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Volume 365 - Bank of America, November 21 – December 31, 1939
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Volume 365 - Bank of America, November 21 – December 31, 1939
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Henry Morgenthau, Jr. Papers
Diaries of Henry Morgenthau, Jr.
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Book 365
Bank of America
November 21 - December 31, 1939
Regraded
Bank of America
Book
Page
Comptroller of Currency's resume' of meetings with
the Gianninie discussed by HMJr, Foley, Tietjens,
Delano, Upham, and Hanes - 11/21/39
365
1
"Washington Bank Trends and Backgrounds": Excerpt
concerning Giannini conferences - 11/26/39
22
Future Treasury policy discussed by HMJr, Hanes.
Gaston, Delano, Upham, Foley, Tietjens, Sherbondy.
Greenbaum, and Hanes - 11/28/39
30.73
a) Conversation with Dean Lloyd Garrison
(University of Wisconsin)
78,90
b) Landis memorandum suggesting 8: course of
procedure
102
Resume' of case for FDR - 11/30/39
107
Conference of Treasury group: Comptroller of Currency
group; Crowley (Federal Deposit Insurance Corporation):
Landis (Securities and Exchange Commission); Greenbaum;
Garrison; Spencer, Ottley, and Smith - 12/2/39
112
a) FOR informed of program as worked out - 12/4/39
142
1) FDR-Crowley conversation in which FDR
indicates his concern over Delano's weakness
in this connection; if necessary, FDR
himself will handle matter and remove both
Gianninis from active management of Bank -
12/5/39
144
Eccles-HMJr conversation in which Eccles states his
feeling that Federal Reserve Board has been derelict
in its duty discussed with Delano, Crowley, Foley,
Tistjens, and Folger - 12/12/39
146,305
a) Eccles' letter to Comptroller discussed by
Treasury group
305,310,312.
317,322
Comptroller's letter to Giannini following their request
that further consideration be given to the arguments
and proposals presented by them - 12/12/39
15?
a) Bank of America's answer refusing to send copies
of letter to Board of Directore
323
1) Discussion of letter and proposed answer by
Treasury group, Comptroller of Currency, and
Landia - 12/28/39
353
b) Copies sent to Secretary of Board and National
Bank Examiner - 12/28/39
366,369
1) Secretary of Board asks that he be made agent
of Comptroller's office to facilitate
distribution - 1/2/40: See Book 366, pages 1
and 19
a) Discussion by Treasury group:
Book 366, page 4
b) Treasury answer: Book 366, page 3
e) Two copies delivered by Comptroller's office to
directors - 1/4/40: Book 366, pages 20 and 25
1) Director Bocqueraz's answer - 1/11/40:
Book 366, page 51
2) Director Marble's answer - 1/11/40:
Book 366, page 52
Regraded Unclassified
Bank of America - 2
Book
Page
Bank of America's letter to Comptroller in reply to
Comptroller's letter of October 2 - 12/12/39
365
161,306
Gesell, Gary: HMJr contemplates using him as counsel
and drops in to Temporary National Economic
Committee hearing to "look him over" - 12/15/39
309,320
Bank of America's progress report on agreement of
December 15, 1938 - 12/23/39
324
Bank's premises - appraisal of reported on by bank
examiner - 12/28/39
329,338
1
RE BANK OF AMERICA INVESTIGATION
November 21, 1939.
11:30 a.m.
Present:
Mr. Foley
Mr. Tietjens
Mr. Delano
Mr. Upham
Mr. Hanes
H.M.Jr:
The purpose of this little gathering 1s, Hanes
started to tell me tidbits of "Mr. Giannini goes
to Washington." I wonder if you could give me a
chronological story of what happened, as far as
you know.
Delano:
Well, we have got a running story written and I
think it might be preferable just to - I don't
think it would take too long.
H.M.Jr:
Would you read it?
Delano:
I might add that in addition to this we have got
a transcript of exactly what took place.
H.M.Jr:
Every time?
Delano:
Every time except where Mr. Foley and these people
discussed the technical questions. We have & running
memo on that but this is supposed to be the whole
thing.
H.M.Jr:
And you can give me a copy of it?
Delano:
Yes, we are preparing a book on the whole thing.
H.M.Jr:
What did Mr. Giannini say when you had a stenographer
present?
Delano:
The only comment they made was that they wanted a
copy of the transcript and we told them we would
be very happy to give them one.
The first meeting was held on Thursday, November 16,
1939. It was attended by the Gianninis and Mr. Collins.
Mr. Hanes came in in the middle of the meeting and
had to leave for a press conference and then came
back, so he had kind of a disjointed attendance. The
rest of us were there, the Comptroller's office,
and the legal department was represented by Mr. Foley
and Mr. Tietjens. My office was represented by myself,
Mr. Mulroney and Mr. Folger.
Regraded Unclassified
2
- 2 -
"The first point discussed grew out of a statement
made by the visiting representatives of the bank
to the effect that the Bank of America N.T. & S.A.
desired 8. section 30 citation to clear the air.
Mr. L. M. Giannini stated that our continual letters
harassed the bank and were resulting in some loss
of business; that they were not satisfied with the
disinterestedness of our examiner and questioned
the fairness of our examinations; that they wanted
the matter reviewed by the Federal Reserve Board
at once. They practically asked for & citation.
Mr. L. M. Giannini said that that was the reason
why he had forwarded a request for an informal re-
view by the Federal Reserve Board and the Federal
Deposit Insurance Corporation so that they could
satisfy their directors with an independent examina-
tion which they could present as a rebuttal of the
Comptroller's findings. He cited particularly as
one reason why they could not secure a disinterested
examination the fact that Examiner McLean was indebted
to their bank in the sum of $10,000."
H.M.Jr:
How much?
Delano:
$10,000.
H.M.Jr:
Did you know that?
Delano:
No, I didn't. We didn't any of us know it and when
Mr. McLean was sent into the Bank I asked if there
was any reason why he shouldn't examine this Bank.
They said there was no reason.
H.M.Jr:
In passing, may I ask whether any other examiners
owe any other banks? I just thought that would be
the first rule and regulation of a bank examiner,
that he shouldn't owe the bank a dollar. I will
go further, that the whole organization of the
Comptroller of the Currency should be free of debt
to a national bank.
Delano:
I think that is right.
H.M.Jr:
In passing, let's check up.
Delano:
Yes, we will.
H.M.Jr:
I should say that would be Rule 1.
Regraded Unclassified
3
- 3 -
Hanes:
I asked him how this thing came about and he said
1t came about through a merger or consolidation
of the bank with some other bank. He owed this
other bank money and they took over that bank and
he owed that bank $10,000.
Delano:
But the Secretary's question goes deeper than that,
as I understand.
Foley:
He borrowed the money from the state bank, which
later became a national bank.
H.M.Jr:
I would say anybody connected with the office of the
Comptroller of the Currency should not be in debt
to a national bank. I would say that would be
Rule 1.
Hanes:
Sure.
Delano:
That is right. Mr. Upham might explain a point on
that, because we discussed it. I think he explained
to me that, of course, it is illegal for a national
bank examiner to owe a national bank, to make a loan
from a national bank, but this was not an illegal
transaction in that the man borrowed from a state
bank.
H.M.Jr:
But that would be equivalent.
Hanes:
After he owed to the bank, he ought not to examine it.
Delano:
There is no doubt in our minds about that.
H.M.Jr:
I think it is damned unfortunate.
Delano:
Yes. I think Mr. McLean....
H.M.Jr:
Who picked Mr. McLean to do that job?
Upham:
The Chief Examiner in San Francisco, Mr. Wright.
H.M.Jr:
Well, if it was me, I would fire the two of them.
But go ahead. This constantly putting me in this
false light is terrible. I don't like it. It is
terrible. It makes a damn fool out of the whole
Treasury to have a fellow examining the bank that
owes $10,000. It just makes a damn fool of all of
us. It just gives Giannini another thing to harp
on. He has got to come and tell us that this
Regraded Unclassified
4
- 4 -
fellow does owe him. I think it is awful. I think
it is pretty lax somewhere.
Delano:
"Mr. Giannini stated that Mr. McLean is paying
small monthly sums on it and they had, in the
past, pressed him for collection."
H.M.Jr:
Incidentally, that could no more happen in the
office of the Internal Revenue that a man would
go to examine a bank or individual to whom he
was indebted - it just couldn't happen. I straight-
ened all that out the first day I came here.
Delano:
It was certainly - it won't happen in the future.
H.M.Jr:
It just couldn't happen, not in Internal Revenue,
that a fellow could go into the XYZ Corporation,
to whom he owed money or was under any obligation.
Delano:
We certainly regret it sincerely.
H.M.Jr:
You don't regret it half as much as I do.
Delano:
"The office of the Comptroller 18 investigating
this aspect of the situation. It is understood
here that Mr. McLean's loan was for money borrowed
from a state bank in 1928. That state bank was
later taken over by a national bank which bank was in
turn absorbed by the Giannini interests.
"The second question discussed was the argument that
occurred over whether the December memorandum was
B. contract, the point being made by the Messrs.
Giannini that it was an agreement which bound both
parties, and by this office that it was a unilateral
understanding and that the Comptroller had no right
or power to bind himself to any future course of
action.
"The third subject of discussion arose from the
contention that the visiting representatives of
the bank were not clear as to just what the Comp-
troller actually wanted as a program for correc-
tions. The Messrs. Giannini stated there was
doubt in their minds; that in spite of our many
letters of criticism and our letters of warning
there still remained cloudy issues which they
Regraded Unclassified
5
- 5 -
wanted to clear up. It was agreed that Mr. L. M.
Giannini, Mr. Collins, Mr. Folger, Mr. Wright
and our attorneys should hold & meeting, that
those points should again be discussed and it
should be made clear to the representatives of the
bank just what the Comptroller's office required.
"On Thursday afternoon and Friday morning there
was discussed the criticisms made in the report
of examination and the letters based thereon, also
the various letters of the Comptroller. There was
no agreement on any of the issues but the ground
was thoroughly canvassed and the representatives
of the bank were explicitly informed as to what
corrections the Comptroller desired should be made.
The points covered included: dividend policy,
increase of capital, charging off of losses, self-
insurance fund, Transamerica large line, A. O.
Stewart large line, Transamerica Corporation ex-
cessive line, National City Bank stock, Capital
Company and California Lands, Inc. contracts,
Merchants National Realty Company, real estate
loans and other minor matters.
"At this meeting, when pressed for a commitment as
to whether all criticisms had been made clear to
them, Mr. L. M. Giannini stated that, in regard
to the so-called violations of law, he understood
what the issues were but it was not clear as to
what the reasoning was behind the Comptroller's
position. In other words, he admitted that the
criticisms had been presented but he wanted to sit
down with the legal department and discuss the
validity of the legal position. Mr. Tietjens and
Mr. Sherbondy stated they would be glad to dis-
cuss these matters informally although they saw
nothing to be gained by such a debate. It was
later agreed between Mr. Tietjens and Mr. L. M.
Giannini that such a conference would be fruitless
and the idea was abandoned.
"At the Saturday meeting there was a review, point
by point, of the main items of criticism. The
Comptroller requested the bank's officials to
advise him as to their program on each item.
6
- 6 -
"Generally speaking, as to dividends, the repre-
sentatives of the bank were unwilling to make any
commitment other than a statement that the dividend
to be declared in March would be considered at that
time on the basis of the earnings of the bank. They
pointed out that they had already advised Mr. Wright
that dividends paid to Transamerica Corporation
constituted 42% of the total dividend and that this
42% of the total dividend would be impounded and
applied either to a reduction of the Transamerica
large line or to the purchase of additional common
stock of the bank, thus increasing the capital
structure by that amount. They further stated
that Transamerica Corporation would leave the
decision as to the disposal of these funds to the
Comptroller of the Currency. There is now in such
a fund something over $800,000 representing Trans-
america's share of the latest dividend disbursement.
The Messrs. Giannini stated that Transamerica would
carry forward this policy indefinitely, and Mr. A. P.
Giannini stated that he would guarantee it through
1940. They also stated that regardless of any sale
of stock of the bank now owned by Transamerica, the
Corporation would guarantee to place into the fund
at least the amount now received by the Corporation
in the form of dividends from the bank."
H.M.Jr:
These fellows just can't think straight. They can't
do a direct thing in & direct way. They have always
got to have B. subterfuge. Nothing ever strikes
them better than their method of setting up a fund
and 80 on. They just can't think the way a normal,
honest person would think. They have always got to
think of 8. subterfuge.
Delano:
"If the funds of Transamerica were used in this
manner for the purchase of the stock 1t would, in
the opinion of our staff, be tantamount to 8.
reduction of 42% in the dividend."
H.M.Jr:
Instead of reducing their dividend, they want to
pay the Transamerica and get it back instead of
simply saying, "We will reduce the dividend," which
is normally the business-like way of doing, but no,
they have got to do it in a phoney way.
Delano:
That is right.
7
- 7 -
"An to increase in capital: The Bank's representa-
tives stated they would be willing to increase
the common capital of the bank during 1940 in the
sum of 20 to 25 millions, and without recourse to
the RFC. As to details, they would increase it by
10 millions in April and 10 millions in August,
doing it serially.
"As to losses: The only losses which the bank's
officers are unwilling to write off in toto at
this time is the $9,300,000 on banking premises.
There was considerable discussion at this point
as to the presentation by Mr. Giannini of appraisals
on these properties made by the American Appraisal
Company. The Comptroller stated that these apprais-
als would be considered as new evidence and that
they should be submitted through the proper channels.
The Messrs. Giannini stated they would be willing
to consider an acceleration of depreciation on
banking premises in lieu of an immediate write off
of the entire amount. The figure of $150,000 per
month was mentioned by Mr. L. M. Giannini."
It should be explained that that is a pretty small
increase over the amount that is mentioned normally.
"In regard to the self-insurance fund: Mr. L. M.
Giannini took the position that he had no legal way
to recover the money paid to Transamerica General
as premiums for protection. The bank strongly
argues that this is a proper transaction, perfectly
legal, and that no right exists to require its
return.
"As to the Transamerica large line, the A. 0. Stewart
large line, Transamerica excessive line, and the
National City Bank stock: Mr. L. M. Giannini stated
that corrections on all these items would proceed in
about the same manner and to about the same propor-
tionate extent as has obtained during this year.
"Capital Company and California Lands, Inc. Contracts:
The officials of the bank re-committed themselves to
the 1938 program which was complete liquidation of
these contracts by 1942.
"As to real estate loans: The bank will continue to
make strenuous efforts to remove from its portfolio
the real estate loans which do not conform.
Regraded Unclassified
8
- 8 -
"At the conclusion of the discussion on Saturday,
Mr. A. P. Giannini stated that if there was any
prospect of getting together on this basis, which
had just been outlined by himself and Mr. L. M.
Giannini, they would cancel an appointment which
they had with five members of the Federal Reserve
Board to review this matter on Monday, November 20.
He further stated that 1f it was impossible for an
understanding to be reached here, they intended to
go forward with their plans to discuss the matter
with other agencies and to lay the issue publicly
before the country.
"In conclusion, and in answer to Mr. Ciannini's
question as to what was to be the procedure from
here, the Comptroller stated that he wished to
take under consideration the entire situation as
it now exists. He desired, however, to make it
emphatically clear that during these conversations
of the past three days that his office had not
entered into any arrangement or contract or under-
standing. He further stated that he did not want
to give anyone the impression that anything had
been accomplished in the way of an understanding,
but rather that the situation remained the same
as it had been up to the moment, and that if the
Bank's representatives had other people to see or
other plans bearing on this matter, it was for
them to determine what their next step should be."
I called up Mr. Giannini this morning and told him
that Mr. Crowley was out of town and that 1f he
required this whole week for discussion and for
consideration in the matter, if he would give me
a ring Tuesday or Wednesday of next week, we would
talk further on it.
H.M.Jr:
Did he see the Federal Reserve Board members?
Delano:
He is seeing them this afternoon, I understand.
H.M.Jr:
Oh, he is still in town?
Delano:
Yes.
H.M.Jr:
I see.
Delano:
I talked to Mr. Crowley and brought him up to date
Regraded Unclassified
9
- 9 -
and Leo said he would be back next Monday and he
will sit in with us on next Monday on what con-
sideration we are going to give this thing.
H.M.Jr:
How can the Federal Reserve Board see these people?
Foley:
I was going to ask Mr. Delano if he didn't think
that perhaps Mr. Giannini was talking about other
things with the Federal Reserve Board.
Delano:
I understand that he has seen five members of the
Federal Reserve Board, not the whole Board. In
other words, this is an informal discussion on his
part.
Foley:
Is he asking for an examination of the bank by the
Fed rather than the hearing as to the matters in
dispute between you and the bank?
Delano:
Well now, I don't know. Now, John McKee called me
up and wanted to have lunch with me today. I don't
see any reason why I shouldn't go to lunch with him
and I may find out then more about this.
H.M.Jr:
Now, Hanes started to tell me about Giannini, when
he started talking about me and Mrs. Roosevelt and
all that. Have you got that?
Delano:
You have that, haven't you, in that Thursday tran-
script?
Tietjens:
I don't have the Thursday transcript.
H.M.Jr:
Was that all taken down?
Delano:
Oh yes.
H.M.Jr:
Can somebody remember it - I understand from Hanes
that the stenographer was not present when he
started that - saying that I was the first one that
was responsible...
Delano:
This was after the meeting broke up. I came back
in to that and....
Foley:
There is no transcript of that, is there?
Regraded Unclassified
10
- 10 -
Delano:
There 1a no transcript of that.
Foley:
There is one thing I think you ought to know that
1s of interest. When Mr. Delano suggested that
the experts get together to discuss the different
positions, he (Mr. Giannini) said that he wanted
Mr. Foley to sit in. Mr. Delano said that was all
right with him, if Mr. Foley could spare the time.
I said I was too busy but I would designate Tietjens
to sit in for me but he said he wanted me to do it
because he had been told by the President to see me
about this matter. I told him I thought that was
very strange because I have never had any conversa-
tions with the President about him or the Bank or
any of us and he hadn't spoken to me or sent me any
messages. He said maybe it wasn't the President,
maybe it was Pa Watson. On second thought, it might
be Frank Murphy. "No," he said, "I know who it
was. It was Jimmy himself. Jimmy spoke to his
father and his father told Jimmy to tell me to see
you when I came to Washington. But I came to the
Comptroller's office. I didn't come to you because
I thought that was the proper way to proceed."
Delano:
We have got all that in the transcript.
H.M.Jr:
What about this stuff that Johnny was telling me
about, about myself and Mrs. Roosevelt, that every-
thing was fixed up from the time
Delano:
I would like to have Johnny confirm this, because
I was out of the room part of the time when Mr. Hanes
was talking. He came back to the meeting late, after
the meeting had broken up, and it was an informal
discussion. My understanding of that - I would rather
have Mr. Hanes tell you because he probably got all
of it and I don't think I got all of it. My under-
standing was that he said that
H.M.Jr:
This is L. M. Giannini?
Delano:
No, I think that is the two of them. They said that
Rogge had gone out to the Coast and gone all through
the various books and come back convinced that there
wasn't any criminal case on any of these matters and
that Rogge out there had told them that the President
had communicated to the Attorney General to the effect
that he would like to have this thing all cleared up
and that all that was necessary now was some face
Regraded Unclassified
11
- 11 -
saving on both sides and that it could be adjusted,
that Rogge had come back then and the Attorney
General had called in the Treasury officials and
the SEC for a general discussion of the matter and
the thing was moving along when the Secretary of
the Treasury intervened with the President and told
him that a lot of laws had been broken here and
that the matter was very bad and there shouldn't
be any cessation, and then the SEC came out with
this statement, that the matter was - I am speaking
purely out of memory. I would like to have Hanes
confirm that.
There 18 one other thing that came up in that con-
nection. Mr. Foley mentions the point about his
saying that he was told to see Foley and then saying
later that it was Jimmy that told him, not the
President. In that same interchange that took place
there informally, he said that Pa Watson had called
him up and told him to go see the Attorney General.
Now that was the same day, that was the Thursday
when we were holding this meeting and it was the
Thursday afternoon that they went down to see the
Attorney General and then the Attorney General on
Friday made that statement.
H.M.Jr:
Did you see them at all?
Foley:
I attended the first meeting on Thursday. I was there
about an hour.
H.M.Jr:
What are you going to do about this fellow McLean?
Delano:
We hadn't arrived at a determination, Mr. Secretary.
I feel quite as much upset about it as you do.
H.M.Jr:
Aside from anything else, I think the man ought to
be taken off that place and put somebody else on,
immediately.
Delano:
Yes.
H.M.Jr:
I would like to make that recommendation.
Delano:
I will do that.
H.M.Jr:
Johnny, he read the whole thing and I have asked
Delano just what this conversation was where they
Regraded Unclassified
12
- 12 -
brought me in and Mrs. Roosevelt in, and he said
he needed you to help him because he only had
part of it.
Hanes:
How it came up, I don't know, but he said he was
getting along pretty well, as I recall. He either
implied or said - I don't know which - that the
White House was about to fix him up and you went
over and told Mrs. Roosevelt that he was a crook
and also that you told Mrs. Roosevelt that he
violated every law in the statute books. That was
about as nearly his words as I can remember them.
Delano:
I supplemented, Johnny, to this extent, to say
that my understanding was that he told us the
story of Rogge going to the Coast
Hanes:
And Rogge had been fired because he didn't find
anything wrong.
Delano:
Out there, Rogge had said that the matter could be
fixed up, it was a question of face saving, and that
he had come back - the Attorney General had called
this meeting. - just check me, Johnny. At that time
he made the statement that that would have all moved
forward except for the intervention of the Secretary.
I didn't understand he had gone to Mrs. Roosevelt
Hanes:
I asked him again and he said Mrs. Roosevelt. Then
I took issue with it and we had a set-to there for
a while.
Delano:
Then he said - I remember specifically he said the
President, Mr. Secretary - - he said that you had gone
to the President. And then all bets were off, the
thing was back in the position where it was.
H.M.Jr:
My comment to Hanes was, when he told me this morning,
I was quite proud of myself. That was my comment.
To think first that I had enough influence around
town and second that if I was responsible for holding
it off until you could do your duty as you saw it -
and on that thing, in discussing that thing with Hanes
this morning, I want to make this suggestion which
Hanes and I are in agreement on if you are. I would
like to invite down here again, if Foley will agree,
Dean Landis and also Mr. Greenbaum, who you don't
know but these gentlemen do, and possibly the Dean
of the Law School at Wisconsin.
Regraded Unclassified
13
- 13 -
Foley:
Lloyd Garrison.
H.M.Jr:
And ask those three gentlemen to stay here long
enough physically with you and us, actually, the
way we did in another case here, until we make
up our minds what we are going to do.
Delano:
I would like that.
H.M.Jr:
Then when we have made up our minds what we are
going. to do, we would later hold the thing before
the President. We would say, "We have decided
this 1s what we should do." I have no program
today, but I would like to make up my mind next
week with the help of these three gentlemen what
kind of a program we should have, agree amongst
ourselves, and then lay it before the President
and take these people with us. I will say to
the President, "I want to lay this whole thing
before you after we have made up our minds, you
see, and hold everything until that point. Now,
what do you think of that?
Delano:
Something of that general nature was what I had
in mind. You notice I took great care to tell
these men that nothing was settled, there was no
agreement and there was no understanding. The
matter is under consideration.
H.M.Jr:
The sort of thing I had in mind - you mentioned
five or six things there, you see, and I wondered
which would be the best thing to go on, this so-
called ctober second or third letter, use that
8.8 a basis. Does that have all of these things?
Foley:
That 1s right.
H.M.Jr:
We don't need anything other than that?
Foley:
That is the most complete document we have.
H.M.Jr:
Then the thing would be to take that and use that
as a basis and let these gentlemen . - what did
Dean Landis use?
Foley:
He started from that. I sent that to him and he
started with that.
14
- 14 -
H.M.Jr:
Then the thing would be to have these other people
posted.
Delano:
Here is a suggestion. I think that July 31st letter,
too, 1s a very important document.
Foley:
That deals, of course, with the report of examiner
preceding the letter. The October second letter
goes all the way back over the period.
H.M.Jr:
What you tell me in your report - I not only haven't
got any criticism of that but I think you handled
the situation all right and I wanted to tell you
that I think this thing is very difficult only if
a man wants to be bothered by all this political
going-on and the only thing that bothers me in this
whole thing is that when Mr. Giannini blows up and
makes personal remarks it is terribly hard for me
to stay conditional, but I have up to this point and
I will continue because we have lots of other things
which are just as difficult and it doesn't bother
me a bit. Now, I think we ought to bring this thing
to a head. The President will be here next week and
next week would be a grand week to do it, clear the
atmosphere so that we can all come to an agreement.
This is a legal matter, more or less. If we need
these bankers, we can call them in, but it is more
or less legal, isn't it?
Foley:
Well, I think it is more factual than legal, Mr. Secre-
tary.
H.M.Jr:
Well....
Foley:
But....
Delano:
I would like to have the bankers if we can.
H.M.Jr:
Well, let's not have too many people so we trip over
them, you see. I think I know how these bankers
feel. Let's have this group in for & couple of days
and then we can always get word to these fellows to
come on in, you see, but I would like to get their
advice. I think I know how these bankers feel and
the position that Dean Landis has taken, I think, is
not the same as the bankers have taken.
Foley:
He is over to the left of them.
15
- 15 -
H.M.Jr:
I wouldn't use that word "left".
Foley:
Right. He is farther over than they are,
H.M.Jr:
Let me put it that he takes a more serious view-
point, and I don't know how B. man like Dean Gar-
rison would feel about it or how Mr. Greenbaum
would feel about it but I would like to get their
advice. Once we have made up our own minds, it
will be very easy to say, "Well, this 1s the program,
Mr. President. Inasmuch as there are 80 many people
who have their feet in this trough, I would like
you to look at it." Then of course if the legal
document has B. recommendation of procedure from
the Comptroller to me and from me to the President,
that would be the neatest way. What?
Hanes:
Yes.
H.M.Jr:
Get it right down in writing. Now, from what few
minutes you and I had, you feel happy over that,
don't you?
Hanes:
Yes.
H.M.Jr:
Johnny?
Hanes:
I think you are right in not bringing the bankers
in until you have got the lawyers thoroughly
straightened away.
Delano:
I was planning on sending all this transcript material
to these three bankers. Would you rather have that
held?
H.M.Jr:
Let's hold 1t a little bit.
Delano:
All right.
H.M.Jr:
I would like to hold it. This thing has gotten down
to a kind of - you want to excuse yourself, don't you,
Johnny?
Hanes:
I think I had better have five minutes with you before
I go.
H.M.Jr:
We will be through in two minutes.
16
- 16 -
Hanes:
All right.
H.M.Jr:
I am not making any comment, but I think it is a
compliment Mr. Giannini paid me. If I am the
fellow that has thought it up, I am quite proud.
I am both sarcastic and serious, because you and
I started on this thing and by God let's find
out whether I am Secretary of the Treasury, whether
you are the Comptroller of the Currency, or is
Mr. Giannini, and I would like to know between
now and Christmas.
Delano:
I am a little disturbed, Mr. Secretary, on these
other people that are in this thing, the Attorney
General and all.
H.M.Jr:
That doesn't bother me a bit. I want to reassure
you. I doesn't bother me a bit, because when it
is all washed up, my avenues are only one way and
that distance is from here to the White House and
there are no by-ways and the President hasn't seen
fit to say anything to me and he hasn't mentioned
it. If the President of the United States would
personally stop this question until they would
limit their dividends - 1t was his formula and I
agree with it and I won't be any party to paying
a whole dividend and then - I don t believe Mr.
Giannini and there is no reason for me to believe
him because he has never kept his word and the
longer I am in this thing the more I feel that there
is no reason for me to believe Mr. Giannini. Now,
your avenue is to me; my avenue is to the President.
I told Frank Murphy on the five-point program that
the one that had to do with the dividends of the
Bank of America - I told him very politely it was
none of his business. He said, "I agree, and will
you please tell Foley to tell it to Rogge."
Foley:
And I did.
H.M.Jr:
And that is the only conversation we have had. I
said on the four points, "It is SEC." I said on
the fifth - I don't know whether you were in the
room then or not....
Delano:
Yes, I was here.
H.M.Jr:
I told him it was none of his business and he said
he agreed.
Regraded Unclassified
17
- 17 -
All of this stuff naturally bothers you more
than it bothers me because it is 95 percent you
and 5 percent part of my business, but I want to
say again - it is not necessary - I have been
with Mr. Roosevelt seven years here and four years
in Albany and the time is yet to come when he calls
me off on anything of this kind. I am quite con-
fident that I have always had his back 8. hundred
percent. Otherwise, I couldn't stay here that long
because somebody would get me. To be B. little
philosophical, it is straightening this sort of
thing out which would give the working man and the
farmer, and so forth, confidence in the Administra-
tion. They know that the President of the United
States dictated to Marvin McIntyre and made him
sign it, "There 18 no back door to the White House."
That is the President's own dictation. These
fellows - we are just giving them enough rope and
they are going to hang themselves. It is a pretty
fight and the day is going to come that you are
going to be very proud of the part you have played
in it. You are going to be very proud of the day -
and you and I and the rest of us have just got to
keep our mouths shut and whether it 18 Mr. Giannini
or whether it is somebody else, I would always say
to let the Courts try it, we don't try it in the
newspapers. I dare Mr. Giannini to bring in any
reputable banker in the United States who will look
over his statement and say, "It is a well run bank."
I dare him to bring in any reputable banker, anyone
in the United States, and say that bank 1s well run.
And you will be proud of the day that you had some-
thing to do with this.
Delano:
Mr. Secretary, it has been a little difficult to sit
through these few days and not get caught in the
meshes of discussion and I want to be sure and check
with you that I have your approval on what we are
doing.
H.M.Jr:
It is all right. You are going to be proud of the
day - this is a thing you are going to tell your
grandchildren.
Regraded Unclassified
18
November 21, 1939
MEMORANDUM TO THE SECRETARY:
National Bank Examiner C. H. McLean was today relieved
from his present duty of examining the Bank of America in the
Twelfth District and transferred to the Third District with head-
quarters in Philadelphia, Pennsylvania. This action was deemed
necessary because of recent information reaching this office to
the effect that Mr. McLean is indebted to the Giannini interests
in the amount of some $10,000.
At the time of his assignment to examine the Bank of
America Mr. McLean was asked by District Chief Examiner Wright if
there was any reason why he could not properly examine the bank,
and he replied that to the best of his knowledge no such reason
existed. This office had no knowledge of his indebtedness to
the Giannini interests until so informed by Mr. L. M. Giannini
during the conferences just completed here.
Consideration is being given to the promulgation of
a rule by the Comptroller which would make impossible the
repetition of a like incident.
Preston Delano
19
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE November 21, 1939
TO
MR. HANES
FROM
MR. IREY
M
Marshall Diggs has not yet been interviewed by Comptroller
Delano. Mr. Wilson has been trying to contact Mr. Diggs and on
one occasion did talk with him, as will be noted from the attached
memorandum. In view of the fact that the Secretary was not going
to be able to see Mr. Diggs, the latter requested time to consider
what action he should take and promised to call later on the tele-
phone. He failed to do so, and the latest word is that he is out
of town and will not be back until to-morrow.
If Mr. Diggs does not agree to appear for the interview this
week, it is my purpose to suggest that we proceed # along different
lines to secure from him the statement which is desired.
20
TREASURY DEPARTMENT
WASHINGTON, D.C.
COORDINATOR
OFFICE OF THE CHIEF
U.S. SECRET SERVICE
1939 NOV 20 m " 29
November 20, 1939 TREASURY SERVICES AGENCY
Memorandum:
After several attempts to reach Marshall Diggs by
telephone, I reached him on November 13, 1939, and in-
formed him that the Secretary would be unable to comply
with his (Diggs') request but that he had directed that
Comptroller Delano and I conduct the interview. Mr. Diggs
requested time to consider what action he would take and
said he would call me on the telephone later in the day
to advise me or if he had to leave town that day he would
telephone me on his return on Wednesday or Thursday. Not
hearing further from him I phoned his office this morning
and was informed that he was out of town and would be back
about Wednesday of this week.
Regraded Unclassified
21
To:
The Secretary
November 25, AM 1939
From:
Mr. Hanes
Mr. Delano
At the conclusion of the Thursday, November 16th, meeting with
the representatives of the Bank of America in the office of the
Comptroller, and while the meeting was breaking up, there occurred
an informal and unrecorded conversation between the Messrs. Giannini,
Mr. Hanes and Mr. Delano. In the course of this conversation
Mr. A. P. Giannini stated that during Mr. Rogge's recent trip to the
Pacific Coast he had conferred with them (the Gianninis) stating that
the office of the Attorney General had found nothing criminal in the
Bank's relationship with either the S.E.C. or the office of the
Comptroller, and that with a little face saving on both sides the
entire matter could be settled. Mr. Giannini further stated that when
Mr. Rogge returned to Washington he made such a report and as a result
he was "fired" from both the S.E.C. case and from representing the
office of the Comptroller in the anticipated Section 30 case. It was
the further contention of Mr. A. P. Giannini that a settlement of the
entire matter had been blocked by the intervention of the Secretary
of the Treasury who had told Mrs. Roosevelt that Mr. Giannini was a
"crook", and also told the President that "the Gianninis had broken
all the laws on the statute books."
The Gianninie also took occasion to criticise the action of the
Secretary of the Treasury in inviting Messrs. Smith, Ottley and Spencer
to advise the Treasury in the Bank of America case. Mr. Hanes and
Mr. Delano took exception to the remarks of the Gianninis in reference
to the Secretary and Mr. Hanes pointedly informed them that he regarded
such statements as misrepresenting the attitude of the Secretary, as
highly improper, and further that he did not wish to listen to them.
At this point (when the conversation had lasted probably ten
minutes altogether) Mr. Giannini wes called to the telephone by
Mr. Delano's secretary to speak with Mr. McGuire of the Department of
Justice. Mr. Giannini was requested to come to see Mr. Murphy, the
Attorney General, at once. He put on his coat and left immediately with
the statement that General Watson of the White House had made the appoint-
ment for him.
John WHOMES
Regraded Unclassified
22
Excerpt from page 4 of WEEKLY REVIEW OF WASHINGTON
BANKTRENDS and BACKGROUNDS
November 26, 1939
11-24-39
(3) GIANNINI WASHINGTON CONFERENCES: (Ref. No's. 133,3; 132,2,b,c,
A.B. Nov. 20, 24)
(a) Temporarily Concluded: A. F. and L.M. Giannini met
with various Government officials, listened to detailed and techni-
cal suggestions, kept in contact with their offices in San Frencisco
and, just before Thanksgiving, left for New York. Further confer-
ences are forecast. Recent developments are B. shade friendlier
than earlier ones. A growing number of high officials are now
definitely anxious to see "difficulties" ironed out and, 1f possi-
ble, a reasonable degree of friendliness achieved. The "case"
has its melodramatic side, with its "villians," its "informers";
In fact, all the characters found in & Dumas novel. But so far,
no "heroes" have emerged. Very definitely the "case" involves
no brench banking angles as such, or is the principle of unit versus
branch banking apparent, except that the Gienninis represent a giant
system which, apparently, is too big for the Government to chastise
or do more then "threaten." (The fact that Secretary Wallace was
willing to feature the A.P. Giannini offer in the food stamp case,
seems indicative of B. shift of Washington sentiment. See Sec.l,e.
this issue).
(b) Efforts to Settle: Out of the cloud of rumors and
speculation it seems likely that Attorney General Murphy was told
that B. "high official" wanted to see the whole matter cleared up,
so held conferences. It is unlikely that the Fresldent directly
indicated such procedure. However, it is fairly certain that
"sources close" to him 60 hinted. Another story is that James Roose-
velt has been busy working for a settlement. This is not so unlikely
except that Jimmy's influence here is not very extensive. This Roose-
velt son is in contact with the Bank through motion picture financing.
(lis contract was written by former Comptroller 0'Connor.) The re-
cently published "Merry-go-Round" story is only partially true.
(c) Prospects: The whole case -- Gianninis versus Govern-
ment departments -- is likely to react against the agencies involved.
If unable to prove their charges and unable to act openly against any
of the Giannini banking corporations, it will be difficult, if not
impossible, to refute the assertion that the West Coast Financial
"Empire" 1s bigger than the Government. There are, of course, obvious
political aspects involving the possible loss of the electoral vote
of California.
Regraded Unclassified
23
November 27, 1939
For the Secretary
I am now informed that the loan in the Bank of America
N.T. & S.A. of San Francisco to George Eccles for $20,500,
secured by 1700 shares of First Securities Company stock
and some other unlisted stock was paid in November, 1936.
At the same time accommodation was apparently secured by
Mr. Eccles from the Irving Trust Company of New York City.
This loan was $23,000 as of last April.
wma
e
24
11-27-39
Sunday
Mrs. Klotz:
For your information, since I talked to you
about it, I am enclosing my memoranda of Friday and today
to the Under Secretary.
The Secretary has troubles and annoyances
enough without my adding to them. I hope you will not
think it necessary to bring this to his attention. I
must get along down here without causing worry to him
in any way. That is one reason for the second memorandum.
I thought it might keep Mr. Hanes from bothering the
Secretary with it all.
lym, Upm
Regraded Unclassified
25
November 26, 1039
To: Mr. Hanes
From: Mr. Upham
Since I wrote my impassioned memorandum to you
on ? iday, the Comptroller and I have discussed the
situation. We are agreed that either one of us could
be mistaken as to what I said to him and as to whether
I mentioned Mr. Sherbondy's name. I an sure I did not:
his recèllection is that I did. In any event, my
memorandum was not intended as & criticism of the
Comptroller. It was intended to make ckear that Mr.
Sherbondy did not make the statement to me, and to state
my belief that there could be no objection to either him
or anyone else making the statement to me.
For any possible disrespect to either you or the
Comptroller, I offer my sincere apologies.
tepm
Upm
Regraded Unclassified
26
Nevember n. 1939
MEXORANDUM TO: The Nonorable,
John V. Names,
Under Secretary of the Treasury.
Some remarks I made to the Comptreller this moraing
have come back to me (after having been retold by his to you,
by you to Mr. Foley and Mr. Sherbondy, and by then to me)
in such different form that I am impelled to give you direct-
17 and in writing what I said.
The Comptroller had asked me if I had read the complete
transcript of conversations with the Giamminis, and what I
thought about them -- specifically if be had made any "slips"
or statements against interest. He 10 generous enough to
encourage no to speak with the utmost frankness and I take
adventage of that attitude and do 10. Accordingly, I teld
him, among other things, that it seemed to me he ought, in
his own interest, and as & massro of self-protection, to
refuse to confer with the Giamninis alone, without some of
his staff and a stenographer. I had said the same thing before
and he was acquainted with my position.
In an "I-teld-you-sc" mood, I related to his that I
had been told Mr. Marie Giannimi had said in the conferences
is Mr. Folger's room that Mr. Names had expressed the view
Regraded Unclassified
26
Nevember 23, 1939
MEMORANDUM TO: The Honorable,
John V. Hanes,
Under Secretary of the Treasury.
Some remarks I made to the Comptroller this morning
have some back to as (after having been retold by his to you,
by you to Mr. Foley and Mr. Sherbondy, and by them to me)
in such different form that I as impelled to give you direct-
ly and in writing what I said.
The Comptroller had asked me if I had read the complete
transcript of conversations with the Gianninis, and what I
thought about them -- specifically if he had made any "slips"
or statements against interest. He is generous enough to
encourage ne to speak with the utmost frankness and I take
advantage of that attitude and do so. Accordingly, I told
him, among other things, that it seemed to as he ought, in
his own interest, and as a massro of self-protection, to
refuse to confer with the Giamninis alone, without some of
his staff and a stenographer. I had said the same thing before
and he was sequainted with my position.
In an "I-told-you-so" mood, I related to his that I
had been told Mr. Mario Giannini had said in the conferences
in Mr. Folger's room that Mr. Hanes had expressed the view
Regraded Unclassified
27
Mr. Rames - 2
to him in the Comptreller's effice on Thursday of last week
that of course the memorandum of December 15, 1938, repre-
sented an agreement - that while it night not be legally
binding, it is serally binding as a Gentleman's Agreement
"and we are all gentlemen". The point I made to the
Comptroller was that seeing them privately made it possible
for them to make such statements.
I did not tell the Comptroller who teld no this. I
mentioned no names. I did not mention Mr. Sherbondy, and as
a matter of fact he did not tell no. I believe my words
were "that's what the lawyers told not when I vas asked for
the source. I should not have said that. As a matter of
fast my recollection is that it was either Mr. Tietjens or
Mr. Wright. I said nothing whatever to the Comptroller about
the meeting of the Giamninis with you and him being the "real"
meeting, OF that Mr. Sherbondy or anybody clse had said there
vas a "secret" meeting.
I think it would have been perfectly proper if Mr. Sherbondy
had reported to m either this OF anything also that was said
in the conferences with Mr. Folger, just as I think it was
perfectly proper for whoever did tell me, to do N. I should
not like to feel that persons who attend conferences in our
offices are not free to discuss them fully with me.
It seems to me likewise that a penark of this character,
even though disbelieved, should be made known to the Comptroller,
to you, to Mr. Foley, and to the Secretary. Some of our staff
Regraded Unclassified
28
Mr. Hanes - 3
have reported to - certain statements made about me by the
Giamninis, which are not true; and I think it is their duty
to de so, and I thank them for it.
I think that the Secretary, the Comptreller, and I, and
perhaps others, are running some risk in connection with
our supervision of the Bank of America. But I have no
apology for reporting to the Comptroller, or to you, or to
the Secretary, or to any of you, that I have heard that such
a remark as the one here under discussion was made.
CBU/mrl
11/25/39.
Regraded Unclassified
29
Nevember 28, 1939
TO: Mr. W. P. Folger,
Chief National Bank Imminer
The transfer of Mr. c. H. MaLesm from the Twelfth
District to the Third District makes necessary the selection
of a successer whose imediate daty will be to finish the
present examination of the Bank of America. Great care
should be exercised that the examiner chosen should be free
from my commection e entenglements with the disminini
interests. It should be assertained beyond doubt that he
area no meney to any bank - state, national or private.
Furthermore, he should be experienced and have 8 long reserd
of meritarious service. I suggest that the Chief Exeminer
in the Twelfth District be made responsible that these 10-
into &
Presten Balame
30
RE BANK OF AMERICA
November 28, 1939.
10:15 a.m.
Present:
Mr. Delano
Mr. Upham
Mr. Gaston
Mr. Greenbaum
Mr. Hanes
Mr. Landis
Mr. Foley
Mr. Tietjens
Mr. Sherbondy
Mrs Klotz
H.M.Jr:
I think we will start and we won't wait for
Mr. Hanes. What I would like to do reasonably
soon, with the help of these people in the
room.
(Mr. Hanes enters the conference)
I was just starting to say, what we would like
to do with the help of the people in the room
here is to make up the Treasury's mind as to
what course we shall take in regard to the Bank
of America. I think the time has arrived that
we ought to fish or cut bait, one or the other.
I don't know how to start this morning, but if
it is agreeable to the Comptroller, can Foley
sort of state the case? Will you sort of act as
judge and jury? How will that be?
Landis:
That is all right.
H.M.Jr:
Will that be all right? Just where we are - take
plenty of time. Is that all right?
Hanes:
Yes, sir.
H.M.Jr:
Just as though you were - what is the situation,
where do we stand and what is the decision that
the Treasury has to decide on.
Foley:
There are several remedies that are open to the
Comptroller's office when he is confronted wi th
a. situation such as we find here. The principal
remedy is proceeding to remove the principal
malefactors, the directors and officers, before
the Federal Reserve Board.
31
- 2 -
Another proceeding 18 notice to the Bank that
the report of examination will be published
unless the items criticized by the Comptroller
are complied with.
Another proceeding is one before the FDIC for
the suspension of insurance, which means that
a receiver would have to be put in, which means
that the Bank would have to be closed as & going
institution.
Another proceeding is to revoke the charter of
the Bank as a national bank, which would also
mean closing the institution.
The two that seem most pertinent here, and the
ones that we ought to give consideration to,
are the Section 30 proceeding and the threat
to publish the report of examination of the Bank
unless the Comptroller is satisfied that the Bank
has complied with the items criticized. The
bankers tell us that the publication of the report
of examination is a very serious matter and may
result in EL run on the Bank and possible closing
of the Bank. It is my thought that if the measure
is as severe as the bankers tell us it 18
U.M.Jr:
May I interrupt you? When you say bankers, who
do you mean?
Foley:
Tom K. Smith, Charlie Spencer and John Ottley,
this informal banking group from the outside that
the Secretary has designated to advise him on
the banking side. That committee thinks that
Greenbaum:
When they made their recommendation to proceed
under Section 30, had they carefully considered
the other proceeding and made that to the ex-
clusion of the publication?
Foley:
When they first made up their minds that there
was B. basis here for a Section 30 proceeding,
I don't think that they excluded the possibility
of publication of the report. The last time they
were in here, about two weeks ago, I raised the
question of the publication of the report again
and asked them to give it serious consideration.
Regraded Unclassified
- 3 -
They reported in the Comptroller's office that
they had given it consideration and they thought
if we did that it might result in closing the
Bank and they thought that 8. less severe measure
WB.B the Section 30 proceeding; that we ought to
give consideration to that first and then the
publication of the report; then an action to
suspend the insurance and then an action to revoke
the charter. In that order, they thought the
measures ought to be taken up. It seems to me
that if the measure of publication of a report
of the examination is as severe as this banking
group thinks it 18, that it is even more useful
perhaps for our purpose, because if these fellows
have a large financial stake in this institution
and a voice in its management, perhaps they would
be willing to give up a voice in the management
to protect their financial stake and it might
never be necessary to publish the report of
examination. We might be able to get resignations
that way. That, it seems to me, ought to be con-
sidered in the light of some of the disadvantages
which are present in presentation of this matter
to the Federal Reserve Board.
There is a rather inadequate method provided by
the statute, The known attitude of the Federal
Reserve Board and the possible unsatisfactory
result that might be reached over there
H.M.Jr:
Well
Foley:
Now, would you like me to take up, Mr. Secretary,
item by item the matters that have been criticized.
H.M.Jr:
No, I am going to refer to Landis first, because
he has been at 1t B. little bit longer, but that
doesn't mean that you (Greenbaum) don'
Landis:
I wonder 1f the best method of getting at my
ideas on this - I would like to review a little
of the history of this entire transaction, as I
see it, with the Comptroller and the Treasury.
We start off with the situation where the Bank
was opened in 1933 under conditions which are
fairly doubtful as to whether it was B. wise thing
Regraded Unclassified
33
- 4 -
to open. Those conditions went on and no attempt
to remedy those conditions WEB taken until late
in 1938. Then you have, all of a sudden, a tele-
gram sent by the Comptroller of the Currency to
the Bank, telling them that they must not pay
their dividend. No particular charges, no partiou-
lar specification of why that shouldn't be done,
The Bank, nevertheless, goes ahead and acts, and
subsequent to that a conference is arranged between
members of the Treasury Department, Comptroller's
office, the Chairman of the FDIC, Leo Crowley, and
others.
Subsequent to that conference, which lasted for a
number of days, B. memorandum was submitted by
Mr. Giannini attempting to summarize the points,
criticisms that were made by the Government and
the suggestions that were made 8.8 to how to remedy
those matters. That memorandum neglects - and
there is nothing in the written record to advance
or mention, so far 8.5 I know - the basic condition
upon which that memorandum was prompted, and that
is that a certain amount of capital was to be
forthcoming from the RFC to remedy the existing
ratio between the capital of the Bank and its
holdings. That was not forthcoming because, A8
I understand 1t, the position of the Treasury was
that they would not authorize subscriptions by
the RFC in that connection unless they were given
a substantial change of management of the Bank
or control over the management of the Bank.
The Giannini memorandum, however, contended that
this agreement was modus operandi, which, 1f
followed out, would abolish the operation by
them. The Comptroller at the time denied that
was B. binding agreement upon the Comptroller and
denied that that would foreclose him with refer-
ence to any future action. Yet at the same time
no further action was taken by the Comptroller's
department except to sort of insist upon the
carrying out of that memorandum until July of
the next year. The Bank declared a dividend
again in March without any protest with reference -
being made by any authorities.
In July of 1939, the first, as I interpret it,
real warning is directed to the Bank, directing
Regraded Unclassified
34
- 5 -
it that it must cure certain matters or in the
event that they don't cure those matters, they
will be considered as an unsound bank. Now,
the Bank replies to that - and I don't want to
go into the merit of that reply at the present
time - but the Bank again declared another divi-
dend in September. Thereupon, the Comptroller
in October again sent them a much more strenuous
letter setting forth much more specifically the
unsound practices, violations of law that he
believed the Bank was indulging in and insisting
that they must be cured.
Now, I reviewed that record because I think that
record is important in a consideration of what
kind of action it would be advisable to take at
the present time. Up until 1938, the Treasury -
when I speak of the Treasury, that is including
the Comptroller's office - the Treasury 1a cer-
tainly to be criticized for the attitude that it
had taken toward the Bank in permitting it to go
ahead with practices which now it declares are
unsafe and unsound and are also violations of
law. Since that time, the Treasury may be criti-
cized - and I say criticized because I am trying
to view this record in the fashion that somebody
was called upon to pass about - the justification
of the Treasury at the present time taking certain
steps. The Treasury might be criticized in not
insisting firmly enough upon the position that it
took late in 1938, not insisting on that position
firmly enough until fully a year had passed, being
the letter of October 2, 1939.
I think those things are bad from the standpoint
of the Treasury now taking the position that you
must immediately cure certain things which have
been continued for a long period of time and as
to which the Bank has made some efforts, but in
no degree satisfying the demands of the Treasury
of 1938. That angle must be looked at, in my
judgment of this situation.
Now, enother angle has to be viewed and that 18
the seriousness of both the condi tion of the Bank
and the practices indulged in by the management.
I think there 1s no question but that the condition
of the Bank 1s quite a serious condition. With
35
- 6 -
criticized assets in excess of the adjusted
capital structure of the Bank and with no
genuine effort made to correct that situation
and the continuation of a rich dividend policy
despite that fact, this 18 something that sooner
or later will threaten very seriously the whole
situation. Furthermore, the kind of things of
which real complaint can be made today are the
practices indulged in by the Bank which reflect
upon the integrity of the management, and that,
I think, is a very serious matter that may re-
flect upon the integrity of that management, not
that they have been putting their hands in the
till, but that they have done things which decent
bankers do not do, not from mistaken judgment
but as I see this record, things that are so
bad that debar these men from assuming the
responsibilities of the management of that Bank.
I asked that question specifically of Messrs.
Ottley, Smith and Spencer and I think they were
agreed on that point, that the management of the
Bank was, briefly, B. bad management.
In this sense, the mere correction of certain con-
ditions in the Bank would give you no assurance
that the Bank thereafter would be managed according
to standards of banking ethics and banking integrity.
I think that, therefore, leaves the Treasury in
the position where it really is required to do two
things - one, to correct the situation of the Bank
and the other, to correct the situation of the
management in that Bank.
That makes me turn again to the problem of the
remedy, as suggested by Mr. Foley. Proceeding
under Section 30 is B. lengthy procedure. It is
one that will take great preparation and 1a per-
haps one of so doubtful outcome, 8.8 far as I can
gauge the - shall I say the sympathies - of the
Federal Reserve Board with reference to this
situation. Proceeding to release the report of
the examination is one that 1s completely in the
Treasury's hands. It can do that without reference
to any other authority. It may, naturally, run
into litigation along that line by some effort
to restrain the publication of the report of
examination.
Regraded Unclassified
36
- 7
Now, those are the only two practical choices
of action by the Treasury at the present time.
The question 1s, as I see 1t, whether or not
by employing either of those two methods this
situation could be corrected and perhaps corrected
without reference to anything more than B. threat
of action under either of these two terms. I
think it 1a important to realize that the proceed-
ing which would release the report of examination,
in the judgment of the bankers - and I refer to
Ottley, Smith and Spencer - would in all probability
precipitate a run on the Bank and perhaps destroy
the Bank, a result that I think is unwise. It
isn't B. result to be desired. If correction could
be brought about, that is the ideal end toward
which the Treasury itself could aid, Therefore,
much is to be said against publication of the
report of examination.
On the other hand, assuming that they are right
in their view that that report will destroy the
Bank, consideration ought to turn to what would
be the threat of action of that nature. Suppose
there was a threat made to publish that report,
conditioned upon correcting the situations set
forth in the Comptroller's letter and conditioned
particularly upon getting into the Bank adequate
capital, something in the nature of 20 million
dollars, which would bring their ratio of deposits
back to somewhere in the one to ten ratio instead
of the one to fifteen ratio that exists at the
present time. To get that capital into the Bank
would mean one of two methods, either selling
stock by the Bank, which would be an undesirable
method, because no stock should be sold in that
Bank without calling the public's attention to
the serious condition of some its bank entries -
the question of permitting a Bank to sell stock
is within the jurisdiction of the Comptroller
and therefore the Comptroller could exercise
his jurisdiction in such a fashion that that
avenue of capital would be cut off.
There would remain, then, only the source of
capital from the RFC and 1f you can compel the
Bank to go to that source, you could lay down
conditions upon the management which would correct
Regraded Unclassified
37
- 8 -
the management situation of the Bank at the same
time. The question is whether or not a threat
to
H.M.Jr:
May I interrupt you? In that proceeding, wouldn't
you include something about the dividend?
Landis:
The proceeding means correction of the conditions
detailed in the Comptroller's report, which would
be dividend. All these other matters that are set
forth, providing for losses or cutting down on
some of the large lines dealing with, I think,
the disgraceful situation were presented by the
depositors. Those would be part of that proceeding.
The correction of those things - my point is that
merely correction of those things isn't sufficient
because a management who indulges in tactics of
that nature is going to continue without the real
jurisdiction of the Comptroller being exercised,
I think. That is my judgment on this particular
situation.
Now, would a threat of disclosure, that is, the
thread of publication of the report of examination,
bring about a correction along that line? In other
words, could you force these people to resort to
the RFC and at the same time to bring about a
correction of the conditions within the Bank itself?
I don't know. If that could be done, it would seem
to me that that would be the ideal situation. If
the result of the threat of publishing the report
of examination would be to bring about that situa-
tion, it would seem to me to be the ideal answer
to this problem. Then a proceeding under Section 30
would follow before the Federal Reserve Board. But
when you come to consider that, you are speaking
in terms of whether or not this threat would bring
out a willingness on the part of the Bank to do
these other matters. A consideration of that, I
think, has to bear in mind this: Gianninis, them-
selves, have unquestionably extensive interests
in the Bank. I have never seen them and I have
never talked with them, but faced with the destruc-
tion of a great institution which they have built
up and which they certainly have some pride in
and which is linked with their name all through,
will they let go of the management of that Bank.
Regraded Unclassified
38
- 9 -
in order to save it and in order to save their
own reputation? That is one of the considerations
that is present.
The second thing is the consideration of the pressure
that can be brought upon the Transamerica Corporation.
The Transamerica Corporation owns 42 percent of the
stock of that Bank. It is perfectly patent that
dividend policy at the Bank 1s being pursued in
favor of the Transamerica Corporation, and Trans-
america Corporation at the present time is in a tough
situation, so that if the dividends of the Bank were
reduced, its own Bank would be more discredited than
it is being discredited at the present time due to
the operations of the Securities and Exchange Com-
mission. So undoubtodly, the President of the Trans-
america Corporation, Mr. Grant, would be a powerful
figure in determining just what answer the Bank
would make to a threat of that nature. Would he
think that in behalf of his own interests, the
corporation, dare he look ahead to the point where
the Treasury will make public that report of exam-
inations and bring about the consequences of that?
There is another unpredictable fact, but it is an
important one.
The one objection, apart from the danger of - shall
I say destroying the Bank - arising from this action
of making public the report of the examination of
the Bank, is that it is an administrative action
which is taken solely within one department and
there is no hearing. It is autocratic in character.
The law makes it that way. The fact that it is
autocratic in character is something that may subject
the Treasury to considerable criticism when a less
autocratic remedy is also at their hand, namely,
the action before the Federal Reserve. I think
that is an important element to consider. Not only
political but financial criticism may very well
attach to the Treasury for the employment of what
I call the autocratic method 8.8 against the quasi-
judicial method of proceeding under Section 30.
I advance these considerations because these are
the things that have been running around in my
mind in trying to determine what would be appro-
priate action for the Treasury to take. The more
I read this, the more I am convinced of this point,
39
- 10 -
that this situation would never be satisfactory
unless the total management of the Bank itself
could be changed. I am terribly convinced over
that point. A bank management that does the
things that this management did, it seems to me,
ought not to be permitted to remain in charge of
& tremendous institution of this nature, with
the tremendous responsibilities that do attach
to this particular bank management. I have
talked for a long time.
H.M.Jr:
Every word of what you say is of tremendous 1m-
portance and of great interest. You stated it
so clearly and carefully that it was very helpful
to me, and that 1s what I wanted you to do, is
to help me see it, removing all of the veils and
all the personalities and everything else that
have been injected and all the politics that have
been injected. There are some things I would like
to say. I think you gave a magnificent resume of
this picture.
Have you (Mr. Greenbaum) had time to go into this
thing?
Greenbaum: No, I haven't had time to make any real study
which would warrant me to make anything like an
analysis nor a definite recommendation, but if
you think it would be helpful, I can give you
certain - what I might call general impressions
that I have.
H.M.Jr:
I wish you would.
Greenbaum:
Supplementing what Dean Landis has just said, it
seems to me that it is perfectly clear that what
you are seeking to do cannot be accomplished by
any of the four methods that Mr. Foley has pointed
out. I do not mean by that that one or more of
those steps shouldn't be taken, but obviously
none of those so-called remedies can, by their
very nature, cure the situation, namely, as Dean
Landis has pointed out, you are concerned with
management primarily, I would say, supplying the
new capital there and with that the dividend
policies, and then I would say correction of
different abuses that have occurred.
40
- 11 -
If you analyze the steps that you can take
legally, first you have the proceeding under
Section 30. Suppose it was successful from
the standpoint of ending up with an order of
removal. It may be true that you have gone a
step in that direction, but you haven't decided
what the new management will be and - nor can you -
nor has the Treasury Department or the Comptroller
the power to do that.
The next step would be the publication, which
obviously cannot be B. constructive thing. It
may be quite destructive and the two other steps
indicated, that is, proceedings under the FDIC
to revoke the charter and to cancel the insurance,
obviously the funereal steps that you would take
in connection with this thing are those.
Therefore, all I wanted to emphasize was the con-
sideration of any of these four remedies. Ob-
viously, you must have clearly in mind that that
will not be a corrective. Whatever one or more
you decide on must be a means to an end. I feel
very strongly, from rather an inadequate study
of that, and stating with a good deal of diffi-
dence, that before taking any of those steps -
and I would favor Section 30 if any was to be
taken - that & final effort should be made of 8.
very firm and definite nature, if possible, out-
lining precisely what should be done within a
given stated time and with an indication that if
it is not done it would be followed by drastic
action. That is in line with what Dean Landis
is saying there.
I did have the feeling also that he indicated
that, looking at this from a public relations
aspect, the Treasury might be subject to some
criticism of condoning, at least part of that,
by not taking more drastic action previously in
spite of the - what to me was a shockingly de-
fiant attitude that the Bank has taken throughout.
In other words, I would like to see some other
step taken and a very firm and positive one in
the nature of an ultimatum as B. prelude to any
other action, not only from the standpoint of
the hope that that might correct the situation,
41
- 12 -
but also I think it would materially improve the
position of the Treasury in any subsequent action
which it might be forced to take.
B.M.Jr:
Well now, can I kind of review this thing a little
bit? Anybody interrupt me that wants to. Let's
go back on this situation. It doesn't help it
any, right or wrong, but I wasn't here in '33 when
the Bank was opened. As a matter of fact, I have
never read their records so I don't know the
exact circumstances under which it was opened,
although I have had verbal explanations. But the
Bank was opened, and then from '33 to '38 - September -
O'Connor was Comptroller and while there is no written
record, he does say that he did again and again ad-
monish - I think that was the word he used, the
exact word - these people to do something, but there
is no written record, although he says 80. I think
I am correct in that, am I not?
Delano:
Yes.
Foley:
No written record.
S.M.Jr:
But before that
Hanes:
No, the record is very bad.
H.M.Jr:
But O'Connor said he had admonished them again,
but there is no written record. Sometime - I don't
know exactly when it was - '37, or sometime like
that - the Chairman of FDIC brings it to my atten-
tion that he is worried about this thing because
it represents such a tremendous proportion of the
guaranteed deposits, so we looked into that and
about that time, if I am correct, on their own
and independently of us the SEC began to make an
investigation of Transamerica. I think I am right
on that, am I not?
Foley:
I think Dean Landis was in the SEC then.
Landis:
The SEC program was started, I think, in the summer
of 1936. It was started very casually' in this
fashion. About that time we were conducting a study
of investment trusts and although Transamerica 1s
technically not an investment trust but one of the
bank owning trusts, it seemed to me that it was
Regraded Unclassified
42
- 13 -
wise that we ought to know something about what
Transamerica was - the condition of Transamerica.
I had heard rumors to the effect that Transamerica
wasn't as sound as it should be. I didn't know
whether to put any credit in those rumors or not,
but I thought it would be a good idea to start an
investigation in order to see whether or not we
were sitting on top of the world or not. So 8.
crew of men was sent out there in 1936, the summer
of 1936, and started making an examination of the
reports. The results of that examination brought
B. series of other proceedings in their train over
the years.
Gaston:
I think you are about correct as to the time,
Mr. Secretary, because at the time this matter was
brought up to you by Leo Crowley, we got confiden-
tially & copy of the preliminary study made by the
SEC men.
Hanes:
That was in April of 1938 that they gave you that.
Gaston:
That confidential copy?
Hanes:
Well, I was at the SEC in December of 1937 and it
was in the spring of '38 that that report came
before the SEC and it was determined at that time
that we would send a confidential copy both to
the Secretary of the Treasury and to the FDIC,
I think. I am not sure about the FDIC, but I em
sure about the Secretary of the Treasury.
Landis:
I think I am wrong; it was the early summer of
1937.
Hanes:
It was presented to the SEC after I went there
and that was in the spring of 1938 that we sent
it over to the Secretary.
H.M.Jr:
Well, anyway, beginning with the change in the
office of the Comptroller of the Currency, we
have got to do everything, I think, through dis-
cussions and contacts to try to make the manage-
ment of the Bank of America conserve their assets
through reducing their dividend payments. There
also was a series of negotiations in regard to
taking additional capital.
43
- 14
Looking at this thing from the standpoint of being
autocratic, well certainly, we have been in con-
sultation with them now - active consultation - for
almost two years. They have had every opportunity
to comply with the requests of those agencies of
the Government that have to do with supervision of
the banks and I have yet to see any real effort on
their part to comply with the Government's request.
I think on December 15 they received a request signed
by the President and myself. They completely dis-
regarded that request. I think their attitude was
insolent, showed B. complete lack of cooperation.
They have certainly broken law after law and 8.8
far as Mr. Greenbaum's suggestion as to making one
more effort, I think we have passed that stage. I
think that letter of October 2, written and signed
by the Comptroller, went beyond 8. warning stage.
