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ADMINISTRATIVELY CONFIDENTIAL
MEMORANDUM
Mr Flanigan and the Postal Service Bond Sale
I.
Treasury and Postal Service Disagreement
There were two issues brought to Mr. Flanigan's attention
during the early planning stages of the Postal Service's bond sale. The
first issue concerned a disagreement between the Postal Service and
Treasury during the latter part of 1970. The Postal Service desired to
sell its proposed first bond issue to the public while the Treasury wished
to exercise its option and purchase the debt. Since the conflict involved
a department of the Executive Branch and could have required Presidential
resolution, Mr. Hargrove brought the disagreement to Mr. Flanigan's
attention. Mr Flanigan responded by asking the Treasury Department
and the Postal Service to each prepare a memorandum outlining their
respective positions Mr Flanigan then forwarded their respective
reports to each other. Finally, in March of 1971, shortly after
Secretary Connally was appointed to office, the conflict was settled.
Agreement was reached after discussions between the Treasury and
Postal Service staffs and discussions between Postmaster General Blount
and Secretary Connally. Mr. Flanigan was not involved in this ultimate
solution of the problem.
ADMINISTRATIVELY CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library
-2-
ADMINISTRATIVELY CONFIDENTIAL
II.
Specific Inquiries from Mr Hargrove
The second issue brought to Mr. Flanigan's attention during
the Postal Service's debt planning involved two questions from
Mr. Hargrove (1) Would it be advisable to include a commercial bank
in the underwriting syndicate? (2) Would Morgan Guaranty Trust
Company be a good bank for that purpose? Mr. Flanigan responded in
the affirmative to both questions. Indeed, the Committee Report of
the Postal Service Subcommittee of September 21, 1971 states that
Morgan Guaranty was clearly qualified.
III. Charges About Mr. Flanigan
Charges have been made that Mr. Flanigan continued to have
an interest in his prior firm of Dillon, Read and Co., and that he
influenced the decision of the Postal Service to select Dillon, Read as
one of the underwriters for the postal bond issue. Mr. Flanigan had
no interest whatever in Dillon, Read during this period having sold his
interest upon entering government services in April, 1969. Furthermore
in no way was he ever consulted nor did he advise on the investment
banking members of the underwriting syndicate. Mr. Flanigan's role
was limited to the two issues described above.
IV.
Mr. Flanigan and the Federal Financing Bank
Mr. Flanigan has had principal White House responsibility for
developing and proposing the Federal Financing Bank Legislation which
was submitted to Congress in December, 1971. This legislation would
ADMINISTRATIVELY CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library
-3-
ADMINISTRATIVELY CONFIDENTIAL
subject agency borrowing to Treasury debt coordination and, in addition,
would establish a Federal Financing Bank which would be authorized to
acquire agency debt issues Mr. Flanigan has been a strong advocate
for including all agencies including the Postal Service, under this
legislation and has made several attempts to persuade the Postal Service
that it would be desirable for it to be included. Thus, Mr. Flanigan
is an advocate for legislation which includes concepts of agency financing
which were endorsed in the September 27, 1971, report of the Postal
Service Subcommittee.
V.
Mudge, Rose, Guthrie & Alexander and the Postal Service
Underwriting
Charges have been leveled that Mr. Hargrove should have
insisted that the managing underwriters, Solomon Brothers, fire Mudge,
Rose because of the prior connection of President Nixon and former
Attorney General Mitchell with that firm. Mr. Hargrove has responded
that he was unwilling to fire a respected firm in this field, Solomon's
regular counsel for this type of work, merely because of the prior
association of Messrs. Nixon and Mitchell. Mr. Flanigan was in no
way involved in this matter.
VI.
General Allegation of Impropriety of White House Involvement
This kind of charge is purely political and appears not worthy
of comment. In the two cases in which Mr. Flanigan was involved,
Mr. Hargrove came to him as a responsible member of the federal
ADMINISTRATIVELY CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library
-4-
ADMINISTRATIVELY CONFIDENTIAL
establishment with the relevant expertise necessary either to give advice
or to perform a normal White House coordinating function. The
allegation that this implied political influence on the Postal Service is
baseless and without foundation in fact. In considering the validity of
charges of improper White House involvement in Postal Service matters
leveled in the September, 1971 Committee print, the following comments
of Chairman Udall in a December 8, 1971 letter to Mr. Hargrove
appear relevant.
"
You (Hargrove) have always impressed me as an
especially talented, knowledgeable and conscientious
member of the Postal team. You have performed well
in a task of immense complication and difficulty during
a particularly crucial period of postal history. Because
I always did, and still do, consider you an honorable
man, I deeply regretted the differences we had relating
to the bonding matter. While I remain deeply and
sincerely convinced of the validity of the main thrust
of my criticisms relating to it, I have never believed
or intended to imply that you acted illegally or in any
way for personal gain. If any language in the special
report can be read to the contrary then I regret it and
hope this letter will clear the air
11
ADMINISTRATIVELY CONFIDENTIAL
Reproduced at the Richard Nixon Presidential Library
DETROIT FREE PRESS
Monday, August 16, '71
5-
How Did Nixon's Old Law Firm Get Postal Service Plum?
BY WILLIAM VANCE
three agreed on different New
Free Press Washington Staff
public corporation supposedly
York law firms as their first
firms the companies suggested
lection of the firm.
insulated from politics.
It is not new except that in-
shortly before the scheduled
have clear evidence of polit
WASHINGTON President
choice.
would be acceptable.
Arnold Tracy of Mudge-Rose
directly, and perhaps for the
bond sale in October..
cal influence but believes th
Nixon's former law firm has
White House and Postal Ser-
Udall said he was informed
said the firm does not repre-
first time since Mr Nixon and
been named counsel for a U.S.
Mitchell left the firm, Mudge-
The Postal Service points
implication is too strong to ig
The question of political in-
vice spokesmen flatly denied
by a responsible Postal Ser-
sent the federal government
Postal Service bond issue even
fluence was raised by Rep.
that political pressure was ap-
Rose stands to profit from an
out that Mudge-Rose will be
nore. He has ordered his sub
vice official that the underwri-
on any matter and will not be
though most underwriters han-
Morris Udall, D.-Ariz., chair-
paid by the underwriters, not
committee staff, with Genera
plied.
ters had told postal authorities
doing so now. "We represent
arrangement involving Uncle
dling the issue preferred other
They point out that the un-
that the former Nixon firm
Sam.
by the Postal Service. Udall
Accounting Office help, to in
man of the House subcommit-
the underwriters," he said.
attorneys.
tee on the Postal Service.
derwriters, not the Postal Ser-
dismisses that argument as a
vestigate the contract proce
"had to be hired." Udall has
dures.
The preferences are re-
Udall, a strong supporter of
vice or the administration,
A Justice Department
Udall said the "old Nixon-
technicality, noting that the
refused to name the official.
vealed in documents the
the Postal Service, was princi-
spokesman for Mitchell noted
Mitchell fir m" may collect
fee still represents a cost to
were responsible for hiring
By the end of August he ez
Postal Service itself used in
pal author of legislation that
Mitchell and a Mudge-Rose
bond counsel. Postal officials
that the law firm "has repre-
"millions" in fees on the issue.
the Postal Service because it
pects to have enough informa
choosing five underwiriting
transformed the old Post Of-
representative declined to
said they told the underwriters
sented these underwriters in
But no one knows for sure.
will be paid from the bond
tion to determine whether
firms for the first $250 million
fice Department into a quasi-
comment on the question of
that any of the seven law
bond matters for 25 years. It is
The commission probably
sale proceeds.
hold Congressional hearing
under its $10 billion bond pro-
political considerations i'n se-
not a newjarrangement."
won't be negotiated until
Udall admits he does not
on the issue.
gram.
Their disclosure comes amid
allegations on Capitol Hill that
political considerations m a y
have influenced selection of
the underwriters and legal
counsel.
Only one of the five under-
writers rated the former
Nixon firm - Mudge, Rose,
Guthrie & Alexander as its
top choice for legal advice,
postal records show.
That broker, Solomon Bros.
& Hutzler of New York, subse-
quently was appointed "man-
aging under- writer"
among the
five firms se-
lected.
Presuma-
bly Solomon
Bros. had the
deciding voice
because its
preference for
Mudge Rose
Udall
prevailed over
the others. However, repeated
attempts to question Solomon
Bros. officials on the selection
process brought no response.
President Nixon and Attor-
ney General John Mitchell
were senior partners In
Mudge-Rose prior to the 1968
election.
One other underwriter -
Dillon, Read & Co. - listed
Mudge-Rose among four possi-
ble choices for counsel. A for-
mer vice-president of the Dil-
lion firm, Peter Flanigan, is a
special assistant to President
Nixon.
THE REMAINING three un-
derwriters selected by the
Postal Service did not include
the former Nixon firm on their
preference lists. Two of the
Reproduced at the Richard Nixon Presidential Library
THE WHITE HOUSE
WASHINGTON
WS
January 28, 1972
MEMORANDUM FOR JOHN DEAN
FROM:
PETER FLANIGAN
sub
You will be interested in the attached letter to Hargrove
from Udall. Based on the letter, it is hard to envisage Udall
making a convincing case of impropriety. The genesis of the letter
was a note from Hargrove to Udall saying that he was leaving the
Postal Service.
Attachment
Reproduced at the Richard Nixon Presidential Library
a MORRIS K. udall
COMMITTEES:
INTERIOR AND INSULAR AFFAIRS
2D DISTRICT OF ARIZONA
POST OFFICE AND CIVIL SERVICE
Congress of the United States
House of Representatives
Mashington, D.C. 20515
December 8, 1971
Mr. J. W. Hargrove
Senior Assistant Postmaster
General
United States Postal Service
Washington, D. C. 20260
Dear Jim:
Thanks for your personal note of December 6th.
You have always impressed me as an especially ta-
lented, knowledgeable and conscientious member of
the Postal team. You have performed well in a task
of immense complication and difficulty during a
particularly crucial period of postal history.
Because I always did, and still do, consider you
an honorable man, I deeply regretted the differences
we had relating to the bonding matter. While I remain
deeply and sincerely convinced of the validity of the
main thrust of my criticisms relating to it, I have
never believed or intended to imply that you acted
illegally or in any way for personal gain. If any
language in the special report can be read to the
contrary then I regret it and hope this letter will
clear the air.
At the time this matter first arose I was flattered
that you had enough confidence in my fairness to come
here face to face, give me the facts and answer my
questions. You developed in that meeting in your typi-
cally clear and forceful manner the rationale behind
the basic decisions which were made. My initial reaction
that day was more favorable to that philosophy than the
judgments I reached on further reflection and investiga-
tion. I conceded then and now that there was a strong,
rational case to be made for negotiation over bid and
non-guarantee over guarantee. As reasonable men we
differed on this judgment question.
Reproduced at the Richard Nixon Presidential Library
Mr. J. W. Hargrove
-2-
December 8, 1971
My major misgivings which still persist were over
the damage done to the image of the new enterprise by
the unfortunate appearances which arose from selection
of investment firms and their legal counsel. In the
context of P.O.D. history, our fight for a new non-
political system and the bruises I acquired during my
role in it -- these disclosures were disappointing
and troublesome.
In any event, this is water over the dam. Taken
as a whole your performance in a difficult public job
reflects credit on you, and I wish you well in what-
ever you undertake. I hope our paths cross again
under more pleasant circumstances.
Best wishes,
mbk
Mo Morris K. Udall
Reproduced at the Richard Nixon Presidential Library
PMF STATEMENT
The Staff Report to the Postal Service Subcommittee attempts to
draw the inference that I had some part in the choice of Dillon Read &
Co. Inc., as one of the managing underwriters of the Postal Service's
bond issue. This inference is completely false. I was in no way
involved with the choice of Dillon Read as one of the five bankers for
the bond issue. I have no connection whatever with Dillon Read, as a
result of entering government service I sold my interest in that firm
and put my other investments in a blind trust. Nor is there any under -
standing, either explicit or implicit, of any future connection with
Dillon Read.
Reproduced at the Richard Nixon Presidential Library
FOR
CONGRESSMAN EDWARD J. DERWINSKI
Mr. Udall's partisan attack on the Postal Service for its
choice of managing underwriters and their choice of counsel, has
no basis in fact and is completely uncalled for. The inferences
are wrong and improper.
I have reviewed with the Postal Service their procedures in
making their selectionfand the reasons for their choices. I am com-
pletely convinced that that choice is justified on the basis of sound
business judgment and was not influenced by political considerations.
All five firms are leaders in their industry and the combination of
their particular talents will afford the Postal Service as strong a
sponsorship as could be achieved.
He months prises #.
questions of impropriaty
Mr. Udall has not alleged any misconduct or impropriety as
based in
incorrect
indeed he could not in view of the record. The Postal Service has
completely
facts,
promptly and candidly replied to all of Mri, Udall's requests for
appaiculty
information. There is not a shred of evidence to support any claim
with
of patronage wrong doing.
little effort
This partisan action has all the earmarks of a purely political
to very
attack as a prelude to next year's election.
this facts.
Men of good will in both parties Tought long and hard to take
the Post Office out of politics. It is deplorable that Mr. Udall,
who in the past supported this cause, has now seen fit to play politics
with Postal affairs.
Reproduced at the Richard Nixon Presidential Library
UPI-10
(RELEASE AT 10:30 A.M., EDT)
(POSTAL)
WASHINGTON--A SENIOR MEMBER OF THE HOUSE POST OFFICE COMMITTEE
TODAY ACCUSED A WHITE HOUSE AIDE AND AN OFFICIAL OF THE U.S. POSTAL
SERVICE OF "MISCONDUCT AND IMPROPRIETY" IN CONNECTION WITH A PLANNED
$250 MILLION POSTAL BOND ISSUE.
REP. MORRIS K. UDALL, D-ARIZ., CHAIRMAN OF THE SUBCOMMITTEE ON
POSTAL SERVICE, SAID IN A REPORT SUMMING UP A MONTH-LONG INVESTIGA
TION BY HIS SUBCOMMITTEE STAFF THAT INVESTMENT COMPANIES WITH WHOM THE
TWO OFFICIALS HAD CLOSE PERSONAL TIES AND PRESIDENT NIXON'S OLD LAW
FIRM STOOD TO MAKE "MILLIONS OF DOLLARS" BETWEEN THEM IN HANDLING THE
SALE OF THE BONDS.
UDALL ALSO CHARGED THAT THE POSTAL SERVICE'S DECISION TO SELL THE
BONDS ON THE PRIVATE MARKET RATHER THAN THROUGH THE TREASURY
DEPARTMENT WITH GOVERNMENT GUARANTEES WOULD COST TAXPAYERS EXTRA
INTEREST RATES TOTALLING ABOUT $125 MILLION.
UDALL WAS MAINLY CRITICAL OF THE ROLES PETER FLANIGAN, A SPECIAL
ASSISTANT TO NIXON, AND JAMES HARGROVE, AN ASSISTANT POSTMASTER GENERAL,
PLAYED IN SELECTION OF. THE INVESTMENT FIRMS.
THERE IS NO COMPELLING EVIDENCE AT THIS TIME OF VIOLATIONS OF THE
CRIMINAL CODE," HE SAID. "WE ARE FACED RATHER WITH A LESSER DEGREE OF
MISCONDUCT AND IMPROPRIETY."
HE SAID "IT SMACKS OF CRONYISM IN THE WHITE HOUSE, BUT THAT THERE
WAS NO EVIDENCE THAT NIXON OR ATTORNEY GENERAL MITCHELL KNEW ABOUT
THE NEGOTIATIONS THAT RESULTED IN CHOICE OF THEIR OLD NEW YORK LAW
FIRM -- MUDGE, ROSE, GUTHRIE AND ALEXANDER -- TO HANDLE LEGAL DETAILS
OF THE BOND ISSUE.
"I THINK PRESIDENT NIXON WOULD BE HORRIFIED IF HE KNEW HIS
UNDERLINGS WERE CARRYING ON IN THIS MANNER," UDALL SAID. "I WOULD BE
SURPRISED AND SHOCKED IF I THOUGHT THE PRESIDENT AND THE ATTORNEY
GENERAL WERE PART OF THESE MANEUVERINGS WHICH UNFORTUNATELY GIVES THE
APPEARANCE THAT THEY WERE A PART OF SOME SHABBY MANEUVERING."
THE BOND ISSUE WILL BE THE FIRST MADE BY THE POSTAL SERVICE SINCE
IT BECAME AN INDEPENDENT AGENCY UNDER THE 1970 POSTAL REORGANIZATION
ACT, WHICH UDALL SUPPORTED.
9/27--GE852A
Reproduced at the Richard Nixon Presidential Library
[CONFIDENTIAL COMMITTEE PRINT]
92d Congress
1st Session
}
{
COMMITTEE
COMMITTEE PRINT
PRINT No. 11
A REPORT ON THE CIRCUMSTANCES
SURROUNDING THE PROPOSED SALE OF
UNITED STATES POSTAL SERVICE BONDS
PARED BY THE STAFF OF THE
AL SERVICE SUBCOMMITTEE
11 stade poobreque 6T ST. dsmay 22 WE SERVICE Texast Z Europe das STUL
POST OFFICE AND
ESENTATIVES
is
not
until
SE
103,
20:30 elease 2.m. a m.
UT,
Printed for the use of the Committee on Pos.
347
Monday
U.S. GOVERNMENT PRINTING OFFR
67-276
WASHINGTON : 1971
Reproduced at the Richard Nixon Presidential Library
COMMITTEE ON POST OFFICE AND CIVIL SERVICE
THADDEUS J. DULSKI, New York, Chairman
david N. HENDERSON, North Carolina, Vice Chairman
MORRIS K. udall, Arizona
H. R. GROSS, Iowa
DOMINICKV DANIELS, New Jersey
EDWARD J. DERWINSKI, Illinois
ROBERT N C. NIX. Pennsylvania
ALBERT W JOHNSON, Pennsylvania
JAMES M. HANLEY New York
WILLIAM LLOYD SCOTT Virginia
CHARLES II. WILSON, California
JAMES A. McCLURE. Idaho
JEROME R. WALDIE, California
LAWRENCE J. hogan, Maryland
RICHARD C. WHITE. Texas
JOHN H. ROUSSELOT California
william D. FORD. Michigan
ELWOOD HILLIS, Indiana
LEE H. HAMILTON. Indiana
WALTER E. POWELL, Ohio
FRANK J. BRASCO. New York
C:W BILL YOUNG. Florida
GRAHAM PURCELL, Texas
WILLIAM 0. MILLS, Maryland
ToM BEVILL. Alabama
BILL CHAPPELL, JR., Florida
JOHN H. MARTINY Chief Counsel
VINCENT M. GAUGHAN, Staff Director and Special Counsel
B. BENTON BRAY Associate Staff Director
VICTOR C. SMIROLDO, Counsel
WILLIAM A. IRVINE. Assistant Staff Director
THEODOR J. KAZY Senior Staff Assistant
FRANCIS C. FORTUNE, Coordinator
ROBERT E. LOCKHART, Assistant Counsel
SUBCOMMITTEE ON POSTAL SERVICE
MORRIS K. UDALL, Arizona, Chairman
WILLIAM D. FORD, Michigan
EDWARD J. DERWINSKI, Illinois
ROBERT N C. NIX, Pennsylvania
ELWOOD HILLIS, Indiana
JEROME R. WALDIE, California
WALTER E. POWELL, Ohio
LEE H. hamilton, Indiana
Ex Officio Voting Members
THADDEUS J. DULSKI, New York
H. R. GROSS, Iowa
JOHN B. GABUSI, Staff Assistant, Room 122, Cannon Building-Ext. 57620
(II)
Penreduced at the Richard Niven Presidential ibrerv
CONTENTS
Page
Letter of submittal
Introduction
I. A chronology of events
II. The selection of underwriters
III. The nature and necessity of the bond issue
IV. Politics and the Postal Service
APPENDIX
A-1. Letter from Assistant Postmaster General James Hargrove soliciting
proposals on U.S. Postal Service bond issue.
A-2. Federal agency and quasi-Government underwriter management
summary, 1970
A-3. Leading 25 managing underwriters of municipal issues, 1970.
A-4. Leading 25 managing underwriters of corporate issues, 1970.
A-5. Leading managing underwriters of municipal and corporate issues,
1970_
A-6. Rankings by utilities, 1970-71 combined
A-7 Rankings of underwriting firms on basis of total dollar amount of
public offerings of taxable securities managed or comanaged.
A-8. Letter from Hon. Morris K. Udall and Hon. David N Henderson to
President Richard Nixon recommending high ethical standards for
members and employees of Postal Rate Commission, and memo-
randum from Postmaster General supporting proposal.
