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The original documents are located in Box K29, folder "Rockefeller, David (2)" of the
Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
November 6, 1973
Dear David:
Thank you very much for your letter of October 17
with which you enclosed a copy of your presentation
and that of Mr. Butcher to the security analysts.
I appreciate your bringing to my attention the
remarks you made about Chase's earnings objectives.
With kindest regards.
Sincerely yours,
(signed) Arthur
Arthur F. Burns
Mr. David Rockefeller
Chairman of the Board
The Chase Manhattan Bank
1 Chase Manhattan Plaza
New York, New York 10015
NB:slc
#2231
FORD is LIBRARY 9ERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
THE CHASE MANHATTAN BANK
1973OCT 23 AM 29
National Association
1 Chase Manhattan Plaza, New York, New York 10015
OFFICE OF RECEIVED THE CHAIRMAN
October 17, 1973
DAVID ROCKEFELLER Chairman of the Board
#2231
NB-T
Dr. Arthur F. Burns, Chairman
Board of Governors
Federal Reserve System
20th Street & Constitution Avenue
Washington, D.C.
Dear Arthur:
I hope you got back safely from Africa and that you had a
pleasant visit to Kruger Park. I heard a bit on your
activities from Dr. Diederichs in South Africa.
I was extremely pleased that we could have a talk together
in Nairobi. Your comments and advice on the subject of
particular concern to me personally were very much
appreciated.
During the course of our conversation in Nairobi, mention
was made of Bill Butcher's and my presentation to the
Security Analysts. You had gained an impression from the
press of what had been said which I believe was misleading.
In any event, I enclose a copy of our two presentations
and would ask you most particularly to look at page three
of my talk where I speak specifically of our expectations
and ambitions with respect to earnings. I hope you will
feel that this was a reasonable statement under the
circumstances.
With best regards,
Sincerely,
Dand
Enclosure
FORD : 938670 LIBRARY
The Chase Manhattan Corporation
Investment Community Presentation
September 12, 1973
FORD i LIBRARY
Remarks by David Rockefeller
Chairman of the Board
The Chase Manhattan Corporation
At Investor Community Presentation
R.
New York, September 12, 1973
GERALD
0807
LIBRARY
NEW DIRECTIONS FOR CHASE MANHATTAN
Good afternoon, ladies and gentlemen, and welcome to
Chase Manhattan! My associates and I are delighted that so many of
you are able to be with us today.
Our purpose is straightforward. We plan to tell you how we
are building upon a traditionally strong commercial banking base so as
to expand and diversify further into an aggressive, high quality
international financial services corporation. We will be completely
forthright, both in our presentations and in the question-and-answer
period.
I will outline our overall management philosophy, setting
forth the primary policy objectives we established to strengthen
our profitability and our position in the financial community. In
other words, where we are headed, what we have done so far to get
there, and what we are going to be as an institution.
Our President, Bill Butcher, will give a detailed account
of the strengths of our global business base, and our problems and
how we are curing them. In other words, just where we are and how
we intend to do better.
Banking today is substantially different than it was when
I joined Chase 27 years ago. Then, our major challenge was to invest
our resources. Now, it is to fund our assets profitably.
- 2 -
We didn't have many overseas locations at that time, but
we were in Shanghai, Tientsin and Havana. Today, we haven't yet
made it back to those cities, but we do have a presence in some 2,000
locations in 92 countries.
Banking, in the past few years, has undergone many very basic
changes in national and international financial structures, asset and
liability management techniques, computer applications, payments systems,
retail services, corporate planning and budgeting methods, information
sciences and a host of other areas.
Moreover, many of the underlying concepts of the banking
business have changed, and competition for its business is far keener.
The provision of broader worldwide financial services has
made our job exceedingly complex with many new opportunities and many
new problems. Moreover, banking and all other businesses must now
incorporate in their planning such social and political factors as
nationalism, populism, consumerism and protectionism --- issues that
have a profound effect on a major international institution like Chase,
not to mention their broader impact on the thrust and posture of our
country as a whole.
This questioning climate demands public-spirited as well as
aggressive performance, and has necessitiated basic structural changes
in our organization. These have included the refocusing of many of our
operations, and the devotion of enormous quantities of time, attention
and resources to developing innovative ways to serve new markets
profitably but with sensitivity and respond affirmatively to fundamental
shifts in the global economy.
FORD i LIBRARY GERALD
- 3 -
LISEASE GERALD R. FORD
Some of these forces of change have had a direct impact --- some
negative, some positive -- on an item of overriding concern to us and to
you -- namely, our bottom line performance. At the end of 1972, our five-
year compounded earnings growth rate was 6.6%, or 2.2% lower than that of
the previous five years. Since I became Chairman in 1969 with sole
responsibility as Chief Executive Officer, our four-year growth rate
has been 7.1%, a reduction of 1.7% from our 1962-67 standard.
Quite frankly, these figures are not satisfactory to me or any
of us responsible for the management of Chase. We are convinced, however,
that they do not reflect a lasting slippage in basic performance, but
rather a temporary slackening due to a vital repositioning for improved
and more aggressive performance in the changing world of the future.
While, for many reasons, we will not give you a specific earnings
growth target this afternoon, I can tell you this. We are resolutely
determined to meet your definition of a growth corporation in the
nearer term. We also fully intend, in the longer run, to achieve
a level of earnings performance among the very best in the industry.
Our overall management philosophy has had three major
objectives. Our first has been and is to accelerate our transition
into a multi-faceted international financial services corporation
in the truest sense.
In 1969, we realized clearly that our traditional domestic
and overseas business base would by itself neither enable us to
achieve significantly higher earnings growth, nor to service emerging
global financial needs profitably. We therefore moved decisively to
create the geographic and functional business base essential to penetrate
expanding markets and increase our earnings growth rate.
- 4 -
Internationally, we have emphasized new branches, commercial
banks, finance companies, retail banks, merchant banks, Edge Act
corporations, mortgage banks, and leasing, investment advisory and
consulting companies. Altogether, we have built a very substantial
and widespread base in these areas.
As you know, a field of particular interest to me has been
East-West trade, which I believe has a very promising future. We
have established the first representative office of a U.S. bank in
Moscow, set up a special East-West trade unit in Vienna, and become
the sole American correspondent bank for the Bank of China. We
have also created The Chase World Information Corporation, another
first of its kind, that is initially focusing on providing East-West
trade information and counseling to our customers.
Domestically, we have been moving to expand our geographic
and market reach. We have broadened our branch network and moved
rapidly toward establishing Chase throughout New York State. We
have also strengthened our already substantial real estate business
with a series of new subsidiaries and services, created a successful
FORD j LIBRARY GERALD
alliance with BankAmericard, and positioned ourselves in a number of
other markets such as factoring, leasing, economic consulting and
small business finance and investment.
Our plan to merge with the Dial Financial Corporation
should be ruled on by the Federal Reserve Board by the end of this
year. When the merger is consummated, as we are confident it will
be - given the merits of the case - Dial will put us in the consumer
finance business and bring additional outstanding retail people to
our management team. It will also further our domestic mission to
- 5 -
become a truly national financial services corporation.
Our objective now is to increase the effectiveness of our
domestic and international business base, and to expand and diversify
it further.
In this regard, there are five markets we believe hold
particular opportunities. These are retail, real estate, innovative
international banking mechanisms, medium-sized corporations, and
management information.
We have already made a number of significant strides
in the retail and real estate areas. Internationally, our Orion
and Libra consortia are the type of new banking forms which we
are convinced are going to be highly successful in today's inter-
national economy.
Our strategies with regard to medium-sized corporations
and management information, on the other hand, are not yet as well
developed, but we are pushing forward and see promise.
GERALO FORD VIBRARY
As we have expanded geographically and functionally, the
job of management and control has become far more difficult and
complex. This fact sharply underscores the critical importance of
our second major objective -- that is, to be second to none in
management.
There are two key factors in management -- quality managers
placed effectively and the necessary tools to enable them to function
efficiently.
Since 1969, we have devoted a great deal of effort to
modernizing and streamlining our management structure. We have
completed a comprehensive realignment of our corporate organization
along functional lines. We have adopted anumber of new management
- 6 -
techniques. We have worked hard on developing the management tools
and teamwork vital to producing sound results on the bottom line.
With regard to effective management tools, we have come a
long way. Let me tell you where we stand.
We made our first formal attempt at planning long-range,
five-year strategies in 1971, following the reorganization of our
corporate structure. We realized the difficulties we would encounter
because of the many people in new positions, but we felt that
important strategic ideas would emerge which would be worthy of full
development,
.
and we were right.
The new planning system identified gaps where team efforts
had to be mounted in many parts of Chase to assure the proper
development and effective implementation of our strategies. This
process also helped us to reexamine some strategies, take remedial
action where necessary, and identify new opportunities.
The 1972 long-range plan was a decisive improvement over
its predecessor. The 1973 plan was still better, leading to the
first definitive tying together of our long and short-range planning
processes.