If you say to a fellow about three times, "I am
going to knock that chip off your shoulder, it
gets to a place where he has even less respect for
you than the Gianninis have for the Treasury. They
haven't any respect for us and there isn't any
reason why they should, because they have been
above any authority since '33 and they have felt
that they. can continue through various avenues to
flaunt the authority of the Government. They
have successfully done it to this stage and I
think when we wrote that letter of October 2 -
they have had two months to make an effort to com-
ply - a real effort to comply with the various items
listed in that letter and I have yet to see any
real effort on their part other than trying to
pull political wires. Now, that doesn't say that
Mr. Greenbaum can't have B. rebuttal and if he didn't,
I would be disappointed in him, but I personally
feel that we have passed the stage of additional
warning and have arrived at the point where we
ought to, with the help of you gentlemen, make up
our minds 88 to what we are going to do. I don't
know, and I haven't made up my mind, and I didn't
make up my mind until that last telephone call
that I had with Mr. Lendis that this question really
got down to 8. matter of whether we should or shouldn't
condone that management any longer. Since my tele-
phone call with him, I personally would feel that
the decision we have got to make 18, are we going
to condone that management or are we going to say,
44
- 15 -
what 15 the best way to get rid of it.
Everything in this room 1a highly confidential,
but I saw the President just before he left about
a week ago and he asked me what the program was
and I said, well, I hoped to make up our own minds,
put it into brief form and then come over there
with you gentlemen whom I have invited to accompany
us and ask him to give us all the time necessary
to let us present this thing to him, and he said
he would like to do that.
Now again on this matter of autocracy, the other
suggestion that I had WGS that if the Treasury and
the President were in agreement - and we wouldn't
act unless we were in agreement - then the thought
I had was of asking the Chairman of the Banking and
Currency Committee in the House and Senate to call
8 joint meeting and let us present this case to
them and then get their quasi-approval of the
actions.
Landis:
Who are they now?
H.M.Jr:
Wagner, Steagall and Barkley. That would overcome
that criticism. I would just lay the whole thing
before them and if necessary take days or weeks,
or whatever it 1s, to lay this thing before them.
I would say, "Now, gentlemen, we have arrived at
this stage and this is what we are recommending,
but before we do it we would like a quasi-approval."
Now, there is no use trying to put anything down
on paper, I suppose, until we know what we have
in mind. Following the avenue that you were talking
about, to tell them that we are going to give them -
how many days notice before we publish, what does
the law say?
Foley:
Ninety.
H.M.Jr:
Ninety days. Supposing we give them a ninety-day
notice of publication of this report and then
set down once more in that notice the things that
we would want them to do during those ninety days
and that would partially take care of what you
say, wouldn't it?
Regraded Unclassified
45
- 16 -
Greenbaum: That' is what I had in mind. I didn't mean to
hold up beyond, maybe, & very short length of
time sending that.
H.M.Jr:
As far AB I am concerned, it has gotten beyond
the discussion stage. Nobody that I have seen
yet can do it any way unless he does it the
Giannini way and this last suggestion - I mean
it is so typical - they will take certain pro-
portions of their dividends - no, take all the
dividends that they paid Transamerica and ear-
mark those and subject to
Foley:
Give them a write-off of indebtedness to the
Bank or to purchase preferred stock in the Bank.
H.M.Jr:
They can't do it the way any normal person would
do, say, "We will cut the dividends in half."
They just can't do it the normal way. But let
me say, we go ahead and give them a. ninety-day
letter, is that what you call it, or a letter
saying that in ninety days we will publish this
thing unless they do the following things, and
then list the things during the ninety days.
Now, at the end of ninety days if they don't want
to do it, then we publish. Then what I want to
ask the Comptroller, what is your best guess as
to what would happen? You say during ninety days -
you have got ninety days to do the following things.
If at the end of the ninety days you haven't done
them a hundred percent - and we are not going to
argue about them - we publish. Then what is your
best guess of what would happen?
Delano:
That is an awfully difficult question.
H.M.Jr:
What would you do, under your authority, at the
end of ninety days?
Delano:
The would publish the report in case they had not
met all the conditions. I thought you meant what
would be the result to the Bank and
H.M.Jr:
You mean you'd publish the report, and then what
happens to the management and the Bank? I mean,
I don't know my Comptroller's law. What do you,
Regraded Unclassified
46
- 17 -
8.5 Comptroller, do? You publish it on such and
such a day and then what do you do?
Delano:
After that, we do nothing, we just make it public.
That 1s the sanction, making it public.
H.M.Jr:
You do nothing about the management?
Delano:
There is no teeth in the sanction except the
publication of the report. The assumption of
the law is that the publication of the report
would be a sufficiently drastic remedy and would
provoke resignations or corrections. I think I
state that correctly, do I not?
Foley:
I think BO.
H.M.Jr:
Supposing Giannini doesn't resign and they continue,
then what?
Hanes:
You are just where you are now.
H.M.Jr:
I would like to look every jump ahead on that.
Delano:
We are exactly in the same position that we are
at the moment. We have simply informed the public
as to the condition of the Bank and that is what
the law contemplates.
Landis:
If the judgment of the bankers is correct, the
publication of the report would precipitate a
very serious run on the Bank.
Delano:
I wasn't dwelling on that, because I understood
the question was as to what we would do. I under-
stand when we have published the report we have
completed the sanction.
Landis:
Yes, but I was thinking if the financial statement
for a bank was published and, let's say that
really the casus belli for the publication of that
report would be the declaration of the dividend
in March, which would be just about the ninety-
day period, then if that did precipitate B. situation
in the Bank, other action would inevitably follow,
certainly a Section 30 proceeding would have to
be taken. Very likely Mr. Crowley would be pro-
ceeding under the FDIC.
Regraded Unclassified
47
- 18 -
Delano:
What you mean 1s, in case we publish the report
and the Gianninis do not resign and nothing
happens and the Bank doesn't have the run that
would destroy it and force insolvency, then we
would have to go forward with other proceedings.
That would be discretionary with us, wouldn't
it? I mean it is not something that follows
Foley:
It is all discretionary. You wouldn't have to
publish the report.
Gaston:
I think if you give formal notice that you are
going to publish the Bank report, you want to go
through with it. I don't think there should be
any conditions attached to it that nullify the
effect of the statement that you are going to
publish the report. I don't think a formal
announcement that you are going to publish the
report should contain anything but a mere state-
ment that because of their actions in the past
and the condition of the Bank, it becomes neces-
sary to publish the report, and let it go at that,
and I think you have got to go through with it.
So I think the logical thing to do if you want 8.
threat to bring them to terms - and I agree with
you that the mere writing to them and asking them
to come in is going to accomplish nothing - I
think some formal action is necessary. I should
think the formal action would be the formal notice
of proceedings before the Federal Reserve Board
of Governors. That is not an irrevocable thing.
What you are seeking ultimately is the removal
of this management from the Bank and that looks
directly toward the removal of the management of
the Bank.
In the meantime, the Bank comes in and says, "Now
what can we do to prevent this hearing which will
cause us & lot of trouble." of course, they can
avoid the hearing by resigning. The management
of the Bank can resign in advance of the hearing
and that will supersede the hearing. But the other
thing, I think, is
H.M.Jr:
I don't understand it. You say we should send out
a ninety-day letter?
Regraded Unclassified
48
- 19 -
Gaston:
I say we should not and I stated the reasons
why I don't think we should.
H.M.Jr:
What do you say we should do?
Gaston:
Start the proceedings before the Board of Govern-
ors, because that gives a chance for bargaining
which the others do not.
H.M.Jr:
What are they going to do in the bargaining?
Gaston:
After they get the formal notice of hearing before
the Board of Governors of the Federal Reserve
System - and I don't think we should give them
any invitation to bargain, either.
H.M.Jr:
That is another view. You believe in the Section
30?
Gaston:
Yes, and I think it would be a great mistake if
you chose to follow this matter of a notice that
you were going to publish the report to attach
that condition under which they could avoid the
publication of the report. I think there is a
serious legal question of whether that wouldn't
nullify the notice that you are going to publish
it. But at any rate, I think it would be a mis-
take because it hangs a string on it and says you
don't really mean it.
Foley:
Well, Herbert, when you give them notice that you
intend to publish the report, you tell them unless
you do the things you criticize, you will publish.
Gaston:
Is that the routine thing?
Foley:
That 1s the law, and you don't have to publish if
they do those things.
Gaston:
That is the law?
Foley:
That is the law.
H.M.Jr:
I don't agree with you, Gaston, at all.
Let me ask you this, Ed. You sent out 8. ninety-day
letter to a taxpayer 'for a hearing on the Board
of Tax Appeals. Now, Jim, why can't this be a
Regraded Unclassified
49
- 20 -
good example? During that ninety days, can't
the taxpayer come in and settle?
Foley:
Yes.
Landis:
There are plenty of examples.
H.M.Jr:
I am just thinking in terms of Treasury procedure.
You get a ninety-day tax letter and during that
time - that is the suggestion that you (Greenbaum)
and Knollenberg made, isn't it, that we send out
this thing - well, we get ready to try and if the
fellows come in and do the thing, we - in other
words, as I got the suggestion of the ninety-day
letter that you fellows made, our trouble is that
we try it and the fellow says, "Well, I don't owe
the Treasury any tax, I have got no bill from them."
Now, in this case - I am just thinking out loud -
why isn't it the same, give the fellow a ninety-
day letter like the taxpayers get and during those
ninety days the taxpayer can settle and then the
Board of Tax Appeals doesn't get it and we settle
all the time, don t we?
Gaston:
Mostly court cases.
H.M.Jr:
All right. Now, we send this fellow a ninety-day
letter we are going to publish unless during that
period he does the things you stipulate. If he
doesn't do it, then you go before the Federal
Reserve Board, which corresponds to the Board of
Tax Appeals. What is the matter with that?
Landis:
I don't see any objection to that. It seems to
me that the ninety-day letter would be leverage
for a trade, as I call it, and a. right trade. It
is e more powerful leverage than the leverage
under Section 30, because there they have a chance
to go through other sources and whereas with the
ninety-day letter you have got the entire situation
in hand.
H.M.Jr:
Let me ask another thing from the standpoint of
public reaction. It seems to me that our case
before the Federal Reserve Board is twice as good
if we have published their report than if we
Regraded Unclassified
50
- 21 -
go before them and present our evidence and
they object to each thing we do. Did you ever
think of that?
Landis:
I think there 13 a lot to that. I think my
ideas on the procedure have changed a little
since the last conversation I had the other
day with Hanes and Foley, and so on. There, I
was under the impression that the best method
of proceeding was to proceed immediately under
Section 30.
The way the thing lines up in my mind is this,
when you come out with that threat to publish,
whether or not you stipulate certain conditions,
somebody will be within your office in a few
days to talk, or if you stipulate certain con-
ditions in that notice, then again somebody will
be in within a few days to talk. Supposing the
thing isn't completely satisfactory, the arrange-
ment that is made. Then there is always the
opportunity to bring a little more pressure by
saying, for example, one of your conditions 18
8. change in the management of the Bank. If you
boys won't make that change, we have got to make
e change ourselves by proceeding under Section 30,
so you do have that additional leverage to bring
about - what I would call one of the main points
of your program, whereas if you go under Section
30 alone, your leverage 1s weak because you have
to rely upon the tedious proceeding before the
Federal Reserve Board.
The focal point is now, in the sense that only
those things that relate to the existing manage-
ment of the Bank don't necessarily carry with it
the requirement for B. correction of certain
practices that are going on, whereas your pro-
ceeding to bring about publication of the report
gives you, I think, much more coverage and then
if it is sticking, you can then proceed under
Section 30. There is no reason those two things
shouldn't go on simultaneously. That 1s my
conception of that procedure. It changed a little
after the last conversation, thinking just how to
use your own weapons.
Regraded Unclassified
51
- 22 -
Foley:
That is right.
Greenbaum:
I just want to call attention, Mr. Secretary -
in the discussion I think we have become a little
confused as to the procedure angle as we proceed
under Section 30, or if you would proceed on the
publication idea. As I understand the procedure -
Mr. Foley and the others can correct me - under
Section 30 there would be no notification what-
soever to the Bank. It would merely be - that 1s,
no notification from the Comptroller. The Comp-
troller would certify to the Federal Reserve and
then the Federal Reserve would, if it deemed
proper, send out a notice and set this for hearing
with the Bank.
Foley:
That is right.
Greenbaum:
In other words, it wouldn't follow automatically
if you proceed under Section 30 that the Bank
would immediately be notified or anything. All
you would do is report certification after warning.
H.M.Jr:
I am familiar with that.
Greenbaum:
Therefore, if you would proceed only under Section
30, you would not have the opportunity, as far as
notification goes, of giving a notification to the
Bank and then your analogy of the ninety-day notice
would be correct if you are proceeding on the pub-
lication idea.
H.M.Jr:
That is right. But here is the thing, I don't
know how much the analogy of the SEC is setting
forth and the Federal Reserve is setting forth,
but in the Transamerica case, in trying to prose-
cute that before the SEC, they are constantly in
the courts and they are held up all the time. I
don't know whether - let's say we had no ninety-day
letter, we just notified the Federal Reserve we
wanted to proceed. Could the Giannini lawyers tie
us up on every bit of evidence that we want to
proceed on, such as introducing the first thing
would be an examination of the Bank? I mean, could
they protest and constantly go to B. court to tie
us up?
Regraded Unclassified
52
- 23 -
Foley:
You can't stop 8. fellow from bringing an action,
Mr. Secretary. I should think that it is reason-
able to assume that wouldn't be done here, because
the procedure is fairly well set forth in the
statute and they would have little or no chance
to go into court and ask the court to restrain the
Comptroller from laying before the Federal Reserve
evidence as to the conduct of this Bank that the
statute authorizes him to do.
H.M.Jr:
But they could - various things, as before the SEC...
Foley:
I would assume they would attempt to hold up all
they could.
Gaston:
You could still resort to the ninety-day letter.
Foley:
They probably would attempt to enjoin you from
publishing the report, but on a hearing before
any judge, I should think they would have no chance
at all.
Landis:
Look at the danger of a proceeding to enjoin pub-
lishing a report. That 1s a terrible thing.
Foley:
It would show they were afraid to have it come out.
Landis:
That is a damning accusation.
Delano:
The thing I wanted to ask, Mr. Secretary, was if
the lawyers had any idea that any court would hold
that as a tenable ground. Suppose we went out and
sent this ninety-day letter and laid down condi-
tions and the Gianninis went into court and asked
for a restraining order against our publication of
this report because of capriciousness, et cetera.
What are the odds that the court would listen to
such a thing or would require argument or would
take it out of our hands for review before a court?
Foley:
On the possibility that you can't tell just what
judge this might come before, I would say that our
chances were 99 to 1.
Delano:
That is what I want. There is practically no
chance at all.
Regraded Unclassified
53
- 24 -
Foley:
There shouldn't be any chance that they should
be able to stop you from the courts.
H.M.Jr:
From publishing
Foley:
Either the report of examination or putting in
your evidence before the Federal Reserve Board.
H.M.Jr:
Well, let me ask you this, could you (Landis)
go back B. minute? Do you feel - after all, to
get back to the question of being arbitrary,
do you feel that we would be arbitrary or unfair
or unjust, whatever word you want to use, in
view of our letter of July, our letter of October,
and then 1f we came along with a notice of ninety
days and this thing, stipulating the things we
wanted them to do and which they had ninety days
to do? Do you feel that would be arbitrary or
autocratic in view of the history?
Landis:
I don't think 80, on this record. There has been
an ample opportunity given the Bank to comply with
the Comptroller's suggestion, and they have con-
sistently refused to do so, but I was just think-
ing - a very uninformed, popular feeling - a great
objection exists at the present time through our
country at large to certain administrative pro-
ceedings on the grounds that those proceedings
are so arranged with the administration as both
prosecutor and judge. That is the nature of the
proceeding, that you yourselves determine, without
reference to anybody else, whether or not to in-
flict this injury upon the man. I don't say those
things out of malice, but that is the kind of
attack that could be made on the Treasury and the
kind of attack that - I mean the publicity from
the other side - I would think about that.
H.M.Jr:
I am going to argue with you on this thing, be-
cause this question of Treasury authority or
authority invested in one person - the way I feel
1s this: What is the fundamental interest I have
in this? It is to insure depositors all over
America. Now, I want to make sure that this
Federal Deposit Insurance thing continues to work
and through the bad management from one Bank, that
all depositors, their deposits are in danger. Now,
Regraded Unclassified
54
- 25 -
we have given this man every kind of warning
and while I know the criticisms, after all,
if Congress did give this authority to adminis-
trative executives so that this democracy could
work in order that we would have the supervision
over people who want to abuse the rights of the
little fellow
Landis:
I don't disagree with you.
H.M.Jr:
I know, but I want you to do that, but I just
feel that that isn't even a matter that even
goes back to last July - well, let's date it
from the time that this man (Delano) took office.
Let's say that Mr. O'Connor didn't make strenuous
representations. The new management went in in
September, '38, didn't it?
Delano:
I think I took the oath of office in October.
H.M.Jr:
But Upham went in and - it is since September,
isn't it?
Delano:
That is right.
H.M:Jr:
So it 1s from '38 through '39 and for one year
it has been the one thing you have been trying
to do, to get these fellows. Certainly no one
can accuse Delano of not giving these fellows
every effort to meet you one third of the way.
Delano:
That is right.
H.M.Jr:
And for one year and two months now, one year and
three months, under the new management we have
been trying to make these fellows meet us. Now,
certainly even Mr. Landis criticizes the Treasury
for having been slow and not forceful enough,
and so forth and so on. He doesn't accuse us
of being too tough. The point I make, if we do
it this way, wouldn't the thing be to say in view
of our letter of such and such a date and such
and such warning, all of which matters they have
disregarded, we now want to give them one last
opportunity during the next ninety days to do
the following things and that we feel in the
interest of our depositors - lacking that, in
Regraded Unclassified
55
- 26 -
the interests of other depositors, 1t will be
necessary for us to publish the report so their
depositors will know the condition of their
Bank. That is the purpose of publishing, isn't
it? And then the depositors can decide whether
they want to keep their money there or not. I
am thinking out loud.
Landis:
The proceeding for publication of a report, as I
understand it, would seem to me that what the
Secretary 1s saying at the present time 1s B very
important thing to employ, at the present time,
to wit, there shall be an exhaustive findings of
fact by the Comptroller himself that the condi-
tions have not been complied with preceding the
issuance of the notice. Would you think that
should be done?
Greenbaum:
That is in line with the point that I was trying
to make B. few moments ago, which I didn't make
clear.
H.M.Jr:
That all takes in combining ample explanation,
but moving forward, but still gives the fellows
three months in which to do something.
Greenbaum: Well, I think, Mr. Secretary, what you said is
amply borne out by - a little while ago, Mr.
Secretary, you asked the Comptroller, as I under-
stood it, what would happen after the ninety days
and after the publication, that is, what would
happen in the sense of what the Comptroller's
office could do, and I think the answer is correct,
legally, 8.8 far as that section goes, nothing.
The proceeding is finished upon the publication.
Now, the point I am trying to make is this: I
think that the record, as far as I have seen it,
more than amply justifies your statement that
the Treasury couldn't be accused of being dic-
tatorial or autocratic in any way. Dean Landis
indicated criticiam in the other direction in
the early days. What I am getting at 1s this,
if you take any of these actions, you are not,
obviously, by their very nature, correcting the
condition you want to correct. What you are
doing is, you are taking the action because you
are properly sick and tired of this arrogant
Regraded Unclassified
56
- 27 -
defiance on their part and instead of writing
letters to them, giving them warning, you want
to take some drastic proper legal action to
tell them you are going to do something. The
point I am trying to make is, I think you can
do that without necessarily immediately taking
your choice of Section 30 or this ninety-day
thing.
To be legal for B. moment, if I may, it says
here that the Comptroller has the power and is
authorized to publish the report of this exam-
ination, which shall not begin until 120 days
after notification of the recommendations or
suggestions of the Comptroller have been com-
plied with to his satisfaction. Then follows
the ninety-day notice that such publicity shall
be given to the Bank of the affiliate. Now,
suppose 8. letter was given which would follow
Dean Landis' point, in which you would rehearse
and have what we lawyers call B. "self-serving
declaration" of what has happened, characterizing
any my you wish their arrogant defiance of this,
referring to your letter of October second, their
inadequate reply, et cetera, and say that the
following recommendations have not been complied
with and 1f they are not complied with within
120 days, you will take action 8.9 provided by
law. Now, you could then construe that, if you
wanted, to give yourself another ninety days
after that or you could construe it that you
could take an action under Section 30, or what-
not.
In other words, you would then, as I see it, for
the first time tell them to do something with a
definite time or else.
H.M.Jr:
Wait a minute. According to that statute, we
give them 120 days notice in order to do what
the Comptroller thinks they ought to do. Then
at the end of the 120 days, we either go on the
ninety-day or Section 30,
Greenbaum: Or both, or they may comply with something in
the meantime.
Regraded Unclassified
57
- 28 -
H.M.Jr:
Then decide on the ninety days or Section 30
or both.
Gaston:
Doesn't that 120 days refer to the recommendations
contained in the report itself which has already
been furnished to them?
Greenbaum: I think you could construe this easily to say that
you have given them 120 days notice now.
Foley:
120 days started to run with the July letter of
criticism based upon the last report of examina-
tion which was sent out, I think you don't have
to wait another 120 days.
Greenbaum: The point I made is, although you don't have to
wait 120 days, I think 120 days and more notice
has been given to them, which would entitle you
to proceed under this ninety-day section.
But the point I make 18, you don't want to proceed
under that if you can accomplish your purpose by
making them, by a real drastic action on your part,
come to the table and do what you want.
H.M.Jr:
Now, everything we are saying here 1s under the
strictest confidence, and in order to help me
you have got to know how I think and I can only
think while I go along. The reason I don't think
I want to do the 120 and 90 is, I think the Presi-
dent would have every reason to feel, "Well, good
heavens, this 1s the fifteenth of December. It
has been one year that Morgenthau has been fooling
around with this thing, because we called him up
on or about the fifteenth of December," and the
President says, "No, I won't do it that way, I
want to do it this way." So it is about twelve
months and he would probably say, "For heaven's
sake, Henry, get this off my lap, either say you
are going to do something or don't, but I am sick
and tired of all this thing going on," and it
isn't 120 days, as far as he is concerned, it is
twelve months.
Now, again, that is one argument why I don't want
to use 120 days. I think he would be perfectly
right.
Regraded Unclassified
58
- 29 -
The other thing, the ninety-day thing - this
may shock some of you people - I would like
the ninety days to expire while Congress 18
here, because then if we had need for addi-
tional authority, we can go to Congress and
ask them for it, but if you take your 120,
which 1s four months, and 90, which makes seven,
you might figure out when that would end. Con-
gress wouldn't be here.
Gaston:
Your 120 days have already run,
H.M.Jr:
I don't think that - shall I do it for you again,
Mr. Greenbaum.
Greenbaum:
I understand. You could partially take care of
that situation by including your ninety-day
notice in the 120, which should leave it open
to you, and you can say such action as may be
proper, including the publication of the state-
ment. In other words, you would then be ex-
tending the time merely 30 days, and you would
have the advantage that you would not be taking
just a formal definite threat to do the publica-
tion. I am impressed with what Mr. Tom Smith
and the other two advised us.
H.M.Jr:
How do you mean?
Greenbaum:
As Mr. Foley pointsout, that is a more drastic
step to take, The department has never taken
that before.
H.M.Jr:
We have never had a case like this before.
Greenbaum:
Also, I am impressed by the fact that Mr. Giannini
has great publicity powers and maybe the ninety-day -
he would beat you to it and follow up what Dean
Landis is saying with a campaign of persecution.
H.M.Jr:
He has done everything
Foley:
I think that is probably true, but....
H.M.Jr:
He has done everything he could.
Foley:
Unless we cleared the decks so we could publish
the report of examination, we can't answer him.
Regraded Unclassified
59
- 30 -
It is the only way we can open up.
H.M.Jr:
And we haven't. I haven't said anything to
anybody except in this room and we have been
over-patient. He has done everything he can.
He has shot every bolt on publicity and the
best answer is that there 1sn't 8 reputable
newspaper in the United States that will print
a word that he says about me, personally, and
they haven't, not one.
I don't want to crowd you fellows. I mean,
I think maybe we have got to 6. point where it
has helped me a lot and maybe you kind of like
to think about it and - I am asking advice,
but I am going to do my own thinking. Do you
want to talk B. little bit?
Delano:
I think so, Mr. Secretary. I think the main
question here is the availability and the
desirability of the sanctions. It is a ques-
tion of a ninety-day notice or a question of
a Section 30 citation. I am a little concerned
at the bankers' advice, our advisory bankers.
On this question of publication, they seem to
take a pretty strong standpoint against it and
I am a little concerned at what Mr. Crowley
might think about that aspect of the thing as
reflecting on the potentialities of destroying
the Bank. I would like to think about that one
a little bit and I would like to - this whole
thing has been very profitable to me. I have
some very interesting ideas now as a result of
this conference. I would like to think about
them a little bit and discuss it further.
H.M.Jr:
What I thought 1s - I don't know how time is,
but what I thought we would try to do is this.
These people, plus Dean Garrison - if we could
more or less get some kind of a tentative agree-
ment, at least two alternatives or something
down, then I thought I was going to ask these
people if they would come down and have the
same type of meeting with the three bankers and
then get the three lawyers and the three bankers
together and then let's see out of that if we
Regraded Unclassified
60
- 31 -
couldn't get an agreement, but there is no
use having the bankers, as I told you, until
these legal fellows are agreed amonst them-
selves.
Delano:
What I would like to do, Mr. Secretary....
H.M.Jr:
I wouldn't move without giving the bankers an
ample opportunity to sit in and talk.
Delano:
I would like to have their judgment.
H.M.Jr:
I would too.
Delano:
What I would like to do, personally, as the
chap sort of carrying the ball, I would like
to have the opportunity to discuss with these
legal gentlemen who are here at some length
this whole thing, and then I would like to have
an opportunity to call in our bankers and dis-
cuss the matter with them so that we can get
our minds thoroughly clarified and thoroughly
advised on all these things. I don't know how
long these gentlemen are going to be here or
what their plans are.
Greenbaum:
I was hoping to get back tonight, but I would
be available this afternoon.
Landis:
I have to go back tonight.
Delano:
This 1s the most important thing we have got.
As far as I am concerned, I will give any time
that is agreeable to these gentlemen.
Landis:
Might I ask one question, Mr. Secretary?
H.M.Jr:
Make it two.
Landis:
Well, I was wondering whether those people who
have dealt with Mr. Giannini in the preliminary
conversations, like Mr. Hanes and Mr. Delano,
what their judgment would be on whether or not
that fellow will give in or trade under the
conditions we have discussed.
Regraded Unclassified
61
- 32 -
Hanes:
That is a guess, Jim. My guess 1a that he will
never give in on anything.
Landis:
Is he carrying the Bank down with him?
Hanes:
He will go right down to his own desk and the
Bank's desk too. I don't believe he has any
great financial stake in this enterprise. It
1a Giannini's name that he 1s fighting for,
80 I don't believe he is going to surrender,
ever. He has taken the attitude now - he is
asking us to cite him before the Federal Reserve.
He wants us to cite him there. He isn't fighting
shy of this citation at all. He is asking us to
come on, cite him. He 1a asking for battle,
and I don't think the fellow is going to surrender.
I think we have a fight on our hands any way we
look at it.
You didn't say a thing in your summary that I
could disagree with any way in the world. I
think you are absolutely right on it and I am
thoroughly in accord with you on the fact that
the management of this Bank ought to be removed.
But I can see grave practical difficulties in
getting that accomplished. For instance, the
Secretary's suggestion that we send out a ninety-
day letter - I like that suggestion on this
publication. I don't think Giannini would ever
want that report published. The practical diffi-
culty in sending out B. ninety-day letter is that
you don't want to send out a ninety-day letter
which is going to put you back in this autocratic
position you were talking about & moment ago
and say you must accomplish these things within
ninety days and then lay down - set up ninety
conditions to be performed in the ninety days
which are impossible. You can't do that.
H.M.Jr:
That would be out.
Hanes:
Now, wait a minute. Here is what I am getting
at. The criticized assets of this thing, to a
certain extent at any rate, are real estate.
I haven't examined the criticized assets 80 I
am talking now from ignorance and not from my
knowledge of the particular thing, but I do
Regraded Unclassified
62
- 33 -
know there is terrible difficulty in liquidating
criticized assets by their very nature, but they
must be slow assets or they wouldn't be criticized
assets. They must be doubtful. Therefore, it
brings a very practical problem before you im-
mediately, what can this Bank do within ninety
days which would satisfy the Comptroller. Now,
if the bankers were correct - here again, I am
talking from ignorance and hearsay - if the
bankers are correct in what they said about this
thing, Giannini has made substantial steps toward
correction at any rate. I think they have enumer-
ated some fifteen or eighteen things which he has
done. I remember Spencer telling you at lunch
that day that in his opinion that would be con-
sidered substantial, the things that the Bank has
already done.
So the very practical problem that comes to my
mind immediately in this ninety-day letter, which
I like because I think that is the strongest threat
we have got, I don't think Giannini fears the
Section 30 citation one iota and I have good reason
to believe 1f I were in his place I shouldn't fear
it, but I would welcome it. I believe he is right
in not fearing a Section 30 citation for a variety
of reasons which it isn't necessary to go into,
but it does bring the most - the most pertinent
fact in this ninety-day situation now is what can
we lay down by way of conditions which, if pub-
lished, the public wouldn't say, "Well, the
Treasury gave him a chance to correct this situ-
ation but it was impossible to perform, and that
is the practical difficulty with your suggestion,
as I see it.
Landis:
You say Giannini rightly would fear a ninety-day
procedure. You say he is concerned over his
reputation. Now, assuming that the conditions
that were laid down are possible conditions to
be performed within ninety days and assuming
also that one of those conditions would be a
change in the management of that Bank, would he
say, "Well, I can preserve my reputation by taking
this way out; I can maintain that reputation: I
will still be A. P. Giannini, the guy who made
Regraded Unclassified
63
- 34 -
the Bank of America, and my son 1a - well, he
has been working too hard and he ought no
longer to be president of the Bank but he
would still be on the Board of Directors" -
something like that. And then would you talk
to the point as to whether or not Grant wouldn't
Giannin1? be the fellow who is exerting pressure on
Hanes:
To preserve the Transamerica situation?
Landis:
Yes,
Hanes:
Well, that is a hard question to answer. I
think the old boy is - I think he is in con-
trol of Transamerica. I think they are all
scared of him, Jim. I think that is the truth
about it. He is a fighter, you know, and I
think Giannini probably controls Transamerica
as well as the Bank of America, and yet I don't
think he does it by stock or ownership. It 1s
an odd situation, really.
Landis:
Grant is up under the guns now and you would
place him much more under the guns with a thing
of this nature, so I would think that Grant
would try and break away from the Giannini
stranglehold in order to save himself.
Hanes:
It might be. Giannini might make a deal to
surrender the management of this Bank in order
to save all of his associates out there. I
don't know. I don't think that point has ever
been discussed with Giannini.
Landis:
Just trying to get what guesses could be made
on that line.
Hanes:
My guess is he 1s determined to fight the thing
through. For that reason, I would like to have
all the ammunition on our side before we proceed.
He isn't going to surrender without taking his
case to the public.
H.M.Jr:
Well, as to the question of what Spencer said
down there, I think it was Spencer - one of them,
anyway, said that he felt for the first time
Regraded Unclassified
64
- 35 -
that Ciannini was making an effort. That is
the way I understood him to say it. But granted
that he 1s making an effort to correct some of
the things, that still doesn't change the situ-
ation in my mind, not the way I am thinking, as
to what Mr. Landis said, are these people fit
people to manage a billion dollar bank. Now,
this pressure has been on them a little over a
year and they have done & few things. They
haven't yet said that they will out the divi-
dends, What they do say 1s that hell will freeze
before they cut the dividends.
Now, as to what goes in the ninety-day letter,
I would only want to see the things go into the
ninety-day letter that anybody could say, "Well,
the Treasury, in view of the things which they
have asked heretofore, are unalterably opposed
to asking anything that isn't fair," and I would
only ask them to do the things in the ninety days
which were entirely reasonable for them to do.
That doesn't mean that you are still are not
asking them to do all the things in the October
second letter, but you could say, "Now, during
the ninety days, we feel that the things we asked
you to do, these are possible, and you can't
take the 120 million dollars worth of real estate
and liquidate it." They haven't been able to do
it since '33. One of the things they can say
18
Hanes:
After he has stopped his part of the bargain, are
you estopped from publishing the notice?
Landis:
I think you are privileged to do that. I think
it is an ultimatum.
Hanes:
After he has complied with what you said, then
are you estopped from publishing his statement?
Landis:
I should think the Treasury would have no desire
to publish the statement.
innuss
That would be my answer, certainly, that I would
think it would be bad faith if we did publish
it after he had done these things. It would be
bad faith If we published. Then we haven't
Regraded Unclassified
65
- 36 -
accomplished the object which I, for one - I
don't know how the rest of you would feel -
and Bank. that is to get A new management in this
Landis:
But that is one of the issues. One of the con-
ditions would be bringing new capital into the
Bank and the only way in which new capital can
be brought into that Bank would be through the
RFC, which in turn would have control over the
management.
Hanes:
Well now, there is one point there, Jim, with
the RFC coming in through the agency of a pre-
ferred stock agent, we will say, it would not
give the RFC controlling interest in the Bank
unless it was stipulated in the contract with
the RFC that they should name the Board of
Directors and the management of the Bank. It
wouldn't have physical control of the Bank, in
other words.
Landis:
That, as I understand it, is the method the RFC
operates under. It leaves them under conditions
Hanes:
When it makes the trade.
Delano:
It doesn't have to. It is discretionary.
Foley:
He does if the situation warrants it,
Delano:
That is right.
H.M.Jr:
But to answer the point that Hanes makes, my under-
standing of the point Hanes makes, 1f these con-
ditions were such that they could comply with them
in ninety days, is what he would do in regard to
management, and the answer that was given to
Mr. Hanes was that one of the conditions was that
they have got to take new stock and when they take
it from the RFC, the RFC, as part of the contract,
will stipulate that the RFC can say who the
directors will be or who the management will be.
Landis:
Exactly. I wouldn't be worried 80 much there
about the continuance of the two Gianninis still
on the Board of Directors, provided that you had
Regraded Unclassified
66
- 37 -
your own representatives on the Bank Board
who would insist upon your pursuing the
appropriate policies. You can still retain
them, see, give them show, save their face.
It is possible to do that, save their face
through this whole thing, and as against that
choice of being allowed to save their face
or a choice of a possible destruction of the
Bank which would mean a destruction also of
Giannini, I think there 18 little choice.
Hanes:
I agree. That clears my mind. If we have got
some way of getting that management of the Bank
out of there
H.M.Jr:
Now, having heard this, through this device -
I mean your position has always been, as I
understand, that you have grave doubts as to
our getting anywhere on Section 30.
Hanes:
Yes, sir, and I still have them.
H.M.Jr:
What about this thing we are talking about now?
Hanes:
You mean the....
H.M.Jr:
The ninety-day route.
Hanes:
I think' it is the strongest weapon you have got.
I don't think Section 30 1a going to help you
very much. I think this is a good one and ought
to be pursued.
H.M.Jr:
Do I understand that you have had time enough to
think about it, that you would want to recommend
that to me?
Hanes:
I would like to think about it. I haven't had
much time, but my curbstone judgment is, for
whatever it is worth, with the right to revise
as I go along and study the case, that that is
the proper way to proceed and I would be at
this moment in favor of recommending it.
H.M.Jr:
You started to ask - you said you wanted to ask
Hanes and somebody else, didn't you?
Regraded Unclassified
67
- 38 -
Landis:
Whoever knows the Gianninis and could formulate
some kind of a guess as to whether or not, in
the light of all the past transactions, in the
light of the characters of those people, and so
on, what they would do in the face of these
alternative things.
Delano:
I think you asked me 88 well as Mr. Hanes. I
was going to say, Mr. Secretary, that my judg-
ment follows closely that of Mr. Hanes in the
matter. I don't know that I could add anything
to his appraisal of these chaps.
A. P. Giannini is now along in his middle
seventies. He started his career as a seller
of fish in San Francisco and he has always fought
his way up. He has been a man with B. great,
booming voice and a personality - an aggressive
personality. Everything he has gotten, he has
gotten by fighting. He believes in that as a
weapon, 8. force majure, as they say. His son
follows him. A. P. still dominates his son.
The old gentleman is not well. These last con-
ferences, I was impressed by the fact that he
looked badly and his eyesight is very poor.
He is almost irrational at times. He is explo-
sive. His son, Mario, has been in the hospital,
I understand, of late and he 18 what they call
a bleeder. He has hemophilia and he gets a
little nosebleed and he has to go to the hos-
pital with it and he 1s not strong at all; he
1s B. weak fellow, physically.
Now, those two things, I think, might be of
importance in what Mr. Hanes is discussing,
the question of whether an ultimatum served
on them on a ninety-day basis might not give
them reason to save their face or to save the
Bank. They might crack under it. I don't
know. I think it is a question of judgment.
They have shown no weakness. They have been
very belligerent, but they are not well and that
is important. Both of them are not well.
Landis:
Yet, as I remember, Spencer's judgment was that
for the first time after your letter of October
2, they began to show - they were willing to do
things.
Regraded Unclassified
68
- 39 -
Delano:
They said that. These three bankers seemed
to think that this was the first indication
that we had here. They have done some things -
they reduced the long line of Transamerica from
76 down to about 64 million. They took out
some National City Bank stock out of there and
they did some things that gave these bankers
the impression that there was a drift toward
meeting our wishes, but they remained adament
on the dividend. They remained adamant on the
charging off of the losses listed by the Examiner.
It seems to me they remained adament on all of
the important things. They are willing to do
some of the minor ones, but I - but the things
that we want and which go to the heart of the
problem, there is no concession on those. There
is a belligerent attitude. Doesn't that conform,
Mr. Hanes, with your judgment?
Hanes:
Yes.
Delano:
That is my judgment and I think it follows very
closely Mr. Hanes' judgment.
H.M.Jr:
Well, I would like Mr. Upham, as well as being
decorative, I wonder whether he could be useful.
Do you want to say something? Would you sum up
the thing as you see it, both before this meeting
and what you have listened to today? Were you
finished?
Delano:
I am all through, yes.
Upham:
Well, I think I was in thorough agreement with
the first statement that Mr. Landis made. I
think that expresses my views just about as
completely as I can express them and as I sat
here I was hoping that that statement could be
made available to the three bankers. I have not
seen or heard anywhere as complete and adequate
a statement of the situation as I view it as
he gave here the very first thing. It seems to
me that the Gianninis, as the Comptroller says,
are not coming our way on any of the important
things.
H.M.Jr:
Who is that?
Regraded Unclassified
69
. 40 -
Uphams
The Gianninis are not coming our way on any
important things. They haven't made any pro-
position to us that we can accept and I am
inclined to think that our best bet is a threat
to publish the report. I see no difficulty in
stipulating things with which they can comply
in ninety days. That is, their Board of Directors
can declare themselves as to dividends; they can
declare themselves 88 to capital. So far as
management is concerned, I think it ought to
be our condition rather than the RFC's condi-
tion. If we want them out of the Bank, either
in ninety days or 120 days, we should stipulate
that they get out of it in some way, or the
Comptroller, when he approved the capital increase,
should make it his stipulation as to management
rather than putting it over into the RFC.
H.M.Jr:
I think that is an excellent point. May I ask
you this - this is a fair question. Has this
been your position recently or have you been
influenced by Mr. Landis, this position that you
are taking about the ninety days, what you just
said.
Upham:
I don't think I had ever completely made up my
mind on the ninety-day letter until today. I
have in conversations more or less favored that,
but not definitely and finally and positively.
I have been influenced by what I have heard to-
day, yes,
H.M.Jr:
Well now, let me do this thing this way. What
time, Ed, did you say that Dean Garrison would
be available?
Foley:
He said he would be in his office after 2:30,
and that would be 3:30, I take it, our time,
and he would be available to talk any time it
was convenient for you to call him after 3:30
our time.
H.M.Jr:
I will be available shortly after 4:00 o'clock.
Does that delay you fellows too much?
Landis:
No.
Regraded Unclassified
70
- 41 -
H.M.Jr:
Let's say, 80 that I won't be holding you -
why don't we say 4:30? What I thought we
could do at that time would be to call up
Dean Garrison on the phone, tell him that
we have a loud speaker, that the people are
here, and would you be willing, more or less,
to state the thing as we see it?
Landis:
I will do my best.
H.M.Jr:
We can tell him he 18 talking to an audience
here and then you would have 8. chance to -
as I understand, the Comptroller wants to
talk to you people. The thing that I was
looking forward to is a possibility of when
I could get you two gentlemen and Mr. Garrison
down here to give us, say, maybe two days, as
soon as possible. The first day we'd sort of
come to an agreement and during those two days
we would have the bankers here as well, and at
the end of those two days we would try to have
a piece of paper we could agree on and then
say we would take that over to the President.
When would you have two days available?
Landis:
I can always make two days available.
H.M.Jr:
I called up Harry White this morning and said,
"Harry, when can you comfortably be ready to
come down to the house?" He said, "8:15," and
I said, "When, uncomfortably," and he said,
"Well, any time you say."
Landis:
Well, I can make available two days always on
a Monday or Tuesday or a Friday and Saturday.
The two days that I am always tied up are
Wednesday and Thursday. Next week, Monday and
Tuesday, or two weeks from now?
H.M.Jr:
No, no. Monday and Tuesday would be the - I
mean you wouldn't want to make it Sunday and
Monday, would you?
Landis:
That is all right.
H.M.Jr:
How are you fixed, Eddie?
Regraded Unclassified
71
- 42 -
Greenbaum: Uncomfortably, I could do that.
Delano:
That is also true of the Comptroller. There
is a. dinner in New York for the president of
the A.B.A. and I am supposed to go to it on
Monday, Monday evening.
H.M.Jr:
You could make that and be back. You could
make it if we had that meeting Sunday and
Monday.
Delano:
I would like to go to that dinner, because it
18
H.M.Jr:
You could still go and make it Sunday and Monday.
Foley:
Would you want to fix it at a time when the
President was here?
H.M.Jr:
I am not sure he will be here Monday.
Foley:
That is what I had in mind.
H.M.Jr:
And I know he won't be here Sunday. What I am
trying to get at is, when we talk to Mr. Garrison
we say, "Well, we could make it Sunday - either
Sunday, Monday or Tuesday" - is that all right,
as far as you are concerned?
Landis:
As far as I am concerned.
H.M.Jr:
How about you, Eddie?
Greenbaum:
Monday and Tuesday would be better.
Foley:
For Dean Garrison, Mr. Secretary, I think Saturday
and Sunday are the only days that are free. If
he came down on a Monday, he would have to give
up classes. He teaches every day except Saturday
and Sunday.
B.M.Jr:
What I am just getting at is - we will have to
adjust it, 80 I would like to do this as fast
as possible so that - you could do this thing
just as fast as possible. Well now, both of
you want to think and go and see the Comptroller.
What would you two gentlemen like to do?
Regraded Unclassified
72
- 43 -
Landis:
At your service.
H.M.Jr:
Well, I will leave it to you. Maybe you feel
like you want to take a little walk or some-
thing.
Landis:
All right.
H.M.Jr:
Maybe right after lunch they could come and see
you.
Delano:
Yes, if it is agreeable to you.
H.M.Jr:
And we will have another meeting here at 4:30
for everybody.
73
November 28, 1939.
4:30 p.m.
BANK OF AMERICA
Present:
Mr. Hanes
Mr. Delano
Mr. Foley
Mr. Tietjens
Mr. Greenbaum
Mr. Crowley
Mr. Landis
Mr. Duffield
Mr. Sherbondy
Mr. Upham
Mr. Folger
Mrs. Klotz
Landis:
Before you get Dean Garrison on the phone, I would
like to give you a summary of my thoughts.
H.M.Jr:
He 1s calling at 4:35. Do you want me to say I
can't talk to him for ten minutes?
Landis:
Yes, if you would.
H.M.Jr:
I will do that.
Landis:
I was rather impressed by the opinion of the bankers
and of Mr. Hanes and by others, including Mr. Foley
this afternoon, that this notification of publication
of the report within ninety days looks like & pretty
definite and final action on the part of the
Comptroller. I had also had in mind, myself, that
that action, once taken, would mean publication of
the report unless certain conditions were met.
Therefore, the opportunity would be given to the
Bank of meeting those conditions. Thinking it over,
shifting their method of procedure slightly in order
to give the bank the opportunity to meet the
suggestions, providing it wants to make them, which
1s the final end of this procedure before publication
of their report - I assume you do not want to publish
the report if the suggestions of the Comptroller are
met - this type of procedure occurred to us, namely,
that one should start by any rule to show cause by
the bank as to why the report should not be published,
inasmuch as they have not met with the Comptroller's
suggestions within ninety days after those suggestion
have been made. That foroes the bank to come here and
talk to the Comptroller. That proceeding ought to
be a fairly formal proceeding, 80 as to give the -
Regraded Unclassified
74
- 2 -
make it clear that this is not mere conference stuff,
but this 1s actually contemplated. You have got to
meet the points of their program or else the decision
would be against them.
Now, that enables the molding of the entire proceeding
the ultimate action of the Comptroller, which would be
his determination to publish the report, and it seemed
to us that this thing, this molding of this procedure,
has certain virtues which the mere determination of
the Comptroller on an ex parte basis would not have.
I am afraid of this, because this idea has not been
germinated long enough. The more I think of it, the
more I think it has & certain value of procedure which
the other procedure does not possess.
H.M.Jr:
That would take up to February 1.
Landis:
Not necessarily. Suppose that you could get out a
rule to show cause by the 10th of December. You would
notify the Bank to appear for hearing 88 of, we will
say, January 2nd. By that time the new report of
the bank examiner would be here and would be available
and a better judgment would be arrived at in the light"
of that report than can be arrived at today without
that report. It would have the advantage of eliminatin
that concept of autocratic action which I talked to
you about this morning. This would be a decision made
after hearing, not a decision made prior to hearings.
It has certain advantages.
I drew up a memorandum, for which I should apologize,
both for the English and the typing, very hurriedly
sketching that form of procedure.
H.M.Jr:
May I read it out loud?
Landis:
Yes, indeed.
H.M.Jr:
"A suggested course of procedure in connection with
the publication of the report in order to avoid any
conception that the Comptroller's act in ordering
publication of the report would foreclose any efforts
by the Bank to meet the objections of the Comptroller
would be as follows:
'(1) According to the Statute the Comptroller must
find that the Bank shall not, within one hundred
twenty days after notification of his suggestions,
have complied with the same to his satisfaction.
Regraded Unclassified
75
- 3 -
"(2) This means that there muet be a finding of the
Comptroller based upon lack of compliance upon the
part of the Bank with his earlier suggestions.
"(3) There is little reasoning why that finding
should not be made after giving the Bank an opportunity
to show cause that the finding is not justifiable.
"(4) To bring this procedure into effect, a rule could
be issued upon the Bank to show cause while the
Comptroller should not act in accordance with the
provisions of the Statutes in regard to publication.
'(5) This would give the Bank an opportunity to show
how far it has gone in that regard and also to advance
a program to meet the Comptroller's suggestions.
(6) In order to keep the Bank toeing the line with
reference to any program suggested for the future,
this administrative proceeding need not be determined
but can simply be continued from time to time as may
be deemed necessary.
#(7) The advantage of this method of procedure would
be to give the Bank an opportunity to make a satis-
factory arrangement with the Comptroller prior to such
final action as the Comptroller may take, rather than
having the Comptroller take this action subject to
withdrawing that action in accordance with suggestions
that the Bank may make and which are agreeable to
the Comptroller.
(8) This procedure has the advantage of showing to
the banking world as a whole that ample opportunity
has been given to any particular bank to present its
case before the sanctions that the statute authorizes
the Comptroller to impose have been imposed.
"(9) This course does not mean that the procedure
would be public; in fact, its sole purpose is to
permit a series of private negotiations with the
Comptroller using the full leverage that the statute
entitles him to use in imposing his program upon
the Bank."
It is awfully hard, you see, to do this, it 18 an
entirely different proposal. If somebody had already
told me, I could cancel this call. I made this
appointment five hours ago to talk to him.
Regraded Unclassified
76
- 4
Landis:
I think you can talk to him perfectly clearly now.
H.M.Jr:
I wouldn't want to comment on this.
Landis:
I would like to get him to consider that idea, his
consideration of both -
H.M.Jr:
Tell him how we felt this morning and how we felt
this afternoon.
Landis:
Yes.
H.M.Jr:
Then I don't have to - I mean, it ie impossible for
me to assimilate this thing in ten minutes.
Landie:
Certainly.
H.M.Jr:
What do you think about that?
Greenbaum:
I agree with you. I think that would be better.
H.M.Jr:
Any comment I made on this would be useless.
Greenbaum:
Dean Landis and I likewise feel that it would be
unwise and unfair to expect Dean Garrison to give
his opinion, that the thought was merely to give
this to him for his consideration and later on to
get his comments.
H.M.Jr:
Well, if we could do it that way - but as I say, I
Just don't know.
Landis:
I would Just like to get your permission to talk
about that idea and put it in his mind.
H.M.Jr:
The alternative, either the ninety days immediately
or let it run B. hundred and twenty days and notify
them that we might within the one hundred and twenty
days do that.
Foley:
It is the same.
H.M.Jr:
As this?
Foley:
No, I think what you are saying, the ninety day thing
and the one hundred twenty day thing at this stage
are practically the same.
Greenbaum:
It is a modification, but they run concurrently.
Regraded Unclassified
77
- 5 -
H.M.Jr:
There are three things, the one hundred and twenty
day, the ninety day running concurrently, or have him
come in to see whether once more he would do it in
the light of what Mr. Hanes said that Mr. Giannini,
in his opinion, would do anything. It 1s not very
encouraging.
Hanes:
I didn't say he wouldn't agree to anything, but that
he wouldn't agree to it without fighting, or to
getting out of the Bank.
H.M.Jr:
Well, anyway, I am always willing, Mr. Landie, if you
would talk along these lines. How 18 that?
Landis:
That is all right.
H.M.Jr:
I will talk to him first and ask him if it is
agreeable that you talk on the line.
Eddie?
Greenbaum:
This would completely solve the problem that is
bothering me about one hundred twenty days. I think
this 18 8. very good machine to handle the situation.
It takes care of the points of view on it and that
18 some immediate action of a definite type. In my
opinion, we can take this action and have it
instituted without much effort.
H.M.Jr:
Your changing your examiner out there won't make
any difference?
Delano:
It may delay the report for a few days, but in 8.
very minor way. Mr. Folger, that 18 right, isn't it?
Folger:
That is right.
H.M.Jr:
When will the report be in?
Folger:
Some time after the latter part of the month of
December.
H.M.Jr:
(On phone) Hello
Insert telephone conversation ith Dean Garrison.
Regraded Unclassified
78
November 28, 1939.
4:46 P.M.
H.M.Jr:
Hello
0:
Dean Garrison.
0:
Go ahead.
H.M.Jr:
Hello.
Garrison:
Hello Mr. Secretary.
H.M.Jr:
How are you?
G:
Fine.
H.M.Jr:
Mr. Garrison, the reason I'm calling you at this
time is this. Dean Landis is here and the Comptroller
and Foley and Hanes and Mr. Crowley and some others.
Now, if it's agreeable to you, Dean Landis will talk
to you and tell you along the lines we've been think-
ing to-day, you see.
G:
Yes.
H.M.Jr:
Yes, and if you didn't mind I'd like - we have a
loud speaker here so we can all listen.
G:
Allright.
H.M.Jr:
Would that be agreeable to you?
G:
Sure.
H.M.Jr:
Well then with that introduction I'll let you talk
to Dean Landis. (Laughs) Thank you.
Dean
Landis:
Hello.
G:
Hello Jim.
L:
How are you Lloyd?
G:
Great.
L:
Ah - this morning we had a long conference in the
Secretary's office on this Bank of America thing.
G:
Yes.
Regraded Unclassified
79
- 2 -
L:
And, if you remember, there are several sanctions
that can be imposed by the government in that
connection.
G:
Yes.
L:
First, the Federal Reserve
sanction under
Section 30.
G:
Yes.
25
Secondly, the sanction of publishing the report
and three the FDI sanction and four the National
Bank sanction.
G:
Yes.
L:
Now here's the situation that has developed. It
seems perfectly plain that, unless some action is
taken by the government, none of the main suggested
changes in the practices of that bank will be
accomplished.
G:
Yes.
L:
Moreover, the whole record of the bank leads a
great many people to the conviction that the
futures of that bank will continue to be a proudy
and a dangerous one, so long as that management is
in control. The question then arose as to what
view the appropriate sanction should take and
Section 30 and the publication of the report was
suggested. Section 30 has the disadvantage that
the leverage in Section 30 is really not with the
Comptroller but with the Federal Reserve Board
G:
Yes.
L:
whereas the publication of the report has the
advantage that the leverage is with the Comptroller;
he determines whether that report is to be published
or not.
G:
Yes.
L:
And it was believed that if that leverage was
exercised that the ends might be accomplished; the
ends both of - ah - ah - bringing about the suggested
changes in the practices of that bank and also
Regraded Unclassified
80
8
indirectly bringing about a change in the management
of that bank might be accomplished. If, for example,
the Comptroller should determine that the report of
the examination of the bank should be published that
in itself is & very very serious thing. The - ah -
the - ah - unanimous opinion of the bankers is that
that might destroy the bank and I think Mr. Crowley
had even (laughs) is more sure of that than the
rest of us are; that that would precipitate a very
serious situation.
O:
Yes.
L:
But that may be the thing that would have to be
done in the event that the changes aren't made
in that bank. So if the Comptroller went ahead and
took that action there would still be 90 days dur-
ing which the bank could come in with suggestions,
etc., which would enable the Comptroller to say,
"well since these conditions have been complied
with, the report will not be published".
G:
Yes.
=
Now that I think was more or less the concurrence
of opinion this morning on that subject.
G:
Yes.
L1
Some doubt was expressed with reference to that
procedure being a wise procedure due to the fact
that, in the minds of some people, that looked like
irrevocable action on the part of the Comptroller
once he made the judgement that the report should be
published and, therefore, he was, more or less, bound
to go through with the - with the publication of the
report. In my opinion, that isn't so - he isn't
bound to go thru with it, even though he says that
he is going to publish that report.
Yes.
Lt
Also, if you notice that procedure, it's an ex-party
judgement that the Comptroller makes under those
circumstances.
C:
Yes.
25
You noticed that.
B:
Yes.
Regraded Unclassified
81
- 4 -
L:
Now the bargaining is done under that procedure
after the Comptroller has really rendered that
ultimate judgement of his, to wit, that the report
shall be published.
G:
Yes.
L:
It's done within the 90 day interval of grace that
follows that. Ah - the suggested procedure that
was suggested this afternoon is that instead of
starting off with this ex-party judgement on the
part of the Comptroller this kind of action should
be taken - a rule to show cause should be served
upon the bank as to why the Comptroller should not
reach that judgement that the report should be
published.
G:
Yes.
L:
That would be followed by a hearing before the
Comptroller, in which the question would be raised
as to whether or not the bank had met these suggestions
and also in which the question could be raised as to
how the bank would meet these suggestions. Now the
leverage there is always with the Comptroller.
G:
Yes.
L:
That gives it a - between a rather good opportunity
for getting the bank to accept the program and by
maintaining that proceeding in status quo is continu-
ing until you're assured that the bank will take that
program - - you hold the whip-hand over the bank.
G:
Yes.
L:
Ah - it has the advantage of also making the
Comptroller judgement not an ex-party one but
one that is given after opportunity and notice to
hear.
G:
Yes.
L:
That kind of an administrative thing could seem to
be done under the provisions of that statute.
G:
Yes.
Regraded Unclassified
82
- 5 -
L:
Well now that is the way the talk lies and has
gone. Ah - I think the points upon which argument
is to be exercised is whether or not a wise pro-
ceeding under these circumstances inasmuch as nothing
continuing is accomplished as a result of the con-
ferences to-day; the wise proceeding is to move
towards publication of the report because that is
the most serious threat that can be made to the bank.
G:
Yes.
L:
Or whether or not the lesser proceeding which would
bring about the removal of the existing management
of the bank, provided the Federal Reserve is con-
vinced that is 30 should be the method of procedure.
It certainly seems clear that is what is needed is
some very definite affirmative action on the part
of the government.
G:
Oh I quite agree to that.
L:
That - that definite action on the part of the
government should lead, not only to the change of
the banking practices but certainly, within a reasonable
period of time, towards a shift in the management of
the bank itself. How do you feel about that?
G:
Well I was - I just wanted to ask this question.
Now suppose if the worst comes to the worst and
you publish the report and he, of course, at the
same time publishes a typical blast in the sort
that he's been getting out, after he clouds the
issue, and so forth and accuses the government is
persecuting him in bad faith and not living up to
the December agreement and so forth and so on,
how much - how much actual effect do you think that
that is likely to have in producing a change of
management, so long as - so long as he controls
Trans-America?
L:
The consequences of publishing that report are
very hard to guage. They're necessarily very
speculative. Ah - it's effect upon the bank as
a whole and its effect upon the stockholders - ah -
is such that you can't be sure as to whether or
not the bank would survive the publication of
that report or not.
G:
Yes.
Regraded Unclassified
83
L:
But in the event a situation of that kind arises,
there is always the other alternative of still
proceeding under Section 30. In the light of
the publication of that report rather than pro-
ceeding prior to that publication when the whole
matter is secret, the thing is in
the
Federal Reserve Board, a certain amount of mis-
leading information 18 bound to get out with
reference to a proceeding of that nature, particularly
when one considers that a great source of that misin-
formation would be the Gianninis themselves.
G:
Yes. What would you think of - of coupling with
the order to show dause, an order to show cause
why you shouldn't bring a Section 30 proceeding also?
Lt
That was also suggested by Mr. Greenbaum this after-
noon; the possibility of clipping an order to show
cause along that line as well. Ah - I don't think
that any ultimate determination has been made on
that and - oh, anyway all these determinations are
very tentatively.
G:
Yes.
L:
But the objection to that will just sort of confuse
the proceeding. Ah - the suggested program itself
would, in two ways, have a chance to bring about a
change in management. One item of that suggested
program is the necessity for getting more capital
into the bank - something in the neighborhood of
twenty million dollars. About the only practical
way in which that capital can be brought into the
bank is thru a loan by the RFC.
G:
Yes.
L:
A loan by the RFC and then conditioned by the Treasury
in some way so that iw will have a very responsible
share in the management of the bank, that's one thing.
A certain suggested procedure that is involved is
a change in the dividend policy. Now the change in
the dividend policy, according to the suggestion
Mr. Foley made this afternoon, would very likely
precipitate a change in the management, though the
Gianninis might not be able to survive that change.
There are two ways in which one can move indirectly
towards the direct result under Section 30 and either
of those may be productive, but they would be both
Regraded Unclassified
84
- 7 -
involved in the proceeding with regard to the
publication of the report.
G:
Yes. I get from you the impression that its going
to be a little easier to arouse the other stock-
holders than to accept Federal control and I
L:
Well that again is a certain amount of guesswork but
I think one must remember that the stockholders,
not only of the bank, apart from tax work, but the
stockholders of Trans-America will be considerably
disturbed at any shift in the dividend policy of
that bank and they will come back and say, "What
the hell" and they'll say that to the Gianninis.
G:
And how much - has anybody got any idea of how
much stock interest in Trans-America the Gianninis
have?
L:
In Trans-America itself?
G:
Yes.
L:
Yes we know how much Giannini himself has - ah -
there is nobody in Trans-America that controls
as much as 10% of the stock of Trans-America.
G:
Yes.
L:
Ah - the individual stock holdings, as disclosed
to the SEC, show only about 4,000 shares to
A. P. Giannini (aside to someone: "Is that right?"
Ah - Not with a certain of interest.
L:
Gianninis financial state, according to all the
figures here, in the bank as such is not too
excessive but his psychological state in the
bank everything.
G:
Well Jim - I like this - I like this program and
I think it has this additional advantage. It
gives you a little more time without - at the same
time pulling your punches and I think that's - I
mean its a three months' proposition, whereas if
you were going to move under section 30 you
presumably would go right ahead. Now the added
Regraded Unclassified
85
- 8 -
value of time, it seems to me, the infinite -
it links in with the SEC delisting move and
as that thing begins to get closer to the -
closer to the time when its going to actually
pop and the publication of the statement gets
closer to the time, you're going to have a com-
bination of forces, it seems to me, working to
really bring the Gianninis to do something about
this.
L:
Yes.
G:
I think if you can synchronize those two things
that you've gained something, don't you?
L:
Oh I think you do. Ah - I think what you said
there a moment ago that this is a
action
without pulling your punches is an important thing.
G:
Yes.
L:
That is, the time for pulling punches is definitely
gone
G:
Yes - yes that's certain.
L:
now. And the - oh, the real danger on the
other side is to resort to some kind of remedy -
ah - which - ah - will be too excessive.
G:
Yes. And I suppose, so far as the possible danger
of a bank run goes, that the publication of the state-
ment would perhaps be no more serious than Section 30
proceedings.
L:
Oh no - no. I think there's general disagreement with
you on that point that the Section 30 proceeding would
not necessarily mean anything much - anything too
much along that line, whereas the publication of the
statement would carry all the dangers of a bank run
and a bank run there - that would affect not only
the Pacific Coast situation; it would affect
seriously other situations.
G:
I see. My only reason for saying that was that I
supposed that the bulk of his depositors were the
kind of people who wouldn't understand a statement
when it was put out anyway and who might be more
scared by hearing that the Gianninis were being
Regraded Unclassified
86
- 9 -
about to be fired. I don't know. I haven't any
judgement on that at all. I just put it as a
question.
L:
Well certainly the opinion of the bankers along
that line has been the much more drastic remedy
of those two much more drastic action is the
publication of the report.
G:
Yes. Well then I think - of course, you don't have
to make the ultimate absolute decision on that, do
you? I mean you give these fellows notice that why
shouldn't you do it and have a hearing and then,
as a result of the hearing, say nothing comes forth
from them you give them the three months' notice
and you can always - if you feel when the time comes
that some other course is then desirable you can
always do it.
L:
Yes you have, I think. You always have a string
on the situation until you actually publish the
report.
G:
Yes. The big
now is that you may not have
to use it at all.
L:
Yes.
G:
As far as the
L:
That's the hope.
G:
Yes, that's the hope. Well I think that makes
sense.
L:
Just a moment Lloyd.
(Pause while group confers)
L:
Lloyd.
G:
Yes.
L:
The orders are that you pick some day - Sunday,
Monday or Tuesday - preferably not Sunday but
not necessarily Sunday to be on deck in Washington.
G:
Yes. For how long, Jim?
Regraded Unclassified
87
- 10 -
L:
Certainly a day.
G:
Yes.
L:
Perhaps more - I mean just leave leeway in there.
G:
Yes. Well now if you want an answer on that at
this moment, I'll have to do a little studying
on that I'm afraid.
L:
Those three days are agreeable for both myself
and for Eddie Greenbaum.
G:
Yes, well could I - could I take a little bit
of time to study my calendar on that and see
what I could move around here.
L:
Yes and will you telegraph the Secretary as
soon as you can tonight.
G:
Yes, now how soon would he want that. Is it
important to have it the coming week or the week
after or
L:
Ah - the coming week.
G:
The coming week.
L:
That is
G:
He wanted me then?
L:
That is beginning next Monday.
G:
He wouldn't want to put it off any longer than
that.
L:
Ah - its the Monday - - it would be the Sunday a
week from yesterday.
G:
Yes - yes.
L:
A week from the day before yesterday.
G:
He wouldn't want to put it off beyond that time
L:
No - no.
G:
I gathered.
Regraded Unclassified
88
- 11 -
L:
No.
G:
Allright.
G:
Now, Jim, just one other thought. On the coupling
of the two things in the show cause order - the
Section 30 and the publication.
L:
Yes.
