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Mr. STONE. Certainly [handing paper to Mr. Pecora].
Mr. PECORA. Do you know this to be a true copy of such letter?
Mr. STONE. I believe it to be.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Letter, Thomas to Reichert, Oct. 27, 1931, was received in evidence and marked " Committee Exhibit No. 110, Jan. 31, 1934 ", and portions of the same were subsequently read into the record by Mr. Stone.)

Mr. PECORA. Now you may refer to it.
Mr. STONE [reading]:
3. Stocks
Mr. PECORA. Have

you
another

copy

for

your own use? Mr. STONE. No. Mr. THOMAS. He has it marked. Mr. STONE [reading]: 3. The examiner states in his letter that he believes the stock of the Detroit Company which we are carrying now at the value of $25,000 should be entirely eliminated from our assets through a charge to our profit and loss account. Inasmuch as the stock is still owned by the Detroit Trust Company we do not feel that we should entirely eliminate this item from our assets, but we have charged our undivided profit account and set up a reserve against the Detroit Company deficiency, of $250,000, the total amount at which we are carrying this stock.

In other words, I understand that we carried out his instructions.

Mr. PECORA. In his letter of September 18, 1931, Examiner Carroll makes a further recommendation under the caption of “ Stocks with regard to setting up a special reserve to cover the impairment in the value of the capital stock of the First Detroit Co. Was that done? Mr. STONE. Further reading from paragraph 3 [reading]:

In this same paragraph the examiner states that they find the $4,000,000 book value at which we are carrying the stock of the First Detroit Company to be impaired to the extent of $123,517.90. To take care of this deficiency we are charging undivided profits $200,000 and crediting this amount to the reserve against depreciation on First Detroit Company Stock.

I am not reading now, but there was about $77,000 more charged off than the examiner recommended.

Mr. PECORA. May I have a copy of that letter to the Commissioner?

(Mr. Stone handed exhibit 110 to Mr. Pecora.)

Mr. PECORA. You observe that Examiner Carroll in his letter of September 18, 1931, called attention to the fact that total loans of the trust company as of August 31, 1931, secured by Detroit Bankers Co. stock, plus a loan to the Detroit Bankers Co., comprised 3112 percent of the total loans and discounts of the trust company at that time. You notice that, do you not?

Mr. STONE. I do not know that I get that clearly in my head. What made up the 31 percent?

Mr. PECORA. The loans secured by Detroit Bankers Co. stock, plus a loan to the Detroit Bankers Co., the specific amount of which is not given in Examiner Carroll's letter. He calls attention to the fact that those loans aggregate 3142 percent of the total outstanding loans and discounts shown by the examination of August 31, 1931.

Mr. STONE. That refers only to our collateral loans.
Mr. PECORA. Yes.

Mr. STONE. Not to mortgage loans or any other kind. I have no reason to doubt the statement, but I do not know about the fact.

Mr. PECORA. In your reply, or in the reply of the trust company to this letter of September 18, 1931, on the subject of loans and discounts, you said as follows (reading):

In compliance with your recommendation we have discontinued for the present making loans secured by Detroit Bankers Company stock and will gradually reduce the present loans which we have predicated on this stock. However, there will be one exception to this. Recently each of the units of the Detroit Bankers Company agreed to carry the loans of all officers and employes of that unit. This will mean a transfer of officers' and employes' loans between the various units. A great many of these loans are secured by Detroit Bankers Company stock, and under this plan we shall be obliged to take over from other units loans in the approximate amount of $275,000, whereas the other units will take up from us loans in the amount of $110,000. This will mean a net increase of approximately $165,000 face amount of loans, many of which are predicated on Detroit Bankers Company stock.

Was it not known to you currently, as chairman of the board of the trust company, that the trust company was carrying a large amount of collateral against loans which consisted of stock of the Detroit Bankers Co.?

Mr. STONE. Yes, in a general way.

Mr. PECORA. Was that regarded by you as sound banking policy, for the bank to have that large concentration of collateral ?

Mr. STONE. Not if it could be prevented, but those loans, I think, were made up largely, if not entirely of loans formerly made on stock of the bank units, which afterwards went into the holding company, and when they exchanged their stock in the banks they naturally received Detroit Bankers Co. stock, which remained as collateral to these loans.

Mr. PECORA. The market value of that Detroit Bankers Co, stock would be affected by any change in the dividends paid on that stock, would it not?