In short-range planning, we adopted management-by-objective
and responsibility budgeting. Each of our major responsibility
centers plans its objectives and budgets annually within the context
of our long-range strategies. After approval, the performance of
each center against plan is measured monthly. The same system which
monitors this critical decision and performance measurement process
GERALD FORD LIBRARY
- 7 -
also meets our needs for financial accounting and tax planning
purposes.
Even though we used only a modified version of this system
in 1970, while the automated system was being put in place, the
result was that the rate of increase of controllable expenses was
halved from that of 1969. This rate was again roughly halved in
1971. Since the 1971 budget cycle, we have used the whole system
in an increasingly sophisticated way both for income, expense, asset,
liability and capital planning and for performance measurement.
We have thus been able to tie our controllable expenses
directly to income objectives. We know who is producing planned
results and why these results are what they are. It is our policy
and intention that managers who produce, and, indeed, those who do
not, be rewarded appropriately. The key is performance.
In 1970, we also began the extensive work of updating
GERALD LIGNARY FORD
and expanding our global cost-accounting system to prepare for
profitability planning and measurement. Bill will tell you a good
deal more about how we are beginning to use this tool.
I will just say that we are now beginning to measure with consid-
erable accuracy the profitability of our major business areas. By the end
of this year we will have up-to-date information on all significant product
costs and production standards on a worldwide basis. Coupled with an
automated system we are putting in place, we will be able to follow
and evaluate in a much more definitive way the profitability of
individual accounts, of relationships consisting of more than one
account, and of specific products. Our goal here is to enable
management to appraise marginal product lines critically and thus be able
more accurately to place emphasis where the income potential is greatest.
- 8 -
Other tools with a heavy impact on profitability are those we
have developed for production management and control. Their use has
achieved very substantial savings domestically over the past four years,
and we see more on the way. Modern industrial engineering techniques
have led to new approaches to how we organize, plan and measure our
production systems. We intend to use these same techniques in our
rapidly growing overseas production areas where applicable.
Better quality control tools are also critical to increasing
our market share and profitability. We and other financial institutions
have had a number of problems in maintaining satisfactory quality of
service in the face of increased volume, and this has hurt us. We are,
however, making a determined effort to improve our service performance.
Quality is absolutely essential to meeting our business growth goals.
The ultimate objective of all these management tools is two-
fold.
First, we want to create a lean structure that puts a premium
on sales, performance, and profitability. If we didn't have these tools,
that would be impossible.
Second, at the corporate level, we are aiming at greater
sophistication and flexibility in our asset-liability management --
especially with regard to critical interest margin implications. We
will shortly have a system that will show us the expected results of
alternative business strategies so that we can accommodate more quickly
to unanticipated changes in business conditions. The forerunners of this
system which we have developed over the past four years have already been
helpful. We expect the benefits to be even greater in the future.
FORD is LIBRARY 07V870
- 9 -
On the people side of our management objective, we have also
made real progress.
We have sharply clarified management responsibilities at all
levels.
My own objective and overriding interest is to do my utmost
to strengthen Chase in its endeavors to provide first-rate financial
services on a worldwide basis.
In this connection, my principal responsibility is the
development of overall policy and strategies which will enable us to
meet our corporate objectives. It is also my responsibility to see
that these objectives are carried out.
In this latter regard, I continually monitor, through a
formal review system, and informally both within and outside the chain
of command, the performance of the Corporation and the fundamental
issues facing it. This way, I keep up to date on the vital inside
workings of the bank, evaluate progress, and alter policies or
strategies quickly where necessary.
In addition, I devote a considerable amount of my time to
direct involvement with regard to the governmental and other external
forces that impact our future. Likewise, I participate in many
GERALD FORD LIBRARY
activities within and without the bank which are designed to enhance
specific customer relationships.
Bill Butcher, with the help of our Vice Chairmen George Roeder
and Lee Loree, is directly responsible for the day-to-day functions of
the Corporation and for carrying out our plans.
Needless to say, good people at all levels are the raw material
of good management, and we are working to create a climate at Chase con-
ducive to retaining and attracting highly talented and inventive people
with a broad range of skills. We encourage freedom of expression and
initiative within a framework of team play aimed at accomplishing
- 10 -
our goals. We are satisfied that Chase has the scope, diversity, job
richness and spirit to challenge top-quality talent.
We have always been able to meet our banking expansion
objectives with skilled commercial bankers we have trained ourselves.
More recently, to meet the multiple line and staff needs of our
broadening business base, we have been reaching our increasingly to hire
topflight specialists.
Our senior management includes the Executive Office, 12
Executive Vice Presidents and 47 Senior Vice Presidents. The average
age of the whole group is 46, and we have each been with Chase an
average of 20 years. From these figures, you can see that our management
combines relative youthfulness with considerable experience. It is also
important to note the diversity of responsibility to which our senior
managers have been exposed. Over 80% of them have different jobs now
than they did when I became Chairman in 1969.
These changes in management responsibilities have, of course,
necessitated a great deal of fast on-the-job personal growth, but,
although this may have placed heavy pressures on some, we have achieved
substantial longer-range gains in terms of a more aggressive, more
innovative and more exciting management climate.
Changing our management climate, structure and methods of
operation has not been an easy task. There have been disruptions both
internally and externally. If we had it all to do over again, we would
undoubtedly do some things differently. But, on the other hand, I know
of no way to change a complex organization at a quick tempo without some
disruption, and in our case change was absolutely essential.
GERALD FORD LIBRAPA
- 11 -
The accomplishment of both our first and second
objectives is basic to meeting our third major objective --
to build Chase earnings growth.
There are many aspects to this, and Bill will detail the
ways in which we are approaching this objective. However, I would
like to touch on the policy framework within which we focus on
profitability.
First, let me state flatly that we will not sacrifice
potential future earnings growth for the sake of immediate gains.
Rather, we are aiming for an effective and productive balance
between present profit and longer-range returns.
Second, we believe the profitability cannot be achieved
at the expense of the business environment in which we function.
When we talk about the environment, we are really talking about our
own markets. We are increasingly finding social needs that we
can meet profitably -- thus moving toward the integration of our
social and economic objectives. Moreover, in the environment in
which we live today, a corporation that is not responsive to the
broader concerns of society is not likely to be tolerated over
the long term.
Finally, we believe that profitability depends on out-
standing team performance, and we are moving to insure just that
by emphasizing bottom line results and creating stronger individual
incentives.
These, then, are Chase's primary objectives -- expansion
and diversification of our business base, excellence of management,
and a sharp focus on the bottom line.
GERALD FORD LIBRAPT
- 12 -
What we have endeavored to do is to chart a course we
think is best for us at Chase Manhattan.
It builds on our substantial new and historic strengths,
and corrects identified weaknesses.
It reflects fundamental changes in the basic character
of our business.
In pursuing this course, we are unequivocally determined
to maintain a position of leadership, to optimize earnings for
our shareholders, and to do this within a framework that will
enable us to discharge our duties to the communities and the
customers we serve.
Obviously, objectives are nothing without effective
implementation. And the man here at Chase who is responsible for
that is my associate, Bill Butcher.
Bill's 26 years at Chase have been marked by unique drive
and outstanding performance. He joined us right out of Brown
University where he had a distinguished record. His early career
was with our domestic branches, after which he spent several years
in the International Department, including three years as its head.
At the beginning of last year, he was named Vice Chairman for Planning,
Expansion and Diversification -- a post he held until becoming
President in October.
His broad background, keen abilities and decisiveness will
play a key role in our future progress
Bill Butcher.
FORD & GERALD LIBRARY
Remarks by Willard C. Butcher
Presiden t
The Chase Manhattan Corporation
At Investor Community Presentation
New York, September 12, 1973
OUR MISSION: PERFORMANCE
I propose to be entirely blunt and candid in outlining
the problems and strengths of Chase.
I will relate these to my own prime mission, which is
translating objectives into reality -- that is, performance.
By performance, I mean excelling in our jobs, not just
doing them.
I mean using flexible new management structures to innovate,
grow and sell effectively in key future markets.
I mean, above all, orchestrating all of our efforts to make
Chase reflect on the bottom line its advantages and potentials as a
true growth corporation.
My remarks may run longer than either you or I would
desire. My intention, however, is that you know this financial
services corporation better than you have known it before, and
better than you know others.
I will do three things -- define in detail our earnings
base; discuss our overall profit picture and financial policies; and
finally, pinpoint some of our strengths and problems and what we're
doing about them.
Let me begin first with a description of our earnings
base.
FORD & LIBRARY GERALD
- 2 -
FORD i LIBRARY
We have made major strides in improving our financial
of
disclosure in recent years, but I will go considerably beyond what
you have seen before -- covering our activities on an international,
domestic- and overall geographic and functional basis, as well as
outlining our capital investment program.