B. List of political contributions by principals of firms in 1968
(III)
Reproduced at the Richard Nixon Presidential Library
LETTER OF SUBMITTAL
U.S. HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON POSTAL SERVICE,
OF THE COMMITTEE ON POST OFFICE AND Civil SERVICE,
Washington, D.C., September 24, 1971
Hon. THADDEUS J. DULSKI,
Chairman, Committee on Post Office and Civil Service, U.S. House of
Representatives, Washington, D.C. 20515
DEAR MR. CHAIRMAN In August, just before the Congressional
recess, I advised you of my concern regarding developments relating to
the proposed issuance of bonds by the United States Postal Service and
of my intention to make some preliminary investigations into this area
during the August recess. With your permission and cooperation we
arranged for a General Accounting Office employee to be detailed to
assist the Subcommittee. Mr Robert Schremp, an experienced
auditor from the GAO (who was with the Banking and Currency Com-
mittee on a similar assignment for some six years), joined the Sub-
committee staff on assignment and has been of great assistance. In
addition, we arranged for a special consultant to assist in the prepara-
tion of the staff report. Mr John Nash, a six year staff member of the
Investment Bankers Association and more recently a private consul-
tant, assisted the Subcommittee during this period.
In addition, I spent some time directly involved in the investigation
and analysis, including a trip on August 12 to New York City, during
which time we spent a full day interviewing leaders in the investment
banking community as well as conferring with top officials of the
Federal Reserve Bank of New York.
Based on this intensive investigation and analysis, a preliminary
study has been prepared by the staff. Based on my own considerations
and those of the staff I have reached certain conclusions and offer
certain recommendations to you and the Subcommittee.
Introduction
The Postal Reorganization Act of 1970 (PL 91-375) completely
restructured the Postal Service of the United States, replacing a
Cabinet level department with an independent agency of government.
The agency is run by a Board of Governors appointed by the President
with the advice and consent of the Senate and it has wide ranging
authority to efficiently and economically move the mail of the United
States. As a part of that authority the agency may issue revenue
bonds for purposes largely related to capital expenditures and Congress
gave the agency great flexibility in the management of this authority
The bonds may total $10 billion outstanding at any one time and may
either be sold directly to the Treasury of the United States or upon
the open market. In addition, the bonds may or may not be guar-
anteed by the full faith and credit of the United States. If the
(V)
Reproduced at the Richard Nixon Presidential ibrarv
guarantee of the United States is not attached to specific issues of the
bonds, there is an implicit guarantee that the revenués of the Postal
Service will be sufficient to meet all interest and principal costs at
maturity
While the Postal Service agency was not activated until July 1,
1971, much preliminary planning went on in late 1970 and early 1971
looking forward to the new status. In the fall of 1970 and in early
1971 the Postmaster General and his principal assistants made
public their intention to use the financing authority and the bonding
authority, and indicated that an initial issue of some $250 million in
bonds would be tried sometime in the fall of 1971 The Postmaster
General and his staff-in making this crucial step into the financial
market-had several major decisions to make
1 Should the bonds be sold directly to the Treasury or to the
public utilizing the open market of Wall Street? The Postal Service
decided that they would sell the bonds to the open market utilizing
the investment banking industry
2. Should the bonds be guaranteed by the United States or carry
no such guarantees? The decision was that these bonds would carry
no guerantees.
3. If the decision was to go to the open market, (it was), should
the underwriters be selected through private negotiations or through
some type of competitive bidding? It was decided that the Postal
Service would negotiate with a variety of investment bankers and
then decide, based on those negotiations, which firms would be the
underwriters.
4. If a negotiated arrangement was decided upon, which of the
several dozen major underwriting firms should be selected and under
what terms and conditions? The Postal Service selected fiveinvestment
banking firms, through a negotiated process and many questions
have been raised about their selection. These will be discussed in
greater detail in this letter and in the attached report. (Details on
this subject can be found in Part II of the attached report.)
Because of the very large amounts of public money involved and
because of the important precedents to be set it was important that
each of these four major questions be answered carefully and wisely
It was also vitally important, in view of the history of the old Post
Office Department and the great difficulty in enacting the Postal
Reform bill, and the huge sums of money involved, that these first
actions be most carefully handled SO as to avoid at all costs any
appearance or suggestion of impropriety.
Based on my investigation I have reached two principal conclusions:
1) this important bond issue has been handled in such a way that
the strong appearance of impropriety has arisen, and 2) that the
method chosen for this financing may eventually and unnecessarily
cost the taxpayers and the Postal Service large sums of money
I am recommending to you and the Committee that we take
appropriate action to correct the mistakes of the Postal Service and
that preventive measures be adopted to insure against similar errors
in the future. The following report will include some suggestions as to
possible changes in the Postal Reorganization Act so as to create a
financing system that will be of greater benefit to both the Postal
Service and the general public. (Details on this subject can be found
in Part III of the attached report.)
Reproduced at the Richard Nixon Presidential Library
VII
You will recall the long controversy which surrounded the subject
of postal reform in 1969 and 1970. It was only through the cooperation
and public spirited efforts of dozens of members of both Democratic
and Republican parties that a postal reform act was finally signed by
the President. A group called "The Citizens Committee for Postal
Reform"-headed by a former chirman of the Democratic National
Committee and a former chairman of the Republican Committee-
spearheaded much of this effort. Implicit in all of this was the desire
to make a clean break with the past history of the Post Office Depart-
ment in which from the beginning of the republic the party in power
had used the Department for political purposes. It was no secret that
postmasters were appointed, promotions arranged, building architects
and contractors selected, banking depositories selected, and many
other decisions of this kind were made by politicians for political con-
siderations. When the bill was finally signed, Postmaster General
Blount with commendable zeal indicated that one of his highest prior-
ities would be to eliminate the last vestiges of politics from the de-
cision-making in the department. Throughout his term as a Cabinet
memb r Mr Blount resisted vigorous and persistent efforts by mem-
bers of his own party to revive the old advisory system of postmaster
appointments. Those of us who fought for reform supported him in
these efforts and it is clear that to a very high degree this ancient
practice has been rooted out of the department.
In addition, Congressman Henderson and I were greatly concerned
that the setting of postal rates be removed from any political context
and were among those who fought for an independent Postal Rates
Commission. Shortly after the Act was signed, we dispatched a letter
to the President setting forth in strong terms our concern that the
postal rate agency not go the way of some other federal agencies in
which the regulatory board may become dominated by or subservient
to the very economic interests it is designed to regulate. (A copy of
that letter and Mr Blount's supporting statement appear in the
Appendix A-8 of the report.) The President promulgated a strong
order to this effect and it had the full support of Postmaster General
Blount.
I had supposed that having taken these constructive and far-
reaching steps, the officers of the department-most of whom con-
tinued in similar capacities when the conversion occurred-would be
even more vigilant against any appearance of politics, especially when
such huge sums of money were to be involved in revenue financing.
That is to say, if it is vital to the establishment and success of a
non-political postal service for such minor matters as postmaster
appointments in small towns to be removed entirely from politics or
the appearance of political considerations, how much more vital is it
to assure that hundreds of millions or billions of dollars are handled
without any reference to political considerations or to the appearance
thereof In this hope, at least to date, I have been seriously
disappointed.
There is no compelling evidence at this time of violations of the
criminal code. We are faced rather with a lesser degree of misconduct
and impropriety In several instances I find strong suggestions that
political considerations were involved in major decisions of this
supposedly independent, non-political agency Regardless of the actual
existence of such involvement, it is clear beyond any doubt that some
Reproduced at the Richard Nixon Presidential Library
VIII
of these actions have an appearance of serious impropriety and these
will be documented in some detail below In sustaining public con-
fidence the appearance of evil is almost as serious as the actual thing.
I wish to leave with you, Mr Chairman, and the Subcommittee
these following conclusions.
1. The Postal Service made a serious mistake in deciding to
issue the first group of bonds without a government guarantee.
The reasons given for this decision of the Postal Service are not
irrational and the best possible face has been put upon them by
those in charge. But it is clear that any minor advantage to the
Postal Service-by dispensing with a government guarantee-is
more than outweighed by the cold fact that the decision will
undoubtedly cost, at a minimum, tens of millions of dollars. Mr
James Hargrove, Senior Assistant Postmaster General for Sup-
port, and the Board of Governors seem genuinely convinced that
the "fiscal discipline" of the Postal Service agency was worth
these extra costs. I am not convinced this is the case.
2. Serious mistakes were made in the selection of the five firms
to make up the underwriting team. I make no charges against
the integrity of any of these firms but from the standpoint of
economy, efficiency and wisest use of public funds, the selection
of two of the five simply cannot be justified.
3. Three of the five firms selected, Salomon Brothers and
Hutzler, Merrill Lynch, Pierce, Fenner, and Smith, and The
Morgan Guaranty Trust Company, are clearly qualified and no
criticism can be made of their selection. While some others are as
well qualified and are certainly competent, no suggestion is made
that an error in judgment or any improper action was involved
in the selection of these three firms. (Details on the selection of
underwriting firms can be found in Part II of the report.)
4. It seems clear that Dillion, Read and Company, while an
honorable, experienced firm in certain aspects of financing, was
poorly qualified for this particular assignment and that it was
chosen largely because of the personal relationship between the
Senior Assistant Postmaster General, Mr Hargrove, and various
representatives. of Dillon Read. Mr Hargrove throughout this
investigation has been cooperative and voluntarily furnished us
details of his long standing relationship. However, Mr Hargrove
presents an almost complete insensitivity on this matter He
quite openly indicates that he sees no conflict of interest in favor-
ing one firm over another because of his prior relationship in the
private sector I wasrshocked to discover that it was widely as-
sumed on Wall Street that Dillon Read would be picked because
of Mr Hargrove's prior association with that firm. (Details on
this subject can be found in Part I of the report.)
5. The selection of Kidder, Peabody and Company causes a
similar appearance of impropriety and should not have been made.
The various critéria involved in the selection of these firms could
lead the public to conclude that the predominant factor in the
selection of Kidder Peabody might have been the large amounts
of money given by the Chairman of the Board, Mr Albert Gordon,
to the Republican Party during the last presidential election. Mr
Gordon personally contributed approximately $38,750 to various
Republican committees during 1968. Kidder, Peabody and
Reproduced at the Richard Nixon Presidential Library
IX
Company is a medium-sized investment banking firm that is
certainly not exceptional in the area of governmental financing.
Mr Hargrove's main recommendation of Kidder Peabody was
his belief that "The selection of Kidder, Peabody and Company
was based largely upon a desire to include in the management
group a 'generalist' firm" Kidder Peabody is considered to have
significant retail outlets but its retail outlets are certainly not
nearly as numerous as those of a number of other applicant firms
which were rejected. It should be specifically noted that Kidder
Peabody's expertise in the area of federal government bond issues
is minimal. They have been involved in two agency bond issues,
both of which have occurred during the past two years. Abso-
lutelv no other factor stands out to diminish the selection of
Kidder Peabody when contrasted with the many firms who were
not selected.
The blatant appearance of the Kidder Peabody selection as
it might look to a knowledgeable observer can be summarized
by comparing that firm with First Boston. The Post Office itself
established five objective criteria. First Boston ranked first
on three of the criteria among the 21 firms considered, and was
third and tenth on the other two Kidder Peabody did not
even qualify on one of the five criteria and ranked 7th, 8th,
15th, and 15th on the others.
Kidder Peabody had never handled an issue of this kind,
First Boston is the industry leader. First Boston is a publicly
owned, basically apolitical firm with only one $500 contribution
we could identify in the 1968 election. Kidder Peabody is not
publicly owned and its partners are intenselv politically oriented
with more GOP political contributions than any other firm
considered. Which did this new "non-political" Postal Service
select? The argument that personal political considerations
played no part simply will not wash. The "Dear Jim" letter to
Mr Hargrove from Chairman of the Board Albert Gordon of
Kidder Peabody thanking him for the "
high honor, [but]
it is also a first for us" stands out in bold relief.
This is, not to argue that First Boston should have necessarily
been selected, while it seemed the clear first choice, there were
other choices which could have been justified on a rational,
merit basis. It is not to argue that there is something wrong with
the Kidder Peabody involvement in GOP political financing.
It is to argue that a brand new non-political government agency
should not expect to make these kinds of decisions and the
public to believe that everything is objective and above-board.
In addition we would note that Kidder Peabody has had a
ronsistent record of contributions by its principals to the Repub-
lican Party ($63,143 in the 1968 Presidential election) While
the First Boston's principals contributed a total of $500 in 1968
In conclusion it is clear that the underwriting team selected
was not the best qualified Two of the five were poor selections
on any rational, objective basis and in each case personal or
political considerations appear to have played a significant part,
or at least strong inferences can be drawn to that effect. (Details.
on this subject can be found in Part II of the report)
67-276-71-2
Reproduced at the Richard Nixon Presidential Library
x
6. It was, and is, a serious mistake for the Postal Service not
to insist-as it has the right to do-that the law firm in which
President Nixon and Attorney General Mitchell were formerly
senior partners, be excluded from employment by the under-
writers. This factor superimposed on all the others above simply
reinforces the suspicion that this critical first, importanct trip to
the money market was influenced by considerations other than
the best interests of the Postal Service. (Details on this subject
can be found in Part IV of the report.
7 Peter Flanigan is a Special Assistant to the President and
was formerly a Vice President of Dillon, Read and Company
There is ample evidence to indicate that the has been involved
in discussions and meetings involving the issuance of the bonds
by the Postal Service. I emphasize again as of July 1, 1971, the
U.S. Postal Service is no longer a Cabinet or Executive Branch
agency It is (or was intended to be) a nonpolitical service business
of the federal government.
The fact that a White House official is involved in any aspect
of this issuance raises serious questions of impropriety Both the
Postal Service officials and Mr Flanigan should have been sen-
sitive and alert to the appearance of this relationship and Mr
Flanigan should not have been involved in any manner with the
decisions being made in this regard. That he has, both in fact
and in appearance, is a serious breach of propriety Even worse
is the fact that Postal Service officials know very well that Mr
Flanigan's interests go beyond his current job and that he still
continues to have a substantial interest in Dillon Read. (Details
on this subject can be found in Part I of the report.)
8. There has been considerable comment and discussion con-
cerning the possibility of the creation of a Federal Financing
Bank. This proposed Bank, under discussion by the Treasury
Department, would become a central purchaser of all government
agency securities, including those of the Postal Service. The
Federal Financing Bank, in its turn, would sell regular govern-
ment securities to the investor public. This would allow a coordi-
nation and bring under one roof all of the various agency financ-
ings. The Postal Service, as one agency, would be able to sell all
the bonds needed for its capital outlays directly to this Federal
Financing Bank. When and if this proposal is considered by the
appropriate committees, our Committee should make sure our
views are known. It is my present opinion that the Federal
Financing Bank may provide the Postal Service, and other
/
government agencies, a far better mechanism that should cer-
tainly be given close study (Details on this subject can be found
in Part III of the report.)
9. There is considerable merit to the approach used by other
government agencies in having a fiscal agent represent the agency
in all of its dealings with the investment banking industry
Rather than having a small, select group of investment bankers
doing all of the underwriting for the Postal Service, it is feasible
that a career employee of the Postal Service be retained to act as
Reproduced at the Richard Nixon Presidential Library
XI
fiscal agent in selling the bonds of the Postal Service. This em-
ployee would be stationed in New York City and coordinate all
dealings in Postal Service bonds.
This choice was never seriously studied by the Postal Service
and there are strong arguments for its use. It certainly would
assist the Postal Service in demonstrating its objectivity and
nonpolitical approach to the sale of these Postal Service bonds
were it to utilize the fiscal agent approach. The attached report
goes into this method in some detail and certainly merits con-
sideration by the Postal Service. (Details on this can be found
in Part III of the report.)
Having stated these conclusions, Mr Chairman, let me now sug-
gest some recommended actions that the Subcommittee may want to
review
Recommendations
1. In order to prevent these important bonds from being issued I
under questionable circumstances and to clarify the selection proce-
dures of the underwriters, the Postal Service should rescind the de-
cision to select the five managing underwriters and all actions the
underwriters have taken to date.
The bond issue should be managed by firms selected by a commit-
tee, rather than one person, and objective ratings should be estab-
lished No rankings were ever prepared based on the proposals solicited
by the Postal Service and the five firms selected were selected by one
man, Mr James Hargrove, with more or less pro forma ratification
by the Board.
No firm which has a direct relationship, either previous or current,
should be allowed to participate in this issue, if that relationship was
with any senior manager of the Postal Service.
2. Unless the full faith and credit of the United States is made a
part of the bonds, the Treasury should purchase the first $2 billion of
issues by the Postal Service.
3. The law firm of Mudge, Rose, Guthrie, and Alexander should be
disqualified from doing business due to the prior relationship of Presi-
dent Nixon and Attorney General Mitchell. This has nothing to do
with the well recognized ability or integrity of the firm but rather with
creating public trust in decisions of its officials and establishing bevond
any doubt the non-political, independent nature of the new Postal
Service.
4. Chairman Patman and the Banking and Currency Committee
of the House should be encouraged to investigate the interlocking
relationships of the investment bankers doing business with the vari-
ous federal agencies, especially as to the fact that a select few firms
seem to be doing most of the business with the federal government.
5. The Secretary of the Treasury and the appropriate congressional
committees should give serious consideration to the proposal that all
government security issues, including those of the Postal Service,
should be made directly through the Treasury, thus saving billions of
dollars in fees and commissions to the investment banking industry
and various legal firms. A proposal on this subject is currently under
study in the Treasury Department..
Reproduced at the Richard Nixon Presidential Library
XII
6. The Post Office and Civil Service Committee, acting through the
Postal Service Subcommittee, should pursue the implementation of
these recommendations with the Postal Service. If necessary, public
hearings should be initiated to verify the conclusions reached by this
report.
7 If the Postal Service insists on following policies which are out-
lined and criticized above, we should consider immediate and appropri-
ate legislative action to prevent it.
I will be discussing these matters with you and the other members
of the Subcommittee in due course and I am hopeful that the Postal
Service will take this report in the spirit in which it was prepared and
will assist us in the implementation of the Postal Reorganization Act
as it was intended to be implemented by the Congress.
With best regards,
MORRIS K. Udall, Chairman.
Reproduced at the Richard Nixon Presidential Library
INTRODUCTION
This report was occasioned by developments and disclosures that
followed the United States Postal Service's announcement of its
choice of underwriters for the $250 million bond issue it has scheduled
for October 1971 Salomon Brothers & Hutzler, Merrill Lynch,
Pierce, Fenner & Smith, Inc., Morgan Guaranty Trust Company,
Kidder, Peabody and Company, and Dillon, Read and Company,
Inc. were chosen by the U.S. Postal Service Board of Governors,
who acted upon the recommendation of Mr James W Hargrove,
Senior Assistant Postmaster General for Support.
Various people indicated concern about this choice of underwriters
immediately after it was announced, expressing their views to Con-
gressm n Morris K. Udall, Chairman of the Postal Service Sub-
committee. In the ensuing months there was continued criticism of
the thods and criteria used to select underwriters for the first
Postal Service bond issue, and Congressman Udall asked the Postal
Service Subcommittee staff to begin a review of the matter
On July 27, 1971, it became known that the law firm of Mudge,
Rose, Guthrie and Alexander, formerly Nixon, Mudge, Rose, Guthrie,
Alexander & Mitchell, were to serve as counsel to the underwriters
of the Postal Service issue. Because at least the appearance of im-
propriety had been given, it was suggested that Mudge Rose might
have been selected for political reasons rather than on its merits.
Therefore Chairman Udall requested that the Postal Service Sub-
committee, assisted by the General Accounting Office, begin an
intensive investigation of the circumstances surrounding the selection
of legal counsel and managing underwriters for the bond issue.
The investigation has shown that there were major improprieties
that seemed to exist prima facie. There were also questions about
the disposition of millions of dollars in legal fees, underwriters'
commissions, and consultation costs, since the Postal Service plans
ultimately to issue $10 billion in bonds. If any special consideration
was given to individuals or firms for personal or political reasons, the
Postal Service Board of Governors' actions may have been unethical
and/or illegal.
This report has been prepared to protect the integrity of the Postal
Service and to preserve the spirit of the Postal Reorganization Act.
Its first section is a chronology of events leading up to the selection
of underwriters and legal counsel. Most of the facts were gathered
from records of meetings, letters, and other memoranda collected with
the cooperation of the Postal Service, the Treasury, and other govern-
ment agencies. Chairman Udall and members of his staff met with
certain investment bankers on August 12, 1971, at the New York
Federal Reserve Bank to obtain further information.
(XIII)
Reproduced at the Richard Nixon Presidential Library
XIV
Part II is an analysis of the proposals solicited from the candidates
for handling the bond issue. The Subcommittee reviewed these docu-
ments in great detail, comparing the information they contained about
the firms' capabilities with the actual choices that were made. It is
to be emphasized that the Postal Service itself stated the criteria that
would be used in making decisions, outlining these in its April 13,
1971, letter soliciting proposals. Thus part II evaluates the selection
only in the light of the Postal Service's own stated criteria.
Part III questions the methods by which the Postal Service plans
to market its initial bond issue. Should the bonds be sold using a
negotiated process or through competitive bids? Another important
question is whether they should be sold with the guarantee of the full
faith and credit of the United States, or whether they should be sold
as non-guaranteed bonds as the Postal Service now intends.
Part IV reviews the entire matter and seeks to determine whether
the best interests of the Postal Service were served in the selection of
counsel and underwriters. The influence of personal relationships and
political affiliations on the Board of Governors' decisions is examined
and the question of the relative competence of the firms chosen is
discussed.
This report was prepared under the direction of the Chairman,
Representative Morris K. Udall, to assist the Subcommittee in its
deliberations. It is the work of the staff and does not reflect any de-
cisions or judgments of the members of the Subcommittee.