Mr. STONE. Yes.

Mr. PECORA. Don't you know, as a director of the Detroit Bankers Co. at that time, that all the other unit banks of the Detroit Bankers Co. carried heavy concentrations of collateral against loans, consisting of Detroit Bankers Co. stock? In other words, do you not know that that condition prevailed generally throughout the unit banks of the company?

Mr. STONE. I do not know. I do not recall that any report was made to the directors of the Detroit Bankers Co., but I think it is fair to say that I knew of the fact in a general way.

Mr. PECORA. Any depreciation in the market value of the Detroit Bankers Co. stock would, to the extent of such depreciation, undercollateralize the loans which the various unit banks held, and which were secured by Detroit Bankers Co. stock, would it not?

Mr. STONE. It would reduce the collateral value. Whether it would render them undercollateralized or not would depend upon the facts in each case, the amount of stock pledged, and whether they had other securities pledged.

Úr. PECORA. You know as a matter of fact, Mr. Stone, that most of the loans carried by the unit banks, and which were secured

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principally by Detroit Bankers Co. stock, became ultimately undercollateralized ?

Mr. STONE. I do not think I have ever seen any reports of the various banks upon that subject.

Mr. PECORA. Apart from specific reports, is not that within your knowledge as a member of the board of directors of the Detroit Bankers Co.?

Mr. STONE. I would not like to say that it was, from actual facts or knowledge. I would not question the fact, however.

Mr. PECORA. Through this policy of the unit banks having these heavy concentrations of collateral against loans, consisting of Detroit Bankers Co. stock, were not the unit banks put in a position whereby in order to prevent any depreciation in the market value of that Detroit Bankers Co. stock, they had to extend themselves to the utmost in paying dividends to the Detroit Bankers Co. so as to enable the latter, in turn, to meet its dividend requirements of 17 percent on the par value of its own capital stock?

Mr. STONE. I do not think that influenced them in the payment of dividends or fixing the rate. I can speak for myself. It would not influence me.

Mr. PECORA. Would not that have been the effect, a necessary effect and consequence, of these heavy concentrations of collateral consisting of Detroit Bankers Co. stock?

Mr. STONE. To what effect do you refer? That tbe higher the dividends the

Mr. PECORA. No; that unless dividend requirements on the Group Co. stock were met by the Detroit Bankers Co., the market value of that stock would depreciate, and to that extent the loans secured by that stock in the various unit banks would become impaired as to the security to the extent of such depreciation !

Mr. STONE. Another way of stating that would be that as the dividends went down, the market value of the stock would go down, and its value as collateral would go down.

. Mr. PECORA. Yes. Mr. STONE. Yes; I think that is true.

Mr. PECORA. Did not that put the various unit banks under the burden, so to speak, of going the limit by way of declaration of divi. dends to the Detroit Bankers Co. to enable the Detroit Bankers Co. to meet its dividend requirements on its own capital stock, so as to support the market value of it?

Mr. Stone. The Detroit Bankers directors may have been subject to influences of that kind in their minds, but I do not think that it had any effect in fixing the dividends of the Detroit Bankers Co.

Mr. PECORA. Mr. Stone, if that influence would manifest itself on the directors of the Detroit Bankers Co., would it not also manifest itself on the boards of directors of the various unit banks, in view of the fact that there sat on the boards of the various unit banks, in every instance, officers or directors of the Detroit Bankers Co.?

Mr. STONE. I think naturally that whatever information they obtained from their membership, whatever opinions they formed from their membership on the Detroit Bankers Co., would be used, and would influence them in connection with their duties as directors of the constituent units.

Mr. PECORA. Yes; that is a normal consequnce, is it not, of that relationship and tie-up between the unit banks and the officers of the holding company?

Mr. STONE. For the good of both the units and the Detroit Bankers Co.

Mr. PECORA. For good ?
Mr. STONE. Yes.
Mr. PECORA. Also for evil.

Mr. STONE. It might be, if they were minded; but I believe they were not.

The CHAIRMAN. What was the capital of the Detroit Bankers Co.?

Mr. STONE. The capital was 50 million authorized and 35 million issued, I believe.

The CHAIRMAN. Was it listed on the stock exchange?
Mr. PECORA. On the Detroit Stock Exchange?
Mr. STONE. Yes; I think it was.
The CHAIRMAN. What was the par value ?
Mr. STONE. $20 per share.
The CHAIRMAN. It was sold to the public, was it?