Because I have been closely involved in our international
operations, I will start with those. (SLIDE ONE)
As you can see at the top, since the end of 1968, the base year
we will use for most of our comparisons, our overseas branches almost
doubled from 50 to 95 by year-end 1972. Geographic emphasis has remained
relatively constant, with some 60% of this growth in the Caribbean and
Latin America, and the rest spread about evenly among Europe and Africa,
and Asia and the Middle East.
Subsidiaries, defined as entities in which we hold more than a
50% interest, went from 11 to 26. Activities in Europe and Africa more
than doubled, and we established two subsidiaries in Asia. As a result,
at the end of 1972 we had 35% of our subsidiaries outside of the
Caribbean and Latin America, compared to 27% five years ago.
Affiliates, defined as entities in which we hold an interest
of 50% or less, more than tripled from 7 to 23. The greatest growth
here was in Asia and the Middle East, but Europe and Africa also more
than doubled. These two areas combined had 83% of our affiliates in
1972 versus 71% in 1968. Of course, the data for both subsidiaries
and affiliates include only operating units, and exclude administrative
and holding companies and venture capital investments.
So far this year, we have added overseas five new branches, six
subsidiaries, six affiliates and the representative office in Moscow.
Now, I want to turn to the source of earnings by country
- 3 -
FORD & 03RA70 LIBRARY
in our overseas network, regardless of the form of representation.
Both the number of countries (SLIDE TWO) contributing to our inter-
national earnings and the size of their contributions have increased
substantially. This slide does not include countries where Chase was
only less than a 20% interest in any entity.
As you can see at the top, the number of contributing countries
has risen from 35 to 50. Countries producing more than $1
million pre-tax have nearly doubled from 8 to 15. Countries making
between $250 thousand and $1 million increased from 7 to 10, and countries
yielding up to $250 thousand from 20 to 25.
The next slide (SLIDE THREE) shows how the contributions of
various countries have developed.
On the left hand side, you see the countries in the first
three lines as they stood in 1968 by size of contribution. In the
three right hand columns, you see where those countries stood in 1972.
On the first line, all eight of the more-than-$1 million producers in
1968, remained in that category in 1972.
Of the seven yielding between $250 thousand and $1 million
in 1968 on the second line, two moved up to the highest category, two
stayed in the middle group, and three slipped back into the lower
group -- pointing up the fluctuations in individual countries that
make international diversification so important.
Of the 20 countries earning up to $250 thousand in 1968 on
the third line, three had moved to the top rank by 1972, and eight had
advanced to the middle rank. Moreover, lower down on the next to last
line, you will see that two of the 15 new countries, in which operations
were started since the end of 1968, had already joined the largest
producers by 1972.
- 4 -
It has been our policy overseas to employ a mix of branches or
wholly-owned subsidiaries, controlled by not wholly-owned subsidiaries,
and affiliates in order to achieve our expansion and diversification goals
in the most efficient and effective way. We make these decisions in the
light of our reading of the situation in each country. Many of you may
wonder how well this policy has worked.
This slide (SLIDE FOUR) gives a breakdown of our international
subsidiaries and affiliates by type of business at year-end 1972.
Commercial banks lead the list with 16, followed by 11 finance companies,
7 merchant banks and 4 Edge Act corporations. Mortgage banking, leasing,
investment advisory, consulting and 4 other types of companies round out
the list.
Together, these 49 subsidiaries and affiliates contributed
$13.6 million in pre-tax equity earnings in 1972, compared to $3.4 million
from our 18 subsidiaries and affiliates in 1968 -- a four-fold increase.
Last year, five of these made more than $1 million, eight
produced between $250 thousand and a million dollars, and the rest had
up to $250 thousand in earnings or modest start-up losses.
So far in 1973, we have added 1 commercial bank, 1 finance
company, 5 merchant banks, 3 leasing companies, and 2 consulting companies
and have applied for 2 more Edge Act corporations in Houston and Chicago.
While the growth of our earnings base on the international
front has been most dramatic, we have also substantially strengthened
the potential of our domestic network. (SLIDE FIVE)
Between 1968 and 1972, our New York metropolitan-area branches
increased from 147 to 178, our domestic operating subsidiaries from 2
to 10, and our total domestic locations from 149 to 191 including three
upstate branches.
GERALD FORD LIBRARY
- 5 -
In addition to one leasing and one small business investment
company in 1968, the added subsidiaries include three commercial banks
as part of our statewide expansion, three mortgage banking companies, an
investment advisory corporation, and a consulting company.
In addition, we have three bank-related activities within our
domestic operations -- the factor and finance division, formerly Shapiro
Factors; the BankAmericard Division; and the provision by our Real Estate
Department of investment and financial advice to the publicly-owned Chase
Manhattan Mortgage and Realty Trust in Boston as well as other clients.
These domestic subsidiaries and three bank-related activities
contributed $14.8 million of income before taxes in 1972, compared to
$600 thousand from such activities in 1968. Last year, four had more than
$1 million in earnings, two produced $250 thousand to $1 million, and
the rest earned less than $250 thousand.
So far this year, we have added twelve metropolitan area
branches, for a total of 190, and three domestic subsidiaries for a total
of 13. Two of these new subsidiaries are commercial upstate banks with
four more branches, and the other is a mortgage banking company.
Let me now bring together our international and domestic
operations and explain what they mean in terms of geographic profit-
ability and asset deployment.
This chart (SLIDE SIX) shows the geographic sources of our
bottom line profitability, using a two-year comparison because of our
lack of precise corresponding figures for 1968.
Between 1971 and 1972, the domestic share of our
QERALD FORD VIBRARY
profitability slipped from 71% to 66% of our total or from about
$106 million to $97 million. This is a fact about which we are not at
- 6 -
&
FORD
GERALD
all happy, and you' 11 hear more on this subject shortly.
LIBRARY
On the other hand, our international operations,
after internal distributions of supporting expenses
and overhead, contributed 34% or about $51 million of last year's bottom
line, compared to 29% or $42 million in 1971.
Europe and Africa kept the same 12% share and $17 million
of profitability in both years. Asia and the Middle East increased
to about 9% from 7%, or by about $3 million. The Caribbean and
Latin America increased their share from 10% to about 13% or by
around $6 million.
There is an important overall correlation (SLIDE SEVEN) between
our geographic profitability and the deployment of assets.
While domestic assets increased by $200 million between
1971 and 1972, the share of world-wide assets employed domestically
dropped by 4% and the share of earnings on the last slide declined by
5%. Europe and Africa in green increased their share of assets by
about 1% while the earnings share remained the same. Asia and the Middle
East also increased their share of assets by 1% and profit-
ability by 2%. The Caribbean and Latin America increased their
share of assets by 2% while their share of profitability increased 3%.
From such figures, the spreads between assets employed in
various areas and business lines and the profits earned become apparent.
Analysis of these and other trends shows that we must be more aggressive
in deploying earning assets efficiently, and we are facing up to this
challenge.
Total capital outlays by Chase net of depreciation from the
end of 1968 through 1972 amounted to some $180 million, of which one
- 7 -
third was in fixed assets and two thirds in investment assets. More-
over, of the total, three quarters was used internationally and one
quarter domestically.
During this same period, we increased internationally in staff
from some 3,500 to about 6,600 -- an average annual growth of 775,
reflecting our aggressive expansion and diversification efforts. Our
domestic staff grew slightly from 17,200 to 18,800, or an average of 400
people each year. Here, needs for expansion were partially offset by
the efficiency and control mechanisms David has described. We estimate
roughly that these measures have saved us about $40 million pre-tax.
These, then, are some of the major trends and facts affecting
our earnings base.
Now I think it would be useful to look briefly at a second
area -- our overall profitability and financial policies.
Internationally, at the end of 1972 our four-year compound
earnings growth rate, after taxes, was over 20%. That average rate is our
minimum goal over the next several years, and we are confident we will
meet it.
The earnings drag in starting up overseas activities is
generally reasonably short. Many of our newer international activities
are now breaking into the black while others are advancing to higher
levels of profitability.
Moreover, our increasing geographic spread internationally
reduces overall risk and enables us to take advantage of offsetting
economic growth patterns between various countries and areas. It also
provides us more earnings flexibility when and if we encounter special
problems with any single venture.
One such challenge we now face is the announcement by the
GERALD ORD LIBERTY
- 8 -
Federal Reserve regarding our investment in Standard and Chartered Bank.
We are actively seeking ways to avoid disinvestment in this case. But,
should it be necessary, Chase fully intends to have its share in these
markets.
Domestically, our compound earnings growth rate since the end
of 1968 has, after taxes, been down slightly.
Last year, after internal distributions of supporting expenses
and overhead, three of our six major domestic earnings areas were not
profitable. As you know from our first and second quarter reports,
we are still off a little in total domestically SO far this year. How-
ever, I am happy to say that five of the same six areas have generated
profits in the first half and the trend is encouraging despite very
difficult interest spread problems.