Reproduced at the Richard Nixon Presidential Library
PART I-A CHRONOLOGY OF EVENTS
On April 30, 1969, James W Hargrove, Senior Assistant Postmaster
General for Support met with representatives of the Chase Manhattan
Bank, the Chemical Bank of New York, First National City Bank of
New York, The First Boston Corporation, the Equitable-Mutual
Company, Lehman Brothers, Merrill, Lynch, Pierce, Fenner and
Smith, and Dillon, Read and Company Mr Hargrove called this
meeting to discuss the financing provisions of the Administration's
forthcoming Postal Reform bill. Before joining the Postal Service,
Mr Hargrove had had extensive contact with the firm of Dillon Read
in his capacity as a Vice President of Eastern Texas Transmission
Corporation, and at this meeting it was obvious that Mr Hargrove
was very familiar with Dillon-Read's representatives.
Following that meeting on May 1, 1969, a senior member of Dillon
Read wrote to Mr Hargrove suggesting that he should ask for help
from "the leadinx firms in this area," which included the First Boston
Corporation, Merrill, Lynch, Pierce, Fenner & Smith, Salomon
Brothers & Hutzler; and the Morgan Guaranty Bank. Thus from the
beginning these four firms had been recommended as being out-
standing.
In May of 1969 the Administration introduced its version of Postal
Reform, H R. 11750, of which Mr Udall was the principal Demo-
eratic sponsor, and hearings progressed. On October 7, 1969, Assistant
Postmaster General Hargrove wrote to his former long-time associate
Mr August Belmont IV, the President of Dillon Read. This letter
included a draft of the testimony Mr Belmont planned to give before
the Senate Committee the following week as the "industry" spokesman
in support of the new Postal Reform legislation's financing provisions.
Two letters written during the July 1969 House hearings on Postal
Reform comprise the only recorded criticism of the Postal Service's
financing proposal. The first, from First Boston Corporation's Senior
Vice President James Morrison argued-through a lengthy and detailed
analysis of the bill-that the lack of Treasury guarantee; and in fact
the entire concept of financing through the private market, were
incompatible with current market behavior and the long-term market
situation.
Another leading firm, the Discount Corporation of New York,
wrote that "an investor will think in terms of to what extent the postal
system can go to the Treasury to meet its commitments
" Both
of these letters referred to the desirability of a Treasury guarantee for
the bonds. Both advisors felt strongly that the Postal Service could
not sell these bonds on the open market at a competitive price, as
though it were a private corporation, without incurring additional costs
These unfavorable letters of July and August 1969 were closely
followed by three others dated August 4, 5, and 6, from representatives
of Dillon Read and Salomon Brothers. All approved of the financing
(1)
Reproduced at the Richard Nixon Presidential Library
2
provisions and minimized the problems, if any, of the lack of Treasury
guarantee. The two critical letters were never entered in the record of
the Congressional Committees, yet the written approval of Dillon
Read representatives became part of the testimony given before the
House and Senate.
The Postal strike occurred in March of the next year and on
June 18, 1970 the House passed a version of Postal Reform, incor-
porating the financing provisions recommended by Mr Hargrove.
On July 7, 1970, Mr Hargrove wrote to Mr Belmont, with whom
he was on a first-name basis, sending copies of both the House and
Senate bills SO that Dillon Read would have an opportunity to review
them immediately. Mr Hargrove commented that there was a slow-
down at the Government Printing Office but that nevertheless he had
obtained the enclosed copies for Dillon Read's immediate perusal. He
asked the firm to indicate which approach was best from their stand-
point and to give their comments. On July 9 Mr Robert Christie,
Senior Vice President of Dillon Read, wrote to Mr Hargrove, ad-
dressing him as "Dear Jim", and stated that from Dillon Read's
standpoint both bills could accomplish the main purpose although he
thought the House version somewhat better than the Senate version.
No other firm was asked to evaluate the legislation.
Within two weeks, on July 21st, Mr Alvin Shoemaker, Vice Presi-
dent of the First Boston Corporation, wrote requesting copies of the
legislation and on July 28 Mr Hargrove answered that no copies
were available but that ultimately he hoped to be able to send a copy
of the conference-approved final law. Note that there was complete
G
cooperation with Dillon Read, but that from the very beginning
First Boston Corporation received a lesser degree. Remember, too, that
First Boston was one of the firms critical of the proposed legislation.
In mid-August, the President signed the bill (PL 91-375)
From mid-July through the early fall of 1970, Mr Hargrove and
Mr James McKinnon, Treasurer of the Postal Service, met with
various investment bankers in New York and Washington to discuss
the financing mechanism of the new Postal Reorganization Act. On
I
September 29, 1970, Mr Hargrove received the first letter from
Salomon Brothers specifically referring to the underwriting proposal.
This letter was from a Vice President, Mr Robert LaBlane, who
also knew Mr Hargrove on a first-name basis. On November 6, the
Vice President of Goldman Sachs, Mr. Daniel W Hoffgren, also wrote
refer.ing to the forthcoming bond issue of the Postal Service and
indicating his firm's interest in it. On December 2, Mr Hoffgren
wrote again to Mr Hargrove and in this letter he referred to a meeting
of the day before with the Postmaster General and Mr Hargrove
and thanked them for it. The following excerpt is also from the letter
I will take the opportunity, with discretion, to talk to Peter
about the problem we discussed. In the meantime, I strongly
suggest you send a copy of your memo to John Mitchell,
'as my experience has indicated he has an understanding
of this problem.
This is the first written reference to the involvement of Peter Flanigan
of the White House staff and Attorney General Mitchell with the
question of bonding.
Reproduced at the Richard Nixon Presidential Library
3
It should be noted here that Mr Hoffgren had only recently joined
Goldman Sachs, having previously been Mr Flanigan's assistant in
the White House.¹
In a letter dated August 11, 1971, Mr James Hargrove acknowl-
edged that "Peter" in Mr Hoffgren's letter was indeed Peter
Flanigan. Mr Hargrove stated that their intent was to prevail upon
the White House, through Mr Flanigan, to intervene with the Treas-
ury Department. He said the Postal Service feared that the Treasury
Department objected to the proposed methods of selling the bonds
and might preempt the whole issue. It was hoped that Mr Flanigan
would intervene to protect the position of the Postal Service and the
managing underwriters.
Mr Hargrove stated that he had no correspondence with Attorney
General Mitchell, on this subject, nor did he discuss the matter with
him. Mr Hargrove's memoranda of this period are technical argu-
ments in behalf of the Postal Services position regarding the issuance
of non-guaranteed bonds. Mr Hargrove did not mention why Mr.
Mitchell should have been involved at all in this matter, which
clearly does not concern the Justice Department, or touch upon the
duties of the Attorney General. The only possible connection Mr
Mitchell had with the bond issue would have been through his former
association with Mudge, Rose, Guthrie & Alexander
On December 3, 1970, Mr Hargrove gave his first major speech
on the Postal Service's bond issue before the Investment Bankers'
Association winter meeting at Boca Raton, Florida. He told the
bankers that the Postal Service preferred and intended to sell its
bonds without a Treasury guarantee to the private market, and that
if such a sale were not arranged, there would be no business at all
for the investment bankers' industry The investment banking
industry would get business from the Postal Service only if non-
guaranteed revenue bonds backed by the estimated $9-10 billion
revenue of the Post Office were placed on the private market like
any other corporate bond.
However, he stated that there was an implied guarantee, i.e., for
while the U.S. Government might allow Lockheed or Penn Central
to fail, it would never let the Post Office go without meeting its
debt.s. Mr Hargrove was saying "You investment bankers will sell
Postal Service bonds as though they were non-guaranteed private
bonds, but at the same time I suggest you tell your customers, sub
rosa, that there really is a guarantee." Thus the bonds would be sold
at a higher cost to the taxpayer and the users of the Postal Service,
ultimately forcing the cost of money higher
Mr Hargrove's rationale for this marketing method was that the
Postal Service management needed the discipline of knowing that the
Treasury would not bail them out. That is, that the discipline of the
marketplace would force the Postal Service to meet its obligations in
paying interest and principal on these bonds, and thus the system
would induce efficiency This rationale was put forth by the Postal
Service in spite of criticism raised by two of the most preeminent
investment bankers in the United States, the First Boston Corporation
It should be further noted that Mr. Gustav Levy, Chairman of the Board of Goldman Sachs and
Company, personally gave an estimated total of $7,000 to various Republican committees in New York
State during the 1968 campaign.
67-276-71-3
Reproduced at the Richard Nixon Presidential Library
4
and the Discount Corporation of New York, but with the full approval
of Dillon Read and Company
After this speech in December, 1970, there was a predictable spate
of letters from investment bankers. Not surprisingly they supported
the non-guaranteed private sale Postal Service bond. On February 3,
3, 1971, Kuhn, Loeb and Company, represented by Mr Thomas
Dewey, Jr., made known its support of the negotiated bid/non-
guaranteed bond. On March 8, Dillion Read-again represented by
Mr Robert Christie-wrote a long letter which seemed to paraphræse
Hargrove's speech in Boca Raton. On March 12, in response to a
specific request by Mr Hargrove, Salomon Brothers wrote. "negotiate
and have a non-Treasury backed bond."
On March 26, 1971, Mr. Hargrove wrote a detailed memo to the
file justifying the negotiated bid/non-guaranteed bond, and noting
support from the investment banking industry
The memo mentions other market makers in the Federal Govern-
ment, such as the Federal Home Loan Bank Board, and Fannie Mae,
who supported Hargrove's approach. (See Part III for detailed analyses
of other agencies' views.)
On April 8 Assistant Postmaster General Hargrove wrote to three
members of the Postal Service's Board of Governors requesting them
to allow him to solicit proposals on the $250 million bond issue.
Approval was given by conference call and on April 13 a generalized
letter was sent to more than thirty bonding houses asking them to
describe themselves in terms of specific areas of competence. Osten-
sibly, this was where the decision-making began on the underwriting
in April of 1971
Just prior to this, on April 9, Mr Edward A. Fox, Director of the
Federal Home Loan Bank Board, wrote a letter to Mr Hargrove in
response to conversations they had had. Mr Fox favors a complete
restructuring of the method by which the Federal Home Loan Bank
Board sells its securities to the public. Before Mr Fox became its
Director, the Federal Home Loan Bank Board had an extremely
large securities group of more than 200 agents, both regional and
New York-based. Centralization was totally lacking. Mr Fox decided
to centralize the operation with a small syndicate of pre-eminent
bonding houses. In his April 9 letter Mr Fox said to Mr Hargrove
"I was warned and threatened by many that further reductions in
the svndicate regardlèss of criteria, would be politically unpalatable."
The letter continues, "
as it appears that the political pressure
that has always threatened is not as severe as you are led to believe."
This makes reference to a previous conversation in which Mr. Hargrove
apparently believed that there would be some political pressure if
only a few underwriters for the Postal Service issue were selected. Mr
Fox reassured him that that had not been his experience.
On August 11, 1971, in response to further subcommittee inquiries
regarding the memoranda between Mr Hargrove and Mr Fox, Mr
Hargrove verified that he was indeed concerned about political pres-
sure if he selected à few underwriting firms, rather than using the fiscal
agent approach as the Federal Home Loan Bank Board had used for
over thirty years. He said he feared Congressional concern that under-
writers from different geographical areas be included, and that the
"pressure" did not concern the actual firms to be selected. He did not
indicate that political pressure emanated from the Executive Branches
to influence the selection of managing underwriters.
Reproduced at the Richard Nixon Presidential Library
5
At this same time, the end of April, Mr Hargrove recommended
that the following five firms be included in the bond issue Salomon
Brothers, Merrill Lynch, Pierce, Fenner & Smith, Inc., Dillon, Read &
Co.; Kidder, Peabody & Company, and the Morgan Guaranty Bank.
He submitted a statement to the Subcommittee that he was somewhat
confused about allowing a commercial bank to be involved in this
business and, in spite of the specific legal exemption for it, he had
discussed it with Mr Blount. The Postmaster General had recom-
mended that he discuss the matter with Mr Peter Flanigan at the
White House. He did so. Mr Flanigan recommended that they go
ahead with Morgan Guaranty, an exceptionally good commercial
bank. Mr Hargrove said that he discussed no other issues with Mr
Flanigan. It should be noted that for 15 years before joining the White
House staff Peter Flanigan was a Vice President of Dillon Read, the
same firm that Mr Hargrove had SO much contact with in the private
sector before coming to the Postal Service. From the written record, it
appears that Mr Hargrove had considerable continued contact with
Dillon Read representatives, present and past, and that Mr Flanigan
was certainly one of these.
On May 4, 1971, the Board of Governors selected the five managing
underwriters that Mr Hargrove had recommended for the proposed
bond issue.
At about this time, Mr William Simon, as a representative of Salo-
mon Brothers and Hutzler, the lead underwriter, selected Mudge,
Rose, Guthrie & Alexander as bond counsel for the underwriters and
informed them of his choice.
On July 26, 1971, Congressman Udall became aware of this selection
and immediately asked the Subcommittee to initiate this investigation.
Reproduced at the Richard Nixon Presidential Library
PART II-THE SELECTION OF UNDERWRITERS
A review of the 33 proposals submitted to the Postal Service by the
underwriters who wanted to manage the first $250 million of a proposed
$10 billion in bonds revealed two things.
1 The stated criteria in the Postal Service questionnaire
sent to managing underwriters were seriously biased, ignoring
a substantial segment of the investment banking industry,
whose expertise is in the area of revenue bond financing for
governmental agencies.
This bias favored the inclusion of some firms, including
some of those ultimately selected, who otherwise would defi-
nitely not have been considered.
2. A majority of the firms submitting proposals were
qualified to participate as managers or co-managers of the
bond issue. However, a comparative analysis of their abilities
shows that the Postal Service did not select the five most
qualified firms.
A QUESTION OF CRITERIA
In a December 1970 speech before the convention of the Investment
Bankers Associations of America at Boca Raton, Florida, and one
given before the Municipal Forum of New York in April of 1971,
Assistant Postmaster General James Hargrove laid the groundwork
for the selection of underwriters
The Postal Service is authorized to create and sell $10
billion worth of postal revenue bonds.¹
The Postal Service is not a corporation, but is in every
respect a government agency [at the same time] it is in every
respect a viable, strong, self-supportive, all-pervasive
monopoly-powered utility in a benign regulatory framework.
(Our italics in both quotations.)
These statements are crucial to the criteria by which the underwriter
would ultimately be selected. Mr Hargrove described the issue as
revenue bonds, whose principal and interest would be paid out of the
revenues of the Postal Service. At the same time, the Postal Service
was still a government agency, with the implicit guarantee of the
United States behind it. In addition the Postal Service was described
as a utility, and its issue was said to be similar to that of a gas/electric
or telephone company
At no time were the revenue bonds compared to those of a munici-
pality or state government. For example, bonds issued by cities for
sewage-line expansion or capital construction may be more akin to a
Postal Service bond than are ITT's telephone bonds. Firms specializing
1 Recent conversations with Postal Service officials confirm their belief that these are definitely rerenue
bonds.
(7)
Reproduced at the Richard Nixon Presidential Library
8
in government agency and private utility bond issues were given
preference in the terms of the questionnaire and firms that manage or
co-manage billions of dollars of state and municipal revenue bonds for
municipally owned transportation, water and power facilities, were
effectively eliminated.
The most telling evidence is the following, taken from the
questionnaire soliciting proposals.
Question 3
Please indicate, by separate categories, financings in 1970
and thus far in 1971 of (1) Government and Government
agency securities not exempt from Federal income tax and
(2) corporate utility debt securities.
"
No information on revenue bonds handled for governmental units is
solicited in the questionnaire though some fairness would seem to have
demanded the inclusion of such a question.
Thus commercial banks submitting proposals were able to describe
their competence in only one category, government issues, since they
are forbidden by law to deal in corporate issues.
Note that a specific exemption to existing law was inserted in the
Postal Reorganization Act to allow commercial banks to handle Postal
bond issues (12 USC 24, seventh) That provision, which also allows
commercial bank dealings in securities of a variety of federal and
state or local agencies, is premised on the full faith and credit guarantee
of the United States. The Postal Service's continuing insistence that
its bond issue will not carry the full faith and credit guarantee makes
their choice of Morgan Guaranty an improper one.
Thus, we now have a situation where the law stipulates that
commercial banks can underwrite securities so long as they are
guaranteed except for Postal Service bonds which will be underwritten
by banks without a guarantee.
'As is probably clear, this provision of law was written into effect
after the great collapse of the banking industry in the early 1930's.
A
QUESTION OF COMPETENCE
Aside from the biased nature of the criteria, we must examine the
selection process itself. Even assuming that the questionnaire is fair,
were the firms top-rated in terms of its criteria indeed the ones selected?
Appendices A2 through A7 are the latest available data showing the
relative position of the five underwriters in the investment banking
industry in a number of areas of competence. We assume that volume
of business is one indicator of competence, i.e., if X company handles
more government agency issues than Y company, we assume it has
more competence in handling agency issues.
A review reveals that in at least two cases there were at the very
least excellent alternative choices to the ones actually made.
Postal Service officials were very much aware of the necessity for
complete objectivity in their selection procedures and, even more
importantly, knew which firms had the most demonstrated competence
in bonding for government agencies. The memoranda that demon-
strated this awareness came not from interested firms, but from dis-
interested professionals in government. The following is representative
of the advice that seems to have been ignored:
Reproduced at the Richard Nixon Presidential Library
9
the underwriters will add a cushion in the commis-
sion, normally $1.50 to $2.00 more per $1000. The amount
charged will vary with the length of the issue and the condi-
tion of the market.
Prior relationships are the normal way an underwriting
syndicate is formed and participation is based on this rela-
tionship, hence a syndicate is fairly static. On the other
hand, a selling group can be more tailored to fit the situation
and greater control over the issue can be exercised, therefore
a selling group is more flexible.
An occasional visitor to Wall Street should use an under-
writer to distribute an issue. But a continuing participant
[like the Postał Service] in the market place is best suited
using the selling group method of distribution, not only is
the selling group method less expensive, it remains more
flexible. (Our italics.)
The above is an internal memorándum to a kev Postal Service
officia 1 recommending that a selling group be used when a bond issuer
is going to market over and over again, as the Postal Service will, and
advising against a syndicate. It points out that syndicates are based
on "prior relationships" and not objective criteria. In spite of this
advice the Postal Service set up a syndicate based on prior relation-
ships, that would be more expensive than a selling group. Thus it
ignored competent advice and even its own criteria, as expressed in its
letter of solicitation to the underwriting firms.
Another item is of relevance, and appears here in full
Agency financing of less than five year maturity is not included in
this list.
Reproduced at the Richard Nixon Presidential Library
Amount in
Agency
Placement
Sold
thousands Due
Coupon
Monagement
TVA
Comp
June 1, 1969
$100, 000
June
1, 1974
8.0 percent at 101
1st Boston, Lazzard, East Dillon, Solomon Bro., Bank of America.
TVA
Comp
Oct. 15, 1969
100,000
Oct. 15, 1994
8½ percent at 100
Do.
TVA
Comp
Mar. 15, 1970
100,000
Mar. 15, 1995
9.0 percent at 101
Halsey Stuart, Equitable, Smith Barney, 1st National City, White
Weld, Morgan Guaranty, Chase Manhattan, Chemical Bank,
Merrill Lynch, 1st National of Chicago.
TVA
Comp
do
50, 000
June 15, 1975
8,75 percent at 101
Bank of America, 1st Boston, Solomon Bro.
TVA
Comp
do
50,000
June 15, 1995
8.75 percent at 101
Halsey Stuart, Equitable, Smith Barney, 1st National City, White
Weld. Morgan Guaranty, Chase Manhattan, Chemical Bank,
Merrill Lynch, 1st National of Chicago.
International Bank for R. & D
Negoc
July 23, 1970
200,000
Aug. 15, 1995
85/8 percent at 100
Morgan Guaranty, 1st Boston.
Do
Negoc
Jan. 15, 1971
200,000
Jan.
15, 1976
61/2 percent at 100
1st Boston, Morgan Guaranty, Solomon Bro.
International American Development Bank
Negoc
Oct. 1, 1970
100,000
Oct.
1, 1995
85/8 percent at 99!
Blyth, Lazard, Lohman.
Penn Central transportation certificate
Negoc
Jan. 26, 1971
50,000
Jan 15, 1976
61/8 percent at
Merrill Lynch.
guaranteed by Secretary of the Treasury.
1001/2.
Penn Central
Negoc
do
50,000
Jan. 15, 1986
7.05 percent at
Do.
1001/2.
Federal National Mortgage Association
Negoc
June 1, 1970
250,000
June_ 1, 1975
83/3 percent at 100
1st Boston, Morgan Guaranty, Merrill Lynch, Solomon Bro.
guaranteed by Government National
Mortgage Association.
Do
Negoc
Sept. 29, 1970
200,000
Oct.
1,
1990
85/8 percent at 100
Morgan Guaranty, Merrill Lynch, Solomon Bro., 1st Boston, Goldman
Sachs.
Federal home loan mortgage guaranteed by
Negoc
Nov. 19, 1970
140,000
Nov. 27, 1995
8.60 percent at 100.