G:
It did seem to me to be worth one more thought
because supposing that the worst comes to the
worst and the Gianninis are adamant and they do
nothing and your - your time begins to run close
to the publication date - suppose for some
sufficient reason at that time - say three months
or so hence you can prove that you don't want to
run the risk of publishing this thing - you then,
it seems to me, with a little more punch, swing into
your Section 30 proceeding - then to a certain
publication and nothing else and then pull that -
pull back from that and swing into a new line of
attack, see what I mean?
L:
Yes - yes,
G:
You're holding both things over them; you're not
saying devinitely which one you're going to use.
I'd so word the show cause order as to indicate
that the publication is the main thing but you
were still considering the other, so that if you
should decide to use the other you wouldn't be
called upon if you found it too much, see what I
mean?
L:
Yes. Well I - I did that - the very definite thing
that was worth
.
I mean we hadn't a
chance to talk - ah - on that thing more than a few
minutes this afternoon
G:
Yes.
L:
and I think its a very definite thing that's
worthwhile thinking about, as to whether the show
cause order mightn't embrace also the question of
a reference from the Comptroller to the Federal
Reserve pursuant to Section 30.
G:
Yes. Well is there anything more, Jim, now?
Regraded Unclassified
89
- 12 -
L:
Just a moment. Just a moment, the Secretary wants
to talk to you.
H.M.Jr:
Hello.
G:
Hello.
H.M.Jr:
I'm sorry I couldn't meet with you Sunday.
G:
Well I'm glad you didn't fit your time to it.
H.M.Jr:
But I appreciate all the time and trouble you gentlemen
are taking and I am anxious at least to make up our mind
which way we're going to go
G:
Yes.
H.M.Jr:
....and - because I didn't - the President asked me
how soon we'd have - would make up our mind and I
told him I thought by the time he got back. Well I'm
hoping I'd be somewhere early next week because it
will be a year - well its over a year now that we've
been trying to get somewhere and if it isn't too incon-
venient and you could come down and then this time we'll
try to have the three bankers here also who are advising
us.
G:
Yes.
H.M.Jr:
And - so as soon as you could look at your calendar
and would send me a telegram I'd appreciate it very
much.
G:
Yes I'll do that within an hour, Mr. Secretary.
H.M.Jr:
Thank you so much.
G:
Allright.
H.M.Jr:
Goodnight.
G:
Goodbye.
Regraded Unclassified
90
November 28, 1939.
5:25 P.M.
H.M.Jr: Hello
Dean
Garrison: Mr. Secretary.
H.M.Jr: Yes Dean.
G:
Would Saturday of this week be possible?
H.M.Jr:
Surely - now wait a minute - wait a minute - we've
got to ask these other lawyers.
G:
Allright.
H.M.Jr:
Just a minute. (Brief pause while Secretary
consults with those in his office)
H.M.Jr:
Ah - the people here will adjust themselves.
Does that mean, in a pinch, you'd stay over Sunday?
G:
Yes.
H.M.Jr:
It does?
G:
Yes it does.
H.M.Jr:
Well then let me ask - (Aside to group: I think we
ought to take him)
H.M.Jr:
I mean yes.
G:
Well if Sunday would be better than Saturday that
would be allright with me, provided that I could
leave by 6 o'clock Sunday afternoon.
H.M.Jr:
I'd like - I'll take it the way we first put it -
that is Saturday was an option on Sunday.
G:
(Laughs) Allright.
H.M.Jr:
I can't take Sunday with an option on Saturday.
(Laughs)
G:
(Laughs) Allright.
Regraded Unclassified
91
- 2 -
H.M.Jr: So if you can roll in here about - ah - Saturday
morning why - ah - Mr. Landis and Mr. Greenbaum
will be here and we'll have those three bankers
here too.
G:
Allright, fine. What - what time would you want to
H.M.Jr: Well the Comptroller's office is usually open at
nine
G:
Allright.
H.M.Jr:
.....and I'll try to get down at the same time.
G:
Allright.
H.M.Jr:
Or you can meet in Mr. Foley's office at 9 o'clock.
G:
Allright, I'll be there.
H.M.Jr:
(Laughs) And they're all laughing because Foley's
reputation is good at staying late but not in coming
early.
G:
(Laughs)
H.M.Jr: Well Foley will make an effort and be here at 9 o'clock
Saturday.
G:
Allright.
H.M.Jr:
Thank you. Ever so much obliged.
G:
Goodbye.
Regraded Unclassified
92
- 6 -
Landis:
I think it was interesting that he got this idea
that this thing was hitting hard without pulling
punches. I think that is a very important idea to
get across. The time for pulling punches 18 gone.
You want to give them a perfectly clear under-
standing that unless they do meet the suggestions
of the Comptroller, drastic action will take place.
That 10 the idea you expressed.
Crowley:
Yes, sir.
H.M.Jr:
I don't get that.
Greenbaum:
I would like to supplement that in this way, that
following up the statements that you were making
this morning, Mr. Secretary, of the necessity of
doing something that would take this out of the
talking stage and be definite and drastic and that
that was the point that you were making and we
would say to add with that the machine whereby the
Treasury would not be taking either an irrevocable
action or an action that might be subject to that
construction. This, I think, has the advantage
of both of those. In the first place, as far as
delay on this thing goes, I want to mention this,
that this action has been contemplated as 8. result
of the July letter. You couldn't have acted before
one hundred twenty days. The one hundred twenty
days will be up on November 30. Therefore, if
action follows promptly after that and they are
cited and told to come in and show cause why this
drastic action should not be taken, you are acting
promptly in that regard.
Now, this would be something very real in the sense
that it would not - that it would take it completely
out of the conversational stage. As we visualize
it, this would be a notice served on them which
could be served very promptly after the decision
is made and it would fall upon them to appear at
a formal hearing before the Comptroller, which
would be conducted with stenographic minutes
and counsel acting for the department there and
they would have the opportunity to present what
they wanted. It seems to me you are getting definite
action. Then it gives the opportunity to work out
something during the hearings or pending the decision
after the hearings as to whether the ninety day notice
should not be given.
Regraded Unclassified
93
- 7
H.M.Jr:
Do you count the one hundred twenty days from the
beginning of July?
Foley:
The thirty-first of July was the date of the letter
of criticism that was based upon the last completed
report.
H.M.Jr:
Supposing he is ahead with these formal hearings,
the ninety day letter on the publication would only
go out after the hearings were concluded.
Foley:
After the decision of the Comptroller was handed
down, based upon the evidence at the hearing. That
is the judgment.
Greenbaum:
But the mere fact of sending this notice and having
the formal hearing in iteelf, in my opinion, 1e a.
very serious action and shows that the Comptroller
means business on this.
H.M.Jr:
What has he been meaning all the time, what does his
July letter and his October letter mean? What do
all these other talks mean?
Greenbaum:
I think this would bring it out of that category.
H.M.Jr:
Not if past experience means anything. We haven't
had formal hearings, but they have had meetings
going on here continuously ever since September, '38.
It has just been a succession of meetings and 80
forth and BO on and I Just think this 16 going to
be very difficult for the Comptroller. I don't
know how you would feel about it.
Delano:
The Comptroller feels that way.
H.M.Jr:
And it would be kind of self torture. I am willing
to bet anybody that when you are through you haven it
arrived anywhere, any more than you haveduring the
year that you had been in office on this thing. I
mean, in getting them to make any real concessions.
Delano:
I think the point that Dean Landis 18 making
particularly in regard to this holding of an adminis-
trative hearing 1s that he regards that as a
strengthening of the Comptroller's position for
wanting to publish the report.
Landis:
I think it strengthens his position encrmously.
I think if action is taken without any hearing of
Regraded Unclassified
94
- 8 -
that nature, you can be subject to oriticism on the
ground which 18 being advanced by these people at the
present time, that they are making the changes.
Now, if you are going to make 8. definite finding that
they are not making those changes -
Delano:
Of course, we have just gone through three days.
Landis:
That is a conference.
Delano:
There is apparently in these gentlemen's minds a
distinction between these last three days and the
formal hearing in which we would invite them in on
a basie of showing cause and having a counsel. I
imagine we would get about the same result out of
that, don't you, that we have got out of this other
one, or do you think the fact that it is formal
and it 18 a citation to show cause would earry enough
impressiveness with it to change the situation?
Landis:
Have you ever said to them, "Now look here, we are
going to publish your report of examination"?
Delano:
No, we haven't said that.
Landie:
That is what you were saying and you were saying
that for the first time. "We are going to publish
that and what are you going to do about it." That
1s an entirely different story than any story that
has yet been given them.
Delano:
We have said everything but that, practically. We
haven't put it in those words. We have threatened
them with Section 30 and all the sanctions in the
book.
Foley:
They are not afraid of the Section 30 proceeding.
H.M.Jr:
They are asking for it.
Foley:
But this has the advantage of exhausting the possibiliti
that we have within the Treasury, without going to an
outside agency and at the same time it holds over them
a much more drastic result than would be accomplished
by an order from the Federal Reserve Board.
Delano:
I am thoroughly in agreement that this is the most
drastic thing we can do. It 1s a question in my mind
of how we should do it, and this morning we discussed
the question of issuing it in the form of an ultimatim
Regraded Unclassified
95
- 9 -
saying that if they didn't do certain things, then
we would publish the report. Possibly because of
past experience and possibly because of unwillingness
to go through another grilling down there, I kind of
liked that idea. I would rather do it that way; I
would like to set out something on the line and say,
"Go ahead and do 1t," but I do yield to Dean Landis
if he thinks that it 1s bad to do that right now
without further action and without further hearings.
If he thinks that 1a judicious, that 1a something,
I think, for the lawyers to decide.
H.M.Jr:
I would yield, too. I am not going to ask these
fellows to come down and advise me and then not
take their advice, but it is an entirely new thought
and after speaking on this and arguing a little bit
about it, if they still feel - they felt one way
this morning and they feel another way this afternoon
and they may have another thought tomorrow. I am
not going to hurry them. We have been at this
seven years and if we take seven days, why that
isn't very long.
Upham:
Mr. Secretary, may I interrupt?
H.M.Jr:
Go ahead.
Upham:
There 18 one thing in favor of Dean Landis' proposal,
and I think only one, but that 18 a fairly important
one. He says that if we do not have this hearing
and we say that we will publish the report, they
may enjoin the Comptroller from publishing the
report and one reason why 8 court would grant that
injunction 1s that there was no hearing. Now, that
seems to me important.
H.M.Jr:
Now, wait a minute. You are handing down some edicts.
Is there any basis of common law for what he is saying?
Landis:
What I said was this -
Upham:
Maybe I have got it wrong.
H.M.Jr:
It sounds like the Supreme Court, if he is right.
Landis:
I was thinking over the possibilities of what the
Bank could do -
H.M.Jr:
Are you a lawyer?
96
- 10 -
Crowley:
No.
H.M.Jr:
Just see those that are, five. Everybody else is
a lawyer.
Gaston:
You said you were, that you had six years in law
school.
Landie:
What I said was this: I was thinking over the
possibilities of what the Bank might do in that
connection. Supposing it sought to enjoin the
Comptroller from publishing that report. One
ground upon which it might ask for that injunction
would be the lack of any hearing prior to that
action of the Comptroller. That thought was the
thing that led me into the idea of why not have
8. hearing and that was the thing that led me
into this 1dea of the administrative show cause
order. I wouldn't say they can certainly enjoin
the Comptroller from doing 80, but I think this
point came 8.8 & result of trying to think what
the Bank's reply to any such thing of that nature
might be.
H.M.Jr:
One of you gentlemen said this morning that if
they tried to enjoin it, it would be terrible
for them, the reaction of the public that they
tried to stop showing.
Landis:
I think I said that.
Foley:
I don't think that 18 a - the only consideration.
If I thought that was the only consideration, I
wouldn't be for it - because I don't think they
could enjoin the publication successfully of this
report by the Comptroller if he wanted to go ahead
and do it, but I like it because it gets here in
the Treasury and gete away from outside agencies
where influences that can'tbebrought to bear here
are brought to bear. The ultimate decision and
the ultimate action 18 a much more severe one than
the ultimate decision in a Section 30 proceeding
and I think it may give usa bargaining position
for the first time. Certainly we have not now.
If I thought it was simply going through what we
have gone through in the Comptroller's office by
way of negotiation during the last week, I wouldn't
be sympathetic at all.
Regraded Unclassified
97
- 11 -
H.M.Jr:
Mr. Crowley is the granddaddy of all of this.
Crowley:
Well, as I told these men I felt about the publications
of the report, I think that Congress gave us the
right to publish that report and it was to be used
in extreme circumstances. I think the general
opinion was that the publication likely would
close any bank that the report was published on.
Now, I realize that you men have wasted & lot of
this time with this fellow, and I don't agree that
you haven't made some progress and that you aren't
going to make more progress on this thing. The
only reason in the world I think you would be
justified in publishing the report would be if
this fellow continues to spread unfair statements
about what the Comptroller's office 16 trying to
do and as to the condition of his bank. I don't
think you will have to sit idly by and indefinitely
let it be going to press and the Treasury or the
Comptroller's office not saying anything about
this thing.
I think the publication of the report likely would
scare out several hundrede of millions of dollars
of uninsured deposits. I think it would start to
fly out Just as soon as it got rumored that WAB
going to happen. I think already they feel the
effects of that thing and they won't admit 1t.
I think that if the lawyers agree that this 18
the procedure that will help to bring some kind
of a basic settlement for this thing, it 1s
all right. I don't agree at all that you are
going to lose your Subsection 30 case, that you
wouldn't get somewhere with it, and I don't agree
that you aren't going to get a settlement of this
thing here that will be quite satisfactory, because,
as I said this morning, no matter how hard he tried,
he can't keep his dividend rate up because he isn't
going to have the earnings to do it. He is going
to be forced to do it. As I told you men the
other day, the only thing I don't want 18 to have
him go out in the highways and byways of California,
as he did with the Walker syndicate that time,
and pass the responsibility for cutting off this
dividend to the Federal Government. We didn't
make these laws; we didn't put this bank in this
shape. He is responsible for the men on his
Board of Directors, who in turn are responsible
for the dividends. If I was Comptroller, I would
Regraded Unclassified
98
- 12 -
let this fellow write me a letter telling me what
he 1a going to do about my letter to him. I would
continue preparing my Subsection 30 case; I would
continue on this proceeding, if that 1s the way you
elect to do; I would let him know what you are
going to do and when Congress comes here I would
prepare my data; I would prepare before the Banking
and Currency Committee an executive session; I
would lay this thing before them; I would ask for
a definite legislation, putting back into the
Comptroller's office the right of controlling the
dividends of national banks, doing away with
Subsection 30 where you have a super-power over
you, and you will get your results, very quickly.
When this fellow invites 8. Subsection 30 case, he
is Just whistling in the dark, he doesn't want
his Subsection 30 case, because you can't read
that history without knowing that this fellow
can't stand up, he has got to make peace and work
out a program that is satisfactory in this thing
here if that bank is to live economically.
H.M.Jr:
I may have gotten your secretary in wrong last night.
Did you hear about it? It was with Ed Noble. I
will tell you about it.
Foley:
O.K.
Landis:
May I make one remark, Mr. Secretary, or at least
get the judgment of these people on one thing?
Upon the assumption of publication of the report,
that it is a much more serious thing than the
removal of the management, I would like to ask
which of these two blows 1s the heavier blow that
could be dealt, the initiation of a complaint to
the Federal Reserve Board or the sending out of
this so-called rule to show cause?
Delano:
The latter, in my judgment, would be much heavier.
Landie:
I think there is an impression that that is a weak
bit of action. It is not a weak bit of action.
H.M.Jr:
Maybe I feel that way because I don't quite under-
stand it and I am a. little afraid of it. The
combination 1a bad. But I have between now and
Friday to study it. I am going to understand it
better. I am not familiar with this procedure,
Regraded Unclassified
99
- 13 -
because no one has suggested that in connection
with this up until this afternoon. It is an entirely
new suggestion.
Hanes:
May I ask a question to clarify in my own mind -
I don't quite get clear this show cause order. Do
they go out of the Treasury with the idea that he
would respond to a hearing in Washington and at
that hearing the Comptroller would lay out the
things he demanded be done -
Landis:
The basis of your complaint is the July 31st letter.
"You were ordered to do 80 and 80 and you haven't
done it. That being the case, why shouldn't I
publish your report?"
Hanes:
The question then comes in my mind, if he can't
show cause why you shouldn't publish the letter,
you go ahead and publish the letter?
Foley:
You serve notice you are going to publish it.
Hanes:
Under the other plans, as I gathered this morning,
it seemed to me that offered a possibility of
getting some concrete things done under the
threat of publication of the letter in ninety
days, in other words, in that interim you had
a real opportunity to bring about the things
that you want to bring about, whereas under
this -
Foley:
You still have that, John, it is the same thing.
Hanes:
How?
Foley:
Because the decision -
H.M.Jr:
I think John 18 making 8. very good point.
Hanes:
I just don't understand it.
Foley:
The only difference between what was suggested this
morning and what 18 being suggested here 1s the
hearing on the - sending out of the notice of
intention to publish the report. Now, in reality
what would happen 18 that this hearing would be
practically the same kind of a hearing that you
hold before the Federal Reserve Board on the
removal of the officers. It would be formal,
Regraded Unclassified
100
- 14 -
counsel representing both sides would be present,
the reporte of examination would be put into
evidence and testimony would be taken from the
examiners and when the Comptroller's case was
put in the record, then Mr. Giannini would be
called upon to rebut that testimony and he would
be held according to rules of evidence to the
case that is before the Comptroller and if he
isn't able to rebut that testimony successfully
and the weight of evidence 16 on the Comptroller's
side, then the Comptroller decides to publish the
report of examination and sends out the notice.
H.M.Jr:
May I interrupt there?
Foley:
During the ninety day period they can come in and
say, "We will do anything you want to do, we will
put new capital in that bank, we will resign, we
don't want to - we want to know what we have to
do to keep you from publishing the report."
H.M.Jr:
I think Hanes and I have got - and this show cause
thing, that is A preliminary step to the ninety
day and has every advantage but it doesn't take
anything away from what we were talking about
this morning, but it is just giving them an
opportunity.
Foley:
That 18 right and it instills in their minds the
seriousness of it.
Greenbaum:
I want to supplement what Ed says in this way:
Whenever you settle B. law case in a law suit,
you settle it when it 1s on the calendar for
trial. Over in the Bureau you settle it after
you have sent out a lot of notices. This pro-
oedure that we are suggesting would have a formal,
legal status and would get them down here for
these hearings. Actually, it accomplishes the
three things, namely, it puts the Comptroller
on record Bo that he isn't dictatorial in that
way. Next, it gives a good background to the
whole thing, and third, maybe most important,
an opportunity to really get those guys to do
something on notice that you are going ahead.
Hanes:
Nobody had explained to me how you were going
to get that result. I understand now. It was
the result I was looking for. I understand now.
Regraded Unid
101
- 15 -
Foley:
And you have got something, if you want to go down
on the Hill, to let the members of the Committee
look over. There 1s a formal record.
H.M.Jr:
Now, unless somebody else has got something, could
you send out word tonight for those three gentlemen
to be here Saturday and Sunday?
Delano:
Yes, sir.
H.M.Jr:
Tonight, telephone them tonight.
Delano:
Yes, I will telephone them right away.
H.M.Jr:
Mr. Landis and Mr. Greenbaum, between now and
Saturday, could tell Mr. Foley.
Delano:
Might run into a complication with these bankers,
Mr. Secretary.
H.M.Jr:
Say, listen, these three men are the hard fellows
to get. You can always get bankers.
Foley:
The competition of the Army and Navy game on
Saturday may be quite a factor. I think maybe
that was Eddie's trouble.
Gaston:
Was that your trouble, Ed?
Foley:
No, I am not going.
H.M.Jr:
I can't thank you people too much and it is
continued until next Saturday.
Regraded Unclassified
102
Dean Landis' memorandum submitted at
meeting 11/28/39 at 4:30pm,
November 28, 1939
A suggested course of procedure in connection with
the publication of the report in order to avoid any conception
that the Comptroller's act in ordering publication of the report
would foreclose any efforts by the bank to meet the objections
of the Comptroller would be as follows:
(1) According to the statute the Comptroller must find
that the bank shall not,within 120 days after notification of
his suggestions, have complied with the same to his satisfaction.
(2)
This means that there must be a finding of the
Comptroller based upon lack of compliance upon the part of the
bank with his earlier suggestions.
(3)
There is little reasoning why that finding should
not be made after giving the bank an opportunity to show cause
that the finding is not justifiable.
(ssued
To bring this procedure into effect, a rule could
be
upon the bank to show cause why the Comptroller
should not act in accordance with the provisions of the statutes
in regard to publication.
Regraded Unclassified
103
(5)
This would give the bank an opportunity to show how far
it has gone in that regard and also to advance a program to meet the
Comptroller's suggestions in full.
(6) In order to keep the bank toeing the line with reference
to any program suggested for the future, this administrative pro-
ceeding need not be determined but can simply be continued from time
to time as may be deemed necessary.
(7) The advantage of this method of procedure would be to give
the bank an opportunity to make a satisfactory arrangement with the
Comptroller prior to such final action as the Comptroller may take,
rather than having the Comptroller take his action subject to with-
drawing that action in accordance with suggestions that the bank may
make and which are agreeable to the Comptroller.
(8) This procedure has the advantage of showing to the banking
world as a whole that ample opportunity has been given to any parti-
cular bank to present its case before the sanctions that the statute
authorizes the Comptroller to impose have been imposed.
(9)
This course does not mean that the procedure would be
public; in fact, its whole purpose is to permit a series of private
negotiations with the Comptroller using the full leverage that the
statute entitles him to use intposing his program upon the bank.
Regraded Unclassified
104
November 29, 1939
Preston Delano told me last night that Mario
Giannini had been phoning him from New York asking
when he should come to Washington. Delano asked
whether he could tell Giannini to go back to Calif-
ornia and that we would let him know when we had
something and he could come back. I o.k'd his tell-
ing Giannini to go home
105
November 28, 1939
MEMORANDUM
Mr. Delano talked to Mr. Mario Giannini over the
telephone to New York at 6:00 P.M., Tuesday, November 28,
1939 and informed Mr. Giannini that in answer to his
question as to whether there should be further discussion
in the near future, the office of the Comptroller was
still studying the situation and that there existed no
reason why Mr. Giannini should stay in the East for a
further conference at this time.
Preston Delano
106
November 29, 1939
I said to Hanes today, "Unless you talk to me
before you leave, Friday night, I take it that you
approve the suggestion which Dean Landis made yester-
day at the meeting in connection with the method of
handling the Giannini matter. #
107
memorandum FOR THE PRESIDENT:
I have been considering pessible action in the Bank of America
satter. As you know, I have had a group of bankers (Tom K. Smith,
John Ottley and Charles Spenear) advising m. I have also called in
Deas Landis, Dean Garrison and Eddie Greenbaum.
The sanotions to which the most serious consideration is being
given are (1) a proceeding under Section 30 of the Banking Act before the
Board of Governors of the Federal Reserve System for the removal of the
directors and officers of the Bank for violations of law and continuing
unsafe and unsound banking practices, and (2) publication of the last re-
port of examination of the Bank because of the Bank's failure to comply
with the recommendations and suggestions made by the Comptroller based on
the report of examination. The benkers believe that the threat of the
use of the second senstion would be, by far, the more drastic in its impact
on the Bank.
st a meeting yesterday with of staff and the lawyers' group, the
consensus was that the better course to fellow in the first instance would
be to institute proceedings for the publication of the repart. In this
connection it was suggested that a formal hearing be accorded the Bank W
the Comptroller's Office before actual publication of the report was No-
sorted to. The procedure for such 4 hearing would be started w ordering
Regraded Unclassified
108
- $ -
the Bank to appear before the Comptroller, w as appointed by
his to show cause why the Comptereller should net act is assoriance with
the provisions of the statutes authorising his to publish the report of
examination of any mational bank which shall not, within 180 40gra after
notification of de recommendations or based a the -
tim, have complied with the recomminations w suggestions to the catte-
faction of the Comptreller. the letter of criticism based upon the last
report of consination - seet to the Bank as July $1, 1989. Accurdingly.
the 180 days will expire as November so, 1000, this prosedure world have
the advantages (1) of giving the Bank a fair opportunity to be heard before
any cation to taken, the obvisting the possibility that charges of
arbitrary notion sight be más against the Comptroller) (a) of keeping
preseedings against the Bank univer the control of the Comptroller's office,
the making 10 unnoversary to call on my other agency for cotten is the
matters and (a) of afferting as opportunity tw the Bank to advance a
program during the proceedings which would meet the Comptereller's suggestions
is full. In this event, et course, the publication of the report would not
be mis.
In the - nothing in the way of & entinfustory program to
developed at the houring, the Semytroller will netify the Bank tist the
report will be published after the expiration of 90 days. s certification
for the removel of the wiflsers end directors could them be mis to the
Federal Reserve Doard. Is this vary the force of the - mark fenaible
sanstions will bosome available to the Comptroller.
This proposal is only is destative term. A further meeting is to
be hold this web-ond which will be attended m both the lawyers' and
bankers' groups. I hope to give you a definite plan early sort cock.
EHF:s:eb 11/30/39
109
Treasury Department
TELEGRAPH OFFICE
PO 12 24 COL
A STLOUIS 1149A NOV 30 1939
1939 NOV 30 PM 1 16
MRS HENRIETTA KLOTZ
WASHNDC
LEAVING HERE TWA TWO OCLOCK FRIDAY AFTERNOON EXPECT ARRIVE
WASHINGTON EIGHT OCLOCK FRIDAY EVENING THEREFORE MAKING MYSELF
AVAILABLE CONFERENCE AS REQUESTED, BY SECRETARY.
TOM K SMITH
116p
Regraded Unclassified
110
November 30, 1939
MEMORANDUM TO:
Mrs. Klotz
We seem to be having some trouble in getting
our bankers here for this Saturday and Sunday meeting. So
far there is no word from Mr. Tom K. Smith as to whether he
can be here.
Mr. Spencer has just called up and said he
would be in Friday evening at 7 P.M. but would have to leave
here at 10 o'clock Saturday morning.
Mr. Ottley is arriving
Friday evening and will stay through.
I am hoping to have
definite word from Tom K. Smith sometime today.
Preston Delano
ew)
Regraded Unclassified
111
November 30, 1939
MEMORANDUM TO: Mrs. Klots
Mr. Tom K. Smith has just phoned me from St. Louis,
advising me that he is taking the plane out of there tomorrow
afternoon, arriving here about 7 that evening, (December lst).
He will go direct to the Washington Hotel where he will meet
Mr. Spencer and they will discuss the matter during the evening,
together with Mr. Ottley who is also arriving here around 8 or
9 P.M.
Mr. Smith will also call Mr. Spencer in the mean-
time and endeavor to have him stay over Saturday, December 2nd,
if Mr. Spencer can so arrange his plans.
Preston Delano
PD
Regraded Inclassified
112
RE BANK OF AMERICA
December 2, 1939.
9:30 a.m.
Present:
Mr. Delano
Mr. Crowley
Mr. Landis'
Mr. Greenbaum
Mr. Spencer
Mr. Ottley
Mr. Upham
Mr. Smith
Mr. Folger
Mr. Foley
Mr. Tietjens
Mr. Sherbondy
Mr. Garrison
H.M.Jr:
In the first place, may I say thank you for all
of you having given up today.
What did you (Mr. Smith) lose, a couple of ducks
by coming down?
Smith:
I brought you some ducks.
H.M.Jr:
Did you?
Smith:
Yes.
H.M.Jr:
Well, that is nice.
Spencer:
Lame ones? I am glad you have those ducks on the
record.
Smith:
You all know the duck season closes Tuesday, don't
you?
Foley:
Not here.
Smith:
It does in the northern district. It opens in
Arkansas.
H.M.Jr:
Well, gentlemen, the reason I asked you to come
down is that this Bank of America case - during
the week I was able to consult with these special
legal advisers and I am beginning to see my duty
a little clearer than I have before and it has
taken a little bit different turn since I have
had a chance to talk with these three bankers,
and I thought if we could possibly get unanimous
opinion, or almost unanimous, on where we go
Regraded Unclassified
113
- 2 -
from here, it would be very helpful to the
President and me.
These lawyers were not all invited at the
same time, 80 they haven't all had the same
amount of time to study on it. I wondered
if Dean Landis would mind reviewing the matter
as we left it the other night, Do it any way
that you want, but bring it up to the - if you
still feel the way you did the other night.
Landis:
Yes.
H.M.Jr:
Would you mind doing it?
Landis:
No, I would be glad to.
I think again it 1s worth while just reviewing
a few of the facts of the Bank of America situ-
ation in order to see just what the issues are.
One will remember that the position of the
Comptroller with reference to the Bank of America
became set in the latter part of 1938, in Septem-
ber, in fact, that then in September there is
the objection to the dividend policy. Subsequently,
a further letter of criticism following the report
of examination, and finally, on July 31, 1939, a
letter of warning in which certain specific condi-
tions in the Bank are criticized, designated both
as violations of law and/or unsound banking prac-
tices. That is followed up again by another
letter of October 2, 1939. The unsafe banking
practices and the violations of law that are
brought to the attention of the Bank of North
America as early as July 31, 1939, or earlier
than that, are many, but the chief points involved
are really three or four in number.
The first is that nothing much has been done with
reference to the writing off of losses in the
neighborhood of something like 13 million dollars.
The second is that no definitive plan or substantial
progress has been made with reference to reducing
the large line of credits extended to Transamerica
and its subsidiaries.
Regraded Unclassified
114
- 3 -
The third 1s that the dividend policy of the
Bank 1a both unwise and dangerous and has con-
tinued and is threatening to continue at the
same rate of 19.2 percent.
The fourth is the absence of such capital in
the Bank and the absence of their making any
adequate provision for getting capital into
the Bank. The ratio of those deposits to
capital is excessive, and instead of having
been reduced during this period of time, has
been increased.
Now, there are a large number of other things
as well. Those four matters seem to me the
chief things upon which the criticism of the
Comptroller rests. Beneath that, of course,
is a general conclusion which, as I gather, is
shared by most people who have examined this
case, that the entire record of transactions of
the Bank of America demonstrates a type of
management in that Bank that is truly dangerous,
dangerous from a national standpoint.
Now, that being so, the question becomes one of
how to correct those conditions, what mechanism
is to be used for the correction of those con-
ditions. Conferences between the officials of
the Bank and the Comptroller have produced a
little, but not enough to give 8. guarantee of
good faith that all these conditions will be
adequately remedied. The Comptroller, therefore, -
and I speak partly for myself and partly trying
to represent the opinion of others who have sat
in conference - is forced to take a position where
he must take some action in order to correct these
conditions and in considering the terms of action
the suggestion that was made was that either a
program be brought under Section 30 of the Federal
Reserve Act or for the publication of the Bank
report. The latter seemed to be the best method
to pursue, because if one pursued the latter
method, the control of the entire negotiations
between the officials of the Bank and the Comp-
troller would be a matter of direct dealing
between the Comptroller and the Bank without
the intervention of a third party, such as the
Regraded Unclassified
115
Federal Reserve Board, who might possess dif-
ferent views on this matter or might have
different ideas as to the management of the
Bank when the responsibility for that manage-
ment under the law remains with the Comptroller.
Under the law, the Bank report can be published
after ninety days after the Comptroller has
determined that it can be published, but the
Comptroller's finding as to when the Bank report
can be published must depend upon his having
warned the Bank that certain practices were
going on and that those practices had not, in
the Comptroller's judgment, been corrected within
120 days of the warning. So you see, this pro-
gression must go on under the statute. First,
8. warning by the Comptroller that practices
must be corrected. That warning must be disobeyed
at least 120 days. Thereafter, the Comptroller
must make a finding that those practices have
not been discontinued and that therefore it is
wise to bring about the publication of the
report.
After that determination 1s made, under the statute,
still ninety days have to transpire before the
report itself can be published.
Now, in considering the mechanism of that finding
that the Comptroller must make in the circumstances,
it seemed wise on two grounds, at least two grounds,
to provide an opportunity for a hearing before the
Comptroller as to whether or not he should make
that finding, that the practices were being con-
tinued in defiance of the Comptroller's warning.
The two grounds that I mentioned are, one, the
essential failure involved in that idea of giving
the Bank an opportunity to state its case before
the Comptroller. The notice of an opportunity to
be heard is an ingredient of our conceptions of
fair dealing and to introduce those into the
procedure seemed wise, both from a general stand-
point as well as from a legal standpoing.
The second ground that seemed wise - that seemed
to make 8. hearing of this nature desirable, was
that the very hearing might be sufficient to
Regraded Unclassified
116
- 5 -
correct the conditions of the Bank. I think
Mr. Greenbaum in one of our discussions put
the whole story rather succinctly when he said
that prior to the litigation people do B. lot
of beefing, but when a charge is brought, then
they begin to think in terms of settling.
What has been happening here is that there
has been a lot of beefing around between the
Bank officials, by the Bank officials, and they
have never been adequately brought face to face
with the seriousness of the continuance of the
practices that are involved. This proceeding
does that and this proceeding forces them to
meet definitively the charges that are made
against them. That proceeding would be started
by a rule to show cause upon the Bank, B. draft
of that rule to show cause having been already
prepared by the General Counsel's office, and
I had the opportunity of looking it over this
morning. As I said to Mr. Greenbaum, I would
hate, if I was a Bank official, to be hit by
that rule. It would make me think and think
hard, and that is exactly the purpose of the
proceeding. Thereafter, this hearing would take
place - it ought not to be too extended. One
would hope that the necessity for publication of
the report would not be forthcoming, inasmuch as
the condition or the proceeding which it seems
necessary to impose on the Bank would be met by
the Bank officials during the progress of that
hearing.
I do not believe that this proceeding involves
any unnecessary delay. Such delay as it may
involve, indeed, is a short delay and one that
seems desirable for actually forcing the officials
to think in terms of the proceeding that was set
forth to them in the reports of the letters of
the Comptroller of July 31 and October 2. It
may be that one letter will get opposition here
on the part of the Bank. If so, it seems to me
that there is nothing to do but for the Comp-
troller to pursue the full powers that he has
under the law to remedy the situation that has
continued too long.
I don't want to make a speech on this, but I am
just trying to outline the thinking that 1a
going through here.
Regraded Unclassified
117
- 6 -
H.M.Jr:
I appreciate very much what you have done. You
have done just what I wanted to do and what I
would like you to do.
Before we talk with these three gentlemen, I
wondered if Dean Garrison would care to say
anything in the line of possible differences
or disagreements with what Dean Landis has said.
I don't want to say to the bankers - well, let
me get the benefit of the legal opinion first,
Garrison:
Well, I think I have nothing to add, Mr. Secretary.
I threw out the suggestion when we were discussing
this together on the telephone that one might
couple in the show cause order a statement that
the Secretary - the Comptroller would also consider
proceedings before the Federal Reserve Board to
remove the officers and directors, shoot both
guns in the same document, reserving your own
ultimate choice according to the circumstances,
but I haven't given it the amount of thought the
rest of you have and I understood the objection
to that to be that it might confuse the hearing
when it was held. It might become, with the
threat of - be in position of two different sanc-
tions and it would perhaps confuse the issues.
I think there is something in that. It seems to
me perhaps better to simplify the thing by pro-
ceeding - one can always later proceed with the
other sanction if he decides it is the better
thing to do.
So far as the general approach is concerned, I
am heartily in agreement. It seems to me that
you have come to grips with the thing and will
have to move.
H.M.Jr:
Mr. Greenbaum?
Greenbaum:
I have nothing to add to what Dean Landis said
and just one thought in connection with Dean
Garrison's point. We felt that that might be
taken care of by including in this order to
show cause a statement that not only would action
be taken in reference to the publication of the
report, but such other action as the Comptroller
Regraded Unclassified
- 7 -
might deem appropriate, including, if we thought
warranted, proceedings under Section 30.
Carrison:
That would be my point.
Greenbaum:
In that way we think it would not deflect from
the main issue but nevertheless get it in there.
Garrison:
I think that is fine.
H.M.Jr:
Let me ask this question. I don't want to go one
iota too fast at this stage. We have taken plenty
of time up to now and an hour or two is of very
little importance.
Do you three gentlemen want to confer with Mr. Foley
and be sure that you are in agreement and then say,
"This is the plan we recommend," to the three
bankers, or are you ready to do that now?
Landis:
I can answer for myself that this is my best judg-
ment.
H.M.Jr:
I see.
Garrison:
With Mr. Greenbaum's additional - I assume that
that is in this document.
Greenbaum:
No, it is not, but that can be easily put in.
Landis:
This is only a tentative draft.
Garrison:
I haven't seen this draft of the show cause order,
Mr. Secretary. It has just been handed to me.
H.M.Jr:
Why don't we say this - you haven't seen it - why
don't we say that you three gentlemen study it and
when you feel that the thing is in such shape that
you are in unanimous agreement, then you could
meet with these three bankers and present it to
them for their criticism. How would that be? What
would you think of that?
Landis:
I see no objection to that. In fact, the points
that Mr. Garrison and Mr. Greenbaum - we have a
few little suggestions in here. Those are points
upon which the judgment, really, of the person
Regraded Unclassified
119
- 8 -
handling this case ought to be controlling.
They are not differences of opinion which go
to the merits of the proceeding as such. This
order, in fact, as drafted, will be redrafted
at least ten times before it is in shape, but
it does contain the substance of the proceeding
upon which one should exercise the broad judg-
ment as to whether this proceeding is the kind
of thing that should be initiated.
H.M.Jr:
Then you would feel that you are ready to answer
questions from the bankers?
Landis:
Yes, indeed.
Garrison:
Yes, I would, Mr. Secretary.
Greenbaum:
Yes.
H.M.Jr:
Ed?
Foley:
Yes.
H.M.Jr:
All right. I wonder 1f the bankers understand
what the proposal is?
Ed, supposing you - just one minute.
Now, before we go on, have you any suggestions,
Mr. Delano?
Delano:
No, I think that is an excellent procedure that
18 outlined here. We haven't talked with the
bankers at all since they have been here and I
think they are next on the program.
H.M.J.:
Does that sound all right to you?
Delano:
Yes.
H.M.Jr:
What do you think, Mr. Crowley?
Crowley:
I think it is perfectly all right. Let the bankers
and the lawyers get together and discuss this
thing and determine the policy and then let the
lawyers handle the drafting of it.
Regraded Unclassified
120
- 9 -
H.M.Jr:
To show you how broad minded I am, I let &
utility magnate sit right here with us.
Smith:
Let what?
H.M.Jr:
Let a utility magnate sit in this room and
confer with us.
Smith:
You are not referring to....
H.M.Jr:
Leo.
Smith:
Is he a utility banker?
H.M.Jr:
Magnate.
Landis:
M-a-g-n-e-t.
Crowley:
That will offset the bankers' influence.
H.M.Jr:
Don't you read the papers?
Smith:
I quit reading them.
H.M.Jr:
That is all right with you?
Delano:
Yes, Mr. Secretary.
H.M.Jr:
Ed, say it again just what this legal procedure
is.
Smith:
Mr. Secretary, have you decided that you have
reached the point where legal action is necessary?
Has the Comptroller decided that?
H.M.Jr:
Well, I would put it this way, that the meeting
today is for the purpose of deciding what they
should do. No decisions have been made as of
today.
Smith:
This meeting is to decide what to do?
H.M.Jr:
Yes, and no decisions have been made, nothing
has been decided. It is all in the flux, but
these gentlemen have decided that they are
recommending this procedure.
Regraded Unclassified
121
- 10 -
Smith:
That is the last thing that has taken place?
Delano:
Yes, that record there.
Smith:
That is all I have.
H.M.Jr:
I mean nothing has been decided.
Smith:
I think the other consideration - there are other
considerations more important than discussions
of what you are going to do from a legal stand-
point.
H.M.Jr:
What do you think would be well to discuss?
Smith:
In this case, Mr. Giannini and the two Gianninis
came here and asked for conferences - asked for
a meeting and asked some questions of the Comp-
troller's office which haven't been answered and
until they are answered, you are not ready to
proceed and I don't know that you can determine
your line of procedure until you know what the
answers to those questions are.
H.M.Jr:
What questions have they asked of the Comptroller?
Smith:
Here is the last word. I just read this thing
this morning from Mr. Giannini. After the con-
ferences were over, he says, "I am simply in a
quandary." Then the Comptroller said to him over
the long distance telephone, "The office of the
Comptroller is still studying the situation."
They said there existed no reason why Mr. Giannini
should stay in the East for further conferences
at this time. They indicated 8. desire to com-
promise; in other words, sit down and make B deal.
Now, unless you terminate that matter, anything you
terminate that matter, anything you do will meet
with the response - "Well, we have told the Comp-
troller's office we would like to settle this and
we will do anything that is reasonable."
Mr. Giannini says in here, "We can get together,"
time and again in the conversations and if you
bring any proceedings, he will answer that by
saying, "Well, I have told you I would do anything
Regraded Unclassified
122
- 11 -
that is reasonable. All I want to know is what
you want."
Now, in the conversations, they have been told
previously that you could take all the conversa-
tion put together and get out of it - well, you
ought to know what I mean, but they just haven't
been told that in so many words,
H.M.Jr:
I don't follow you. You people approved the letter
of October 2, didn't you?
Smith:
That is right.
H.M.Jr:
Is there any written evidence from the offices of
the Bank of America that they want to comply?
Smith:
No, but they have come down here personally, Mr.
Secretary, and said, "Now, we will do anything
reasonable," and after a lot of conversation the
Comptroller's office said, "We will study what
you suggested and let you know."
H.M.Jr:
What do they suggest?
Smith:
Well, they suggested putting in more capital; they
suggested they would work out a program of charging
off their real estate; they suggested programs for
all of the things criticized. Isn't that right,
Mr. Comptroller?
Delano:
No, I don't interpret it that way, Tom.
Spencer:
That is what I read there, that they touched on
everything.
Smith:
There isn't a single criticism in that letter that
they haven't made a counter-suggestion for.
H.M.Jr:
This is the first time I have heard it.
Smith:
Well, there it is.
H.M.Jr:
This is the first time I have heard - the only
statement I have heard about Mr. Giannini or
the Bank of America's officers was the one at
Regraded Unclassified
123
- 12 -
lunch I had where I think either you or Mr. Spencer
said, "Well, I am getting the feeling for the first
time that we are getting somewhere with Mr. Giannini."
Smith:
That 1a correct.
E.M.Jr:
From that date on to this moment, nobody has told
me that there 1s indication on the part of the
Gianninis to do anything.
Smith:
This is the record of what has taken place since
we talked to you that day and it is full of pro-
positions. Isn't that correct, John?
Ottley:
Let's take
Smith:
We haven't talked at all.
Ottley:
I got here last night and walked right in and read
this thing last night until about 1:30. I am of
the same mind with Tom Smith. Personally, I would
feel that the bankers should sit down with the Comp-
troller and go over this document here, which
represents that conference, and - it is rather B.
long thing - and I will say definitely that I haven't
got it word for word in my mind, but I am - a pro-
position would come up and the Comptroller would
say, "Well, I want to study that," and he would
say, "Well, let us know," and so forth and so on,
and the things may have been answered in the letter
but I was impressed with the idea that with these
people coming here and spending two or three days
that represented that, that the Comptroller's
office should go back definitely in answer to this
visit and discussion that they had before you would
go ahead with legal procedure. That is the im-
pression I have.
I haven't had a chance to talk to the Comptroller
or to the other people that interviewed him, but
personally my thought is that the law is always
open, you can go to that any day you get good and
ready, but if there is any chance short of the law
to get what you want
H.M.Jr:
Let me explain my position. We have met here with
Mr. Landis, Mr. Greenbaum, our own people, spoken
Regraded Unclassified
124
- 13 -
to Mr. Garrison, Mr. Foley sat here, Mr. Hanes
sat here and this whole thing was discussed and
I believe they met in the afternoon in the Comp-
troller's office. Was that Tuesday?
Delano:
Yes.
H.M.Jr:
Tuesday, wasn't 1t?
Delano:
Yes.
H.M.Jr:
They came back here at half past four. Mr. Landis
acted as spokesman and made this recommendation of
the show cause order. The Comptroller was here,
the Chief Bank Examiner was here, Mr. Hanes was
here, all these lawyers were here, and it was agreed
in the room here that this was the way to proceed.
Nobody told me anything about any proposals. The
only thing is one time, you (Mr. Delano) said
Mr. Giannini wanted to talk to me on the telephone,
wanted to come and talk to me. You said to me,
"Would it be all right to tell him to go back to
the Coast until we have something," and I said,
"Yes, I have got a lot of things to do."
These people said to proceed along this line and
everybody acquiesced that the next move was this.
If there is any more dickering going on, I should
think what happened December 15, 1939, would be a
sufficient lesson that nobody should enter into
more tentative agreements or so-called gentlemen's
agreements or any other kind of an agreement without
getting the approval of the Secretary of the Treasury
and the President of the United States, and if
there has been any such indication, I am about fed
up.
What happened, Mr. Comptroller? Why do you sit
here and put me in this position?
Delano:
Mr. Secretary, we interpreted this meeting that
took place here in my office as simply a meeting
of these gentlemen coming here to find out what
we wanted and we made it very clear to them.
H.M.Jr:
Which gentlemen?
125
- 14 -
Delano:
The Gianninis. They said there were some doubts
in their minds. We made it very clear to them
what we wanted, in my judgment. They talked
again about doing certain things which we regarded
8.8 idle talk. We are not taking them at all
seriously.
Furthermore, my interpretation of what Mr. Landis'
proceeding 1s, that the very thing he 18 proposing
will give them still another chance to come back
here and present a case if they want to present it.
I do not propose to sit with these gentlemen and
just talk and talk interminably about this case,
I think we have reached the stage where we can't
do that any more. Now, they will make proposals
every time they put their foot in the door. I
don't consider that there is anything in the record
there - and certainly all these gentlemen have read
it - I don't think there is anything in that record
which will make it imperative for us to go back
again and discuss and try to come to an arrangement
with them. I think it is much more in the public
interest and much more in our interest to have the
thing in the form of a formal hearing. They will
have all the chances to present their case and
make their proposals there.
H.M.Jr:
That is the way I understood.
Delano:
That is my position.
H.M.Jr:
But what you didn't say was what you wanted.
Smith:
Mr. Secretary, have you read this, and you, Mr.
Landis?
Landis:
I have read all the correspondence.
Smith:
I mean the transcript of the conversations.
Landis:
Between the Comptroller and the - no, I have never
seen them.
Smith:
It is possible we may have misunderstood.
H.M.Jr:
As I said 8 little while ago, this thing has been
going on for a great many years and a couple of
hours isn't going to make any difference.
Regraded Unclassified
126
- 15 -
Spencer:
That is my feeling, for heaven's sake, let's
take hours enough now to all agree whether
there is anything in this or not. There are
places in here where it looks to me as though
you could have sat down and concluded - I could,
in the banking business, anyway.
H.M.Jr:
Why don't we adjourn long enough to let these
legal advisers read this thing? If there is
any reason in there - I haven't read it. I
didn't know there was any
Smith:
Let me ask Mr. Spencer 8. question. Did you get
the same impression I did?
Spencer:
Yes. There is one paragraph in here - I concede
that. This is L. M. Giannini:
"If you wish to kick out the management, let's
start the process to accomplish that end. If
it becomes necessary for A. P. and me to make
a living outside the Bank, I think we can manage.
Certainly A. P. hasn't made anything on his job.
Only seven years of effective work. He has taken
the Bank from 650 millions to one billion 435
million, cleaned up over 70 millions of bad assets,
added 20 millions to the net capital structure,
paid 43 million of dividends, and I think he has
done a superhuman task. He has reestablished the
confidence of the people; he has done a superb
job. You, Mr. Comptroller, were not in the office
at the time, but 8. very good job has been done.
Now, personalities enter into the thing, beginning
with examinations early in 1938. Up to that time
we had a perfectly normal examination but after
that
Now, that is his statement. Now, whether it is
true or not
H.M.Jr:
well, there is nothing in there that would make
me change my mind one iota. There 1s nothing in
there that is binding on the Comptroller. What
is in there to make me change my mind? He has
made statements like that over and over again,
which are not true. There is nothing in that,
Mr. Spencer, to make me change my mind a bit.
Regraded Unclassified
127
- 16 -
Delano:
Mr. Secretary, may I interject? If we could
do this thing that these gentlemen are suggesting
here now; I mean if we can go back and sit down
with these men again, we will be exactly where
we were last December, in my judgment.
H.M.Jr:
And where you have been each December for seven
years.
Delano:
In other words, they will say to us, "Why cer-
tainly, we will do this, we will meet this, we
will do this," and then we will find the time
dragging with the corrections not going on, and
I don't think we are getting anywhere.
Ottley:
Mr. Secretary, may I say just one word?
H.M.Jr:
Two, three, four words.
Ottley:
At one of these - three gentlemen have been asked
to come up here. I don't know what time the others
arrived, but I got here last night and I have
studied this thing and read it until about 1:30
this morning. Definitely, it is an important thing.
If the Comptroller's office and you and the
General Counsel have made up your minds definitely
that that is what you want to do, what you have
outlined, why
H.M.Jr:
I wouldn't have asked you up here if I had made
up my mind on it.
Ottley:
That 1s what I think. Now, since you have asked
us up here, I am definitely of the opinion from
reading this evidence that the result of the in-
terviews they had with the Gianninis, which Counsel
said they haven't read, I would think that it would
be advisable for us to relieve you of - give you
your time back to do something else and let us
get in a room and go over this thing together
and then reach & conclusion after the Counsel
have read it and after Mr. Spencer and Mr. Smith and
I and Mr. Crowley and the others have had an oppor-
tunity to discuss with the Comptroller and Mr. Folger
and some of the other gentlemen that were in that
discussion - to get our interpretation of what is
on this piece of paper and then come back to you
Regraded Unclassified
128
- 17 -
and then we are ready to vote. I couldn't vote
on anything until I have more information on
what is on this piece of paper.
H.M.Jr:
I have got nothing to do until this thing is
finished one way or the other, beginning with
this warning. I will set everything aside until
this thing is finished, but I would like to get
it settled one way or the other if it 18 one,
two, three, four or five days. I want to get it
settled.
Why don't we do this, Ed: You take these three
legal gentlemen and give them each a copy of
this and let them read it and discuss it. If
they want to send for anybody, they can. Give
these three bankers a lawyer who can explain to
them the show cause order, if that is necessary.
After these three legal advisers have satisfied
themselves, let the three legal advisers and
the three bankers get together and when they are
ready for me, all right. In the meantime, I want
a copy of that thing and I would like to read it.
What do you think, Eddie?
Greenbaum: I think that is all right.
H.M.Jr:
There are plenty of rooms around here where you
can all meet. Mr. Hanes' room is empty.
Regraded Unclassified
129
RE BANK OF AMERICA
December 2, 1939.
4:00 p.m.
Present:
Mr. Crowley
Mr. Greenbaum
Mr. Spencer
Mr. Landis
Mr. Gaston
Mr. Delano
Mr. Smith
Mr. Ottley
Mr. Foley
Mr. Upham
Mr. Folger
Mrs Klotz
Miss Chauncey
Mr. Garrison
H.M.Jr:
Where are we now, Ed?
Foley:
Well, we have had another meeting with the bankers
and I think W6 are in substantial agreement. We
are going to prepare B. letter pointing out the
items criticized by the Comptroller, based on the
report of examination of last July, and point out
that the suggestions and proposals made by the
Gianninis in the conferences that were held by
Mr. Delano do not meet those criticisms, and tell
him that unless those items are met squarely and
in a satisfactory way that we are going ahead in
pursuance of law. That will be sent out sometime
early next week, if it is agreeable. We would
wait a reasonable time, maybe two weeks, maybe
until the first of January, and if we don't have
any proposal from him in writing that squarely
meets the matter of write-offs of the nine million
loss item, the question of additional capital and
the matter of dividend policy, then the order to
show cause, which will commence the ninety-day
period to run, will be sent out.
Tom, is that fair?
H.M.Jr:
Before Tom answers, I want to say in the first
place that Mr. Smith did me a particular service
this morning by bringing to my attention the
stenographic notes of the meetings which were
conducted in the Comptroller's office. I hadn't
read them and nobody had particularly brought my
attention to them, because I didn't know that
there had been any negotiation going on.
Regraded Unclassified
130
- 2 -
My understanding was that these people were
going to come in and that Mr. Delano was going
to listen. I didn't realize that he was going
to negotiate, and so you did me another service.
Smith:
This injects the additional step in there that
corrects that - that brings the record in shape
to proceed.
H.M.Jr:
Well, I have seldom been as disturbed over any-
thing as when I read that record. I feel that
our case has been damaged by Mr. Delano's nego-
tiation, but time only will tell. I was greatly
disturbed. If a letter like this goes out and
Mr. Giannini comes in again and continues to
treat the Government officials the way he did
in those two hearings and gets a copy of the
record, it is pretty hard to explain to the public
how we let a men got away with anything like that,
but that we are carrying out & federal law. But
if these federal advisers feel a letter can be
prepared and if the Comptroller will sign it,
perhaps the damage that was done in those several
days can be overcome, I don't know. I am very
much discouraged. But I have had a chance to see
the special legal advisers.
How do you feel, I would like to ask the bankers,
every one of them.
Spencer:
You mean that the record of
H.M.Jr:
As of today. From now on, I mean. What chance
have we got of having the spirit of the law of
the Comptroller of the Currency carried out?
Spencer:
Well, I think this was just part of B. negotiation
that would normally take place. We are trying
to do business with Giannini. I don't think there
1e any great amount of damage done by having a
transcript of the conversation backward and forward,
if that is what you referred to,
H.M.Jr:
Well
Spencer:
You have got it down in black and white and that
is something, so I don't think Giannini has had
Regraded Unclassified
131
- 3 -
that before. He has gone out and talked anything
he wanted to.
S.M.Jr:
It is all Giannini's way, though. Do you feel
what Mr. Foley said, if a letter could be pre-
pared here now, that that is the next step?
Spencer:
Confine it to just three or four of the major
things that haven't been done. We three bankers
have felt that there has been a lot done with
this situation over the last twelve months. The
only thing that he hasn't really charged off of
any size is the 98 million dollars on these bank
buildings and he has got a wedge in there because
he has had these American appraisals made. He
wants to argue on that. Now, they may not be
worth anything from a current value standpoint.
H.M.Jr:
What would you say the three or four outstanding
things are that we ought to mention in a letter?
Spencer:
Capital, dividend and his charge-off are the
three major things that he hasn't really lived
up to.
Smith:
Self insurance.
Spencer:
Yes, that too.
H.M.Jr:
Well, would it be agreeable to you if such a letter
was prepared in the Treasury and a copy to be sent
to you before it goes out, could we bother you that
much, all of you, to have you go over it and make
any comments?
Spencer:
I would be perfectly willing to do that.
H.M.Jr:
How about you, Mr. Ottley?
Ottley:
I would.
H.M.Jr:
Now, let me see.
Smith:
Mr. Crowley.
H.M.Jr:
If you didn't mind, I would sort of put Crowley on
my side of the table and let him come in last
Regraded Unclassified
132
- 4 -
in order to give him the benefit of all of the
comments in the room.
Mr. Greenbaum?
Greenbaum:
I have nothing to add.
H.M.Jr:
Shall we submit a letter to you of this sort?
Greenbaum:
I will be glad to look it over.
H.M.Jr:
Dean Garrison?
Garrison:
That is agreeable with me.
H.M.Jr:
Do you think this is the proper thing to do?
Garrison:
Yes, I am in thorough agreement.
H.M.Jr:
Dean Landis?
Landis:
Yes, I would be in agreement.
H.M.Jr:
And how about you, Comptroller?
Delano:
I am in agreement.
H.M.Jr:
Supposing as the result of this letter they want
to come in and instead of answering these things,
want to talk some more?
Delano:
I am through, as far as talking is concerned.
H.M.Jr:
All right, Leo?
Crowley:
Well, I think whatever letter is written to them
on the capital, the dividend and charge-off, ought
to be definite. We ought to give him 8. letter he
won't take around and show to everyone. Give him
one that if he shows it, it will show our position
on the thing. I think we ought to say in that
letter that his offer to use Transamerica for -
to turn back - kick back those dividends is en-
tirely unsatisfactory, because I don't think it
is satisfactory. Then if he doesn't come along
with a written proposal that is satisfactory,
then I think you should go right ahead with your
Regraded Unclassified
100
- 5 -
procedure. If he wants to come back here to
negotiate, I think there is only one way to
negotiate with him and that is if he wants
to come back here to say to bring with him
in writing whatever proposal be has to make
so that we get it definitely in writing from
him as to what he wants to do. Then before
anything is accepted, that we sit down and
discuss the thing together before any answer
is given to him. After he gets his proposal....
H.M.Jr:
Could I make one amendment, that whatever he
submits in writing should have the approval
of his Board of Directors so it is in final
form.
Crowley:
That is right.
Landis:
That is a good idea.
Spencer:
Very good.
H.M.Jr:
I notice in this thing he talks about his Board,
but it should have the approval of his Board.
Crowley:
That is all I have to say. I think we could dis-
cuss this thing, Mr. Secretary, for two years
and we would be always right back to this same
point.
H.M.Jr:
Well, I think this last conference set the Govern-
ment back.
Spencer:
Well, you have come a good way in a year.
H.M.Jr:
Well, thanks for the pat. I don't think we
deserve it.
Smith:
Well, they haven't made a lot of progress this
year.
Spencer:
He has turned in a lot of recovery in there.
H.M.Jr:
Now, in this record he talks about agreeing to
raise 20 or 25 million capital, but I don't
see that he said he was going to do it by
buying preferred stock.
134
- 6 -
Crowley:
He intimates he 18 going to do it through private
sources.
H.M.Jr:
But he doesn't do it the clean-cut way, 20 or
25 millions worth of preferred stock.
Crowley:
That is right.
Mr. Secretary, there 18 one thing
H.M.Jr:
Is that right? There is nothing there where he
says, "All right, I will take 20 or 25 million
of preferred stock from the RFC."
Smith:
I think he did say something about issuing common,
didn't he?
Delano:
Yes, he said he would get it outside.
Crowley:
What he wants to do - the reason he talks to you
about this kick-back from the Transamerica on
this dividend is so he can keep his dividend
record up as far as his public is concerned, so
that he may go to his public to sell this 20 or
25 million dollars based on this 19.2 or 6 divi-
dend, you see.
H.M.Jr:
And if we let him do that, we are as guilty as
he is.
Crowley:
That is right.
H.M.Jr:
Is that right, Mr. Spencer?
Spencer:
There is no question about that, and also this
scheme of his about withholding the money and
turning it back into the Bank in one form or
another, I think is a shady proposition.
H.M.Jr:
If he holds out another 13 months, he knows that
Morgenthau won't be here, most likely.
Smith:
What?
H.M.Jr:
Yes.
Cy?
Regraded Unclassified
135
- 7 -
Upham:
No, I think I have nothing to add, Mr. Secretary.
H.M.Jr:
Come on, Cy, if you have got something, this
1s the time to spring it.
Upham:
I was a little better satisfied with speedier pro-
ceeding, but I don't object to this. If they want
to send a letter first, it is all right with me.
I do think it is important that we deal with the
Board of Directors next time.
H.M.Jr:
I think so.
Gus, when will this next report be in, bank exam-
ination?
Folger:
They told me a few days ago, Mr. Secretary, that
it would be here sometime during this month,
December.
H.M.Jr:
Now....
Folger:
The latter part of the month.
H.M.Jr:
Will this criticism of McLean - is that the man's
name?
Folger:
Yes.
H.M.Jr:
Now, when this report comes in, will it be the
work of McLean or will it be the work of some-
body else?
Folger:
It will be another examiner. McLean will not
show in the report.
H.M.Jr:
But won't this report be as of July first?
Folger:
August 31st was when it was started.
H.M.Jr:
Well, as to these things - points raised in the
October second letter, will you bring those up
to date? How recent can your examination show
whether they have or haven't made any changes
from the various points made in the October
letter of criticism?
Regraded Unclassified
136
- 8 -
Folger:
He can show that as of December fifteenth.
H.M.Jrt
Can het
Folger:
Yes.
H.M.Jr:
When you speak of....
Folger:
I mean the Examiner in Charge, Chief Examiner of
the district.
H.M.Jr:
I haven't got my report here, but he criticized
somebody else in that report.
Folger:
There wasn't much to that. That was a man - he
bought a bank in 1929 and enough 80 that bank
owed it money, the bank he bought. He said to
tell you it was $5,000 or something like that.
That man's name was Williams. He is now about
74 or 75 years old.
H.M.Jr:
But he is not connected with the Comptroller's
office?
Folger:
Oh,no. He was an examiner before he went in the
bank.
H.M.Jr:
Well now, Gus, when can the Comptroller give us
this bank examination plus these particular
criticized items as of December fifteenth? When
could we reasonably expect to have them?
Folger:
You will have that report - it will be Christmas,
or close to it.
H.M.Jr:
Well....
Folger:
As near as I could....
H.M.Jr:
This letter ought to be able to go out by the
seventh, oughtn't it, Mr. Delano?
Delano:
Yes, I should think so.
Greenbaum:
Mr. Secretary, I think that we must bear in mind
that that letter should not go out until the
appraisals obtained...
Regraded Unclassified
137
- 9 -
Smith:
Can't go out on the seventh. Can't go out until
a week from Monday, at the earliest.
H.M.Jr:
That is the eleventh.
Delano:
Gus? I would say we could beat that. What about that,
Folger:
I can get an answer from him tomorrow on those
appraisals - Monday.
H.M.Jr:
I didn't hear that.
Folger:
They are talking about the appraisals made by
the American Appraisal Company of the banking
houses. Mr. Wright and the examiner are analyzing
those and they asked me when we would get a re-
port from Wright on that, as to what he thinks
it would appraise. I told him in Mr. Delano's
office within a week, but I can get that answer
from him quicker than that if necessary.
H.M.Jr:
The eleventh is Monday a week.
Smith:
Thursday of next week is the earliest you could
possibly do it and sometime between then and
Monday, 18 that about right?
H.M.Jr:
All right, let's say a deadline of Monday, the
eleventh. Christmas is on the 25th, so right
after Christmas, if his Board of Directors - I
am just trying to work out the schedule. If
his Board of Directors of the Bank of America
doesn't give a satisfactory written reply to
whatever you say in a letter of the eleventh,
then we begin a show cause order, is that the
program?
Greenbaum:
Yes, sir.
H.M.Jr:
A letter goes out on the eleventh that you
(Delano) will write and these gentlemen will
have B chance to look at it and make sugges-
tions. If, by the day after Christmas we don't
get a Christmas present from the Board of
Directors of the Bank of America, then a show
cause order goes out, is that it?
Regraded Unclassified
138
- 10 -
Foley:
Yes,
H.M.Jr:
And during these two weeks you will be pre-
paring a show cause letter?
Foley:
Yes.
H.M.Jr:
Is there any reason why there should be a lapse
of time? I mean, if by the 26th you haven't
heard, how soon afterward could the show cause
order go forward?
Greenbaum:
Well, Mr. Secretary, I would suggest a little
amendment on that. Following up Dean Garrison's
point that we do not send out the show cause
until after you have actually received the
bank examiner's report, which would mean right
after the first of the year
H.M.Jr:
Gus Folger says he will have it by the 25th.
Let's say he is wrong by a day and we get it
on the 26th. The show cause will go forward on
Monday, January first.
Smith:
That is the proper way to do it.
H.M.Jr:
Would that be all right? I am just trying to
get it on the table.
Smith:
The steps are these: This first letter will
draw the curtain on the previous conversations
and negotiations. Now, the next step will come
after the report of examination is received and
it will be based on the facts as reported in
that examination and that is the logical sequence
and the proper way to handle it.
H.M.Jr:
You feel your organization can live up to this?
Delano:
I think so, yes, sir.
H.M.Jr:
Provided, always, that you don't get any satis-
faction from this letter which will go out on
or before the eleventh.
