by the various units, I dare say, from the officers of the various units, as most bank comptrollers do, and measured the earnings, and arrived at that figure. Mr. PECORA. Now, is that what Mr. Verhelle has told you? Mr. BALLANTYNE. No; he did not tell me that. Mr. PECORA. You are assuming that that is how he got it? Mr. PECORA. You do not mean that, do you? Mr. BALLANTYNE. Well, I know as well as I know anything that that was how he got it? Mr. PECORA. Well, that is a different statement. Mr. BALLANTYNE. He is here and you can ask him. Mr. PECORA. I am going to later on. Now, Mr. Ballantyne, did you know that for the purpose of arriving at this figure of $7,475,293.47 as being the net operating income of the Detroit Bankers Co. for the year 1931, after customary reserves had been arrived at, it was done substantially in the following manner: By first transferring from the reserves account the sum of $22,373,880.30 to operating account? Do you know that that was done? Mr. BALLANTYNE. Well, was that done? Mr. Verhelle, do you know that that was done? Mr. VERHELLE. No. Mr. BALLANTYNE. No; I have no knowledge of it. Mr. PECORA. You don't know how this figure of $7,485,293.47 was arrived at, do you? Mr. BALLANTYNE. Well, I know that it was the sum of the earnings reported by the various units. Mr. PECORA. That it was derived how? Mr. BALLANTYNE. That it was the sum of the earnings reported by the various units of the bank. There could be no other way. Mr. PECORA. I think I will examine Mr. Verhelle about this matter from now on. TESTIMONY OF JOSEPH F. VERHELLE-Resumed. Mr. PECORA. Mr. Verhelle, you have heard the testimony just given by Mr. Ballantyne to the effect that the figures embodied in the annual report to stockholders of the Detroit Bankers Co. for the year 1931 were obtained by him from you as the comptroller of the company? Mr. VERHELLE. Yes, sir. Mr. PECORA. That testimony is true, I presume? Mr. VERHELLE. Yes, sir. Mr. PECORA. Now, where did you get the figure of $7,475,293.47, which is stated in this report to stockholders to have been the net operating income of the company after customary reserves? Or how did you arrive at that figure! Mr. VERHELLE. Of course, in answer to the first question, as to where I got that, it was from the various units, naturally, from the various officers of the various units, who were responsible for the recording of such items as earnings, expenses, and so forth; presumably from the general bookkeepers, together with the men in the different accrual departments, and what not. As to how it was arrived at, I would say that it took into consideration, first of all, gross operating income which each of these units carries on its books, which consists of a multitude of items, such as interest earned, and so forth. I do not suppose you are interested in that detail. Then, in addition to that, profits on investments, profits on real estate, and recoveries on loans. The total of that was substantially, say, within a million dollars of $35,000,000. Mr. PECORA. Go ahead. Mr. VERHELLE. Against that were charged the expenses of the various units. The principal item included in that, of course, was interest expense, general operating expenses, in addition to which there was charged to each such items as depreciation, any furniture and fixtures purchased, inasmuch as none of the units carried any of those items on their books, they being charged off immediately. So those were charged to them. And then Senator COUZENS (interposing). Were any losses charged to them? Mr. VERHELLE. Yes. In the year 1930 we charged against-and when I say "we" I am making a mistake. I should say the units that made up these totals charged against their operating expense and credited to reserve account for the purpose of meeting losses that would be incurred as a result of their own activities for that year the sum of approximately 12 million dollars. That may be out $300,000 or $400,000, and it is probably a little less than 12 million dollars. In the year 1931, and that is in your question here, instead of that customary figure those reserves charged to operating expense were materially increased-and again I am saying it within $300,000 or $400,000 increased substantially, approximately $3,000,000. This procedure was in line with the accrual system which was in effect. That is, daily certain specific amounts were set up by these organizations into a reserve for a contingency account, the purpose of which was to provide for losses incurred against the business then conducted. During the year 1930, as well as during the year 1931, other amounts were charged to the undivided-profits account, as representing losses incurred during the previous years, which in the best judgment of the men conducting the affairs of the business during those years they had failed to realize. After all, they were chasing this thing down the hill. Now, the result of taking these gross earnings, which I say were approximately $35,000,000, and deducting what must have been approximately $28,000,000 expense, was the method of arriving at the $7,000,000. There is a very clear explanation of that, by the way, in the June 30, 1931, report, which came out in between those two dates. Mr. PECORA. Let me have a copy of that very clear explanation. Mr. VERHELLE. That is, on this particular question you have in mind. Mr. PECORA. Is that the only copy you have? Mr. VERHELLE. This is the only copy I have of this report. Mr. PECORA. The document you have produced, and which you say contains "this very clear explanation", is a printed document entitled "Semiannual Report to Stockholders, June 30, 1931, of the Detroit Bankers Co." Mr. Chairman, I offer it in evidence. Senator COUZENS. Mr. Verhelle, was that report circulated among the public? Mr. VERHELLE. It was circulated in exactly the same or identical manner as is done in the case of any bank to the stockholders. Mr. PECORA. Mr. Chairman, I offer it in evidence, but it need not be spread on the record as it is quite voluminous. Senator COUZENS. The report will be received in evidence, and appropriately marked as to exhibit number, with