Solomon Bro., Morgan Guaranty, 1st National City Bank, Lehman,
Government National Mortgage Asso-
Merrill Lynch.
10
ciation.
Federal National Mortgage Association
Negoc
Apr. 1, 1970
200,000
Apr.
1,
1975
8 percent at 100
Solomon Bro., 1st Boston, Morgan Guaranty, Merrill Lynch.
Farmers Home Administration, Department
Negoc
Feb. 3, 1970
200,000
Jan. 31, 1975
87/8 percent at 100
Merrill Lynch, 1st Boston, A. G. Becker.
of Agriculture, insured notes.
Negoc
Feb. 3, 1970
150,000
Jan. 31, 1980
8.90 percent at 100
Do.
Negoc
300,000
July
1, 1985
85/8 percent at 100
Do.
Negoc
Dec. 22, 1970
300,000
Nov. 30, 1980
7 percent at 100
Do.
Negoc
Apr. 6, 1971
200,000
Mar. 31, 1981
6.40 percent at 100
Do.
Federal Home Loan Bank
NA
Aug. 25, 1969
201,000
Aug. 25, 1974
7.65 percent at 100
Alan Knowles, fiscal agent and manager.
Do
NA
Nov. 25, 1969
250,000
Nov. 25, 1974
8.0 percent at 100
Do.
Do
NA
Mar. 25, 1970
350,000
Feb. 25, 1980
7.75 percent at 100
Do.
Do
NA
July 27, 1970
300,000
Aug. 25, 1975
7.95 percent at 100
Do.
Do
NA
Aug. 25, 1970
265,000
May 26, 1975
8.05 percent at 100
Do.
Do
NA
Oct. 15, 1970
200,000
Oct. 15, 1980
7.80 percent at 100
Do.
Federal Land Banks
NA
Feb. 20, 1970
210,000
Jan. 20, 1975
8 and 38 percent at
Glen Brown, fiscal agent and manager.
100.
Do
NA
Feb. 23, 1971
224,000
Apr. 20, 1981
6.70 percent at 100
Do.
Federal National Mortgage Association
NA
Sept. 10, 1969
250,000
Sept. 10, 1974
7.85 percent at 100
John Claybourne, fiscal agent.
Do
NA
Dec. 10, 1970
250,000
June 10, 1977
6 and 38 percent at
Do.
100.
Do
NA
250,000
June 10, 1981
7.25 percent at 100
Do.
Do
NA
Feb. 10, 1971
250,000
Feb. 10, 1982
6.65 percent at 100
Do.
Do
NA
Mar. 11, 1971
200, 000
June 10, 1983
6.75 percent at 100
Do.
Do
NA
Apr. 12, 1971
200, 000
June 11, 1984
6.25 percent at 100
Do.
Federal Intermediate Credit Bank and Bank for Cooperatives sold short term issues until 1970 when they both marketed 3 year maturity paper.
Reproduced at the Richard Nixon Presidential Library
11
Note that in the foregoing document, Dillon Read and Kidder
Peabody are not listed at all. First Boston Corporation, a firm not
selected, appears in almost all of them. Note further that the Tennessee
Valley Authority, an agency usually compared to the Postal Service,
takes competitive bids on all its bond issues. There are no syndicates
based on prior relationships nor are the issues negotiate.l in private.
The chart below demonstrates that neither Dillon Read nor Kidder
Peabody possesses the same level of qualifications as the other three
firms selected, which consistently rank in the top ten for all categories.
Dillon Read
Kidder Peabody
Criteria 1
ranking
ranking
Federal. age underwritings (management)
Did not qualify
20 out of 21.
Leading und erwriters of municipal bonds
do
15 out of 25.
Leading uno erwriters of corporate issues
12 out of 25
8 out of 25.
Combined u derwriters of corporate and municipal issues
10 out of 37
14 out of 37.
Leading underwritings of utility bonds
14 out of 20
7 out of 20.
10-year (1950-69) total ranking of top 10 investment firms based on total Did not qualify
Did not qualify.
dollar amount of public offerings of taxable securities managed or CO-
managed.
1 Except for the last item, this data is based on information provided by the Investment Bankers Association for the year
1970. The last item (10-year ranking) is taken from the Investment Dealers Digest-Corporate Financing Directory.
These data suggest the Postal Service may have applied other un-
stated criteria in making their final choices. The relationship of Dillon
Read's principals with the top management of the Postal Service and
the White House has been outlined in this report. Time and time again
clear evidence appears that the selection of Dillon Read was antici-
pated. Consider that President Nixon's recruiter for top policy posi-
tions,² Peter Flanigan, was formerly a Vice President of DillonRead.
There is a good possibility that Mr Flanigan recruited Mr Hargrove
for his present job at the Postal Service. They continued their relation-
ship during the present Administration, well beyond the time when
the Postal Service became non-politically dependent. Conversations.
and written memoranda passed between them as late as the spring of
1971, well after the Postal Service had instituted the non-political
policies affecting its day-to-day operations. Yet no admonitions
against high-level politics seem to have affected the Postal Service
management.
The following chart succinctly outlines the close ties that have long
existed between Dillon Read and Mr James Hargrove of the Postal
Service.
2 Newsweek magazine of April 28, 1969, said of Peter Flanigan: "He came to be known-and feared -as the
Administration's chief headjhunter doing the President's hiring and much of the firing
Flanigan
concentrates on top-level jobs [and] after a slow start, Flaingan [has] been making solid headway in
stocking the Nixon Administration with Nixon loyalists."
67-276-71
Reproduced at the Richard Nixon Presidential Library
President Nixon
Peter Flanigan, Assistant to the President, former Vice
President of Dillon Read-possible recruiter for James
Hargrove's Postal Service position
12
James Hargrove, Assistant
Dillon Read, Investment Bankers to
August Belmont, Chairman of the
Postmaster General, for-
Texas Eastern Transmission
Board of Dillon Read. At request of
merly treasurer of Texas
Postal Service, he examined the fi-
Eastern Transmission
Arranged for Mr Hargrove to address
nancial provisions of the proposed
Municipal Forum of New York
Postal Reorganization Act and made
recommendations and suggestions
Selected as managing underwriters
concerning the legislation.
for Postal Service Bond issue by
James Hargrove
Testified before the Senate Post
Office and Civil Service Committee
with respect to the feasibility of
financing the Postal Service's captial
improvement program.
Reproduced at the Richard Nixon Presidential Library
Considering the preceding data, at least an appearance of impro-
priety exists. It is suggested that Civil Service Commission and U.S.
Postal Service regulations be reviewed to determine if any conflict of
interest occurred in the selection of Dillon Read as one of the managing
underwriters of the Postal Service bonds.
Kidder, Peabody and Company deals in a broad range of securities
and has a large volume of sales office dealings with the general public.
Beyond this, nothing sets them apart as particularly qualified to
manage the bond sale of the Postal Service. They have little experi-
ence in government issues, either as manager or co-manager Some of
the firms not selected have more expertise in specialized areas while
others have a greater range of retail outlets. Bache and Company,
the second largest retail firm in the United States after Merrill Lynch,
Pierce, Fenner and Smith, was not selected and yet is substantially
larger than Kidder, Peabody and Company
A search for other criteria that might explain the selection revealed
that, in comparison to the other firms selected, Kidder Peabody had
made very significant contributions to the Nixon Presidential
campaign.
It is clear that members of the financial community have as much
legal right as anyone else to make political contributions. It is sug-
geste.l here, however, that the crucial first use of the bonding authority
of a new, nonpartisan public agency the Postal Service should have
avoided any suspicion that selections were influenced by past political
support. The clear intent of the Postal Reorganization Act is to place
the Postal Service bevond the political control of the President or
any of his advisors. The Board of Governors and long tenure of the
Postmaster General were designed to free the Postal Service from
politics.
What is the evidence that the selection of Kidder Peabody may
have been influenced by political considerations? The Chairman of
the Board of Kidder Peabody, Mr Albert Gordon, who personally
contributed $38,750 3 to various Republican committees in the Presi-
dential election of 1968. The Citizens Research Foundation's list of
political contributors shows that at least 13 other Vice Presidents of
Kidder Peabody contributed a total of $24,393.00 to various Repub-
lican committees.
Members of other firms also contributed money to election com-
mittees, some gave only to Republican committees, others gave to a
mixed group, and some gave insignificant amounts when veiwed from
a firm's standpoint (See Appendix B.) Kidder Peabody stands out as
the firm whose principals contributed most to the Republican Party-a
total of $63,143.00.
No other firm considered has this same pattern of campaign con-
tributions and thus it appears that this factor must have played some
role in the selection of Kidder, Peabody and Company as one of the
five underwriters for the Postal Service bond issue.
3 The New York Times listed this amount in the June 20, 1971 edition.
(13),
Reproduced at the Richard Nixon Presidential Library
14
Here follows a company-by-company analysis of all 33 proposals
submitted to the Postal Service. As will be seen, there is ample evidence
to conclude that (1) the five best firms were not selected, (b) the
selection criteria were biased to favor certain firms, (c) even by the
biased criteria, the five highest-ranking firms were not selected, and
(d) personal and political considerations may have played an import-
ant, if not crucial, role in the selection of Dillon, Read & Co., Inc.,
and Kidder, Peabody and Company
SUMMARY OF UNDERWRITERS' PROPOSALS
Note. All political contributions referred to were made during the
1968 Presidential Election Campaign.
Bache and Company, New York, the second largest brokerage firm
in the United States, is expert in the underwriting and distribution
of corporate and municipal securities. It also distributes and deals in
general market securities, mutual fund shares, and Canadian securities.
The firm, which has over 100 branch offices throughout the United
States, managed or co-managed $96 million in utility issues in 1970.
It retailed in excess of $250 million in General National Mortgage
Association issues. Bache has never managed or co-managed a govern-
ment agency issue. The company ranks 8th in net worth of firms
submitting proposals to the Postal Service and 16th in ranking among
underwriters of utility issues.
Political contributions none.
Summation Bache and Company, while never having served as a
manager or co-manager of government agency issues, has sold these
issues successfully By virtue of its distribution capabilities, through
its 100 branch offices, and experience as a manager or co-manager of
of utility and municipal bond issues, Bache possesses the qualifications
to manage or co-manage Postal Service and/or other government
agency securities.
Bank of America. Unlike investment banking firms, commercial
banks are limited underwriting corporate bonds. Under the Glass-
Steagel Act of 1934, commercial banks are prohibited from under-
writing corporate and revenue securities. They may underwrite
general obligation bonds of states and municipalities and most gov-
ernment issues.
The Bank of America is the largest privately owned bank with a
capital base in excess of $1.2 billion. It is one of the major participants
in the nation's money markets and deals in virtually all debt instru-
ments. The bank has managed TVA issues and has participated in
agency issues totalling $8.7 billion.
Summation Because commercial banks lack expertise and manage-
ment ability in handling revenue bonds there is doubt whether any
bank should be considered for a management position in the Postal
Service issue? Considering its distribution capabilities and previous
experience in government issues, the Bank of America possesses
credentials to participate in the Postal Service issue in line with other
banks.
A.G Becker and Company is a Chicago-based investment banking
firm which underwrites and distributes corporate and municipal
securities. They are stock and bond brokers, dealing in commercial
paper and short-term discount notes of the Federal National Mortgage
Reproduced at the Richard Nixon Presidential Library
15
Association and the Export-Import Bank of the United States, along
with issues of the Farmers Home Administration. In 1970-71, A.G.
Becker ranked 6th by agency debt issues participations amoug under-
writers submitting proposals. The firm also served as a manager or
co-manager of $1.2 billion of a Farmers Home Administration issue
during the same period. The firm ranked 23rd by net worth among
major companies submitting proposals. For the period 1970-71 the
firm did not serve as a manager or co-manager of a utility issue but
was responsible for the private placement of $53 million of utility debt
securities.
Political contributions $3,100 was contributed to the Republican
Party by principals of the firm.
Summation A. G Becker, by virtue its experience, has all the
credentials to be considered for a management position in the Postal
Service issue. The firm maintains an active secondary market on all
issues it manages or co-manages.
Blyth and Company Inc., New York, is held in high regard in the
investment banking and corporate communities. The firm's expertise
is mainly as an underwriter of corporate securities. It is also experienced
in utilities and tax-exempt bonds. During 1970-71 the firm did not
act as a manager or co-manager in government or government agency
issues.
Blyth and Company in net worth ranks 22nd among major in-
vestment banking firms sumitting proposals. On the basis of total
dollar amount of public offerings of taxable securities managed or,
co-managed in 1969 it ranked 6th and for the 10-year period 1960-69,
7th. The firm makes markets in all issued it manages or con-manages.
Their daily inventory runs to more than $15 million. The firm is
not a factor in agency debt issues.
Through its 39 offices the firm has wide distribution with institutions
and retail buyers.
Political contributions $2,500 to the Republican Party by princi-
pals of the firm.
Summation Despite the firm's lack of experience in government
agency business, considering its experience in all other areas of
-investment banking, Blyth could adequately fulfill a manager's
position for the Postal Service issue.
Chase Manhattan Bank is one of the 10 largest commercial banks
in the United States. By law commercial banks cannot underwrite
corporate securities or revenue bonds and Chase Manhattan cannot
therefore demonstrate any expertise in these areas. However, it is a
leading underwriter of municipal general obligation bonds and
maintains a sizeable sales force which markets its bonds at the whole-
sale and retail levels. The bank has never been a sole manager of
government or government agency issues. Chase Manhattan acted
as a co-manager during 1970-71 on two TVA issued and Government
National Mortgage Association issues on a fully modified pass through
bond issue.
Political Contributions. There is no record of political contributions.
Summation Setting aside the fact that commercial banks cannot
underwrite corporate or revenue bond securities, and recognizing that.
they lack the experience of the other banks in government agency
Reproduced at the Richard Nixon Presidential Library
16
issues, Chase Manhattan's experience in municipal bonds would
qualify it to be considered for a manager's position in competition
with other banks.
Dean Witter is a highly respected West Coast firm headquartered
in San Francisco with a major branch office in New York City The
firm, according to the Investment Dealer's Digest, was the nation's
second largest retail distributor of new underwritings in 1970. Dean
Witter maintains 76 branch offices in 21 states, the District of Co-
lumbia, two Canadian provinces, and London, England. The firm has
never managed a U.S. Government or government agency issue. It
has utility bond experience but is not considered a major factor in
this area.
By net worth of major investment banking firms, Dean Witter
ranks 14th. The firm has no standing on the basis of total dollar
amount of public offerings of taxable securities managed or co-
managed. The firm is not considered a factor in ranking by utilities
or agency debt issues for the period 1970-71
Political contributions Totalled $2900, $500 of which was ear-
marked for a specific Republican candidate.
Summation Dean Witter's experience is mainly in the distribution
of equity securities. The firm does not meet the criteria set forth for
a management position in Postal Service securities.
Dillon, Read and Company, Inc., New York, is a small to medium-
siżed investment banking firm engaged in the underwriting and dis-
tributi of corporate municipal securities. The firm is a financial
advisor to governmental instrumentalities, and power and transpor-
tation authorities. It is actively engaged in the financing of utility
debt issues.
The firm's experience in the government and government agency
area in 1970 and 1971 has been as a seller of 38 debt issues totalling
$1,775,000,000. The last issues it managed or co-managed were those
of the Export-Import Bank in 1967-1968.
While the firm maintains a secondary market in issues it manages
or co-manages, it does not have an active government bond depart-
ment. In ranking of net worth by firms submitting proposals Dillon
Read was 32nd out of 33. In ranking of the nation's top 100 under-
writing firms, it placed 90th. The firm has no ranking in agency debt
issues among the top 18 firms of the 33 submitting proposals. In util-
ity debt issues they were 13th.
Political Contributions $4000 to Republican Party contributed by
August Belmont.
Summation Dillon Read possesses experience as a manager in
utility and municipal debt issues. However, in comparison with the
credentials and experience of other firms submitting proposals for the
position of a manager or co-manager of the Postal Service issue and
other government and government agency issues, it is doubtful if
Dillon Read would place in the top ten for consideration.
Discount Corporation of New York, a 50-year-old company, possesses
expertise in the distribution of equity securities. It considers itself
one of the most active and largest primary dealers in U.S. Treasury
issues, federal agency obligations and obligations of the International
Bank, Inter-American and Asian Development Banks. It also dis-
tributed issues of the Federal National Mortgage Association.
Reproduced at the Richard Nixon Presidential Library
17
Since members of the Corporation's Board of Directors serve on the
boards of commercial banks, the Corporation is not permitted by the
Federal Reserve Board to deal in corporate securities. Discount Corpo-
ration has never served as a manager or co-manager of government
agency issues. The Corporation, in its proposal, stated that at this
time it did not consider itself qualified to be a manager or co-manager
But principals of the firm stated they could contribute to the managing
group in the distribution of Postal Service bonds. In ranking by net
worth of major companies submitting proposals, Discount Corpora-
tion placed 28th. In all other categories Discount Corporation was not
a factor
Summation At its own request, Discount Corporation should not be
considered for a manager or co-manager's position in the Postal Service
bond issue.
Eastman Dillon, Union Securities, New York, is widely respected.
Its credentials are in the area of corporate, utility, and municipal
bond underwriting and it serves as investment bankers to leading U.S.
corporations. In the area of revenue bond financing, and in particular
industrial revenue bonds, Eastman Dillon has developed a reputation
for innovative financing concepts. The company has never managed or
co-managed government or government agency securities. It has been
a distributor of government bonds for over 20 years, and has a major
distribution network incorporating 650 institutional and retail broker-
age houses.
In ranking by net worth, among major companies submitting pro-
posals Eastman Dillon was 18th. In utilities they placed 8th. In agency
debt issues for 1970-71, they distributed in excess of $1,300,000,000
of such issues. For the year 1969 Eastman Dillon ranks 7th on the
basis of total dollar amount of public offerings of taxable securities.
The firm maintains a secondary market in all security issues they
underwrite or manage.
Political contributions. To the Republican Party, $14,000 by the
principals of the firm.
Summation Eastman Dillon, on the basis of its experience in under-
writing corporate, municipal, and industrial revenue bonds, and its
20-year history of distributing government securities, possesses the
necessary credentials and expertise to act as a manager or co-manager
for the Postal Service issue, or government or governmental agency
issues.
Equitable Securities, Morton and Company, New York. Equitable
Securities is a small to medium-sized investment banking firm origi-
nating in Nashville, Tennessee, with a major New York office and 12
branch offices throughout the country The firm is a subsidiary of the
American Express Company.
The firm's expertise is in the underwriting of municipal and cor-
porate securities. It is institutionally oriented and is accustomed to
dealing in large amounts of debt securities. Equitable Securities makes
active markets in all issues it underwrites and as well as others its
clientele would have an interest in.
The firm has been in a major position in agency financing for a
number of years. Equitable Securities has been a manager or CO-
manager on two TVA issues for the year 1970 and ranks 14th in
underwriting of utilities for. the same period. In net worth of major
Ponreduced at the Richard Nixon Procidential Library
18
«companies submitting proposals, it rated 30th and 13th in agency
debt issues for 1970-71 In its proposal covering letter, Equitable
Securities stated that there are two or three or possibly more firms
that are outstanding in their ability to negotiate, manage, or co-
manage Postal Service issues based on past performance. The firm
went on to state that it is not a leading candidate, but feels because
of its distribution capability it would qualify as a manager in the
underwriting group,
Political Contributions. None.
Summation Equitable Securities would qualify as a participant in
the selling group.
The First Boston Corporation, New York. First Boston Corporation
is considered one of the nation's most prestigious banking firms. The
company raises more money for more corporations than any other
investment banking house in the world. The First Boston Corporation
ranks at or near the top in the underwriting of government securities,
municipal bonds, and in third market issues where exchange lists of
stocks are traded away on the floor at net prices.
The company, which buys and sells to institutions, managed or
comanaged $6.2 billion of underwriting in 1970. This placed it in the
position of participating in more than 25% of the $23 billion in federal
agency securities.
In the ranking of underwriting firms submitting proposals to the
Postal Service, on the basis of total dollar amount of ,public offerings
of taxable securities managed or co-managed, First Boston was first
with $4,098,657,000, representing 90 issues. For the 10-year period
1960-69 it was first with $32,603,991,000, representing 535 issues. In
the ranking of utilities for the 1970-71 period, the firm placed 3rd
with $4,812,000,000. In 1970 First Boston ranked 10th among the
nation's underwriters of municipal bonds. First Boston maintains one
of the largest government bond departments and secondary markets
for securities it manages or co-manages.
Political contributions. $500 was contributed by a principal of the
firm to the Republican Campaign Committee.
Summation First Boston's credentials speak for themselves. The
firm's expertise in all phases of investment banking qualifies it as a
top choice for a management position in the Postal Service issue and
in government and government agency securities. It is one of the four
leading firms that are essentially non-political.
First National Bank in Dallas is a major bank in the Southwest, and
acts as a fiscal advisor to the State of Texas. The bank is a major
underwriter and distributor of U.S. government agency securities in
the Southwest, and maintains active secondary markets in their issues.