Still, strengthening domestic earnings is our clearest
challenge and our overriding goal.
FORD & GERALD LIONARY
It is not a healthy situation when our nation's largest
financial institutions must consistently look abroad for meaningful
growth opportunities. Given a sensible approach by the government
to diversification and monetary and fiscal policy, however, I think
we can do something about it.
Before moving on to some of the ways we plan to reach that
objective, let me say a few more words about our financial policies
and the way we evaluate profit performance.
Our dividend policy is generally to pay out 40%-to-45% of
normalized income before security transactions -- that is, profits ad-
justed for unusual or non-recurring items.
Our capital financing policy recognizes that debt capital is
less expensive to our shareholders than equity financing because of
- 9 -
the tax savings arising from the deductibility of interest expenses.
Our policy also reflects the fact that, though convertibles
are often a more expensive way to raise capital than straight long-term
debt, they are still a less expensive way of raising equity. Our longer-
range plans show that we will need the stockholders' equity that our
outstanding convertibles will eventually represent.
Beginning with 1969, long-term debt, including our convertibles,
has represented between 24% and 31% of our total capital funds, and it
is now over 28%. We believe that a proper minimum target would currently
be about 25%. Naturally, acquisitions mady by issuing new equity or
conversions of outstanding convertible debt may reduce our long-term debt
ratio below the minimum target from time to time, but such reductions
would be temporary.
With regard to operating leverage, defined as average assets
less average capital divided by average capital, we have had an increasing
trend since 1969. In that year, the multiple was 12.9 which grew to
14.7 in 1972. Currently the multiple is 13.9 and our present minimum
target is 14.
We are aware that when you analyze earnings growth rates,
you are interested in two separate factors which affect that rate and
which have a marked impact on a corporation's price earnings ratio.
The first factor is how we are doing on our average return
on capital. To measure this ratio we add average after tax interest on
long-term debt, including our convertibles, to average income before
securities transactions. We then divide the total by average capital
funds. From 1969 to 1972, Chase's average return on capital was 9.2%.
The second factor influencing earnings growth is the rate of
BERALD FORD LIBRARY
- 10 -
new investment, which measures how much on an average annual basis
we are increasing our capital as a percent of our earnings level. We
calculate this by dividing the change in total capital funds by total
earnings, including the after-tax interest on long-term debt, over
the same time span. From 1969 to 1972, Chase's rate of new invest-
ment was nearly 66%.
If we multiply these two factors, the resulting rate of
earnings growth would be 6.1%. The difference between this figure
and the 7.1% previously mentioned as our earnings growth rate since
1969 is the result of the financial leverage provided by our most
recent convertibles. Consequently, you can see that we can improve
our rate of earnings growth by either increasing the return on
average capital funds or increasing our new investment rate. We
plan to do both.
I outline these policies for an important reason. We
believe the market pays a discount for uncertainty, not a premium,
and we want you to understand the financial factors that Chase
management can influence and how we intend to influence them.
Should we change our policy regarding these financial factors in
the future, we will make the changes public.
Another major point I would like to clarify is how we view
and evaluate the profitability of our various activities.
We review the performance of our department managers in
two frameworks -- responsibility and profitability. Let me explain
these terms.
BERALD FORD LIBRARY
- 11 -
Since 1970, we have had responsibility budgeting which
measures performance against plan regarding expenses and income
GERALD ANTHELY FORD
controlled by the manager.
Profitability planning, on the other hand, is strictly
oriented to the corporate bottom line, and includes interdepartmental
charges or credits for services rendered.
While Chase has emphasized responsibility more than
corporate profitability performance at the department level,
increasing the emphasis on profitability is a very high priority
with which all of our senior managers are involved. The simple
reason we did not emphasize this more previously is, as David said,
that our cost accounting system had to be expanded and improved
to provide the necessary measurements. That work is now nearly
complete, and sufficient data are at hand to point our major
problems for resolution, though we will clearly improve the system
further as we go.
Profitability planning and measurement is a crucially
important tool to tie together all of the factors arising from
alternative business strategies and to determine their effect on
the bottom line. Contingency planning in our rapidly changing
economic environment is thus more effective, and we can have a far
better feel for relative opportunities in our various business lines.
The end objective of profitability planning is, of course, profit-
per-share performance by each senior manager within a context of
better and more innovative corporate asset-liability management.
A swing in the interest rates we must pay for money market
funds affects the profitability of various business lines in quite
different ways. For example, in times of lower money market rates, the
value of our retail deposit base in funding Chase's total assets is less
- 12 -
FORD & GERALD LIBRARY
than it is in times such as 1973. One of our objectives in this
area is to expand retail assets, not only to attain increasing profits
from this business line, but also to moderate distortions caused
by rate cycles.
Our real estate business, on the other hand, generates
about the same percentage of profits whether interest rates are
high or low.
Our domestic Corporate business is constantly affected by
political pressure on the prime lending rate, which is a major
reason we so actively supported the creation of the dual rate structure.
Though interest rates and the interest spread clearly have
a huge impact, profitability planning gives us far greater flexibility.
It encompasses and emphasizes other income as well. It spotlights
the impact of direct, indirect, and overhead expenses for management
consideration and decision. Most importantly, it is a vital
management tool for evaluating strategic options, constantly
focusing on the bottom line and driving the Corporation forward.
Individuals must continue to be evaluated on how well they
do in their own areas of responsibility within the overall profit
plan. But senior management, especially major department heads,
must primarily be measured by one criterion -- how they are doing
in terms of bottom line performance.
This brings me to the third point I would like to cover
today -- some of the strengths and problems we face in achieving
our goals.
You have undoubtedly deduced a number of both from the
facts we've given so far. But let me touch on those we feel to be
- 13 -
especially important, first with regard to our domestic earnings.
It has been said that we've had problems with the growth
of our domestic trust and fiduciary profits, and that is correct.
Both performance and profits in these areas have slipped over the
past years.
We have, however, moved decisively to reverse this. We
have restructured these operations to provide more management
flexibility, including the creation of the Chase Investors Management
Corporation New York as a subsidiary. We have introducted effective
portfolio performance measurement. We are now compensating officers
for their individual performance on the same basis as the rest of
the Street.
So far this year, these steps appear to be paying off.
While one sip doesn't make a spring, our portfolio performance has
improved against standard measures. We want to do still better,
but for the moment we believe we're on the right track.
It has been said that our position in correspondent
banking has slipped, and I believe that is now incorrect.
The widely quoted statistics here are of a one-day nature and
concern only one aspect of our institutional business. But if one uses
these numbers, figures for last June 30 show that we have a substantial
lead in gross deposits from commercial banks, both domestic and foreign.
In fact the total lead over our nearest competitor is more than double
what it was at a high point at the end of 1968.
Moreover, we are on the offensive. We have sharpened our
emphasis on results and recently added a number of major accounts.
FORD & LIBRARY GERALD
- 14 -
New products are being put in place, and we have returned to an
aggressive posture with regard to our competition.
Another area on which we are placing real emphasis, as
I mentioned before, is the management of our interest margins, the
mix of our assets and liabilities, and the mix between our investment
and commercial banking portfolios.
We are not yet satisfied with our asset/liability
management or control of the net interest margin, but we're moving
in the right direction and are making significant progress toward
our goal the ability to orchestrate the entire Corporation for
optimum profitability.
Our profitability evaluation mechanisms, which help us
choose between options, are far better than they were five years
ago, and they will be even sharper by the end of this year. Other
management tools, which you have heard about, have greatly decreased
our reaction time to change.
Moreover, we have created the new position of Chairman
of the General Loan Committee with responsibility for loan port-
folio policy, instituted monthly reviews of loan related performance
against the overall business scenario, and established a program
to upgrade the quality of our portfolio. These things have been
done to reduce the level of loan losses from the overly high rate
in recent years -- a rate which, as you know, has considerable impact
on our bottom line.
Finally, we are strengthening our teamwork.
As our business becomes increasingly complex and interdependent,
pulling together also gets tougher. But is also gets just that much
more essential.
GERALD FORD VIBRARY
- 15 -
We have already noted a number of programs we have put in
place to force cooperative effort -- a factor that is now a major
aspect in our performance reviews of individual managers. These
steps are working, and the growing emphasis on profitability
planning is designed to tighten our teamwork even more.
In addition, we have created Executive Vice President level
teams focused on specific interdepartmental problems which impede
profit performance. One group is devoting itself to clearing up
costly lapses between departments which create non-earning assets.
Another group is making recommendations concerning the effective-
ness, innovativeness and cost efficiency of the indirect and over-
head expense areas of the Corporation. Groups such as these are
designed to keep senior management attention on what is needed
to orchestrate Chase better and make the cash register ring.
These joint undertakings are, we believe, enhancing
FORD is LIBRARY GERALD
everyone's spirit of competition, "can do" and common cause.
