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Mr. STONE. Twelve out of 56.
Mr. PECORA. That answers your question?
Senator COUZENS. Yes.

Mr. PECORA. Now, at that time what was the value of the 30,000 shares of the capital stock of the First Detroit Co. which was paid in the form of this special dividend?

Mr. STONE. I think there was 3 million capital and 1 million surplus, or $4,000,000. Is that correct?

Mr. PECORA. It was carried on the books at $4,000,000?
Mr. STONE. Yes.

Mr. PECORA. Shortly after the declaration and payment of that special dividend in the form of this stock you recall that 20,000 shares of it was surrendered by the Detroit Bankers Co. for cancelation, and upon cancelation the Detroit Bankers Co. received $2,000,000 in cash.

Mr. STONE. You mean after they had acquired it, it was surrendered to the First National Co., liquidating dividend !

Mr. PECORA. First Detroit Co.
Mr. STONE. I mean the First Detroit Co.
Mr. PECORA. Yes.

Mr. STONE. That was the liquidating dividend to which we referred last week.

Mr. PECORA. And that $2,000,000 was then used by the Detroit Bankers Co. to pay off or to help pay off or reduce a loan which it was then carrying at the Chase National Bank in New York!

Mr. STONE. I haven't personal knowledge of that, but I have no doubt that is a fact, because that was the purpose for which the dividend was declared.

Mr. PECORA. According to your explanation of the purpose for which this special dividend was declared, it was declared to help the Detroit Bankers Co. meet its obligations, which rested upon the original obligation of $7,200,000 incurred by the First National Bank prior to the actual incorporation of the Detroit Bankers Co.?

Mr. STONE. That is correct.

Mr. PECORA. And by that process the sum of $2,000,000 which was included among the assets of the Detroit Trust Co. was taken out of reach of depositors and general creditors of the Detroit Trust Co., was it not?

Mr. STONE. Well, having declared that dividend, naturally that would be true; yes.

Mr. PECORA. Now, you are an old banking officer and trust company official, Mr. Stone. Did you think that was fair to the officers?

Mr. STONE. Oh, yes.
Mr. PECORA. Why?

Mr. STONE. Well, there was abundant capitalization left to have protected the depositors. That was considered at the meeting. As I recall at the time, the company had capital, surplus, undivided profits and reserves of approximately 14 million or 14 million and a half dollars. Taking out the 4 million left a capitalization of about 10 million dollars as a protection to about 47 million dollars of depositors. That is at the ratio of about 1 of capitalization to 4.7 of deposits, which I think is far above the usual ratio of banks.

Carroll, examiner.” Will you look at it and tell me if you recognize it to be a true and correct copy of a letter addressed to the Detroit Trust Co. from the State examiner named Carroll on or about the date which that bears?

Mr. STONE (after perusing document). I assume that it is; yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Letter dated Sept. 18, 1931, from R. A. Carroll, examiner, to Detroit Trust Co., was thereupon designated “ Committee Exhibit No. 109, Jan. 31, 1934 ", and appears in the record immediately following, where read by Mr. Pecora.)

Mr. PECORA. The exhibit marked " Committee's Exhibit No. 109 in Evidence” reads as follows (reading]:

SEPTEMBER 18, 1931. DETROIT TRUST COMPANY,

Detroit, Jichigan. GENTLEMEN: This letter refers to the recent examination of your bank as at the close of business August 31, 1931. The following matters were discussed with Pres. Browning, Vice-Pres. Butler, and Treas. Thomas, and will require your further attention.

1. Loans & discounts.-Classification of your loans is made a part of this report and shows the following classifications, Under-margined loans (16.9%)

$1, 646, 170. 19 Slow (5.3%)

513, 097. 10 Doubtful (1.5%)

142, 183, 33 Loss (2.7%)--

258, 011.54 Loans secured by Detroit Bankers Co. stock total $1,640,544.86, which with the loan to the Detroit Bankers Co. comprise 31.5% of your total loans & discounts.

This Department recommends that in the future no additional loans be extended which are predicated upon Detroit Bankers Co. stock and that your present loans be gradually eliminated whenever possible.

2. Real estate.-Carrying value of $2,322,499.81 with the following losses set-up: Losses not including Int. & Advances-

$343, 954. 65 Interest additions.

73, 799. 68 Advances to operations of properties

57, 369. 68

Total losses set-up-

474, 224. 01 Due to these losses and the fact that you have 503 mtges under foreclosure totaling $2,738,251.20 which is classed as potential real estate we believe a Reserve for losses in real estate of at least $500,000 should be set-up at this time, & same increased periodically until a more favorable outlook appears in the real estate situation.