Delano:
That is right.
Regraded Unclassified
139
- 11 -
H.M.Jr:
Well now, just one other suggestion, because
everybody seems to like this Board of Directors
letter. What about directing this to the Board
of Directors?
Landis:
What about what?
H.M.Jr:
This letter of the eleventh, you 866 - the Board
of Directors. "Gentlemen, the President of the
Bank, Mr. Giannini, was in town and we conferred
with him, as a result of which we wish to direct
you a letter and we feel that the following three
or four important things should be passed on by
the Board of Directors within the next two weeks.
If not, we will have to take the following steps..."
This will be addressed to the Board of Directors.
The criticism of the Bank is addressed to the Board
of Directors, isn't it?
Upham:
Yes, sir, and we have been sending a copy to each
Director and I think we ought to do that with this,
each one of them an individual copy of his own.
Smith:
I think the first letter should be addressed to
the President of the Bank and the second letter -
& copy furnished to all Directors, and the second
letter should be sent to the Board of Directors.
H.M.Jr:
You mean to show cause?
Smith:
Yes.
H.M.Jr:
The letter of the eleventh to the President of the
Bank and the copy to the Directors?
Smith:
Yes, because that is an answer to a personal re-
quest.
H.M.Jr:
But the show cause order would go directly to the
Directors?
Spencer:
That is right.
Landis:
And the Bank.
H.M.Jr:
Yes.
Regraded Unclassified
140
- 12
Landis:
It has got to go to the Bank and to each of
the Directors.
H.M.Jr:
When does your train go back to St. Louis?
Smith:
It has gone.
H.M.Jr:
What time did it go?
Smith:
It is only 4:20. I can make that train. It
goes at 5:20.
H.M.Jr:
Sure. Do you want a reservation on it? What
railroad is it?
Smith:
Pennsylvania.
H.M.Jr:
What do you want, 5:20?
Smith:
Yes, I can make it.
H.M.Jr:
What train is it?
Smith:
The Spirit of St. Louis, Pennsylvania. I am not
kidding you.
H.M.Jr:
0. K., Lindbergh. What do you want?
Smith:
Anything. What am I allowed?
Klotz:
A lower.
Smith:
Nobody calls the train anything else out there
but the Spirit.
Garrison:
On this letter of December first, I should think
the drafts could go out before the American
Appraisal report comes in on the assumption it
is going to show so and SO. We could approve
the draft with the understanding that it will
be changed if the appraisal report is otherwise.
That would save time, don't you think, if we
could get that cleaned up next week?
H.M.Jr:
Yes. Prepare it, have it all ready.
Regraded Unclassified
141
- 13 -
Garrison:
And circulate it among us to pass upon,
Foley:
Sure.
H.M.Jr:
Well now, everybody is in agreement?
Smith:
Strange to say.
H.M.Jr:
Now, one of the reasons why I was particularly
upset about this thing this morning, not that
you brought it to my attention but what you
brought to my attention. I had cleared all this
with the President, you see. It was all cleared
and it was agreeable to him that we go forward
to show cause and I have got to give him an
explanation why we are not following the pro-
cedure. He approved everything.
Has anybody else got a train?
Ottley:
I have got mine.
H.M.Jr:
What time?
Ottley:
6:00.
Greenbaum:
I would like to get away if it could be 80 on
the 5:00 o'clock train.
H.M.Jr:
You can. Do you want to ask these gentlemen
anything?
Delano:
No, sir.
H.M.Jr:
I just want you to know - I guess you do know,
don't you, I had Mr. Foley prepare a memorandum
based on what they said on Tuesday. I took it
over to the President when I had lunch with him
and he cleared it and said, "You don't have to
talk to me about it again. I think, Ed, you
had better have another one for me Monday in
case he should have me for lunch Monday, then I
could explain to him why we had changed. I
could explain why the timetable was changed.
He was entirely satisfied with this other pro-
cedure, but I was in the dark, so he is in the
dark. I want to correct it.
Well, I can't thank you all enough for all the
trouble.
Regraded Unclassified
not show the los this at
lunch but dis cussed the critents
THE SECRETARY OF THE TREASURY
which he approved WASHINGTON M.M. Dec. 4. 1931
142
MEMORANDUM FOR THE PRESIDENT
A definite program has now been worked out with reference
to the Bank of America as e result of meetings held last Saturday
attended by Messrs. Tom K. Smith, Charles Spencer, John Ottley,
Lloyd K. Garrison, James M. Lendis, Edward 8. Greenbaum and rep-
resentatives of the Treasury.
The plan is substantially the same as that outlined in By
November 30 memorandum. One additional step was suggested and
agreed to by the conference. Before the Order to Show Cause is
served, 6. letter will be addressed to the Bank by the Comptroller
concluding the conferences which the Comptroller's Office had with
the Gianninis on November 16, 17 and 18, As the record now stands,
these conferences have not been concluded. This letter will inform
the Bank that the proposals made at the conferences with the Comp-
troller have been studied and found unsatisfactory and that unless
appropriate steps are taken by the Bank's Board of Directors by
December 27, 1939 to meet the Comptroller's criticiams as to divi-
dende, new capital and losses, the Comptroller will be required to
take such steps as are authorized by law to carry out his responsi-
bilities.
If the Bank does not submit a satisfactory program in response
Regraded Unclassified
143
- 2 -
to this letter, an Order to Show Cause why the report of examination
should not be published and a certificate for the removal of the
officers and directors of the Bank be transmitted to the Board of
Governors of the Federal Reserve System will be served about
January 2, 1940 and the procedure outlined in My November 30
memorandum will then be followed.
144
December 5,1939
Dictated by Mr. Crowley)
Yesterday afternoon the President, in talking
about the Giannini matter, said that he had conferred
with the Secretary at noon-time and that the Secretary
had told him about the negotiations that had gone on in
the last two weeks and he was greatly disturbed about the
weakness with which Mr. Delano had conducted the affairs
and said that Giannini was Just an ordinary Dago and a
fruit peddler and that he did not know the ordinary ethics
of Government and that for us to let the letter go forward
that the Secretary had discussed with him and if that let-
ter did not bring the results that he then would expect to
get & memorandum from the Secretary and myself as to what
we wanted done as to a program and if Giannini did not agree
to it that he would send for Giannini personally to tell him
that the time had come for someone to let him understand
that he could not defy the United States Government and that
unless he accepted the program in good faith that he was go-
ing to take steps to remove he and his son from the active
management of the Bank; that if he agreed to a program and
showed the proper spirit that he would give him an opportun-
ity to continue in the Bank, otherwise he was publicly going
to handle the matter himself.
Regraded Unclassified
December 7, 1939
For the Secretary
I have been informed by our San Francisco office
that the Bank of America's loan to George S. Eccles
was made early in 1933 for an amount of $30,000. The
exact date could not be made known without digging out
old transfer files of the bank and this action would,
without doubt, excite suspicion and create an embar-
rassing situation. I hope, this approximate date will
be sufficient.
Upm
146
RE BANK OF AMERICA
December 12, 1939.
4:30 p.m.
Present:
Mr. Delano
Mr. Crowley
Mr. Foley
Mr. Tietjens
Mr. Folger
Mrs Klotz
H.M.Jr:
Mr. Eccles came over here with a document on &
piece of paper which was not signed and not
Federal Reserve letterhead, and said he was
authorized by the Federal Reserve Board to tell
me that they want to know what is going on in
the Bank of America and that he, Eccles, feels
that they have been derelict in their duty and
what should they tell Congress if Congress asks
them where was the Federal Reserve when all of
this was going on. So I said, "Well, the answer
to that 1s very simple. When we first started,
we asked everybody to sit in, including Mr. Ran-
som, who was acting, and Mr. Ransom - I think
I am correct in saying - lead everybody to be-
lieve in the Treasury that they might be con-
taminated if they associated with us while we
were looking at how to deal with the Bank of
America." So Eccles said - first he argued, then
he said, "No, that interpretation is correct."
He said, "This is not criticism of you, but I
think we are very vulnerable." So I said, "I
think you are, too, and I think the way you have
conducted yourselves is perfectly ridiculous,
to take that attitude, and in the case of a bank
like this
"Well, you first started out to discuss Section
30." I said, "Sure, when we consult any bank
it is always Section 30. We are discussing
Section 30 now and I am going to make an impor-
tant decision in the next fifteen minutes and
I want you to know it." I didn't want him to
say - "This thing 18 moving very fast, but I
will tell you, subject to consulting with my
associates, that if you write me a letter for-
mally asking that you want to be informed, we
will treat you just the way we have treated
Leo Crowley, who knows everything we do before
we do it," and I said whatever the normal way
of communicating between the Board and the
Treasury . - whatever is the normal way - whether
they address the Comptroller or whatever the
Regraded Unclassified
147
- 2 -
normal way is, "You write me 8. formal letter
that you want to declare yourself in and you
will be in," but I said, You can't do it
this way, giving me & piece of paper with no
signature or no letterhead on it, this is too
important." He said, "If we do it, we will
want McKee to sit in," and I said, "He is all
right," but I said, "I just think that...."
Well, I told him, "The way you have conducted
yourselves He said, "Well, this is
Ransom. I was out of town." This happened
a little over a year ago, I told him we were
going to make an important decision so he
couldn't think we just rushed that around, but
I could not accept 8. piece of paper from him.
Am I right?
Crowley:
Yes. I had lunch with Marriner this noon.
That is the first time I have seen Marriner
since last August and he said he was coming
to see you. I told him it was my understanding
that Ronald had very definitely in this room
said that he didn't want to sit in on these
conferences. I think he was sitting about where
Preston is sitting when he said he didn't want
to sit in on these conferences.
Delano:
He said that, Mr. Secretary, on the grounds
that he might have to be a judge later on.
H.M.Jr:
I told him without looking at my records that
my impression was that the Federal Reserve said,
"Please don't talk to us, because we may have
to - we have to keep ourselves pure and sacred,"
and so forth and 80 on. Well now, he said, "If
Congress asks me where was the Federal Reserve
Board..." And I said, "I don't know what you
would answer."
Crowley:
You don't think he got inoculated this morning,
do you! He was at the White House this morning.
H.M.Jr:
Was he?
Crowley:
So the ticker said.
H.M.Jr:
Well, he wants to declare himself in and the way
Regraded Unclassified
148
- 3 -
I. feel is, he can come on in, the water 10 hot.
I told him that. But that was the only answer,
wasn't it, Edf You wouldn't take a piece of
paper like that, would you?
Foley:
Not from him.
H.M.Jr:
All right. Now, where do we go from here? After
all, these people got through - - is this acceptable
to you!
Delano:
Yes. The letter has been signed and it is being
multigraphed.
H.M.Jr:
Is it there?
Delano:
I have a copy of it. The original 1s being
multigraphed.
H.M.Jr:
Is this a true copyt
Foley:
Yes.
H.M.Jr:
Has Mr. Crowley seen it?
Delano:
Mr. Crowley has seen this.
H.M.Jr:
I want to take time to read this, if I may, out
loud. All the doctors and lawyers and Indian
chiefs have seen this?
Delano:
I think so.
Foley:
I am sorry we don't have the original, but it is
being photographed so we can have the copies
available for the directors.
Delano:
Is that a good copy there?
H.M.Jr:
No, you gave me a pretty bad one and I an getting
old. This is all right.
"Dear Mr. Giannini:
"Reference is made to the recent conferences at
Washington with you and Messrs. L. M. Giannini
and Charles W. Collins representing the Bank of
America National Trust and Savings Association,
Regraded Unclassified
149
San Francisco, California, which were hold at
your request to discuss criticisms and recom-
mendations relating to the condition and manage-
ment of your Bank as set forth in my letters of
April 14, July 31 and October 2, 1939. At these
conferences you indicated that in spite of these
letters and other information furnished the Bank,
further explanation was requested as to the basis
of these criticisms and recommendations, and your
request was complied with. During the course of
the conferences, you and the other representatives
of the Bank advanced certain arguments and made
certain suggestions which you requested be con-
sidered by this office.
"Although careful study has been given to this
entire matter over a long period of time, never-
theless I have complied with your request and
have given further careful consideration to
arguments and proposals presented by you. In
my opinion they fail to meet in any important
particular the criticisms made of the unsafe and
unsound banking practices and violations of law
pursued by your bank in the face of long continued
and persistent warnings.
"In order that there shall be no misunderstanding
of the position of this office, I shall again be
specific with reference to the most flagrant of
these practices."
I think this sounds good, don't you?
Delano:
It 1a all right.
H.M.Jr:
"1. The Dividend Policy: Specific warnings
against the continuance of your dividend policy
as an unsafe and unsound banking practice began
on and have continued since September 13, 1938.
Despite these warnings the same policy has been
deliberately pursued and dividends at the criti-
cized rate have been declared on three separate
occasions. At our last conference, you indicated
your determination to pursue that policy. The
suggestion involving the use of dividends payable
to Transamerica Corporation either (1) for the
purchase of additional stock in the Bank, or
Regraded Unclassified
150
(2) for the retirement of obligations owed the
Bank by Transamerica Corporation or its sub-
sidiaries, is not only inadequate and evasive
but has implicit in it the perpetration of a
deceit upon your shareholders, other than
Transamerica Corporation. Obviously, such a
proposal could not be considered as meeting
the long continued criticisms of your dividend
policy.
"2. New Capital: Despite repeated insistence
that new capital be provided, in view of the
Bank's criticized assets, its over-concentration
in real estate, and the prevailing ratio between
its capital and deposits, no steps have been
taken to correct this condition, and no plan to
that end has been forthcoming. The casual sug-
gestions made by you at the conference obviously
are no substitute for the needed capital, nor
for a detailed, definitive plan.
"3. Charging Off of Losses: In our letters of
July 31, October 2 and November 15, 1939, you
were directed to charge off all losses set up
in the report of examination completed July 21,
1939. At our last conference, you stated that
you refused to charge off these losses. No
proposal was submitted other than that of accept-
ing certain appraisals of the American Appraisal
Company or increasing slightly the depreciation
on real estate. The summary of the appraisals
you have furnished has been examined. It is my
opinion that it cannot be accepted as justifica-
tion for refusal to charge off assets that in
our reiterated view should have long since been
written off. The slight increase in the depre-
ciation rate that you suggest hardly needs
comment. Its insufficiency 1s obvious. Our
suggestions have always been pointed toward
charging off these losses, not amortizing them.
"The foregoing are the more important of the
unsafe and unsound banking practices and vio-
lations of law which your Bank has persisted in
in spite of repeated warnings. Attention has
been called on numerous occasions to these and
other unsafe and unsound banking practices and
151
- 6 -
violations of law, including the Bank's
failure to take steps to have returned to it
the large balance carried with the Transamerica
General Corporation in the Self-Insurance Fund.
While I am naturally pleased to note improve-
mente which have been made in the Bank's posi-
tion in regard to certain of these practices,
most of which resulted during the past year
from the efforts of this office, nevertheless
the important fact remains that the more essen-
tial matters, some of which have been outlined
above, remain outside the orbit of such changes
as you have made. These all-important matters
are in essence unchanged and my recommendations
regarding them unobserved.
"I need hardly remind you of the duties placed
upon this office by section 5240 of the Revised
Statutes of 1873, as amended (U.S.C. title 12,
sec. 481) which requires me to see to it that
my recommendations and suggestions, based upon
the last report of examination of your Bank,
are complied with. In the major respects men-
tioned above, my recommendations and suggestions
have not been complied with, although more than
the statutory time for compliance has passed.
"The duties of my office will not permit me to
countenance a continuation of this situation
and unless appropriate and specific steps to
correct the matters referred to above are taken
by the board of directors of your Bank by
December 31, 1939, I shall be compelled to take
such action as the law authorizes and requires
to protect the interests of depositors and
stockholders.
"I request that a copy of this letter be trans-
mitted to each of your directors and I am en-
closing sufficient copies for that purpose. I
do this not merely that the gravity of this
situation shall be presented to them but also
in order that such final proposals as may be
forthcoming may have in their initiation and
presentation the sponsorship of the board of
your Bank."
Regraded Unclassified
152
- 7 -
I think that is 8. darn good letter.
Crowley:
I think it is a dendy letter.
H.M.Jr:
That letter could go into publication tomorrow
and there is nothing that you have to apologize
for.
Delano:
I think it 1s a fine letter.
H.M.Jr:
It impresses me. It makes me think you have got
a pretty good case. I think that 18 a good letter.
I am afraid to ask for any more suggestions unless
Leo has one. I will give you the exclusive privi-
lege.
Crowley:
No, not on the letter. Let's let the letter go.
H.M.Jr:
0. K. Now, what else?
Crowley:
Mr. Delano told me as we walked in that Giannini
is calling him from California. I think he has
got to take the telephone call. I think he should
tell him that you are sending him a letter. Find
out first what he wants. If he wants to talk
about this thing, tell him you are sending him
a letter which is stating your position.
Foley:
To be mailed tonight.
H.M.Jr:
Do you mind if I interrupt?
Crowley:
Not at all.
H.M.Jr:
You have had to go over - to consult the doctor
for various reasons. Couldn't you conveniently
tell them that you are out of town until - what
is today, Tuesday - - until Thursday.
Delano:
It is a curious thing, because that is exactly
what the operator was told, that I was having
my nose fixed in this clinic and I was not
available and then they canceled the call.
H.M.Jr:
I personally - excuse me.
Delano:
I thought I would wait until they got this
letter.
Regraded Unclassified
153
- 8 -
H.M.Jr:
You and me both.
Crowley:
Just so he can't say that you didn't take a
call.
H.M.Jr:
That is all right. Your thought is, wait
until he gets this letter. Who canceled the
call?
Delano:
He did.
H.M.Jr:
Wait until he puts it in again.
Delano:
Yes.
H.M.Jr:
I think that your own idea 1a better than Leo's
if he doesn't mind my saying so.
Crowley:
Not at all.
H.M.Jr:
I would wait until he gets the letter.
Delano:
That is my idea.
H.M.Jr:
I would follow your own instinct. All right,
Leo?
Crowley:
Then there is one other thing. When he comes
back after he gets this letter, let's make him
put his proposition that he wants in writing
and let's not let him come back and have another
Town Hall meeting and start talking individual
items here.
H.M.Jr:
Don't we say that?
Foley:
Yes, in the last sentence.
Crowley:
He will want to come back here and try to clutter
up this record with another meeting, don't you
know.
Foley:
I think the Comptroller ought to tell him that
he isn't going to listen to him unless he has
a plan that has been approved by his board of
directors.
Crowley:
That is right.
Regraded Unclassified
154
- 9 -
Delano:
I have got an idea on that, Mr. Secretary.
No don't want to meet with these gentlemen
any more unless they come with a. program
which is specific in writing and endorsed
by their directors.
H.M.Jr:
And stick to that.
Delano:
Yes, I will stick to that.
H.M.Jr:
You can ell them, "Gentlemen, unless you come
with a written plan of your board of directors,
there is no use of my wasting my time to 860
you."
Crowley:
That 18 right.
E.M.Jr:
But I have got to have a written plan approved
by your board of directors." And I wouldn't
see him.
Delano:
I won't.
H.M.Jr:
I wouldn't see him until they have a formal
letter.
Delano:
I told Ed I would climb a tree first.
E.M.Jr:
I hope they don't saw off the limb on you.
Delano:
Well, we are past that danger.
H.M.Jr:
I would not see the so and 808 until they have
8. formal plan and I wouldn't subject myself to
their insults.
Crowley:
That is right.
Delano:
That is agreed.
H.M.Jr:
If you wait now until they get this letter and
they call you up and they say - if they are
just paraphrasing what they have said before,
tell them we will see them when they have a
written plan from their Board of Directors,
and not before.
Crowley:
He will keep on playing with this thing in-
definitely.
155
- 10 -
H.M.Jr:
We had to write this letter in order to over-
come the last conference. Now, you have gotten
beyond that stage. If they have a formal thing,
sure, see them.
Delano:
I would like to have the thing very carefully
worked along with Leo and with the General
Counsel.
H.M.Jr:
Maybe by a day or two you will have Mr. McKee.
Delano:
Yes, it looks like it.
Crowley:
That will be a. big help. It will be like this
letter, Ed. If they want to come in now, they
will want to write the thing over again.
Foley:
To bring McKee up to date.
Crowley:
Every time we bring some new man in on this
letter, he has a new idea. The Federal Reserve
can't come in here and upset what you have
already done.
H.M.Jr:
How can they?
Crowley:
That 1s what they would like to do. They would
like to have some ideas of handling this.
Delano:
Do you understand the Federal Reserve is going
to make a formal request?
H.M.Jr:
That they want to be kept informed.
Crowley:
Well, that is the best indication that things
seem to be going along pretty well.
H.M.Jr:
0. K.
the original of this letter and 30 copies
ere sent to Giannini at 6:00 p.m. on 12/12'39
via air mail marked special delivery and was
156
registered.
McGuire
157
TREASURY department
COMPTROLLER OF THE CURRENCY
WASHINGTON
ADDRESS REPLY TO
"COMPTROLLER OF THE CURRENCY"
December 12, 1959
Dear Mr. Giannini:
Reference is made to By recent conferences at Washington
with you end Messrs. L. M. Giannini and Charles W. Collins repre-
senting the Bank of America National Trust and Savings Association,
San Francisco, California, which were held at your request to dis-
cuss criticisms and recomendations relating to the condition end
management of your Bank as set forth in my letters 02 April 14,
July 31 and October 2, 1959. At these conferences you indicated
that in spite of these letters and other information furnished the
Bank, further explanation was requested as to the basis of these
criticiams and recommendations, and I complied with your request.
During the course of the conferences, you and the other representa-
tives of the Bank advanced certain erguments and made certain
suggestions which you requested be considered by this office.
Although I had already given careful study to this entire
matter over a long period of time, nevertheless I have complied
with your request and have given further careful consideration to the
arguments end proposals presented by you. In By opinion they fail
to meet in any important particular the criticisms made of the
unsafe and unsound banking practices and violations of law pursued
158
2 -
by your Bank in the face of long continued and persistent warnings,
In order that there shall be no misunderstanding of the position
of this office, I shall again be specific with reference to the most
flagrant of these practices.
1. The Dividend Policy: Specific warnings against the continuance
of your dividend policy as an unsafe and unsound banking practice began
on and have continued since September 13, 1938. Despite these warnings
your Bank has deliberately pursued the same policy and has declared
dividends at the criticized rate on three separate occasions. At our
last conference, you indicated your determination to continue that
policy. Your suggestion involving the use of dividends payable to
Transamerica Corporation either (1) for the purchase of additional
stock in the Bank, or (2) for the retirement of obligations owed the
Bank by Transamerica Corporation or its subsidiaries, 18 not only in-
adequate and evasive but has implicit in it the perpetration of 8. deceit
upon your stockholders, other than Transamerica Corporation. Obviously,
such a proposal could not be considered as meeting our long continued
criticisms of your dividend policy.
2, New Capital: Despite my repeated insistence that new
capital be provided, in view of the Bank 8 criticized assets, its
over-concentration in real estate, and the unsatisfactory prevailing
ratio between its capital end deposits, you have taken no steps to
correct this condition, and you have submitted no satisfactory plan
to that end. The casual suggestions made by you at the conferences
obviously are no substitute for the needed capital, nor for a detailed,
definitive and acceptable plan.
Regraded Unclassified
159
- 3 -
3. Charging off of Losses: I directed you in RV letters of
July 51, October 2 and November 15, 1959 to charge off all losses set
up in the report of examination completed July 81, 1959. At our last
conference, you stated that you refused to charge off these losses.
You submitted no proposal other than that of accepting certain appraisals
of the American Appraisal Company or increasing alightly the depreciation
on real estate. You have furnished us with certain valuation figures
which you report to be the summary results of an appraisal made for you
by the American Appraisal Company, which appraisal has not been made
available to us. I cannot accept these figures as justification for
your refusal to charge off assets that in By reiterated view should
have long since been written off. The slight increase in the depreciation
rate that you suggest hardly needs comment. Its insufficiency is
obvious. My suggestions have always been pointed toward charging off
these losses, not amortizing them.
The foregoing are the more important of the unsafe and unsound
banking practices and violations of law which your Bank has persisted
in in spite of By repeated warnings. Attention has been called on
numerous occasions to these and other unsafe and unsound banking
practices and violations of law, including the Bank's failure to teke
steps to have returned to it the large balance carried with the Trans-
america General Corporation in the fund designated by you as the
"Self-Insurance Fund." While I as naturally pleased to note improve-
ments which have been made in the Bank's position in regard to certain
criticized practices, most of which improvements were made during the
Regraded Unclassified
160
- 4 -
past year in response to my criticisms, nevertheless the important
fact remains that the more essential defects in your practices, some
of which have been outlined above, remain untouched by such changes 48
you have made.
The duties placed upon this office by section 5240 of the
Revised Statutes of 1873, as amended (U.S.C. title 12, sec. 481)
require me to see to it that my recommendations and suggestions,
based upon the last report of examination of your Bank, are complied
with. In the major respects mentioned above, my recommendations
and suggestions have not been complied with, although more than the
statutory time for compliance has passed. Unless appropriate and
specific steps to correct the matters referred to above are taken by
the Board of Directors of your Bank by December 31, 1939, I shall be
compelled to take such action as the law authorizes and requires to
protect the interests of depositors and stockholders.
I request that a copy of this letter be transmitted to each
of your directors and I an enclosing sufficient copies for that purpose.
I do this not merely that the gravity of this situation shall be
presented to them but also in order that such final proposals as may
be forthcoming may have in their initiation and presentation the
sponsorship and approval of the Board of your Bank.
Very truly yours,
Comptroller of the Currency.
Mr. A. P. Giannini
Chairman, Board of Directors
Bank of America National Trust
and Savings Association
San Francisco, California
Regraded Unclassified
161
LETTER
FROM THE BOARD OF D IRECTORS OF BANK
OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION TO THE
COMPTROLLER OF THE CURRENCY IN
REPLY TO THE LETTER OF
OCTOBER 2, 1939 FROM THE
COMPTROLLER TO THE BOARD OF
DIRECTORS
DECEMBER 12; 1939
Regraded Unclassified
162
TABLE OF CONTENTS
Page No.
1
INTRODUCTION I. DIVIDEND POLICY AND UNDERCAPITALIZATION
3
3
1. Undercapitalization
5
B. Dividend Policy
1. Valuations of Banking Premises made
by National Bank Emminer are er-
12
ronsous and totally unrel iable
2. There is no author in the Nation-
al Bank Emminer to classify a loss
29
in banking premises
33
II. REAL ESTATE CONCENTRATION
д. Contracts with California Lands Inc. and
39
Capital Company
1. History and terms of Successive
Contracts with California Lands
37
Inc. and Capital Company
40
2. Reply to Comptroller's criticisms
.
45
B. Merchants National Realty Corporation
46
1. History of "Former Bank Premise 8ᵗʰ
.
49
2. Reply to Comptrollers Criticiams
53
III. TRANSAMERICA C ORPORATION LARGE LINE
A. Items listed in Report of Examination
57
of March 31, 1939
57
1. Transamerica Corporation
2. Bankamerica Agricultural Credit
59
Corporation
60
3. California Lands Inc.
62
4. Capital Company
65
5. Intercontinental Corporation
66
6. Transamerica Service Corporation
66
7. Pacific Coast Mortgage Company
69
8. Bankamerica Company
. 70
9. Western Furniture Exchange Inc.
Regraded Unclassified
163
Page yo.
10. Western States Corporation
.
70
11. Transamerica General Corporation
.
70
B. Inter-America Corporation Centracts-
History
72
1. Comptroller's criticism
80
2. Reply to Comptroller's
Criticiems
-
84
(a) Extensions of Inter-Anerica
Corporation Contracts
.
B6
(b) Revaluat ion of Bonds
+
.
86
(c) Purchase of Charged-off
Assets
.
88
(d) Acceptance of Stock of
National City Bank
. 92
(1) Option to Purchase
- 94
(o) Reinstatement of notes sold
under Intor-America Cor-
poration Contracts
97
C. Self-Insurance
98
IV. VIOLATIONS OF LAW
103
A. Section 5200 of the Revised Statutes
. 104
1. Acceptance of & Contract of
Guaranty from Transamerica Cor-
portion on an obligation previ-
ously existing was not a viola-
tion of Section 5200 of the Re-
vised Statutes
.
106
2. Transamerica Corporation is not
obligated to the Bank within the
meaning of Section 5200 of the
Revised Statutes
. 107
B. Section 5136 of the Revised Statutes
e 113
C. Section 5137 of the Revised Statutes
113
D. Section 24 Federal Reserve Act
115
V. CONCLUSION
- 116
- 2 -
Regraded Unclassified
164
Sen Francisco, California,
December 12, 1939.
The Comptroller of the Currency.
Washington, D. 0.
In thoir letter of October 11, 1939. the Board of Directors of the
Bank of America National Trust and Savings Association, drew the Comptrollor's
attention to the fact that they were still awaiting his response to several
previous communications. Such response has not yet been received but in the
paintino the Directors have determined to reply in dotail to the lotter of
October 2, 1939 from the Comptroller to the Board of Directors.
The matters set forth in the Comptroller's lotter, with one exception,
knvo r.ll been the subject of extensive corrospondence over a period of more
than n. year, and agreements and commitments have been made. It cannot be
determined from the present lotter whether the Comptroller has completely
overlooked previous commitments or whother it has been determined, without
notice to the book or its directors, to disrogard then. Rather than review
the provious correspondence on these matters there is attached to this letter,
as the first exhibit, on itemized list of it.
The one matter not proviously under discussion with the Comptroller's
office is the doclaration of a dividend on September 12, 1939, without
vriting off all of the losses set up by the Emminer in the report of oxani-
nation completed July 21. 1939. This matter will be discussed in detail but
at this point it my be said that it is not believed that the statement nado
by the Chief National Bank Examiner to President L. M. Giannini; Mr. R. G. Smith
Executive Vico Prosident, and Mr. V. E. Blaucr, Vice-Chairnan of the Board,
to the effect that the Comptroller of the Currency could direct a bank to charge
off my nasot and the brun't could do nothing but comply. 10 correct. It may be
assured that the Comptroller of the Currency is wested with considerable
discretion, but cortainly that discrotion cannot be exercised artibrarily and
without a mowlodge of the facts upon which it must be based and even then
mot so reasonably related to the subject under consideration and importially
Appliod. It my be conceded also that the Comptroller of the Currency DAY
Regraded Unclassified
165
ordinarily roly upon information secured for him by the National Bank Im-
increa When, in good faith. 18 is assorted, however, that the information
furnished to the Comptrollor is erroneous and the rosult of nistako, 18 would
appear that puroly as n. catter of caution the Comptroller should verify the
information bofore proceeding to take stops which night result in sorious in-
jury to the bank, its depositors and stockholdore. It has proviously been
asserted and will be conclusively domonstrated that the valuations nade by
the National Bank Emminor upon banking promises which resulted in the clas-
sification of lossos of approximately $9,000,000 word the result of gross
errors and nistolcos by the Examiner. It would appear that the Comptroller
should sook to vorify the information furnished to him before connitting
his Office to a ruling which cannot possibly be mustained.
The Comptrollor's suggestion that the several transactions reforred
to in the letter ovidence a schege to uso the facilities of the bank for the
benefit of Transamerion Corporation or its subsidiarios is not wirranted. The
simple fact is that Transamorica Corporation directly and through its subsidi-
arice has contributed approximately $17,000,000 to the nesets of the bank dur-
ing a period of approximately sevon years. Those contributions have been of-
fected through cash payments on the guarantics against loss on bank nasota
horsefter reforred to, purchase of real proporty from the bank with & rosult-
ing roalized loss on rosales, and losses absorbed in the acquisition of vari-
our banks purchased by Transamerion Corporation and subsequently nergod with
bank of Ancrica N. T. & L The transactions complained of have all resulted
in substantial benefit to the bank rather than Transanerica Corporation, and
that corporation and its subsidiarios and nffiliates unintain deposits with
the bank at tinos as high as $16,000,000.
It is bolioved that the criticians contained in tho lotter of October
2, 1939, are the result of & failure to understand the facts or incomplete in-
formation about the transactions which are referred to thoroin and that if all
of the circumstancos surrounding each transaction should be understood and con-
sidered by the Conntroller, the Comptroller hinself would be antisfied that the
Regraded Unclassified
166
criticians ATO not woll mde. It is the purpose of this letter therefore
to furnish the Comptrollor with complete information respecting each trans-
action and on explanation of the reasons and notives for onch. The roply
will so directed to the various subjects covored in the Comptrollor's lotter
in the order thoroin not forth.
I DIVIDEND POLICY AND UNDER CAPILATIZATION
(A) Undor Capitalisation
The Comptrollor states that the ratio of the capital structure of
the bank to doposits is out of proportion to the rntio required for enfo and
sound banking and that failure of the directors to renedy the undercapitalisod
condition of the bank is an unsafo and unsound banking practice.
In the letter of September 23, 1938, from the Acting Comptroller of
the Curvency, it was stated that the bank was undercnpitalized to the extont
of $42,000,000. but in the reply to this lotter by the directors on October 11,
1938, it was pointed out that under the provisions of the National Bank Act
the amount of the capital of the bank wns more than twice that required by law.
Theronfter. in the conforences hold in the office of the Comptroller of the
Currency in Docomber of 1938. the program submitted by the Comptroller of the
Currency provided, as the first item, that the bank should obtain additional
capital BO that its capital should have a ratio to total deposits of one to
ton. This program was approved by the Board of Diroctors of the bank and an
application una filed with the Reconstruction Finnnce Corporation for & loan
to anable stockholders to subscribe for proferred stock in the apount of
$25,000,000. No notion has over been takon upon this application oven though
in a letter dated April 16, 1939, from President L. X. Giannini to the
Comptroller of the Currency it who stated that the bank wru willing to proceed
with the capital increase upon the plan agreed if the Comptroller desired it
to do so. No roply to this commication vas even nado and the letter of
July 31. 1939. from the Comptroller of the Currency contained no further
request for an increase of capitalization.
Regraded Unclassified
167
Under those circumstances it would ordinarily bo assumed that the
Comptrollor's request for additional capital hnd boen abandoned bocause in
(nos of the bank's exprossed willingnoss to procoed with the agreed program
upon his request, no such roquest was mdo. The letter of October a does
not purport to bo such a request traft assigns as an unsafe and unsound practico
the failure to remody the "undercapitalized condition" of the bank.
The right of the Comptroller to dosignate a rntio of capital to do-
posits is scriously questioned for it 1s not bolioved that any such authority
exists.
In the first place, the National BANK Act (Soction 5138 Revised
Statuton: 12 USCA 51) specifics in dotail tho capital required for national
Insite. This soction pormits the Comptroller of the Currency, in his dia-
crotion, to waive sons of the requirements of the statuto, but thoro is no
authority in that soction or any other provision of law giving the Comptrollor
power or discrotion to imposo requirements not provided for in the atntute 11-
solf. Although there have been many recent amondmonts to the National Bank
Act, proposals to change the capital roquirements imposed by this section have
been ignored, and it must be assumed that Orngrose did not want such changos
to be ando.
In the socond place, there does not appear to be any provision in
Any statuto which gives the Comptroller of the Currency the power or authority
to doclare and by his doclaration thereby ostablish any not or practice ns an
unsafe or unsrund banking practice. Soction 30 of the Banking Act of 1933
(12 USCA 77) provides that when in the opinion of the Comptroller, a director
or officer of a national bank has continued an unsafe or unsound practice in
conducting the business of the bank after having boon warned by the Comptroller
to discontinue such practico, the fnots any be certified to the Board of
Governors of the Federal Roserve Systen. It is difficult to BOD upon what
basis the failure to socure additional capital can be considered na a "prootico
in conducting the businoss of the bank". That term obviously refors purely to
nothods of operating or conducting the business of banking. It is even nore
- 4 -
Regraded Unclassified
168
difficult to justify an attempt by the Comptroller of the Currency to sub-
stituto his opinion of ndequate capitalization for any bank for the opinion
of Congross as expressed in the enactment of the statute. Congross has
stated in dotail the capital requirements for a national bank, and it would
not appear that the Comptroller of the Currency could change those requiro-
note ovon though in his opinion they are insufficient.
Although the Comptroller's lotter refors to nn alleged concentration
in roal ostate and other criticized assote, it is ovident from the comparison
of the ratio of capital to deposits in 1927 and in 1939 that the claim of under-
capitalization 10 based upon the publicly nanounced policy of the Comptroller's
Office to roquiro a ratio of one to ton between capital and deposits. While
this my be a desirable ratio, it is cortainly not universal. and if it lion
within the power of the Comptrollor to require it, it would appear that the re-
quirenent should be ostablished by regulation or rule which would be applicable
to all banks alike. It would appoar that if a ratio between capital and do-
posits of loss than one to ton constitutes an unsafe and unsound practice in. one
bank it should likowise constitute unsafe and unsound practice for all banks.
The Comptrollor states that the adjusted capital structure of the
Sank as shown by the report of examination completed July 21, 1939 is
$9,000,000 loss than that shown in tho next procoding report of examination
completed on February 8. 1939. As a matter of fact, the adjusted capital
structure increased by $6,000,000 from the date of the last examination. The
apparent reduction shown in the report of examination ending July 21, 1939
vas accomplishod in part by the classification of a loss of approximately
$9,000,000 on banking premises and a III classification of $6,891,000 in the
roal estage purchase contracts of California Lands Inc. and Capital Company.
As will do hereafter shown in detail, noither of those classifications can be
justified under the facts.
(B) Dividand Policy
The lotter of October 2, 1939 contains a number of criticisms of
Regraded Unclassified
169
: dividend policy of the bank. These will be specifically referred to
before discussing the subject in general.
The Comptroller states that it in an unsafe and unsound practice
to disbured dividends while the bank carries B. dangerous accumulation of
real eytrite and other fixed assets, an unwarranted concentration in the
obligations of Transamerica Cornoration and total criticised assets of more
than $130,000,000.
It is not believed that the bank has A dangerous accumulation of
resl main. The investment in banking premises is well under the limit
involved by law and the bank's promises nate considered to be thoroughly sound
Assets and for the proper conduct of the bank's business. Purther-
sore as ratio a:" the banit's occupancy expense to capital and deposits is
0.10-Malf of that of 284 reporting banks in all parts of the
country C.D. shows by a survey sublished by the American Bankers Association.
The of other roal estate owned is small in relation to the bank's
canital rad volume of roal estate loans. Other real estate does not re-
recont fixed because it io disposed of an soon 08 possible after its
acquisition.
The so-colled "unwarranted concentration" in the obligations of
Corporation and its subsidiarios is discussed herenfter in
Bote11 -- 53 under the handing of Transanorica Corporation Largo Line.
I. is not believed that these obligations can properly be designated as an
www.anted concentration. Zie obligations that constitute direct loans
- state logal limits ruid amply secured and ATC not advorsely classified.
2011 property nequired on foroclosure must be sold to somo one. The contracts
sold roal ostate to subsidiarios of Transamerica
Communition live resulted Alrordy in the receipt by the bank of almost
$0,000,000 2020 thrus it could has received by appling the proporties to in-
Signes. nents on those contracts lave boon anticipated by more
The contract b;- Transamories Corporation guarnisteed
Regraded Unclassified
170
and protection of the ban!: and to classify it ne unwarranted is to say that
it 10 improper for a stockholder to lond its crodit to the bank to protect
it from loss on doubtful nesots.
The Comptrollor statos that the report of examination completed
July 21, 1939 shows criticized assota of more than $130,000,000. The
Examiner did classify assots in this amount in the last report of exami-
nation. The propricty of declaring dividonds in the face of this criticism
by the Examiner must in the final analysis depend upon the nature of the
criticism and whether or not it 1a justified under the facts. Approximately
$12,000,000 of the adverse classification applics to banking premises. Do
part of this classification can be justified as will hereafter be shown in
detail. Approximately $34,000.000 (since reduced to less than $30,000,000)
of the classified assets consist of contracts for the sale of real property
acquired on foreclosure to California Lands Inc. and Capital Co. More than
50% of the aggrogate purchase price of those proporties has been paid; in-
stallments have been anticipated, and more than $10,500,000 has been paid on
the contracts in the period since April 28, 1938. Further facts hereafter
shows vill indicato that this classification is not justified.
A large portion of the classified assets are loans which under
examination procodure formerly in effect may have been classified as "slov".
The revised procedure for examination of national banks as agreed upon by
the Socretary of the Treasury, the Board of Governors of the Federal Reserve
System, the Directors of the Federal Deposit Insurance Corporation, and the
Comptroller of the Currency, provides that no loan shall be classified as II
"If ultimato repayment seems reasonably assured in view of the sound not
worth of the makor or endorsor, his earning capacity and character, or the
protection of collateral or other security of sound intrinsic value." The
bank cannot be responsible for the failure of the National Bank Examiner to
follow the procodure laid down for classification of loans. When the quos-
tion in whether the payment of dividonds is an unsafe or unsound practice
to view of the criticised nasote of the bank, however, it 18 certainly
- 7 -
Regraded Unclassified
171
scherit] to Actermine if the critician in justified under the facts and
of governmental authorities. Under the former examine-
the cli seification no "slow" was not nr. néverse classifi-
80, Spense 19 question vas raised no to ultimate
Mication. By including the "slow" naset In the present
II, it receives nn electification end thoreby Cives
of n large amount of criticized negots. the major portion
get subject to criticium At all. The Comparative Schodule of
criftod Loris ned Discounts set forth in the report of examination of
I. 1930. completed July 21, 1939, At 3. insort 1, shows that
of classified lorns 73 Avril 10, 1933 was 49.6% of the total of
Locan sed that this percentrge has stondily decreased ia every report
04:10 that time, 00 that i- the last report it vis reduced
13.555 of total of All loans. This showe continued and substantial
returned the porcentage of classified loans.
Combrollor states that n Inrge part of the dividendo de-
your 1932 VOTO paid from non-recurring profits from sales
corrition. It is not claimal that this vna unlowful,
no 7.1 and washind proctice, but apparantly it
A careful consideration of the carrings aid
1330 indicates that the Comptroller's statement
criticiam not justified. For the 7632 1355 dat
155 including recoveries not not profite 2"
to $13,057,832.25. nné during the and
the ando of securition were $9,048,520.18. or
writtence :f $22,103,752.41. During the 8020 period, the bank
of $1,206,129.40, suffered 100000 of $2,062,709.63
and from termsnetions originating subsequent to
Insted of $4,565,274.70 11 transactions originating prior to
decovarios of $293,852.81 loaving A not of
t: do divirgié nominst total carnings for the period and loaving
- 5 -
Regraded Unclassified
172
a not profit of $14,565,291.29. Dividonds of $9,600,000 word paid, lonving
the sua of $4,965,491.29 which was added to capital funds,
The rovised procodure for examination of antional banks nbovo re-
forred to states with respect to profits on socurities, "Until lossos have
Seen written off and adaquate reserves established, the une of profits from
the sala of Isocuritios for any purpose other than those, will not be np-
provod." This would soon to indicate that securities profits name required
to be used to pay losses, and if this is 80, then suroly the compliance
with the regulation should not be criticized.
It any be conceded that ordinarily non-rocurring profit, such no
arisos from the salo of securities; should not be disbursed in the form of
dividends and that is undoubtodly the reason for the requirement that they
should first be used to provide for losses and ostablish reserves. In de-
termining a fair dividend mto, howover, it is belioved to be proper to com-
sidor such non-rocurring profits as na offset to losses which con be fairly
considered to be non-recurring. The schodule of carnings and dividonds hore-
after sot forth in Exhibit 7 shows that during the year 1938 losses from
current operations and on transactions originating after 1932 totale&
$2,062,709.83. whoreas losses occurring on transactions prior to 1932 were
$4,566,274.70; one for A period of 41 years since 1935 lossos on transactions
pade prior to 1932 word in excess of $34,000,000. while from current operations
and transactions subsoquent to that date, the loss was approximately $5,000,000.
In view of the fact that losson on loans mndo since 1932 have boon approximately
72/1000 of 1$ por annue on the annual average volume of total loans outstanding,
it is bolioved that the treatment of losses on loans and investments mnde
prior to that tino is fully justified.
The Comptroller statos, "Before any dividends wore paid, carnings
should have been used (1) to eliminato all lossos and a reasonable portion
of the other criticized nesots, (2) to ostablish an adequate rosorve against
possible future losses, and (3) to establish a proppe ratio betwoon not
source capital and deposits." The last point (3) heretofore has been discussed
under the hoading of Undercapitalisation at page 3. In reply to the other
- 9 -
Regraded Unclassified
173
points. $10 following my be said:
(1) All admitted losses were eliminated.
(2) It is assumed that the criticized assets referred to are doubt-
ml itom which might result in future losses. The amount of net carnings
cirried over to the Undivided Profits Account for the year 1938 exceeded the
amount of the doubtful classification of loans And investments shown in the
start examination report of that year. For nll practical purposes the Un-
ivided Profite Account is e. resorve for future losses because if current
invoice are not sufficient to take care of current losses, they may be
nate from that account. It DAY be that some banks consider it desirable to
et acido reserves for futuro lossos rather than loave the funds in the Un-
divided Profits Account. From B. practical standpoint it doesn't appear to
salto any difference in the ultimate outcome whother a portion of the carnings
nine put in a reserve for future lossos or left in the Undivided Profite
Account. from which they are available for payment of future lossos. As far
(
TVII this bank is concorned, as shown by the table in Exhibit 7. not profits
from January 1, 1935 to Juno 30, 1939 were $57 588.789. 36 after providing
resorves for more than $34,000,000.00 of ostimated looses considered to be
non-recurring because they proso an transactions sade prior to 1932 by the
prior management of the bank. During this period $37,200,000. was paid in
dividends and $20,598,822.32 was addod to capital funds. It in not belioved
that 2. distribution of 64% of the not profits of the bank constitutes an
unworrented dividend policy, or an unsafe and unsound banking practice, whom
the réjusted unimaired capital in more than twice that required by 10M and
daquate provision has boan n-do for losses nnd improvement of capital
structure.
The Comptroller statos in effect that the dividond policy is un-
varraited and an unsafe and unsound banking practice bocause 99% of the
:!vidonds were >nid to Transamorica Corporation and that this corporation
ovo- JOW DWED 42% of the stock. It la impossible to conceive of evon B.
loveible basis for on assortion that the propricty of A dividend disburse-
- 10-
Regraded Inclassified
174
sent can be determined by reference to who owns the stock and therefore
receives the dividend. If the dividend disbursements are proper in view
of the earnings and capital of the bank, it is immaterial whether the
stock is owned by Transamerica Corporation or anyone else. The assertion
that Transamerica Corporation has been unduly favored or favored at all
has no basis in fact because that corporation as a stockholder has con-
tributed approximately $17,000,000 of its own funds to the improvement
of the asset condition of the bank in one form or another over a period
of years. Transamerica Corporation and its subsidiaries also maintain
substantial average deposits with the bank. Furthermore, it should be
noted that prior to the declaration of the September, 1939 dividend
Transamerica Corporation had agreed that dividends received by it from
its stock in the bank might be impounded for the purpose of reducing ite
commitments to the bank or to subscribe to additional stock in the bank,
and the last dividend amounting to $830,000 has now been applied to
reduce those commitments (p.72).
Reference is made to the dividend declared on September 13, 1938,
and it is stated that the declaration of that dividend, in spite of the
warning of the Comptroller of the Currency, constituted an unsafe and un-
sound practice. It has heretofore been axplained that the telegram of
Suptember 13, 1938, which incidentally was the first criticism ever made
by the Comptroller's Office of the dividend policy of the bank, was not
delivered until after the dividend had been declared. Furthermore, the
Comptroller has apparently overlooked the fact that the payment of a
similar dividend in March, 1939, was expressly authorized by the
Comptroller's Office by the agreement of December 15, 1938. A copy of
this agreement is attached hereto, marked Exhibit 2. After having
ratified previous dividends and expressly authorized a dividend in March
of 1939, it would not appear that the dividend payments prior to September
12, 1939 could properly be assigned as an unsafe and unsound practice or
otherwise criticized.
The final criticism specified in the letter of October 2, 1939
is the declaration of the dividend on September 12, 1939 without writing
-11-
Regraded Unclassified
175
off book assets of $13,517,598.69 classified as loss by the National Bank
Examiner in the report of examination completed July 21, 1939. All of
the classified losses which were admitted were charged off prior to the
dividend. Some of the losses were not and are not now admitted and have
not been charged off, and these will now be discussed.
The principal item of loss not admitted is a IV classification
of $8,743,637.09 in banking premises carried on the books of the bank and
Merchants National Realty Corporation. There are two reasons why this
classification is considered to be impropor and cannot be admitted, which
are now set forth.
1. Valuations of Banking Premisos made by National Bank
Examiner are erroneous and totally unreliablo.
The report of examination of March 31, 1939 selects 124 parcels
of roal property used for banking premises and carried on the books of the
bank or Merchants National Realty Corporation (after doduction of deprecia-
tion of $6,110,621. to 12-31-38) at a value of $32,821,403. and classifies
$3,176,635 as VIII and $7,599,298 as #IV.
In most instances these
properties have been owned for many years and depreciation has regularly
been taken, and the properties have not been classified in previous reports
of examination. The present examination report adversely classifies sp-
proximatoly 32% of the book value of the properties listed in each clas-
sification. To classify as a loss or as doubtful in one examination period
32% of the bank's investment in certain banking premises which have been
owned for years and regularly depreciated, would indicate either gross
laxity in previous examinations or a serious mistake in the present ono.
By telegram on July 21, 1939 Mr. L. M. Giannini informed the
Comptroller that the valuations made by the Examiner were based upon per-
sonal opinion and survey momoranda assembled primarily for use in insurance
and assessment matters by Amployees of the Capital Company and that authentic
appraisals by qualified independent appraisers had been rejected. Similar
information was conveyed to the Chief National Bank Examiner by lotter dated
-12-
Regraded Unclassified
176
July 22, 1939. Both the Comptroller and the Chief National Bank Examiner
refused to consider the objections made and the report of examination
gns confirmed. In a letter dated July 31, 1939 from the Chiuf National
Bank Examiner to Mr. L. M. Giannini, President of the bank, it was stated
"It may be true as you state, that memorande contained in Capital Company
filcs were not intended to represent qualified or authentic appraisals
but were made for insurance purposes or to establish assessed values for
taxation purposes. The unsigned memoranda in the files of the Capital
Company made for such purposes were observed by the examiner but were
easily distinguishable from appraisals and were not mnde the basis for
the examiner's classification. As heretofore stated, the examiner's
classification was based almost entirely upon your appraisals found in
your files." The Chief National Bank Examiner was clearly misinformed
upon this point because as will heroafter be shown, there were very few
appraisals in the bank's files and the Examiner did use almost exclusively
metoranda and appraisals found in the Capital Company files prepared for
insurance and tax purposes, many of them unsigned.
The Board of Directors and the management cannot accept value-
tions placed upon banking premises by a National Bank Examiner when it is
ovident that those valuations are the result of obvious mistake and in
disregard of available information. These banking premises constitute a
permanent investment of the bank's funds. They are actually used for the
operation of the bank's business. The book values of these properties
with rare exceptions represent actual cost less depreciation, and there
would uppear to be no occasion for ostimating a loss LS long as the
premises are continued to be used for the purposes for which they were
(equired. This is especially so in view of the fact that the bank's
occupancy expense is approximately one half of that of the average 284
reporting banks in a survey of the Amorican Bankers Association.
The report of examination states that the valuations upon these
properties were based upon approisals in the files of the bank or the
-13-
Regraded Unclassified
177
Capital Company or, in instances where no appraisal was available, upon
an estimate of the Examiner based upon the best information available
to him, without an explanation of what information was secured or from
what source. No details of the so-called appreisals are given, nor
does the report contain any explanation as to why information found
in the files of the Capital Company should be considered binding upon
the bank. Before discussing specific properties referred to in the
report of examination, certain genoral considerations should be called
to attention.
By the terms of a contract in offect for many years, the Capital
Company has been and is the managing agent of all of the bank's premises.
Under this agreement and for an annual fee the Capital Company assumes
entire responsibility for these properties. It socures tenants; sollects
rentals; makes alterations, repairs and improvements; pays taxes, main-
tains insurance where necessary; and in general does everything that
an owner would do seeking to maintain and preserve real property at a
minimum expense and for the greatest benefit to himself. For its own
convenience and benefit, Capital Company has through its agents and
employees caused surveys to be made of each of the properties consti-
tuting banking premises. These surveys contain complete information
with respect to the property, such as details of construction, floor
plans, equipment and similar information which is considered necessary
or pertinent for the Capital Company in its capacity as managing agent
of the property for the bank. In many of these surveys the field rep-
resentative of Capital Company has stated his idea of the value of the
property usually for insurance or tax purposes. Presumably many of
the Examiner's valuations based on Capital Company so-called appraisals
were obtained from statements made in these surveys.
The bank clearly cannot be bound by voluntary statements made
by agents or employees of Capital Company as to the value of its banking
Regraded Unclassified
178
prenises. For instance, if the bank purchased a piece of real property
for $100,000 and & field agont of Capital Company, making his survey
of the proporty the wook after its purchase, thought the property only
with $50,000, it is clear that his opinion would not in any sonse oon-
stitute an appraisal or occasion the charging off of any part of the
bank's actual cost in the acquisition of the property, Such menorunda
in the files of the Capital Company, used by the Emainer in dotormining
the valuation of banking premisos, are not a true indication of the
value of the ;roperty end are not binding on the bank and cannot be
accepted.
It must also be remembered that this bank is doing business in
57 counties and 307 communities throughout the State of California. This
noans that there are more than 350 soparato taxing authorities fixing the
values of real proporty on different bases of valuation for the purpose of
lovying taxes. The Capital Company under its contract is charged with the
responsibility for keeping taxes and insurance within reasonable limits and
on a reasonable and equitable basis. It should be ovident that valuntions
made by Capital Company representatives for such purposes or for that matter
any other purpose are not binding upon the bank and are of no value in
determining whether the carry value of the property used for banking pre-
mises reasonably conforms to its actual and uscable value.
Over a long period of time this bank has acquired by purchase
and merger many independent banks and locations throughout the State of
California. On each such purchase or merger the question of the value of
the banking premises always has entered into the negotiations. Invariably
the selling bank has sought to obtain the best allowance possible for its
banking premises, regardless of the vulue at which they might have been
carried upon its books, and the natural dosire of this bank has been to make
the best bargain possible, In many cases it has been necessary to allow more
than the book value of the banking promises BO acquired for the reason that
such premises ofton have had an actual value considerably in excess of
their book value.
-15-
Regraded Unclassified
179
The National Bank Examiner in the report of oxamination not only
has used valuations made for the purposes above set forth, but in many in-
stances has taken part of a valuation and rejected the rest. For instance,
a property may have been carried upon the books as Land $10,000, Building
$20,000, and the survey specified the land at $7,500 and the building at
$22,500. In many such instances the Examiner has disregarded the total
valuation and specified a loss on the land value without regard to the
value ao B. whole. Furthermore, in instances where the Capital Company may
have had more than one survey, the Examiner frequently has taken the lowest
without regard to the date of oither. In one instance B survey dated 1930
may have boen rejected as too old, and in another a 1928 survey may have
been accepted.
Furthermore, in addition to basing valuations on purported ap-
praisels obviously made for a specific purpose and not representing a.
true valuation of the proporty by a qualified appraiser, the report of
examination is replete with statements which constitute gross errors, such
as taking an appraisal for some property other than the one reported, or
specifying as loss amounts purported to have been added to the book value
of the property when the records show that no such addition has been made.
In many instances the Examiner reports that no appraisal was available,
and he gave his own ostimate of the value of the property apparently based
upon a pure guess as to what it ought to be.
In some instances property consisting of a land and building
has been purchased to secure a site for banking purposes, and upon no-
quisition the existing building has been demolished and new building erected.
Throughout the report the Examiner criticizes the addition to the cost of
the land of the valuation of or cost of denolishing the old building. This
practice would appear to be proper however, in every case where the property
in purchased for the purpose of adquiring a site for at new building to be
crocted upon the purchase of the land. In such cases the existing building
has no value but on the contrary is a liability to the extent of the cost
-16-
Regraded Unclassified
180
of removal+ That expense is clearly part of the cost of the land.
To illustrato the utter unreliability of all of the Examiner's
classifications it is proposed to set forth specific examples of the mis-
takes and errors in judgment set forth in the report of examination, These
examples constitute morely a cross-section of the report as n. whole and are
not an attempt to itemize all the valuations which are considered to be in-
proper. It is believed that very for, if any, of the Examiner's valuations
can be substantiated by a fair and impartial appraisal. So many gross and
obvious errors have been nade that it cannot be considered that any of the
Examiner's valuations are proper until a fair appraisement of all of the
properties which is now in progress, can be made. The following examples
contain a reference to the property, a quotation of the Examiner's comments
and the amount classified as loss, with a correct statement of the facts
concerning the particular property:
45 - Venture
III $112,697.84
"Four-story class C building thirteen years old, 50' X 100'. File
indicates cost of new building in 1925 was $60,379.25 and that
the premises were carriod at $89,518.13 on September 8,1925. No
major improvements have been made since that date and it is not be-
lieved that the property is worth in excess of $125,000 at this time."
The Examiner's comments with respect to the cost of the
building indicate that he has secured from sone place in the file the
cost of the building on an entirely different site which was formerly
used for the banking premises in Ventura. The building now occuped
by the Ventura branch, owned by Merchants National Realty Corporation,
was erocted in 1926 at a cost of $218,830.65, upon which depreciation
of $66,378.96 has been charged off. It is clear that the Examiner's
classification is due to his nistake in not sccuring correct in-
fornation with respect to the property upon which he was placing a
valuation.
66 - San Francisco Main Office
IV $140,002.00
"WI Powell Street. Entire building used for banking purposes.
-17-
Regraded Unclassified
181
Carrying figure appears out of lino with sound values, but no supporting
appraisal in the files. Howover, on April 10, 1930, $140,002.00 was
charged to this account representing cost of cancellation of leaso
on the adjoining property, Powell Hotel, purchased for future premises
and now carriod by the Morchants National Roalty Corporation, being a
part of the assote formorly sold under the Trensamerica Corporation
contract and re-acquired from Capital Company in 193% The above-
nentioned charge would not appear to be a proper capitalized expense
and it should be eliminated."
The sum of $140,002.00, stated by the Examinor to have been charged
to the property used as the San Francisco Main Office, was not in fact
at any tine ever charged to that proporty and is not included in the
present book value. The sum of $140,002.00 was paid for the cancel-
lation of the lease upon the adjoining property, and the examiner has
confused the two properties in his report.
218 - Santa Monica
IV $7,500.00
".....Amount paid for cancellation of lease Dec.21,1928 of $7,500.00
was capitalized and added to building value."
The records of the bank show that the $7,500.00 paid for cancel-
lation of the lease was charged off as a loss at the time and was not
added to the book value of the property.
600 - Los Angeles Main Office
III $1,005,245.60
"Twelve story structural steel and concrete, Class A building, erected
in 1925. Building is 170' x 190'. Land value carried at $1,735,206.81
is believed to be greatly in excess of present worth, and building at
$1,770,000.00 net was appraised in 1933 by a tax representative and an
architoct at approximately $900,000.00. Based upon available informa-
tion, present day valuation is estimated at not in excess of
$2,500,000.00."
The Examiner's classification of $1,005,245.60 as III on this
building is indicative of the nanner in which he has disregarded estab-
lished values and, without disclosing any of his reasons or the source
of his information, has arbitrarily placed a valuation upon the property
which is entirely out of lino with present day appraisals. This build-
ing was crected partly in 1925 and partly in 1927 at an actual cost of
land and building in excess of $4,000,000. Since that time depreciation
of upproximately $600,000 has been written off, leaving the net book
-18-
Regraded Unclassified
182
value: land $1,735,206.81, building $1,770,038.79. This particu-
lar property is located in the center of the financial district in
Los Angeles and constitutes ono of the most desirable office loca-
tions in the entire city, Since 1932 gross rentals from the portion
of the premises not occupied by the bank have averaged 3236,000 per
year. Even during the lowest point in the depression of 1933 and
1934 this building 70.8 approximately 85% occupied, showing a percent-
age of occupancy well above the average occupancy during that period.
The present appraised valuation of the property, according to an 4p-
praisal received from the American Approisal Co., is $3,701,042.00.
20 - Seventh & Olive Streets - Los Angeles
III
$569,024.86
"Leasehold premises, lease expires Nov. 30-2020, Building was con-
structed in 1923 and was sold to the Stockholders' Auxiliary Co.
June 19-23, for $979,783.66. File indicates original cost to the
bank $1,033,300.00 and acquisition by the Merchants National Realty
Corporation June 30, 1933, for $1,470,273.47 net. Reproduction
cost of building as of March 24-34 based upon five appraisals, less
25% yearly dopreciation, was given at $515,028.69. It 1a apparent
from the available information that the leaschold 1a carried at an
amount greatly in excess of actual cost and current market and an
estimated value of $750,000.00 is allowed for purpose of this re-
port."
This case illustratos perfectly the inaccuracy, misinforantion
and false conclusions provalent throughout the classifications of
banking promises.
This building was constructed at an original cost of $979,783.66
und sold to Stockholders Auxiliary Corporation on Juno 19, 1923 for
$979,783.66. At the same time, however, the leaschold interest in the
land was sold to the Stockholders Auxiliary Corporation for $500,000,
which was paid to the bank and credited to the bank's profits. Subse-
quently on October 1, 1925 the proporty was repurchased from the Stock-
holders Auxiliary Corporation for 31,522,049.16, representing its
book value at that time. Botween June 19, 1923 and March 1, 1927, the
date of the charter of the Bank of Italy as a National Bank, ap-
proximately $190,000. was spent in improvenents and alterations and
-19-
Regraded Unclassified
183
poti the daté of the national charter the proporty vas carried at
4. net book value of 31,646,404.73. All of the facts word available
to the Comptroller of the Currency at that time and no criticism
Jab then made of the book valuo of the property. On June 30, 1933,
the propurty was transferred to Morchants National Roalty Corporation
at its then book value of $1,470,273.47 and its book value on March
31, 1939 was $1,319,024.86.
The examinor classifies $569,024.86 as III and gives as lis
reason those get forth above, which should be scrutinized,
First Reproduction cost loss depreciation in 1934 based upon
five appraisals 78.8 $515,000. There nover was any appraisal of this
property in 1934. The examiners statement of the five appraisals
THE based upon a memorandum propared by the tax representative of
the Capital Company for prosentation to the Building Department of
the Los Angeles County Assossor's Office. That portion of the
which the examiner classifics as fivo appraisalystates
18 fullows:
"We have taken up the matter of reproduction cost of
the improvements heroin under consideration with five of
the outstanding firns of architects, ongineers, con-
tractors and buildors in the City of Los Angeles, includ-
ing the firm that planned and supervised their croction,
and find that during the Spring of 1933 those improvements
(exclusive of Bank fixtures, furniture, oquipment, etc.)
could be reproduced for considerable below their cost in
1923. Morgan, Walls & Clements who were the architects
and ongineers under whose diroction the Transcnorica
Building THIS planned and crected, state that the ro-
production cost of said building based upon prices - labor
and matorials in March 1933 would cloncly approximate
$720,000.00. The Willian Simpson Construction Company
under date of March 7, 1933, state approximately $721,000
would be the replacement cost. Walker & Eisen, Architects,
set 3712,250.00 as thoir estimato of regroduction cost
(March 11, 1933). Chan. C. Frye, Arcidtoct, under date
of Fobruary 4, 1933, states his estimate of reproduction
cost of 3704,972.00. The Posso Construction Company,
Ltd. under date of March 14, 1933, placed $693,700.00
as the reproduction cost."