They are also creating a management climate that attracts
and motivates the critical ingredient of our future success -- our
people. As you have heard, we have a relatively young team, and
we're very proud of it. Our people are eager to perform, not set
in their ways, and determined to make the Corporation work as a
whole.
What's more, our managers are clearly attuned to the
growing emphasis on sales and service quality. We are sharpening
our marketing capability by developing entirely new products,
adapting existing services to meet broader needs, and exercising
firmer quality control. But the key is people who want to sell,
know how to sell, and know what to sell -- and, more and more, our
- 16 -
people do!
Our people, new management tools, enhanced capacity to
implement and sales orientation are all basic as we move to
capitalize on our strengths and special future opportunities. Five
of these have been mentioned by David -- retail, real estate, the
middle market, management information and additional forms of
international banking. I would like to expand on them briefly.
In the retail area domestically, you are well aware of
our statewide expansion, which will make us the first down-state
bank in all of New York's banking districts. In addition, you
have heard of a number of other efforts designed to strengthen our
retail distribution network.
Dial is particularly important. We feel strongly that
the price we are prepared to pay is fully justified in view of
Dial's excellent management, the quality growth record of the Dial
operation, and the possibilities presented to serve the public
through a retail presence in 33 additional states.
Internationally, our retail strategy is equally aggressive.
Buttressing a rapidly growing base of finance companies, we have
initiated retail banking operations in Germany, with others on the
way elsewhere, and are expanding our credit card operations to the
Caribbean. These steps will bring Chase retail products to
markets with rapidly increasing consumer affluence. and the banking
entities will also reduce our reliance on money market funds to
finance our traditionally substantial international commerical
banking business.
GERALD Advent R. FORD
- 17 -
Additionally, we continue to emphasize and expand ,our
real estate operations which provide a substantial percentage and
growing amount of our earnings in both low and high interest rate
periods.
Internationally, our real estate network is focused on a
number of growing markets and we plan shortly to enter more.
Domestically, fees for advisory services have increased and our
entry into the Florida market has been a real success. The recently
established Chase Manhattan Realty Capital Corporation will provide
a vehicle for more intense and broad-scale penetration of nationwide
markets.
Two other areas we believe offer opportunity for growth
are the so-called middle market and the provision of financial
information.
In all candor, our objectives in these fields are not yet
matched by fully-developed strategies and tactics. We are, however,
moving ahead with a number of plans both domestically and
internationally, and we see both markets as a way to expand our
earnings base. We see our evolving middle-market strategy, in
particular, as an excellent chance to get in on the ground floor
with today's smaller companies that will be the giants of tomorrow.
The Chase World Information Corporation, Chase Econometric
Associates, and our other important information collection and
analysis potentials, as well as other activities we are now con-
sidering, form a significant base for the development of a business
FORD is LIBRARY 9ERALD
- 18 -
which we believe has considerable long-term potential. The possible
changing position of government regulation with regard to consulting
services for correspondents and others holds major promise which we
are ready and able to take advantage of.
We have already spent a great deal of time on the inter-
national area, so I will only say that we fully intend to intensify,
not just maintain, our overseas efforts and profitability.
We are going to continue to search out aggressively
innovative mechanisms, such as our Orion and Libra consortia, that
place us in a leadership position, fill real financial needs, and
impact positively on our bottom line.
In the future, we are also going to continue to expand
actively our geographic coverage and range of services.
To this end:
-- We will continue supplementing our European efforts with more
intensive marketing and new near-banking facilities.
-- We will focus increasingly on the Middle East and Africa,
FORD is LIBRARY GERALD
and we have created a new group devoted exclusively to
this area.
-- And we will continue the pace we have set in the Pacific
Basin and the Far East which will be an area of even
faster growth.
This, then, has been a description of Chase and its earnings
base, some of our efforts to correct weaknesses, and some of our
initiatives to capitalize on what we view as our prime future strengths.
Let me end with a few quick overall observations.
Chase, today, is a basically different institution from
what it was five years ago.
- 19 -
We have not only changed in terms of our business base, but
in our fundamental focus and environment.
We have a management structure that can take better advantage
of countercycles in our business, expand decisively, and deploy
earnings assets more aggressively.
We are creating a climate that puts a premium on one thing --
bottom line performance.
To achieve that bottom line performance and become a real
growth corporation, we must continue to do two things -- expand our
earning assets, and improve our earnings on assets.
As I see it, to expand our earning assets, we must:
1.
Develop more competitive business strategies.
2.
Accelerate our expansion and diversification.
3.
Build our base of talented, ambitious and creative people.
4. Sell.
5.
Improve the quality of our services.
6.
Reward our producers.
To improve the earnings on our assets, we must:
1.
Improve our asset-liability management.
2.
Employ profitability analysis to achieve the optimum balance
among our business lines.
3.
Control expenses.
4.
Reward those managers who employ our resources with maximum
efficiency and impact.
Our mission is to take these ten ingredients and make them
our ten commandments.
FORD is LIBRARY GERALD
- 20 -
There are no overnight miracles, but I believe we have a
solid organization, an excellent and expanding business base, the
necessary management tools, competitive strategies, and aggressive
tactics.
We intend to use this base to achieve the hard-hitting type
of performance you and we expect of a growth corporation.
FORD is LIBRARY 038470
Slide 1
Overseas Branches
1968 1969 1970 1971 1972
Caribbean, Latin America
30 32 38 44 56
& Canada
Europe & Africa
9 11 14 18 19
Asia & Middle East
11 12 13 15 20
Total
50 55 65 77 95
Subsidiaries
1968 1969 1970 1971 1972
Caribbean, Latin America
8 10 12 14 17
& Canada
Europe & Africa
35557
Asia & Middle East
-
-
-
1
2
Total
11 15 17 20 26
Affiliates
1968 1969 1970 1971 1972
Caribbean, Latin America
& Canada
22224
Europe & Africa
447710
Asia & Middle East
14469
Total
7 10 13 15 23
FORD & GERALD LIBRARY
Slide 2
Countries by Size of Contribution
to Pre-Tax Overseas Earnings
number of countries
50
50
44
41
15
38
40
35
more
than
11
13
8
$1MM
10
30
11
$250 M
7
to
8
9
11
20
$1MM
less
20
than
20
21
20
25
10
$250 M
O
1968
1969
1970
1971
1972
Slide 3
Growth in Size of Overseas Pre-Tax Earnings
by Number of Countries
1968
1972
Less
$250M
More
than
to
than
$250M
$1MM
$1MM
More than $1MM
8
8
$250-$ MM
7
3
2
2
Less than $250 M
20
9
8
3
Total
35
New Countries
15
13
o
2
Since 1968
FORD & GERALD LIBRARY
Total Countries
50
25 10 15
1972
Slide 4
International Subsidiaries
and Affiliates
Commercial Banks
16
Finance Companies
11
Merchant Banks
7
Edge Corporations
4
Mortgage Banking Companies
2
Leasing Companies
2
Investment Advisory Companies
2
Consulting Companies
1
Other
4
Total
49
Slide 5
Domestic Network
1968
1969
1970
1971
1972
Metropolitan
147
Area
152
158
170
178
Branches
Domestic
2
3
3
5
10
Subsidiaries
FORD is LIBRARY 0.E.A.L
Slide 6
Geographic Sources of Income
before Securities Transactions
percent and millions of dollars
0
20
40
60
80
100
UNITED STATES
1971
71%
($106)
66%
A1972
($97)
EUROPE & AFRICA
12%
($17)
12%
($17)
ASIA & MIDDLE
7%
($10)
EAST
9%
($13)
CARIBBEAN,
10%
($15)
LATIN AMERICA
13%
($21)
& CANADA
Slide 7
Assets Employed by Geographic Area
percent and billions of dollars
0
20
40
60
80
100
UNITED STATES
1971
70%
($17.9)
66%
($18.1)
1972
EUROPE & AFRICA
16% ($4.0)
17% ($4.7)
ASIA & MIDDLE
5%
($1.4)
EAST
6%
($1.7)
CARIBBEAN,
9%
($2.3)
LATIN AMERICA
11%
($2.8)
& CANADA
GERALD LIBRANA R. FORD
BOARD OF
THE CHASE MANHATTAN BANK
1973 SEP 10 PM
FEDERAL RESERV
National Association
1 Chase Manhattan Plaza, New York, New York 10015
OFFICE RECEIVED CHAIRM
2
DAVID ROCKEFELLER Chairman of the Board
September 4, 1973
The Honorable Arthur F. Burns
Chairman, Board of Governors of the
Federal Reserve System
Federal Reserve Building
Constitution Avenue, N.W.
Washington, D. C.
Dear Arthur:
Vernon Jordan, Executive Director of the National Urban League, has
asked me to serve as Dinner Chairman of this year's Equal Opportunity
Day Dinner. On this occasion James A. Linen will be honored for his
five years of dedicated service as President of the League and his
distinguished contributions to equal opportunity for all Americans.
