Mr. THOMAS. But you said in respect to those that there is over $6,000,000 in default.

Mr. PECORA. No; I meant the aggregate amount of the issue.

Mr. THOMAS. I was afraid the record would read in respect to

the 52 million that there was over 6 million in default.

Mr. PECORA. Thank you for the correction. No; the default was with respect to $25,000,000 of such certificates issued.

Mr. THOMAS. As far as I can tell, that seems to be correct.

Mr. PECORA. I offer it in evidence as a compilation in a very convenient form.

The CHAIRMAN. Let it be admitted.

(Tabulation headed "Detroit Trust Co., Certificates of Participation as of Jan. 1, 1934", was received in evidence, marked "Committee Exhibit No. 107, Jan. 31, 1934 ", and will be found at the end of this record.)

Mr. PECORA. Now, Mr. Stone, I want to ask you about the declaration of that special dividend on or about December 1, 1931, by the Detroit Trust Co., which was paid in the form of the 30,000 shares of the capital stock of the First Detroit Co., which the Detroit Trust Co. at that time owned. You recall the declaration of that special dividend, don't you?

Mr. STONE. Yes.

Mr. PECORA. You as chairman of the board at that time participated in the discussion at the meeting of the board of directors at which that dividend was declared?

Mr. STONE. Yes, sir; I believe I presided at the meeting.

Mr. PECORA. Now, will you give the committee the facts and circumstances involving that declaration of special dividend?

Mr. STONE. The recommendation that the dividend be made came from the directors of the Detroit Bankers Co. Mr. John Ballantyne, president of the Detroit Bankers Co., was present at the meeting and read a statement with respect to the consolidation of the Peoples Wayne County Bank and the First National Bank. At the end of that statement he said that the directors of the Detroit Bankers recommended the declaring of this dividend.

Mr. Browning then, I believe, offered the resolution for the declaration of the dividend and explained the purpose for which the dividend was to be declared.

Mr. PECORA. What was that purpose?

Mr. STONE. I will state it in a general way. I haven't the exact language of the minutes. The proceeds of the dividend, in other words, the assets which would go with the declaration of the stock of the First Detroit Co., were to be used to retire indebtedness of the First National Co. which it had incurred. I think perhaps to get the background of that it might be necessary to go back to the time prior to the organization of the Detroit Bankers Co.

Mr. PECORA. All right; will you do that?

Mr. STONE. I should say about some time the latter part of August or early in September, when the principal officers of the four banks and the Trust Co. which were contemplating organization into the Detroit Bankers Co. held meetings, it appeared that the First National Co. had been making purchases of outstate bank stocks for the First National Co. account, and it was stated at one of those meetings,

one of those early meetings, that the amount, I don't recall exactly, but I think it was three million to three and one half million. Subsequent to that letters went out, I think in October, to the stockholders of the four banks and the Trust Co.

Mr. PECORA. Those are the five original banking units of the Detroit Bankers Co.?

Mr. STONE. Yes-describing the terms for the exchange of stock and the formation of the Detroit Bankers Co.

Mr. PECORA. That is the circular letter that was put in evidence here last week?

Mr. STONE. I believe so.

Mr. PECORA. Dated October 5, 1929?

Mr. STONE. Yes; that is correct. Then, I think in November sometime, about the middle of November, at a meeting of the organization committee report was made that these purchases of outstate bank stocks amounted to the sum of about $7,200,000.

I should go back and say that at the early meetings to which I referred the opinion was generally expressed that no more of these State bank stocks should be purchased. It was not the intention of the organizers to purchase-I mean when they came together as a group-outstate bank stocks. Their intention was to limit their ownership of the national institutions to Detroit and the metropolitan district. But the First National Co. had started on it and those in charge of it were requested to discontinue those purchases. Then, in November, about the middle of November, when the meeting to which I have referred was held of the organization committee

Mr. PECORA (interposing). That is November 1929?

Mr. STONE. 1929; yes. It was reported that the amount had reached, for the purchase of these stocks, about $7,200,000, and, of course, I am frank to say that most of us were surprised that the purchases had been continued. But upon inquiry of the First National Co. the statement was made by them that they had made commitments which in honor bound they felt they should carry through, and that resulted in the purchases to this extent.

The CHAIRMAN. Were those purchases made in cash?