Mr. STONE. Yes, sir; the public dealt in it. It was not sold to the public by the Detroit Bankers Co.

The CHAIRMAN. No; but it was dealt in on the stock exchange.
Mr. PECORA. It was traded in.
Mr. STONE. It was traded in; yes, sir.

Mr. PECORA. The 35 million dollars of stock originally issued was issued in exchange for capital stock of unit banks?

Mr. STONE. That is correct.
The CHAIRMAN. Do you know how it was quoted about this time?
Mr. STONE. No, sir: I could not remember.

Mr. PECORA. Around the end of 1931 I think the stock was quoted at about $30, compared with a quotation of about $80 at the end of 1930. Is that your recollection?

Mr. STONE. I do not recall really. I did not keep track of it.
The CHAIRMAN. What are the latest quotations?
Mr. STONE. The latest are nothing.

Mr. PECORA. The question of statutory liability is involved, too, so that instead of being an asset the stock might be a liability to the holders of it.

Mr. STONE. I think it was around $10 to $15 at the end of 1932, or something like that.

The CHAIRMAN. That is what I mean.

Mr. Pecora. Is it not apparent to you, Mr. Stone, in view of what you have frankly acknowledged to be the situation with regard to these concentrations of Detroit Bankers Co. stock among the various unit banks as collateral for loans, that the boards of directors of the different unit banks were influenced in their dividend declarations by the situation in which not only the Detroit Bankers Co. found itself but the unit banks as well?

Mr. STONE. I am sorry I cannot agree with you as to that. I can speak for myself, but I did not even have it in mind. What was running through the minds of the other directors I do not know. I recall no discussion of that fact at board meetings.

Mr. PECORA. Let us see how it operated in your own mind. You were chairman of the board of the Detroit Trust Co. at the same time

that you were a member of the board of directors of the Detroit Bankers Co., were you not?

Mr. STONE. Yes, sir.

Mr. PECORA. You have already said that it was in the minds of the directors of the Detroit Bankers Co. that it was advisable for them, or necessary for them, to meet their dividend requirement on their capital stock in order to maintain the market price of the stock.

Mr. STONE. Oh, no. If I made such a statement, I would like to have it corrected. I do not think that the influence of dividends on the stock market was in the minds of any of the directors.

Mr. Pecora. Then I have completely misunderstood the testimony you gave within the last few minutes on that.

Mr. STONE. I may have misunderstood your question, then..

Mr. PECORA. You, as a director of the Detroit Bankers Co., knew that large concentrations of that company's stock were in the various unit banks as collateral for loans, did you not?

Mr. STONE. Yes; I think I had a general knowledge.

Mr. PECORA. You had not only the general knowledge as a director of the Bankers Co., but you had a specific knowledge as chairman of the board of the Detroit Trust Co., as to the extent to which that particular banking unit held large blocks of the Detroit Bankers Co. stock as collateral for loans.

Mr. STONE. Yes, sir; acquired in the way I have explained.

Mr. PECORA. Yes. Now, you knew, as the result of that knowledge, that unless the Detroit Bankers Co. paid dividends on its capital stock, the market value of the capital stock would be depreciated.

Mr. STONE. I would say that that is a correct statement.
Mr. PECORA. Yes.

Mr. STONE. But I would also say that I did not have that in mind at any time when dividends were being discussed.

Mr. PECORA. And if that is a correct statement, is it not also a correct statement that any such depreciation in the market value of the Detroit Bankers Co. stock that would follow a failure of dividend payments would be reflected in all the unit banks which held large concentrations of that stock as collateral for loans?

Mr. STONE. Yes; that would follow.

Mr. PECORA. And in order to avoid all those consequences, none of which would be beneficial to the unit banks which held these large concentrations of stock, it was advisable to meet the dividend requirements on the capital stock of the Detroit Bankers Co.

Mr. STONE. I would have to repeat that I do not think that was in the minds of the directors of the Detroit Bankers Co. I say that because at any meeting which I attended that was never discussed or considered.

Mr. PECORA. Mr. Stone, don't you know that various national bank examiners that examined national banking units of the company had, at various times, criticized the dividend-paying policy of those national banks because of conditions that were then existent?

Mr. STONE. No; I really did not know that. It was not within my knowledge.

Mr. PECORA. Were not the various reports of examinations made by national-bank examiners, as well as by State bank examiners to

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