The Dinner will be held in the Grand Ballroom of The New York Hilton
Hotel on Wednesday evening, November 14, 1973. Past award recipients
have included former Chief Justice Earl Warren, Robert A. Sarnoff,
Thomas J. Watson, Charles Evers, Kenneth A. Gibson, Walter Reuther,
and Whitney M. Young, Jr.
Because I feel that Jim Linen is, indeed, a most worthy recipient for
this year's Equal Opportunity Day Award, I was pleased to accept
Vernon's invitation and I hope you will serve with me as a member of
the Honorary Dinner Committee. Though the calls upon your time will
be quite minimal, your counsel, cooperation and support will be
invaluable in making this year's dinner a worthy tribute to Jim.
Our Committee will hold only one meeting on Tuesday, September 18, at
4:30 p.m. at the Chase Manhattan Bank offices, 410 Park Avenue
(fourth floor). Please mark your calendar both for the Dinner date
and the Committee Reception date. A reply card is enclosed for your
convenience.
I look forward to having you on the Committee and to seeing you at the
meeting on September 18.
OLEICE
FORD
Sincerely,
GERALD
LIBRARI
David
Called
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LEDEBY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 30, 1973
Chairman Burns
To
Subject: Acquisition of Standard-
Brenton C. Leavitt
From
B.B.L.
Chartered Bank Group Limited, London,
by Chase Manhattan Bank.
In September, 1969, the Board approved the acquisition of
about 15 per cent of the shares of Standard-Chartered Bank Group Limited,
London, upon condition that an interest of Chartered in a California
bank subsidiary be sold within one year or that domestically oriented
banking business be eliminated within two years. Chase has been unable
to comply with the Board's order, and on April 18, 1973, the Board
informed the bank that a proposal to shift the shares of the California
subsidiary of the Chartered Bank of London to a pension trust would not
be acceptable.
On April 18, 1973, the Board ordered Chase to divest its
shares in the group on or before April 18, 1974, to submit to the Board
a plan of divestiture within 90 days, and to furnish reports at 90-day
intervals thereafter of progress made in disposing of those shares.
The Board's letter dated April 18, 1973, (copy attached)
refers to no deadline other than that Chase must submit a plan of
divestiture within 90 days - July 18, 1973.
Pa
treat,
ro
FORD is 9ERALD LIBRARY
mil
per
Mr Gardner
BOARD OF OVERNORS
OF THE
OF
FEDERAL RESERVE SYSTEM
OF
WASHINGTON, D. C. 20551
THE
SYSTEM
ADDRESS OFFICIAL CORRESPONDENCE
TO THE BOARD
April 18, 1973
Mr. William S. Ogden, Executive Vice President
The Chase Manhattan Bank National Association
1 Chase Manhattan Plaza
New York, New York 10005
Dear Mr. Ogden:
Reference is made to your letter of March 16, 1973, re-
questing the Board to extend until April 18, 1974, the time in which
your bank ("Chase") might take appropriate steps with regard to Chase's
holding of shares in Standard and Chartered Banking Group Ltd. ("Group")
that would constitute compliance with the Board's letter of April 18,
1972. Further reference is made to your letter of April 5, 1973,
which requested a Board ruling that a proposal to shift the shares
of the Chartered Bank of London, San Francisco, California, now held
by the Chartered Bank Ltd. to a pension trust of one of the banks in
the Group would constitute compliance with the Board's letter of
April 18, 1972.
In the Board's opinion, the proposed pension trust arrange-
ment would continue to place control of the California bank within
the Group and the Group would consequently remain engaged in activi-
ties in the United States of a kind other than those incidental to
an international or foreign business. Accordingly, the Board would
not regard that arrangement as a satisfactory means of compliance
with the conditions attached to the Board's consents to your holding
of shares in the Group.
It appears to the Board that efforts to achieve a reorgani-
zation of the Group's activities in the United States or otherwise to
meet the conditions in the Board's consents have failed. Therefore,
the Board hereby orders Chase to divest its shares in the Group on or
before April 18, 1974, to submit to the Board a plan of divestiture
within 90 days, and to furnish reports at 90-day intervals thereafter
of progress in disposing of those shares. This order shall be effec-
tive immediately and shall remain in effect unless within a period of
FORD & LIBRARY GERALD
Mr. William S. Ogden
-2-
90 days from the date of this letter Chase shall have submitted,
and the Board shall have found satisfactory, an alternative means
of compliance with, the conditions attached to the Board's earlier
consents.
Very truly yours,
(signed) Tynan Smith
Tynan Smith
Secretary of the Board
FORD i LIBRARY GERALD
Gardner
April 18, 1973
Eugene J. Keogh, Esq.
Halpin, Keogh & St. John
630 Fifth Avenue
New York, N. Y. 10020
Dear Mr. Keogh:
Reference is made to your request on behalf of the Standard-
Chartered Banking Group, Limited, London, England, for a ruling that
Stendard-Chartered is engaged, directly or indirectly, in the United
States only in activities that are incidental to its international or
foreign business within the meaning of sections 25 or 25(a) of the
Federal Reserve Act, and to your letters of January 10, January 22,
January 25, February 22, March 1, and March 30, 1973, in support of
that contention.
Chase Manhattan Overseas Banking Corporation, New York
("CMOBC"), acquired shares of Standard-Chartered pursuant to sece
tion 25(a) of the Federal Reserve Act which authorizes any corporation
organized thereunder to purchase and hold, with the Board's consent,
shares of any corporation not engaged in the general business of buying
or selling goods, wares, merchandise or commodities in the United States
and not transacting any business in the United States except such as in
the Board's judgment may be incidental to its international or foreign
business. Chase Manhattan Bank, N.A., New York, acquired those shares
from CHOBC and holds them under a similar restriction pursuant to
section 25 of the Federal Reserve Act which authorizes any national
bank to acquire and hold, with Board approval, stock in any foreign
bank that is not engaged, directly or indirectly, in any activity in
the United States except as, in the Board's judgment, shall be inci-
dental to the international or foreign business of such foreign bank.
GERALD R. FORD LIBRARA
Eugene J. Keogh, Esq.
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Based on the information available to the Board and after
full consideration of your views, the Board declines to make the
requested ruling. It appears that Standard-Chartered is engaged
indirectly through the Chartered Bank of London, San Francisco,
California, in activities in the United States that involve the con-
duct of purely domestic banking business and that the Board would not
consider to be incidental to international or foreign business.
Very truly yours,
(signed) Tynan Smith
Tynan Smith
Secretary of the Board
PG: June
4-18-73
GERALD R. FORD LIBRABA
April 13, 1973
To:
Board of Governors
Subject: Chase Manhattan Bank ("Chase")
investment in the Standard-Chartered Bank
From: Legal Division
Group Limited, London ("Standard-Charter-
(P. Gardner, Jr.)
ed"), which owns all of the shares of
Chartered Bank, London ("Chartered"),
which owns all of the shares of the
Chartered Bank of London, San Francisco,
("Chartered-California").
ACTIONS REQUESTED
1. Disapproval of Chartered-California's request for a ruling
that it is doing no business in the United States except such as is in-
cidental to Standard-Chartered's international or foreign business and
that Chase should therefore be permitted to continue to hold 13.5 per
cent of Standard-Chartered's voting shares.
2. Disapproval of Chase's request for a ruling that it should
be permitted to continue to hold such Standard-Chartered shares if
Standard-Chartered places 60 to 100 per cent of Chartered-California's
voting shares in its employee pension trust,
3. Staff* recommends that the Board order Chase to divest its
shareholding in Standard-Chartered on or before April 18, 1974, and to
make quarterly reports to the Board regarding progress in locating a
buyer or buyers for Chase's shares.
HISTORY OF BOARD ORDERS
March 24, 1965 - The Board approves investment by Chase Manhattan
Overseas Banking Corporation ("CMOBC") in not more than 20 per cent of the
shares of Standard Bank at a cost not to exceed $25 million.
* Concurrence: Division of Supervision and Regulation (Mr. Dahl).
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Board of Governors
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November 17, 1965 - The Board rules that Standard Bank's
agency in New York may invest temporarily idle funds in brokers' loans,
prime commercial paper, Federal funds and short-term obligations of
U.S. banks.
September 29, 1969 - The Board approves CMOBC's acquisition of
approximately 15 per cent of the shares of Standard-Chartered through
exchange of Standard Bank shares (as a part of the formation of Standard-
Chartered as a holding company to own Standard Bank and Chartered Bank,
and through purchase of additional shares) upon condition that Chartered
Bank either sell its interest in Chartered-California within one year or
eliminate the domestically-oriented banking business done by Chartered-
California within two years.
January 23, 1970 - The Board makes an order essentially repeat-
ing the terms of the September 29, 1969, order, with time periods to run
from the date of acquisition of Standard-Chartered's shares. It also
rules that Chartered's branches or agencies in the United States may
temporarily invest idle funds in brokers' loans, prime commercial paper,
Federal funds, and short-term obligations of U.S. banks.
