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1931, 503 morgages, on which the Detroit Trust Co. had made loans, were then in process of foreclosure, and that the face amount of those mortgages in process of foreclosure, was $2,738,000. It was apparent then that the real estate market in Detroit and its vicinity,

I mean in August of 1931, was in a very serious condition, and that real-estate values were depreciating rapidly. Isn't that so?

Mr. THOMAS. Yes. I think that was true generally all over the country.

Mr. PECORA. Yes. And in the face of that condition the Detroit Trust Co. continued to sell to itself as trustee for those trust funds participation certificates in those mortgages.

Mr. THOMAS. Well, I don't know whether there were any sales after that date or not. If so, I imagine there were very few.

Mr. PECORA. Well, according to an exhibit offered in evidence this morning, consisting of reports and data compiled by Mr. Van Every, auditor of the Detroit Trust Co., sales of those participation certificates were made as late as March 2, 1932, to these trust accounts. That seems to be the fact, doesn't it?

Mr. THOMAS. Presumably so.

Mr. PECORA. Would you consider that an exercise of sound judgment on the part of the Detroit Trust Co. as trustee for those trust accounts, to purchase that kind of security for those trust funds!

Mr. THOMAS. Well, it would depend on the actual condition of those mortgages in back of the participation certificates. As I said before, it was a very difficult matter to examine every mortgage and see just what the extent, if any, of the defaults were.

Mr. PECORA. And because it was a difficult matter to do that, it wasn't done.

Mr. THOMAS. Yes; but

Mr. PECORA (continuing). And purchases were made by the Detroit Trust Co, as trustee of those trust funds from itself as the issucr of those mortgage-participation certificates, and a charge was made of 1 percent as an investment fee in those cases.

Mr. THOMAS. Well, that was in just very few cases, I believe, that we made a charge of 1 percent on the trusts. Of course, I think perhaps at that very time they were analyzing the mortgages. You will remember that we had I think it is something like 25,000 mortgages in our care, both company participation and trust mortgages, totaling about $70,000,000, and it necessarily took some time to make a complete investigation.

Mr. PECORA. And because of the extent to which the Detroit Trust Co. had invested in real-estate mortgages, the Trust Co. must have known and must have been keenly aware of the depreciation going on during all of that time in real-estate values, that is, during the years 1930, 1931, and 1932.

Mr. THOMAS. I think the company knew as well as anyone else knew.

Mr. PECORA. And with that knowledge, as trustee it bought from itself those mortgage-participation certificates, and considered them good investments for trust funds, did it!

Mr. THOMAS. Well, I don't know. I don't think it would do that with that knowledge.

Mr. PECORA. Well, it had the knowledge, didn't it? You have already admitted that.

Mr. THOMAS. It was accessible; yes. I don't know whether they had completed the examination by that time.

Mr. PECORA. I will now resume my examination of Mr. Stone.

TESTIMONY OF RALPH STONE-Resumed

Mr. PECORA. Mr. Stone, in the month of May 1932 it appears that the Detroit Trust Co. underwent another examination by the State banking authorities. Do you recall that?

Mr. STONE. Yes; I believe so.

Mr. PECORA. And as a result of that examination, which was made as of the close of business on May 23, 1932, didn't the Trust Co. receive from the examiner, Mr. H. G. Taylor, a letter, of which I now show you what purports to be a photostatic copy?

Mr. STONE (after looking at the photostat). The date is blotted out here by a sticker, but I have no doubt that is correct.

Mr. PECORA. No; the date I gave you is the date of the examination, and that is in the body of the letter.

Mr. STONE. That is right, May 23, 1932.

Mr. PECORA. Yes. Is_that a copy of a letter received by the Detroit Trust Co. from Examiner Taylor?

Mr. STONE. Yes, sir; from Examiner H. G. Taylor.
Mr. PECORA. Mr. Chairman, I offer that photostat in evidence.
The CHAIRMAN. Let it be admitted.

(Photostatic copy of a letter addressed to the Detroit Trust Co. by H. G. Taylor, examiner of the State of Michigan Department of Banking, was marked “ Committee Exhibit No. 115, Jan. 31, 1934", and will be found immediately following where read by Mr. Pecora.)

Mr. PECORA. The document just received in evidence as committee exhibit no. 115, on the letterhead of the State of Michigan Department of Banking, reads as follows: DETROIT TRUST Co.,

Fort Street at Shelby, Detroit, Mich. GENTLEMEN : Following is report of the examination of your institution as of the close of business May 23, 1932.

(Matters in general discussed with McPherson Browning, president, L. K. Butler, vice president, and W. J. Thomas, treasurer, during examination.)