What the examiner has designated an "appraisal" tm6 nothing more
Men start by the tax representativo, that certain contractors
-30-
Regraded Unclassified
184
had estimated in March of 1933, n. year proviously, that based upon
the prices of labor and materials at the bottom of the depression,
the building could be reproduced for substantially loan than its
original cost. This is not an appraisal in any sense of the word.
Second The examiner was apparently avero that what was
designated as an appraisal in lda report, was not in fact an
approisal ut all and therefore did not accept the value urged
in the nomorandum to the Assessor, but proceeded to "allow" an
"estinated north" of the property of $750,000.00 "for the purpose
of this report". The examiner may be qualified to estimate the
with of an obligation or promise to pay money but is not
qualified to appraise roal [roporty nor in fact did he attempt
to appriso the property. Ho moroly looked through some files
of the Capital Company and concluded that be should not allow
(
C valuation of more than $750,000.00 on the property. His
conclusion was not based on information found in the files but
(28 simply his guess unde for the purposo of his report. Such
tin arbitrary classification is cloarly unwarranted. That he was
quvioualy wrong is indicated by the fact that this property has
been Appraised by the American Appraisal Company at $1,354,905.00.
Since 1934, gross rentale from the portion of the proporty not
occupied by the bank have averaged $135,000 por year.
33 - Californin-Montgosery, San Francisco
IV $664,077.17
"Ton Story Class A, steel frame Bank and office building built in
1917 with now additions in roar built about 1928. 69 feet on Cali-
Dornin Street by 177 feet on Montgomery Street. Land is carried
at $1,050,000.00 and is not considered to be worth in excess of
$4,000.00 per front foot for 100' depth. Appraisal in file gives
Land 6634,750.00, Imp. $622,500.00 at a total of $1,275,000.00."
The appraisal to which the Examiner refors TRLB made in 1931 by a
thx representative of the Capital Company, prosumably for the purpose
of securing an equitable assessment of the proporty. The Assessor's
parket valuation, however, is for in excess of the amount of the
-21-
Regraded Unclassified
185
0
appraisal. This proporty was purchased in 1927 for $1,915,000. The
adjoining lot was purchased in 1928 for $100,000 and the building on-
larged at a cost of $150,000. An additional floor, the eloventh
floor, was added in 1929 and the building is now eleven stories and
not ton AB stated by the Examiner. The total cost of this property
to date is - land $1,050,000, improvements $1,191,886.84, from which
dopreciation of $302,559.67 has already boon taken, The value of
the land is enhanced by the fact that the bank also owns the ad-
joining proparty on Montgomery Street, making a single parcel on
Montgomery from California to Pine Street. These two properties
together have boon appraised by the American Approisal Co. for
$1,925,000 for the land alono without giving any consideration to
the improvements. This case is an example of the rockless disro-
gard for the intorosts of the bank which is ovidenced by the Ex-
aniner's valuations of banking premises. With nothing more than
an appraisal made by a tax representative of the Capital Company
in 1931 and his belief that the property in not worth more than
$4,000 per front foot for a depth of 100 foot, whereas the property
has it depth of 1774 foot, the Examiner arbitrarily classifios a loss
of 5664,000. The directors and the management would be derolict in
thoir duty if thoy should accept any such unreasonable and unwarrant-
cd classification.
289 - Clay-Montgomery, San Francisco
IV
$242,248.13
"Covers three buildings, two eructed in 1913 and one in 1931.
Houses designated branch, administration department and central
clourings etc. Carriod high and appraised in 1931 at $546,768.00,
deducting 2% depreciation for eight years will bring present value
to approximately $450,000.00."
The so-called appraisal to which the Examiner refors was made
by the tax representative of the Capital Company, presumably for the
purpose of attempting to secure a reduction in the assessed voluation
of the proporty. The fullacy of attompting to roly upon an approisal
-22-
Regraded Unclassified
186
sade by a representative of Capital Company presumably to secure an
equitable assessment is clearly demonstrated by the fact that the
appraisal of the American Appraisal Co. just completed gives a
present-day value to those promises of $918,861.00.
251 - Oakland Main Office
IV $815,085.07
"Class A building erocted part in 1906 and part in 1923. Lot 100'
X 150' on Broadway and 12th. Proporty values have dopreciated
matorially in this soction over the past several years and the ad-
jacont 100' on Broadway and 150' on 13th now carried in the bank's
Other Roal Estate Owned account is appraised at $200,000.00 for
the land. It is apparent that the carrying figuro on this property
is greatly out of line with sound present day values as land is
carriod on the bank's books for $900,028.30. Approiser recommended
a value of not over $1,000,000.00 in 1931."
This building was acquired in the takeover of the Oakland Bank on
December 21, 1929. The total cost of the land and building up to that
time was $2,560,231.74, and depreciation of $242,231.74 had been charged
off. Upon acquisition of the property by this bank an additional
$268,000 was written off of the carry value, and since that time de-
preciation in the sum of $261,038.06 has been charged off. The present
building was constructed in 1923, and since that time an aggregate
of $771,000 has been written off of the original cost of construction
in a period of 16 years. The bank has no record of any appraisal or
appraiser's recommendations with respect to the value of this property.
The Examiner's classification appears to be based upon a pure guoss
and not upon any accurate or dependable information with respect to
the value of the property or the improvements.
543 - Broadway-Grand, Oakland
III $160,135.56
"Fivo story brick exterior, steel frame Class C building with banking
quartors and six stores on ground floor and 49 apartmonts. Land
carried at $292,536.50 1s believed to be greatly out of line with
sound values and total investment is excessive in view of deposit
liability of branch. Estimated value not in excess of $300,000.00,
but no appraisal has been made since 1930."
It is significant that in this instance the Examiner did not use
the figures stated in the Capital Company so-called appraisal, but
-23-
Regraded Unclassified
187
remarked that no appraisal has been made since 1930. The so-called
appraisal in the Capital Company file indicates a value in 1930 of
land $300,000 and improvements $265,500. In other instances where
the Examiner has used an appraisal found in the Capital Company files,
the appraisal has been used to fix the value of the property regardless
of its date or the purpose for which it may have been made, The Ex-
aniner's comments indicate that his classification is to 8. groat ex-
tent based upon what ho considers the amount of the investment should
be with relation to the amount of the deposit liability of the branch,
and it is evident that the amount of the valuation is a puro guess on
the part of the Examiner without consideration of the actual value of
the premises. The value of this land has in fact substantially in-
cronsed since its acquisition by the bank, and the property produces
a monthly income of approximately $2,500 from the portion not occupied
for banking purposes.
35 - Sun Jose Main Office
III $252,723.49
"Office building, with banking quarters on ground floor. Part of
building is ton stories, balance one story. Lot 126¹ X 137'.
Present worth is not believed to be in excess of $800,000.00."
This is a class A building crected in 1927 at an actual cost
of $924,739.22, from which dopreciation of $208,621.35 has been de-
ducted. The land alone was appraised in 1928 at $408,000, and the
appraisal of the American Appraisal Co. just completed indicates
a present-day value of $1,401,336.00. In other words the Examiner
gives a III classification of $252,723.49 because he doesn't believe
the property to be worth nore than $800,000.00 but the present ap-
praised value by highly compotent and qualified appraisers 1a
$340,000.00 in excess of the book value. The III classification is
puroly arbitrary and cannot be justified under any circumstances.
10 - Fresno
IV $162,536.50
"Eight story Class A building erocted in 1917, and two story Class
-24-
Regraded Unclassified
188
rpl budiding erocted in 1926, carried nt $352,536.50 VIID np-
prained in 1928 nt $190,000.00 end apparent excess refers only to
Ind value."
It so-onlled approisal to which the Examiner refers is apparently
- Mirvey is the filos of the Capital Company. and although
Employer based his valuntion of the land upon this survey, he
read the fact that the snao approisal valued the improvements
(-= 1: excess of the carry value. The present book value of this
proporty is $651,502.71. and the Asseosor's market value for the
your 1938/39 is $729,600. The property has been approised by the
Approisal Company for $1,103,226.00.
145 - Supposento Main
IV $474,618.20
"Xill yrs of bank building is BOYOR stories, belance one story.
Sordra several parcels. adjoining, purchased nt different times.
Feil/ings were remodeled in part and part new construction.
Original price paid for the buildings with continued on the books
-1 full amount and no allowarce mndo for wrocking. Book value
(
of the property nt this time bolieved to be greatly out of line
with current values nad worth is catimated nt $750,000.00."
Here NAME the Examiner classifics n loss of $474,000.00 be-
- 1: is stated, the bon!= value of the property is bolloved to
out of 11:00 and the Examiner actimatos the volue to be $750,000.00.
As for ne chn So determined, no complete approisal of this proporty
1.8 ser hear, nado. The present promises consist of soveral parcols
required Mifforent times. Upon the purchase of two parcels,
hildings vore situated upon the land which had to be domollshed in
telre to ornit the construction of the braking promises. In ne-
de income tex regulations, the cost of the land and build-
placed & the books n.s the value of the land because the
addition Missolves had no value whntover in the purchase of the
(
tito for Seazing promiscs. The Examiner's arbitrary classification
X = loss upon those promises is not bneed upon any appraisal of
le
proporty nor, ns for ne can be determined, any nccurato informa-
it and connot be accopted 7VB a propor vnluation of
-25-
Regraded Unclassified
189
thoso premises.
Nercod
IV $83,985.72
"Throo story roinforced concrete building Class A. Banking quarters
and cuo store on ground floor with 40 offices nbove, Survey in 1929
gives reconstruction cost of building at $125,000.00 with land
valued nt $22,500.00."
The survey reforred to by the Examiner was apparently propared
by on employee of the Capital Company, and while mdo in 1929
estimating the roconstruction cost of the building nt $125,000, the
natual cost of construction of the building in 1928 the your bofore,
VOB $206,964.67. It in obvious that the purported survey cannot be
considered D.B an appraisel of the property. The approisal of the
American Approisal Co. just completed indicates c. present value of
$256,666, which in substantially in excess of the present book value.
409 - French-Anorican, Snn Francisco
IV $100,600.00
"60" R 103' on Battor Street. Ton story Class A bank and office
building. one part crected in 1907, addition erocted in 1912 and
three story brick office building erected about 1912. Land car-
ried high at $295,565.38 and approised in 1931 at $198,000.00.
Building value appears fnir."
The so-called appraisal to which the Examiner refors was ando by
n. represontative of the Capital Company for tax and insurance purposes.
Although the Examiner necepted the valuation of the land contained in
the appraisal, he disregarded the fact that the anno survey showed the
value of the building to bo $75,000 in excess of the then book value.
It is belioved that the Examinor's classification is clearly wrong.
The proporty who set up on the bank's books at the tine of its ac-
quisition at its then appraised value for a total of $629,664.10,
from which doprecintion of $172,464.15 has already been charged off.
Within one year after its acquisition an offor for the purchase of
the property for $710.000 accompanied by a cash deposit of $25,000
was refused. The book value is $457,200.00 and the appraisal of the
American Apprniaal Co. shows A present-day value for this property
of $482,535.00.
-26-
190
IV $14,814.25
6- Chico
"One story class A building reinforced concrobe. Approised 1932."
The present building was crocted in 1931 at a cost of $71,151.94
without inclusion of architoct's foos or contractors' profits, and
since that time depreciation in croose of $11,000 has been written
off. The so-called appraisal to which the Examiner refors was mão
by an employee of the Capital Company undoubtodly for tax purposes,
na the building at that tino was loss than two years old. Apprecatily
the efforts to secure a reduction in the assessed valuation were un-
successful because the City and County Assessors' narkot valuations
Are both in OXCOSS of the prosent carry value of the proporty. The
book valuo of the proporty is $82,254.28 and it has been appraised by
the Anerican Appraisal Company for $125,565.00.
The forogoing examples are typIcal of the nanner in which all of
the valuntions have been pnde and lossos estimated on the ontiro list of
124 parcols of banking pronises contained in the report of examination of
March 31, 1939. No purpose would be served by going through the ontire
list because it is ovident from the gross errors, nistakos, and calcula-
tions which nro ovidanced in each valuntion that the ontire classilications
must be considered as absolutely unreliable and not acceptable for any
purpose. Although the Chiof National Bank Examiner stated in the letter
nbove reforred to that unsigned necoranda wore not used na & basis for
the emninors valuations, a total of 22 such unsigned nonoranda wore the
instruments designated by the examiner na the appraisal upon which his
valuntion was onde.
It in significant to noto that out of a total book value on the
124 proporties of $32,821,403. the examiner classified $7,599.298 as QIV
and $3,176,635 no VIII but nowhere in the report is thore any explanation
as to why an excess of the book value over the examinor's valuntion is
classed in one case as III and another caso na IV. For examplo, in the
-27-
Regraded Unclassified
191
Los Angelos Main Office (Anto D. 18) the examiner stated that present
valuation ms estimated at not in excess of $2,500,000 and classified
$1,005,245.00 as #III. In the Sucramento Main Office (Ante P. 25) premises
houver he estimated the worth to be $750,000.00 and classified $474,618.20
as /IV. Many similar examples my be found. If the amount of the excess
of book value over the examinor's valuation is classified as #III in one
case why should it be classified as #IV in another? No reasons are stated
for this difference in classification on comparable properties.
It is impossible to conclude from an examination of these
valuntions that they represent a fair valuation of the properties concerned,
but on the contrary it would appear that as to this phase of the report it
pas started with the determination to show a loss and that the losses were,
therefore, scattered indiscriminately through the Banking Premises account.
The classifications cannot possibly be sustained by reference to any fair
or importial valuation of the proporties.
Au the directors have previously advised the Comptroller of the
Currency, at the suggestion of the Chief National Bank Examiner of this
district, appraisals of these propertics were being made by the American
Appraisal Co., a nationally known and thoroughly compotent appraisal con-
corn which firm trae suggested by the local representatives of the Comp-
troller's Office. These approisols have now been completed and premises
which are valued in the report of examination by the National Bank Examiner
at $21,834,113 have boun appraised by this company at $33,060,582 taking
the land at its present day low market value and improvements at re-
production cost less depreciation, conclusively demonstrating the un-
reliability of the valuations placed in the report of examination. Re-
gardless of the authority of a National Bank Examiner to classify a loss
upon banking promises which are carried on the books of the bank at cost
less depreciation, and it is seriously questioned that any such authority
exists, it is ovident that in any case such losses cannot be properly
classified except upon & fair and impartial valuation of the premises by
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Regraded Unclassified
192
duly qualified appraisers. It is obvious that the investment in banking
premisos is on an entirely difforent basis from the investment of the bank's
funds in obligations which are required to be collected in order to realise
u;un the investment. Banking prenises constitute a permanent investment of
the bunk's funds, and regardless of the appraisal which my be placed upon
any particular parcol of land, its value to the bank is dorived by reason
of the housing of a branch of the bank for the conduct of its business. AB
long 18 that business is continued at that location, thore would be no oc-
casion for any loss on the property.
2. There is no authority in National Bank Examiner to classify
a loss in banking premises.
The right of n. National Bank Examiner to classify 05 a loss any
part of the bank's invostment in banking premises which is carried upon the
books at cost and from which depreciation in a reasonable amount has regu-
larly been deducted, may very well be questioned. It is not believed that
any authority for such a procedure oxists, and from their very nature bank-
ing premises are not subject to such classification.
The gractice of classifying loans and other investments springs
from and is founded upon the theory that the portion of the bank's assets
which is invested in obligations of one sort or another is only worth that
which can ultimately be collected upon them. Loans, discounts, bonds and
other obligations all represent a promise to pay moncy, When the bank's
noney is invosted in an obligation, obviously the worth of the asset de-
pends upon the probibility of repayment. If the obligation is repaid, the
investment has been recovered in full; if it is not repaid, the investment
has proven a loss.
Naturally, thorefore, in determining the condition of a bank
through an examination, it is necessary to determine the probability of
colluction of the various obligations in which the bank has invested its
funds. Under the former practice in bank examinations, assets of this
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Regraded Unclassified
193
character wero oither not classified at all or 1702°C classified as "slow",
"doubtful" or "loss". Those terms were proporly applicable to and aptly
descriptive of obligations representing a promise to repay money, A
classification as "slow" indicated that the promise WELLS good, but would
be slow in payment; "doubtful" indicated just what the term implies;
and the classification as "loss" indicated that it was not believed that
the promise would ever be performed or the bank's money recovered.
Under the rovised procedure in bank examinations, the designa-
tion of the classification has boon changed, and the "slow" classification
eliminated, but the samo theory is still applied, namely the soundness
of the assot is determined by the probability of the repayment to the
bank of the noney represented by it.
It may oven be conceded that those classifications may be ap-
plied to other real ostate owned, although such real estate does not
consist of a promiso to pay money. Such roal estate does not represent
a fixed invostment, but must in the course of business be sold for
aonoy or a promise to pay money and therefore eventually result in a
conversion into money. To the extent that such real estate may be
difficult to nell or to the extent that it may be considered improbable
or inpossible to realize on such a salo the full amount of its book
value, it any be classified 0.8 a doubtful recovery or a probable loss.
But banking premises cunnot be considered on the same basis
as an obligation to pay money, nor an assot which in the course of bus-
inuss must be converted into money. Banking premises are a permanent
investment necessary for the conduct of the bank's business. As long
as the bank continuos in existence, it will continue to uso its banking
promises for that purpose, It is not contemplated that thoy will at any
tino be converted into money. The land itsolf is as permanent na any
thing can bo, and normal deprociation providos for the elimination of
the cost of the improvements by the time they have outlived their use-
fulness. Annual expense of approximately $500,000. for modernisation,
-30-
Regraded Unclassified
194
deteration and repair is charged to operating expense. What occasion can
her De, then, for saying that a loss is probable on a particula: bank-
the case which may have cost $100,000 and is now carriou upon too books
at £90,0007 Suppose the approised value today is $75,000, would that
be occasion for saying that D loss of $15,000 is probable and should
Maruforo be charged off? Such a loss would not be recognized by the
Insure Tax Division of the Treasury Department. Why? Because there
13 no lose until the property is 30ld and the loss realized. How can
is be said that a loss is probable if the property is not intended to
be 2017? Approised voiue at best is à vague and uncertain thing.
Market value may fluctuate up or Sown or both. None of these things
affects the value of the property as = banking location, nowever, nor
to S necessary adjunct for the conduct of the bank's business.
Further evidence of the impropriaty of an attempted classifice-
Non of banking premises is l'ound in the revised procedure for the exam-
instion of national banks heretofore reforred to. It is there provided
that loans or portions thereof shell be clossified in the groups which
Lne set forth as follows:
I
Loans, the repayment of which is assured
II
Loans, involving elements of risk but not if
ultimate repayment is reasonable assured.
III
Loans, the collection of which is doubtful
IV
Losns, regarded uncollectible
It must be noted that each classification is predicated upon
the possibility of repayment or of collection of 5 obligation. The
dissifications are Limited entirely to 1ssats represented by obligations
for the payment of noney. There is no referunce to clussification of
product Investments in banking prumises, and from their very nature
350 not subject to the same grouping ce ossets which in the ordinery
course of business must be converte: into money.
It is therefore believed tost regardless of the value it which
-31-
Regraded Unclassified
195
any banking house has been appraised, it is not proper to include in the
report of examination a classification of any part of its book value 0.0
doubtful or loss.
The dividend policy is reasonable and proper.
The specific criticisms set forth in the letter of October 2, 1939
have now been answered, but there are some matters of general consideration
which apparently have been overlooked by the Comptroller and should be
called to his attention.
There in inserted in Exhibit 7 a schedule showing earnings und
dividends for the period from January 1, 1935 to June 30, 1939. There
are three factors demonstrated by this schedule which are particularly
important in e consideration of the propriety of dividend payments.
First, earnings from current operations have consistently increased
throughout the period. Second, 87% of all losses on loans and invest-
ments during the period occurred on loans made prior to 1932 and may,
therefore, reasonably be considered non-recurring. Third, during a
period of 43 years a total of $20,500,000 has bean added to capital
funds.
It should also be borne in mind that there are 350,000 stock-
holders who directly or indirectly participato in dividends paid by the
bank. A large proportion of these stockholders constitute part of the
2,500,000 depositors of the bank. Any change in the dividend policy,
therefore, would directly affect & large number of depositors of the
bank and would indicate a retrogression in the affairs of the bank,
whereas the contrary is true as shown by consistently improving earnings.
Other than subject to the limitations imposed by law, the time
when and amount of dividends which may properly be paid are matters within
the discretion of the Board of Directors in the exercise of their best
judgaunt. The Comptroller of the Currency has expressed the opinion
that the amount of the dividend rate is excessive and has asserted that
the payment of dividends at the present rate is an unsafe and unsound
-32-
Regraded Unclassified
196
practice. Great respect is had for the Comptroller's opinion, and his
criticisms have been carefully studied. The Board of Directors does not
agree with the opinion of the Comptroller with respect to the dividend
rate, and it is their considered judgment that under all of the circum-
stances sut forth herein the dividend rate is proper and not subject to
criticism.
II REAL ESTATE CONCENTRATION
The Comptroller's letter of October 2, 1939 states that there
is an unwarranted concentration of the bank's assots in real estate ag-
reventing $94,000,000, and that this concentration includes the real
vstate used for bonking premises, the bank's investment in Merchants
National Realty Corporation and also the real estate contracts with
California Lands Inc. and Capital Company.
The total investment in real property used for banking premises
is curried upon the books of the bank and Merchants National Realty Cor-
porution at $41,042,905, as of December 31, 1938. It is the opinion of
the board of Directors that these properties are thor-ughly sound ussets
and are necessary for the proper conduct of the bank's business. This
upinion is substantiated by current appraisals of the proporties recently
completed. The occupancy expense of the bank has steadily decreased since
1932 even though during that period 83 additional banking premises were
added.
It should be borne in mind that with few exceptions all of the
maj investments in banking premises consist of buildings suitable for
other purposes CO well S.S for banking premises. They represent sound
business proporties, and are productive of very substantial income.
Purthermore, the bank's investment is not confined to a single location
or comunity, but the banking premises are located throughout the State
of Celifornia. These circumstances, therefore, lend stability to the
-33-
Regraded Unclassified
197
properties and the bank's investment in then,
For example, the largust single investment in banking premises
which is carried on the books of the Merchants National Realty Corporation
is the building at 7th and Spring Streets in Los Angules, at which is
located the we Angeles Main Office. This property consists of & 12-story,
class "A". steel and concrete office building erected part in 1925 and part
in 1927 at an actual cost for the land and building in excess of $4,000,000.
This building is located in the heart of the financial district of Los
Angules. Its central location and modern construction and conveniences
make it one of the most desirable office buildings in the entire City of
Los Angeles. Over the seven year period, from 1932 to 1938 inclusive, the
everage rental income from the property, exclusive of the portion used for
banking premises, has been in excess of $236,000.00 per year. Obviously
the value of this building is not dependent upon occupancy by the bank, and
it has recently beon approised at 43,701,042.
The real estate contracts with California Lands Inc. and Capital
Company will hereafter be discussed in detail under separate headings. It
in notud that these contracts are also included in the Examiner's classifi-
cation of the large line of credit to Transemerica Corporation. Obviously
the contracts cannot be considered as Other Real Estate end at the same
time as obligations of Transamerica Corporation or its subsidiaries. It
is not believed that these real estate contracts or Other Real Estate OWNe
by the bank can properly be designated as an unwarranted concentration in
real estate because they do not in any sense constitute fixed investments.
Any bank or financial institution making loans secured by roal proporty
necessarily acquires some roal property on foroclosure. It is not believed
that the properties which have been acquired by this bank are in greater
proportion to those acquired by other financial institutions engaged in
the store kind of business, and in any event these properties are rapidly
being liquidated. The major portion of foreclosures resulting in the
acquisition of real property have been upon loans made in predecessor
-34-
Regraded Unclassified
198
banks which have been acquired by this bank. These loans were made under
a different policy from that which has always prevailed in this bank in
the making of real estate loans and the record of real estate loans
originating in this bank assures that there will not be a repetition of
the former large scale foreclosures.
A. CONTRACTS WITH CALIFORNIA LANDS INC. AND CAPITAL COMPANY
The letter of October 2, 1939, on this subject contains matters
that were not previously raised in correspondence from the Comptroller,
and previous correspondence has also raised points which are not included
in the present letter. In order to arrive at 4 clear understanding of
the issues presently involved, it is necessary to review previous cor-
respondence with the Comptroller's Office.
In the letter dated September 13, 1938, from Mr. E. H. Gough,
Deputy Comptroller of the Currency, to Mr. A. P. Giannini, it W&S stated
that the real estate contracts of California Lands Inc. and Capital
Company appeared to be substantially Other Real Estate; that no advantage
to the Bank could be seen in making sales to the two companies; and that
there was no apparent reason why the Bank should not itself retain and
sell the Other Real Estate it WAS forced to acquire.
In the letter dated Suptember 23, 1938, from Mr. Marshall R.
Diggs, Acting Comptroller of the Currency, to the Board of Directors of
the Bank, it was stated that the lenient terms and conditions of the con-
tracts were such that the arrangement constituted in effect merely an
agency agreement and not a bons fide sale, and that therefore the
property should be classified on the books of the Bank LS Other Real
Estate.
In the letter of October 11, 1938, from the Board of Directors
to the Comptroller of the Currency it was pointed out that resales under
these contracts were increasing and that payments were in excess of the
-35-
Regraded Unclassified
199
requirements of the contract. It was also pointed out that in the opinion
of Counsel of the Bank the contracts constituted legally enforceable con-
tracts for valid sales of the property.
During the conferences held in the office of the Comptroller of
the Currency during December of 1938, it was agreed that these contracts
would be eliminated by December 15, 1943, but by & letter from the Comp-
trolle: of the Currency to the Board of Directors of the Bank on April 14,
1939, it was contended that these contracts were construed as a violation
of the "spirit" of the law, and should therefore be carried on the books
of the Bank as Other Real Estate.
On July 31, 1939, the Comptroller of the Currency directed
another letter to the Board of Directors with respect to the latest report
of examination, but in that letter no criticism was made of the real estate
contracts of California Lande Inc. and Capital Company.
In the most recent communication from the Comptroller on this
subject, dated October 2, 1939, and addressed to the Board of Directors,
the Comptroller's criticisms on these contracts are in substance that they
constitute an apparent attempt to circumvent the provisions of Section 5137
of the Revised Statutus (12 U.S.C.A. 29), and that the successive contructs
Were appirently amended for the benefit of Transamerics Corporation or its
subsiditries rather than to protect and benefit the Bank, and, further,
that unless the land companies should pledge additional collateral for the
contracts, the failure to sat up reserves to cover possible losses would
constitute an unsafe and unsound practice. It is to be noted that the
Comptroller does not now urge that these contracts do not constitute bonu
fide soles of the property, nor is the request made that they should be
Bet up on the books of the Bank &S Other Real Estate owned.
The first criticism of the Comptroller with respect to these con-
tracts is that the original contracts were modified from time to time to
most the nueds of California Lands Inc. and Capital Company rather than
to protect and benefit the Bank, and the Comptroller specifically refers
-36-
Regraded Unclassified
200
to the modifications in the successive contracts which it is claimed
evilence unsafe and unsound practice in unculy favoring Transamerica
Corporation or its subsidiaries.
It in apparent from the Comptroller's letter that he is not
fumiliar with the terms of the various contracts, and in order to reply
to the criticisms it is necessary that the various provisions of the con-
tracts should be explained in detail.
1.
HISTORY AND TERMS OF SUCCESSIVE CONTRACTS
WITH CALIFORNIA LANDS INC. AND CAPITAL COMPANY
It is correct, as stated in the Comptroller's letter, that the
original contracts for the sale of real property acquired upon foreclosure
were mádo with National Bankitaly Company, which executed contracts to
purchase these properties which required a down payment of 25). of the book
value of the property and interest at 6%, the balance to be paid within
fine years and the purchaser to pay the taxes. All of these contracts,
however, werd made prior to 1931, and affected relatively few properties,
and it WCB the practice at that time to execute a separate contract for
each parcel. For & short time during 1931 and 1932 contracts were mude by
which other real property acquired under foreclosure was sold to California
Lends Inc. and Capital Company on contracts which required a 10% down
payment with the balance payable within five years at interest at the rate
of 1% per annum. The bank was required to pay the taxes and the sole price
was fixed at the cost to the bank or the approised value whichever was the
lowust. Here again a separate contract WLS made for each parcel that WEB
sold. On June 25, 1932, a different form of contract was entered into be-
tween the Bank and the land companies. This form of contract contained
substantially the following provisions: The Bank agreed to sell and the
land company agreed to buy the property at the oppraised value or the carry
value, whichever was lower, payable at the and of five years, with interest
-37-
Regraded Unclassified
201
at 15 cynble soni-nanually; The Bank rotained Bitle and agrood to pay
10200 (which were on effset to franchise taxes) and assossments; The
land company was to receive the income and to pay all expenses other than
taxes at assessments: If the proporty were sold, the proceeds wore ro-
quired to 30 paid to the Bank: Cost of rohabilitation to be considered
DE non nicition to the purchase price, and the Bank assumed the risk of
profit or 1058 in the ultinate sale. The contract also provided that if
the proporty should not have boon sold by the land company nt the ex-
piratice of five yours, a re-approisel should So ondo and the Innd company
should purchase the property outright. Sinilar contracts wore entered
into from time to tine Setween the Bank and California Lands Inc. nnd
oncited Company covering additional proporties which and been acquired
by the 3-cilt on forcelosure. Those contracts wore all cancelled and now
contracts entered into on April 4. 1934, and the now contracts are those
(
under widch payments are currently being nade. The successive changes in
those contracts were known to the National Bank Examiners and not criticized
nt the tim.
California Lands Inc. Contract
On April 4, 1934, a contract wha entered into between the Bank
and California Lands Inc. which provided in substance na follows:
First: All provious contracts were terminated and all proporty which was
the subject of provious contracts was sold to California Lends Inc. under
the toros of the now agreement for $13,250,000., which represented the
corregate balance on existing contracts. The purchase price wns payable
in ton unitual installments of $1,300,000 connencing Docember 31, 1935.
Secring intorsat at 1$ nor annun, payable sini-manually, under the fol-
<
loving conditions:
(a) Sollor to roccivo all proceeds of sales of my
portion of the proporty are to accept nny notos
given for the purchase price without recourse
on the buyor, If the proceeds of sales word
-38-
Regraded Unclassified
202
not sufficiont to pay the installment required by
the agreement, balance to be paid in cash by the
buyer. Any excess received during any year to be
applied upon the next succeeding installment.
Second: Seller to pay taxes until the property should be convoyed to an
ultimate purchaser; the buyer to maintain insurance.
Third: Title to remain in the soller until the property conveyed to the
purchaser or the buyer, but the buyer ontitled to the possession and to
rants, issues, and profits.
Fourth: The agreement provided that additional proporties night be sold
to the buyer on the same terms and subject to the provisions of the con-
tract at a price to be agreed upon.
The purchase price of the properties actually turned over to
California Lande, Inc. at the dato of the contract was $12,950,455.13
and from the date of the contract to May 31, 1938, additional properties
were sold in the sun of $8,260,021.49. During the poriod from April 4,
1934, to April 28, 1938, payments reduced the total balance to $12,051,526.09.
From April 28, 1938 to December 9, 1939, additional payments of $1,409,991.44
have been made, and the balance of the contract on December 9, 1939 was
010,641,534.65.
Capital Company Contract
On April 4, 1934, a now contract was entered into between the
Bank and Capital Company for proporties sold for the sum of $15,591,773.59.
This contract was identical in terms to the contract entered into with
California Lands, Inc. hereinabove summarized, with the additional provision
that, whon required, the Bank should advance funds for the rehabilitation
or inprovement of properties, such amounts to be added to the [rice under
the agreement.
Additional contracts wore entered into betwoon the Bank and
Capital Company upon the same terms for n. total sum of $13,000,019.47
-39-
Regraded Unclassified
203
between June 26, 1934, and March 27, 1935, and additions to each of these
contracts were made by subsequent sales. The total amount of property
sold to the Capital Company under these contracts from April 4, 1934, to
May 31, 1938, was $51,764,330.48. During the period from April 4, 1934,
to April 28, 1938, payments on account of these contracts reduced the total
balance to $27,687,820.37. From April 28, 1938, to Ducember 9, 1939, net
payments upon these contracts amounted to $9,215,497.29 so that the balance
on December 9, 1939 W&B $18,472,323.08.
2. REPLY TO COMPTROLLER'S CRITICISMS
À fair analysis of the provisions of these successive contracts
and the payments that have been received under them does not show that
there has been any undue favoring of Transamerica Corporation or its sub-
sidiaries nor a disregard of the interests of the Bank, but, on the con-
trary, considering the entire history of the transactions, it must be
concluded that they were highly advantageous to the Bank.
It is true that the first contracts colled for A 25% down jay-
nent with interest at 6% and the entire balance within five years, and
that these contracts were subsequently cancelled. The sale of real
property which hus been acquired upon foreclosure is not for the pri-
v.ry purjose of receiving income, but rether to dispose of the property
upon the beat terms that can be obtained. It would have been desirable,
of course, for the Bank to continue in 1931 to sell the property for 8
down payment of 25% with the entire balance in five years and receive
interest at 6% upon the unpaid balance. The simple fact of the matter
is, however, that the requirement of these payments WAS greater than
could be met under existing economic conditions, and the Bank merely
did what it would have done for any other buyer, namely, modified the
terms of the contracts so that the obligations could be met and payments
would be continued and increased,
-40-
Regraded Inclassified
204
The 1932 contracts were the result therefore of the inability
of the Bank to sell the property upon the terms that had previously been
obtained on such sales. They were considered at the time to be fair and
advantageous to the Bank in view of the then existing economic conditions,
particularly with respect to transfers and sales of real property. During
the year 1934 it became apparent that there would be considerable loss in
the ultimate resale of these properties by the land companies, and it wes
therefore sought to arrive at an equitable edjustment of the contracts and
to eliminate the uncertainty from the Bank's standpoint of the provisions
that the Bank should assume the risk of profit or loss on any subsequent
sale. The new agreements made in 1934 were a definite improvement in the
Bank's position in two very important respects.
First, rather than provide for e single payment at the end
of five years at a price to be determined by & future appraisal, the new
contracts provided for definite installments of 10% annually over a period
of 10 years. There does not appear to be any valid objection to e con-
tract of sale providing for payment of the purchase price in 10 annual in-
stallments. Installment contracts have always been an accepted method of
selling real property because they provide for the amortization of the pur-
chase price over 8 period of years. There can be no objection to 8. ten year
installment contract under the provisions of Section 5137 of the Revised
Statutes because that merely prohibits the holding of title and possession
by the Bank for longer than five years after the acquisition of the property.
Under these contracts both title and possession passed to the purchaser on
the sale, even though the actual record title not conveyed until e later
date.
Second, the new contracts provided for 6 definite and fixed purchase
price which was not dependent upon future negotiations or variations
In market value or sale conditions, and the purchaser directly essumed any
risk of profit or loss which might be incurred on a subsequent resale. This
provisions was retroactive and applied to all of the properties even though
41
Regraded Unclassified
205
in the original contracts the bank had assumed this risk.
To say that these contracts were for the benefit of Trans-
emerica Corporation or its subsidiaries is to ignore incontrovertible
facts. In addition to sales prior to 1932, the Bank, from 1932 to
June 1, 1938, sold approximately $67,000,000 in real property which had
been acquired upon foreclosure, and during that period of time epprox-
imately $37,000,000 has been puid on account of the contracts. During
that time California Lands Inc. and Capital Company have actually aus-
tained losses on reseles of the property acquired from the Bank in ex-
cess of $8,900,000. There is attached hereto as "Exhibit 3" a schedule
showing in detail the amounts of real estate seld by the Bank to California
Lands Inc. and Capital Company and the loases sustained by those companies
on resales of property acquired from the Bank under these contracts. An
analysis of this schedule should show beyond any doubt that these contracts
have proved to be very much to the advantage of the Bank not only by making
possible a prompt sale of real estate acquired on foreclosure, but also to
permit the maximum recovery upon properties which had been so acquired.
The Comptroller has specified certain technical criticisms
of these contracts which will now be considered.
(a) Annual Payments
The Comptroller states that the unnual payments required by
the contract have no relationship to each property sold, but relate rather
to the aggregate purchase price. It does not appear that this provision
can have any effect on the Bank. The obligation of the purchaser under
the contract is to pay for all of the property acquired at the price agreed
within the time stated. If the purchaser is unable to dispose of any
property or for reasons of its own desires to hold any particular property
without selling it, it does not appear that the Bank is at all affected
by this procedure.
(b) Formal Approval by Directors
Criticism is made that formal approval to the execution of
- 42 -
Regraded Unclassified
206
these contracts was not given by the Board of Directors of the Bank.
Formal approval of the agreements was not necessary under the operating
resolutions of the bank which provide E general authorization.
(c) Agreement to Accept Notes at Face Value.
The Comptroller atates that the agreement of the Bank to accept
notes or other obligations at their face value in payment of the ob-
ligations of the contract constitutes en unsafe or unsound practice, since
it prevents the Directors exercising sound discretion in selecting
desirable purchasers or procuring adequate prices for the respective pro-
perties. It is not considered that these agreements require the Bank to
accept any note or other obligation unless it constitutes B bons fide sale
from an actual purchaser. No instance has been found since the inception
of the contracts in which the Bank was requested to accept anything other
than a bons fide obligation in payment.
With respect to Directors securing adequate prices for the
verious properties, the contracts, of course, fix the actual price which
the land company is required to pay upon the purchase of the property.
The Directors have recognized the risk that might arise in the event
that the properties should be sold by the land company without regard
to value, so that the financial position of these companies might be 1m-
paired to such an extent that they would be unable to complete their
obligations to the Bank. Since the inception of these contracts the
practice has been that the resale prices and the terms of sale by the
land company are fixed in consultation with duly authorized officers
of the Bank and no change in these resale prices or terms is made without the
consent of the Bank.
(d) Real Estate Trades or Substitutions.
No criticism has been made of any particular transaction in which
a trade of real estate has been made. Although there may have been in-
(
stances during the life of these contracts when the land company pur-
chasing the property has effected B trade or exchange of one particular
- 43- -
Regraded Unclassified
207
property for some other property in order to improve its position, it
does not appear that such an exchange of property would constitute en
acquisition of real estate by the Bank in violation of Section 5137 of the
Revised Statutes. In any event, such exchanges, if any, have been few
and of no consequence,
(e) Pledge of Security
The Comptroller states that additional security should be
pledged to protect the Bank against loss upon the sales of property which
should not be finally disposed of by the land companies within five years
after acquisition by the Bank. It is difficult to see any legal basis
for this position. As far as the Bank is concerned, the real property
covered by these contracts has been sold under valid and binding
arreements and it is not apparent upon what basis the Bank could lawfully
demand that the purchasers pledge additional security for en obligation
previously entered into and not in default. It is felt that the
financial net worth of each of the land companies is more than sufficient
to provide essurance of ultimate payment of the obligations according to
their terms. (See P. 60 and 62).
The Comptroller states that these contracts were apparently
made to circumvent the five year limitation upon the holding of reel
estate by 8 national bank. This criticiam has not previously been made
during the ten years that property has been sold under these contracts.
It is not believed that this inference can be fairly adduced from the
facts surrounding these contracts and the payments that have been made
under them. On the contrary, it 18 believed that an impartial appraisal
of all of the facts can only load to the conclusion that they comply
with the full meaning and intent of the statute, and further, that their
operation over a period of years has actually resulted in the liquidation
of a large amount of real property acquired on foreclosure in e prompt
manner end with a minimum loss to the Bank, and et protection to the Bank
at the expense of the land companies,
- 44
Regraded Unclassified
208
By the memorandum of December 15, 1938, it was agreed that
these contracts would be liquidated in full by December 15, 1943, This
program has actually been followed in good faith, 88 a comparison of
the balances of these contracts will indicate,
Balance
Balance
Balance
4-28-38
6-30-39
12-9-39
California Lands Inc.
12,051,526.09
11,116,370.20
10,641,534.65
Capital Company
27,687,820.37
22,542,407.56
18,472,323.08
Total
39,739,346.46
33,706,107.76
29,113,857.73
The foregoing schedules show that total payment on these con-
tracts during B. period of 19 months have amounted to $10,625,488.73. It
is believed that these payments conclusively demonstrate good faith end
diligence in the carrying out of the agreed program for liquidation.
B. MERCHANTS NATIONAL REALTY CORPORATION
Under the heading of Real Estate Concentration the Comptroller's
letter refers to certain properties of Merchants National Realty Corporation.
These transactions were the subject of previous correspondence with the
Comptroller's Office, and before proceeding to answer the Comptroller's
criticisms, reference to former correspondence should be made.
On July 14, 1937 a contract for the sale of certain future and
former bank premises to Transamerica Corporation was terminated and these
properties placed in Merchants National Realty Corporation. A report of
this transaction wes contained in the report of the National Bank Examiner
of August 21, 1937, and although no criticism was contained in the letter
from E, H. Gough, Deputy Comptroller, to Chairman of the Board A. P. Giannini
on September 13, 1938, nor in the letter from Mr. Marshall R. Digga, Acting
Comptroller of the Currency, to the Board of Directors of the benk on
September 23, 1938, an explanation of the transaction was contained in the
letter from the Directors to the Comptroller on October 11, 1938,
- 45 -
Regraded Unclassified
209
In the letter of April 14, 1939 from the Comptroller of the
Currency to the Board of Directors, it was stated that the net result of
this transaction was the re-acquisition of Other Real Estate by the bank
and that the amount of this property should be removed from the carrying
value of the stock of Merchants National Realty Corporation and shown
upon the bank's statements as Other Real Estate.
In the letter of June 30, 1939 from President L. M. Giannini to
the Comptroller of the Currency, it was pointed out that the investment
of the bank in the stock of Merchants National Realty Corporation is shown
in the call report as "Investments and other assets indirectly representing
bank premises or Other Real Estate." This explanation was apparently satio-
factory to the Comptroller, and no further mention was made of this trans-
action in the letter of July 31, 1939.
The Comptroller's letter of October 2, 1939 refers again to
these former bank premises acquired by Merchants National Realty Corpora-
tion and states in substance that this transaction resulted essentially
in a re-sequisition by the bank of Other Real Estate and released Trane-
america Corporation from any risk or hazard of loss through depreciation
in the value of the real estate, while the Merchants National Realty Cor-
poration assumed this hazard. It is stated that this transaction
evidences the unsafe and unsound practice of favoring Trensamerica Cor-
poration, that the use of bank funds for the purpose of indirectly pur-
chasing real estate constitutes an unsafe and unsound practice and a
violation of Section 5137 of the Revised Statutes (12 USCA 29), and
further that the carrying of this real estate in the bond account of the
bank as en investment in the stock of Merchants National Realty Corporation
la misleading and an unsafe and unsound practice.
Before replying directly to the Comptroller's criticisms, it
is believed that the history of this transaction should be reviewed.
1. HISTORY OF "FUTURE AND FORMER BANK PREMISES"
- 46 -
Regraded Unclassified
210
Upon the consolidation of Bank of America of California and
(
Bank of Itely N.T. & S.A. on November 1, 1930, 8 number of properties
which had been owned and used by both of the banks 88 banking premises
or had been acquired for that purpose were DO longer necessary for that
purpose by reason of the consolidation of branches, and it was considered
desirable that these properties be disposed of.
On October 1, 1931 an agreement was made between Bank of America
N.T. & S.A., Transamerica Corporation and Capital Company, which in sub-
stance provided that the bank should sell and Transamerica Corporation
should purchase all of these properties for the sum of $9,155,786.56, pay-
able $780,011.02 in cash at the time of the execution of the agreement end
the balance as and when sales of the property were made, but in no event
later than October 1, 1936, with interest upon the unpaid purchase price
at 15 per annum. Transamerica Corporation by the provisions of the
agreement was entitled to the income and required to pay the expenses
in the management and operation of the property. The agreement recited
that the property was being purchased with the intention of selling,
trading or liquidating the same, and Capital Company was therefore ap-
pointed as agent for the purpose of managing the properties, collecting
the income and paying the expenses of operation, the proceeds of sales
to be paid directly to the bank.
During the life of this agreement the rights of Transamerica
Corporation under the contract were acquired by Capital Company, and dur-
ing the period ending July 14, 1937 the total sum of $468,843.72 was paid
to the bank from sales of 19 parcels of the land, and the aum of
$2,812,485.14 was paid by Transamerica Corporation in cash in partial
satisfaction of its obligation under the agreement. Subsequently the
bank reduced the purchase price by $1,000,000 and refunded that amount
to Transamerice Corporation to partially reimburse it for loss assumed
in the purchase of the properties. Up to July 14, 1937 the bank had,
therefore, received & total of $2,281,328.86, leaving an unpaid balance
- -47-
Regraded Unclassified
211
at that time of $5,874,457.70.
As has heretofore been pointed out, it was determined during
the year 1937 that the majority of the stock of the bank which had there-
tofore been owned by Inter-Americe Corporation, 6. subsidiary of Transamerica
Corporation, should be distributed to the stockholders of Transamerica
Corporation and the identity of ownership, which had theretofore existed
between the Bank and Inter-America Corporation, terminated, In addition
to the settlement of the Inter-Americe Corporation contracts, which are
hereafter discussed, it wese considered necessary and desirable from the
Bank's standpoint to likewise settle and terminate this contract for the
sale of these former Bank premises. This WGB accomplished in the follow-
ing manner: The Bank made n. contribution of $5,875,000 to the surplus
stock of Merchants National Realty Corporation, which ie a wholly owned
subsidiary of the Bank. Merchants National Realty Corporation thereupon
acquired the remaining 35 parcels of land contained in the original con-
tract with Transamerica Corporation from Capital Company for the sum of
$5,874,457.70. Actually this money did not at any time leave the control
of the bank. It was transferred from Capital Company to Transamerice
Corporation and thence to the bank all on the same day 08 part of the
same transaction and in accordance with the pre-arranged plan to effect
a settlement of the original contract. On the same date and as part of
the same transaction, an agreement was made between Merchunts National
Realty Corporation and Capital Company by which Capital Company was ap-
pointed exclusive agent for the sale and management of the real property
transferred on that date, with authority to operate, maintain, and lease,
end generally manage the proporty, collect the income, pay taxes and pay
the net income to Merchants National Reolty Corporation. As compensation
for its services, Capital Company was to receive 21% on the sales price
of any purcel of property, none of which were to be sold for less than
the prices fixed by the agreement without the consent of Merchants Notional
Realty Corporation. The Capital Company by this agreement also agreed
Regraded Unclassified
212
that it would liquidate and sell the property at a rate of not loss
than $590,000 annually; end further agreed that in the event that
(
during any year the sales should not amount to $590,000, the Cepital
Company would purchase sufficient of the property to make up the sum
of 2590,000.
2, REPLY TO COMPTROLLER'S CRITICISMS
The Capiryoller states that the net result of these transactions
was a re-scquisition by the bank of Other Real Estate which it had previ-
oualy sold under contruct and that this was illegal and B. violation of
Section 5137 of the Revised Statutes as amended (12 U.S.C.A. 29). It is,
of course, true that Merchants National Realty Corporation, B subsidiary
of the bank, has acquired real property which formerly constituted Future
end Former Bank Premises and which was under contract of sale to Trans-
america Corporation prior to July 14, 1937. This transaction, however,
deea not constitute a violation of Section 5137 of the Revised Statutes
either 86 an unlawful purchase of real property, nor as B. holding of real
property for B. period in excess of five years from the date it was acquires
by the bank, In the first place, the eontract of October 1, 1931 by which
the bank egreed to sell this property to Transamerica Corporetion was made
within one year after the property had been acquired by the bank, 1.0.,
within one year after the consolidation and the determination that these
particular pronerties would no longer be used as banking premises. The
original sale, therefore, to Transamerice Corporation was in strict
compliance with the Statute, and from that time forward the purchaser of
the properties was in possession under the contract and actually managing
and operating the properties under its obligation to pay the full purchase
price, The re-nequisition of these properties by the bank was nothing
note nor less than the termination by autual consent of the contract of
onle that had previously been made and WBE not in any sense the purchase
- 49 -
Regraded Unclassified
213
by the bank of real property in the sense prohibited by Section 5137 of
the Revised Statutes.
For example, assume that the bank had ecquired 6. parcel of pro-
perty upon foreclosure and thereafter entered into an agreement to sell
the property for $10,000 in installments of $1,000 per year over e ten
year period. The execution of such a contract is in legal effect a sale
of the property, and from the date that possession 18 delivered to the
purchaser Section 5137 has been fully complied with. Assume, however, that
at the expiration of four years and after the purchaser has paid $4,000 on
account of the purchase price, he then desires to surrender the property
back to the bank. The acceptance of the property by the bank and the con-
sent to the release of liability of the purchaser from further payments
under the contract is clearly not the purchase of real property, but is in
legal effect no different than if the purchaser, after having paid the
$4,000, defaulted in the contract end refused to continue further on the
contract. The bank's remedy in such n. cese would be to forfeit the interest
of the purchaser under the contract. In such 8 situation it could not
properly be contended that by consent to a termination of the contract
and re-scquiring the property, the acquisition would be a violation of
Section 5137 when the re-scquisition would be the result of any legal pro-
coedings taken against the purchaser who had defaulted on the contract;
nor could it properly be suid that upon the acquisition of the property
there was at violation of that portion of Section 5137 of the Revised
Statutes which prohibits the holding of property for more than five years,
because obviously the title and possession of the property have not been
held by the bank during the time that the contract of sale was in effect
end the purchaser was in possession of the property,
The termination of the contract for the sale of these former
bank premises to Transamerica Corporation is no different than that of
the example given, The original contract was made in good faith and
constituted a valid agreement of sale of the property, and was in full
- 50-
Regraded Unclassified
214
compliance with Section 5137 of the Revised Statutes. The termination
of the contract in July of 1937 was not a purchase of roal property in
contravention of section 5137, nor does too fact that too bank through
its subsidiary acquired title to the proporty constitute the holding
of the proporty for moro than five yours in violation of Section 5137.
For the purposes of that Section toe title to the property WAS not 4c-
quireo until July 14, 1937. It is felt that no criticism can be directed
to the acquisition of the property by voluntary agreement when legal pro-
coulings to enforco the contract would, in any event, have resulted in a
cancollation of the contract and re-acquisition of the property.
The Comptroller also states that tue acquisition of this proporty
by Merchants National Realty Corporation released Transamerica Corporation
from any risk or huzurd of loss through depreciation in the value of the
real property, while the Werenants National Realty Corporation, wholly
owned by the Dank, assumed tust risk. This is not correct. This nazard
W&B not assumed by Merchants National Realty Corporation, because as la
part of the BAMO transaction Capital Company, F wholly changed subsidiary of
Transamerico Corporation, entered into an agreement by which it ussumed
responsibility for the sale of the property at the rate of $590,000 per
year, And lacking such sales Agreed to purchase for its OHD account
proporties at the rate of $590,000 per year at prices not less thun
thous spucified in the agreement. It is therofore, cluar that 41-
though the bank uid combent to the termination of the contract with
Transamerica Corporation, it has not through ito subsidiary assumed
way risk or hazard of Loss through depreciation for the reason that
tas below price of the properties is in effect guaranteed by Capital
Company, and G dofinità liquidation program has been assured.
It is believed tast tirie transaction has equitable and fair under
all of the circumstances and was one mude for the bust interest of the bank.
while Baled of some of the smiller purculs news produced $468,000, Trans-
Gmerica Corporation during the life of two contract use paid in almost
-51-
Regraded Unclassified
215
$2,000,000 and the amount of the original contract had been reduced to
(
45,874,457.70 which, it W&S felt, would be realized under the agreement.
The contract of Capital Compuny to purchase the properties in the event
that it is unable to effect sales at the rate specified in the contract is
a protection against any hazard urising from - depreciation in value and
provides for the ultimate disposition of the real estate. Since the ex-
ocution of this contract, the requirements have been complied with. In
the conferences in December 1938, it was agroed that the time of perfor-
manco under this agreement would be accelerated NO that all the properties
would be disposed of prior to July 15, 1942 and as of December 12, 1939
the Capital Company commitment has been reduced by $2,858,684 pursuant to
this understanding. In the meantime the bank has benefited and will con-
tinue to benofit from receipt by Merchants National Realty Corporation
of the net income from the property which ut the time of agreement was
$250,000 por year.
The method of carrying this item upon the books of the bank
and the reporting of it in call reports to the Comptroller is believed
to be currect. The bank's books BACW un actual contribution to the
capital surplus of Merchants National Realty Corporation, and this con-
tribution has actually made. Unless BOISO other or different trunsactions
word had, it would seem to be necessary to include this amount as part
of the bank's investment in a wholly owned subsidiary. Carrying it on
the bouks or reporting it in any other way would clearly not reflect the
transaction thut was actually had. The item is also reported to the
Comptruller of the Currency exectly in accordance with the Comptroller's
requirements, as the bank's total investment in the stock of Murchants
National Rualty Corporation is snown in the call report under Item 9 as
(
an investment indirectly representing bunk promises or Other Reul Latate.
This transaction was recorded upon the bank's books in the nanner in
Which it WALL effected, and the entries- that were made truly and correctly
reflect exactly what 168 dune.
-52-
Regraded Unclassified
216
III TRANSAMERICA CORPORATION LARGE LINE
In previous correspondence from the Comptroller of the Currency
and in previous reports of examination of the National Bunk Exa iner,
reference has been made to "extensions of credit" or "obligations" of
Transasserics Corporation and its subsidi.ries. The letter of October 2,
1939 recognizes the fact that many of the items included in this total
do not in fact constitute extensions of credit or obligations of Trans-
anerica Corporation or its subsidiaries, and refers to these credits in
une group as obligations that are "substantially dependent upon the
future prosperity, earning power and success of Transamerica Corporation,
its subsidiaries und allied interests".
AS early as 1933 when this "large line" was fur in excess of the
amount at the present time it was recognised by the Comptroller's Office
that the major portion of these items did not constitute extensions of
credit by the bunk but rather tast tasy were transactions for the benefit
of the bank. In the report of examination of April 10, 1933, National
Bank Examiner, E. A. Price, with respect to this line suid (Consolidated
Report, page 11 Insert 9):
"It is recognized that 4 very substantial por-
tion of this line dues not actually represent money
borrowed; rather hus time bank become the beneficiary
through the credit so extended. This is particularly
true of those loans which represent the sale of real
estate and other undesirable assets to affiliates".
The recent attitude of the Comptroller toward these transactions
fails to recognize the very important sicment that the mujor portion of them
hero in fact entered into for the benefit of the bank and that the bank has
actually received wany millions of dollars from them that it would not other-
wise have obtained.
In replying to the Comptroller's criticisms under this heading of
the letter of October 2, it will be shown taut the major portion of the
itums included within the Comptroller's criticisms are not in fact dependent
-53-
Regraded Unclassified
217
upon the future prosperity, earning power or success of Transamerica
Corporation or its subsidiaries. Before going into a detailed discussion
(
of those itums, however, there are certain points which should be bruught
to attention.
At the outset it may be stated that the Directors and the usn-
agement of the bank recognize and have recognized that these items cun-
stitute a watter of importance in the administration of the affairs of the
bank. Constant efforts have been made and will continue to be made to
liquidate these items in full, una the items which were included in the
same designation of "Trunsumerica Corporation Large Lines" in the report
of examination commenced April 28, 1938 have been reduced by the sua of
$24,138,666., the details of which will hereafter be shown. The reductions
which have been made indicato that real attention nas been given and is
being given to the problem and satisfactory results are being obtained.
This so-called large line of Transamerica Corporation and its
subsidiaries was one of the matters which weB discussed in the conferences
of December, 1938, and it was provided in the agreement of December 15,
1938, item 11, that loans to Transamerica Corporation and its ullied
interosts would be brought within the legal limit allowed to one interest
not later than July 15, 1942, and that the real estate contracts of
Capital Company and California Lands Inc. would likewise be eliminated
by December 15, 1943. The Directors and the management of the bank have
complied with this agreement in good faith and with diligence, and it can-
not be denied that substantial progress has been imoe.
The letter from the Comptroller of October 2, 1939 waken no
reference whatever to the agreement of December 15, 1938. Neitner the
Directors nor the wahagement have ever boen advised by the Comptruller
C
that tau procedure outlined and agreed upon at that time was no longer
satisfectory to the Comptroller or that suale other action THE necessary.
This ugreement has arrived at after extended conferences nut only with
the Comptroller of the Currency, but with too Office of the Secretary of
-54-
Regraded Unclassified
218
time Treasury and other governmental departments. without regular to the
quastion as to whether or nut after having 467000 to - which 068
been carriou cut by the Bank in good faith the Couptroller could properly
change the requirements ande at that time if in his discretion DE should
decá it necessary to do BU, it is apparent thut in any event until the
Comptroller has given notice to the Directors and to the management that
his requirements are changed, compliance with the drugram Jutlined by the
Colytroller's Office are approved by other governmental departments could
n.t properly be assigned 65 an unsufe or unsourc practice.
The report of examination of April 28, 1938 whichwas the busis
of the conferences of December, 1938, states tont the total of the cb-
ligations included in the designation "Trunsamerica Corporation Large
Was" was approximately $76,000,000 and the report of examination of
March 31, 1939, completed July 21, 1939, likewise includes L total of
£76,000,000 in the items owine to nake Up the total of the er-up debit-
note "Transumerico Corporation wrfe Line". Apparently base. and these
reports, the Comptraiior states that there has been little improvement in
the ascrugate total of these obligations in the plat several years. it
10 evident that the Comptruller fuiled w notice that the report of air
adination of March 31, 1939, includes in this classification de Group of
obil_ations which, with De exception, were als in existence and not in-
cither in the report of examination of April 28, 1938. As & result of
including in the state group in the duren 31, 1939, report items which
were not includeu in twis group in the ,revious reports, it hus been
Made t. applar that there was no reduction in the obligatione want were
grovi_usly listed In this group, Libreus on tou cuntrury taeru 11-5 been
resuction of $24,138,666, UP to tutal of 33-1/3%, in the
amount of the obligations watch were included in this group in tax re-
jurt of of April 28, 1938.
Whetnur or not the itons which LTd DUE includes in this Group
are ,roperly classifica 48 obligations of Transamerica Corporation or
-55-
Regraded Unclassified
219
its subsidiuries (una it will nereafter be SHOWN that they are not properly
SO clossifieu), it wust be recognizes tast the Comptroller's conclusion tout
there has been little reduction in the tital line for the pust several years
16 clearly erroneous. This may readily be illustrated by the following table
which includes all of the items which were grouped in the classification
"Transamerica Corporation Large Line" in tue report of Aril 28, 1938, with
the balance as of taut date and the bulance as December 9, 1939:
Item
Bal. 4-28-38
Bal. 12-9-39
Reduction
1. (4) Guaranteed Loans
$5,524,096.03
$3,717,123.93
$1,806,972.10
(b) Option to Purchase
2,716,800.00
1,630,080.00
1,085,920.00
(c) Loans secured by
stock of TA
4,817,223.99
3,508,269.30
1,308,954.69
(a) Investment in stock
of TA
I
68,741.69
97,493.88
28,752.19(Inc
2. First National Corporation
of Portland
1,000,000.00
---
1,000,000.00
3. Transamerica Service
Corporation
7,600,000.00
2,700,000.00
4,900,000.00
4. bankagerice Agricultural
Credit Corporation
Direct Loan
50,000.00
400,000.00
350,000.00(Inc
Livestock LOUNE
Discounteu
5,743,637.43
5,546,611.11
197,026.32
5. Cerifornia Lando Inc.
(4) Real Estate Salus
Contract
12,051,526.09
10,641,534.65
1,409,991.44
(b) Heal Estato Lana
Discounted
301,016.19
-
301,016.19
(e) Direct Lean Unaucured
50,000.00
-
50,000.00
6. Capital Company
(-) mul Batate Sales
Contructs
27,687,820.37
18,472,323.08
9,215,497.29
(b) Roal Estate Loans
Direct
946,000.00
651,000.00
295,000.00
(c) Direct Advances in
Suzpense Resources
497,040.65
---
497,040.65
7. intercontinental
Corporation
7,150,000.00
4,700,000.00
2,450,000.00
TOTAL
$76,203,902.44
$52,064,435.95
$24,138,666.49
It cust. also be resembered tast the ultimate want of any obli-
(Ation Jeyebus net only u.n the security, but LIS- upon the future presperity,
-56-
Regraded Unclassified
220
earning power and success, as well as the financial net worth, of the
obligor. Credit of any kind, regardless of the form of the obligation,
is necessarily dependent upon these factors. The statement that these
obligations are dependent upon Transamerica Corporation and its sub-
sidiarios implies that the obligations are dependent upon n. single source
and fails to take into consideration the fact that many of the sub-
sidiarios of Transamerica Corporation represent sound, substantial and
diversified interests and holdings which are not affected by the fact that
their stock is owned by Transamerica Corporation.
A. ITEMS LISTED IN REPORT OF EXAMINATION OF MARCH 31, 1939
No will proceed now to a detailed reply to the Comptroller's
criticisms that the items listed in the report of examination of March 31,
1939, (pago 8, insert 2) consist of items which are dependent upon the
future prosperity, earning power and success of Transamerica Corporation,
its subsidiaries and allied interests.
1. (a) Guarantood Loans $4,507,868.76. The nature of this
itom and the canner in which it arose are discussed in full detail hereafter
at page 72, For the present purposo it is sufficient to point out that the
payment of this obligation is primarily dependent upon recoveries made
from charged-off assets of the bank; and the only obligation of Trans-
america Corporation is that in the ovent recoveries upon those charged -off
items do not amount to the sum of $1,300,000 per year for five years from
July 14, 1937, Transamorica Corporation will nako up the difference under
the terms of its contract of guaranty. Recoverios upon these assets and
a cash payment of $250,000.00 have alroady reduced the guaranteed anount
(
.0 $3,717,123.93 as of Docember 9, 1939, and the value of the collateral
held DA security for the guaranty, not including the charged off cosots,
is more than twice the amount of the remaining balance on the obligation.
A complete recovery upon tho charged-off assets is not even remotely
-57-
Regraded Unclassified
221
dependent upon the future prosperity, surning poser or success of Trans-
aserica Corporation because if the chargou-ust items themselves do not
groduce the full amount guaranteed, the security is mre trun umple to
provide for tue bulance,
(o) Option to Purchase $2,173,440.00. The uctails of the
acquisition of this stock are set forth in Full it puge 94. This item
dous not represent an extension of cradit nor an obligation of Transamerica
Corporation in any senso of the word. The bank acquired 56,600 shares of
the chpital stock of National City Bank of New York in satisfaction of an
obligation previously contructed. Upon the acquisition of the stock, it
gave un option to Transauerice Corporation to purchase the stock at $48.00
per share which was the then worket value, una to protect itself free a.
varistion in the market value, the bank took an additional 18,400 shares
in the event that the option should not DC exercised and the stuck savula
be otherwise solo for less than the option rice. It QuoS not appour
that is any possibility could this be considered us an extension of credit
to, I an ooligation of, Transamerica Corporation, ner is it dependent
upon t.De futuro prespurity, earning power or success of Transanurice
Corporation, its subsidiaries or any su-called allied interest. Trans-
america Corporation Owner approximately % of the stuck of National City
Bunk of New York, una tast bank is clourly not an affiliate JF allied
interest of Transamerica Corporation.
(c) Investment in stock of Transamerica Corporation
264,438,88. There appoars to Do no reason or excuse for two classifica-
tion of this item in la line of credit of Trensasurica Corporation or its
subsidiaries. The stock WAB luwfully acquired by tax bank in satisfaction
of dents una While, of course, the ultimate value of the invostment depends
upon the future of Transmerice Corporation, it. is true that any invust-
aunt is ultimately dependent upon too success of the enter,rise of which
it constitutes is part. The assunt 16 BU number tast it QUES not require
extenued discussion.