January 5, 1972 - The Board grants Chase Manhattan Bank permis-
sion to acquire CMOBC's 13.77 per cent shareholding in Standard-Chartered
subject to the conditions in outstanding consents.
April 18. 1972 = The Reard ******** CMOBC's continued holding
of Standard-Chartered shares provided that Chartered Bank Shall sell its
shares in Chartered-California on or before April 18, 1973.
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Board of Governors
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ESSENTIAL FACTS
1. Chase's shareholding in Standard-Chartered is its largest
foreign investment - valued at approximately $90 million. (Chase has
an unrealized capital gain of approximately $60 million.)
2. Chartered-California had total deposits of approximately
$42 million as of December 31, 1971. It is very small in relation to
Standard-Chartered's worldwide operations (total deposits $5,974,000,000).
Chartered-California is engaged in general banking business, including
local, purely domestic banking services as well as international financing.
3. Chase originally invested in Standard Bank to develop an opera-
ting capability in Africa. (It sold certain African subsidiaries to Standard.)
4. Chase has been undertaking studies looking toward possible
realignment of its African strategy, since Chase anticipates further
penetration of the U.S. market by Standard-Chartered that will cause
additional regulatory problems under the Board's standard of business
"incidental" to international or foreign business.
5. Chase has the contractual undertaking of Standard-Chartered
to comply with requirements of U.S. law regarding its U.S. activities
necessary to ensure that Chase will not be required to dispose of its
Standard-Chartered shares.
6. Standard-Chartered has indicated that it does not regard
itself as being legally obligated to dispose of its Chartered-California
shares.
7. Standard-Chartered is alleged to be the last major
independent among Britain's "overseas banks". Possibly, Chase's
FORD & LIBRARY 076839
Board of Governors
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13.7 per cent shareholding -- when combined with other substantial minority
shareholdings -- suffices to prevent a takeover of Standard-Chartered by
other British banks because a merger with another bank would reportedly re-
quire the support of 75 to 85 per cent of Standard-Chartered's voting shares.
8. It is alleged by Chase that disposal of Chartered-California
shares by Standard-Chartered had been proposed at the specific request of
Chartered's Chairman, W. George Pullen. Chase claims that competitive
considerations associated with the success of Barclays in the U.S. market
have led Standard-Chartered to realign its worldwide strategy toward in-
creased interest in the U.S. market. Disposal of Chartered-California
would run counter to such plans.
EDGE ACT PROBLEM
"Incidental" business test as applied to a minority investment.
CMOBC's shares in Standard-Chartered have been transferred to
Chase, as a direct investment in a foreign bank under section 25 of the
Federal Reserve Act. Even a minority noncontrolling investment in a
foreign bank is subject to the condition that the foreign bank shall not
be engaged, directly or indirectly, in any activity in the United States
except as, in the Board's judgment, shall be incidental to the interna-
tional or foreign business of such foreign bank.
The difficulties encountered in connection with this investment
illustrate the problem in trying to regulate foreign minority investments.
CMOBC took the precaution of obtaining a contractual undertaking from
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Standard-Chartered to refrain from activities, and cause its subsidiaries GERALD
LIBRARY
Board of Governors
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to refrain from activities, in the U.S. market that would require CMOBC
(or its assignee, Chase) under U.S. law and regulation to dispose of its
investment in Standard-Chartered. When such an agreement breaks down, the
prospect of a lawsuit against a prestigious foreign bank in its home country
does not offer an attractive alternative. Chase's practical options seem to
be either to negotiate a reorganization of Standard-Chartered or to sell its
shares.
Chase's counsel, in a telephone conversation with Mr. Gardner on
April 12, 1973, indicated that all avenues for possible reorganization of
Standard-Chartered have been explored, and that there is no acceptable re-
organization plan that would sever Chase from any connection with Chartered-
California, aside from the pension trust proposal discussed below. It does
not appear that a further extension of time to work out a compromise solution
would serve any useful purpose.
While the application of the "incidental" business limitation to
minority noncontrolling investments operates harshly, perhaps this should
simply be viewed as a business risk incident to this type of investment,
Standard-Chartered's argument - redefining "incidental" business.
The Legal Division does not concur in the argument of Standard-
Chartered's counsel that Chartered-California's business (which includes
domestically oriented banking activity) should be deemed to be "incidental"
to Standard-Chartered's international or foreign business. This is essen-
tially the same argument previously presented by Chase and rejected by the
Board, and would involve a novel interpretation based solely on the small
size of the domestic banking operation in relation to the worldwide business
of the parent foreign bank.
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Board of Governors
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BANK HOLDING COMPANY ACT PROBLEM
Multi-State banking operation.
Although the Board's orders were couched in terms of the
"incidental" business standard of the Edge Act, an additional policy
question under the Bank Holding Company Act arises by virtue of the
fact that Chartered-California's operations are in a different State
than Chase's head office. Section 3(d) of the Bank Holding Company Act
prohibits the Board from approving any application by a bank holding
company to acquire, directly or indirectly, under section 3 of the Act,
the voting shares of an additional bank located in a State other than
the State where the holding company's principal banking subsidiaries
were located on the date it became a bank holding company.
Application of section 3(d) to the present situation is not
clear; however, the policy behind section 3(d) would seem to support a
narrow interpretation of the "incidental" business standard of the Edge
Act. Here, Chase does not control Standard-Chartered and, arguably,
therefore, does not own or control "indirectly" any voting shares of
Chartered-California, However, the ownership scheme (Chase having a
13.7 per cent interest in a holding company that indirectly -- through
its wholly-owned subsidiary, Chartered Bank -- controls all of Chartered-
California's shares) may render legally supportable the contrary conten-
tion that Chase "indirectly" owns an interest in Chartered-California,
through the device of an intermediate holding company, proportionate to
its shareholding in the holding company.
FORD & LIBRARY GERALD
Board of Governors
Such problems of legal construction can be avoided altogether
by a restrictive interpretation of the "incidental" business standard of
the Edge Act, so as to preclude the incipience of a situation in which a
member bank owns a minority interest in a foreign bank doing a domestically
oriented banking business, directly or indirectly, in the United States,
In the Legal Division's view, it is important to avoid setting
a precedent that would tend to support the legality of 6 to 24 per cent
investments by bank holding companies in bank holding companies located
in other States,
FOREIGN BANK ASPECT
Under the Edge Act, the Board has permitted financing of export-
import transactions, but has not permitted financing of the purely domestic
credit needs of foreign customers (e.g. - financing of local plant, equip-
ment, inventory). Foreign banks such as Standard-Chartered are keenly
interested in being able to finance all of the credit requirements of
their foreign customers in the U.S. market on a multi-State basis,
(Compare: Both Schroder and French American indicated dissatisfaction
with the possible reorganization of their New York "investment company"
operations to comply with the narrow Edge Act standard of business "inci-
dental" to international or foreign business.)
Standard-Chartered's activities in the United States are con-
sistent with present rules governing the activities of foreign bank
1/ A further legal discussion of the Chase and Standard-Chartered
arguments is contained in Attachment "C".
FORD & 939870 LIBRARY
Board of Governors
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holding companies in the United States. A regulatory problem arises only
because of Chase's investment in Standard-Chartered. For this reason,
Standard-Chartered alleges that the Board's ruling discriminates against
it as compared with its foreign bank competitors in the United States.
However, technically, the Board's orders have been directed to Chase and
not to Standard-Chartered. Disposition by Chase of its Standard-Chartered
shares would cure any immediate U.S. regulatory problems for Standard-
Chartered, but at the cost of losing Chase as an international
partner.
PENSION TRUST PROPOSAL
Chase does not control Standard-Chartered or Chartered-
California. It presently has an indirect 13.7 per cent interest in the
equity of Chartered-California, Chase expects that Standard-Chartered
may propose the reduction or elimination of this participation by Chase
in the earnings of Chartered-California through the placing of 60 to 100
per cent of Chartered-California's stock in an employee pension trust of
Standard Bank or another bank in the Standard-Chartered group. Such
purchase by the pension trust would be largely financed by borrowings
from a bank within the Standard-Chartered group. (Chase asks that this
information be accorded confidential treatment.)
Chase concedes that the proposal does not represent a long-range
solution to the problem of anticipated further expansion of Standard-
Chartered's activities in the U.S. market,
FORD i LIBRARY 076870
Board of Governors
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The pension trust proposal does not take account of sections
2(g) (2) and 2(g) (3) of the Bank Holding Company Act! Under those sections,
Standard-Chartered would be presumed to continue to control Chartered-
California after the transfer. Although, arguably, Chase would no longer
have a stake in Chartered-California's earnings (assuming ability of the
pension trust to carry the debt incurred to acquire Chartered-California),
Chase's influence over the conduct of the California operations would be
no different than prior to the transfer.
Since there is no long-range solution in view, the Legal Division
doubts the merits of adopting a patchwork solution to the problem over the
shorter run.