the understanding that it is not to be spread in full on the record. (The semiannual report of Detroit Bankers Co. to stockholders, as of the date June 30, 1931, was marked "Committee Exhibit No. 11, Jan. 25, 1934 ", and will be kept in the files of the subcommittee, not to be printed in the hearings.) Mr. PECORA. Mr. Verhelle, will you refer me in this semiannual report, which has just been received in evidence as committee exhibit no. 11, to this very clear explanation of the question I propounded to you? Mr. VERHELLE. The question to which this provides an explanation is the question as to what happened to the $23,000,000 referred to before. This takes into consideration only one half of the year and contains at the beginning of the statement-may I just read it? Mr. PECORA. I will tell you what I think you better do: Just take a pencil and indicate by marginal notes or lines the portion that constitutes this "very clear explanation ", and let me have it. Mr. VERHELLE. All right. That is now marked so as to show it. Mr. PECORA. You do not mean the pages in between where you have marked the report, do you? Mr. VERHELLE. No, sir. Mr. PECORA. You have marked a page which I will now read into the record: To the stockholders of the Detroit Bankers Co.: The report herewith submitted covers our operations during the first half of 1931: The combined earnings of the banking units for the first 6 months of 1931, after setting aside reserves for every form of expense, including interest, taxes, depreciation, and so forth, were $5,819,569.18. Out of these earnings there was set aside reserves for contingencies of $1,918,820.70. Net earnings available for dividends were $3,908,748.48. Dividends paid were $3,036,200. The balance that was transferred to undivided profits was $872,548.48. And the other page that you have marked in this report reads as follows: Undivided profits on December 31, 1931, $17,218,579.01, less amount transferred to surplus, Grosse Pointe Savings Bank of $15,000, balance $17,203,579.01; less amounts set aside as reserves to guarantee deposits of other banks, $1,967,788.50, balance $15,235,790.51; less amounts transferred to reserves for con-. tingencies, $6,000,000, balance $9,235,790.51. Add profits first half of 1931, $3,908,748.48, gives $13,144,538.99; less dividends paid first half of 1931, $3,036,200; undivided profits on June 30, 1931, $10,108,338.99. Is that right? These are the two pages in the semiannual report that you marked. Mr. VERHELLE. Yes. Mr. PECORA. These two pages constitute the "very clear explanation" that you have referred to. Mr. VERHELLE. To one of your questions, as to the method by which it was arrived at, being an answer to one of your questions, because that takes into consideration the first half of the year, whereas your question referred to the year 1931. Mr. PECORA. Well, so far as I can understand these two pages, which constitute this "very clear explanation", they show, among other things, that on December 31, 1930, the undivided profits of the Detroit Bankers Co. and its units amounted to $17,218,579.01; and at the end of the first half of 1931, namely, on June 30, 1931, or 6 months later, those undivided profits had been reduced to $10,108,338.99, or a loss in the undivided profits account of over $7,000,000 for the first 6 months of the year 1931. Isn't that correct? Mr. VERHELLE. Except for the word "losses." It is a reduction. Mr. PECORA. Well, we will call it a reduction. Or does it represent losses, or does it represent anything other than losses, what you now call a reduction? Mr. VERHELLE. It represents a reduction in the undivided profits account, because you asked me Mr. PECORA (interposing). Doesn't that reduction represent, in substance and effect, losses? Mr. VERHELLE. No, sir. Mr. PECORA. What does it represent? Mr. VERHELLE. I can myself clearly explain that by taking a specific item to which that would be applied. That is, taking one of the items that make up that group. Mr. PECORA. Why not just take this page, embodied in the semiannual report marked in evidence "Committee Exhibit No. 11", which page you have marked as one of two pages furnishing this very clear explanation"? 66 Mr. VERHELLE. Well, I cannot explain it your way, sir. Senator COUZENS (presiding). We will give you until after lunch to explain it. The subcommittee will now recess until 2 o'clock p.m. Mr. VERHELLE. May I have that semiannual report, Mr. Pecora! Mr. PECORA. Yes; if you need it. Mr. VERHELLE. I haven't another copy of it. Mr. PECORA. All right. (Thereupon, at 12:50 p.m., Thursday, Jan. 25, 1934, the subcommittee recessed until 2 p.m. the same date, at the same place.) AFTERNOON SESSION The hearing was resumed at the expiration of the recess. Senator COUZENS (presiding). The hearing will please come to order. TESTIMONY OF JOSEPH F. VERHELLE Resumed Mr. PECORA. The last question and answer, Mr. Verhelle, are as follows: Mr. PECORA. Well, so far as I can understand these two pages, which constitute this very clear explanation, they show, among other things, that on December 31, 1930, the undivided profits of the Detroit Bankers Co. and its banking units amounted to $17,218,579.01, and at the end of the first half of 1931, namely, on June 30, 1931, or 6 months later, those undivided profits had been reduced to $10,108,338.99, or a loss in the undivided-profit account of over $7,000,000 for the first 6 months of the year 1931. Is not that correct? Mr. VERHELLE. Except for the word "loss"; it is a reduction. Now, what was that reduction in the undivided-profits item of over $7,000,000 due to, Mr. Verhelle? We are talking now about a reduction established through the first 6 months of the year 1931. Mr. VERHELLE. The principal item in that statement resulting in the reduction in the undivided-profit account is the transfer to the reserve for contingencies in the amount of $6,000,000, which figure represents amounts set aside by various units of the group to provide for the writing down of assets contained in their statements in case the amounts at which they are set up are not fully realized upon from liquidation. |