-58-
Regraded Unclassified
222
(4) Lowns Secured by Stock of Trunsuberica Corporation
$3,508,269.30. Here again there is no apparent reason or excuse to 10-
clude this item in a group purporting to be credit extended to Trans-
america Corporation or ita subsiniaries. This 1tem represents individual
Luans to many different borrowers, which wre secured by a pledgo of stock
of Transumerica Corporation. The louns are primarily dependent upon the
financial responsibility of the makers. To the extent that payment may be
dependent upon the security, it is true that the obligation might be de-
pendent upon the future success of Transamerica Corporation. On the other
hand, these loans, for the most part, are being maintained in current
condition and are constantly being reduced, which would inuicate that there
is a considerable measure of financial responsibility in the indivioual
borrowers.
2. Bankamerica Agricultural Credit Corporation. Livestock
Loans Discounted $5,663,459.06. These loans all represent loans to in-
divioual borrowers upon the security of livestock. It is considered that
all of the loans were scund credits at the time they were made and coula
have been discounted with the Federal Intermediate Credit Bank instead
of with Bank of America N.T. & S.A. Under these circumstances it is not
considered that they are subject to criticism us an investment of bank
funus.
It is true these louns were discounted with the endorsement of
Bankamerica Agricultural Credit Corporation which 16 owner by Transaserica
Corporation, and to the extent that the ooligations are not palu by fi-
nancial responsibility of the indivioual Derrowers and the value of the
security for the loans, they are dependent upon the future ability of the
Bankuserica Agricultural Credit Corporation to A if called used to do
so. On the other hand, it must be obvious that these loans were predicated
upon the financial responsibility of the various makers and the value of
toe security siven upon the making of the loan. None of these loans has
been adversely classified to any extent in the report of examination, and
- 59 -
Regraded Unclassified
223
every reasonable indication is that they will DE pata by the burrowers in
que course. The inclusion of these louns 45 purt of an alleged over-
concentration of credit dependent upon the future success of Transamerica
Curporation is obviously unwarranted,
The schedule shows an increase in the direct loans to Bankswerica
Agricultural Credit Corporation. These loans are made from time to time
to provide funds for temporary auvances to burrowers of the corporation
penuing execution and receipt of completed loan papers and security afree-
dents.
3. Culifornia Lanis Inc.
(-) Direct Louns Secured by Roal estate 948,281.53.
(b) Real Astate Louns Discounteu $188,029,74. To the extent
that the security for these itoms might be insufficient, they are dependent
use the credit of Culifornia Lanus Inc. which is owned uy Trensamerica
Corporation. The loans are comparatively small was in 8000 standing, and
no deficiency in security is anticipated. since the uste of the Examination
the discounteu loans (b) have been eliminated.
(e) Real estate Sales Contract $11,514,370.44. A detailed
history and explanation of this contract is heretofore set forth on page
37. The balance upon the contract 0006 not represent an extension of
credit, but constitutes the balance Jue Upon the purchase price of roal
property acquired by tue bunk on foreclosure and auto to California Lanus
Inc. under contract of April 4, 1934.
The criticism that this obligation is dependent upon the future
of Transamerica Corporation or its subsidiaries is clearly not warranteu.
In the first place, if there was a default in the contract, the bank would
re-acquire the property which it have previously sclu and sould be in the
Shale position sa formerly. Further, California Lanus Inc. is a ouing
concern, owning and operating real properties throughout the State of
California. In Guuition to the property which is being purchases under
contract from the bank, it uwno unenousibered real properties which have un
- 60 -
Regraded Unclassified
224
approximate currying value of $7,500,000 and securities having a market
value of $2,500,000, and the sound value of its assets over and above its
liabilities is $13,500,000. In spite of the fact that, as heretofore
pointed out, California Lands, Inc. has absorbed a loss in excess of
03,300,000 on the TO le of property purchased from the bank during C
period of approximately six years, its net worth has increased from
$13,096,035 on December 31, 1933, to $13,532,000 on September 30, 1939.
The company has set aside reserves of $3,000,000 for losses on properties
purchased under contract from the bank. Those circumstances would indicate
that this company is soundly managed and successful in its operations, and
that in addition to the value of the property which has been sold under
contract by the bank, the ultimato payment of the obligation of California
Lands Inc. is more than reasonably assured in view of the sound net worth
of the company, and therefore no adverse classification of any portion of
this contract should be made.
In the report of examination of March 31, 1939, the total amount
of this contract was classified $9,833,079.71 as II and $1,444,999.46 as
III. In explaining this classification the Examiner states (page B,
insurt 9) that the classification is made because some of the property has
been sold to California Lands Inc. for more than its appraised value and
that, therefore, California Lands will apparently suffer a loss on the
resale. This fact would not indicato that the bank would sustain any loss,
however, because Colifornia Lands, Inc. is clearly bound by its contract to
pay the balance of the purchase price, and has set aside ample reserves
for such losses. Furthermore, in this connection the Examiner states that
be has not allowed credit for instances in which the appraised value of the
property exceeds the contract price because "solling costs will undoubtedly
absorb all apparent excess." Thore doesn't appear to be any basis for the
Examiner's conclusion in this regard because past experience clearly in-
lientes that solling expense has been absorbed through current operations
and income.
-61-
Regraded Unclassified
225
4. Capital Company
(a) Direct Real Estate Louns $909,000. This is a conforming
roal estate loan not classified in the report of examination, and reduced
to $653,000. To the extent that the security might be insufficient its
ultimate payment is dependent upon the not worth of Capital Company, E sub-
sidiory of Transamorica Corporation, but obviously there is no deficiency.
(b) Direct Advance for Construction of Building Added to
Roal Estate Sales Contract $1,100,000. This advance was made pursuant to
that provision of the agreement between the bank and Capital Company by which
the bank agreed to advance funds for the rehabilitation or improvement of
property sold to Capital Company under these contracts. The advance has since
been paid by Capital Company, and no further consideration is necessury.
(c) Real Estate Salos Contracts ($22,556,664.63. The real
estate sales contracts by which property has been sold by the bank to
Capital Company are practically identical with the contracts made with
California Lands, Inc. and are heretofore discussed at page 37. As pointed
out in connection with the California Lands, Inc. contract, the contracts
do not represent an extension of credit, but the amount set forth consti-
tutes the balance due upon the purchase price of roal property acquired
by the bank on foreclosure and sold to Capital Company under contracts
dated April 4, 1934 und subsequently.
Here again the criticism that the Abligation is dependent upon
the future of Transamarica Corporation or its subsidiarios is not war-
ranted because in the event of 4. default, the bank would re-acquire the
property and be in the same position as before. Furthermore, Capital
Company is at going concern, owning and operating many parcels of city
properties throughout the State of California. In addition to the pro-
perties being purchased on the contract, it owns unencumbered real pro-
perties having a carry value in excess of $5,000,000 and securities
having a market or estimated value of $7,800,000, with a net value of
Bound assets over end above liabilities of $19,641,152.18. For the year
-6-
Regraded Unclassified
226
1938 the gross operating incomo of Capital Company was $3,012,351.88 and
its net operating profit $820,200.10. In spite of the fact that Capital
Company has absorbed losses of approximately $5,000,000 upon the resale
of properties purchased from the bank during e period of approximately
six years, its net worth has increased from $17,475,766.56 on December 31,
1933, to $19,641,152.18 on September 30, 1939. This company also has sot
aside reserves of approximately $2,000,000 for losses on properties pur-
chased from the bank. Hore ugain the circumstances indicate that the
company is soundly managed and successful in its operations, and in addition
to the value of the property sold under these contracts, the ultimate pay-
nent of the balance of the purchase price is more than reasonably assured
in view of the sound net worth of the company, and therefore no adverse
classification of any portion of these contracts should be made.
In the report of examination of March 31, 1939, the total
balance of those contracts was classified $18,210,577.40 as II and
$5,446,067.23 as III. The same reasons for the classification are given
by the Examiner, as stated in the California Lands Inc. contract, and they
are based upon the conclusion that because some of the properties have
been sold by the bank to Capital Company for more than their present ap-
praised value, the Capital Company will apparently suffer a loss on a
resale. The Examiner has not allowed credit for instances where the ap-
praised value of the property exceeds the purchase price because he con-
cludes that selling costs will undoubtedly absorb all apparent excess.
It is pointed out again with respect to these contracts that regardless
of thether or not Capital Company suffers a loss upon & resale, that
fact of itself would not indicate & loss to the bank because Capital
Company is bound upon its contract, and, in fact, has set up reserves
to cover such losses. Past experience of Capital Company also indicates
that selling expense has been absorbed in current operations and income,
and the classification is, therefore, improper for failing to take into
consideration the amount of profit which might be realized on some sales
-63-
(Next page No. 65)
Regraded Unclassified
227
as an offset against losses which are anticipated on other properties and
also because an loss to the bank is indicated because of the net worth of
the coupony and its domonstrated ability to pay.
(d) Agreement Covering Purchase of Future and Former Pre-
ulses Carried Under Merchants National Realty Corporation $4,578,309.34.
The obligation of Capital Company under this agreement does not constitute
on extension of credit. As heretofore explained at page 48, Morchants
National Realty Corporation, wholly owned by the bink, entered into a con-
trect with Capital Company by which Capital Company La appointed as ex-
clusive agent for the sale of the properties described in the agreement
and agreed to sell them at the listed price at the rato of not less than
$590,000 por year, and if Capital Company WAB unable to effect such sales,
it agreed to purchase for its own account sufficient proporties to make
up the amount of $590,000 per year. The contract represents an obligation
of Capital Company to the extent that it is unable to sell the property
to others, and then consists of an agreement to purchase the property from
the Merchants National Realty Corporation at the prices specified in the
agreement. Even though It any bu that in some instances the specified skles
prices of the properties exceed the present value of such properties, that
fact in itself does not indicate FL loss to the bank because Capital Company
in bound by its agreement to purchase the proporties if it is unable to
sall than. The sound net worth of Capital Company as a going concern
inCicates that the bank is more than reasonably assured that its obligation
will be met.
5. Inter-Continental Corporation Direct Secured Loan $7,000,000.
This item represents a direct extension of credit to A company which is de
subsidiary of Transaberica Corporation. The report of exmmination of
April 28, 1938 should n. belence of $7,150,000, and the balance as of
Ducember 9, 1939 WILD $4,700,000. The obligation is secured by L pledge
of collateral having a sound value in excess of the balance of the in-
dubtodness and ample to protect the Loan. Its payment is, therefore, not
-65-
Regraded Unclassified
228
dependent upon the future prosperity, carning power or success of Trans-
america Corporation. The loan has been substantially reduced since its
inception and further reductions will be ande.
6. Transumerica Service Corporation Direct Secured Loan
$5,000,000. This item also represents a direct extension of crodit to
Transamerica Service Corporation, which is & subsidiary of Transamerice
Corporation, The report of examination of April 28, 1938 showed the
balance to be $7,600,000, and the balance as of December 9, 1939 was
32,700,000. The security held for this obligation is likowise in excess
of the amount of the debt and more than sufficient to protect the loan.
Its payment, therefore, is not dependent upon the future prospority, earn-
ing power or success of Transamorica Corporation. This loan has likewise
been substantially reduced and further reductions will be made.
7. Pacific Coust Mortgage Company Direct Secured Loan
32,750,000. Although this loan has existed for some time, it has not pre-
viously been included or grouped as part of the obligations of Transame
Corporation or its subsidiaries. The Examiner's excuse for including this
item at the present time is that it was formerly an affiliate of Trans-
america Corporation and is closely cllied to Transamerica Corporation's
interests. It is stated that the shareholders of the company are largely
officers, directors and employees of the Bank of America N.T. & S.A. and
shareholders of Transamerios Corporation. The Examiner gives CB his
reason for including this loan under "Transamerica Corporation Large Line"
the fact that the collateral pledgod to secure the indebtedness represents
investments in which Transanerica Corporation owns control or a sub-
stantial interost and in Buse instances the collatoral was purchased from
Transamerica Corporati n or its subsidiaries.
The facts stated by the Examiner in the report of examination
(the examination of 3/31/39, jagu 8, insert 14) indicate in themselves that
this credit cannot be considered as a loan to 4 subsidiary or affiliate of
Transenorica Corporation, nor one the payment of which is dependent upon
-66-
Regraded Unclassified
229
the future prosperity, carning power or succese of Transamorics Corporation
or its subsidiaries.
In the report of examination of April 28, 1938 (page 8, insert 19)
it was shown that the Pacific Coset Mortgage Company wis sold by Trans-
america Corporation to A. 0. Stowart in December, 1932 for the aum of
$3,200,000 and that the full purchase price WAS paid by the year 1935. No
question has ever been raised as to the bona fidos of this sale, and with
a consideration of $3,200,000 actually paid many years ago no question
could be raised. The Examiner does not in fact claim that the Pacific Coast
Wortgage Company is a subsidiary or an affiliate of Transamerica Corporation,
but says that it is an "allied interest", and he therefore includes the
debt in his grouping of the large line of credit extended to Transamerica
Corporation.
It is not quite cloar what the Examiner means by his expression
"allied interest", but his suspicions do not stand up under on lysis.
There is no indication that Transamerica Corporation owns any of the stock
of Pacific Coast Mortgage Company, or has, or exercises any sort of in-
fluence or control over its operations. The fact that some of the stock
of Pacific Coast Mortgage Company is owned by Officers, directors or
employees of the Bank of America N.T. & S.A. does not make the company an
affiliate or an allied interest of Transamerica Corporation either in
fact or in law.
Nor can any significance be attached to the fact that this
company owne socurities in firms in which Transamerica Corporation owns
control or a substantial interest. The far-fotched conclusions to which
this reasoning could be applied could not be better illustrated than in
the very example given. Transamerica Corporation wns approximately
541,000 shares of the capital stock of National City Bank of New York,
which has a market value in excess of $16,000,000. While this stock
constitutes approximately 9% of the total stock issued and outstanding
and is a very substantial interest in that bank, it is obvious that the
-67-
Regraded Unclassified
230
National City Bank of New York is neither a subsidiary nor affiliate of
Trensamerica Corporation by reason of that stock ownership. Pacific Const
Mortgage Company owns 15,000 shares of the anno stock, having B. market
value of approximately $450,000. Is Pacific Coast Mortgage Company an
allied interest of Transamerice Corporation because it cuma an interest
in National City Bank of New York, in which Transamerice Corporation like-
viso owns or owned a substantial interest? Obviously not. For the saue
reason the fact that Pacific Coast Mortgage Company owns stock in other
corporations in which Transamerica Corporation owns a substantial interest
or even controlling interest does not make it an affiliate or on allied
interest of Transamerica Corporation.
Nor does the fact that some of the securities owned by Pacific
Coast Mortgage Company were purchased from Transamerica Corporation or
its subsidiaries alter the situation, For example, Transumeric Cor-
poration formerly owned & large interest in Bancamerica-Blair Corporation,
not known as Blair and Company, which was at securities affiliate within
the nonning of the Banking Act of 1933. By the terms of that statute
Transamerica Corporation W&S required to dispose of its interest in any
securities company affiliate, and connection with that roquirement
Pacific Coast Mortgage Company acquired all of its holdings. It is ob-
vious that from the date of such acquisition Pacific Coast Mortgngo Company
became the owner of the controlling interest and responsible for and con-
cerned with the future and operations of that company. By the sale
Transamerica Corporation severed its interest in the company and its con-
corn in the future or operations of it. It is not possible to say that
because Transamerica Corporation sold its interest in Bancanerica-Blair
Corporation and Pacific Coast Mortgage Company acquired it, that the
interests of Pacific Coast Mortgage Company were thoreby allied with or
in coumon 1th Transamerica Corporation. The sale would indicate ex-
actly the contrary.
There is likewise no busis for assertion that the liquidation
-68-
Regraded Unclassified
231
of the indebtedness of Pacific Coast Mortgage Company is dependent upon
the future prosperity, earning power or success of Transamerica Cor-
poration or its subsidiaries. The fact that Pacific Coast Mortgage
Company owns a stock interest in some corporation in which Transamerica
Corporation also owns or owned a stock interest is not an indication that
payment of the debt is dependent upon the future of Transamerica Corporation.
Insofar as the payment of the obligation is dependent upon the security held
for it, it may be dependent upon the future of the companies whose stock is
pledged, but there is nothing to indicate that the future of those companies
is dependent upon the future of Transamerica Corporation. Except in unusual
circumstances which clearly are not present here, the future and progress of
any corporation are not dependent upon the worth of its individual stock-
holders, but rather upon the success of its operations.
We therefore believe it is clear that there is no morit to the
suggestion that Pacific Coast Mortgage Company is an allied interest of
Transamerica Corporation, or that payment of its obligation is in any way
dependent upon the future of Transamerica Corporation or any of its sub-
sidiaries. The inclusion of this loan as one of the items in the purported
large line of credit to Transamerica Corporation is clearly not warranted
under the facts.
8. Bankauorica Company Direct Secured Loan $1,066,400. The
report of examination shows that this company was fornerly owned by
Transamerica Corporation and was acquired by the Pacific Coast Mortgage
Company. The fact that it was sold by Transamerica Corporation clearly
indicates that it is no longer a subsidiary of Transamerica Corporation,
and no feets are stated which would justify the inclusion of this credit
in the "Transamorica Corporation Large Linc". Nothing is stated in the
report which would indicate that the payment of this obligation in in
any my dependent upon the futuro prosperity, earning power or success
of Transamerica Corporation or any of its subsidiaries. The loan is
fully secured, and no part of it has been adversely classified.
- 69 -
Regraded Unclassified
232
9. Western Furniture Exchange, Inc. Illogal Real Estate Loan
$520,000. Previous correspondence with the Comptroller's Office has in-
dicated the reasons for the acceptance of this nota and the belief that
the note was properly acquired and did not constitute an illegal roal
estate loan. However, in view of the Comptroller's insistence that this
loan constituted an illegal investment of the bank's funds in spite of the
bank's opinion to the contrary, Transamerica Corporation agreed to remove
the note from the bank for cash, and this has been done.
10. Western States Corporation Direct Secured Loan 21,500,000.
Capital Company, a subsidiary of Transamerica Corporation owns the non-
voting preferred stock of this corporation but has no control because
voting power is entirely in the common stock. Under these circumstances
it is not considered that this corporation is a subsidiary of Capital
Company nor of Transamerica Corporation. In do far as the loan itself is
concerned, it is secured by collateral which has a market or estimated
value substantially in excess of the amount of the loan, and no part of
the loan is adversely classified.
11. Transamerica General Corporation Deposit of Self Insurance
Funds $2,272,659.55. This item will hereafter be discussed in detail at
page 98. The amount specified by the Examiner as an unsecured borrowing was
not in any sense of the word an extension of credit, but was in fact a pay-
ment by the bank to Transamerica General Corporation for indemnity for
fidelity losses. These sums were paid without any express or implied promise
that they would be repaid, and the bank has received full consideration for
the payments by protection from and reimbursement for indemnity and fidelity
losses. This sum is not 0.0 asset of the bank, nor is it an obligation of
Transamerica General Corporation to the Bank.
From the foregoing analysis of the various items which have been
included in the "Trensaparica Corporation Large Line", it is apparent that
by far the major portion of the itoms included cannot be considered as
obligations of Transamerica Corporation or its subsidiaries nor as dependent
- 70 -
Regraded Unclassified
233
upon the future prosperity. earning power or success of Transamarica
Corporation.
The schedule heretofore set forth at page 56 shows that payments
have been made upon the obligations listed in the report of examination of
April 28, 1938, in the total sum of $24,138,666. This indicates definite
and substantial progress in the reduction of the total amount of these
items.
The Comptroller also states in his letter of October 2, 1939,
that the major portion of the collateral pledged to secure the obligations
listed under "Transamerica Corporation Large Line" are reported to be
permanent investments of Transamerica Corporation or its subsidiaries,
and that therefore no liquidation can be anticipated from that source.
The primary source of payment of any obligation, however, is ordinarily
considered to be the financial ability of the obligor, and collateral is
taken to assure payment in the event that the obligor fails in the per-
formance of his obligations. As far as the value of the collateral is
concerned, that would not appear to be affected by whether it was owned
by Transamerica Corporation or one of its subsidiaries or by any other
person. nor whether it was considered by the owner to be a permanent or a
temporary investment.
The Comptroller also refers to the disbursement of dividends by
Transamerica Corporation. The major portion of these dividends was, of
course, the distribution of 58% of the stock of Bank of America F.T. & S.A.
with a value at the time of distribution of approximately $60,000,000. In
so far as the payment of cash dividends by Transamerica Corporation is con-
cerned, consideration should be given to the fact that they were to an
extent influenced by the tax statute which for all practical purposes
prevented a corporation from using its income to pay its debts by imposing
heavy penalties in the form of taxes for failure to distribute its earn-
ings. Pursuant to its offer by letter of September 11, 1939, Transamerica
Corporation has agreed to set aside its dividends from the bank to be used
-71-
Regraded Unclassified
234
either to accelerate reduction of its commitments to the bank or to subscribe
to additional stock in the bank and the portion of the last bank dividend
received by Transamerica Corporation amounting to $830,000.00 has been applied
to reduce the commitment of Capital Company to Merchants National Realty
Corporation under its agency agreement covering Future and Former Bank Premises.
The letter of the Comptroller, on page 23, under the heading of
"Violations of Law" specifies 6 violation of Section 5200 of the Revised
Statutes in excessive obligations of Transamerica Corporation and its sub-
sidiaries. It is believed that the Comptroller's conclusions in this respect
are incorrect, but in view of the fact that a discussion of the legality of the
various transactions is dependent upon a thorough understanding of the facts,
the reply to this portion of the letter will be reserved until a later point.
B. INTER-AMERICA CORPORATION CONTRACTS
HISTORY
In order to fully understand the nature of the Inter-America
Corporation contracts and the manner in which they subsequently were
liquidated, it is necessary to consider briefly the circumstances under
which these contracts originated.
On November 1, 1930, Bank of America of California, a state bank,
consolidated with Bank of Italy National Trust and Savings Association, a
national bank, under the charter of Bank of Italy National Trust and
Savings Association and under the name Bank of America National Trust and
Savings Association. The first examination of the consolidated bank by
the National Bank Examiners was conducted in February, 1931, and ves con-
cluded on Way 5. 1931. The report of this oxamination showed non-bankable
assote of $14,700,000, and the National Bank Examiner and Doputy Comp-
troller of the Curroncy roquired that somothing bo dono about thoso assets
prior to July 1, 1931. The major portion of theso itoms, as well as ad-
ditional items which wore subsoquently developed in 1931 and the early
-72-
Regraded Unclassified
235
part of 1932, had arisen through loans at the Los Angeles Office of Bank
of America of California, formarly the Boad Office of the combined
Regraded Unclassifie
Hellman and Morchants National Bank of Los Angeles. Many of these items
resulted from questionable and even dishonest practices of some of the
officers of that Branch, who were formorly officers of the Merchants
National Trust and Savings Bank of Los Angeles, & predecessor institution,
in which most of those items originated, and as a result of the ex-
amination the Deputy Comptroller of the Currency requested the removal of
such officers as were considered to have been responsible for the creation
of these loans. When the present management assumed control requests for
prosecution for these practices produced no results.
As a result of conferences between J. y. Pole, the then Comp-
troller of the Currency, and the then management of the bank and Trane-
america Corporation which was ousted in February 1932, it was determined
that the items under discussion would be covered by the execution of an
appropriate collateralized guaranty by Corporation of America, the
beneficial interest in which corporation was almost entirely owned by
the stockholders of the bank through endorsement on the stock certificates,
Pursuant to this arrangement Corporation of America entered
into an agreement with the bank on June 26, 1931, which agreement took
the form of a contract of sale and purchase of assets, The agreement
specified a price of $15,000,000 and a maturity of one year and provided
that interest collected upon any of the assets included, other than
interest already accrued, should be credited as interest upon the contract
and no other interest should be payable until the maturity of the contract.
It also provided that the bank should act as agent of the purchaser for
the purpose of collecting and liquidating the assets. Certain securities
described in the agreement were pledged to secure performance.
On December 31, 1931, a similar agreement was made for asseta
totaling $10,000,000.
Subsequent to the examination commencing August 31, 1931, the
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236
National Bank Examiner classified additional non-bankable assets of
$10,214,000 and requested that those additional assets be similarly
treated. Pursuant to an arrangement with the Comptroller of the Currency,
another agreement was executed by Corporation of America under date of
Fobruary 13, 1932 two days before the election which removed the former
management in substantially the same form DE the two previous agreements.
Corporation of America pledged securities for its commitments under this
agrocment, and at the same time plodged additional securities for the two
provious agroements, which included socuritios bolonging to Transamorica
Corporation or its effiliatos.
On December 11, 1933, Corporation of America entored into an
agreement with Transamerica Bank Holding Company by which the interost
of Corporation of America in the above contracts wha assigned to Trans-
enorion Bank Holding Company, which assumed all of the obligations and
the liabilitios of Corporation of America under thoso agreements. This
transfer was made because at the time tho stock of Corporation of
America was owned by the shoreholders of the Bank and each share of bank
stock carried with it A share of stock in the Corporation. This arrange-
mont was required to bo terminated by the Banking Act of 1933 and it was
contemplated to liquidato the nssots of the Corporation of America as
far na possiblo to pormit this severance. The transfer was consonted to
by Bank of America National Trust and Savings Association, and the Oor-
porntion of Amorica WILB rolonsed from its licbilitios under those con-
tracts in viow of the assumption by Transamorica Bank Holding Company.
Thoso throe contracts, which have somo timos boon reforrod to na the ABC
contracts and moro ofton DE Intor-Amoricn Corporation contracts, woro
originally entered into botwoon tho bank rund Corporation of Amorica, and
than assigned to Inter-Amorica Corporation which VAB originally naned
Transamerica Bank Holding Company. Copios of thoso agreements Are already
in the Comptroller's Office but if additional copies are dosired they will
be furnished upon request.
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237
As previously indicated, these contracts wore in fact intended
as contracts of guaranty against loss upon assote which had been requested
in the reports of examination by the National Bank Eraminers during the
year 1931. All of the evidence indicates that it was intended that Trans-
america Corporation, which was to all practical purposes the sole stock-
holder of the bank, owning 99.65% of its stock, should provide security
against loss on the items which were covered by the contracts, In recent
reports of examination the Examiner has taken the position that these
contracts were outright contracts of sale and not contracts of guaranty
as claimed by the bank. This position is untenable as regardless of the
form of the agreements, it 1e clear that it was intended from their in-
ception that they should be considered as a guaranty against loss, and at
all times they have been so treated by both parties to the agreements.
The initial correspondence on this subject indicatos definitely
that as far as the Office of the Comptroller of the Currency was con-
cerned these contracts were considered as B. guaranty against loss by
Transamerica Corporation. On January 27, 1932, which was subsequent to
the execution of the first two agreements, the Comptroller of the Currency
addressed a letter to Jas. A. Bacigalupi, the then President of Trans-
america Corporation, as follows:
TREASURY DEPARTMENT
Office of the Comptroller of the Currency
January 27, 1932.
Mr. Jas. A. Bacigalupi, President,
Transamerica Corporation,
460 Montgomory Street,
San Francisco, California.
Dear Sir:
In the recent examination of the Bank of America
National Trust and Savings Association items aggregating ap"
proximately $36,000,000 were classed as losses, or as suffi-
ciently doubtful in character to render them non-bankable.
The bank has been guaranteed against loss on
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238
$25,000,000 of this amount by the Corporation of America in
writing. while the remainder is under & vorbal guaranty.
Inserruch as your Corporation owne practically all
of the stock of the bank and its affiliated Corporation of
America, you are urged to promptly deposit with the bank suf-
ficient collateral that the entire $36,000,000 obligation will
be fully secured. You are also urged to have & written FULL
anty deposited in liou of the existing vertal one.
Respectfully,
(Signed) J4 Y, Pole,
Comptroller.
JWP
MEN
*Underscoring supplied.
It is clear that the Comptroller not only considered the two
previous agreements as guaranties agninst loss, but that he requested a
further written guaranty for the additional $11,000,000 requested to be
guaranteed in December of 1931.
These contracts from thoir incoption were likowise viewed as
guaranties by Corporation of America, and various entries in the books
of Corporation of America and other subsidiaries of Transamerica Cor-
poration indicnto this fact. On June 30, 1931, Corporation of America
set up a "Reserve for Assots Purchased under Controct" in the amount of
$15,000,000, and this was increased on September 22, 1931, to
$33,784,147.20 and then transferred to two other reserves designated
"Reserves for Assets of Banks" $18,784,147.20 and "Roserve Relative to
Bank Contracts" $15,000,000. On December 31, 1931, the $10,000,000 com-
tract was executed, and at that time Transcmerica Bank Holding Company
set up an account payable designated "Liability to Bank of America
National Trust and Savings Association under Contract of Guaranty of
Assets". Subsequently those reserves were designated "Reservo for
Liability and Possible Loss under Outstanding Inter-Company Contracts"
and were carriod under this designation during the reminder of the life
of the contracts. In the Ernst & Arnst audit report of Transamerica Bank
Holding Company for the year onding December 31, 1931, reserves of
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239
$10,094,376.57 were classified on the financial statement as "Reserve for
Liability under Contract of Guaranty of Assets Presently to be Consumer
mated with Bank of America National Trust and Savings Association."
The following factors should also be considered:
(1) The nature of the contracts themselves is such as to indicate
a guaranty against loss. & substantial portion of the property transferred
under the agreement consisted, among other things, of depreciation in bonds
and depreciation in bank premises. Obviously, such an intangible item as
depreciation on securities or depreciation on bank premises could not pos-
sibly be made the subject matter of a sale.
(2) All recoveries upon any of the items covered in the agree-
ments were by the terms of the agreements to be applied directly upon the
liability of Corporation of America. While this provision, of course,
1s not necessarily inconsistent with the theory that the assets were sold,
it is nevertheless consistent with the construction that the contracts
were intonded as a guaranty against loss and that when, therefore, any
recovery was made, the loss was eliminated and & corresponding credit
made upon the liability under the contract.
(3) From time to time throughout the life of the contracts,
various asseta which were included in the contracts and which had ap-
preciated in value were restored to the active assets of the bank and a
corresponding credit made upon the liability under the contracts. This
was expressly provided for by the agreement of December 31, 1931. This
procedure has been criticised by the Comptroller, and his criticism will
be answered in another part of this letter. For the present purpose,
however, this procedure indicates clearly that the contracts were treated
as guaranties against the losses which had been estimated by the Examiner.
Upon the appreciation in the value of the assets, however, the probability
of loss which had occasioned the Examiner's classification was eliminated,
and to that extent the guaranty against loss satisfied. The fact that
this procedure was adopted from the inception of the contracts indicates
- 77 -
Regraded Unclassified
240
that thoy voro at all times considered by all partics ne contracts of
guaranty against loss.
As far as tho prosont management 18 concorned, it accopted
the contracts for what thoy apparontly wore intonded to bo, and sinco
it assuned tho rosponsibilitios of management has consistontly adopted
that construction and governod its action accordingly,
Tho logal consoquences of a writton agreement are not necos-
sarily confinod to the words of the agrooment itsolf. Furthormoro, any
roasonable construction which is placed upon the provisions of a written
contract by the partios thomsolvos and acted upon subsoquent to the OX-
ocution of tho contract is in the final analysis the only intorprotation
that can bo placod upon the torms of the instrument. Thoso contracts
having boon interproted from tho boginning by both parties to the con-
tracts with the approval of the Comptrollor of the Curroncy as guarantios
against loss, tho proprioty and validity of the subsequent actions of tho
partios undor thom must bo considered in the light of the interpretation
nutually agrood upon.
Subsequent Sales of Chargod-Off Assots
Subsoquent to the exocution of the contracts of Juno 26, and
Docomber 31, 1931, and tho third agrooment on Fobruary 13, 1932, cortain
charged-off assots word sold by tho bank on Fobruary 1, 1933, for a con-
sidoration of $250,000. The bank sold to Corporation of Amorica all
chargod-off itoms than owned or possessed by the bank, or which might
thereafter be acquired on or bofore July 1, 1933. Those chargo-offs
wore subsoquently included in a salo of mumorous assots on Docember 11,
1933, by Corporation of Amorica to Transamorica Genoral Holding Company
and on Docomber 30, 1933, transforrod from Transamorica Gonoral Holding
Company to Transamorica Bank Holding Company. By agroonent dated
January 2, 1934, for a consideration of $50,000 the bank sold to Trans-
amorica Bank Holding Company chargod-off itoms thon on the books of the
bank, and any futuro itoms charged off up to July 1, 1937. By agroonont
-78-
Regraded Unclassified
241
dated October 1, 1936, Inter-Anorica Corporation (formorly callod Trans-
america Bank Holding Company) sold the charged-off Itoms which had boon
acquired under the agrooments of Fobruary 1, 1933, and January 2, 1934,
to Capital Company and California Landa, Inc. for the sum of $300,000,
plus an additional anount not to oxceed $200,000 to be paid out of 20%
of the rocoverios nado from the itoms.
Payments on Inter-America Corporation Contracts
The total anount of the throo Inter-America Corporation con-
tracts was $35,213,902.61. Prior to July 14, 1937, this had boon reduced
to the sun of $8,561,087.07.
Tho liquidation of the balance of those contracts on July 14, 1937,
vos offected in the following manner: Bank of America National Trust and
Savings Association acquired for $6,500,000 from the Capital Company and
California Lands Inc. the unliquidated portions of all of the chargod-off
assets which had proviously boon included in the throe original Intor-
America Corporation contracts, and in the agrooments of February 1, 1933,
and January 2, 1934. Thoso itoms had a face value of approximately
$55,000,000. Upon acquisition of those assots the bank transfered the
sur: of $6,500,000 to Capital Company end California Lands. Of this amount
$657,645 VAS applied upon the roal ostato contract of California Lands, Inc.
The sun of $5,844,287.07 was paid back to the Bank by Transamorica Corporation
and appliod upon the original Inter-America Corporation contracts, reducing
the balance to $2,716,800. This balance WILD sottlod by the acceptance from
Inter-Amorica Corporation of 56,600 sharos of the capital stock of National
City Bank, having n. markot value at that timo of $2,716,800 (soo lotter of
July 15, 1937, Exhibit 4). In connoction with the acceptance of this
stock in sottlement of the balance of the contract, the bank gave to Trans-
america Corporation an option to repurchneo the stock from the bank at the
purchase prico of $48.00 por share, to be exorcised for not loss then 11,320
shores por your for fivo yours, and in considoration of the option Trans-
emerica Corporation, to protoct tho bank ngainst loss, plodgod with the
-79-
Regraded Unclassified
242
bank nn additional 18,400 shares of stock with authority to nell to the
oxtent necessary in the event that in any yoar the option was not oxop-
cised. A copy of this option agreement 10 attached, marked Exhibit 5+
In connection with the $6,500,000 transaction, Transancrice Corporation
exocuted nn agrooment by which it guarantood that the bank would rocover
upon the nesots. not loss than $6,500,000 within five yours, and at the
rato of not loss than $1,300,000 por your. The contract provided that
collections upon the nasote in excess of $6,500,000 should bo dividod
equally botwoon the bank and Transamorica Corporation for a poriod of
ton years, and thoroafter all rocoveries should bolong to the bank.
copy of this guaranty is attached as Exhibit 6.
As socurity for the faithful performance by Transanorica Cor-
poration of its guaranty. there word plodged with the bank the following
securities, having a value of $7,563,695:
66,560 shares Central Bank, Ockland
$4,060,160
5,445
n
First National Bank of Portland
1,470,160
10,000
If
Bankamerica Agricultural
Credit Corporation
1,243,000
28,300
National City Bank of Now York
735,800
"
71
,
Bank of Anador County
30,175
40
"
Bank of & Lovy & Co.
18,000
6,410
31
II
Bank of Davis
$7,563,695
Recoverios upon those assete and payments up to December 9, 1939
have amounted to $2,752,876.07 and the balance to be recovered under the
guaranty of Transamerica Corporation DE of that date 1a $3,717,123.93.
Briefly summarized, the net result of c.ll of these transactions
is that in 1931 the bank VOB guarantood against loss on non-bankable assets
of $35,000,000.00 and through cash payments, recoveries, and approciation
in assots proviously charged off the anount guarantood has been reduced to
loss than $4,000,000.00 and the payment of the balance fully assured.
1. COMPTROLLER'S CRITICISMS
The objections spocified in the Comptroller's lottor of October 2,
-80-
Regraded
243
1939 to the Board of Directors were not previously raised by the Comptroller,
and it is therefore material to review briefly what has transpired in con-
nection with these transactions In previous reports of examination and corres-
pondence between the Comptroller and the bank and its Board of Directors. In
the report of examination by the National Bank Examiner on August 31, 1937 the
Examiner set forth in detail all of the transactions above referred to and his
conclusione and recommendations with respect to them under the section of the
consolidated report designated "Loans to Affiliates in Excess of Section 23A.
Federal Reserve Act."
On May 6. 1938 the Chairman of the Board of Directors, A. P.
Giannini. addressed a letter to Mr. Marshall R. Diggn, Acting Comptroller of
the Currency, with respect to the report of examination made as of August 31,
1937, celling the Comptroller's attention specifically to various items and
criticisme of the Examiner's report, It was after the Comptroller was advised
of the Board's dividend action on September 13, 1938, before any reply to this
letter was made, The Comptroller's reply, although dated September 13, 1938,
was not mailed until September 15, 1938. This letter, in addition to giving
the Comptroller's answer to the points made by the Chairman of the Board,
commented in general upon the criticisms and recommendations of the National
Bank Examiner in his report of examination of August 31, 1937. With respect
to the transactions which ultimately resulted in the setting up of guaranteed
loans of $6,500,000. the Deputy Comptroller stated as follows:
"It is noted from your letter that at the time it
was written the so-called "guaranteed loans" had been
reduced since the examination from $6,380,000 to
$5,525,000. These loans should be adequately secured
with readily marketable collateral. In making this
statement the bank's action in eliminating the contracts
of the Inter-America Corporation by writing up United
States and Municipal securities approximately
$14,000,000, heretofore referred to, and applying that
amount upon such contracts has been considered. The
contracts are understood to have been adequately secured
by marketable collateral and it was the impression here
the contracts were to be collected to the extent possible
and if there was any deficiency, the deficiency was to be
provided for by sales of the securities pledged."
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Regraded Unclassified
244
On September 23, 1938 Marshall 2. Dises, Acting Comptrollar of
the Currency, addressed a letter to the Board of Directors of the Tank
with respect to the report of examination completed on September 15, 1938.
which report had likewise included & dotailed statement of the transactions
leading up to the guaranteed loans. This letter, with respect to guaranteed
loans, stated as follows:
"On page 8. insert 2, there is shown under "Large Lines"
the extension of credit to Transamerica Corporation and its
subsidiaries, which has been criticised for years, aggregat-
ing approximately $76,000,000. or in excess of one and one-
half times the capital stock of the bank. It is noted that
the so-called "Guaranteed Loans" amount to $5,500,000 in
round numbers. This amount should be fully collateralized by
readily marketable securities, particularly in view of the
method used to eliminate the contracts of the Inter-America
Corporation by writing up United States and municipal securities
approximately $14,000,000 and applying that amount as a credit
on such contracts, which were then indicated to have been ade-
quately secured by marketable collateral. It 10 the position of
the Office of the Comptroller of the Currency that these con-
tracts should have been eliminated, not by B. weakening of the
asset condition of the bank through writing up certain assets as
indicated above, but by actual collection, with any deficiency
taken care of out of the securities pledged."
It is to be noted that although at this time the Comptroller had
full information with respect to all of the transactions leading up to the
guaranteed loans transaction, no suggestion was made that any unlawful acts
had been committed, nor were the transactions designated as unsafe or
unsound banking practice, By a letter dated October 11, 1938, addressed
to the Comptroller of the Currency, the Board of Directors of the bank
replied to the Comptroller's letter of September 23 with a detailed expla-
nation of all of the transactions referred to in his letter of September
23, including an explanation in detail of the transactions resulting in
the guaranteed loans. No reply to this letter was ever made by the Comp-
troller, and subsequently during donferences held in the Office of the
Comptroller of the Currency in December of 1938 a memorandum concerning
the action to be taken with respect to various criticized transactions
was agreed upon. By item 15 of the agreement of December 15. 1938, and
related correspondence it was understood that both the Comptroller and-
-82-
Regraded Unclassified
245
Chief National Bank Examiner had agreed to the liquidating program proposed
in the conferences.
In a letter dated April 14, 1939 from the Comptroller of the
Currency to the Board of Directors of the bank, the Comptroller refers on
page 1 and page 3 to the guaranteed loans and states that these loans in
their entirety should be removed from the assets of the bank and pending
such removal should be adequately secured by marketable collateral. It
WAE not asserted at this time that any of the transactions were illegal
or considered to have been unsound and unsafe practice, In this letter,
although the Comptroller did not assert that the guaranteed loans trans-
action was unlawful, he did state that the acceptance of the promissory
note of Testern Furniture Exchange Corporation in lieu of cash required by
the option to Transamerica Corporation to purchase stock of National City
Bank acquired on the settlement was an illegal investment of bank funds,
and requested that it be removed from the bank.
On June 30, 1939 President L. M. Giannini, addressed a letter to
the Comptroller of the Currency in reply to his letter of April 14, and
with respect to the Comptroller's request that the "guaranteed loans" be
removed from the bank, pointed out that these transactions were the result
of valid and binding contracts between the bank and Transamerica Corporation
and that there did not appear to be any basis upon which the bank could
demand from Transamerica Corporation anything other than fulfillment of its
contract obligation. With respect to the acceptance by the bank of the
second trust deed lien of the Western Furniture Exchange Corporation. Mr.
Giannini pointed out that the bank had accepted this obligation in lieu of
the cash provided to be paid upon the purchase of the stock of National
City Bank, for the reason that the bank had previously had an interest in
this property through foreclosure and that the note was considered to have
been properly acquired.
In his letter of July 31, 1939. addressed to the Board of Directors
of the bank, the Comptroller again requested the removal from the assets of
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Regraded Unclassified
246
the bank of the second lien obligation of Western Furniture Exchange Corpo-
ration. Other than that, however, there was no mention of the transactions
resulting in the guaranteed loans, nor any assertion that any of those trans=
actions were unlawful or in the opinion of the Comptroller unsafe and unsound
banking practice.
In the Comptroller's letter of October 2, 1939 under the heading
"Transamerica Corporation Large Line" on page 14, the Comptroller makes
specific charges with reference to these transactions. The criticiems will
now be answered.
2. REPLY TO COMPTROLLER'S CRITICISMS
The reply to the Comptroller's criticisms upon these various
transactions will be confined to those set forth in the letter of October
2, 1939, as that is the latest expression from the Comptroller upon these
points and will be addressed directly to the various specifications in the
Comptroller's letter.
(a) Extensions of Inter-America Corporation Contracts,
The first criticism of the Comptroller with respect to these
contracts is that the time of performance (and consequent accrual of interest)
was extended from time to time from 1932 until 1937, and that these extensions
were for the benefit of Transamerica Corporation, or its subsidiaries, and
that by reason thereof the bank was deprived of the income contemplated by
the original contracts. These extensions are, therefore, specified by the
Comptroller as unsafe and unsound banking practice.
Passing for the moment any technical reply to the criticisms
and considering the matter molely upon the merits, it 1a impossible to
agree that the Comptroller's criticism is justified. It may be conceded
for the sake of argument that the extensions of the maturity of these con-
tracts were for the benefit of Inter-America Corporation, the obligor
thereunder. Any indulgence granted to an obligor is usually for his
-84-
Regraded Unclassified
247
benefit but it is ordinarily considered that by reason of the extension
in the time of performance the obligor will be better able to meet his
obligations. and the creditor benefitted to that extent. The obligations
of Inter-America Corporation upon these contracts were no different and
should not be considered any different from the obligation of any other
obligor. There is no more reason to criticize an extension of the maturity
of an obligation of that corporation than a. similar extension granted to
any other debtori If the ciriticism 10 justified as to the extensions of
one obligor, it would likewise be justified as to an extension made to
any debtor. However. if this criticism wore carried to its logical con-
clusion, the result would be that sound banking practice would require
that every loan or obligation of any character whatever mist be col-
lected at its original maturity date or the security therefor immediately
foreclosed. Tie cannot agree that sound banking practice requires any
bank to compel forced liquidation of security if payment of the obligation
can be accomplished in an orderly manner without loss and without inflict-
ing heavy penalties upon the obligor. In go far as the interest provision
is concerned, the contracts wore not executed for the purpose of securing
income for the bank, but were for the purpose of avoiding losses which had
been estimated by the National Bank Examiners.
The question as to whether or not the extension of the maturity
of any obligation is unsafe or unsound ie entirely one of judgment under
all of the circumstances. In the last analysis, the Directors of a
national bank and not the Comptroller of the Currency are charged with the
responsibility for the management of the affairs of the bank. It was the
best judgment of the management at the time these extensions were made
that they were for the best interest of all parties concerned. That
judgment has been vindicated by the fact that the major portion of the
obligation has been liquidated in full and the balance placed upon a
definite program of liquidation which has been strictly observed and is
amply secured.
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Regraded Unclassified
248
Frod 1 number tochnic-1 point of vir, there doss not sporar to
be justifiertion for the criticis of the Comptroller unecifying theme ex-
tensi as -8 uneafe and unsound banking practice. The letter of October 2,
1939 specifically states that the Directors of the bank: are mrind pursuant
to Section 30 of the Banking Act of 1933 (48 Stat. 193: 12 U.S.C.A. 77) to
discontinue the unsefe and unsound practices mentioned in the letter, The
est unions countain d of, however vorn all made during the years 1932-37
end have lon since expired,
The romaining criticiems of the Commitroller under the subject of
Inter-Apprice Corporation contracts will be answor-d in the order specified
in the letter of October 2, 1939.
(b) Reveluption of Bonds, The Comptrollor states that the annli-
crtion of credits arising by repoon of the reveluction of certain United
States Government and minicipal bonds in 1935 nad 1936 constituted the ank-
ing of e fift or the forg ving of a dobt and further that the writ'ng un
( supr cistion in securities without giving consideration to looses in
other cosets constitutes an unsefe end unsound institing practice. As T/C have
her-tofor pointed out (page 83) pr virus 00 unications fro the Com-
troller on this subject have not specified that the revaluation of these
`curities constituted 2141 illogal or unlawful transpection, and the exnla-
nations of the reasons for the revaluation were apparently proviously
accepted. The present letter does not Apport that the reveluction of the
securities this unlevful, but criticizes it as an unsafe and uns und benk-
Ing practice and varus the directore to discontinue such practice.
71th respect to the first point that the revaluation of the U.S.
and sunicipal securities and the resultant credit unon the obligations of
the Inter-America Corporation contracts constituted & gift or forgiving &
debt, it is apparent that the Comptroller has not taken into consideration
AE relationship between the bank and Inter-America Corporation, the obligor
under the contracts. During the time that the revaluation of the securities
THE made and in fact for many years prior thereto, Inter-America
-86-
Regraded Unclassified
249
Corporation was the owner of 99.65% of the capital stock of the bank. It
was only by reason of this stock ownership and the consequent interest of
Inter-America Corporation in the affairs of the bank that caused the exe-
cution of these contracts in the first instance. The minority stockholders
did not participate. The assumption by Corporation of America and mub-
sequently Inter-America Corporation of the obligations of these contracts
and the posting of collateral to secure the performance of the guaranty
against loss on assets of $35,000,000 was clearly a transaction for the
benefit of the bank. As practically the sole stockholder of the bank,
however, Inter-America Corporation while it had guaranteed the bank against
loss on these assets, was likewise entitled to the profits of the bank, and
in fact the liability upon the Inter-America Corporation contracts could
only be satisfied through recoveries on the assets referred to therein,
earnings, or profits, or by sale of the capital assets of Inter-America
Corporation.
During the period in which the revaluation of the bonds WELD
made, the normal net earnings of the bank were sufficient 60 that the bank
could have sold the bonds, realized the profit and declared dividends for
the amount of such profits. Such dividends 80 declared might have been
offset against the liability of Inter-America Corporation upon the con-
tracts, or it might have been paid out to the stockholders and returned
to the bank in satisfaction of the liability. To have adopted this
procedure, however, would have resulted In the payment of substantial
dividends to the minority stockholders who did not participate in the
contracts and also would have incurred liability for taxes in very sub-
stantial sums. The revaluation of the bonds and resulting credit on the
guaranty had exactly the same result with respect to the neseto of the
bank and the assets of Inter-America Corporation and the reduction in the
lability upon the contracts as though the bonde had actually been sold and
a dividend declared and the amount thereof offset against the liability,
except that the procedure followed eliminated liability for taxes and gave
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Regraded Unclassified
250
the bank the added advantage of that saving at well as the amount that
would have been paid to non-participating minority stockholders If a
dividend had been declared, The appreciation in the amount of the bonds
represented by the revaluation of the bonds on the books of the bank was
actually realized at & later date by a sale of the bonds, or provided for
through reserves and no loss of any kind was suffered la this connection.
Any taxes due on subsequently realized profits were paid.
With respect to the second point made by the Comptroller, it
may be conceded that as a matter continuing of policy it in not the best
banking practice to write up an unrealized appreciation in securities, As
pointed out in the Directors' letter of October 11, 1938 to the Comptroller
of the Currency, it 18 not and has not been the practice or policy of this
bank to do that. With respect to the particular transactions, however,
it was felt and is now believed by the Directors that because of all of
the cirsumstances the procedure then followed was justified.
(c) Purchase of Charged-Off Assets. The Comptroller states
that the repurchase by the bank of charged-off assets sold by agreements
dated February 1, 1933 and January 2. 1934 evidences either an inadequate
consideration at the time of the sale or an unconscionable price when these
assets were repurchased, as well as an illegal and unwarranted investment
of bank funds, These points will be considered in the order named,
(1) Sale of Charge-offs by contracts of February 1, 1933
and January 2, 1934, While it might appear that a consideration of
$300,000 did not represent the full value of the charged-off assets sold
by the agreements of February 1, 1933 and January 2, 1934 in view of the
subsequent recoveries from those assets. the assets had been charged off
and were not reflected in the assets on the books of the bank. Furthermore,
there were other elements involved in these sales which apparently were
not known to the Comptroller, as they do not appear to have been explained
in any report of examination, which indicate the reasonableness of the
transactions.
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251
The major vortion of the original Inter America contracts were
items representing notes and portions of notes upon which loases had been
estimated by the Examiner and which were therefore required to be charged
off as assets of the bank. In some instances portions of the shan ob-
ligation were charged off in each successive agreement. Under these con-
tracts the bank was required to make collections and to maintain records
upon all of these items. In order to handle them properly, it was neces-
sary to set up a separate department with a large number of employees
whose work was confined to the maintenance of records on these various
items. These records were maintained to show the portions of notes which
were included under any or all of the Inter America contracts and also
portions of such notes which were carried as active assets of the bank.
The major portion of the items covered by the agreements of
February 1, 1933 and January 2, 1934 were items which had previously been
included as partial charge-offs under one or more of the original con-
tracts. If the portions of these notes which were subsequently charged
off had been retained by the bank, it would have been necessary to set
up additional records for the same items in order to properly segregate
the portions of the charge-offs retained by the bank and not included under
the original agreements,
The problem may be illustrated more clearly by stating an
hypothetical example. For purpose of illustration, assume that a promis-
sory note of John Doe for $10,000 was held in the assets of the bank prior
to the examination of February, 1931. As a result of the examination,
let us assume that $2,000 of this note was required to be charged off
and WS8 included in the "A" contract of June 26, 1931, An additional
$1,000 of this note was included in the "B" contract of December 31, 1931
and an additional $4,000 charged off and included in the "C" contract on
February 13, 1932, leaving $3,000 of this $10,000 note carried as an
active asset of the bank, with EL $2,000 portion having been transferred
under contract "A", $1,000 portion under contract "B" and a $4,000 portion
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252
under contract "0". Let us assume further that at a later date it was
necessary to charge off the entire balance of $3,000. This portion of
the note after the charge-off would have necessitated the mintenance of
additional records, and if recoveries were subsequently made, it would
be impossible to determine whether the recoveries should be credited to the
portion which might have been sold under the "A". "H" or "0" agreements
or to the portion retained as a charge-off by the bank.
The sale agreements of February 1, 1933 and January 2, 1934 re-
sulted in the placing of all of these items in one group, and consider-
ing all of the factors involved, it is not believed that the sale was
unreasonable, but on the contrary that it was the logical handling of 8
most difficult operating problem.
(2) Reacquisition of charged-off items. The Comptroller
implies that the repurchase of the charged-off items may have been made
at an unconscionable price. Here again we believe that all of the facts
have not been considered.
For many years prior to 1937 substantially all of the stock
of the bank was owned by Inter-America Corporation, B. subsidiary of
Transamerica Corporation. Legislation enacted in 1933 and 1935 indicated
the desire, if not the requirement, to restrict bank holding companies
and to require the simplificaion of corporate set-up generally. In
keeping with this trend in legislation, the Directors of Transamerica
Corporation in 1937 determined to distribute 58% of the stock of the bank
to its stockholders.
When this procedure was determined upon, it became evident to
the management of the bank that some settlement and adjustment should be
made of the Inter-America Corporation contracts, upon which the balance
at that time was approximately $8,500,000. The charged-off aggets in-
cluded those which were covered under the original ABC contracts and
under the subsequent agreements and had & total face value of approximately
$55,000,000. The bank considered that in the settlement of these
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253
obligations it was docirable for the bank to retain these neests for shat-
ever could be salvaged from chem, and because they ware to e large extent
obligations of clients of the bank. 4n evpraisal was made and It was acti-
nated that the recoveries from the charged off nosets during & period of
five years would amount to $6,500,000. An agreement was therefore made
by which these charged-off assets were returned to the Bank and Trans-
america Corporation executed a written contract of guaranty (Exhibit 6)
to the effect that recoveries upon these assets would amount to not less
than $1,300,000 per year for five years, and this guaranty was secured
by & pledge of securities having a value of $7,500,000.
The primary purpose in this transaction was to effect a settle-
ment and re-adjustment of the Inter-America Corporation contracts, and
to provide a definite liquidating program. In considering the propriety
of the transaction, it is necessary to consider the transaction as &
whole. The so-called "repurchase" was only one phase of it. The net re-
sult which was desired and which was actually accomplished by the trans-
action was merely B. change in the form of the obligation, which was
considered to be necessary in view of the pending separation of ownership
of the bank from Inter-America Corporation. It is clear that the trans-
action did not result in any substantial change in the assets or ob-
ligation of any party, but on the contrary the liability of Inter-America
Corporation, which had always been considered A8 a guaranty against loss
on the charged-off items, was assumed by Transamerica Corporation in the
form of a guaranty that recoveries on the charged-off assets would amount
to $6,500,000 during a period of five years.
The Comptroller states that the transaction evidences undue
favoritiem to Transamerica Corporation because there was substituted for
a valid and well-secured obligation of Transamerica Corporation a group
of previously charged-off assets of very questionable value purported to
be secured by a "so-called" guaranty of Transamerica Corporation. It 18
difficult to understand why the guaranty is referred to as a "so-called"
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254
or *purported" guaranty, As far as can be determined, the contract is
in every respect legally sufficient. and no assertion to the contrasy
has ever been made. Furthermore, the Comptroller has spearently over-
looked the fact that the contract of guaranty is secured by 5. pledge
of additional securities, all of which were held as collateral security
under the original Inter-America Corporation contracts (Central Bank
was formerly Bank of America). No previous question has been raised as
to the sufficiency of these securities, and if they were considered to
be good under the Inter-America Corporation contracts, there is no ap-
parent reason why they are not equally valuable under the present con-
tract of guaranty. As a matter of fact, the margin in the securities
now held exceeds that under the Inter-America Cornoration contracts.
(3) Repurchase of charge-offs not illegal investment,
The Comptroller states that the repurchase of these charge-offe was an
illegal and unwarranted investment of bank funds although this item is
not included in the specific violations of law which are cited on page
23 of the letter of October 2, 1939,
It is not clear just what provision of law is claimed to have
been violated in the acquisition of these charge-offe, but in any event
there are compelling reasons to indicate that this criticism 10 not
justified by the facts.
(aa) Acquisition of charge-offe was settlement of existing
contracts. do has been previously pointed out, the "repurchase" of these
charged-off asseta was only one part of a transaction for the settlement
of the Inter-Americe Corporation contracts. The net result of the entire
transaction was & mere change in the form of the obligation and the sub-
stitution of Transamerica Corporation, the parent company, for Inter-
America Corporation, its subsidiary. as guarantor and it did not constitute
in investment of bank funds.
(a) Acceptance of stock of the National City Bank. In settle-
ment of the Inter-America Corporation contracts on July 14, 1937, the bank
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255
acquired 56,600 sharea of the stock of the National City Bank, which was
accepted at its market value of $48.00 per share in satisfaction of the
remaining liability under the Inter-America Corporation contracts amounting
to $2,716,800. In the letter from the Comptroller of October 2, 1939 it
is stated that the pruchase of the stock was an illegal investment of bank
funds and a violation of law,
It is believed that both the National Bank Examiner and the
Comptroller have misspprehended the facts in connection with the acquisition
of this stock, The bank did not in any sense of the word purchase this
stock from Inter-America Cornoration. No money was paid by the bank to
Inter-America Corporation and used by Inter-America Corporation to satisfy
its liability under the contracts as stated in the report of examination.
An heretofore stated, in contemplation of the major change in
the relationship between the bank and Inter-America Corporation, the
distribution of the stock and discolution of Inter-America Corporation, it
was considered necessary to settle the Inter-America Corporation contracts
which were in existence at that time. The balance of the contracts amounted
to approximately $6,500,000. Of this amount $5,844,287.07 was settled through
the acquisition of the charged-off items heretofore discussed, leaving a.
balance of $2,716,800. The National City Bank stock had previously been held
and at that time was held by the bank as security for the obligations under
the Inter-Anerica Corporation contracts, The bank could not lawfully sell
more security than was necessary to satisfy the liability and it could not
safely purchase any of the securities at a pledgee's sale for anything less
than the then market value. Under these conditions, the bank accepted
56,600 shares of this stock, which had EL market value of $2,716,800, as
payment of the balance of the liability under the Inter-America Corporation
contracts. The stock was accepted in good faith at its market value in
satisfaction of a debt which had previously been contracted. and under these
circumstances it was not B. violation of Section 5136 of the Revised Statutes
(12 U.S.C.A. 24) nor of the regulations of the Comptroller.
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256
The Supreme Court of the United States has held in a number of CASSE
that a national bank may accept stock in a corporation as collateral security
and by enforcement of ite rights at pledgee become the owner of the stock.
(California National Bank Y. Kennedy, 167 U. 8. 362; 17 8. Ct. 831; 42 Is Id.
198; First National Bank V, Converse, 200 U. 8, 425; 26 S. Ct. 306; 50 L. Id.
537). In California it has been held that a national bank can purchase stock
pleAged to secure a debt either to protect or to satisfy the obligation, (McBoyle
Vi Union National Bank, 162 Cal. 277). The regulations of the Comptroller of
the Currency issued under the authority of Section 5136 of the Revised Statutes
also provide that the restirictions and limitations of the regulation do not
apoly to securities acquired through foreclosure of collateral.
It 1a not necessary that & creditor be threatened with loss or &
debtor become insolvent before & pledge can be foreclosed. Failure to pay
at naturity 1e in itself sufficient ground for such action. By the no-
quisition of the National City Bank stock the bank received everything that
It would have been entitled to upon a foreclosure of the pledge. The
transaction cannot be made unlawful merely because the stock was voluntarily
surrendered instead of acquired through the formality of B pledgee's sale,
The law does not require a useless act and the acceptance of the stock,
which had been pledged many years before. in payment of the balance of the
obligation was the legal equivalent of acquisition by foreclosure of the
pledge and clearly within the meaning and intent of the statute and
regulations.
(1) Option to purchase. At the time of the acceptance of
the stock of National City Bank, it was apparent that such a large block
of stock could not be liquidated without unduly depressing the market
value, which would result in a loss to the bank. Under the circumstances,
the bank agreed to give to Transamerica Corporation an option to purchase
the stock at $48.00 per share to be exercised over a five year period by
the purchase of not less than 11,320 shares annually. An option agree-
ment was executed (Exhibit 5), and as consideration for the option
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257
Transamerica Corporation pledged an additional 18,400 shares of the ease
stock, of a market value equal to more than 30% at the option price, with
the bank with authority to dell the pledged stock to the extent necessary
in the event that the option was not exercised for any year and the stock
sold through other channels did not bring the option price of $48.00
per share. The option has been exercised for two successive years. and
Transamerica Corporation has purchased 22,600 shares of this stock at
$48.00 per share. The present market value of the 33,960 shares, plus the
additional 18,400 shares held as collateral, 1s approximately equal to the
contract price.
The Comptroller has not specified as illegal or as unsound the
granting of the option to purchase the stock in the first instance, but
has listed certain objectionable features of the option which are now to
be discussed.
(a) In exercising the first option for the purchase of 11,320
shares at $48.00 per share, Transamerica Corporation delivered and the
bank accepted an eminently sound second mortgage lien on real property
payable in semi-annual instalments over B fifteen year period in lieu of
the cash provided by the option. This 1s not an objectionable feature
in the terms of the option. but rather 18 a question of the discretionary
power of the management.
On July 14, 1938 at the expiration of the first year from the
time of the granting of the option, Transamerica Corporation expressed its
desire to purchase 11,320 shares of the National City Bank stock and of-
fered in payment thereof the nobo on the Bestern Turniture Brohange, Inc,
in the principal sum of $620,000, upon which the balance due was $682,497.22.
The market value of the 11,320 shares of National City Bank stock at that
time was $288,660, and If the Bank had oxercised 190 privilege under the
option to sell the stock to other sources and to sell a portion of the
18,400 shares pledged as additional protection under the option, this course
would have necessitated the sale of practically the entire number of shares
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258
held in reserve. Faced with the alternative of accepting the mortgage
note or selling the stock at the then market price, it was felt that the
best interests of the bank would be served by accepting the note, which
had & sound value and an annual income value of $27,168, thus retaining
the reserve of stock held under the option and at the 9880 time Affording
the bank ample protection in recovery of the purchase price for the first
11,320 shares, The bank had previously acquired by foreclosure, an interest
in the real property upon which the mortgage was executed. This mortgage
represented & part of the ultimate work-out of the sale of the property
after it had been sold by the bank to the Capital Company. At the time of
the acceptance of the note, it was considered that under all of the circum-
stances it could properly and lawfully be accepted in satisfaction of the
purchase price of the stock under the option. The wisdom of that procedure
has been demonstrated by the fact that the market value of the stock sub-
ject to option and the 18,400 shares pledged now approximates the option
price on the balance of the stock. To remove the Comptroller's criticiam
of this item in spite of the bank's opinion that under the circumstances
it was proper, Transamerica Corporation has agreed to take up the note
for cash and that has been done.
(b) "The bank took the stock under an arrangement whereby
Transamerica Corporation rather than the bank would enjoy the benefits
of any increase in the market price." The purpose of the acceptance of
the stock in the first place was to realize $2,716,800 from the Inter-
America Corporation contracts which had been considered and treated by
the bank as B guaranty against loss. The bank believed that the payment
of this amount was all that it was entitled to under the original con-
tracts and all that it could have secured by foreclosure and did not,
therefore, consider the terms of the option under the circumstances to be
improper.
(c) The additional 18,400 shares of National City Bank stock
is inadequate to protect the bank against any appreciable drop in the
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Regraded Unclassified
259
market price of the stock. At the time of the execution of the option,
the market value of the stock which was pledged was equal to one-third of
the option price, It was reasonable to consider this margin was ample
protection at the time the agreements were executed. In view of the fact
that the second option for 11,320 shares has been exercised and the stock
purchased for cash, the amount of estimated loss upon the balance of the
stock held at the present market price is relatively unimportant.