Loans and discounts-Advances.-We recommend that credit files be built up in connection with loans and advances to trusts, with special attention to extensions which are not amply protected by marketable collateral,

Complete information should be procured as to the liquidating ability of borrowers, indebtedness and make-up of assets, whereby plans for workout of lines may be formulated.

Tentative classification is herewith attached.
Mortgages.-Schedule of comments attached.
Other real estate.-$645,321.28 Estimated losses in Other Real Estate.
$54,891.32 Interest additions,
Bonds.-See attached classification.

Reserves.-Reserves have been short by very substantial amounts almost continuously since our last examination,

A further criticism lies in the fact that certificates of deposit are issued to First Wayne National Bank and the Detroit Savings Bank under a reciprocal deposit arrangement, such liability actually constituting Bills Payable. This should be listed on statement under proper caption,

Dividends.-In view of possible contingencies in working out the general assets of the Company, it is very essential that dividends be suspended until conditions are definitely improved.

Reserve accounts.-All available earnings should be carried to reserve accounts.

This letter, together with your reply, should be incorporated in Directors
Minutes, reply to be made on or before August 15th. No detailed report on
lines is requested.
Yours very truly,

H. G. TAYLOR, Examiner, Let me ask you, Mr. Stone, as chairman of the board of the Detroit Trust Co. at that time, if this letter was brought to the attention of the board of directors of the Trust Co.

Mr. STONE. I assume it was.
Mr. PECORA. Do you recall it?

Mr. STONE. Not as of any particular meeting; no. But it was our invariable practice.

Mr. PECORA. Do you recall whether or not any reply, such as was requested in this letter, was sent by the Trust Co. to the Michigan department of banking?

Mr. STONE. There was.
Mr. PECORA. Have you a copy of any such letter that was so sent?
Mr. STONE. Yes.
Mr. PECORA. Will you produce it, please?
Mr. STONE. Yes. Here it is.

Mr. PECORA. Mr. Chairman, I offer in evidence the copy of letter produced by the witness.

The CHAIRMAN. Let it be admitted.

(A carbon copy of a letter dated Aug. 2, 1932, addressed to the Department of Banking, Lansing, Mich., by W.J. Thomas, treasurer of the Detroit Trust Co., was marked “Committee Exhibit No. 116, Jan. 31, 1934 ", and will be found immediately following where read by Mr. Pecora.)

Mr. Pecora. The letter just received in evidence as committee exhibit no. 116, reads as follows:

AUGUST 2, 1932. DEPARTMENT OF BANKING,

Lansing, Michigan. (Attention: H. G. Taylor, Examiner.) GENTLEMEN : We acknowledge receipt today of your report of the examination of our Company as of the close of business May 23, 1932. In this reply we shall refer to the items as captioned in your report:

Loans, discounts, and advances.-Your recommendation regarding the building up of credit files in connection with loans and advances to trusts will be complied with as far as possible. We shall secure all the information we can with respect to these borrowers, and will secure detailed financial statements from as many as will furnish them.

Mortgages.-We have noted your miscellaneous remarks concerning twentyeight of our mortgage loans, most of which pertain to delinquent payments. We will continue to exert every effort to keep payments up to date. Recently we have augmented our Past Due Department by a staff of outside men whose duties are solely collecting past due interest, principal, taxes, etc. Results from this additional force have to date been satisfactory.

Other real estate.-Your estimate of loss in our Other Real Estate Account is $645,321.28. Our present reserve for losses in other real estate is $500,000, which reserve will be gradually increased as we continue our daily reserve accrual.

Bonds.We have noted your recapitulation of our bond account reflecting in percentages the ratio of investments in various types of bonds. You have made no comments or recommendations so we assume no special action on our part is required.

Reserves.-We have been constantly endeavoring to convert assets into cash so as to improve our position of liquidity thereby providing sufficient cash

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reserves.

We are insisting upon periodical liquidation of collateral loans; as above stated we are doing everything possible to secure the liquidation of mortgages and we are liquidating our Company bond account as rapidly as satisfactory bids are received. Further, we have made application for a loan from the Reconstruction Finance Corporation, which, if secured, will furnish us with sufficient cash reserves, and together with the continuous gradual liquidation of assets will permit the reduction of the deposit which the First Wayne National Bank and the Detroit Savings Bank have with us, eventually eliminating the reciprocal deposit arrangement to which you refer.

Dividends.-We have neither accrued nor paid any dividend since April 1st of this year, and will continue this policy until there is a substantial improvement in our earnings, in which event we will communicate with your office before paying any further dividend.