It claims to be the principal underwriter and distributor of state and
municipal bonds in the area, and according to figures of the Investment
Bankers Association, places among the top 25 managing underwriters
in the country for municipal debt securities. The bank under prevailing
federal statutes can issue only securities issued by public bodies.
Summation For distribution purposes, the First National Bank in
Dallas would rate a major position among underwriters for the
Postal Service bonds or other government and governmental agency
securities.
First National City Bank, New York, is one of the nation's 10 largest
commercial banks. Under prevailing statutes, it can only issue securi-
ties issued by public bodies and U.S. Government securities. First
Reproduced at the Richard Nixon Presidential Library
19
National City Bank distributed for the government debt securities
issued by fiscal agents valued at $1.25 billion in 1970-71 The bank
served as a co-manager on $350 million of General National Mortgage
Association securities. The bank maintains a secondary market in all
securities they underwrite. First National City Bank claims to be one
of the top 5 dealers making markets in government securities and
considers itself a leader and primary dealer in U.S. government and
government agency securities.
The bank is also an underwriter of state and municipal bonds. It is
the opinion of First National City that the approach to government
financing should be different than to private issuers. In their proposal
they stated the following: "Whether one likes it or not, government
agency financing tends to be thrown into the political arena and there-
fore an additional unmeasurable ingredient is automatically introduced
and underwritings are held up for public scrutiny and congressional
criticism whether valid or not."
In comparison with other commercial banks being considered for
bank participation in the Postal Service bonds, First National City
possesses the necessary credentials to fulfill the role as a bank manager
or co-manager The biggest asset of commercial banks is their ability
to distribute issues.
Goldman, Sachs and Company, New York, is an old-line, highly
respected investment banking house and has been the leading com-
mercial paper dealer since 1869 and acts as an investment banker to
some of the nation's largest corporations. As an underwriter, the
company has developed a high degree of prestige.
In the area of financing debt issues of states and municipalities,
the firm has established a reputation as an innovator, particularly in
industrial revenue bond financing and air and water pollution abate-
ment financing. The firm states that it has made a major commitment
to enter the federal agency market. It has set up an independent
department which will include a specialized sales force of over 100
men with a high degree of expertise in the sale and positioning of
agency issues. In 1970-71 the firm was a manager or co-manager of
U.S. government agency issues for the Federal National Mortgage
Association, Federal Home Loan Bank, and the U.S. Department
of Agriculture. It has participated as a seller of notes for the Bank for
Cooperatives, Federal Intermediate Credit Banks, and the Federal
Home Loan Bank. The firm ranks 12th in net worth of all companies
submitting proposals. In agency debt issues for 1970-71 the company
was 4th and 13th in ranking by utilities for the same period.
Political Contributions For the 1968 campaign, the principals of the
firm contributed a total $22,000 to 10 Republicans and 4 Democrats.
Summation Goldman Sachs possesses a high degree of expertise in
all areas of investment banking, including their knowledge of the
government area. The firm would rank near the top for consideration
as a managing underwriter of Postal Service or other government
agency securities.
Halsey, Stuart & Co., New York and Chicago, has developed its
reputation in the field of debt security financing of established cor-
porations and governments in the United States and Canada. The
firm in 1968 extended into the field of corporate finance by establishing
a corporate finance department offering a full range of investment
banking services.
67-276-71-5
Reproduced at the Richard Nixon Presidential Library
20
Halsey Stuart has an excellent reputation as a manager or co-
manager of debt securities of states and municipalities, having held
first place among underwriters of these issues in 7 out of the last 13
years. Records of the Investment Bankers Association show a volume
of $9.30 billion.
In 1970, Halsey Stuart was second, after the Chase Manhattan
Bank, in the underwriting of bond issues of states and municipalities
totalling $1,007,619,000. Halsey led the underwriters in managing the
greatest number of municipal issues with 240 during 1970. In 1970 the
firm managed or co-managed $3.1 billion of corporate securities and
$0.5 billion in Canadian bonds. In utility ranking of all firms sub-
mitting proposals to the Postal Service, Halsey ranked 5th. In ranking
of underwriting firms for the years 1969, of total dollar amount of
public offerings of taxable securities, the firm was 5th. In ranking by
government agency, the firm placed 11th among the underwriters.
Halsey Stuart, in 1970-71, was a manager or co-manager of two TVA
issues. The firm customarily makes secondary markets on the more
important issues it manages or co-manages.
Political Contributions None.
Summation Halsey Stuart's long-standing reputation as a mana-
gerial house in debt securities and its experience in all types of securities
including government issues would give them consideration for a
position as manager or co-manager of Postal Service or other govern-
ment issues.
Harris Trust and Savings Bank, Chicago, a well respected mid-West
bank, has established a national reputation for the marketing and
selling of municipal bonds. In the Chicago area the firm is one of the
leading syndicate managers. In 1970 it distributed approximately $362
million of government agency securities and $357 million in 1971 The
bank's participation has been in issues of the Farmers Home Loan,
Federal Home Loan Bank, Federal National Mortgage Association,
Small Business Administration, and Bank for Cooperatives, among
others. Like other commercial banks, it is prohibited by law from
underwriting corporate securities. Harris has a sales staff of 14 govern-
ment agency specialists in New York and Chicago. The bank markets
securities for all 48 continental states.
Summation Harris Trust, because of its expertise in the manage-
ment of municipal bond syndicates and its capabílities in the market-
ing and distribution of municipal and government agency issues, is
well qualified among banks for consideration as a manager of Postal
Service bonds and government and government agency issues.
Hornblower and Weeks-Hemphill, Noyes, New York, is one of the
major investment banking firms in the country and has 66 offices
throughout the United States. Its forte is the underwriting and dis-
tribution of equity securities. The firm is also active in the obligations
of states and municipalities. The firm has participated in two debt
issues of government agencies in 1970-71 In the ame period it co-
managed two Government National Mortgage Association issues.
Hornblower Weeks also maintains a secondary market in all issues it
underwrites. The firm's experience in utilities for the 1970-71 period
total three issues valued at $86 million. Hornblower Weeks ranked
15th among firms submitting proposals for underwriting debt issues
for the period 1970-71 In utilities the firm placed 18th. In total dollar
amount of public offerings of taxable securities for the period 1969, the
Reproduced at the Richard Nixon Presidential Library
21
firm was not among the top 10. In net worth of major companies
submitting proposals the firm was 10th.
Political contributions To the Republican Party by principals of
the firm, $17,500.
Summation Hornblower Weeks' strong point is its ability to
distribute issues through the firm's 66 offices. While its strength is not
as great as other underwriters in government agency business, the
firm is capable of a managing position.
E. F Hutton and Co., New York, is one of the nation's respected
underwriting firms. It ranks 14th in order of net worth of the nation's
top 100 underwriters for the year 1970. The firm is one of the leading
underwriters of equity securities. It has had many years of experience
in structuring and consummating several billion dollars worth of debt
and equity financings and managing national syndicates of investment
banking and brokerage firms.
The firm has never been a manager or co-manager of any govern-
ment or government agency issue. E. F Hutton makes secondary
markets in all issues in which it participates. The company is an
active participant in the distribution of government securities.
In uti ities the firm ranks 15th among firms submitting proposals
to the Postal Service. No information was available with regard to
the ranking of the firm by agency debt issues.
Political contributions: Total $2000 to the Republican Party by
principals of the firm
Summation The firm's strength lies in its investment banking
and syndicate staff of 20 professionals and 1300 account executives
in 82 branch offices throughout the nation. From a distribution point
of view, the firm deserves consideration for a manager's position.
W E. Hutton & Co., New York, is a medium-sized firm dealing
primarily in the area of the underwriting and distribution of equity
securities. The firm has 20 U.S. branch offices and 9 overseas.
In its proposal to the Postal Service, W. E. Hutton indicated that it
has participated in the past in offerings of the World Bank and govern-
mental agencies. It further stated that it has never been a manager or
co-manager for the sale of an issue of a government agency security
Therefore, W E. Hutton felt it could not answer all the Postal Service
questions as to experience in the managing or co-managing of issues.
The firm does not feel that the public utility offerings that it has
managed or co-managed are entirely comperable to a government
agency issue. The firm claims an outstanding record for the distribution
of new offerings.
Summation W E. Hutton feels that it could make a substantial.
contribution in the distribution of Postal Service bonds in the capacity
of a co-manager In the absence of their furnishing data as to expertise
in government agency, municipal and utility issues, and in the firm's
presentation, there is an indication that that firm is not interested
becoming actively engaged in the underwriting of the Postal Service
issue.
Kidder Peabody and Company, New York, is one of the oldest
investment banking firms in the country, It maintains 31 sales offices
in the U.S., and 5 overseas offices. As an investment banking house,
the firm's primary function is to serve as a financial advisor to cor-
porate clients and to assist them in meeting their capital requirements
and financial goals.
Reproduced at the Richard Nixon Presidential Library
22
The firm is widely recognized for its expertise in mergers, acquisitions
and evaluations, private placements, venture capital, real estate
financing and international financing. Kidder Peabody is also active
in debt issues of states and municipalities.
Of the major companies submitting proposals to the Postal Service
Kidder Peabody ranked 19th in net worth for the year 1970. In a
ranking by utility debt issues, 7th. The firm was not among the top 18
in ranking by government agency debt issues for the same period
Kidder Peabody in 1970 was a co-manager for a rights offering of
$1,130,000,598 common shares of the Federal Mortgage Association.
In 1971 the firm co-managed a $30 million issue for the Small Business
Administration. It maintains no government bond department and is
not considered a factor in the secondary market.
Political contributions Albert H Gordon, Chairman of the Board,
and Mrs. Gordon contributed to the Republican Party a minimum of
$23,500. An additional $24,393 was contributed by principals of the
firm for a total contribution of $47,893.
Summation Kidder Peabody possesses all of the attributes of an
investment banking firm in the area of corporate, municipal, and
utility underwriting. It has also demonstrated its management abilities
in these areas. This would justify consideretion for a manager position
in Postal Service or government agency issues, but the firm's lack of a
government bond department and a secondary market capability
would tend to minimize Kidder Peabody's managerial and distribution
strength compared with other qualified firms.
Kuhn, Loeb and Company, New York, is an old-line investment
banking house with excellent credentials in the corporate and inter-
national area. However, it has never been a real factor in the govern-
ment or revenue bond areas. The firm has no retail distribution
capabilities. Of the major companies submitting proposals, the firm
placed 15th in the management of utility underwritings. In ranking
of underwriting firms on the basis of total dollar amount of public
offers of taxable securities managed or co-managed in 1969, it was 10th.
Political Contributions Principals of the firm made political con-
tributions totalling $27,500 to the Republican Party
Summation In view of its overall experience and other benchmarks
to be considered, Kuhn Loeb would not compete as successfully as
others for a managerial position in the Postal Service bond issue.
Lazard Freres & Co., New York, has been involved as a manager
or co-manager in negotiated TVA issues and 3 Inter-American Devel-
opment Bank issues. The firm maintains no secondary market in
issues it manages or co-manages. Its expertise lies in creative corporate
and international financings. Lazard Freres maintains a small munici-
pal bond department. By agency debt issues it does not rank in the
top 18 for 1970-71 Net worth ranking places them 24th out of the
nation's top 100 firms. In the management of utility issues the firm
did not rate in the top 18.
Political Contributions Individuals in the firm made contributions
in the amount of $9,900 which was divided equally between Repub-
licans and Democrats.
Summation In fulfilling the criteria set forth by the Postal Service,
particularly the maintenance a secondary market, Lazard Freres
lacks the required credentials to be a manager of the Postal Service
issue.
Reproduced at the Richard Nixon Presidential Library
23
Lehman Brothers, Inc., New York, has been a strong house in
municipal revenue bonds, utilities, and governments in the past. In
recent years, the firm experienced difficulties, particularly in turnover
of key bond department personnel. It has participated as a manager
or co-manager for the Federal Home Loan Bank, Federal National
Mortgage Association, Export-Import Bank, and Inter-American De-
velopment Bank. The firm has been a major participant in short term
agency paper Lehman was financial advisor to the TVA from its
inception and recently informed TVA that they possessed the ability
to handle their bond issues themselves. While recommending a nego-
tiated bid, the firm also said that it would be willing to participate on
a competitive basis.
The firm maintains a secondary market in agency securities. The
range of the firm's spread on government underwritings is within
established norms. Lehman Brothers ranks 16th by net worth of
major companies submitting proposals, 5th in utility underwritings,
and 3rd in the rankings of underwriting firms on the basis of total
dollar amount of public offerings of taxable securities for the year 1969.
Political Contributions Lehman, through its principals, has been a
major contributor to the Republícan Party A total of $60,636 was
given for the 1968 period.
Summation Lehman Brothers continues to possess management
capabilities, and is considered to have the necessary expertise to be a
manager of the Postal Service issue.
Loe'), Rhoades & Co., New York, has considerable prestige in invest-
ment banking circles. The firm's expertise is in the corporate area,
partic ilarly in the underwriting of equity securities. It is not con-
sidered a factor in the underwriting of securities of states and munici-
palities. Its government bond experience is based on being a co-
manager of two government bond underwritings for the Export-Import
Bank. Loeb Rhoades maintains a secondary market in all issues
managed or co-manage and maintains an active bond trading
market for its institutional clients and correspondents.
The company has 18 offices in the U.S., 12 of which are located in
New York State. The firm ranks 9th by net worth of major investment
banking firms submitting proposals. On the basis of total dollar amount
of public offerings of taxable securities managed for the period 1969,
and the 10-year period 1969-69, the firm did not rate in the top 10. It
was not among the top 18 firms specializing in utility debt issues and
the same holds true for agency debt issues.
Political Contributions The firm through its principals contributed
$78,250 to various individuals and committees, divided between 13
Republicans and 17 Democrats.
Summation Based on the firm's utility and government bond
experience and other criteria set forth by the Postal Service, it would
be difficult to justify a manager's position for Loeb Rhoades in the
Postal Service issue.
Merrill Lynch, Pierce, Fenner & Smith, Inc., New York, is the
largest investment banking and brokerage house in the United States.
It maintains over 200 branch offices and 18 offices in foreign countries.
The firm engages in all areas of investment banking, including the
underwriting of corporate, municipal, and government and govern-
ment agency securities.
Reproduced at the Richard Nixon Presidential Library
24
The firm has been a manager or co-manager OF seller of nearly every
government or agency security in recent years. For the period 1970,
it ranked first as a manager or co-manager of government or govern-
ment agency issues. The firm has an outstanding reputation in the
underwriting of the nation's utilities. The firm's volume of business in
U.S. Government issues and the obligations of government agencies
and negotiable certificates of deposit amounted to $122 billion. In
ranking by utilities for the period 1970-71, among firms submitting
proposals to the Postal Service, Merrill Lynch was number one with
over $7 billion of utility underwritings. For the year 1969 in ranking of
underwriting firms on the basis of total dollar amount of public of-
ferings of taxable securities managed co-managed the firm was 3rd.
For the 10-year period 1960-69, it was also 3rd. In agency participa-
tions Merrill Lynch ranked 1st, and the same is true of its ranking by
agency debt issues of firms submitting proposals. Merrill Lynch, by
net worth, ranked 4th, second only to three of the nation's largest
commercial banks.
Political Contributions Contributions of the firm through its prin-
cipals amounted to $7500 to the Effective Government Association.
Summation Merrill Lynch, by virtue of its size and experience in
management of all types of securities is qualified to participate in the
management group of government and government agency securities
including the Postal Service.
Morgan Guaranty Trust Company, New York, is one of the nation's
largest commercial banks. The bank serves clients in all 50 states and
124 foreign countries. One of its main strengths is in the area of in-
ternational money management.
The bank, like all other commercial banks, is prohibited by law from
the underwriting of corporate securities. In 1970 it ranked 4th among
the nation's top underwriters of debt securities of states and munici-
palities. In government and government agency issues, Morgan Guar-
anty in 1970 managed or co-managed 7 issues comprising TVA,
Federal National Mortgage Association and Government National
Mortgage Association in excess of $1 billion. The bank also acts as a
major underwriter for issues of the Farmers Home Administration and
the Federal Home Loan Mortgage Corporation. It acted as a joint
manager for more than $1 billion of project notes of the Department
of Housing and Urban Development.
Summation Morgan Guaranty, by virtue of its size, experience, and
expertise in the management of government and municipal securities
possesses credentials of the highest order to be a manager of Postal
Service or other government agency securities.
Morgan Stanley & Co. is a name synonymous with prestige in
investment banking circles and is the banker to some of the nation's
leading corporations, railroads, and utilities. The firm has participated
in government and government agency securities and has been a
manager or co-manager in issues for the International Bank for
Reconstruction and Development, Federal Home Loan Bank, and the
Federal Home Loan Mortgage Corporation.
Morgan Stanley jointly managed, 21 issues totalling $2,810,000,000
over the last 19 years and the firm is noted for its leadership in
managing negotiated issues as well as its reputation for quality of
business.
Reproduced at the Richard Nixon Presidential Library
25
While Morgan Stanley does not maintain a secondary market in
issues it manages or co-manages, it is the firm's opinion that the Postal
Service bonds would be actively traded by those banks and firms which
make markets in government securities and Federal agency bonds.
In lieu of secondary market capability, it is relying on its ability and
experience in performing specialized management functions. The
firm does have extremely strong ties to institutions that would be
customers for Postal Service bonds.
In the case of U.S. Postal Service issues, the firm stipulated it would
not take a management fee. Its belief is that the selling concession
would be adequatè to induce maximum selling effort. Morgan Stanley
ranks 31st by net worth of managing companies submitting proposals,
and 9th on the basis of total dollar amount of public offerings of
taxable securities managed or co-managed. In utilities for the period
1970-71, it was 10th among the top 18 firms. In agency debt issues
for the same period, it placed 7th out of 17
Political Contributions. $750 to the Republican National Finance
Committee.
Summation Based on the firm's credentials, its reputation in the
financial community with industry and government, and its experi-
ence as a manager of utilities and government issues, Morgan Stanley
posses the expertise to be a manager of Postal Service or govern-
ment issues. However, the lack of a secondary market capability
should be taken into consideration
John Nuveen & Company is a Chicago-based firm specializing in
debt securities. John Nuveen has historically specialized in the field
of public finance. John Nuveen is a wholly-owned subsidiary of In-
vestors' Diversified Services, Inc. It underwrites and/or distributes
issues of the U.S. government, federal agencies, states and cities, and
other governmental entities. A significant portion of the securities
handled by Nuveen are issued for utility purposes, public and private.
The firm has demonstrated its ability to market large volumes of
securities. Total volume in 1970 was $9.7 billion, of this amount $1
billion par value was in government agency securities, including issues
for the Federal National Mortgage Association, International Bank for
Reconstruction and Development, InterAmerican Development Bank,
TVA, Asian Development Bank, Federal Home Loan Bank, Federal
Land Bank, and in the distribution of Federal Intermediate Credit
Bank Debentures. Nuveen maintains a large secondary market in
all issues it manages or deals in.
John Nuveen ranks 27th by net worth of major firms submitting
proposals to the Postal Service. The firm has managed or co-managed
in excess of $1,717,000,000 of revenue bonds in 1970.
Political Contributions: None.
Summation In 1970 John Nuveen was ranked third in the nation
as a manager of municipal issues. Nuveen possesses the necessary
qualifications and experience to be a manager or co-manager for the
Postal Service issue and/or government and government agency
securities.
Paine, Webber, Jackson & Curtis, Inc., Boston and New York, is an
old-line Boston firm with major offices in New York, Boston, Chicago,
and Los Angeles. The firm has a total of 70 branch offices throughout
the United States. Its expertise is in the underwriting and distributing
of corporate and municipal securities.
Reproduced at the Richard Nixon Presidential Library
26
The firm has čonsiderable experience in the utility bond area but
it has never been a manager in government or government agency
securities. Paine Webber has participated in the selling group for a
number of government agency and quasi-agency securities. By net
worth it ranks as 20th among underwriters submitting proposals to
the Postal Service and 11th for utilities managed or co-managed in
1970-71
The firm is not a factor in agency debt issues or in the managing or
co-managing of underwriting firms on the basis of total dollar amount
of public offerings of taxable securities.
Political Contributions The principals of the firm contributed
$3,000 to the Republican Party
Summation Paine, Webber, Jackson & Curtis' expertise in the
underwriting and distribution of equity securities, in the management
of utilities, and in the distribution of government agency securities
is sufficient to warrant consideration for a management position.
However, one must take into consideration that the firm does not
maintain a government bond department or secondary market
facilities.
Salomon Brothers, New York, is a highly respected full-line invest-
ment banking firm which serves as dealer and broker in U.S. govern-
ment, municipal, public utility, industrial, railroad, and Canadian
securities. The firm also serves as underwriters for many of the
nation's corporations.
Salomon Brothers maintains branch offices in Atlanta, Boston,
Chicago, Cleveland, Dallas, Los Angeles, Philadelphia, St. Louis, and
San Francisco. In 1970 it ranked 11th as an underwriter of debt
issues of states and municipalities. Salomon Brothers makes markets
on a full range of money market instruments. It is a recognized
dealer in government and government agency securities. In 1970 it
managed or co-managed 15 debt issues totalling $2,940,000,000 of
the following government agencies Farmers Home Administration,
Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Mortgage Corporation,
and others. It also managed 2 issues valued at $230 million of Farmers
Home Administration, and U.S. Government Guaranteed New
Communities Act debentures. The firm is a leading factor in secondary
markets for all debt securities. In 1970 the volume exceeded $160
billion. The firm gives priority to issues they manage or co-manage.