Mr. STONE. I assume so; but I had no knowledge of that. The stocks were pledged to banks, I think, in New York. It seems to me the Guaranty Trust. Whether any others or not I do not know. And they were accepted as collateral, I believe, for the full amount of the loan and in November, I imagine, were in the hands of those banks. The letters having gone to the stockholders of the five institutions to form the Bankers Co., and I do not know as a fact now, but I imagine it would be found that the minimum was 662% percent in the case of each institution, consents to the exchange of the stock had come in, so that the organization of the Bankers Co. was an assured fact.

Mr. PECORA. That is because more than 66% percent of the stockholders of the five original unit banks to which that circular letter was addressed had deposited their stock, indicating their willingness to exchange their stock in those five unit banks for the capital stock of the Detroit Bankers Co. ?

Mr. STONE. That is correct; at the time of which I spoke-the middle of November.

Mr. PECORA. Yes.

Mr. STONE. Then the Group organization committee realized it had this obligation of the First National Co. on its hands to take care of in some way. I don't remember any specific discussion, but I think the belief was that that problem was of a size which should not prevent the organization of the holding company. I think at that time the total capitalization was around 90 million dollars, and that would

mean

Mr. PECORA (interposing). Of what, the five original unit banks? Mr. STONE. Yes; I think so. I am giving this from recollection. So that this seven million two was in the neighborhood of about 8 percent of the total capital. The footings of the five institutions, I think it was testified to last week, were $725,000. So that this item of seven million two was about 1 percent of the footings.

Mr. PECORA. By the "footings" you mean the total resources? Mr. STONE. Total resources; yes.

Mr. PECORA. Of the five original banks that were to be acquired by the Detroit Bankers Co.?

Mr. STONE. That is right.

Senator COUZENS. The First National Co. was an affiliate of the First National Bank?

Mr. STONE. I believe the First National Co. was under some sort of an endorsement on stock certificate owned by the stockholders of the First National Bank.

Senator COUZENS. Yes; in substance they were an affiliate of the First National Bank?

Mr. STONE. Yes; that would be a proper term to apply to it, I imagine.

Senator COUZENS. Who was president of the First National Bank when this First National Co. was organized?

Mr. STONE. To the best of my recollection, Dwight D. Douglas. Senator COUZENS. Before the organization of the First National Co., wasn't there some form devised to purchase up these out-State bank stocks through the formation of prestige agreements that were afterward taken over by the First National Co.?

Mr. STONE. Not to my knowledge. I would not be aware of it. Might I follow on, connecting this with the action of the Detroit Trust Co.?

Mr. PECORA. Yes.

Mr. STONE. So the Group found that it had this 7,200,000 obligation to take care of, and I think testimony has already been produced here to show that moneys were borrowed by the Detroit Bankers Co. by various unit members of it for the purpose of reducing the loans in New York.

Mr. PECORA. Loans which had been incurred to enable the First National Co. in the first instance to acquire the stock of these various out-State banks to an aggregate amount of $7,200,000-those are the loans you referred to?

Mr. STONE. I think that is a correct statement; yes.

The CHAIRMAN. Were the dividends declared to take up that debt? Mr. STONE. Yes. That is what I was coming to, but I was trying to stretch the progress of the thing.

The CHAIRMAN. Yes; all right.

Mr. STONE. To show why the directors of the Detroit Trust Co. came to the decision to declare the dividends.

The obligation, as I say, was one of the Group, and the statement which Mr. Ballantyne made to our board showed that on the consolidation of the two banks

Mr. PECORA (interposing). That is the First National and the Peoples Wayne County?

Mr. STONE. First National and Peoples Wayne. The capitalization fixed, as I recall, after advising with the national-bank examiners, at 25 million capital, 25 million surplus, and 7 million profits. There had been a reduction in the capitalization of that company and charging off losses to which Mr. Ballantyne referred in his statement.

That left the bank in position where it could not take out of its capitalization whatever amount might be needed to retire this obligation.

Mr. PECORA. The obligation was the obligation of the Detroit Bankers Co.?

Mr. STONE. It had become so.

Mr. PECORA. Practically, in February 1930, it became the obligation of the Detroit Bankers Co. ?