3. Stocks-$250,000 The Detroit Co. carrying value.-Our report shows this stock impaired to the extent of $251,730.22. This stock should be entirely eliminated from_your assets thru charge to your profit-and-loss account. $4,000,000 First Detroit Co. Carrying value. Our report shows this stock impaired to the extent of $123,517.90. This deficiency should be taken care of by the transfer into a special reserve account from the undivided profits account of enough to fully cover same.

4. Reserves.-Your reserves were short $3,406,115.94 upon date of examinations. We cann consider your time, C. D's & svgs accounts which amount $710,040.44 as reserve. Demand funds only can be classified as reserves.

It is also our understanding that the bond sinking fund accounts will be segregated & a 100% reserve set up the same as for the fiduciary accounts.

This Department frowns upon the plan of building up your reserves through a reciprocal deposit arrangement with other Detroit banks. We realize the present plan of setting up reserves was recently inaugurated, however the plan of reciprocal deposits should be discontinued as fast as the necessary reserves are built up.

Kindly advise the status of your reserves on date of reply.

Senator Couzens. Were the original deposits and your trust balances kept together?

Mr. STONE. Yes.
Mr. PECORA. The trust deposits were not earmarked?

Mr. STONE. No; except on the trust books of the company. That is, the trust ledger would show the amount of cash to the credit of each individual trust.

Mr. PECORA. Now, I have here what purports to be a report or statement signed by Mr. Van Every, auditor of the Detroit Trust Co., under date of December 20, 1933. Will you look at it and tell me first if you recognize Mr. Van Every's signature?

Mr. STONE. Yes, that is correct.

Mr. PECORA. Now will you look at the report itself and tell me if the matters specified therein are within your knowledge or accord with your recollection of the facts!

Mr. STONE. I think that is a substantially correct statement.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Report or statement dated Dec. 20, 1933, signed by F. C. Van Every, was thereupon designated “ Committee Exhibit No. 108, Jan. 31, 1934 ", and appears in the record immediately following where read by Mr. Pecora.)

Mr. PECORĂ. The exhibit reads as follows. It is dated December 20, 1933 [reading]:

As of March 25, 1931, and prior to that time the Detroit Trust Co. did not earmark in any specific bank account the cash balances in fiduciary trust accounts. On August 8, 1931, the Detroit Trust Co. opened the following bank accounts for the purpose of setting aside deposits equal to the cash balances in fiduciary trust accounts, for which the Detroit Trust Co, issued certificates of deposit: Peoples Wayne County Bank“ Fiduciary Account

$4, 500, 000 First National Bank, Detroit---- ---Do---

1, 700, 000 Detroit Savings Bank.---Do-

500,000

6, 700,000 It is not possible to state, as of August 8th, 1931, that the above total was sufficient to cover Fiduciary Trust balances, because it was necessary to analyze trust agreements in order to determine the accounts which were to fall into the Fiduciary classification. It was later determined that the amount was more than ample.

From August 8th, until October 1st, 1931, the above bank accounts were carried on the general books in memorandum only. On October 1st, 1931, at the request of the Michigan State Banking Department the accounts were set up on the General Statement of Condition,

On January 5th, 1932 the fiduciary bank deposits were brought into balance with the cash balance as shown in the fiduciary trust accounts, and kept in balance thereafter. Detroit Trust Company, by H. C. Van Every, Auditor.

Now, Mr. Stone, in committee's exhibit no. 108 which I have just read there is a statement embodied reading as follow:

From August 8 until October 1, 1931 the above bank accounts were carried on the general books in memorandum only. On October 1, 1931 at the request of the Michigan State Banking Department the accounts were set up on the general statement of condition.

In view of that I want to show you what purports to be a photostatic reproduction of a letter addressed to the Detroit Trust Co. under date of September 18, 1931, bearing the signature “R. A. Carroll, examiner." Will you look at it and tell me if you recognize it to be a true and correct copy of a letter addressed to the Detroit Trust Co. from the State examiner named Carroll on or about the date which that bears?

Mr. STONE (after perusing document). I assume that it is; yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Letter dated Sept. 18, 1931, from R. A. Carroll, examiner, to Detroit Trust Co., was thereupon designated “ Committee Exhibit No. 109, Jan. 31, 1934 ", and appears in the record immediately following, where read by Mr. Pecora.)

Mr. PECORA. The exhibit marked " Committee's Exhibit No. 109 in Evidence” reads as follows (reading]:

SEPTEMBER 15, 1931. DETROIT TRUST COMPANY,

Detroit, Michigan. GENTLEMEN: This letter refers to the recent examination of your bank as at the close of business August 31, 1931. The following matters were discussed with Pres. Browning, Vice-Pres. Butler, and Treas. Thomas, and will require your further attention.

1. Loans & discounts.—Classification of your loans is made a part of this report and shows the following classifications. Under-margined loans (16.9%).