In 1970 Salomon Brothers underwrote 69 utility debt issues valued
at $3,423,000,000.
In ranking by agency debt issues for 1970-71, it placed 7th among
firms submitting proposals. In net worth of major companies, Salomon
Brothers was 8th, and second in the ranking by utilities.
Political Contributions. A member of the firm contributed $1500
to the Humphrey and Johnson Clubs.
Summation Salomon Brothers has amply demonstrated its ex-
pertise and credentials as a manager and co-manager in government,
municipals, and utilities to qualify as a manager in the Postal Service
and/or other government agency issues.
Shearson Hammil & Co., Inc. is not a factor in the bond business.
It requested that the firm not be considered for a management or
«o-management position.
Reproduced at the Richard Nixon Presidential Library
27
Smith Barney & Company, New York, is principally active in the
underwriting and distribution of new capital issues. It also provides
senior and equity capital. The company represents some of the
nation's largest corporations, and maintains 17 U.S. offices 2 offices
overseas.
For many years the company has been identified with the under-
writing and distribution of obligations of states and municipalities
and those of the Federal Land Bank and federally sponsored municipal
housing authorities, and other governmental agencies. In the area of
revenue bond financing, Smith Barney has established an outstanding
record. The firm has played a prominent role in over 130 revenue
bond issues for bridges, toll roads, electric power and airport facilities
among others.
Smith Barney was a manager of the following government or
government agency bonds United States Government Insured
Merchant Marine bonds, TVA, and New Housing Authority bonds.
In utilities Smith Barney ranks 16th among those submitting pro-
posals and 12th for agency debt issues. In ranking by net worth of
major companies, Smith Barney placed 12th, in agency participations,
8th.
Political Contributions A senior member of the firm contributed
$6,000 to the Republican Victory Committee.
Summation Smith Barney's expertise has been demonstrated in
utilities, revenue bond financing, and the management and distribution
of government agency securities. The firm also maintains secondary
markets in all the securities it manages. Judged by the criteria set
forth by the U.S. Postal Service, the firm possesses all the credentials
to be a manager or co-manager of U.S. Postal Service bonds and other
government agency issues.
White, Weld & Company is a respected investment banking house
with 12 U.S. offices and 8 branches overseas. The firm in 1970-71
managed no government or government agency securities. However, it
was an underwriter in all issues of the Federal Home Loan Bank,
Federal Home Loan Mortgage Corporation, Banks for Cooperatives,
Federal Intermediary Credit Banks, Federal National Mortgage
Association, and the Farmers Home Administration. The firm has
also participated in TVA authority issues. White Weld has also
managed or co-managed 46 corporate debt utility issues with a dollar
value in excess of $2 billion. The firm maintains a government and
municipal bond department. At one time it was a major factor in
municipals, but in recent years strength in this area appears to have
declined. On the scale of 33, White Weld ranks 13th by net worth of
major companies submitting proposals to the Postal Service. The firm
ranks 6th in the underwriting of total dollar amount of public offerings
of taxable securities managed or co-managed. For the period 1960-69,
White Weld ranked 8th. In utilities for the period 1970-71, it ranked
7th and 14th by agency debt issues.
Political Contributions White Weld through its principals con-
tributed $9,500 to the Republican Party
Summation Based on its management experience in utilities,
municipal bonds, and participation in government issues, White Weld
possesses the credentials to be considered for a manager's position in
Postal Service and other government agency securities.
67-276-71-6
Reproduced at the Richard Nixon Presidential Library
PART III-THE NATURE AND NECESSITY OF THE
BOND ISSUES
POSTAL SERVICE CAPITAL REQUIREMENTS
The Postal Reorganization Act (Public Law 91-375, 39 U.S.C. 2005)
empowers the Postal Service to obtain funds for capital improvements
and operating expenses by issuing interest-bearing obligations. The
obligations may be sold directly to the U.S. Treasury or to the public,
with or without the stated guarantee of the Federal Government.
Although the Postal Service will not need additional funds either
for capital improvements or operating expenses for the next several
months, the Service believes that its borrowing ability should be
established with the investing public before a substantial need for
capital expenditures arises. The issuance of $250 million of 25-year
Postal Service revenue bonds would familiarize the investing public
with the Service's debt obligations, establish its public credit, and
provide a ready market for future issuances of bonds or notes as the
need may arise.
Government agencies and corporations have sold debt obligations
to the investing public by two principal methods competitive bidding
and negotiated sale. A negotiated sale may be arranged with a syndi-
cate of banking institutions or through the agency's own fiscal agent
who in effect organizes a syndicate of banking institutions to under-
write the bond issue.
Some questions can be raised as to the comparative values of a
negotiated versus competitive bid process. Taking competitive bids
would allow the Postal Service completely objective pricing, since the
group offering the lowest cost to the Service would win the right to
resell the bonds. A negotiated process, on the other hand, is a strictly
private arrangement between the issuer and those persons or firms
with whom they choose to do business. One can not unequivocally
determine exactly by what criteria such a selection was made-one
must rely on circumstantial evidence. The purpose in using either
method is the same. that is, the prompt sale of substantial amounts of
debt instruments, most of which will be retained by buyers for ex-
tended periods of time.
No other government corporation or agency is closely comparable
to the United States Postal Service. The Service has a long history of
delivering the mail at prices that do not cover costs, but because it has
a working monopoly of a necessary economic service, profitable
operation seems probable if rates are established which provide for
one. The Act, however, recognizes that the Service is expected to
continue to provide certain traditional services for which there is no
prospect of complete cost recovery, hence substantial Congressional
appropriation subsidies are expected over the next ten years.
(29)
Reproduced at the Richard Nixon Presidential Library
30
The operations in recent years of the Post Office Department
and projected operations for the foreseeable future, would not engender
investor confidence in the Postal Service's ability to repay or even to
meet interest charges on its debts. For example, operating losses
before United States Government subsidies and reimbursements
amounted to about $1.6 billion for fiscal year ended June 30, 1970,
and $2.3 billion for fiscal year 1971 The projected loss for fiscal year
1972 is about $1.8 billion. Despite these losses the Service began
fiscal year 1972 with current assets in excess of $3 billion and uncom-
mitted funds carried forward amounting to about $560 million. In
addition, under the Act, the Service "
.
may require the Secretary
of the Treasury to purchase obligations of the Postal Service in such
amounts as will not cause the holding by the Secretary of the Treasury
resulting from such required purchases to exceed $2 billion at any one
time. The Secretary of the Treasury may purchase obligations of
the Postal Service in excess of such amount.
The Service has a capital investment program for fiscal years 1972
through 1976 that estimates commitments and payments as follows
CAPITAL INVESTMENT PROGRAM-TO 1976
IIn billions]
Fiscal year
Commitments
Payments
1972
$1.4
$0.6
1973
1.3
is
1974
1.2
1.0
1975
1.1
1.0
1976
1.0
1.0
Total
6.0
4.5
Since the Service has been discussing the possible sale of obligations
to the investing public, its needs for cash in the immediate future
should be considered. The computation seems simple
Funds available, July 1, 1971
Cash and investments
$2, 984
Borrowing authority, U.S. Treasury
2, 000
Total
4, 984
Funds applied, July 1, 1971-June 30, 1973
Operating loss, 1972
1, 400
Fixed asset investment
600
Applied 1972
2, 000
Balance.
2, 984
Operating loss, 1973.
1 1, 400
Fixed asset investment
900
Applied 1973
2, 300
Balance June 30, 1973.
684
1 Assumes there will be no Congressional subsidy appropriation and no improvement in operations.
If one accepts the above schedule, showing a balance of over $.5
billion, it is difficult to understand why the Service should borrow $250
million in the open market at least 18 months before the monies are
Reproduced at the Richard Nixon Presidential Library
31
needed. At a rate of 8% per annum the cost would be $30 million, and
additional debt would add to this cost. (There would, however,
probably be an income offset, presuming the cash received would be
invested by the Service in income-producing securities with U.S.
Treasury Department approval.) One can only conclude that the
Service has no need for public borrowing at this time, and that such a
plan is questionable in many respects.
Postal Service Management may acknowledge that funds are not
needed for at least another year, but it argues that investment in
capital improvements will extend far into the future and will require.
about $250 million in commitments every three months for many years!
to come. Presumably the United States Treasury stands ready to
provide funds as the need arises but the Service chooses, with Treasury
Department approval, to sell its obligations to the public with no
guarantee by the United States Government.
The Service plans to operate independently of the United States
Government and to subject itself to the, "discipline of the market
place," presumably in the interest of more profitable operations. It is
difficult to reconcile this viewpoint with attendant facts. Apparently
the Service wishes to have the existing monopoly arrangement con-
tinued, that is, they want their operation protected As to public
borrowing, representatives of leading investment banking firms
informed us that United States Postal Service bonds would be readily
saleable even without a United States Government guárantee simply
because the investing public would regard them as U.S. Government
agency securities that the Government would not permit to default
on pay nents of principal or interest. Without this belief in an implicit
guarantee by the U.S. Government-the bonds would not be saleable.
In other words, the Service seems to be saying that the public has
confidence in its ability to make the U.S. Postal Service an efficient
profitable operation without Government assistance, and the investing
public is saying-"That may or may not be true, it is extraneous. We
know the government will always pay off on the bond's interest and
principal payments, no matter how the Postal Service is managed.
A varietv of methods have been employed by government agencies
to sell their securities. We are concerned here mainly with the sale of
25-year maturity bonds by the Postal Service. The funds borrowed are
to be used prospectively for a capital goods investment program
expected to extend over many years.
In recent years the only government agencies that have marketed
guaranteed securities with a 20-year or longer maturity date have
been the Government National Mortgage Association and the Tennes-
see Valley Authority, The Farmers Home Administration issued some
insured notes in August 1970 due for payment July 31, 1985, a 15-year
maturity, and Federal National Mortgage Association in April 1971
issued securities payable June 11, 1984, a 13-year maturity One
should distinguish between short-term (up to 5 years), medium-term
(5 to 16 years), and long-term (over 15 years) securities because
certain investment buyers may not purchase medium- and long-term
securities, particularly commercial banks and corporations. This mar*
ket condition is undoubtedly weighed by government agencies in
planning their debt funding operations, that is to say, there is a
broader market for short-term securities.
Reproduced at the Richard Nixon Presidential Library
32
The interest cost of money for direct U.S. Treasury obligations as
compared with U.S. government agency sponsored issues is illustrated
by the following income basis yields as quoted in the New York bond
market on August 24, 1971.
Year
Description
Yield
1990
Treasury 3½ percent
5.59
1987-92
Treasury 41/4 percent
6.12
1988-93
Treasury 4 percent
5.86
1989-94
Treasury 41/2 percent
5.99
1995
Treasury 3 percent
4.70
1998
Treasury 3½ percent
5.15
Average yield
5.68
1992
World Bank 5%
7.40
1993
World Bank 57 / percent
7.51
1994
World Bank 6½ percent
7.57
1994
World Bank 63/8 percent
7.57
1995
World Bank 85/6 percent
8.01
1996
World Bank 81/8 percent
7.89
Average yield
7.66
Note: World Bank bonds sell generally on a basis comparable with U.S. Government agency bonds.
The schedule above shows that the average interest cost for long-
term maturities on U.S. Treasury obligations compared with U.S.
government sponsored obligations is the difference between 5.68 and
7.66 or about two percent per annum. At the time this is written it
is estimated that Postal Service bonds due in 25 years would be
saleable to the public at 100, if carrying an eight percent coupon,
while the U.S. Treasury could finance the Service's borrowing needs
at a rate of about six percent. The main argument against public
bond sales by the Postal Service appears to be that the added cost
to the Service and the public eventually will be two percent per year
for 25 years, that is 50 percent, or $1 billion for every $2 billion
borrowed. Ultimately, for the $10 billion worth of postal bonds,
add-on interest costs might total $5 billion.
The Postal Service may sell its bonds to the public at considerable
additional cost as demonstrated above. The management of the
Service may burden itself with additional millions of dollars in added
interest costs by the public sale of its bonds. If it chooses to offer
bonds publicly with Treasury Department approval it may (1)
negotiate the sale to a syndicate made up of investment and com-
mercial bankers or (2) it may, with the cooperation of the U.S.
Treasury, advertise and arrange for competitive bidding on its
prospective bond issuances or (3) it may organize its own underwriting
group through a permanent fiscal agent.
We discussed the above three methods of selling agency bonds to
the public informally with representatives of major investment banking
and commercial banking firms, and with government agency officials
involved in the distribution of agency bonds. There was general
agreement that the first issue of hypothetical Postal Service bonds due
in 25 years in an amount of about $250 million might be best handled
by a negotiated sale to an underwriting syndicate made up of firms
familiar with the underwriting, distribution, and secondary marketing
of government agency bonds. However, we were assured by several
investment bankers that if the Postal Service were to offer its first
Reproduced at the Richard Nixon Presidential Library
33
issue. for competitive public bidding, at least two groups would
probably be anxious to buy the bonds on that basis. The main argu-
ment favoring a negotiated sale as compared with a competitive
bidding sale appeared to be that the former gives the underwriting
group a more permanent interest in the securities sold, and enables the
group to engage in an educational campaign with the buying public.
The fiscal agent method of bond financing has been used extensively
by the Federal National Mortgage Association which works as follows.
The main function of the fiscal agent is to organize and manage the
group of commercial banks and investment bankers who underwrite
and distribute FNMA bonds. The fiscal agent is also expected to be
familiar with the national market for bonds in general and FNMA
securities in particular His expertise and knowledge are used by the
top management of FNMA in reaching decisions regarding the issuance
of new securities.
The prime responsibility in reaching decisions regarding funds that
will be needed by the agency lies with the executives of FNMA. That
is to say, the amount of moneys needed, the majority of the issues, the
coupon rate, and time of issuance are decided upon by the FNMA
executive officers after consultation with the Fiscal Agent. Their
proposal is submitted to the Treasury Department for permission and
advice.
This method would seem to have been a logical choice for the Postal
Service. A career postal employee could act as fiscal agent, thus saving
commissions and fees that would be paid to various companies who
may have been selected for dubious reasons. Using a fiscal agent the
managers of the Postal Service and the Board of Governors would
retain strict control of this vitally important part of the Service.
As another possibility, the General Accounting Office has for many
years advocated the financing of Government agency debt through
the U.S. Treasury Department. The Comptroller General in his report
on the audit of the Export-Import Bank of the United States for fiscal
year 1970 stated
the Congress may wish to consider whether to require
Eximbank to obtain its funds from the least costly source.
Normally, the source will be the Treasury, however, there
may be some instances in which Eximbank may be able to
borrow funds in the private market at less cost than from
the Treasury We therefore believe that Eximbank should
retain the latitude to borrow in the private market only
when it can do SO at less cost than through the Treasury
Elsewhere in the report it is stated
Financing in the private market for Federal budget purpose
through the issuance of participation certificates of bene-
ficial interest costs Eximbank a minimum of 1/2 of 1 percent,
and sometimes as much as 1½ percent, above comparable
Treasury borrowing rates.
Unquestionably, borrowing directly from the Treasury rather than
borrowing from the public would be less costly for the Postal Service,
in interest charges, legal fees, and marketing costs. If the differential in
interest costs amounted to one percent and $10 billion of bonds were
issued for 25-year terms, the added cost would amount to a possible
Reproduced at the Richard Nixon Presidential Library
34
maximum $2.5 billion. This great sum should certainly not be paid
for the sole purpose of creating a false image of the credit worthiness
of the Postal Service.
To operate a business profitably it is necessary to obtain income
greater than the cost of producing the income. Prudent managers are
expected to maximize income by achieving the most favorable possible
balance between price and volume. Conversely, the costs of production
of goods and services from which income is derived should be controlled
at the lowest reasonable level if the enterprise is to make a profit.
The management of the Postal Service has been charged with its
efficient and loss-free operation. Specific areas of its functioning have
been designated by Congress to operate at a loss and are to be sub-
sidized by Congress to reimburse the Service for losses incurred by
congressional directive. All other Service operations presumably should
be made to break even.
The Postal Service obviously plans to invest billions of dollars in
machinery and equipment over the next ten years and presumably
expects to amortize the cost of this capital investment as a charge to
operations over the next 25 years and longer It is expected that the
cost of amortizing the equipment will be considerably less than the
cost of paying people to do the repetitive and mechanical work the
machines will do.
However, in planning for the future, the management of the
Postal Service has made a serious oversight. The cost of borrowing
money to buy equipment is inescapably a cost of production, just as
losses from depreciation and obsolescence are costs of production.
In consideration of this fact we find it incomprehensible that the
Postal Service would choose to burden itself with additional interest
charges that may well amount to many millions over a 25-year period
of operations. This is particularly distressing when it is justified
solely on the basis of a "psychological" need to force Postal Service
managers to be more efficient. That seems a high price to pay for
"psychological" treatment.
And where would this additional money come from? Would it
come from increased postage rates, or increased congressional appro-
priations, or decreased services? In any event such unsatisfactory
solutions would seem to negate the purpose of the Postal Reorgani-
zation Act. The only visible beneficiaries of the public sale of Postal
Service bonds are a small, select group of legal firms, investment
bankers, banks and investors. We sincerely hope that the U.S.
Treasury exercises its rights under the Act to prevent the Postal
Service from incurring unnecessary and excessive interest costs.
Summarizing, then, these points are clear:
1 The decision to negotiate this sale with a syndicate should be
re-evaluated. At the very least, appearances require that the public
believe this decision is not tainted by unethical behavior
2. The October, 1971, timing of the first sale seems premature.
The additional cost of the money ($30 million) seems excessive, since
the capital raised won't be needed for at least 18 months.
3. The Postal Service is incurring at least tens of millions of dollars
in additional interest charges by insisting that the bonds not carry a
Treasury guarantee. Customers see this as superfluous, since they
believe the bonds will be implicitly guaranteed, and therefore add-on
costs are the only consequence of this lack. We do not beliéve that
the added cost is worth the psychological effect on postal managers.
Reproduced at the Richard Nixon Presidential Library
35
4. The Postal Service should consider the fiscal agent method of
selling bonds, if they insist on going to the public, sinçe it is cheaper,
tends to be more honest, and has proved successful over the years
for other agencies.
5. Overall, the U.S. Treasury should be the purchaser of these
bonds as the cost would be tremendously reduced as to interest and
commissions and fees to the investment banking industry
GOVERNMENT AGENCY AND GOVERNMENT SPONSORED AGENCY DEBT
The Postal Service's bond issue will join a myriad of other govern-
ment agency issues in the market place. It will have to competë
successfully for the same investors as these other bonds. As noted pre-
viously, the record of the Postal Service is not good and that is one
reason why a Treasury guarantee would enhance their marketability
In order to have a clear picture of this market situation, we have
prepared a descriptive analysis of the Federal bond market and sales.
An eve increasing number of securities that are not direct obligations
of the U.S. Treasury but which do involve U.S. Government guar-
antees or sponsorship have been purchased by the investing public.
The increase in volume of such securities from June 1962 through
May 1971 is about $38 billion as shown in the schedule below
INTEREST-BEARING SECURITIES ISSUED AND OUTSTANDING BY GOVERNMENT AGENCIES
[End of month in millions of dollars]
June 1962
May 1971
Defense Department: Family housing mortgages and homeowners assistance mortgages
2,130
1,692
Housing and Urban Development Department:
Federal Housing Administration.
424
488
Government National Mortgage Association, participation
fund
0
6,075
Federal National Mortgage Association
2
2,558
0
Export-Import Bank of the United States
300
3,125
Farm Credit Administration:4
Banks for cooperatives
467
0
Federal intermediate credit banks
903
0
Federal Home Loan Bank Board
(3)
6
Tennessee Valley Authority
145
327
Other
(3)
3
Total
7,927
12,716
1 Includes unredeemed matured securites outstanding on which interest has ceased.
2 Effective Sept. 30, 1968, Federal National Mortgage Association was converted to private ownership.
3 Includes 1,226 participation certificates.
4 Effective Dec. 31, 1968, banks for cooperatives and Federal intermediate credit banks were converted to private owner-
ship.
3 Less than $500 000.
INTEREST-BEARING SECURITIES ISSUED AND OUTSTANDING BY GOVERNMENT SPONSORED AGENCIES I
[End of month in millions of dollars]
June 1962
June 1971
Banks for cooperatives
0
1,789
Farmers Home Administration
0
1,150
Federal home loan banks
1,797
7,659
Federal intermediate credit banks
0
5,683
Federal land banks.
2,551
6,797
Federal National Mortgage Association 3
0
14,996
District of Columbia stadium fund
20
20
Total
4,368
38,094
I Includes unredeemed matured securities outstanding on which interest has ceased.
2 Effective Dec. 31, 1968, banks for cooperatives and Federal intermediate credit banks were converted to private,
ownership.
3 Includes mortgage backed bonds beginning June 1970.
70
Reproduced at the Richard Nixon Presidential Library
36
A relatively small percentage (about 17 percent) of the $38 billion
of government sponsored agency securities may be classified as long
term obligations. All of the Postal Service issues will be long-term.