(a) The bank is deprived of the rights to dispose of the stock
except to the extent that Transamerica Corporation may fail to exercise
its option in any particular year. While it 1a true, of course, that
the option having been granted the stock could not be sold except upon
default of the expiration of the option, the option, however, provided
for a price which was equal to the value at which the stock was accepted
in satisfaction of the liability, namely $48.00 per share. The die-
advantage that might have resulted from the inability to sell the stock
except upon the expiration of the option was more than offset by the ad-
vantage that accrued to the bank by having a fixed price and additional
collateral, which at the time was believed to be reasonably sufficient to
assure the realization of the fixed price to the bank. This belief has
been justified by subsequent events.
(e) Reinstatement of notes sold under Inter-America Corpora-
tion contracts. The Comptroller criticizes the reinstatement or restors-
tion of certain of the items included in the original Inter-America
Corporation contracts occasioned by increases of the market value of col-
lateral securing the respective notes. These restorations and ro-
instatements were all effected prior to July 14, 1937 when the guaranteed
loans transaction was effected and were made pursuant to the theory and
interpretation of the contracts from their inception as 8. guaranty against
loss, The contract of December 31, 1931 expressly provided that as to
loans secured by Transamerica Corporation stock proceeds from the sale,
and appreciation in the value of the stock, were to be applied in reduction
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Regraded Unclassified
260
of the amount of the contract. Losses in various notes had been challiged
off by reason of depreciation in the collateral held for those notes.
Then the market value of the collateral had increased to such an extent
that the loan was in good standing and could be restored as an active asset
of the bank, the loss had in fact been eliminated, and to that extent the
guaranty had been satisfied and the contract required that credit be given.
All restorations which were actually made were with the auproval of the
National Bank Examiner and no criticiam on this point has heretofore been
made.
C. SELF INSURANCE
In the report of examination commenced on March 31, 1939 and
completed July 21, 1939 the National Bank Examiner lists under Indebtedness
of Transamerica Corporation and Affiliates a liability of Transamerica
General Corporation for $2,272,659.55, being the amount that over B. period
of several years has been paid by the bank to Transamerica General Cor-
poration as a premium for fidelity bond losses. The Examiner states
that it is his conclusion that the monies which had been BO paid con-
stituted funds of the bank and nothing more than an unsecured borrowing
of Transamerica General Corporation.
Pursuant to this report, the Comptroller in his letter of
July 31, 1939 directed to the Board of Directors of the Bank states
that the amounts "deposited" with Transamerica General Corporation
actually represent reserve funds of the bank that are not shown in its
books, and the bank was requested to return this "deposit" to the bank
in cash,
In the letter of August 8, 1939 by the Directors to the Com-
troller of the Currency it was explained that these funds did not con-
stitute a "deposit" with Transamerica General Corporation, but that
these amounts had been paid as the equivalent of the premium for fidelity
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Regraded Unclassified
261
insurance.
The letter of October 2, 1939 from the Comptroller to the
Board of Directors refers again to the report of examination completed
on July 21, 1939 and states that as it does not appear that Transamerica
General Corporation has any authority to do an insurance business, the
practice of depositing with or paying insurance premiums to that cor-
poration constitutes an unsafe and unsound practice: that the practice
should be discontinued and the remaining balance of the premiums paid
returned to the bank. The Comptroller states that the failure to die-
continue making such payments, or the failure to take steps to obtain
the return of the balance of the premiums, will constitute an unsafe
and unsound banking practice.
The arrangements previously made for the payment of these
premiums to Transamerica General Corporation were discontinued with the
premium that was paid on July 1, 1936, and that portion of the Comp-
troller's criticiam is therefore eliminated from consideration herein.
71th respect to the direction of the Comptroller to secure a
return of the premiums heretofore paid, it is apparent that the Comp-
troller's request 1e based upon the National Bank Examiner's conclusion
that the payment of these premiums to Transamerica General Corporation
over a long period of years constituted an unsecured borrowing by
Transamerica General Corporation from the bank. It is clear that neither
the Examiner nor the Comptroller 10 familiar with the facts surrounding
this transaction from its inception. It 18 felt that & clear under-
standing of the facts will indicate that there is no legal basis upon
which a demand for the return of the monies could be made.
Ao early as 1923 the Bank of Italy, which was then a state
bank, commenced to set up reserves for self insurance and losses on
forged securities by paying part of the amount which would be required to
be paid to an insurance company for a bond to the Stockholders Auriliary
Corporation, which was then owned by the shareholders of the bank. From
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Regraded Unclassified
262
time to time other reserves were likewise net up, some of them in the
bank and come of them by payment to the Stockholders Auxiliary Cor-
poration. The assets of the Stockholders Auxiliary Corporation were
ultimately acquired by Transamerica General Corveration.
Prior to 1932 the Bank of America N.T. & S.A. had carried a
Bankers Blanket Bond to provide for protection from fidelity losses,
forged securities, misplacement or loss of securities and similar coverage
with a penalty of $1,500,000 with the Fidelity & Deposit Company of Mary-
land as surety. On July 1, 1932 it was determined to reduce the amount
of this bond to $1,000,000 with the first $100,000 loss deductible and
not assumed by the surety company, and to place the amount of the dif-
ference in the premium in the reserves for self insurance, In December
of 1932 Transamerica General Corporation WBB holding reserves which had
accumulated by various payments in prior years to the Stockholders
Auxiliary Corporation as self insurance for loss on registered mail,
fire and earthquake, plate glass and other losses. These reserves
amounted to the aum of $571,128.96. At that time the bank on its own
books had set up reserves for fidelity losses in the sum of $263,575.79.
An adjustment was made in December of 1932 whereby the amount of these
reserves which had theretofore been paid to Stockholders Auxiliary Cor-
poration and ultimately to Transamerica General Corporation in the sum
of $571,128.96 was paid to the bank. The reserve which the bank had
accumulated in the amount of $263,575.79 was paid to Transamerica General
Corporation, and in addition there was paid to Transamerica General Cor-
poration by the bank the sum of $145,632.97, representing the premium
for fidelity losses for the period from December 1, 1932 to July 1, 1933,
Until July 1, 1938 the bank continued to pay the amount of
the premium for fidelity losses to Transamerica General Corporation, and
the total balance of these premiums after payment of the premiums to the
Fidelity and Deposit Company and payments for protection against losses
constitutes the fund which it 10 now claimed represente an unsecured
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Regraded Unclassified
263
borrowing of Transamerica General Corporation.
Since 1932 the Bankers Blanket Bond issued by the Fidelity &
Deposit Company of Maryland consists of two policies, one for $400,000
and the other for $500,000. The primary bond is for $400,000 covering
louses in excess of $100,000, the first $100,000 being deductible. This
bond provides complete coverage for all types of losses. The secondary,
or excess, bond of $500,000 is for complete coverage on fidelity losses,
but other coverage is not as complete. Each of these bonds is issued to
Transamerica Service Corporation and affords the protection of the bond
to this bank and all of the affiliated and subsidiary companies of Trans-
america Corporation. affording protection for some 25 or more different
assured. This group insurance permits a considerable saving in the total
cost of the same protection if separate bonds with similar coverage were
issued for each of the assured companies.
The amount of the premium upon the bonds 1a determined each
year by the Fidelity & Deposit Company of Maryland. Full information
BE to the number of locations, branches, number of accounts and employee
is furnished to the surety company prior to the anniversary date of the
bond, and the surety company computes the premium upon the primary and
secondary bonds of $500,000 each and also computes the premium for a
$100,000 bond for the same coverage. The total premium thus computed
has been paid to Transamerica Service Corporation as agent for the bank
and the participating subsidiaries, and that company has in turn paid
the amount required to be paid to the Fidelity & Deposit Company as
premium for the excess coverage on the blanket bond for all insureds
and has paid the difference to Transamerica General Corporation for the the
self insurance reserve maintained by that company for the bank and
participating subsidiaries. The bank and the affiliated and subsidiary
corporations of Transamerica Corporation have contributed their pro rata
share of the cost of this protection to Transamerica General Corporation,
and the bank has paid its proportionate share of the cost and no more.
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Regraded Unclassified
264
Since the inception of this arrangement in 1932 and throughout
the period of its operation, the bank and the participating subsidiaries
have paid the amount of the premium for #idelity insurance to Transamerica
General Corporation and have collected all losses from that corporation.
On payment of losses the bank and the participating subsidiaries have been
billed for and have paid restoration premiums which have been computed at
regular insurance company rates. The payments by the bank have been treated
as an insurance premium and have been regularly charged to operating expense=
The bank has benefited by its proportionate share of whatever saving in
premium which has resulted from the group insurance, and by whatever in-
direct saving may have been effected by facility and dispatch in securing
settlement of losses without formal proof of claim. In any event, the
bank has received the same full protection from losses during the period
and the same consideration for the money that has been paid as it would
have received from the Fidelity and Deposit Company. Although under the
Fidelity & Deposit Company of Maryland Bankers Blanket Bond the surety
company will pay for losses incurred before the expiration of the bond
and discovered within one year after the expiration of the bond, Trans-
america General Corporation has agreed to pay for losses discovered with-
in five years from the date of the termination of this arrangement.
This method of handling fidelity insurance has been disclosed
in all reports of examination of the bank since 1932. In the report of
examination of November 9, 1932 it was shown that the amount of money
paid was retained in part by Transamerica General Corporation as a
premium. Subsequent reports also showed payment to Transamerica General
Corporation and the retention of the appropriate amount of the premium by
that company. No previous criticism of this practice has been made either
by the National Bank Examiner nor by the Comptroller of the Currency.
From a legal point of view, it appears to be inmaterial whether
Transamerica General Corporation has authority to conduct an insurance
business. It has been held by the courts in California that B single
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Regraded Unclassified
265
contract of guaranty or indemnity does not constitute the doing of an
insurance business, and that the requirements for the doing of an in-
surance business cannot be stretched to cover a single contract of
guaranty or indemnity (James Eva Detate va. The Mecca Corporation 40
Cal. App. 515). In any event, Transamerica Corporation through its sub-
sidiaries was the owner of the bank and the affiliated corporations,
and without issuing any contract of insurance it certainly had the right
to set up a. reserve to cover losses of any of its subsidiaries from any
cause whatever and to obtain payments from those subsidiaries in order
to establish and maintain those reserves.
The examiner's conclusion that these payments by the bank to
Transamerica General Corporation constituted an unaecured borrowing of
that company and the Comptroller's direction to the Directors of the
bank to recover the sums so paid appear to be without reference to
elementary legal principles. The money was paid by the bank as con-
sideration for the indemnity agreement of Transamerica General Cor-
poration and was so treated by both parties. There was never an express
or implied promise that the monies BO paid would be repaid by Trans-
america General Corporation, but on the contrary the monies not expended
for the excess coverage have been retained by that corporation and in-
cluded in its annual statements of earnings and income tax returns, and
income tax has been paid upon the amount representing the premiums paid
after deducting losses less recoveries. Under these circumstances it
seems clear that there is and was no promise implied by law for the
repayment of these sums by Transamerica General Corporation and there
1a no legal basis upon which the money or any part of it could be re-
covered by the bank from that corporation.
IV VIOLATIONS OF LAW
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Regraded Unclassified
266
The letter of October 2, 1939 at page 23 specifies various
violations of lan which, it 10 stated, the bank or the directors of the
bank have knowingly or negligently permitted the officers to commit.
The charge that the directors have knowingly or negligently permitted a
violation of law by the officers of the bank is a serious one, Neither
the bank nor the directors of the bank have at any time knowingly per-
mitted any violation of any statute by any officer of the bank. After
a very careful and exhaustive study of all of the facts and circumstances
involved in the various transactions which are specified 6.9 violations of
law, the directors are convinced that no violation of law has occurred.
A. SECTION 5200 OF THE REVISED STATUTES
(12 U.S.C.A. 54)
It is claimed that the provisione of this Section have been
violated by excessive "obligations" of Transamerica Corporation and its
subsidiaries as specified in the report of examination of March 31, 1939
at page 8, insert 1. This portion of the report lists eight items for e
total of $23,045,819.58 as obligations of Transamerica Corporation and
its subsidiaries in excess of the lawful limit permitted by Section 5200
of the Revised Statutes. This contention is based, of course, upon that
portion of Section 5200 which provides that the obligations of 5. cor-
poration shall include all obligations of all subsidiaries in which the
corporation owns or controls B. majority interest. If the parent cor-
poration is itself indebted to the bank within the meaning of the term
"obligation" as defined by Section 5200, the total of the obligations
would include obligations of all of its subsidiaries.
(1) Acceptance of B. Contract of Guaranty from Transamerica
Corporation on an obligation previously existing was not a violation of
Section 5200 of the Revised Statutes. In the first place, it must be
#104-
Regraded Unclassified
267
borne in mind that if the obligation of Transamerica Corporation comes
within the meaning of that term AB defined in Section 5200 of the Revised
Statutes so that all obligations of all subsidiaries of Transamerica
Corporation must be included to determine whether or not the total ex-
ceeds the 10% maximum parmitted by that Section, this situation arose
not by reason of any extension of credit to Transamerica Corporation or
any of its subsidiaries in violation of the statute, but entirely by
reason of a change in corporate set-up whereby Transamerica Corporation
became the owner of a substantial portion of the stock of the bank and
assumed the obligations of Inter-America Corporation to the bank which
corporation, prior to that time, had owned practically all of the stock
of the bank, Some of the facts surrounding this change in corporate
cet-up have previously been explained, but for the purpose of clarity on
the point under consideration will again be referred to,
Prior to July 14, 1937 Transamerica Corporation was not obligated
to the bank under any transaction of any kind. All of the items which are
listed in the report of examination of March 31, 1939, with two ex-
ceptions, existed at that time, but there was no violation of Section 5200
of the Revised Statutes because the total obligation of any corporation
and its subsidiaries did not exceed the 10% maximum provided by Section
5200 of the Revised Statutes.
On July 14, 1937 Inter-America Corporation, which was the owner
of the stock of Bank of America N.T. & S.A., WSB committed to the bank
upon certain contracts relating to non-bankable assete of the bank. These
contracts have heretofore been explained in detail, and it has also been
pointed out that they were considered from their inception 88 5. guaranty
against loss. Whether the contracts be considered AS 8. guaranty against
loas or something else, they were not a violation of Section 5200 of the
Revised Statutes because they were not an "obligation" within the meaning
of that Section.
On July 14, 1937 Inter-America Corporation pursuant to the plan
-105-
Regraded Unclassified
268
theretofore determined upon proceeded to liquidate Its affairs and to
transfer its stock in the bank to Transamerica Corporation, from which &
majority d' the bank stock was to be distributed to shareholders of
Transamerica Corporation. The effect of the settlement of the Inter-
America Corporation contracts, as previously explained, was that the bank
received back the assets which wore covered by those contracts, and as
part of the same transaction Transamerica Corporation guaranteed recovery
on those assets in the sum of $6,500,000 within B. period of five years.
It has been contended that by reason of the execution of this contract
of guaranty Transamerica Corporation became obligated to the bank within
the meaning of Section 5200 of the Revised Statutes and that, therefore,
all of the obligations of all of the subsidiaries of Transamerica Cor-
poration should be grouped to determine whether or not they exceeded the
10% maximum provided by that Section (see report of examination of August
21, 1937, page 8, insort 1: page 20, insert 1). Even if this contention
should be true, and we are satisfied that it is not correct, it is evident
that neither the bank nor the directors knowlingly or negligently permitted
the officers of the bank to commit a violation of Section 5200, Rovised
Statutes. The obligations which are DOW listed as excessive wore all in
existence at the time of the acceptance of the guaranty and prior to that
time had not constituted B. violation of Section 5200. The violation of
the statute, if any, WSB not caused by any act of the bank or officers of
the bank, but on the contrary was due to the change in the corporate
set-up of the holding company affiliate of the bank, As a practical matter
the position of the bank was substantially improved by securing the
guaranty of Transamerica Corporation upon B. commitment upon which it was
not previously liable, and the directors and officers of the bank would
in fact have been negligent in failing to secure such B. guaranty on the
ranefer of the assets of Inter-America Corporation to Transamerica Cor-
poration. Whatever may have been the result of the acceptance of the
guaranty with respect to the obligations of the subsidiaries of
-106-
Regraded Unclassified
269
Transamerica Corporation, it 10 clear that the acceptance of the guaranty
itself was not a violation of that Section because no credit of any kind
was extended, nor was any of the bank's monoy paid out, and the securing
of the guaranty was in fact necessary to protect the bank on obligations
which were already existing.
It should therefore be clear that regardless of what may have
been the legal effect of the change in the corporate set-up of Trans-
america Corporation and its subsidiaries upon the obligations and com-
mitments then existing in favor of the bank, if that change and the
acceptance of the guaranty of Transamerica Corporation resulted in the
classification of all of these obligations within Section 5200 of the
Revised Statutes, the directors did not knowingly or negligently permit
a violation of the statute to be made because the guaranty of Trans-
america Corporation WBB necessary to protect the bank upon obligations
which were already existing. There was no extension of any new credit.
and therefore no violation of the statute but only the securing of B.
guaranty upon commitments which were already existing.
(2) Transamerica Corporation 1s not obligated to the Bank
within the meaning of Section 5200 of the Revised Statutes. In order
to group the obligations and commitments of all the subsidiaries of Trans-
america Corporation within the 10% limitation contained in Section 5200
of the Revised Statutes, it must be shown that Transamerica Corporation
is obligated to the bank within the meaning of that Section. An analysis
of the provisions of the Section shows clearly that there is no lawful
bacis for the contention that the commitment of Transamerica Corporation
under the contract of guaranty and referred to as Quaranteed Loans comes
within the provisions of that Section.
Section 5200 of the Revised Statutes (12 U.S.C.A. 84) provides
in part as follows:
"The total obligations to any national banking asso-
ciation of any person, copartnership, association,
or corporation shall at no time exceed 10 per centum
-107-
Regraded Unclassified
270
of the amount of the capital stock of euch association
actually paid in and unimpaired and 10 per centum of
ite unimpaired surplus fundi The term "obligations"
shall mean the direct liability of the maker or ao-
ceptor of paper discounted with or sold to such as-
sociation and the liability of the indorser, drawer,
or guarantor who obtains a loan from or discounts
paper with or sells paper under his guaranty to such
association and shall include in the case of obliga-
tions of a copartnership or association the oblign-
tione of the several members thereof and shall include
in the 0888 of obligations of & corporation all obliga-
tions of all subsidiaries thoreof in which such corpora-
tion owns or controls B. majority interest."
The "obligations" which are included in the statute are segre-
gated into two classes: (a) direct liability and (b) indirect liability.
(a) "The direct liability of the maker or acceptor of paper
discounted with or sold to such association." These terms must be ao-
copted in their ordinary and usual meaning. It ie clear that the obliga-
tione referred to are the primary liability of the maker of B. promissory
note to repay the money borrowed and the primary liability of the no-
ceptor of a draft or bill of exchange to pay the amount of the acceptance
at the time agreed.
(b) "The liability of the iddorser, drawer, or guarantor who
obtains a loan from or discounts paper with or sells paper under his
guaranty to such association." The obligations here included are the
secondary liability of the indorser, drawer, or guarantor arising when
B. loan is made or paper in discounted with or sold to the bank.
The wording of the statute does not permit of the inclusion
of any liability aq an "obligation" except those which are specified in
the wording of the Section because it eays, "The term 'obligations'
shall
mean...." end proceeds to specify the particular kinds of ob-
ligations which are covered by the statute. Unless the obligation of
Transamerica Corporation under consideration comes within the definition
of the liabilities specified in the statute, there 10 no limitation
upon the amount, nor is there any justification for grouping the ob-
ligations of subsidiaries of Transamerica Corporation under one total.
-108-
Regraded Unclassified
271
It is also cloar from the provisions of Section 5200 that it
is not applicable to any transaction except ono in which the bank has
actually paid out funds upon an extension of crodit. It is to be noted
that each obligation included within the statute is ono which has boon
"discounted with" or "sold to" the bank. The words "discount with" or
"sold to" nocessarily connote the payment of funds of the bank upon now
quisition of the obligation.
It was expressly hold in the caso of Payne vs. Ostrus, 50 y (2)
1039, that the acceptance of a renewal noto with interest added, mking
the total obligation greater than the 10% noximum, was not c. violation of
Section 5200 because no new money left the bank's vaults.
Hot only must the obligation be ono spocified in Soction 5200
and rosult in payment of the bank's money upon acquisition of the ob-
ligation, but the bank's money must also be paid to or for the direct
bonefit of the person whose total obligations are to be ressured by the
statuto. The statuto says that the term"obligations" includes the
liability of the indorser, drawer, or guarantor who obtains a loan from
or discounts or sells paper to the bank. It doos not includo the liability
of on indorsor or guarantor who indorsos or guarantoes the obligation of
some other person as suroty or D.B acconodation indorser.
It has been expressly hold by the Suprome Court of the United
States that liabilities incurred by one porson as surety or indorser for
another are not included in computing the total of linbilities of any one
person under Section 5200 of the Revised Statutos (Corsicana National
Bonk of Corsicana vs, Johnson, 251 U.S. 68, 40 S. Ct. 82, 64 L. Ed. 141;
Genble vs. Brown 29 In (2) 366). In the instant case the guaranty was of
the notos of a great many individual borrowors. It is likewiso clear that
the statuto does not includo within its definitions nn obligation arising
from a contract to purchase property from n bank. Such D transaction
cloarly doos not represent n. loan or discount and no monoy is paid out by
the bank,
-109=
Regraded Unclassified
272
For the purposo of illustration assume that Jonos with a
$10,000 loan representing the anximes obligation allowable und or the
statuto to an hypothotical bank, also owns practically all of the stock
of tho bank and the bank holds $100,000 in notos which aro about to be
classified as loss. Jonos with a not worth of $500,000, in order to pro-
toct his invostment in the stock offors to guarantoo paymont of the doubt-
ful notos. Would his guaranty of the notos constituto & violation of
Soction 52001 It is doubtful that anyone would have the tonority to
suggost such a rosult. Yot this is exactly tho situation which caused
the oxocution of the Inter-Anorica Corporation contracts, except that
that corporation vas not indobtod to tho bank.
Prior to the anondmonts to Soction 5200 by the Banking Acts of
1933 and 1935 the obligations dofinod by tho statuto did not includo the
liability of an indorsor or guarantor and it was thoreforo possible for
a borrowor to obtain loans indiroctly through his guaranty and dofont
the intont of the statuto. Tho amondmonts, of courso, woro intonded to
and did correct this situation. The purposo of the statuto, howover,
is and always has boon to safoguard dopositors and stockholdors by
provonting oxcossivo lonns of tho bank's funds to ono individual thus no-
suring divorsification of assots and roducing the possibility of excossivo
loss. It was dosigned to provont the paying out of the bank's monoy, and
tho only obligations coming within tho definition of tho statute are thoso
in which tho bank's monny 1s paid out upon tho acquisition of the ob-
ligation.
Shortly after the amondnont of Sootion 5200 of tho Rovised
Statutos in 1935. the Treasury Department of the Unitod Statos, through
the office of the Comptrollor of the Curroncy, publishod a "Tablo of
Linitations on Loans" (Form 1416-B) for tho uso of national banks, and
classified as obligations coning within the 10% linitation tho liability
of an indorsor or guarantor "whoro tho indorsor or guarantor roceivos
the procoods from tho bank".
-110-
Regraded Unclassified
273
It in conclusively catablishod, not only by the provisions of
the statuto, but by the docisions of the courts and in fact by the
publications of the office of the Comptrollor of the Currency, that the
word "obligation" in Soction 5200 of the Revised Statutos noans an ob-
ligation crising out of a transaction whoroby nonoy of the bank is paid
out to the obligor upon his primary or secondary obligation to roper it,
Measured by those principlos, it 1a cloar that the commitment
of Transanorica Corporation undor the contract of guaranty doos not con-
stituto an "obligation" within the moaning of Soction 5200 of the Revised
Statutos. The circumstancos under which this contract of guarenty was
nocopted have herotoforo boon explained in dotail, and it le not nocos-
sary to review then again. It is sufficient to point out that from their
incoption the Inter-Anorica Corporation contracts vero intonded to
protoct the bank against loss upon non-benkable assots. No nonoy vos over
paid out by tho bank but on the contrary the solo stockholder of the
bank lonnod its crodit and its socuritios to the bank to guarantoo the
bank against loss on thoso assote, The guaranty by Transancriza Cor-
poration was nothing noro than its assumation of tho connitment of ito
subsidiary, Inter-Anorice Corporation, upon recoiving all of tho assets
of that corporation. Nono of the bank's noney was over paid to Intor-
America Corporation or Transamerica Corporation in those transactions but
on the contrary the bank received the bonofit of the guarentios nrdo by
thoso corpanios and rocoived natual cash payments from thon.
It 1s, thorofore, not proper in dotornining whother or not there
has boon a violation of Soction 5200 to includo the contract of guaranty
of Transcmorion Corporation under the "Guarentood Loans" as an "obligation"
under the statuto, nor 1s it propor to group tho obligations and con-
nitnonte of all the subsidiarios of Transanorica Corporation no one iton
because if thore has boon no oxtonsion of crodit to Transamerica Cor-
poration within the monning of the statuto, tho obligations of each of
the subsidiary companies cannot be considered P.S. n. single intorost but
-111-
Regraded Unclassified
274
must be considered separately.
Even though the guaranty of Transamerica Corporation should,
purely for the sake of argument be considered as an obligation within
Section 5200, the report of examination of March 31, 1939 includes in
the total of the items stated to be in excess of the maximum items which
27°F not obligations of subsidiaries of Transamerica Corporation. For
reasons heretofore set forth, Western States Corporation is not consider-
ed to be a subsidiary of Transamerica Corporation. The purported liability
of Transamerica General Corporation for self-insurance funds is like-
wise not an obligation. Details of this matter have been set forth under
the heading "Self Insurance" at page 98, and as therein explained, this
money was paid as consideration for an agreement to indemnify the bank
against fidelity losses, The bank has received full consideration for
the money paid, and there was no express or implied promise to repay any
mrt of it,
Notwithstanding the fact that it is the opinion of the Board of
Directors that there has been no violation of Section 5200 of the Revised
Statutes, the memorandum of agreement of December 15, 1938 provided that
the total of these items would be reduced to the maximum permitted for B
single interest by July 15, 1942. Substantial reductions have been made
and are continuing to be made upon these obligations, as shown by the
following schedule,
Balance
Balance
Item
4-28-38
12-9-39
Reduction
Quaranteed Loans
$5,524,096.03
$3,717,123.93
$1,806,972.10
First National Cor-
oration of Portland
1,000,000.00
-
1,000,000.00
Bankamerica Agricul-
tural Credit Corp.
50,000.00
400,000.00
350,000.00 (Increas.
California Lands Inc.
351,016.19
-
351,016.19
Codital Company
Unsecured
497,040.65
-
497,040.65
Real Estate Loans
946,000.00
651,000.00
295,000.00
Transamerica Service
Corporation
7,600,000.00
2,700,000.00
4,900,000.00
Inter-Continental Cor-
poration
7,150,000.00
4,700,000.00
2,450,000.00
TOTALS
$23,118,152.87
$12,168,123.93
$10,950,028.94
- 112 -
Regraded Unclassified
275
The report of examination of March 31, 1939 lists the following
11/cme AS a violation of Section 5200 of the Revised Statutes which were
not included in the report of April 28, 1933,
Western Furniture Exchange
3 520,000.00
Western States Corporation
1,500,000.00
Transamerica General Corporation
2,272,659.55
As elsewhere stated, the note of the Western Furniture Exchange
has hern taken out of the bank for cash, and it is the opinion of counsel
for the bank that Western States Corporation is not a subsidiary of Trans-
america Corporation.
For the reasons herein set forth, the amount that is claimed to
be owing by Transamorica General Corporation does not constitute an ob-
ligation or debt,
B. SECTION 5136 OF THE REVISED STATUTES
(12 U.S.C.A. 24)
The details of the acquisition by the bank of stock in the
National City Bank of New York have previously been explained at page 94.
This stock was accepted in satisfaction of n. debt previously contracted,
and the acquisition does not constitute a violation of Section 5136 nor
the regulations of the Comptroller made under that Section.
C. SECTION 5137 OF THE REVISED STATUTES
(12 U.S.C.A. 29)
(1) As pointed out heretofore under the heading "Merchants
National Realty Corporation" at page 45, the re-acquisition of former
bank premises by Merchants National Realty Corporation and their con-
current sale through an agency agreement did not constitute a purchase
of real proporty by the benk. It was in substance and legal effect the
termination of a contract of sale of real property theretofore made and
- 113 -
Regraded Unclassified
276
the substitution of an agency agreement which has roven to be more
matisfactory in every respect,
(2) The properties listed in the report of examination of
March 31, 1939 at page 14, inserts 72 and 73, as being illegally acquired,
may be segregated briefly into those acquired in the settlement of the
Hellman bankruptcies and those acquired for bank premises or in settle-
ment of debts previously contracted,
In the letter of June 30, 1939 from President L. M. Giannini,
to the Comptroller of the Currency, it was explained that the Hellman
properties were acquired in settlement of claims in the Hellman bank-
rustcies, and it is considered that they wore lawfully acquired in settle-
ment. of debts previously existing. The Examiner also claims that these
properties have been held for more than five years. This is true, al-
though the five-year period has but recently expired. A sale of the
principal property consisting of an apartment house is now pending and
papers are at present in escrow. Moet of the other properties have been
sold and the others are carried at a purely nominal value,
It is considered that properties which have been nurchased in
good faith for use as bank promises are not illegally acquired even though
it has subsequently been determined not to use them for that purpose.
The Alhambra property was so acquired; the Glendora property was pur-
chased for the opening of a new branch, application for which had already
been approved by the Comptroller of the Currency, prior to the ac-
Quisition of the existing bank.
(3) Attempts are being made to dispose of the properties
listed 28 held for more than five years.
(4) 7e do not agree that the properties listed in the report of
examination of March 31, 1939 at orge 14, insert 3, as banking premises
should be classified an Other Real Estate. The two lots in San Francisco
were acquired in 1923 with the expectation and intention that they should
be used for the erection of a new building for the general headquarters
- 114 --
Regraded Unclassified
277
of the bank. Subsequent to the purchase of the property, general con-
ditions indicated that it was not desirable to proceed with the con-
struction of a building, and for that reason it was delayed. The bank
has held the property because it was intended, and is still intended,
to erect a building upon it to be used for the head office of the bank,
The construction of such a building would constitute a major investment,
and it is felt that it should not be undertaken until all of the plans
are completed and the time considered propitious. This property was
lawfully acquired for banking premises, and it is to be noted that the
five year limitation of Section 5137 avulies only to real property which
has been acquired in satisfaction of a debt,
D. SECTION 24 FEDERAL RESERVE ACT
(12 U.S.C.A. 371)
As pointed out in the letter from President L. M. Ciannini to
the Comptroller on June 30, 1939 and the letter from the Board of Directors
to the Comptroller dated August 3, 1939, most of the real estate loans
totaling 16,255,299.66, which are classified by the Examiner as non-
conforming to the requirements of Section 24 of the Federal Reserve Act,
were in the bank at the time of its nationalization and practically all
of the remainder were acquired in consolidations and take-overs of other
banks under approval of the Office of the Comptroller of the Currency or
the Chief National Bank Examiner. Steps are being taken to bring the
non-conforming loans into conformity with the Section as racidly as pos-
sible,
As explained in the letter from President L. M. Giannini to
the Comptroller under date of June 30, 1939 and the letter from the Board
of Directors to the Comptroller dated August 3, 1939, the advance of
$1,400,000 to Capital Company for the construction of a building upon
real property sold to that company by the bank was pursuant to the
- 115 -
Regraded Unclassified
278
agreement theretofore made between the bank and Capital Company that
upon properties sold under the agreement the bank would advance whatever
funds were necessary for the rehabilitation or improvement of property
sold, and that the amount of such advances should be added to the cost
rice of the property. This advance has been subsequently paid in full.
1. CONCLUSION
The matters mentioned in the Comptroller's letter of October 2,
1939 have, with one exception, been the subject of previous correspondence
between the Board of Directors and the Comptroller's Office. The
Directors have previously sought to reply to the Comntroller's criticisms
and particularly in the letter of October 11, 1938 endeavored to explain
at length the various criticized transactions. Apparently previous com-
munications have been deemed insufficient or have been ignored. It 1a
the belief of the Directors that facts and circumstances as well as sub-
sequent satisfactory experiences have fully justified the transactions
of which complaint in now made and it is this belief that has persuaded
them to set forth herein at great length and detail, the history of each
transaction, all of the important facts concerning it, the motives be-
hind the actions previously taken, and the reasons why it is considered
the transactions were proper.
It must be remembered that the major portion of the criticisms
is directed against transactions which have been had in the past, some
of then many years ago under a previous management. Obviously that which
has bern done cannot be undone. It would not appear that any constructive
purpose could be accomplished by the repeated complaint of a transaction
long since transpired.
The Comptroller's criticisms anear to center upon two proposi-
tions, first the alleged unwarranted concentration in obligations of
Transamerica Corporation and second, the dividend policy and clained
- -116-
Regraded Unclassified
279
of the Bank.
The "obligations" of Transamerioa Corporation and its subsidi-
aries have been described in detail herein and the facts would indicate
that they are not properly the cause for as much concern as the Comp-
troller's criticisms would make appear. These items are having the
close attention of the management and the rapid progress being made in-
dicates their early complete elimination,
The Directors have actively in mind the desirability of increas-
ing the capital funds of the Bank and it has been pointed out that over
twenty million dollars has been added to the capital funds from profits
during the last four and one-half years, in addition to the indirect
increase resulting from the improvement of the asset condition generally.
The Directors are of the opinion that the dividend rate is in
reasonable proportion to the earnings of the Bank. The dividend rate
is not fixed, and should a change in future economic trends adversely
affect the earnings of the Bank, the dividend action will be regulated
accordingly.
The Directors, however, do not agree with the opinion of the
Comptroller of the Currency that under present conditions the current
dividend rate is excessive and that it should be reduced or curtailed
altogether. The determination of the amount of the dividends which
should be paid is by law vested in the discretion of the Board of Direo-
tors, and that discretion cannot be properly exercised by substituting
the opinion of the Comptroller for the best and considered judgment of
the Directors.
A review of the events which have transpired since September
13, 1933 makes it difficult to understand the attitude of the Comp-
troller's Office with respect to this Bank, its Directors and its man-
agement. The telegram and letter of September 13, 1938 were the first
communications ever received from the Office of the Comptroller of the
Currency criticizing any of the items referred to therein or complaining
- 117 -
Regraded Unclassified
280
of any of the practices or olicies of the Bank. The Directors and the
nanag ment immediately indicated their willingness to adjust the matters
thich were the subject of the criticisms; and after extended conferences
in December, 1933, the management and the Directors agreed to a program
1:11 down by the Comptroller's Office. and consented to by the Inter-
departmental Committee of the Treasury Department, even though many items
in the program were considered to be unjust. This agreement has been
meticulously observed by the Directors and the management, and will con-
tinuo to he followed until the criticiz di items mentioned in it have been
corrected. "ithout reference to the agreement or what has been no-
condished under it, the Comptroller has again criticized the very matters
which were the subject of the agreement.
The Board of Directors and the management of the Bank have
boon and are now willing to cooperate with the Office of the Constroller
of the Currency to the and that all controversial matters shall be settled
to the satisfaction of all parties concerned. As ovidence of that will-
in noss, reference is made to the agreement of December 15, 1938 and the
fact that its provisions have been fully com lied with by the Bank.
The present letter of the Comptroller makes no reference to
this agreement, nor has the Com troller ever advised either the Mrec-
hors or the management that the program there laid down by the Comptroller's
Office is no longer satisfactory to it. Under the circumstances it would
as ear that all the Directors and management can do is to continue
to manage the affairs of the Bank to the best of their ability and judgnent.
By Order of the Board of Directors
of Bank of America N. T. & S. A.
(Signed)
R. P. A. Everard
Secretary.
-118-
Regraded Unclassified
281
2
CERONOLOGICAL SCHEDULE OF CORRESPONDENCE
BETWEEN THE OFFICE OF THE COMPTROLLER OF THE CURRENCY
AND OFFICERS AND THE BOARD OF DIRECTORS OF
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
The following schedule contains a list in chronological order
of various communications between officers and the Board of Directors of
the Bank of America N.T. & S.A., and the Office of the Comptroller of the
Currency, with regard to matters which are referred to in the letter of
October 2, 1939 from the Comptroller of the Currency to the Board of
Directors of the bank, with a brief reference to the subject of the par-
ticular communication.
May
6, 1938 Letter from Chairman of the Board of Directors A. P.
Giannini to Marshall R. Diggs, Acting Comptroller of the
Currency, referring to and commenting upon report of
examination commenced August 21, 1937 and completed
April 20, 1938, and reporting progress made since the
present management took charge.
Sept. 13, 1938 Telegram from Marshall R. Digga, Acting Comptroller of
the Currency, to the Board of Directors of Bank of America
N.T. & S.A., warning the Directors with respect to the do-
claration of a dividend.
Sept. 15, 1938 Letter from Chairman of the Board 1. P. Giannini to
Marshall R. Diggs, Acting Comptroller of the Currency,
with respect to the telegram of September 13, 1938 to the
Board of Directors and other matters.
Sept. 18, 1938 or thoresbout, received lotter from I. E. Gough, Deputy
Comptroller of the Currency, dated September 13, 1938, ad-
dressed to Chairman of the Board A. P. Giannini, replying
to letter of May 6, 1938 from the Chairman of the Board
EXHIBIT 1
-1-
Regraded Unclassified
282
to the Acting Comptroller of the Currency. This letter
was mailed in Washington on September 15, 1938, after the
Comptroller had received advice of the dividend action on
September 13, 1938.
Sept. 23, 1938 Letter from Marshall R. Digge, Acting Comptroller of the
Currency, to the Board of Directors of Bank of America
N.T. & S.A., containing detailed comments and criticisms
with respect to various mattors contained in the report
of examination completed September 15, 1938.
Oct. 11, 1938 Letter from the Board of Directors of the bank to the
Comptroller of the Currency, containing detailed reply to
the comments and criticisms contained in the telegram and
letter of September 13, 1938 and the letter of September
23, 1938 to the Board of Directors.
Oct. 19, 1938 Acknowledgment by c. 3. Upham, Acting Comptroller of the
Currency, of receipt of the letter of October 11, 1938
from the Board of Directors of the bank.
Nov. 23, 1938 Letter from Preston Delano, Comptroller of the Currency,
to the Board of Directors of the bank, agreeing to a con-
ference with the management to clarify the issues raised
by the letter of September 23, 1938.
Dec. 15, 1938 Memorandum agreement resulting from conferences in Docom-
ber, 1938 between L. M. Giannini, President: W. 1. Blauer,
Vice Chairman of the Board; and 2. G. Smith, Vice President
and Cashior, of the bank; Preston Delano, Comptroller of
the Currency; C- B. Upham, Deputy Comptroller; John Γ.
Hanes, Under-Secretary of the Treasury: Loo Crowley, Chair-
man of the Foderal Deposit Insurance Corporation: Jesse H.
Jonos, Chairman of the Board of Reconstruction Finance Cor-
poration; Sam Husbands of the Roconstruction Finance Cor-
poration; Clarence Smith, Assistant Chief National Bank
EXHIBIT 1
-2-
Regraded Unclassified
283
Examiner; 1. P. Folger, Chief National Bank Examiner: and
National Bank Examiner Sodlacek. A copy of this agreement
and accompanying correspondence are attached as Exhibit 2.
Dec. 15, 1938 Lotter from President L. M. Giannini to the Comptroller of
the Currency, expressing & willingness to present the pro-
gram to the Board of Directors of the Bank with his recom-
mendation of approval.
Doc. 22, 1938 Letter from Comptroller of the Currency Preston Delano to
President L. M. Giannini, acknowledging receipt of the
letter of December 15, 1938 from President L. M. Giannini,
and indicating that the program outlined in the agreement
provided a satisfactory solution of the points covered by
it.
Jan. 11, 1939 Letter from President L. M. Giannini to Comptroller of the
Currency, advising that upon his recommendation the Board
of Directors had authorized the management to follow the
program developed in the conferences.
Feb. 20, 1939 Letter from Comptroller Proston Delano to President L. M.
Giannini, roferring to the conferences in December, 1938
and the memorandum of December 15, 1938, and stating pre-
liminary estimates as to capital funds.
Mar. 7, 1939 Letter from President L. M. Giannini to Comptroller Preston
Dolano, advising that he might consider that the Board of
Directors and management of the Bank wore committed to pro-
cood with & progrem to increase the capital structure of
the Bank, and pointing out that the agreement of December
15, 1938 was not & program outlined by the Bank, but one
propared by the Treasury Department and accepted in an on-
deavor to cooperate with the Treasury Department.
Apr. 14, 1939 Letter from Comptroller of the Currency to the Board of
Directors of the Bank, calling attention to numerous
EXHIBIT 1
-3-
Regraded Unclassified
284
matters contained in the report of examination completed
February 28, 1939, and expressly referring to the memo-
randum agreement of December 15, 1938, and requesting a
report of progress made in connection with the items con-
tained in that agreement.
Apr. 15, 1939 Letter from Comptroller Preston Delanc to President L. M.
Giannini, referring to action to be taken by the Board of
Directors, and containing a form of notice to stockholders
in connection with the proposed increase in the capital of
the bank, and directing the bank not to take any action to
increase the bank's capital until it had the consent of the
Comptroller.
Apr. 16, 1939 Letter from President L. M. Giannini to Comptroller Preston
Delano, commenting upon his interview with the Comptroller
in Washington, and advising that on April 3, 1939 in com-
pliance with the memorandum agreement of December 15, 1938
an application had been filed with the Reconstruction
Finance Corporation for a loan to enable stockholdere to
subscribe to $25,000,000 of preferred stock to be issued
when the Comptroller should request it, and stating that
even though it was considered unfair to require that the
bank's capital should be increased, the bank was ready to
proceed with the capital increase upon the agreed plan
should the Comptroller want it to do so.
June 30, 1939 Letter from President L. M. Giannini to Comptroller Preston
Delanc, containing detailed reply to the comments made in
the letter of April 14, 1939 from the Comptroller of the
Currency to the Board of Directors of the bank.
June 30, 1939 Letter from the Comptroller of the Currency to the Board of
Directors, requesting a reply to the letter of April 14, 1939.
July 11, 1939 Letter from President L. V. Giannini to the Comptroller of the
EXHIBIT 1
-4-
Regraded Unclassified
285
Currency, supplementing the letter of June 30, 1939 writ-
ten in reply to the letter of April 14, 1939 from the
Comptroller to the Board of Directors.
July 11, 1939 Resolution of the Board of Directors, adopting the letters
of June 30 and July 11, 1939 from President L. M. Giannini
to the Comptroller of the Currency as their reply to the
letter of April 14, 1939 from the Comptroller to the Board
of Directors.
July 21, 1939 Telegram from President L. M. Giannini to Comptroller
Preston Delano, advising that at conference with the Chief
National Bank Examiner and Examiner McLean, the Examiner
had refused to accept authentic appraisale but had made
valuations of banking premises based upon personal opinion
and incompetent memoranda.
July 22, 1939 Letter from President L. k, Giannini to Chief National
Bank Examiner W. P. Folger, objecting to the classifica-
tione of banking premises contained in the report of exam-
ination about to be filed upon the ground that the valua-
tions were not based upon authentic appraisals, and offer-
ing to pay the cost of authentic appraisals or to accept a
joint aporaisal by the Superintendent of Banks of the State
of California, the Federal Deposit Insurance Corporation,
the Federal Reserve Board, and the Comptroller of the our
rency.
July 28, 1939 Letter from President L. M. Giannini to the Comptroller of
the Currency, objecting to the valuations made in the re-
port of examination by Examiner McLean upon the ground that
they were not based upon qualified appraisals, but upon in-
competent memorands, and that they constituted B manifestly
erronsous and unfair classification of the banking premises.
July 31, 1939 Letter from Chief National Bank Examiner W. P. Folger to
EXHIBIT 1
Regraded Unclassified
286
President L. M. Giannini, stating that the valuations of
banking premises contained in the report of examination
were not based upon uenoranda in the files of the Capital
Company, but almost entirely upon appraisale contained in
the bank's files.
July 31, 1939 Letter from the Comptroller of the Currency, Preston
Delano, to the Board of Directors of the bank, compenting
upon numerous matters contained in the report of examina-
tion completed July 21, 1939, and warning the Directors
pursuant to Section 30 of the Barking Act of 1933 to die-
continue the unsafe or unsound practices referred to in
the letter.
Aug. 5, 1939 Letter from President L. M. Giannini to the Comptroller of
the Currency, stating in detail the progress that had been
made up to that time upon the items enunerated in the cano-
randum agreement of December 15, 1938.
Ang. 7, 1939 Letter from President L. M. Giannini to Chief National Bank
Exariner W. P. Folger, replying to his letter of July 31,
1939, and agnin pointing out that the valuations made by
the National Bank Examiner were not based upon competent
or impartial appraisals.
Aug. 8, 1939 Letter from the Board of Directors of the bank to the Comp-
troller of the Currency, replying in detail to the letter
of July 31, 1939 from the Comptroller of the Currency to
the Directors, and in addition calling the Comptroller's
attention to the fact that the agreement of December 15,
1938 was being complied with, and reporting the progress
made under that agreement.
Aug. 29, 1939 Letter from the Comptroller of the Currency to the Board
of Directors of the bank, advising that nothing contained
:in the letters of August 5, 1939 from President L. M.
EXHIBIT 1
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Regraded Unclassified
287
Giannini and August 8, 1939 from the Board of Directors
changed the ideas of the Comptroller of the Currency as
to the procedure necessary to place the bank in satisfac-
tory condition as outlined in the Comptroller's letter of
July 31, 1939.
Sept. 12, 1939 Letter from the Board of Directors to the Comptroller of
the Currency, requesting a detailed reply from the Comp-
troller to the various matters set forth in the previous
letters from the Board of Directors and President L. M.
Giannini to the Comptroller of the Currency.
Oct. 2, 1939 Letter from the Comptroller of the Currency to the Board
of Directors of the bank, setting forth detailed comments
and criticiems with respect to various matters contained
in the report of examination completed July 21, 1939, and
warning the Directors pursuant to Section 30 of the Bank-
ing Act of 1933 to discontinue the alleged unsafe and un-
sound practices set forth in the letter.
EXHIBIT 1
-7-
Regraded Unclassified
288
EXHIBIT 2
Washington, D. C.
December 15, 1938.
Dear Mr. Comptroller:
While I do not feel that our bank should be
required to have a capital structure of 1 to 10 when this
does not apply to other banks, and while I do not agree to
many of the criticisms that have been made in the report of
examinations and letters of the Department, in the interest
of arriving at an amicable adjustment of differences and a
desire to cooperate with the Department, I believe the at-
tachod program will be acceptable to my Board of Directors
and I will present it to them for approval with my recom-
mendation.
In this connection I want to express my appreci-
ation for the courteous and considerate cooperation that I
have received from you, Chairmen Jones and Crowley, of the
RFC and FDIC respectively, and Under Secretary Hanes of the
Treasury, as well as other members of your Department who
participated in the discussions.
Very truly yours,
(Signed) L. M. GIANNINI
President
Bank of America
Honorable Preston Delano
Comptroller of the Currency
Washington, D. C.
EXHIBIT 2
-1-
Regraded Unclassified
289
December 15, 1938
MEMORANDUM
Re: Bank of America
Reference is made to the various communications in recent wooks
between the Comptroller's Office and the Bank of America N. T. & S. A.
dealing with departmental criticism of the bank's management, including
dividend policies and certain specified items, and with particular refor-
ence to the department's letters to the bank of Soptember 23 and Novem-
ber 23.
After several conferences between L. M. Giannini, President,
W. E. Blauer, Vice Chairman, and Russell Smith, Cashier, of the bank,
Chief National Bank Examiner Folger, Assistant Chief National Bank
Examiner Clarence Smith, and Examiner Sedlacek, some of which confer-
ences were attended by Comptroller Preston Delano, Deputy Comptroller
Upham, Under Secretary of the Treasury Hanes, Leo Crowley, Chairman of
the Federal Deposit Insurance Corporation, Chairman Jones and Sam
Husbands of the RFC, the following would seem to constitute an accept-
able program for the adjustment of the items referred to herein.
1.
Due to the widespread operations of the bank, its great number
of branches, and close affiliation with Transamerica Corporation and its
allied interests, the bank will effect and reasonably maintain a sound
capital structure having a ratio to its entire deposits of one to ten.
The bank agrees to furnish all much additional capital as may be required
for this ratio, as determined by the Comptroller of the Currency after
the result of the examination now in progress, including a review of the
itoma classified as slow. The increased capital will be paid into the
bank as early as practicable after the amount shall have been determined,
but in no event later than Juno 30, 1939. No dividonds will be doclared
thoreaftor unloss the then sound capital structure bears a ratio to the
ontire doposits of substantially one to ten.
EXHIBIT 2
-2-
Regraded Inclassified
290
2.
Real estate in the amount of $1,578,005.49 now carried under
the heading of "banking houses" will be immediately adjusted satisfactory
to the Comptroller.
3.
Stocks and bonds listed on incerts 48 to 50, inclusive, to
Page 6 of the Administration Department Report, with the exception of
the Earl Fruit Company bonds in the par value amount of $505,000.00,
will be adjusted to the satisfaction of the Comptroller by June 30, 1939.
4.
The remaining balance of approximately $1,500,000 of unrealized
bond write-up will be eliminated by June 30, 1939.
5.
The 16 loans made on 1277 shares of the bank's own stock will
be immediately collected or corrected to the satisfaction of the Comp-
troller.
6.
The A. 0. Stowart line listed at approximately $11,000,000, of
which $4,500,000 is classified as alow, will be made satisfactory to the
Comptroller.
7.
The bank will not acquiro the assets or assume the liabilities
of any other bank for the purpose of morger or consolidation without the
prior written approval of the Comptroller of the Currency.
B.
Any dividends declared will at the time of the declaration be
deducted from the undividod profit account and carried as a reserve for
dividends.
9.
The statuto which prohibite a national bank from londing upon
its own stock will bo strictly enforced, and the same principle will be
applied to loans on Transamorica stock. The bank may extend temporary
accommodations to stockholders of Transamorica Corporation in small amounts
for thoir business purposes, accepting Transamorica stock as supporting
security, when they can domonstrate their ability to repay the loan without
relying upon the sale of the stock to pay it.
EXHIBIT 2
-3-
Regraded Unclassified
291
10.
Any loans to Transamerica Corporation and its allied interests
will have the prior approval of the Board of Directors of the bank and
such approval will be recorded in the minutes of the board meeting,
11.
Loans to Transamerica Corporation and its allied interests
will be brought within the legal limit allowed to one interest as soon
as possible, and not later than July 15, 1942, except AE set forth in item
(15) below.
12.
The bank will not write up on its books the value of any of its
assets, and no profit will be taken by the bank on any assets sold to &
related company, unless such sale is EL bona fide sale and without recourse
on the bank. If any such sale is made other than for cash, the note or
notes taken in payment or part payment therefor will be properly secured.
13.
The bank will eliminate "other real estate" and the real estate
contracts of Capital Company and California Lands, Inc., such elimination
to be diligently pursued, and completed by December 15, 1943.
14.
The bank agrees that any criticised items not covered herein
will have prompt and effective attention, and that it will cooperate with
the Comptroller of the Currency in an effort to bring all matters pertain-
ing to the bank in line with his requirements.
15.
It is understood that proposals by the bank with respect to
real estate purchased from Transamerica Corporation by Merchants National
Realty Corporation on or about July 14, 1937; with respect to the charged
off assets repurchased by the bank from subsidiaries of Transamerica Cor-
poration on or about July 14, 1937; with respect to stock of National
City Bank of New York acquired by the bank on or about July 14, 1937,
which items should, in the opinion of the Comptroller of the Currency,
be removed from the bank's assete for cash; with respect to depreciation
on bank building, and with respect to service charges on dormant accounts,
EXHIBIT 2
-4-
Regraded Unclassified
292
are unacceptable to the Comptroller of the Currency and further negotia-
tions will be conducted as to them, after completion of the examination
now in process and in connection with increasing the capital stock.
16.
Upon the bank's agreement to the program outlined herein, 40-
proved by its Board of Directors, it will be free to declare a semi-
annual dividend in March, 1939, if its directors elect to do so, provided
steps have been taken by the bank to increase its capital stock as set
forth in item (1) herein.
17.
The foregoing constitutes the principal items criticized in
office letters of September 23 and November 23, 1938, and when the present
examination now in progress is completed, the bank will endeavor to adjust
any other matters of criticism not included herein to the satisfaction of
the Comptroller of the Currency.
It is understood that failure on the part of the bank to satis-
factorily carry out any of the foregoing proposals, unless specifically
waived by the Comptroller of the Currency, in writing, will serve as a
complete release on the part of the Comptroller of the Currency from any
consent, implied or otherwise, to the foregoing program.
EXHIBIT 2
Regraded Unclassified
293
RECONSTRUCTION FINANCE CORPORATION
WASHINGTON
Jesse H. Jones
Chairman of the Board
December 15, 1938
Dear Johnnie:
I beg to enclose herewith letter from Mr. L. M.
Giannini, President of the Bank of America, to Honorable
Preston Delano, Comptroller of the Currency, with an attached
memorandun covering the understanding reached with Mr. Giannini
respecting criticized items and the future policy of the bank.
The memorandum is as agreed upon by you and me over
the telephone. Leo Crowley has also agreed to it in the same
manner, as well as Mr. Dolano. It is my understanding that
Mossrs. Upham, Folger, Smith and others of the Comptroller's
Office, concurred with you.
In an effort to assuro Mr. Giannini that noither the
Comptroller nor Mr. Folgor wore unfair to his bank but were
only trying to discharge the duties of their office impartially,
I explained to him that Mr. Folger had stated to Mr. Delano and
me that, if an agrocment was reached covering the short agenda,
it would bo satisfactory to him if the three principal itoms in
Paragraph 15 were liquidatod substantially according to the
program now sot for them and on which we were all more or less
in agreement. In view of this, he could not understand why
those three items were set for further negotiations.
I assured Mr. Giannini that ho would got fair treat-
mont on these and all other mattors, and I am convinced of his
desiro to cooporato with the Comptrollor in arriving at an
amicable adjustment of any differences that may ariso.
With beet wishos,
Sincorely yours,
(Signod) Josse H. Jones
Chairman
Honorable John W. Hance
Undor-Secretary of the Treasury
Washington, D. C.
-6-
THISIT 2
Regraded Unclassified
294
EXHIBIT 3
SCESDULE OF ROAL PROPERTY SOLD BY BANK OF AMERICA
NATIONAL TRST AND SAVINGS ASSOCIATION TO CAPITAL
COMPANY AND CALIFORNIA LANDS INC. AND LOSSES
SUFFERED BY THOSE COMPANIES on RESALES.
SALES BY BANK TO
YEAR
CAPITAL COMPANY
CALIFORNIA LANDS INC.
TOTAL
1932
$ 7,057,916.00
$ 144,832.00
$7,202,748.00
1933
5,213,840.00
6,565,615.00
11,779,455.00
1934
11,026,205.00
3,134,053.00
14,160,258.00
1935
12,495,948.00
2,548,972.00
15,044,920.00
1936
8,138,407.00
2,157,934.00
10,296,341.00
1937
5,147,985.00
1,259,844.00
6,407,829.00
1938
1,251,812.00
766,511.00
2,018,323.00
TOTALS
$50,332,113.00
$16,577,761.00
$66,909,874.00
LOSSES SUFFERED BY CAPITAL COMPANY AND
CALIFORNIA LANDS INC. ON RESALES OF
PROPERTY ACQUIRED FROM BANK.
YEAR
CAPITAL COMPANY
CALIFORNIA LANDS INC.
TOTAL
1932
$ 119,665.00
$ 215,238.00
$ 339,903.00
1933
85,379.00
122,217.00
36,838.00
1934
319,603.00
180,935.00
500,538.00
1935
843,785.00
535,627.00
1,374,412.00
1936
628,749.00
1,733,874.00
1,105,125.00
1937
1,308,971.00
2,105,832.00
796,861.00
1938
1,129,818.00
152,931.00
1,282,749.00
1939 (10 mos) 1,186,892.00
332,815.00
1,519,707.00
TOTALS
$ 5,538,587.00
$3,440,645.00
$8,979,232.00
EXHIBIT 3
Regraded Unclassified
295
EXHIBIT 4
BANK OF AMERICA
National Trust and Savings Association
San Francisco Headquarters
Russell G. Smith
Vice President and Cashier
San Francisco, California
July 15, 1937
Mr. V. L. Andrews
Assistant Treasuror
Inter-America Corporation
San Francisco
Dear Mr. Andrews:
This will acknowledge the receipt of 56,600
shares Corporation. To have accepted
of National City Bank stock from Inter- this
Continontal sottlement of the balance of $2,716,800
stock duo us in under the contract of Inter-America Corpora-
tion/
accordance with our arrangomont, Corpora- I am
In the option by which Transamorica National City
onclosing purchase 56,600 shares share. of
Bank tion may stock from us at $48 por
the terms of this option 18,400 to
shares of us as security for faithful of July 14
Under the National City Bank stock performance. are be
hold by acknowledge your letter have ndvis- these
This will instructions have been givon City. to
ing shares that dolivored to us in Now York
Yours very truly,
(Signed) R. G. Smith
Vico Prosident and Cashior.
EXHIBIT 4
-1-
Regraded Unclassified
296
EXHIBIT 5
OPTION TO PURCHASE STOCE
For and in consideration of eighteen thousand four hundred
(18,400) shares of the capital stock of National City Bank of Now York,
deposited by TRANSAMERICA CORPORATION with the BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION for the purposes and under the conditions
horeinafter set forth, the receipt whoreof is hereby acknowledged, the
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION horoby grante to
TRANSAMERICA CORPORATION an option to purchase fifty-six thousand six
hundred (56,600) shares of the capital stock of the National City Bank
of Now York, at and for the purchase price of Forty-eight Dollars
($48.00) per sharo, said option however, to be exercised under the
following torma and conditions:
If TRANSAMERICA CORPORATION shall elect to oxercise said op-
tion it shall do 80 by the purchase of not loss than cloven thousand,
three hundred twenty (11,320) shares of said stock at the price heroin
fixed, por year, all to the and that the entiro number of shares sub-
joot to this option may be purchased by TRANSAMERICA CORPORATION within
a poriod of five (5) years (each year to be a. period of twelvo succes-
sive calondar months) from the date hercof.
In the ovent that in any one year said TRANSAMERICA CORPORA-
TION shall purchase, through exercise of this option, a mmber of
shares in OXCOSS of oleven thousand, three hundred twenty (11,320)
sharos, such excess number 6 of shares shall be considered an having
boon purchased by TRANSMERICA CORPORATION in the year subsequent to
the year in which the purchase was actually made.
In the ovent that said TRANS AMERICA CORPORATION shall not dar-
ing any one year by oxercise of this option purchase oleven thousand,
three hundred twenty (11,320) shares of said stock at the price herein
EXHIBIT 5
-1-
Regraded Unclassified
297
fixor, in the manner heroin provided, the and In that ovent the BANT. OF
MERICA NATIONAL TRUST AND SAVINGS ASSOCIATION may sell at the markot
price eleven thousand, throe hundred twenty (11,320) shares of said
stock of the National City Bank of New York, or such smaller amount as,
when added to the number of sharon purchased by TRANSALERICA CORPORATION
pursmant to this option, and the terms and conditions of the procoding
paragraph, will oqual olevon thousand, three hundred twenty (11,320)
sharos.
In the ovent that the BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION shall soll any of the shares subject to this option
Ad horoinabovo provided at a prico of loss than Forty-oight Dollars
($48.00) por sharo, then the BAIK OF AMERICA NATIONAL "RUST AND SAVINGS
ASSOCIATION may aoll sufficient of said eightoon thousand four hundred
(18,400) shares of National City Bank of Now York stock doposited by
TRABNICIRICA CORPORATION with the BANK OF AMERICA NATIONAL TRUST AND
<
SAVINGS ASSOCIATION as aforesaid, to unito up the difference betwoon
Forty-oight Dollars ($48.00) por share and the actual price por share
a: Thick and stock was sold by BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION.
All sales of said National City Bank of Now York stock made
dersunder whother of the shares doposited as socurity, or the sharos
subject to this option, may be mado by the BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION at either private or public salo or upon
& brokor's board, with cr without notico, and without any advertisement
of sale of any kind or character, and at any such salo the RANK OF
AUSRICA PATIONAL TRUST AND SAVINGS ASSOCIATION may bo the purchasor.
Whenever said BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION has realized from the procode of the salo of stock, cither
pursuant to this option or pursuant to salos horoin provided, or by both
of salt lears, the oun of tro million, soven hundred sixteen thousand,
mindred dollars ($2,716,800.00), then the obligations of said
2.
EXHIBIT 5
Regraded Unclassified
298
TRANSAMERICA CORPORATION under this option shall cease and terminate,
and said BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION shall
transfer and deliver to said TRANSAMERICA CORPORATION any balance re-
maining of the eighteen thousand, four hundred (18,400) shares of National
City Bank stock deposited by TRANSAMERICA CORPORATION as herein provided.
In the event that the BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIA-
TION has sold, pursuant to the terms of this option, or pursuant to sales
herein provided, all of the shares of stock subject to this option, and
all of the eighteen thousand four hundred (18,400) shares of the National
City Bank of Now York stock deposited by TRANSAMERICA CORPORATION with
the BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION as herein pro-
vided, and has failed to realize from the sales of said stock the amount
of two million, seven hundred sixtoon thousand, eight hundred dollars
($2,716,800.00), the said TRANSAMERICA CORPORATION shall in no wiso be
liable for any deficiency between said sum of two million, seven hundred
sixteen thousand, eight hundred dollars ($2,716,800.00) and any amount
realized by the BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
from the sales of said stock.
IN WITNESS WHEREOF, BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION has, this 14th day of July A.D. 1937, caused this instrument
to be executed and its corporate name and seal to be affixed by its offi-
cora therounto by resolution of its Board of Directors duly authorized.
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By (signed) R. G. Smith
Vice President and Cashier
and (signed) Louis Forrari
Vice Prosident
KIHIBIT 5
Regraded Unclassified
299
EXHIBIT 6
GUARANTI
THIS AGREEMENT, mado and ontored into this 14th day of July,
1937, by and botwoon TRANSAMERICA CORPORATION, a Delaware Corporation,
party of the first part, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, & national banking association, party of the second part.