$1, 646, 170. 19 Slow (5.3%)

513, 097.10 Doubtful (1.5%)

142, 183. 33 Loss (2.7%)----

258, 011.51 Loans secured by Detroit Bankers Co, stock total $1,640,544.86, which with the loan to the Detroit Bankers Co. comprise 31.5% of your total loans & discounts.

This Department recommends that in the future no additional loans be extended which are predicated upon Detroit Bankers Co. stock and that your present loans be gradually eliminated whenever possible.

2. Real estate.-Carrying value of $2,322,499.81 with the following losses set-up: Losses not including Int. & Advances.

$343, 954. 65 Interest additions..

73, 799. 68 Advances to operations of properties--

57, 369. 68

Total losses set-up--

474, 224. 01 Due to these losses and the fact that you have 503 mtges under foreclosure totaling $2,738,251.20 which is classed as potential real estate we believe a Reserve for losses in real estate of at least $500,000 should be set-up at this time, & same increased periodically until a more favorable outlook appears in the real estate situation.

3. Stocks--$250,000 The Detroit Co. carrying value.-Our report shows this stock impaired to the extent of $251,730.22. This stock should be entirely eliminated from your assets thru charge to your profit-and-loss account. $4,000,000 First Detroit Co. Carrying value. Our report shows this stock impaired to the extent of $123,517.90. This deficiency should be taken care of by the transfer into a special reserve account from the undivided profits account of enough to fully cover same.

4. Reserves.-Your reserves were short $3,406,115.94 upon date of examinations. We cannot consider your time, C. D's & svgs accounts which amount to $710,040.44 as reserve. Demand funds only can be classified as reserves.

It is also our understanding that the bond sinking fund accounts will be segregated & a 100% reserve set up the same as for the fiduciary accounts.

This Department frowns upon the plan of building up your reserves through a reciprocal deposit arrangement with other Detroit banks. We realize the present plan of setting up reserves was recently inaugurated, however the plan of reciprocal deposits should be discontinued as fast as the necessary reserves are built up.

Kindly advise the status of your reserves on date of reply.

The matter of deducting your iduciary account from your liabilities, and also the 100% reserve for same from your assets in making a published report will be referred to the Commissioner, and you will hear direct from the Office at Lansing, as regards same.

This letter, together with your authorized reply, should form a part of your Directors' minutes. Your reuils, direct to the office at Lansing, will be expected not later than October 20, 1931.

(Signed) R. A. CABROLL, Examiner. What was the stock of the Detroit Co. referred to here, $250,000 carrying value, which, according to the examination of the State banking department, they found to be impaired to the extent of $251,730!

Mr. STONE. Might I say, preliminary to that, as I have several times before, that as chairman of the board I would not have direct knowledge of this I mean of all the facts in there. Some I have. The letter starts by referring to Mr. Browning, Mr. Butler, and Mr. Thomas, calling these matters to their attention. I do not want to make that statement any more, Mr. Pecora.

Mr. PECORA. This letter also specifically requests that it be brought to the attention of the board of directors.

Mr. STONE. Yes.

Mr. PECORA, You, as chairman of the board, then, must have had this letter brought to your notice, if, in turn, it was brought to the notice of the board.

Mr. STONE. I do not mean that at all. The Detroit Co. was a corporation fully owned by the Detroit Trust Co. for the purpose of transacting its bond business outside the State of Michigan, having offices in New York, Chicago, Los Angeles, and San Francisco, the object of incorporating it being to avoid the necessity of making application to the proper authorities in those States to qualify the Trust Co. to transact business in those States. We organized the corporation just for that purpose only.

Úr. PECORA. What action was taken by the board with regard to recommendations made by Mr. Carroll in this letter, that this stock of the Detroit Co., which was then being carried on the books of the trust company as an asset valued at $250,000, should be entirely eliminated, through a charge to profit-and-loss account?

Mr. STONE. Have you a copy of our answer that I could use ?
Mr. PECORA. We have no copy of any such reply, Mr. Stone.
Mr. STONE. Have you one, Mr. Thomas ?
Mr. THOMAS. Was that the examination in 1931 ?

Mr. PECORA. The examination made as of August 31, 1931. This letter is dated September 18, 1931.

(Mr. Thomas produces a paper and hands the same to Mr. Stone.)
Mr. STONE. Paragraph 3 in our letter, entitled “stock
Mr. PECORA. Yes; and it is paragraph 3 of the examiner's letter.
Mr. STONE. We would answer by similar number.

Mr. PECORA. Have you a copy of any letter that was sent in behalf of the Detroit Co. as an answer to this letter of the examiner marked in evidence as Committee's Exhibit 109?

Mr. STONE. Yes, sir. That is what I am reading from.
Mr. PECORA. Will you please produce a copy of the entire letter?
Mr. STONE. Do you wish to see it?
Mr. PECORA. Yes, sir.

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