CONCLUSION
The Legal Division recommends that Chase be given an additional
year to divest its shares in Standard-Chartered. Although this matter has
dragged on for three years, considerations relating to (a) the disappoint-
ment of legitimate expectations that Standard-Chartered itself would take
the necessary curative measures and (b) the overriding importance of
Standard-Chartered's operations to Chase's strategy for the African market
(and Chase's need for time to implement alternate plans) justify the length
of the proposed divestiture period. Since Chartered-California is still
quite a small competitor in California, it is doubted that such an extension
of time would have any serious adverse effect on the public interest.
Attachments - "A" Correspondence with Chase
FORD & GERALD LIBRARY
"B" Correspondence with Standard-Chartered
"C" Additional legal analysis
(Attachments "A" and "B" have been distributed to each of the Governors
and are available in the Secretary's office upon request.)
ATTACHMENT "C"
LEGAL ANALYSIS OF CHASE AND STANDARD-CHARTERED CONTENTIONS
To grant the relief requested by Standard-Chartered (releasing
Chase from the condition imposed in the Board's Order of April 18, 1972),
the Board would have to accept one of the following propositions:
1. (a) That Congress intended, through the Bank Holding Com-
pany Act, to permit any bank holding company to acquire a noncontrolling
(albeit more than 5 per cent) interest in the voting shares of any other
bank holding company without Board approval and even though the banking
operations of the two organizations are in different States, and
(b) That, despite the fact that paragraph 8 of the Edge
Act (or paragraph 4 of section 25 of the Federal Reserve Act) is worded
in such fashion as to literally prohibit even noncontrolling investments
by member banks or Edge corporations in foreign banks doing a local,
purely domestic banking business in the United States, the Board should
rule that the governing standards are those of the more modern statute
(the Bank Holding Company Act) and that a noncontrolling investment that
would be permissible to a bank holding company under (a) above may also
be made through a member bank or Edge Act subsidiary of the bank holding
company. (In effect, the Bank Holding Company Act would be read as
modifying or partially superseding the Federal Reserve Act, including
the Edge Act, in such situations.)
FORD & GERALD LIBRARY
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COMMENT
The first part of this proposition conflicts with the staff's
interpretation of section 3(d) of the Bank Holding Company Act. While it
is not clear that section 3 approval is required for a bank holding com-
pany to make a noncontrolling (albeit more than 5 per cent) investment in
another bank holding company, staff believes that the better view is that
such an investment would require Board approval under section 3(a) (3) as
an "indirect" investment in shares of an additional bank. Chase and
Standard-Chartered contend that the word "indirectly" in section 3(a) (3)
applies only if the investing bank holding company controls the inter-
mediary bank holding company which is being invested in. At least where
the intermediary bank holding company owns all of the shares of its sub-
sidiary bank, staff believes that the Board is legally entitled to regard
the intermediary bank holding company as a device whereby the investing
bank holding company is able "indirectly" to own a 5 per cent interest in
the former's subsidiary bank. (For example, the Savings and Loan Holding
Company Act uses the word "indirectly" in juxtaposition to the words
"through one or more subsidiaries" -- see 12 U.S.C. 1730a(a) (2). Court
decisions on the subject of the meaning of the word "indirectly" are
inconclusive. "Indirectly" signifies the doing by an obscure, circuitous
method of something which is prohibited from being done directly, and in-
cludes all methods of doing the thing prohibited except the direct one.)
A variation of Chase's argument is that such minority noncontrol-
ling investments are governed by section 4 rather than section 3, and may
be permitted where the Board finds them to be consistent with the public
GERALD LIBRARY
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interest under either section 4(c) (8) or 4(c)(9). Consistent with staff's
recommendation, the Board has interpreted section 4(c) (9) as being applicable
only to investments by foreign bank holding companies and not to investments
in foreign bank holding companies by other companies. Also, staff believes
that investment in a bank holding company at the minimum involves public
interest considerations germane to section 3 (and would also involve sec-
tion 4 questions only if the bank holding company to be invested in also
engages in nonbanking activities, and not simply in managing or controlling
banks). Staff believes that the scheme of the statute warrants treating the
question of noncontrolling investment by a bank holding company in another
bank holding company under section 3, rather than section 4. Staff concedes
that the statute is ambiguous. (Section 4(a) (1) prohibits investment in the
voting shares of any company other than a "bank". Literally, the prohibition
would cover a "bank holding company".) The Board is free to rule either way.
(Note that section 3(d) prohibits only certain approvals under section 3, and
not approvals under section 4.)
2. (a) That Congress intended, through the Bank Holding Company
Act, to permit any domestic bank holding company to acquire a noncontrolling
(albeit more than 5 per cent) interest in the voting shares of any foreign
bank holding company with Board approval and even though the banking opera-
tions of the two organizations are in different States, and
(b) Same line of reasoning as 1(b).
GERALD FORD LIBRARY
COMMENT
Since there is no special language in sections 2 or 3 of
the Act suggesting that investments in foreign bank holding companies are
to be regarded differently than are investments in domestic bank holding
companies, the first part of this proposition relies upon the Chase
variation discussed above, which would place the matter of noncontrolling
investment by domestic bank holding companies in foreign bank holding com-
panies under section 4(c) (9) rather than under section 3. Staff rejects
this view, as discussed above,
3. (a) That Chartered-California's local, purely domestic
banking business should be considered "incidental" to the international
or foreign business of Standard-Chartered within the meaning of paragraph 8
of the Edge Act or paragraph 4 of section 25 of the Federal Reserve Act
(because it is small in relation to Standard-Chartered's worldwide business),
and
(b) That Chase's investment is governed by section 4, rather
than section 3, of the Bank Holding Company Act, and is exempt under sec-
tion 4(c) (5) as the kind of investment that a national bank can make under
the Federal Reserve Act, including the Edge Act.
COMMENT
The first part of this proposition involves an interpretation
that the Board has always rejected.
4. That the Chase and Standard-Chartered situation is unique
and should be "grandfathered" under equitable principles, regardless of
the literal wording of the statutes, since there is no evidence of in-
consistency with any purpose of the Bank Holding Company Act or of the
GERALD FORD VIBRARY
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LIBRARY GERALD FORD
Federal Reserve Act, including the Edge Act, so long as Chase does not
exercise any control, direct or indirect, over the policies or management
of Chartered-California.
COMMENT
There is some appeal to this proposition, since it may reasonably
be asked what harm is done to the public interest, so long as Chase does
not actually exercise any control over the operations of Chartered-
California. Nevertheless, there are several considerations which lead
staff to recommend against this alternative:
(a) There is no legal basis for "grandfathering" such a
situation.
(b) The usual facts supporting a "grandfathering" approach
are not present -- i.e., an investment that was legal when made, but is
inconsistent with later statutory amendments, and where actual abuses with
which the statutory amendments are concerned either are not present or are
not of sufficient magnitude as to warrant requiring divestiture.
Concededly, CMOBC's investment in Standard Bank was legal
when made. However, its subsequent (or successor) investment in Standard-
Chartered never attained a permanent legal status because of inability or
failure to comply with Board conditions regarding the making of such in-
vestment (i.e, - elimination of the domestic orientation of Chartered-
California's business or divestiture of Chartered-California). Therefore,
it cannot really be said that CMOBC's investment in Standard-Chartered was
legal when made. Its legality was dependent upon conditions subsequent
which have not been fulfilled, Those conditions were imposed by the Board
prior to CMOBC's making of the investment in Standard-Chartered,
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(c) An exception created for Chase would establish a
precedent for similar action by other bank holding companies which may be
confronted with similar problems -- (e.g. - Mellon's approximately 15 per
cent noncontrolling investment in BOLSA, or Citibank's 40 per cent "non-
controlling" investment in National and Grindlays Bank).
(d) There is value in a sanitary rule -- drawn at a level
of 5 per cent ownership -- which obviates the need to make, and to police,
difficult "control" determinations. For example, in the Banco di Roma case,
involving an area of similar sensitivity to the multi-State banking question
(the Glass-Steagall Act), the Board stated that "[W]hile there is no reason
to doubt the sincerity of the Banco di Roma's plan to insulate the opera-
tions of its subsidiary bank in Chicago from the operations of EuroPartners
[a securities broker], adoption of such a plan as a general guideline for
conforming the operations of any bank holding company to the policies of
the Glass-Steagall Act would pose very difficult supervision problems for
the Board which, in the Board's judgment, render such a plan unworkable."
(Sept. 1972 Bulletin 940, at P. 941.) A strict rule here would avoid similar
problems with the policing of arrangements that potentially compromise
the rule against multi-State banking operations.
Admittedly, Chartered-California (deposits $42 million) is not
a large bank. However, there is no statutory basis for distinguishing
according to the size of the bank, nor was there any inclination of the
Board to make any such distinction in the Banco di Roma case, which in-
volved a de novo bank.
FORD & LIBRARY 9ERALD