Three of the specific issues in that category are listed below The
market of late August 1971 reflects an interest rate return of about
eight percent to investors. Thus, we can expect Postal Service Bonds
to return about same.
June 30, 1971
Description
Outstanding (In millions)
Farmers Home Administration (FHA) 85/8 percent due July 1985
$300
Federal Home Loan Banks (FHLB) 8.60 percent due November 1995
140
Federal National Mortgage Association (FNMA) 85/8 percent due
October 1990
200
Total.
640
Based on a survey by the United States Treasury Department the
categories of investors in the above listed three issues were as follows
at June 30, 1971
FHA
FHLB
FNMA
Number
Percent
Number
Percent
Number
Percent
Commercial banks
8
2.7
2
1.3
8
4.0
Mutual savings banks
22
7.3
11
7.7
20
10.0
Life insurance companies
(1)
1.
.5
Fire, casualty, and marine insurance companies
6
2.0
1
6
6
3.0
Savings and loan associations
51
17.0
29
20.6
14
7.0
Corporations
State and local governments:
General funds
5
1.7
2
1.0
Pension and retirement funds
24
8.0
4
2.8
21
10.5
Other investors
184
61.3
94
67.0
128
64.0
Total 2
300
100.0
140
100.0
200
100.0
1 Less than $500,000.
2 May not add due to rounding.
The vast majority of Postal Service bonds will be sold to these large
investors. The large savings and loan associations and mutual savings
banks who participate in many of these issues will be the ones to reap
the additional interest costs. Of course, the legal exemption granted
large commercial banks will allow them to participate in the issues also.
An indication of the type of investor that holds government agency
securities is provided by the semiannual survey report of the United
States Treasury Department. As of June 30, 1971, it shows the
following
Securities covered in survey
In millions
U.S. Government accounts and Federal Reserve banks
$2, 023
Private investors (see below)
8, 992
Total
a
11, 015
Reproduced at the Richard Nixon Presidential Library
37
Held by private investors covered in survey
In millions
Percent
Commercial banks
$1,438
16.0
Mutual savings banks
517
5.8
Life insurance companies
157
1.8
Fire, casualty, and marine insurance companies
318
3.5
Savings and loan associations
302
3.4
45
5
Corporation:
State and Jocal governments:
General funds
497
5.5
Pension and retirement funds
1,012
11.2
All other private investors
4,706
52.3
Total
8,992
100.0
These investors stand to reap extraordinary benefits from the
method of selling these bonds. We question the fundamental decision
which allows private investors who cannot be classified as "small
business" to make billions of dollars in additional money simply
because the Postal Service chooses the most expensive alternative
available to it.
Reproduced at the Richard Nixon Presidential Library
PART IV-POLITICS AND THE POSTAL SERVICE
Under ordinary circumstances, the choice of Mudge, Rose, Guthrie,
and Alexander would not have been considered unusual. It is an out-
standing municipal bonding law firm, widely regarded for its excellent
capabilities in that area. However, the circumstances surrounding the
selection of legal counsel for the first bond issue of the U.S. Postal
Service cannot be considered usual.
As has been stated, the Postal Service suffered for many years from
political interference at both the Congressional and Executive levels.
All actions of the newly reorganized quasi-independent Postal Service
must be free from any taint of political influence. Thus, to select as
bond counsel the firm of which President Richard Nixon and Attorney
General John Mitchell are former senior partners seems, at best in-
sensitive to appearances and at worst highly political.
The question that needs to be answered is why this law firm was
selected over a number of others that are equally qualified.
In order to answer this question it is necessary to examine state-
ments by Senior Assistant Postmaster General for Support, Mr James
1
Hargrove. When the Subcommittee Chairman, Congressman Udall,
questioned him about the selection of this law firm, Mr Hargrove
insisted that the underwriters had chosen Mudge Rose. He said it
was the underwriters' prerogative to makç the decision, not that of
the Postal Service. However, in a memorandum dated August 20,
1970, Mr Hargrove wrote "The issuer [U.S. Postal Service] would
normally have a good deal to say about the counsel the underwriters
select, although the underwriters themselves engage such counsel and
pay their fees." Obviously then, the Postal Service could have had
considerable influence on the underwriters choice of counsel.
Although Mr Hargrove claimed that the underwriters made the
selection, in reviewing the proposals of the selected five managing
underwriters we find that this can only be partly true. The question-
naire asked the candidate firms whom they would choose as counsel,
and only one of the five managers gave Mudge Rose as their first
choice for bond counsel. This was the firm of Salomon Brothers and
Hutzler One other firm listed Mudge Rose as its third choice while
the remaining three did not mention the firm at all. Thus, at the time
proposals were submitted, the firm of Mudge, Rose, Guthrie, and
Alexander was not the choice of the majority of the five underwriters.
Subsequently a representative of Salomon Brothers and Hutzler
indicated that the decision was made solely by Salomon Brothers as
leading managing underwriter By "solely", the Subcommittee under-
stood that no other underwriter was involved in that decision. No
information directly connecting any representatives of the U.S.
Postal Service and Salomon Brothers in selecting Mudge Rose has
been revealed to this date.
(39)
Reproduced at the Richard Nixon Presidential Library
40
As to the fee that will be paid by the underwriters for the services of
bond counsel, one report of the Los Angeles Times indicated if the same
bond counsel were to handle all of the issues that will total $10 billion
in bonds, its fees could approximate $2½ million. Mr William Simon,
Vice President of Salomon Brothers and Hutzler, told the Subcom-
mittee Chairman that he did not necessarily anticipate that Mudge,
Rose, Guthrie, and Alexander would be the bond counsel for all future
underwritings. However, interviews with other bonding houses indi-
cated that it is the current practice of all government agencies to retain
the same bond counsel throughout the subsequent bond issues. There-
fore, it is our conclusion that Mudge Rose would probably be con-
tinuously employed by the underwriters of the Postal Service bond
issues.
Salomon Brothers and Hutzler indicated that the initial payment to
Mudge Rose for preliminary work would be about $100,000. How-
ever, ne year earlier, Mr Hargrove had stated that he felt confident
the U.S. Postal Service could hire a law firm directly to do basically
the same work for no more than $10,000. In that memo he said "The
survey should be done by one of the Wall Street legal firms that nor-
mally does such things for corporate and government clients.
We
will obviously incur a fee of some significance, but not more than
$5,000 or $10,000 for this particular purpose." Thus, there is appar-
ently a great difference in what a law firm would be paid if hired by the
Postal Service directly rather than by the bond counsel.
The evidence that has been developed showing the involvement of
various members of the Executive Department in this entire process,
indicates that in the selection of Mudge Rose an appearance of impro-
priety exists at the very least. A law firm that formerly has as its
senior partners the current President and Attorney General of the
United States should have been excluded from consideration, if only
for appearånce's sake. The insensitivity to appearances shown by its
actual selection is a mistake of a high magnitude.
Discussions with representatives of the investment banking indus-
try reveal that though Mudge, Rose, Guthrie, and Alexander was
qualified to counsel the bond issue, there are a number of other law
firms equally qualified and willing to do the work, much of which is
pro forma and does not require unique expertise.
Taking all of the above into consideration, it is clear that (1) the
Postal Service could have influenced the selection of the underwriters,
(2) the managing underwriters had no real voice in selecting bond
counsel, notwithstanding Postal Service statements to the contrary,
(3) while Mudge Rose is competent to do the work, there are a number
other qualified firms whose selection could have prevented any
appearance of impropriety, (4) an appearance of gross impropriety did
occur when Mudge Rose was selected, especially in light of the
Postmaster General's statement that it was important to avoid the
appearance of impropriety as actual improper actions.
While there is no direct evidence linking the selection of the bond
counsel to any political decisions of either the U.S. Postal Service or
Salomon Brothers and Hutzler, there is a great deal of circumstantial
evidence to indicate that improprieties did exist. The future ability
of the U.S. Postal Service to deal objectively with the Congress may
Reproduced at the Richard Nixon Presidential Library
41
depend on its rescinding the selection it has made, and we heartily
recommend that it do so. A suggestion to the underwriters from the
Postal Service that another firm be selected would énd the matter,
since obviously the managing underwriters will not retain a law firm
the choice of which does not meet with Postal Service approval. For
the sake of avoiding an appearance of impropriety, the Postal Service
should take such action immediately
CONCLUSION
If one general conclusion can be drawn from this report, it is this,
The timing, nature, and prospective sales of the Postal Service bond
issue should be reviewed and altered to reflect the information provided
herein.
Reproduced at the Richard Nixon Presidential Library
APPENDIX
Reproduced at the Richard Nixon Presidential I ibrary
APPENDIX A-1
Post OFFICE DEPARTMENT,
Assistant Postmaster GENERAL,
Bureau OF FINANCE and ADMINISTRATION,
Washington, D.C., April 13, 1971
GENTLEMEN As you are aware, the United States Postal Service is
contemplating the sale of bonds to the public in the fall of this year
For planning purposes we are assuming an issue of $250 million of
25-year maturity bonds on October 1, 1971 It is contemplated that
the bonds will not be guaranteed by nor have the full faith and credit
of the United States. The bases on which we believe the bonds will be
salable without such guarantee are outlined in a speech made by me to
the Investment Bankers Association, Boca Raton, Florida, December
3, 1970, a copy of which is enclosed for your information
In order that we might be able to consider possible candidates for
managing a negotiated underwriting group, we are asking a number of
firms to confirm to us their interest in being a manager or co-manager
of such a group and to supply certain basic data for comparative analy-
sis. If you are interested in being considered in this respect, please
provide me with answers to the questions below It will be appreciated
if you will keep your answers as brief and to the point as may be
appropriate.
1 Please provide an annual report for your firm for the last
fiscal year or in lieu thereof a descriptive statement of your
management organization and a balance sheet as of a recent date.
2. Please state the particular person in your organization who
would represent you in negotiations with the U.S. Postal Service
if you are selected as a managing underwriter, indicating the
particular background and experience of that person
3 Please indicate, by separate categories, financings in 1970
and thus far in 1971 of (1) Government and Government agency
securities not exempt from Federal income tax and (2) corporate
utility debt securities, for which you have been either (a) the
sole managing underwriter or (b) one of a group of managing
underwriters. Please indicate the maturity of such issues.
4. For the last five Government agency underwritings in which
you have participated as manager or one of agroup of managers, you
please indicate the "spread" for each such underwriting, whether
or not it was competitive or negotiated, the siże of the issue, the
name of the agency, the maturity of the issue, and any other
members of the managing group.
5. If, in connection with financings you have managed alone or
jointly, you have been primarily responsible for arranging meet-
ings with investor groups to acquaint them with securities of
new issuers, particularly in the Government agency. area, please
describe your role in such arrangements.
(45)
Reproduced at the Richard Nixon Presidential Library
46
6. Please indicate the extent to which you make secondary
markets in issues which you manage or co-manage.
7 If you were to be selected as our managing underwriter,
please indicate, if you have no objection, the name of the firm
which you would select as counsel to the underwriters.
8. If you were to be selected as our managing underwriter,
would you agree to have your legal counsel conduct a legal
investment survey with respect to the sale of the indicated
Postal Service Bonds in each of the states?
9. Please indicate the particular strengths which you believe
your firm would bring to the position of managing underwriter,
either alone or as a member of a group of managing underwriters.
10. Please indicate the various factors which should be taken
into account in determining the "spread" on the sale of an issue
of Government agency bonds such as we propose. Please comment
on spreads on other Government agency offerings with which
you are familiar, such as Federal National Mortgage Association,
Home Loan. Bank Board, Farm Credit Administration, Farmers
Home Administration, World Bank, etc.
I would appreciate receiving an answer to this inquiry by April 28.
Many of the questions asked have already been discussed with you
and other firms who have indicated similar interests, so I hope it
may not be too difficult for you to accommodate me by replying SO
promptly
Sincerely,
J W HARGROVE,
Assistant Postmaster General.
Reproduced at the Richard Nixon Presidential Library
47
APPENDIX A-2
FEDERAL AGENCY AND QUASI-GOVERNMENT UNDERWRITER MANAGEMENT SUMMARY
FOR THE FULL YEAR 1970
Management
Number of
credit (in
Name of underwriter
issues
millions)
Merrill Lynch, Pierce, Fenner & Smith, Inc.*
16
$756.8
Salomon Bros.*
(3, 315.0)
15
753.8
(3, 215. 0)
The 1st Boston Corp
11
620.0
(2, 400. 0)
Morgan Guaranty Trust Co. of New York*
7
285. 5
Lehman Bros
(1,350.0)
6
267. 1
A. G. Becker & Co
(1, 115. 0)
5
245. 8
(1, 000. 0)
1st National City Bank
4
78. 5
(456.0)
Goldman, Sachs & Co
2
120.0
The Chase Manhattan Bank N.A
(600. 0)
2
15. 5
(150.0)
Chemical Bank
2
15. 5
(150.0 0)
Equitable Securities, Morton & Co. Inc
2
15. 5
(150. 0)
Halsey, Stuart & Co. Inc
2
15. 5
(150.0)
Smith, Barney & Co. Inc
2
15. 5
(150. 0)
White, Weld & Co
2
15. 5
(150.0)
Blyth & Co. Inc
1
33. 3
(100. 0)
Lazard Freres & Co
1
33.3
(100. 0)
Bank of America N.T. & S.A.
1
12. 5
(50. 0)
Eastman Dillon, Union Securities & Co
1
12. 5
(50.0)
The 1st National Bank of Chicago
1
10.0
(100.0)
Kidder, Peabody & Co. Inc *
1
8.3
(50.0)
Dean Witter & Co. Inc
I
8.3
(50.0)
Dillon-Reid not qualified for listing
*Eirms selected as managing underwriters for Postal Service bond issue.
Reproduced at the Richard Nixon Presidential Library
48
APPENDIX A-3
LEADING 25 MANAGING UNDERWRITERS OF MUNICIPAL ISSUES, 1970
[Thousands omitted]
Total manage-
Firm
No. issues
ment credit
Chase Manhattan Bank
138
$1,356,961
Halsey Stuart & Co
243
1,007,619
First National City Bank
129
942,508
Morgan Guaranty Trust Co.'
132
843,463
Merrill Lynch
*
238
705,187
Bankers Trust Co
147
647,853
Lehman Bros
102
610,910
Bank of America
134
572,975
Blyth & Co., Inc.
149
554,999
First Boston Corp
112
544,210
Salomon Bros
*
80
543,494
Nuveen & Co., John
229
503,393
Smith Barney & Co
109
490,691
First National Bank of Chicago
124
446,150
Kidder, Peabody
91
371,558
Harris Trust & Savings
135
335,225
Northern Trust Co
184
329,258
duPont F. I., Glore Forgan
59
324,114
Morton & Co. W. H. (equit. sec.)
62
303,619
Drexel Firestone Inc
57
301,331
Cont. III. N/B & Tr. Co
153
290,038
White Weld & Co
67
267,638
Eastman Dillon
51
203,471
First of Michigan Corp
113
198,328
United California Bank
64
188,450
Dillon-Read not qualified for listing*
I Represents distributed or proportionate management credit. That is, the value of each issue managed or comanaged is
credited proportionately to each comanager, the proportion being determined by the number of firms in the management
group.
*Firms selected as managing underwriters for Postal Service bond issue.
APPENDIX A-4
LEADING 25 MANAGING UNDERWRITERS OF CORPORATE ISSUES, 1970 1
[Thousands omitted]
Total
Tota
Number
management
Number
managemen
Firm
issues
credit
Firm
issues
credi
First Boston
146
$3,800,565
Lazard, Freres
15
$642, 607
Morgan Stanley
41
3,019,072
Paine, Webber
35
494,665
*Merrill Lynch
135
2,967,953
Dean Witter
33
484,399
Lehman Bros
101
2,056,772
Drexel Harriman
24
448,270
Goldman, Sachs.
57
1,734,643
Stone & Webster
31
418,693
*Salomon Bros
125
1,658,171
DuPont Glore Forgan
12
27
206,068
Blyth & Co., Inc
89
1,594,150
Hornblower & Weeks
13
170,728
*Kidder, Peabody
63
1,383,867
Equitable Securities
18
113,069
Smith Barney & Co
37
1,352,803
Johnston, Lemon.
10
110,339
Eastman Dillon
68
1,138,040
E. F. Hutton
10
105,420
White, Weld & Co
62
1,103,243
Bache & Co
14
95,936
*Dillon, Read
23
984,697
*Morgan Guaranty (forbidden
Halsey, Stuart
58
912, 332
by law in participation)
Kuhn, Loeb
19
730,835
I Represents distributed or proportionate management credit. That is, the value of each issue managed or comanaged is
credited proportionately to each comanager, the proportion being determined by the number of firms in the management
group.
2 Includes F. I. duPont, Glore Forgan Staats, A. C. Allyn.
*Firms selected as managing underwriters for Postal Service bond issue.
Reproduced at the Richard Nixon Presidential Library
49
APPENDIX A-5
LEADING MANAGING UNDERWRITERS OF MUNICIPAL AND CORPORATE ISSUES, 1970
In thousands]
Total management credit
Total management credit
Total
Total
Number
management
Number management
Firm
of issues
credit
Firm
of issues
credit
First Boston Corp
258
$4, 344,775
Bankers Trust Co
147
647,853
Merrill Lynch 1
373
3, 673, 140
Bank of America
134
572,975
Morgan Stanley
41
3,019,072
duPont, Glore Forgan
86
530,182
Lehman Bros
203
2,667,682
Paine Webber
47
504, 520
Salomon Bros.
205
2,201,665
Nuveen & Co., John
229
503,393
Blyth & Co
238
2, 149, 149
Dean Witter
35
487, 174
Halsey Stuart & Co. Inc
301
1,919,951
First National Bank of Chicago
124
446, 150
Goldman Sachs
77
1,849,086
Stone Webster
35
422,289
Smith Barney
146
1,843,494
Equitable Sec. W. H. Morton
80
416,688
Kidder Peabody 1
154
1,755,425
Harris Trust & Savings
135
335,225
White Weld
129
1,370,881
Northern Trust Co
184
329,258
Chase Manhattan Bank
138
1,356,691
Cont. III. National Bank & Trust
Eastman Dillon Union Sec
119
1,341,511
Co
153
290,038
Dillon Read I
36
1,088,170
Hornblower & Weeks
30
232,493
First National City Bank
129
942,508
First of Michigan Corp
113
198,328
Kuhn Loeb
41
857,451
United California Bank
64
188, 450
Morgan Guaranty Trust Co.¹
132
843,463
Bache
35
179,147
Drexel Firestone
81
749, 601
Johnston Lemon
10
110,339
Lazard Freres
16
657,607
E. F. Hutton
10
105,420
1 Firms selected as managing underwriters for Postal Service bond issue.
APPENDIX A-6
RANKINGS BY UTILITIES, 1970-71 COMBINED
1: Merrill Lynch, Pierce*
$7,158,000,000
2. Salomon Bros*
5,632,000,000
3. First Boston Corp
4,812,000,000
4. Blythe & Co
4,681,000,000
5. Halsey Stuart & Co.
4,570,000,000
6. Lehman Brothers
3,882,000,000.
7. Kidder, Peabody & Co.*
2,407,000,000
8. White, Weld & Co
2,236,000,000
9. Eastman Dillon.
1,629,000,000
10. Dean Witter & Co
1, 609,000,000
11. Morgan Stanley & Co
915,000,000.
12. Paine, Webber Jackson
749,000,000.
13. Goldman, Sachs & Co.
735,000,000
14. Dillon, Read & Co.*
643,000,000
15. Equitable Securities
550,000,000.
16. Kuhn, Loeb & Co
335,000,000
17. Smith Barney & Co
283,000,000.
18. Bache & Co
96,000,000.
19. Hornblower & Weeks
86,000,000
20. A. G. Becker & Co
53,950,000,
Morgan Guaranty, not listed
*Firms selected as managing underwriters for Postal Service bond issue.
Reproduced at the Richard Nixon Presidential Library
50
APPENDIX A-7
RANKINGS OF UNDERWRITING FIRMS ON BASIS OF TOTAL DOLLAR AMOUNT OF PUBLIC OFFERINGS OF TAXABLE
SECURITIES MANAGED OR COMANAGED*
Number of
Amount
issues
1969:
The First Boston Corp
$4,098,567
90
Merrill Lynch
3,617,359
94
Lehman Brothers
3,531,758
92
Saloman Brothers
3,018,932
86
Halsey, Stuart & Co
2,561,325
56
Blyth & Co., Inc.
2,456,577
63
Eastman Dillion
1,837,837
69
White, Weld & Co
1,798,439
71
Morgan, Stanley & Co
1,440,403
24
Kuhn, Loeb & Co
664,707
18
10 year totals 1960-69:
First Boston Corp
32,603,991
535
Merrill Lynch
25,440,550
515
Salomon Brothers
22,546,166
539
Lehman Brothers
19,986,214
525
Morgan, Stanley & Co
16,060,956
196
Halsey, Stuart & Co
14,653,764
429
Blyth & Co., Inc.