Reserve accounts.-As you recommend, all available earnings have been carried to our Reserve Account since April 1, 1932, and this will be continued unless as stated in the above paragraph increased earnings warrant a change of policy.

Your report and this reply thereto have been read to our Board of Directors in regular meeting held August 2, 1932, and have been incorporated in the minutes. Trusting this is entirely in order and thanking you for your report, we are Very truly yours,

Treasurer. W. J. THOMAS: F.W.

Now, as I read this exhibit, Mr. Stone, did you notice reference therein, under the caption" Reserves” to the reciprocal deposit arrangement " set forth in Mr. Taylor's letter, which has been received in evidence and marked " Committee Exhibit No. 115”?

Mr. STONE. Yes.

Mr. PECORA. Well, apparently, on August 2, 1932, when this reply was sent by the Detroit Trust Co. to Examiner Taylor's letter, the directors and officers of the Trust Co. had come to the conclusion that there was a reciprocal deposit arrangement with the First National Bank, the Peoples Wayne County Bank, and the Detroit Savings Bank, dating back to those deposits of August 8, 1931; isn't that so?

Mr. STONE. Apparently Mr. Thomas used the same words there, but I do not think we had changed our idea that they were not reciprocal accounts.

Mr. PECORA. Well, now, Mr. Stone, do you think that Mr. Thomas would employ language, and by the employment of such language adopt it, if the board and the officers of the Detroit Trust Co. did not regard that as a reciprocal deposit arrangement ?

Mr. STONE. As a matter of fact, I do not suppose it was called, quite naturally, to anybody's attention. It was put in the letter because it was so called by the banking commissioner, as you will see it was so referred to in his letter.

Mr. PECORA. Yes; it was referred to in this language:

Further criticism lies in the fact that certificates of deposit are issued to the First Wayne National Bank and the Detroit Savings Bank under a reciprocal deposit arrangement, such liability undoubtedly constituting bills payable.

Mr. STONE. I imagine in dictating the reply Mr. Thomas naturally used the same language. But that did not change the fact.

Senator COUZENS. Well, don't you think in effect they were bills payable !

Mr. STONE. No; I do not. They haven't any of the elements of bills payable.

Mr. PECORA. Well, now, Examiner Taylor specifically referred to them as constituting bills payable, didn't he!

Mr. STONE. Yes.

Mr. PECORA. And no issue was taken with him in his characterization of those certificates of deposit as representing liabilities constituting bills payable.

Mr. STONE. No; and he apparently thought of them in that light. Mr. PECORA. Well

Mr. STONE (continuing). I do not know whether you have a record of it or not, but these balances in the shape of certificates of deposit were reduced from time to time.

Mr. PECORA. I beg your pardon?

Mr. STONE. I say, I don't know whether you have a record of it or not, but the amounts of these certificates of deposit were reduced from time to time.

Mr. PECORA. Are you familiar with the facts as to any such reductions?

Mr. STONE. I think we have a statement of it in our papers here.

Mr. PECORA. All right. Produce it and we will put it into the record.

Mr. STONE. Mr. Thomas will try to find it.

Senator COUZENS. While he is finding that paper let me ask you: How were they reduced ?

Mr. STONE. By the bank presenting the certificates and receiving payment on them.

Senator COUZENS. Did you request that they present the certificates ?

Mr. STONE. No; I don't know the facts about them, but I presume they came in in the ordinary course of business.

Senator COUZENS. They seem to have been reduced the same as bills payable were reduced. Of course, ordinarily that doesn't happen with a certificate of deposit, does it?

Mr. STONE. Oh, yes. Holders of certificates of deposit frequently bring them in for payment on account and the taking out of new certificates. It happens every day.

Senator COUZENS. These did not happen in that way, though, did they!

Mr. STONE. I think they did.
Mr. PECORA. Will you produce your records to show it?

Mr. THOMAS. Here is a statement showing the balances of the C.D.'s which the banks bought from us, and the corresponding statement of the balances of those fiduciary accounts. Of course, they were never the same after the accounts were opened. I mean the same amount, because we adjusted the fiduciary accounts daily to the actual aggregate of the cash balances in all the segregated trusts.

Mr. STONE. This is a statement of the First National Bank only and not of the Detroit Savings Bank, the First National Bank having been at this time consolidated with the Peoples Wayne County Bank. The total of the certificates of deposit issued to the Peoples Wayne County Bank were $6,700,000, and this statement shows a deposit of that amount on August 8, and then shows reductions to 412 million dollars on February 11, 1932.

Mr. PECORA. Will you produce that paper for us?

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