Mr. STONE. In substance; yes. At any rate, they so regarded it. I don't know whether it was legally so. They regarded it, I imagine, for the reason that if they had not paid it, the names were quite similar-First National Co., First National Bank-and it would be necessary for the banks in New York to enforce the obligation by suit or foreclosure of pledge; that might have alarmed the depositors of the First National Bank and the Peoples Wayne County Bank to such an extent as to cause runs, and in addition to that it would have probably destroyed the credit of the banks at New York and elsewhere. So that they were in a position where it was necessary for them, whether legally obliged or not, to protect and take care of that loan.

So it became a group matter. And the First National Bank capital structure at reorganization not being in position to provide the funds to retire this obligation of $7,200,000 altogether-they may have been able to contribute to it-the Detroit Bankers Co. made the recommendation to the directors of the Detroit Trust Co. that it declare this dividend. There was an additional advantage in that it divorced or separated the investment business from the Trust Co. business, which was considered a desirable thing to do. That was the trend of times. It was under discussion very considerably then.

I think that explains why the directors of the Detroit Trust Co. declared the dividends. They had faith in the judgment of the directors of the Detroit Bankers Co. and acted partly upon their recommendation and partly upon the exercise of their own judgment in the matter.

Senator COUZENS. How many directors of the Detroit Trust Co. were also directors of the Detroit Bankers Co.?

Mr. STONE. I could not tell that, Senator, without having the comparison, but there were

Senator COUZENS (after a pause). While they are looking that up, when did the change take place between the 12 directors of the Detroit Bankers Co. so that they became a larger group?

Mr. STONE. That is, 9 others added to it, making 21?
Senator COUZENS. Yes.

Mr. STONE (addressing Mr. Thomas). Have you that?
Mr. THOMAS. No; I have not.

Mr. STONE. I should say within 1 year after the organization of the Detroit Bankers Co., but that is just recollection.

Senator COUZENS. Do you know why that was done?

Mr. STONE. Yes; I think that the members of the board of directors of the bank

Senator COUZENS (interposing). First National Bank?

Mr. STONE. Yes; the First National Bank-and the Peoples Wayne County, in which the directors of the banks, some of them, were very large stockholders in the Detroit Bankers Co. by exchange of their stock, felt that the future policies and the operation of the holding company should not be directed entirely by the 12 members of the Detroit Bankers board, who were the senior officers of the constituent units of the Bankers Co. They felt that they should participate in the future planning and operation of the Detroit Bankers Co.

Senator COUZENS. How did they dissolve their trust agreement that they had and set up the 12 men? How did that happen? How did they go about that?

Mr. STONE. Well, it was handled by the attorneys. I don't know just what the process was.

The CHAIRMAN. But this dividend did not go to stockholders at all?

Mr. STONE. No; this dividend went to the Detroit Bankers Co. Senator COUZENS. They were the stockholders, though, weren't they? Weren't the Detroit Bankers Co. the stockholders?

Mr. STONE. Yes. Yes; that is true, the holding company. Mr. PECORA. Senator Couzens, I have checked up in the annual report to the stockholders of the Detroit Bankers Co. for the year 1931 the facts in regard to the question you asked Mr. Stone as to how many directors of the Detroit Trust Co. were also at that time directors of the Detroit Bankers Co., that is, at the time of the declaration of this special dividend, in December 1931, and I find that 12 of the 21 directors at that time of the Detroit Bankers Co. were also directors of the Detroit Trust Co., and those 12 were as follows: John Ballantyne, William T. Barbour, McPherson Browning, Herbert L. Chittenden, Emory W. Clark, D. Dwight Douglas, James S. Holden, Truman H. Newberry, Fred. J. Robinson, Wesson Seyburn, E. D. Stayer, and Ralph Stone.

Mr. STONE. Were they all directors of the Detroit Bankers Co. at that time?

Mr. PECORA. I will check that up. These 12 that I have named were at that time, according to the 1931 report, directors of the Detroit Bankers Co. They were also at the same time directors of the Detroit Trust Co.

Mr. STONE. I guess that is right, because that was after the 9 new members to which the Senator referred were added. That was 12 out of how many members of the board of directors of the Detroit Trust Co.?

Mr. PECORA (after counting). Fifty-six directors' names are listed constituting the board of directors of the Detroit Trust Co. in this annual report.