13,815,443
418
White, Weld & Co
10,668,264
460
Eastman Dillon
7,497,646
355
Kuhn, Loeb & Co
7,288,228
163
*Source: Investment Dealers Digest-Corporate Financing Directory.
APPENDIX A-8
CONGRESS OF THE United STATES,
HOUSE OF REPRESENTATIVES,
Washington, D.C., August 12, 1970.
Hon. Richard Nixon,
President of the United States,
The White House, Washington, D.C.
Dear MR. PRESIDENT The undersigned are proud to have played
active roles in the long and difficult legislative battle to achieve
passage of the Postal Reform Act of 1970. We have high hopes that
this Act will in time bring savings, efficiency and better postal service
to the American people. We are most anxious that this new postal
service succeed and that it meet the expectations which led us to
fight for its creation.
Our pleasure at the enactment of this legislation is tempered, how-
ever, by our realization that the approach taken toward operational
aspects of the new postal service will largely determine whether the
enterprise succeeds or fails. We write this letter to underline our joint
concern about risks and pitfalls which need to be avoided as the
transition is made to the new system. We believe that many features
of that system will require close attention in the coming months, but
our object in writing to you at this time is to discuss the new Postal
Rate Commission.
Mr President, we recognize the large and important role played in
our society by independent regulatory commissions. Some have earned
Reproduced at the Richard Nixon Presidential Library
51
the complete confidence of the public, while others have at times
fallen short of this goal. While the Postal Rate Commission is not an
independent regulatory agency and shares a large measure of its
rate-setting procedures with the Board of Governors, there are
certain similarities between the Commission and the independent
regulatory agencies. These similarities are most apparent in the
relationship of user groups to the Rate Commission.
These observations lead us to believe that the patterns and attitudes
within and about an agency are often set in the early months and years
of its existence. We urge you to employ your influence and prestige
to insure that the new Postal Rate Commission becomes a model of
what an independent regulatory commission ought to be. We think
the decisions you make in the next few weeks and the leadership you
exhibit in launching the new postal service can have far-reaching
and permanent benefits that will help achieve the goals we all sought
in advocating postal reform.
Our strong feelings about the Postal Rate Commission are built
upon participation, as members of the House Post Office and Civil
Service Committee, in Congressional action on several postal rate
bills in past years. We have learned that rate decisions involve hun-
dreds of millions of dollars and are of great concern and interest to
large organized groups of mail users. We have also learned that these
decisions involve complex technical questions. The philosophy of the
new Act is that Congress will lay down broad guidelines for policies
governing postal rates, but that we will leave the task of applying
those guidelines to the combined efforts of the Board of Governors
and the Postal Rate Commission. There is a shared responsibility
between the Postal Service and the Rate Commission in this effort
in that the Service must make the initial recommendations which the
Commission must act upon. After the final recommendation, the
Board of Governors must place the final decision into effect. The
Commissioners will have to be conscious of the heavy burden placed
on the Board of Governors in recommending rate changes and should
give great weight to the needs of this huge enterprise in their delibera-
tions. Within this context, the Rate Commissioners and their pro-
fessional staff should act in producing a rate structure consistent
with Congressional policy
Given the transfer of rate setting authority from the Congress to
the Postal Service and Rate Commission, it is apparent to us that
one of the potential dangers of the new arrangement is that the
intensive, well-financed, and expert lobbying activities previously
directed to Congress will be primarily focused on the five members
of that commission. We do not suggest that the interested parties
have in the past or will in the future resort to dishonest or dishonorable
means. We recognize that there are legitimate business interests
which have a large stake in decisions that are made. These groups
have every right to be heard and should have every opportunity to
make their case in an honorable way using accepted techniques of
persuasion.
But if we are to have fair and just rate policies, if the public is to
have confidence in the way rates are determined, and if the Post
Office is to generate the revenues necessary to bring about the modern-
ization and improvements we all seekthen it is vital that the Rate
Commissioners not only be. exceptionally well qualified and above
Reproduced at the Richard Nixon Presidential Library
52
reproach, but that the general public believes this is the case. As we
have all learned over the years, the appearance of impropriety can
be just as damaging to the public confidence as impropriety itself.
Much has been said in recent days, particularly by opponents of
postal reform, about the inability of the new system to preserve
requisite ethical standards. These comments reflect a cynicism about
whether the new Postal Service can avoid politics as usual in its
operations. Fears have been expressed that the Rate Commissioners
and members of the Board of Governors will be individuals who are
closely identified with large mail user groups. It has been contended
that if Congress is removed as a buffer between special interests and
the public, the new Service will in time be heavily influenced and
perhaps captured by user groups.
Mr President, we believe that these potential problems can be
largely if not entirely avoided if you take certain steps at the outset.
Specifically, we solicit you consideration of several main points
1 We urge that exceptional care be used in the search for
talented individuals to serve as the first Postal Rate Commis-
sioners. It is vital, in our judgment, that these individuals have
no prior connections with or background in the commercial
operations of the large mail users. We recognize the advantages
that previous familiarity with postal matters would bring to the
rate setting function. We believe, however, that rate decisions are
not SO complicated that a person of exceptional ability cannot
quickly overcome a lack of prior experience, and that there would
be a great deterioration of public confidence if the Commissioners
were picked from the ranks of those who have been connected
with or who have represented large mailer groups.
2. We urge that you meet with the first Rate Commissioners
prior to their formal appointment, and that you indicate to them
in the strongest possible terms that the hopes of all of us rest on
their objectivity, complete impartiality and fidelity to the public
trust.
3. We urge that you advise the new Commissioners of your
strong desire that they initially and immediately establish admin-
istrative practices and procedures within the Commission designed
to make it a model for other regulatory agencies in terms of com-
plete impartiality and public confidence. We assume that Execu-
tive Order 11222 of May 8, 1965, will be applicable to the new
commission, but if it is not we think the Commissioners would
want to adopt its terms by regulation to apply to themselves and
to chief staff employees.
4. We hope you will urge the Rate Commissioners not only to
adopt the standards of ethical conduct defined in Executive order
11222, but to expand and to enlarge them as necessary in order
to insure-
a. That all Rate Commissioners and key staff employees
are annually required to disclose to the Civil Service Com-
mission and/or the appropriate Congressional Committees
the financial information referred to in Part IV of the
Executive Order cited above,
b. That strict rules are adopted regarding informal or ex
parte contacts with individuals, groups, or their representa-
tives having business with the Commission. Such rules should
Reproduced at the Richard Nixon Presidential Library
35
require a public record to be made and kept of any such
contacts including luncheons, informal gatherings or any
occasion on which matters pending before the Commission
are the subject of discussion,
c. That such regulations include strong prohibitions
against the acceptance of honoraria, travel expenses, enter-
tainment or the like in connection with attendance at con-
ventions or gatherings of industrial groups.
Mr President, if you should decide to take the actions we have
outlined, we believe you will have done much to insure the initial
success of the United States Postal Service. We think our ideas are
shared by many members of Congress, and we hope for your favorable
consideration of them.
Sincerely,
MORRIS K. Udall.
David N HENDERSON.
AUGUST 17, 1970.
Memorandum FOR JOHN D. EHRLICHMAN
I agree completely with the letter to the President from Congress-
men Udall and Henderson (copy attached) I think this is of over-
riding importance and represents a real danger that we must take
into consideration.
WINTON M BLOUNT.
APPENDIX B
LIST OF POLITICAL CONTRIBUTIONS BY Principals
OF FIRMS IN 1968
(Source "Political Contributions of $500 or More in 1968", Herbert E.
Alexander and Caroline D Jones, editors, Citizens' Research
Foundation, Princeton, New Jersey)
Kidder, Peabody
Albert H. Gordon,¹ chairman of the board.
Governor's Club
$500
-
Nixon-Agnew Election Committee.
2,000
Nixon-Agnew Finance Committee
3, 000
Republican State Dinner Committee
---
2,000
Javits Senate Committee
4, 000
Nixon-Agnew Campaign Committee
3,000
Victory 1968 (Mr and Mrs.)
3, 000
Nixon-Agnew Campaign Committee
-
3,000
Nixon-Agnew Finance Committee.
3,000
Subtotal
23, 500
William N Loverd, vice president and treasurer, Republican State Dinner
Committee.
1,500
Amyas Ames, vice president:
Victory 1968.
3,000
Republican State Dinner Committee
2,000
A.E. Borneman, vice president: Republican State Dinner Committee_
1,500
Nicholas J. Coolidge, vice president: Republican State Dinner Committee_
1, 500
Reproduced at the Richard Nixon Presidential Library
54
Francis J Cunningham, vice president: Republican State Dinner Com-
mittee
1, 000
Albert F Gordon, vice president: Republican State Dinner Committee
2,000
R. Harte, ice president (?)
Republican National Committee_
1, 500
Republican National Finance
-
1, 000
Chandler Hovey, vice president: Victory 1968.
500
Paul B. Kopperl, vice president. Nixon-Agnew
2, 000
Frederick L. Moore, vice president: Republican State Dinner Committee_
1, 500
Raymond J Raff, vice president. Republican State Dinner Committee
1, 500
Julian H. Robertson, Jr., vice president: Nixon-Agnew Victory Rally
1, 100
Lloyd B. Waring, vice president:
Nixon-Agnew
1, 000
Nixon-Agnew Finance
1, 793
Subtotal
24, 393
Total
47, 893
Morgan Guaranty Nobody
Dillon, Read
August Belmont.
(R) Republican Campaign Committee
500
(R) Republican State Dinner Committee
500
(R) Javits, New York Senate_
1,000
Robert E. Christie* (R) Governor's Club, New York
500
Nicholas F Brady (R) Nixon-Agnew TV Committee.
1, 500
Total.
4, 000
Merrill Lynch, Pierce, Fenner & Smith
Stewart A. Dunn (M) Effective Government Association
500
Donald R. Regan: (M) Effective Government Association
500
George L. Shinn (M) Effective Government Association
500
Bernard B. Ramsey (M) Effective Government Association
500
Winthrop C. Lenz (M) Effective Government Association
500
Richard B. King: (M) Effective Government Association
500
John A. Orb (M) Effective Government Association
500
Thomas J. Cassady (M) Effective Government Association
500
Dakin B. Ferris. (M) Effective Government Association
500
Julius H Sedlmayer: (M) Effective Government Association
500
Harry B. Anderson (M) Effective Government Association
500
Ned Ball (M) Effective Government Association
500
Samuel Grodin (M) Effective Government Association
1, 000
Samuel Mothner (M) Effective Government Association
500
Total_
7, 500
Salomon Bros.
Salomon Bros. & Hutzler: (D) Humphrey President Club
500
Charles J Simon (D) President Club Johnson
1, 000
Total
1, 500
A.G. Becker & Co.
John F Donahue (R) Javits New York Senate_
1, 000
J Levy (M) National Committee Effective Congress_
500
L. Moss (R) Victory 1968 Committee
1, 600
Total.
3, 100
First Boston Corporation.
Mrs. Andrew N Overby (R) Republican Campaign Committee
500
Total
500
1 The Citizens' Research Found ation work cites the amount $23,500 for Albert H. Gordon of Kidder
Peabody. A New York Times article, "Contributions of $25,000 or More in 1968 Campaigns," June 20, 1971,
cites $38,750 as Mr. Gordon's total.
Reproduced at the Richard Nixon Presidential Library
.55
First National Bank in Dallas: Nobody
Goldman, Sachs & Co.
Gustave L. Levy
(R) Javits New York Senate
4, 500
(R) Vietory 1968 Committee
1, 000
(R) Republican State Dinner Committee New York
1, 500
James C. Hemphill (R) Victory 1968 Committee.
1, 000
Edward A. Schrader: (R) Vietory 1968 Committee.
1, 000
Stanley R. Miller: (R) Victory 1968 Committee
1, 000
John L. Weinberg (D) Humphrey National Finance Committee.
1, 000
H.R. Young. (R) Victory 1968 Committee
1, 000
Arthur G Altschul (D) Humphrey National Finance Committee
1, 000
George E. Doty (R) Victory 1968 Committee
1, 000
Sidney G. Wineberg, Jr (D) Humphrey National Finance Com-
mittee
1, 000
Walter F Blaine
(R) Victory 1968 Committee
1, 000
(D) Humphrey National Finance Committee
5, 000
John H. Roades; (R) Victory 1968 Committee.
1, 000
Total.
-
22, 000
Hornblower & Weeks
Howard E. Buhse: (R) Nixon-Agnew Campaign Committee
2, 500
Charles L. Morse, Jr (R) Nixon-Agnew Campaign Committee
1, 000
Jansen Noyes, Jr (R) Nixon-Agnew Campaign Committee
1, 000
William J. Lawford, Jr : (R) Nixon-Agnew Campaign Committee
1, 000
William G. Maloney (R) Nixon-Agnew Campaign Committee
500
Blanche Noves (R) Nixon-Agnew Campaign Committee.
1, 000
Clifton P Walker (R) Nixon-Agnew Campaign Committee
1, 000
Ralph Hornblower: (R) Governor's Club, New York
500
Joseph Gimma:
(R) Nixon-Agnew Campaign Committee.
5, 000
(R) Friends of Nixon, New York
3, 000
(R) Governor's Club, New York
500
(R) Republican State Dinner Committee.
500
Total
17,500
Kuhn, Loeb & Co., International:
John M. Schiff
(R) New York County Republican Committee.
1,000
(R) Nixon-Agnew Victory Rally Committee
2,000
(R) Republican State Dínner Committee, New York
3,000
(R) Nixon-Agnew Victory Rally Committee
1, 000
(R) Governor's Club, New York
500
(R) Javits, New York, Senate
4,000
(R) Victory 1968 Committee
3, 000
(R) Nixon-Agnew Election Committee
3, 000
(R) Republican National Finance Advisory Committee
3, 000
(R) Republican Congressional Booster Committee.
1, 000
Frederick M. Warburg (R) Victory 1968 Committee
1, 000
Morris H. Wright: (R) Victory 1968 Committee_
1, 000
David T Schiff (R) Victory 1968 Committee
1, 000
Gilbert W Kahn (R) Victory 1968 Committee
1, 000
Percy W Stewart (R) Victory 1968 Committee.
1, 000
Robert F Brown. (R) Victory 1968 Committee_
1, 000
Total
27, 500,
Reproduced at the Richard Nixon Presidential Library
56
Lazard Freres & Co.:
Andre Mever:
(D) Committee to Elect Best Men
5, 000
(R) Javits for Senate
1, 000
(D) New York Citizens for Humphrey
500
Howard S. Kniffen (R) Victory-1968 Committee
800
Peter A. Lewis (D) Humphrey for President Committee
500
George Murnane, Jr. (R) Victory-1968 Committee
1, 600
Total
9, 900
Lehman Bros.
Frederick L., Ehrman, Chairman (Listed by New York Times for
$41,136.)
(R) Republican National Finance Committee.
3, 000
(R) Nixon-Agnew Election Committee
3, 000
(R) Nixon-Agnew Finance Committee
3,000
(R) Republican Victory Committee
1, 722
(R) Republican National Finance Operating Committee
1, 000
(R) Nixon-Agnew Committee
2, 000
(R) Republican for Nixon Association
3, 000
(R) Nixon-Agnew Committee C.
3, 000
(R) American Good Government
3, 000
(R) TV Nixon-Agnew
3, 000
(R) United Citizens Nixon-Agnew Committee
3, 000
(R) WMN Finance Committee for Nixon-Agnew
914
(R) Nixon-Agnew TV Committee
3,000
(R) Agnew Vice Presidential Committee.
3,000
(R) Governor's Club, New York
500
(R) Victory-1968_
2, 000
(R) Grassroots Committee for Nixon-Agnew
3, 000
Paul L. Davies.
(R) Republican National Finance Operating Committee
1, 000
(R) Nixon-Agnew Victory Rally Committee
1, 000
(R) Nixon-Agnew Vietory Committee
2,000
(R) Nixon-Agnew Committee C
3, 000
(R) Congressional Booster Committee
] 000
(R) Victory-1968
I 000
(R) Republican Victory Committee
1, 000
(R) Republivan Congressional Booster Committee
1,000
(R) Republican Victory Committee
1, 000
(R) Republican Victory Committee
1, 000
Lucius D. Clay:
(R) Republican National Finance Operating Committee
1, 000
(R) Governor's Club, New York
500
(R) Victory=1968
1, 000
F Warren Hellman (R) Nixon-Agnew Committee
500
Joseph A. Thomas.
(R) Nixon-Agnew Finance
1, 500
(R) Nixon-Agnew Victory Rally
500
Walter E. Morse (R) Republican State Dinner Committee
1, 500
Total
- 60, 636
Loeb, Rhoades, & Co.
John L. Loeb:
(R) Javits, N Y Senate.
5,000
(D) NY Volunteers for Humphrey
1, 000
(D) N Y Citizens for Humphrey
5, 000
(D) Muskie Vice President
1,000
(R) Nixon-Agnew Victory Rally Committee
500
Mrs. John Loeb (R) Javits, N Y Senate
1,250
John L. Loeb, Jr.
(R) Representative of Nixon Association
1,000
(R) Representative of State Dinner Committee_
1, 500
27
(D) Committee To Elect Best Men
1,000
Clifford W Michel-
Reproduced at the Richard Nixon Presidential Library
57
Loeb, Rhoades & Co.-Continued
(D) Committee To Elect Best Men
5, 000
(D) Humphrey National Finance Committee
5, 000
(R) Representative State Committee, New York.
500
Henry A. Loeb.
(R) Javits, NY Senate
1,000
(R) Representative of National Finance Operating Committee
1,000
(D) Committee to Elect Best Men
5, 000
(R) Governor's Club, New York
500
(D) Humphrey National Finance Committee
5, 000
(D) NY Citizens for Humphrey
5,000
Mark J. Millard
(R) Javits, NY Senate
2, 500
(D) Humphrey National Finance Committee
5, 000
(D) Committee To Elect Best Men
5,000
Cail M Mueller (D)) Committee To Elect Best Men
3,000
Thomas L. Kempner (D) Committee To Elect Best Men.
2, 500
Armand G. Erpf
(R) Javits, NY Senate
3,000
(R) Governor's Club, New York
500
(D) Humphrey National Finance Committee
5, 000
(D) Committee To Elect Best Men
5, 000
Stephen A. Koshland
(R) Victory, 1968
1, 000
(D) Committee to Elect Best Men
Kenrick S. Gillespie. (D) Committee To Elect Best Men
500
Total
78, 450
Smith, Barney & Co.
William E. Fay, Jr Many did not contribute. (R) Victory 1968.
6, 000
Total
6, 000
White, Weld, & Co.
David Weld.
(R) Republican National Finance Operating Committee
1, 000
(R) Republican National Finance Advisory Committee
1, 000
(R) Victory, 1968
1, 000
(R) New Yorkers For Nixon-Agnew
-
1,000
Henry W Meers. (R) Victory, 1968.
-
1, 000
Philip D. Baker: (R) Victory, 1968
-
-
1, 000
Lloyd B. Hatcher (R) Victory, 1968
-
-
1, 000
Chandler Hovey (R) Victory, 1968
500
-
Eli S. Jacobs. (R) Victory, 1968.
1, 000
-
Harold W Janeway (R) Victory, 1968_
1, 000
-
Total
9, 500
Bank of America. Nobody
John Nuvcen & Co.: Nobody.
Dean Witter & Co., Inc.
Mr. Jean C. Witter (M) Exchange Firms CP Committee.
800
William M. Witter (M) Exchange Firms CP Committee
800
Marco F Hellman: (R) McCloskey Campaign Headquarters
500
Thomas W Witter (M) Exchange Firms CP Committee
800
Total_
2, 900
E. F Hutton & Co.
R. Fomon (R) Nixon-Agnew Finance Committee_
500
Gordon B. Carry, Jr (R) Victory, 1968
1, 000
Thomas P Lynch. (R) Governors Club, New York
500
Total
2, 000
Reproduced at the Richard Nixon Presidential Library
58
Paine, Webber, Jackson & Curtis
Nelson J Darling, Jr. (R) Nixon-Agnew TV Committee.
500
James W Davant (R) Victory, 1968
1, 000
George P. Gardner: (R) Victory, 1968
500
John F Curley, Jr. (R) Nixon-Agnew Victory Rally Committee.
1, 000
Total
-
3, 000
Shearson Hammill & Co.:
Robert C. Van Tayl?(R) United Citizens Nixon-Agnew Committee.
1, 000
Alger (Duke) Chapman'
(R) Republican National Finance Committee
1, 000
(R) Republican State Dinner Committee, New York
750
-
Arthur H. Ross
(R) Governors Club, New York
-
500
-
(R) Javits, New York Senate
3, 000
(D) Humphrey National Finance Committee
1, 000
Total_
-
-
-
7, 250
W E. Hutton & Co.:
William E. Hutton
(R) Nixon-Agnew Victory Rally Committee.
500
(M) Exchange Firms CP Committee
500
(R) Victory 1968.
2, 000
Total
3, 000
Morgan Stanley & Co.:
Charles F Morgan (R) Nixon-Agnew Finance Committee
750
Blyth & Co.:
Paul Devlin. (R) Victory 1968 Committee
2, 000
Alfred J. Coyle (R) Nixon-Agnew Victory Rally Committee
500
Total_
2, 500
Reproduced at the Richard Nixon Presidential Library