WITNESSETH:
WHEREAS, the party of the first part owns all of the outstand-
ing capital stock of California Lands Inc., a California corporation,
and all of the capital stock of Capital Company, also a California 002-
poration, and
WHEREAS, California Lands Inc. and Capital Company are the
owners of certain assets consisting of certain notes, parts of notes,
deficiency judgments, judgments, and similar asseta now held by the
party of the socond part as collecting agent for the owners thereof, and
WHEREAS, California Lands Inc. and Capital Company are dosirous
of selling said assots, and
WHEREAS, the party of the socond part 1s propared to purchase
said assote from said California Lande Inc. and said Capital Company at
and for the purchase price of six million fivo hundred thousand dollars
($6,500,000) provided it ie guaranteed against loss in the purchase of
said assets by the party of the first part, and provided such guaranty
is properly secured by collatoral in the manner and under the conditions
horeinaftor not forth, and
WHEREAS, the party of the first part in willing to givo such
secured guaranty to the party of the second part against loss in the pur-
(
chase of said assets provided the party of the first part shall partici-
pata for a limited period of time with the party of the socond part,
share and share aliko, in all recoverios or collections of und assets
EXHIBIT 6
-1-
Regraded Unclassified
300
in excoss of the purchase price horeof;
NOW, therefore, in consideration of the mutual bonefits horoin
contemplated, the partios horeto do agree and covenant as follows:
The party of the first part horeby guarantoon that the party
of the socond part will roalize from the said assots to bo purchased by
party of the second part from Capital Company and California Lando Inc.
the sum of six million five hundred thousand dollars ($6,500,000) within
fivo (5) years from the date horoof, and that the said aum will be real-
ised at the rate of not loss than ono million throe hundred thousand 101-
lars ($1,300,000) por your from the dato horoof, and horoby agrooa that
in the ovent that in any one year the said party of the second part doos
not realizo from the collection of said assots the sun of one million
three hundred thousand dollars ($1,300,000), the party of the first part
will advance in cash to the party of the accond part, the difforence Da
twoon one million throo hundrod thousand dollars ($1,300,000) an/i the
amount collocted by said party of the secont part during said year on
sait assots. In the ovent that during any year the realizations on said
nagote oxcood ono million throo hundred thousand dollars ($1,300,000) the
amount of such OXCOSS may be credited to the amount guaranteed horoin to
be realized on said assote during the subsoquent years, 80 that the party
of the first part shall not be in dofault under this guaranty if, at the
and of any one year, the amount realized from the collection of said
assote, plus all advances, if any, made by the party of the first part
during the years that this guaranty has boon in oxistonce, avoragos one
million three hundred thousand dollars ($1,300,000) por year.
It is furthor agreed that after the party of the socond part
has realized from said assote, or from said advances, or from the pro-
cools of salos of pladgod securities as horoinaftor provided, or from
all or any of these sources, the aggregate aum of six million five hun-
dret thousand dollars ($6,500,000), the partics hereto shall share equally
in all amounts which Day thoroafter bo collected from or realized upon
MIRIBIT 6
Regraded Unclassified
301
said assets: provided, however, that if the party of the first part has
made any advances to the party of the aucond part, pursuant to the terms
hereof, or if the party of the second part has retained any proceeds
from the sales of pledged securities pursuant to the terms hereof, then
all of the collections from said asseto after the party of the second
part has received six million five hundred thousand dollare ($6,500,000)
às aforesaid, shall be paid over to the party of the first part until
said party of the first part has recouped the antire amount of said ad-
vances and of sald retained proceeds from the sales of pledged securities,
together with interest thereon at the rate of four per cent (4%) per an-
num, and the party of the second part shall not share in said collections
until after the recoupment of the amounts aforesaid by the party of the
first part; and provided further, that the provisions of this paragraph
whereby the party of the first part is entitled to share in the collec-
tions from and realizations upon said assets, shall not be effective be-
yond July 14, 1947, and the party of the first part shall have no inter-
set, in or right to, any amounts collected from or realized upon said
assets after said date; and the party of the second part agrees to use
its best efforts at all times during the term of this agreement to col-
lect and realize upon said assets.
In order to secure the faithful performance by the party of
the first part of the terms and provisions of this guaranty, the party
of the first part has deposited and pledged with the party of the second
part the following securities, to wit:
28,300 shares National City Bank of New York
71
If
Bank of Amador County, Jackson, California
31
#
Bank of Davis, Davis, California
40
il
Bank of à Levy, Oxnard, California
341.2 "
Bank of Lake, Lakeport, California
5,445
II
First National Bank of Portland
-49,920
n
Bank of America (State Bank)
10,000
If
Bankamerica Agricultural Credit Corporation
1,839
11
Northern California Bank of Savings, Marysville
It is agreed that in the event that said party of the first
part shall fail to pay any amount that shall become due from It to the
EXPIBIT 6
Regraded Unclassified
302
party of the second part by virtue of the terms of this guaranty, the
said party of the second part may, without notice to the party of the
first part, and without any domand of performance, and without advertise-
ment of sale (said demand, notice and advertisement of sale being hereby
expressly waived), sell such part of said securities as may be necessary to
pay any amount becoming due the party of the second part by virtue of this
guaranty, including costs of sale, at public or private sale or on a bro-
ker's board, and at said sale the party of the second part may become the
purchaser thereof. Successive sales of said collateral may be made as
successive amounts become due under and by virtue of this guaranty.
When the said party of the second part shall have received the
sum of six million five hundred thousand dollars ($6,500,000). either
from collections on said assets or from advances by the party of the first
part, or from the sale of the securities horeinabove described, or from
All or any of these sources, then and in that event the party of the sec-
ond part shall return to the party of the first part such of the afore-
mentioned pledged securities as may remain unsold.
In consideration of the premises, the party of the second part
hereby agrees to purchase the oforesaid assets from Capital Company and
California Lands Inc. for the consideration and under the terms and con-
ditions hereinabove get forth.
IN WITNESS WHEREOF, the parties hereto have caused this instru-
mant to be executed and their respective corporate seals to be hereunto
affixed by their respective officers thereunto duly authorized, this 14th
day of July, 1937.
TRANSAMERICA CORPORATION
By
W. L. Andrews
and
R. P. A. Everard
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By
R. G. Smith
and
Rugh L. Clary
EXHIBIT 6
+
Regraded Unclassified
EXHIBIT 7
STATEMENT OF EARNINGS, DIVIDENDS AND NET ADDITIONS
303
20 CAPITAL FUNDS OF BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION
FROM JANUARY 1, 1935 TO JUNE 30, 1939
let half
Total
1935
1936
2937
1938
1939
1935 to 6/30/39
Net Earnings from Current
Operations
8,163,856.12
11,494,909.32
12,665,809.97
13,057,832.25
6,283,406.12
51,665,813.78
Profit on Sale of Securities
5,292,014.65
8,262,179.88
3,955,788.64
9,175,514.59
6,644,563.43
33,330,061.19
Loss on Sale of Securities
-134,852.39
-250,386,10
-568,721.38
-126,594.43
-109,855.49
-1,190,409.79
Total Earnings
13,321,018.38
19,506,703.10
16,052,877.23
22,106,752.41
12,818,114.06
83,805,465.18
Depreciation
-1,036,319.05
-1,068,996.44
-1,135,524.52
-1,206,129.40
-626,306.43
-5,073,275.84
Current Losses and Loases on
Transactions Originating
since 1932
-495,672.90
-701,909.68
-1,073,496.72
-2,062,709.53
-753,328.98
-5,087,118.11
Losses on Transactions Origin-
ating prior to 1932
-11,414,741.29
-11,666,409.49
-3,181,602.87
-4,566,274.70
-3,411,927.26
-34,240,955.61
Recoveries
9,483,810.32
6,383,030.79
1,886,886.32
293,852.81
137,093,50
18,184,673.74
Not Profit
9,858,095.46
12,452,418.28
12,549,139.44
14,565,491.29
8,163,644.89
57,588,789.36
Dividends Paid
-6,000,000.00
-8,000,000.00
-8,800,000.00
-9,600,000.00
-4,800,000.00
-37,200,000.00
Voluntary Contributions to
Profits
22,383.87
87,068.15
100,630.94
None
None
210,082.96
Not Additions to Capital Funds
3,880,479.33
4,539,486.43
3,849,770.38
4,965,491.29
3,363,644.89
20,596,872.32
NOTE: Minus sign denotes decrease.
Regraded Unclassified
304
BOARD OF GOVERNORS
OF THE
( 8 - THE
FEDERAL RESERVE SYSTEM
WASHINGTON
OFFICE OF THE CHAIRMAN
December 14, 1939.
Dear Henry:
In accordance with our conversation in your
office on December 12, 1939, I today addressed a
letter to Comptroller Delano, a copy of which is
enclosed for your information.
Sincerely yours
M. S. Eccles,
Chairman
Enclosure
Honorable Henry Morgenthau, Jr.,
Secretary of the Treasury,
Washington, D. C.
Regraded Unclassified
305
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON
December 14. 1939.
My dear Mr. Comptroller:
As outlined in By conversation with you today concerning
the 3ank of America, N. T. and 8. A. the Board does not feel that
it is fully informed. When Governor Ranson attended the meetings
in Secretary Morgenthau's office in the Fall a year ago the dis-
cussion was concerned with the question of the Comptroller of the
Currency instituting a proceeding under section 30 of the Banking
Act of 1933. Im those circumstances the Board, in view of its funo-
tion in such e proceeding, did not believe that it should express
an opinion in advance either upon the merits of the charges or as
to whether you should take the action.
Since then members of the Board have understood that nego-
tistions seeking an agreement with respect to the adoption of cor-
rective neasures have been under way. From time to time it has
received communications from the management of the bank enclosing
copies of communications sent to your ORIGIN While it has had
copies of reports of examination of the bank and recently, at its
request, has received from your office popies of nome of the cor-
respondence with the bank, it dogs BOX have a complete picture of
the situation from your standport.
A short time ago,
you were advised, the management of
the bank requested and was granded an opportunity to discuss the
condition of the bank from X viewpoint informally with members
of the Board. At that time the bank's representatives stated that
they were considering asking a request that the Board, under its
statutory authority, examine the bank. In the circumstances the
Board would appreciate being brought up to date for the purpose of
determining whether it may be helpful is working out the situation
of the bank in the publie interest.
Sincerely yours,
(Signed) M.S. Recles
M. S. Eccles,
Chairman
The Honorable,
The Comptroller of the Currency,
Washington, D. C.
Regraded Unclassified
CABLE
I
/
306
13044
Bank of America
NATIONAL ASSOCIATION
L M DIANNINE
San Francisco, California
December 14, 1939.
Honorable Preston Delano,
Comptroller of the Currency,
Treasury Department,
Washington, D. C.
Dear Comptroller Delanor
On November 15, 1939, you addressed & letter to the Board
of Directors relative to the loss classification set forth in the
examination completed July 21, 1939. This letter was the subject
of discussion at the Board meeting held on December 12, 1939, at
which time I reported to the Board on the result of our conferences
with you and with your technical staff in Washington, in which con-
ferences members of the Treasury Department also participated, and
I read practically all of your transcript of the stenographic notes
of the conferences.
I advised the Directors that on the day that your letter
was mailed, Mr. A. P. Giannini and I had made an appointment to see
you on the following morning, namely, November 16, 1939; that no had
previously advised you of our contemplated visit to Washington, and of
our presence there, and of the result of the approisal by the American
Appreisal Company of the properties listed by the Examiner as warrant-
ing a loss or doubtful classification; that the net result was that on
properties erbitrarily valued by the Examiner at approximately
$22,000,000, the Appraisal Company had established a value of approxi-
nately $33,000,000, which was more than the Bank's book value of the
properties, und approximately $11,000,000 more than the Examiner's
valuation.
I told them that in our conferences we discussed the matter
of your sending this letter on November 15 although we had an appoint-
ment with you on November 16, and also that in the conferences on
several occasions I reised the question of the procedure that you
winted us to follow with regard to the letter, but had not succeeded in
securing e definite statement from you. I told them that Mr. A. P. Gian-
nini and I had previously stated our attitude in the matter and that Nr.
Tietjens, Associate General Counsel of the Treasury Department, had
said, "Leave the record as it is", and that you had stated that "This
office is taking the position that the losses should be charged off,
and I understand you are here now to protest egainst that action and
subrit to us new appraisals in the nature of new evidence bearing on
Regraded Unclassified
307
Honorable Preston Delano
- 2 -
November 14, 1939.
consider this new evidence."
the point. The position of the Comptroller is that he is going to
I also told them that you had communicated with me in New
York on November 28 and had advised me that, while you were not presum-
ing to dictate my movements, you would suggest that I return to the
Coast and that you would give thorough consideration to the various
matters that had been discussed with you and your technical staff in
the conferences and to the "new evidence", and that in due course we
would hear from you.
Following my report the Board considered that it was un-
necessary to take any action with regard to a formal reply at this
time, but in view of the present indefinite status of the matter
referred your communication to me for this acknowledgment.
R Yours very truly
President.
308
0HM, Jr had in mind using Mr. Gasell
as Counsel on the Bank of America
case. )
309
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO
Secretary Morgenthau
December 15, 1939
FROM
E. H. Foley, Jr.
Joe O'Connell, who is conducting the TNEC subcommittee hearing
on insurance, has arranged to hold his last hearing this afternoon
between 2:15 and 3:30. Originally, Joe planned to sit through the
morning until Gary Gesell had concluded his presentation. When Joe
learned there was 8. possibility that you might drop in on the hearing
this afternoon, he arranged to break up today's hearing in two parts.
Of course, Gesell knows nothing of your contemplated visit.
Please let ne know if it would be convenient for you to drop in
on the insurance hearing this afternoon sometime between 2:15 and 3:30.
E.w.7h
310
December 15, 1939
3:45 pm
Present:
Mr. Foley
Mr. Tietjens
Mr. Delano
Mr. Upham
Mr. Folger
Mr. Delano: I saw Mr. Eccles last night and
again briefly this morning. He was running for the
Presidential reception last night 80 did not have a
chance to give me the letter, but he told me he would
send me a copy.
HM,Jr: I have it here and I read it.
Mr. Delano: And then he went over the ground
pretty much that he did with you, justifying the sug-
gestion and mentioning MoKee and also carrying out the
point that he would like to have some information con-
ferences between the Board and my office, and between
the technical staffs, and he thought McKee should sit
in on these more important conferences that took place.
We have been drafting an answer here. I told him, I
said as far as I was concerned I preferred not to go
down and talk to their Board
HM,Jr; No reason why you should.
Mr. Delano:
not be put in the position of
...
being summoned.
HM,Jr: You don't have to! The shoe is on the
other foot.
Mr. Delano: I said as far as the technical staffs
or information is concerned, I would like to see if the we
could cooperate -- left it hanging pretty much in
air; be bad policy. In regard to McKee, certainly had
did not want to turn him down; thought it would no
objection if he wanted to designate MoKee.
We wrote & very short and sweet answer to the
Regraded Unclassified
311
-2-
letter, but the lawyers have something they wanted
to add.
HM,Jr: They would!
Mr. Delano: That is said without any criticism.
HM,Jr: That's all right. I am saying it. You
want to put in some apple sauce?
Mr. Foley: No. I think from reading his letter
it's pretty plain that they think the situation is dif-
ferent now insofar as Section 30 is concerned than they
did before. I think we ought to tell them right in
this letter that we still have very much in our minds the
possibility of bringing a Section 30 proceeding and if,
in view of that, they still want to be kept advised as
to developments from time to time, we will be very glad
if they will designate someone and to furnish that person
with information as to developments.
HM,Jr: Let me tell you what let's do. When you
one-two-three-four-five gentlemen can agree on what kind
of a letter, I won't be available until Monday, 80 some-
time Monday send me in a letter. It has taken the Fed-
eral Reserve a year and a half to write it, hasn't it?
Mr. Foley: Yes.
HM,Jr: So I think if it takes us two days, that's
all right.
Mr. Foley: Sure!
o0o-o0o
Regraded Unclassified
312
RE BANK OF AMERICA
December 19, 1939.
10:00 a.m.
Present:
Mr. Upham
Mr. Foley
Mr. Hanes
Mrs Klotz
Upham:
I have here the reply to Chairman Eccles' letter
of December 14, asking that the Board of Governors
be brought up to date and kept informed with
respect to our relationship to the Bank of America.
The Comptroller has signed the letter. He has gone
to the hospital to see Mrs. Delano, who was operated
on yesterday.
H.M.Jr:
That looks all right to me.
Now, what else have you got besides that?
Upham:
Well, just a simple acknowledgment of another
letter that came in, that crossed our letter in
the mail.
H.M.Jr:
Well, I don't have to read Giannini's letter, do
It
Upham:
I think not. He just explained that he had had a
Board meeting and took up with them the conferences
that he had here in Washington and read a good bit
of the transcript to them and that there didn't
seem to be any particular action to take.
H.M.Jr:
The Board considered it unnecessary to take any
action at this time?
Upham:
That refers particularly to our request that they
republish their last statement of conditions, and
that will come up automatically again. There is
really not any great significance there. You agree
with that?
Foley:
Yes.
H.M.Jr:
We have got to get ourselves 8 lawyer to get busy
on that case.
Foley:
Yes, because we will have to give somebody adequate
time to prepare it and we are going to be pushing
Regraded Unclassified
313
- 2 -
the date forward because we didn't get the
lawyer in time.
H.M.Jr:
I think we ought to
Upham:
What do you think of Judge Marks?
H.M.Jr:
of Cincinnatif
Upham:
Yes.
Hanes:
What happened to Dean Acheson?
H.M.Jr:
He couldn't take it.
Is this all right with you?
Hanes:
I don't know. If it is true, it is all right.
You say that the Bank has done a little more
than equivocate. My impression was, from those
bankers - the last time I heard about it, my
impression was that they had done a good deal
more than equivocate.
Foley:
We say on the principal items.
Hanes:
If it is true.
Foley:
It 1s on the principal items. They have made
some improvements in which they are given new
credit to the letter that went out to the Bank
as a result of those conferences when the bankers
were here and the lawyers, but on the major items,
capital, dividend policy, there just hasn't been
any improvement, because they just haven't done
anything.
H.M.Jr:
There has been equivocation, but not definite
steps. No definite steps have been taken on
the most important of these questions. On that,
I don't think there is any question. This is
just an acknowledgment of a letter from Giannini.
Hanes:
Is Marriner - did you say somebody was coming
over here today from the Federal Reserve?
H.M.Jr:
No, what happened was, Marriner came over to
Regraded Unclassified
314
- 3 -
588 me about B. week ago with a piece of paper,
just a memorandum, wanting me to accept that
saying that they wanted to be consulted, and
I said, "No, I couldn't take a memorandum that
wasn't & formal Federal Reserve Board action,"
and then he wrote this letter, which was &
formal action, and now this is the answer draw-
ing their attention - I think you yourself said
the minute I told you about it, "What about
Section 30?" Wasn't it you who said that?
Hanes:
What I said was that it seemed rather funny to
me to be consulting the court and jury prior
to trial. That seemed to be a little funny
procedure.
Foley:
Well, it is funny in view of the attitude they
took when they did this thing up the first time.
Mr. Ransom said he didn't want anything to do
with it because it would be embarrassing if the
case later was referred to them. There is no
reason to change.
Hanes:
Then Marriner wrote a letter which in my mind
pre-judged the case pretty well.
H.M.Jr:
We still have the letter.
Hanes:
I don't know if we have answered the letter or
not.
H.M.Jr:
I don't think we did.
Foley:
The letter from the Federal Reserve indicates
that we abandoned any thought of ever going
over there and that we are now trying to settle
this and this letter is to correct that impression,
if that is the prevalent impression over there.
We put them on notice we still intend to go over
there.
H.M.Jr:
and "What about the letter Mr. Eccles wrote
If they come back again, I think we can come back
us, does say, that still represent the way he felt?"
Upham:
In which he raised the difficulties inherent in
a Section 30 proceeding.
Regraded Unclassified
315
- 4 -
H.M.Jr:
I would just bring it up. I had forgotten
about the letter, but it may not be the appro-
priate time now. But I do think that when
this thing breaks, you ought to concentrate
and see if you can get us somebody to present
the case. Acheson felt that in view of the
fact that he has been consulted previously
by the Gianninis, that he eliminated himself.
Hanes:
I told you he had been asked to serve as their
counsel.
H.M.Jr:
That, plus the point he had more cases than
he could take care of. So we are looking for
a lawyer with B. searchlight. We have got the
searchlight.
I hear you (Upham) have got a 24-page letter
or something.
Upham:
One hundred eighteen. It is being mimeographed.
H.M.Jr:
Do I have to read it?
Upham:
No, but there is about a three-page conclusion
at the end that I think you would be interested
in.
H.M.Jr:
Is this from Mr. Giannini or from the Board of
Directors?
Upham:
From the Board of Directors, in reply to the
letter of October 2.
Foley:
It is in reply to the Section 30 letter that
was sent out on October 2. It 18 just 8. rehash
of their side. There is nothing in the way of
being constructive or suggestions as to what
they intend to do.
Upham:
I have only one other thing. The Comptroller
asked me to clear a personal matter with you.
He had intended, 1f Mrs. Delano was well enough,
and still intends, if she is well enough then,
to leave Thursday night for over Christmas.
H.M.Jr:
By all means. Sure. If she should have a set-
back, would you let me know, please?
Regraded Unclassified
316
- 5 -
Upham:
Sure.
Hanes:
Is she very 111?
H.M.Jr:
She has got blood poisoning in her hands.
Upham:
She was operated on yesterday with a general
anesthetic.
Regraded Unclassified
c
0
DE: 19 1959
P
I
My dear Mr. Chairmans
This will acknowledge reseipt of your letter of December 14, 1939,
which we written pursuant to our conversation of that date in regard to
the current condition of the Bank of America Entional Trust and Savings
Association of San Francisc, California, and the present status of the
supervisory problems which it presents.
Your letter sems to have been written under the impression that
negotiations secking an agreement with respect to the adoption of corrective
measures have been under may between the Bank and this office and that 6.
proceeding against the officers and directors of the Bank under Section so
of the Banking Aot of 1933 is no longer contemplated.
I want to correct this impression. The situation concerning the
Bank's major problems remains much the same as it was a year ago last fall
when Governor Ranson attended the meetings in Secretary Morgenthau's office.
The differences between this office and the Bank remain unsolved despite
W repeated warnings that definite corrective steps must be taken by the
Bank. Whatever negotiations have been under way have not been for the pur-
pose of seeking - agreement but for the purpose of seeing to it that the
Bank complies with the recomendations and suggestions which I have made
based on reports of examination of the Bank- To date the Bank has done
little more than equivosate and has taken no definite stops to comply with
Regraded Unclassified
318
- 2 -
the most important of these recommendations and suggestions. Neither
does it appear that the Bank is presently disposed to take any such steps.
The continuance of this situation cannot be tolerated. Indeed,
I have told the Chairman of the Board of the Bank that the Bank must
come forward by December 31, 1939 with a definite program, approved by
its Board of Directors, which will meet to my satisfaction my recommendations
and suggestions. If such a program is not forthooming, I will be compelled
to take such measures against the Bank's management as the law authorizes
and requires to protect the interests of the stockholders and depositors.
A proceeding under Section 30 is one such measure and the possibility
that a proceeding under that Section may yet be necessary is by no means
foreclosed.
With this in mind, if you still wish to be advised with respect
to the Bank and will designate some member of your Board with whom I
may communicate, I shall be very glad to keep him informed as to any
action taken.
Very sincerely yours,
/s/ PRESTON DELANO
Comptroller of the Currency.
Hon. Marriner S. Ecoles,
Chairman, Board of Governors
Federal Reserve System
Washington, D.C.
Regraded Unclassified
319
BOARD OF GOVERNORS
C
o
of the
P
Y
FEDERAL RESERVE SYSTEM
Office of the Chairman
December 14, 1939
My dear Mr. Comptroller:
às outlined in my conversation with you today conserning
the Bank of America N.T. & S.A. the Board does not feel that it is
fully informed. When Governor Ranson attended the meetings in
Secretary Morgenthau's office in the Fall a. year ago the discussion
was conserned with the question of the Comptroller of the Currency
instituting a proceeding under section 30 of the Banking Act of 1933.
In those circumstances the Board, in view of its functions in such a
proceeding, did not believe that it should express an opinion in ad-
vance either upon the merits of the charges or 0.6 to whether you
should take the action.
Since then members of the Board have understood that negotiations
seeking an agreement with respect to the adoption of corrective measures
have been under way. From time to time it has received communications
sent to your office. While it has had copies of reports of examins-
tion of the bank and recently, at its request, has received from your
office copies of some of the correspondence with the bank, it does
not have a complete picture of the situation from your standpoint.
& short time ago, as you were advised, the management of the
bank requested and was granted an opportunity to discuss the con-
dition of the bank from its viewpoint informally with members of
the Board. At that time the bank's representatives stated that they
were considering making a request that the Board, under its statutory
authority, examine the bank. In the circumstances the Board would
appreciate being brought up to date for the purpose of determining
whether it may be helpful in working out the situation of the bank in
the public interest.
Sincerely yours,
(Signed) M. S. Ecoles
M. S. Booles,
Chairman
The Honorable,
The Comptroller of the Currency,
Washington, D. C.
Regraded Unclassified
320
December 19, 1939
Gasell
I called Jerome Frank last night and asked
him about Gazelle and he said that he talked to
Eddie Greenbaum and that Eddie felt that we could
not take an S.E.C. lawyer as it looked too much like
collusion and I said"to show you how innocent I am,
I did not even think of it".
321
OFFICE OF
THE COMPTROLLER OF THE CURRENCY
December 22, 1939
HM Jr.
For your information.
I think this can be held until
the Comptroller returns, unless Marriner
gets impatient.
Regraded Unclassified
322
COPY
Board of Governors of the
Federal Reserve System
Washington
Office of the Chairman
December 22, 1939
aly dear Mr. Comptroller:
In response to your letter replying to my
letter of December 14, regarding the Bank of
America, N.T. & S.A., and for reasons indicated in
previous correspondence and conversations, the
Board has asked me to say that it would like to be
advised in regard to the current condition of the
bank and the present status of the supervisory prob-
lems which it presents. The Board nas asked that
you call me on the telephone in order that a confer-
ence may be arranged for this purpose.
Sincerely yours,
(Signed) M. S. Eccles
Chairman
The Honorable,
The Comptroller of the Currency,
Washington, D. C.
Regraded Unclassified
323
CABLE ADDRESS BAMERICAL
13044
Bank of America
NATIONAL TRUST SAVINGS AND ASSOCIATION
SAN FRANCISCO, CALIFORNIA
NEW YORK
December 22, 1959.
Mr. Preston, Delano,
Comptroller of the Currency,
Treasury Department,
Washington, D. C.
Dear Sir:
I acknowledge receipt of a communication from you dated
December 12th, 1939, and addressed to me as Chairman of the Board of Directors
of the Bank of America, National Trust and Savings Association, San Francisco,
California. The letter and a portion of the enclosures have been forwarded
to me at the St. Regis Hotel in New York City.
In the letter, you specifically request that a copy of it be
transmitted to each of the Directors of the Bank of America, National Trust and
Savings Association, and you state that you are enclosing sufficient copies for
that purpose.
Upon advice of my counsel, I have to advise you that I must
decline to comply with your request, inasmuch as your letter contains matter
which is grossly defamatory and libelous. I must therefore refuse to become
a party to the publication or circulation of a libel upon the Corporation of
whose Board of Directors I an Chairman, upon its officers and upon all or some
of its Directors, including myself. If it is now the policy of the Comptroller
of the Currency, under the direction of the Secretary of the Treasury, to enforce
agreement to such opinions as be, or the Secretary, might have formed regarding
the Bank of America, National Trust and Savings Association, or the officers or
Directors thereof, by openly charging violations of law and dishonesty, both
corporate and personal, I shall have to ask that you use some instrumentality
other than me for this purpose.
Yours adi very truly,
Regraded Unclassified
324
BANK OF AMERICA N. T. & S. A.
C
0
San Francisco, California
P
Y
December 23, 1939
Honorable Preston Delano,
Comptroller of the Currency,
Washington, D. C.
My dear Mr. Delano:
This is in reference to the agreement of December 15, 1938,
which was prepared in your office following a series of conferences
between representatives of the Bank and various officials of the
Office of the Comptroller of the Currency, the Treasury Department,
Federal Deposit Insurance Corporation and the Reconstruction Finance
Corporation, which agreement was confirmed by our Board of Directors
at the meeting of January 10, 1939.
Under date of November 6, 1939, I advised you of the progress
made toward fulfilment of the several commitments. The figures were
as of October 31.
Although the Board of Directors in its reply to your letter
of October 2, 1939, covered most of the items in detail, it seems
desirable for us to report the progress made to December 15, 1939,
the first anniversary date. Accordingly, the following table reflects
the improvement that has been accomplished between April 28, 1938, the
date of the examination report which was the basis of the agreement,
and December 15, 1939.
Reduction Through Liquidation
Account
Reduction April 28, 1938
to
December 15, 1939
Guaranteed Loans
$1,809,992.65
Real Estate Contracts
10,624,225.62
California Lands, Inc.
Discounts and Unsecured Loans
351,016.19
Capital Co.
295,000.00
Real Estate Loans
Regraded Unclassified
JED
- 2 -
Reduction April 28, 1938
to
Account
December 15, 1939
Advance for alteration and
rehabilitation of Bank Premises
$
497,040.65
A. O. Stewart line
809,270.02
Pacific Coast Mortgage Co.
775,000.00
Former Banking Premises
Merchants National Realty Corporation
2,897,268.10
Bonds and securities classified
as unlawfully acquired (other
than National City Bank stock)
1,384,358.04
National City Bank stock
1,085,920.00
Loans to subsidiaries
of Transamerica Corporation
First National Corporation, Portland
1,000,000.00
Transamerica Service Corporation
4,900,000.00
Inter-Continental Corporation
2,450,000.00
Total Liquidation
28,879,091.27
Improvement by Correction or Reserves
German Credits
4,157,285.68
Bond Write-up
2,825,597.55
Properties in Bank Premises
Account-Classified as
389,362.20
Other Real Estate
1,180,931.69
Defaulted Bonds
$ 8,553,177.12
Total
As to certain items listed by the Examiner in examination and
reports reported in my letter of November 6, 1939, resulted
subsequent to that of April 28, 1938, the liquidation
improvement in their complete elimination or correction. The figures follow:
Regraded Unclassified
326
- 3 -
Reduction to
12-15-39
Western Furniture Exchange Note
$ 560,000.00
Advance to Capital Co. for
construction of Magnin Bldg.
1,100,000.00
Downtown Properties
301,025.00 #
* Reserve
It will be observed that there has been an actual liqui-
dation of $30,539,091.27 and an improvement by the establishment
of reserves or other adjustments of $8,854,202.12 resulting in a
total betterment of $39,393,293.39 during the period under
discussion. Your special attention is directed to the improve-
ment made since the report of October 31, 1939, when the liquida-
tion figure stood at $26,557,425.62, ns compared with the present
figure of $30,661,091.27, an increase of $4,103,665.65 in the
short intervening time.
You were advised that Transamerica Corporation had set
aside for reduction of its commitments to the Bank, or for
subscription to additional stock in the Bank, the sum of
$830,000.00 which was its portion of the dividend of September
30, 1939. On December 12, 1939, at our request, this sum was
made available to Capital Company and, together with an additional
$342,000.00, composed a payment of $1,172,000.00, which was
applied by Capital Company to the further liquidation of its
contract with Merchants National Realty Corporation. The result
of this payment is reflected in the first of the foregoing tables.
Very sincerely yours,
(Signed) R. G. Smith
Russell G. Smith,
Executive Vice President.
Regraded Unclassified
327
December 26, 1939
MEMORANDUM FOR THE SECRETARY:
In a letter addressed to the Securities and Exchange
Commission, Mr. G. L. Merrick, an Attorney at Law in Los
Angeles, has some comments with respect to the relationship
of the Treasury Department to Transamerica Corporation and
the Bank of America. Excerpts are quoted below:
"Mail fraud-using the mails for the sales of
stock in both Transamerica and Bank of America.
The matter of the $35,214,000, together with the
knowledge of the correct financial condition of
both Bank of America (Bank Examiners reports)
and Transamerica whose financial condition was
affected by the condition of Bank of America
would indicate that the Treasury Department of the
U. S. were implicated in such fraud.
"It would be foolish to assert that the Treasury
knew nothing of the Bank of America affair. It
was and is the opinion that O'Connor was made
Comptroller to cover up this matter by McAdoo and
the administration was in agreement as McAdoo now
has a Federal job paying him $25,000.00 visible
tax payers money, and as the wags say God only
knows how much invisible.
"It appears that some one must take an interest
in the matter. The loss of approximately Twenty-
four Dollars a share has hit these people hard in
many cases. Old people who still have to eat.
They never believed in the Gianninis but they were
convinced that the Government would not permit any-
thing as disclosed to exist in B. National Bank, and
the second largest Bank in the country. And Trans-
America owned the Bank by stock ownership. They were
safe protected by the Government. It has not helped
that no releases were issued on the San Francisco
hearings.
Regraded Unclassified
328
- 2 -
MEMORANDUM FOR THE SECRETARY:
"It might be of interest to know that the
brokerage houses like E. F. Hutton & Co.
large and presumably responsible institutions
tell the people that the 'affair' has been
'arranged'."
lym
329
COPY
TREASURY DEPARTMENT
Office of
Comptroller of the Currency
Chief National Bank Examiner
Twelfth Federal Reserve District
1 Montgomery Street, Room 921
San Francisco, Calif.
December 28th, 1939.
Comptroller of the Currency,
Treasury Department,
Washington, D. C.
Dear Sir:
I few days ago Mr. Folger asked no to ascer-
tain from the Bank of America National Trust and Sav-
ings Association what instructions had been given to
the American Appraisal Company at the time it was
employed to make appraisals of the bank's premises.
I asked Mr. Russell Smith for the information
and he advised me that the oover letter from the
appraisal company would give me the information re-
quired. Insidentally, he stated that the bank did not
give the appraisal company any oral or written instrue-
tions as to procedure. Mr. Smith repeated this
statement to Examiner Huck yesterday which confirmed
the information set out in the latter's letter to me
dated December 22nd, 1939, copy of which is enclosed.
There is also enclosed a copy of & letter
which Mr. Smith gave Mr. Huck yesterday which, in ay
opinion, does not in any way give the information de-
sired by Mr. Folger.
Very truly yours,
13/ IRWIN D. WRIGHT
IRWIN D. WRIGHT
Chief National Bank Examiner
Twelfth Federal Reserve District
IDW:A
330
December 22, 1959.
Mr. Irwin D. Wright,
Chief National Bank Examiner,
San Francisco, California.
Dear Mr. Wright:
Replying to your letter of December
21 regarding the instructions given by the Bank of
America, N. T. 8. A. to the American Appraisal Com-
pany with reference to appraisements of banking prem-
ises, please be advised that Vice President Russell
Smith orally advised me that there was no letter
of instructions written to said company. Mr. Smith
stated he would have furnished to your office at once
detailed data showing the nature of instructions from
the bank to the appraisal company at the time said
company was employed to do this work.
Yours very truly,
Was. F. Huck,
National Bank Examiner.
Regraded Unclassified
331
This is a. draft of Letter of
Transmittal to accompany
General Report and Valuation
of BANK PREMISES OWNED+
- L. LEE HYDER -
PRAISAL COMPANY
SAN FRANCISCO
Russ Building
December 27, 1939
Bank of America, NT&SA
#1 Powell Street
San Francisco, California
Gentlemen:
We have made an inspection and appraisal of your bank premises,
fixtures, and equipment at various locations throughout the State
of California, and are presenting herewith our report and valua-
tion covering the properties designated as
BANK PREMISES OWNED
and consisting of the 317 individual holdings as set forth in
the accompanying summary.
The appraisal includes assets classified as Real Estate, compris-
ing land, buildings, and fixed building equipment; Bank Fixtures;
and Bank Furnishings and Equipment, comprising vault equipment,
movable furnishings, and mechanical and miscellaneous office equip-
ment of all kinds; but excludes supplies and all items of working
capital. It also excludes good will and other intangible assets.
Regraded Unclassified
THE AMERICAN APPRAIS COMPANY
332
Bank of America, NT&SA - cont'd.
The report being presented herewith consists of two parts as follows:
1. This letter stating the scope of our investigation
and the basis of valuation, and setting forth our
opinion of the total value of the properties herein
included.
2. A detailed summary setting forth the appraised re-
production oost new, and cost less depreciation, by
major classes of assets, and our valuation for each
of the 317 separate holdings.
Our investigation was undertaken on or about August 1, 1939 and has
been continuously underway since that date. It included the personal
inspection of every property by one or more representatives selected
from our permanent appraisal staff with regard to their ability and
experience in the particular classes of property involved, who pre-
pared an independent inventory of the appraised assets, with only such
assistance from your organization as was essential to clarification of
ownership, dates of construction and other related matters.
Land plats and descriptions, together with digests of leases and past
operating income and expense, were assembled with the assistance and
cooperation of the Capital Company in accordance with forms and instruc-
tions prepared by us for such purposes. All architectural plans and
other similar data required were obtained, where available, from the files
of the Capital Company or other sources, but such information was in all
cases checked against the actual property during the compilation of the
inventories. To have accepted all information furnished in reference
Regraded Unclassified
THE AMERICAN APPRAISA. OMPANY
Pages #
333
Bank of America, NT&SA - con't.
to land ownership and description excepting in those partioular in-
stances where, from lack of clarity or other reasons, we have verified
and revised the descriptions in accordance with local public records.
The appraisal inventories were prepared to reflect the properties as
they existed at the respective dates of inspection; however, prices of
materials, labor and equipment applied by us in obtaining the oost of
reproduction new of the properties, in the manner 8.5 hereinafter set
forth, are in accordance with the ourrent market conditions and quotations
provailing as of the date of August 1, 1939.
For purposes of valuation the bank promises wore considered broadly in
three types or groups a.e follows:
1. Bank properties where the real estate was utilized
virtually as a bank unit, with little, if any, space
available for a rental to outside tenants. Included
in this group were such properties as provided one or
more rental units such as stores or second floor
tenancies which were minor in character and generally
housed within a. single banking structure.
2. Bank properties with additional adjoining commercially
improved or unimproved land that provides for reasonable
future expansion of the banking quarters.
3. Bank and commercial building properties of the office
building type, that is, where the Bank occupies all or
part of the basement, first floor, messanino, or other
areas, and leases the remaining space to outside tenants
as stores or offices on & typical commercial basis.
The basis of value has been identical for all three types of properties.
However, the nature of the holdings has necessitated some variation in
Regraded Unclassified
THE AMERICAN APPRAISA :OMPANY
Pages H
334
Bank of America, NT&SA - cont'd.
the methods of valuation adopted. In the first type, the valuation
is predicated directly upon the fair value of the land plus the cost
of reproduction less depreciation of the improvements, fixtures and
equipment, all factors tending to decrease the utility, desirability,
and value of the improvements as compared with new being reflected in
the accrued depreciation as estimated and deducted.
In the second type the same general procedure has been followed with
the exception that that portion of the real estate not devoted at
present to banking purposes has been valued with particular considera-
tion to both its commercial rental and its banking potentialities,
irrespective of the more or less temporary status of the current income
from rentable space.
In the third type, the real estate has been treated as an income-producing
commercial holding and consideration given not only to the value of the
land and the cost of reproduction less depreciation of the improvements,
but also to the commercial potentialities reflected in the net income
anticipated from operation. In such instances, fair rentals have been
estimated for the banking quarters and included in the gross income
estimates just as for other rental space. Wherever the total income ex-
pectancy upon such basis is insufficient in our judgment to provide for
all expense, reasonable depreciation provision and e fair return upon
the real estate at the oost of reproduction less depreciation, the value
Regraded Unclassified
THE AMERICAN APPRAISAL COMPANY
Page k
335
Bank of America, NT&SA - cont'd.
has been limited to the amount conservatively reflected by the net
income potentialities. The bank fixtures and equipment are, however,
incorporated in each instance at the cost of reproduction less depre-
ciation assuming their full and balanced utilisation.
The appraised reproduction cost new, which is foundational to our
entire valuation, includes the land and depreciable assets in accordance
with the following basic consideration:
Land at fair value at the date of inspection
for its highest and best use, based upon its
character and location, and with due regard to
the current market conditions.
Buildings and fixed building equipment in
accordance with the market prices for materials,
labor and equipment, prevailing as of the date
August 1, 1959; including contractors' overhead
and profit, and architects' fees computed at
six per cent of direct construction costs; and
also including a reasonable allowance for indi-
reot construction costs consisting of taxes and
insurance, legal fees, administrative supervision,
and interest, which would normally accrue during a
reasonable construction period.
Bank Fixtures in accordance with the market prices
for materials, labor, and equipment, provailing
as of the basic date, including contractors' over-
head and profit for construction items, and archi-
tects' fees computed at eight per cent.
Bank Furnishings and Equipment in accordance with
prices and quotations current as of the basic date,
with recognition to the prevailing quantity dis-
counts, and including an allowance for California
Sales Tax at three per cent.
Regraded Unclassified
THE AMERICAN APPRAISAL COMPANY
Pages to
336
Bank of America, NT&SA - cont'd.
Depreciation as deducted from the reproduction cost new in arriving
at the cost less depreciation is based upon the personal inspection
of our representatives, recognising physical deterioration and all
factors of obsolescence that in our opinion effect the relative de-
sirability of the property as compared with new, assuming its con-
tinued utilisation for the purposes to which it is now devoted or
available; but without specific consideration to possible instances
of over-capacity or inadequacy of banking facilities for ourrent re-
quirements. Loss in value occasioned by prevailing economic conditions
as reflected in restricted occupancy or rentals from income-producing
space is recognized either by an increase in the amount deducted for
accrued depreciation or in the final value estimate, depending upon
the type and nature of the holding.
Upon the premises as stated, it is our opinion that the amounts as set
forth in the last column "Valuation" in the accompanying Summary, which
is made at part of this report, represent the fair and reasonable values
of the assets comprising the Bank Premises Owned, as covered within the
scope of this report, the total value of the 317 holdings being summarised
8.8 follows:
Real Estate
Bank Fixtures
Bank Furnishings and Equipment
Grand Total
Regraded Unclassified
337
THE AMERICAN APPRAISAL COMPANY
Page: #7
Bank of America, NT&SA - cont'd.
We have not examined into and do not pass upon the title to nor
the liabilities against the properties appraised.
Respectfully submitted,
THE AMERICAN APPRAISAL COMPANY
By
Vice President
Regraded Unclassified
338
COPY
TREASURY DEPARTMENT
Office of
Comptroller of the Currency
Chief National Bank Examiner
Twelfth Federal Reserve District
1 Montgomery Street, Room 921
San Francisco, Calif.
December 28th, 1939.
Comptroller of the Currency,
Treasury Department,
Washington, D. C.
Dear Sir:
There are enclosed for your observation copies of
two appraisals made by the American Appraisal Company for
the Bank of America National Trust and Savings Association.
I understand that the bank now has quite a few of
these in their files, but they were received after the cur-
rent examination was closed; therefore, the present report
will not take cognisance of any of these appraisals.
Very truly yours,
(Signed) Irwin D. Wright
IRWIN D. WRIGHT
Chief National Bank Examiner
Twelfth Federal Reserve District
IDW:A
Regraded Unclassified
339
COPY
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION
CALIFORNIA-MONTGOMERY OFFICE
485 California Street
San Francisco, California
Regraded Unclassified
340
C
0
BANK OF AMERICA
P
Y
NATIONAL TRUST AND SAVINGS ASSOCIATION
Property:
CALIFORNIA-MONTGOMERY OFFICE
No. 33
Location:
485 California Street
San Francisco, California
SUMMARY
Reproduction
Cost Less
Cost New
Depreciation
LAND
$ 1,925,000
$1,925,000
BUILDING AND BUILDING FIXTURES
Direct Construction Costs
1,217,023
819,400
Indirect Construction Costs
128,700
87,000
Total Building and Building Fixtures
$ 1,345,723
$ 906,400
Total Land and Building
3,270,723
2,831,400
BANK FIXTURES
67,075
51,982
BANK FURNISHINGS AND EQUIPMENT
Vault Equipment
84,893
67,324
Furniture and Equipment
53,373
36,595
Office Mechanical Equipment
43,601
25,330
Total Bank Furnishings and Equipment
$ 181,867
$ 129,249
GRAND TOTAL
$3,519,665
$3,012,631
Regraded Unclassified
341
0
0
P
Y
LAND
An irregular parcel of land having a frontage of
275 feet on the east side of Montgomery Street, a
frontage of 68'9" on California Street, and a front-
age of 124'6" on Pine Street, containing an area of
24,342 square feet, more or less; subject to a right-
of-way over Lot No. 12A from Montgomery Street to the
Merchants Exchange Building; being Lots Nos. 9A, 10,
11, 12, 12A, 13, and 14, Block No. 260, City and County
of San Francisco, State of California.
Valued at
$1,925,000
(ONE MILLION NINE HUNDRED TWENTY FIVE THOUSAND DOLLARS)
Regraded Unclassified
342
C
0
BUILDING AND BUILDING FIXTURES
P
Y
Bank Building
A part eleven and part twelve story and basement,
reinforced concrete and brick, steel frame, fireproof
building with granite and terra cotta trim on the street
walls, 67'0" X 166'6", covering the entire site.
This structure is of modern type and design, erected
in 1917 and remodeled in 1927. It is now in excellent
condition throughout and fully equipped with all essential
building fixtures and appurtenances. The basement, first
floor, messanine, second and third floors are devoted to
banking purposes, the remaining stories from the fifth to
and including the eleventh floors comprising commercial
office space.
Gross Floor Area
106,047 Sq. Ft.
Cubical Contents
1,665,357 Cu. Ft.
Rollins Property
Building "
A one-story and basement, reinforced concrete building,
10'0" X 68'0", utilized as an easement passageway.
Gross Floor Area
1,360 Sq. Ft.
Cubical Contents
19,040 Cu. pt.
Regraded Unclassified
343
0
P
(cont.)
Y
Building "C"
A one-story and basement, brick and wood joint con-
structed building, 24'0" X 78'0" occupied as a tavern
and brokerage office.
Gross Floor Area
4,368 Sq. Ft.
Cubical Contents
50,664 Cu. Ft.
Building "D"
A three-story and basement, reinforced concrete store
and office building, 79'0" I 74'6" with penthouse 16'0" X
37'0".
Gross Floor Area
24,762 Sq. Ft.
Cubical Contents
350,120 Cu. Ft.
Building "E"
A two-story and basement, brick and wood joist, steel
frame constructed building, utilized for store purposes:
first story 32'0" X 98'0", second story 32'0" x 92'0".
Gross Floor Area
9,600 Sq. Ft.
Cubical Contents
137,782 Cu. Ft.
Building "
A one-story and basement, brick, tile, and wood joist
constructed building 15' X 76' (not including the wall of
Building "E") with a small frame rear addition. This
structure is devoted to restaurant purposes.
2,716 Sq. Ft.
Gross Floor Area
Cubical Contents
40,732 Cu. Ft.
Regraded Unclassified
344
0
P
I
Direct Construction Costs
Reproduction
Cost Less
Cost New
Depreciation
Bank Building
Construction
$ 843,675
$ 632,756
Building Fixtures
102,543
69,508
Fees
56.773
42,136
Total
$1,002,991
$ 744,400
Rollins Property
Buildings "B", "0", "D",
"g" and "p"
Construction
184,091
Building Fixtures
17,826
Fees
12,115
Total
$ 214,032
$75,000
Total Direct Construction Costs
$1,217,023
$819,400
Regraded Unclassified
345
0
P
Y
BANK FIXTURES
Reproduction
Cost Less
Cost New
Depreciation
244
lin. ft. bank counter
and screen
7502
lin. ft. partition
164
lin. ft. counters and
railings
5
check desks
2 benches
18
coupon desks
77
lighting fixtures
3
clocks
6 signs
3021
sq. ft. floor coverings
13
venetian blinds
1
vault burglar alarm
1
dumb waiter
1 elevator
Total Bank Fixtures
$ 67,075
$ 51,982
Regraded Unclassified
346
0
BANK FURNISHINGS AND EQUIPMENT
P
Y
Reproduction
Cost Less
Cost New
Depreciation
Vault Equipment
7 vault doors
4234 safe deposit boxes
4520 sq. ft. lining
4 column enclosures
60 ft. vault racking
19 ft. vault partition
7 coin safes
Sub-total
$ 84,893
$ 67,324
Furniture and Equipment
144 desks
37 tables
22 safes
5 omnibuses
231 files and cabinets
345 chairs and stools
trays, card cabinets,
note cases, transfer
cases, check sorters,
shelving, costumers,
trucks, fans, and other
miscellaneous effects
Sub-total
53,373
36,595
Office Mechanical Equipment
16 bookkeeping and posting
machines
4 calculators
25 adding machines
71 typewriters
2 time stamps
4 check perforators
5 check writers
1 blueprinting developer
1 blueprinting machine
10 dictographs
43,601
25.330
Sub-total
Total Bank Furnishings
$181,867
$129,249
and Equipment
Regraded Unclassified
347
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION
CALISTOGA BRANCH
Lincoln Avenue and Washington Street
Calistoga, California
LC'
348
C
0
P
Y
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION
Property:
CALISTOGA BRANCH
No. 237
Location:
Lincoln Avenue & Washington Street
Calistoga, California
SUMMARY
Reproduction
Cost Less
Cost New
Depreciation
LAND
$ 9,000
$ 9,000.
BUILDINGS AND BUILDING FIXTURES
Direct Construction Costs
37,293
31,208
Indirect Construction Costs
3.310
2.765
Total Building and
Building Fixtures
40,603
33,973
Total Land and Building
49,603
42,973
BANK FIXTURES
7,694
5,793
BANK FURNISHINGS AND EQUIPMENT
Vault Equipment
5,258
4,206
Furniture and Equipment
2,182
1,541
Office Mechanical Equipment
4,404
2,221
Total Bank Furnishings and
Equipment
11,844
7,968
GRAND TOTAL
69,141
56,734
Regraded Unclassified
349
C
0
P
Y
LAND
À rectangular parcel of land located at the south-
west corner of Washington Street and Lincoln Avenue,
having a frontage of 30 feet on the westerly side of
Lincoln Avenue and a frontage or depth of 75 feet on
the southerly side of Washington Street, together
with a small tract at the rear, 4' I 10', containing
a combined area of 2,290 square feet, more or less;
being a portion of Lot No. 7, Block "D", City of
Calistoga, County of Napa, State of California.
Valued at
$9,000
(NINE THOUSAND DOLLARS)
Regraded Unclassified
350
C
0
P
I
BUILDING AND BUILDING FIXTURES
A high, one-story, messanine and part basement, stucco
clad, reinforced concrete building, 30'0" X 75'0", cover-
ing practically the entire site.
This building is of classic design, erected in 1923, and
in good condition throughout; fully equipped with all
essential building fixtures and appurtenances. It is
devoted entirely to banking purposes.
Reproduction
Cost Less
Cost New
Depreciation
Direct Construction Costs
Construction
$ 32,330
$27,480
Building Fixtures
2,852
1,961
Fees
2,111
1,767
Total
$ 37,293
$31,208
Gross Floor Area
3,414 Sq. Ft.
Cubical Contents
61,048 Cu. Ft.
Regraded Unclassified
351
C
0
P
Y
BANK FIXTURES
Reproduction
Cost Less
Cost New
Depreciation
55 lin. ft. bank screen and
counter
5 lin. ft. railing
7 lin. ft. partition
1 phone booth
2 coupon booths
2 check desks
1 bench
1 vault burglar alarm
1 clock
2 signs
29 lighting fixtures
765 sq. ft. floor coverings
7 venetian blinds
Total Bank Fixtures
$ 7,694
$5,793
Regraded Unclassified
35%
C
0
P
BANK FURNISHINGS AND EQUIPMENT
I
Reproduction
Cost Less
Cost New
Depreciation
VAULT EQUIPMENT
2 vault doors
305 safe deposit boxes
1 vault partition
1 vault ventilator
Sub-total
$ 5,258
$ 4,206
FURNITURE & EQUIPMENT
3 desks
5 tables
11 files and cabinets
1 omnibus
29 chairs and stools
shelving, posting trays,
note cases, car cabinets,
costumer, revolver, and
other miscellaneous effects
Sub-total
2,182
1,541
OFFICE MECHANICAL EQUIPMENT
2 posting machines
5 adding machines
1 calvulator
3 typewriters
1 checkwriter
1 check perforator
Sub-total
4,404
2,221
Total Bank Furnishings
and Equipment
$11,844
$ 7,968
Regraded Unclassified
353
December 28, 1939.
4:15 p.m.
RE: BANK OF AMERICA
Present:
Mr. Bell
Mr. Landis
Mr. Delano
Mr. Foley'
Mr. Upham-
Mr. Tietjens
Mrs. Klotz
Mr. Hanes
Foley:
This is the reply to Mr. Delano's letter of the
12th of December. Shall I read it?
H.M.Jr:
Please.
Foley:
It is not a very good copy.
H.M.Jr:
Please.
Foley:
"Dear Sir:
"I acknowledge the receipt of the communication
dated December 12th, 1939, and addressed to me as
Chairman of the Board of Directors of the Bank of
America, National Trust and Savings Association,
San Francisco, California. The letter and 8.
portion of the enclosures have been forwarded to
me at the St. Regis Hotel in New York City.
"In your letter, you specifically request
that a copy of it be transmitted to each of the
Directors of the Bank of America, National Trust
and Savings Association, and you state that you
are enclosing sufficient copies for that purpose.
"Upon advice of my counsel, I have to
advise you that I must decline to comply with
matter which is closely defematory and libelous.
your request, inasmuch as your letter contains
I must therefore refuse to become a party to the
publication or circulation of a libel upon the
corporation of whose Board of Directors I am
of its Directors, including myself. If it is
Chairman, upon its officers and upon all or some
now the policy of the Comptroller of the the Currency,
under the direction of the Secretary of
Treasury, to enforce agreement to such opinions
Regraded Unclassified
354
NT
as he, or the Secretary, might have formed
regarding the Bank of America, National Trust
and Savings Association, or the officers or
Directors thereof, by openly charging violations
of law and dishonesty, both corporate and
personal, I shall have to ask that you use some
instrumentality other than me for this purpose.
This 18 the proposed reply to it. It isn't a
reply to Mr. Giannini, but this is a. letter that
the Comptroller proposes to send to the Secretary
of the Board of Directors of the Bank of America.
"Pursuant to the resolution of the Board
of Directors of the Bank of America, National
Trust and Savings Association, dated September 30,
1938, requesting that our communications to the
Board of Directors from the Comptroller of the
Currency be transmitted through the Secretary
of the Board of Directors, I am enclosing herewith
for the information and consideration of each
member of the Board of Directors of the Bank
of America National Trust and Savings Association,
a copy of a letter which was transmitted on
December 12, 1939 to Mr. A. P. Giannini 8.8
Chairman of the Board of Directors. That letter
was addressed in the first instance to Mr. Giannini,
inasmuch as he had recently conferred in Washington
with me concerning the matters covered in the
letter.
"Since my letter to Mr. Giannini WBB of vital
interest to each Director of the Bank, I requested
him to transmit 8 copy to each of the Directors
and I enclosed sufficient copies for that purpose.
By letter, dated December 22, 1939, Mr. Giannini
refused to comply with that request. Accordingly,
it is necessary for me to transmit to each
Director through you as Secretary of the Board
of Directors, a copy of my letter of December 12,
1939, to Mr. A. P. Giannini and of his reply of
December 22, 1939. I also request that you
transmit to each Director a copy of this letter
to you. Sufficient copies for that purpose are
enclosed. If you are unable to deliver copies
of the above letters to any Director, please
advise me immediately of that fact by telegram
collect.
"In fairness to your Board and, in view of
Mr. Ciannini's refusal to transmit copies of my
letter of December 12, 1939 to the Directors,
Regraded Unclassified
355
- 3 -
I am willing to consider a request, if received
on or before January 5, 1940, that I defer
resorting to my legal remedies for 8. reasonable
time in order to give your Board an opportunity
to act."
Then, in addition to that, would we send a
letter to each member of the Board of Directors
saying, "Copies of correspondence between this
office and Mr. A. P. Giannini, Chairman of the
Board of your Bank, which is of vital importance
to you as a Director, are being sent today to
the Secretary of the Board in San Francisco
for transmission to you pursuant to the procedure
requested in the resolution of your Board dated
September 30, 1938."
That puts each Director on notice that the
Secretary has an important communication addressed
to him.
H.M.Jr:
Why do you go through the Secretary of the Board?
Foley:
Because they adopted A resolution, sir, in 1938
right after the telegram was sent out before the
dividend meeting which gave offense to the Board
because of the way that it was communicated.
They claimed that if it came to their offices
at their regular places of business it would be
opened by their secretaries and would be seen
by people that ought not to see the letter and
they requested in the future that all communications
addressed to them as Directors of the Bank be
forwarded to them through the Secretary of the
bank and they adopted 6. resolution to that
effect.
H.M.Jr:
Now, I suppose the next thing -- suppose the
Secretary of the Board says he considers this
thing libelous and 80 forth and 80 on, then
what?
Foley:
Then we would just send out the order to show
cause.
Upham:
Then we would have to send them direct to the
individual Directors.
Foley:
No, I wouldn't send it to all of them.
H.M.Jr:
Who 1s going to define a reasonable time?
Foley:
The Comptroller. And he also determines whether
or not the request is adequate.
Regraded Unclassified
356
P.M.Jr:
I thought we were at 8 stage where we were
going to fish or cut bait. We have got in
two words there, "reasonable" and "adequate".
Polay:
There 18 no "adequate".
"In fairness to your Board and in view of
Mr. Diannini's refusal to transmit copies of my
letter of December 12th to the Directors, I am
willing to consider a request if received on or
before January 3-" that is only adding three
days - "that I defer resorting to my legal
remedies for B reasonable time in order to give
your Board an opportunity to act."
In other words, if some members of the Board,
not later than the third of January, get in
touch with Mr. Delano and say that there 18 B.
meeting, B. regular meeting of the Board of
Directors on the 9th of January and it will be
impossible to formulate & program to submit to
the Comptroller before that time and they would
like to have Mr. Delano defer taking any action
until after they can get their Board together
and consider a proposal, I think in all fairness
we ought to give them that consideration.
H.M.Jr:
Well, if you are going to do it that way, I think
you had better make it January 5. They can't
possibly get this letter before the lst.
Foley:
If it goes out airmail special delivery, I think
they will have it Saturday.
Upham:
It has to be reforwarded by the Secretary.
Poley:
That is right, yes.
H.M.Jr:
If you are going to follow this procedure, I
certainly would give them until the 5th, which
is Friday. If you want to give them B chance.
What do you think?
Landis:
That letter hasn't been sent yet?
Foley:
No, it hasn't.
H.M.Jr:
They won't get this thing much before the 1st
if are going to do it that way. They would would
have from Monday until Friday. I would give
get you it on the 1st surely, and then they
them until the Sth.
Regraded Unclassified
357
- 5 -
Landis:
I didn't know that letter hadn't been sent yet,
I thought that letter had been already sent.
H.M.Jr:
When we ask our consultants to come in, we do it
before we act - usually.
Landis:
I think it is quite right to make it the 5th
or some date like that. Today 1a the 28th.
Foley:
They won't get it before the 2nd and I figured
that if any Director was really concerned about
it after he got hold of the letter, he could
wire Mr. Delano and ask Mr. Delano to hold up,
and they don't need more than a day or two to do
that.
H.M.Jr:
If you were going to use this procedure, I would
give them until the 5th.
Foley:
All right.
Landis:
There 1a a resolution of that type on record?
Foley:
Yes.
Landis:
Do we have a copy?
Foley:
Yes.
Delano:
I raised that same point you did, Mr. Secretary,
in regard to sending these direct, instead of
sending them to the Secretary, but these
gentlemen convinced me that it would be better
to follow, for the record, the particular
procedure requested by the Board in its formal
resolution, particularly as this is 8. very serious
matter and you want it to be confidential.
H.M.Jr:
You wouldn't want to do this, simply say if for
some reason or other the Secretary of the bank
did not furnish them with a copy of this letter,
one is available through Mr. Smith, the examiner,
at such and such an address in San Francisco,
where they can get a copy if they want?
Foley:
Sure.
Upham:
Good idea.
H.M.Jr:
Whoever the examiner is has copies and if for any
reason the Secretary of the Board wouldn't furnish
and so the representative of the Comptroller at
them with 8. copy or they couldn't get one, Mr. 80
Regraded Unclassified
358
- 6 -
such and such an address has copies and will be
glad to furnish them one on application.
Foley:
Yes, that 1a a good idea.
Landis:
I was thinking also in that letter to the Director,
why not say, Inasmuch as we were requested by the
resolution of your bank of such and such 8. date
to direct all communications to the Directors
through the Secretary, we have this day dated a
communication to you to the Secretary, You see,
it would refer to the resolution.
Foley:
Yes. I thought, you see, by saying "pursuant
to the resolution requesting that all communications -"
Upham:
In the other letter.
Foley:
Yes, I think that is & good idea.
H.M.Jr:
Where does this leave the Comptroller of the
Currency and the Secretary of the Treasury?
Landis:
It leaves you in B. position where, as of 8 week
from next Monday, you are called upon really to
determine whether you are going to do something
or not.
Foley:
And as far as the record is concerned, it is
better that it has been before.
Landis:
Oh yes, The record now is in good shape.
H.M.Jr:
Well, does anybody object to this? Anybody want
to make any suggestions?
Well, Mr. Comptroller, could you fix it up with
Mr. Foley?
Delano:
Yes.
H.M.Jr:
If these suggestions are agreeable to you, and
let it go tonight.
Delano:
Right.
H.M.Jr:
Don't you think you have something at your office?
Delano:
I think that is an excellent idea, because I am
convinced this Secretary isn't going to distribute
these.
Regraded Unclassified
359
- 7 -
H.M.Jr:
If I am a. director of the bank - I think there
should be copies at both Los Angeles and
San Francisco.
Delano:
We can do that.
H.M.Jr:
Both?
Delano:
Both.
H.M.Jr:
Before I go on another angle on this, do you
want to bring anything up?
Delano:
No, I think that is all right.
Landis:
May I interrupt there in that one connection
where you send these copies to your own officers,
I think it would be B. good idea if you would
send them under seal through your own officers
and have your officers deliver the sealed copy
to the directors on request so that your own
office will not know what the contents of that
letter are.
B.M.Jr:
All right.
Delano:
You mean have each - how would we do that?
Foley:
We will send duplicates to each director, one
to the Secretary of the Board of Directors, the
other to your representative on the Coast and
then the director will be advised that he can
get this communication in either place and he
will go and get an unopened communication,
either from the Secretary of the Board or from
your representative.
Delano:
I see what you mean.
Landis:
I don't care about the Secretary's being sealed.
Foley:
I see your point.
Landis:
I wanted to have no notice of the contents of
that letter in the hands of any of the officials
in the Comptroller of the Currency's Department.
Upham:
We always send a copy of it to our Chief Examiner
in San Francisco. We don't have any secrets
from him.
Regraded Unclassified
360
- B -
Landis:
He will get B. copy anyway?
Upham:
Surely.
Delano:
That will be routine.
Landis:
But still the opening of that package would be
in the hands of some other individual.
Delano:
I think that was the point you had in mind.
We would have each one of these that is to be
delivered to each person sealed and with his
name on the outside.
Landis:
You would just be taking every precaution
possible to allow --
Delano:
Yes.
Foley:
Giannini sent a copy of his letter to the
Comptroller saying that this communication
received was libelous to the Attorney General.
Upham:
He sent one to me, too.
Hanes:
I got a copy of it this morning.
Foley:
So a fellow by the name of Schwartz, who is in
the Criminal Division over there, called me up
and --
Delano:
Note an exception. He called me.
Foley:
Yes.
Delano:
He called me and I referred it to the General
Counsel. I thought I might be in jail before
night, so I referred him to the General Counsel.
Hanes:
He served a notice on all of us.
Foley:
So he asked me generally about the letter and
I told him and he wanted a copy of the letter to
that we sent and I told him I would speak
you they would send to Giannini and
about it and I asked him for 8. copy he of the
promised reply to give me that. I have 8 letter him, here
to him enclosing a copy which I will send
also asking for a copy of their reply.
Regraded Unclassified
361
E.V.Jr:
You can refuse to do 1t. What else?
Poley:
Mr. Eccles wrote to you and here 1s a copy of
that reply.
H.M.Jr:
This is almost like 8. board of directors
meeting..
"My dear Mr. Chairman:
"I have your letter of December 22, 1939,
stating that the Board would like to be advised
in regard to the current condition of the Bank
of America National Trust and Savings Association
and the present status of the supervisory problems
which it presents.
"To bring you up to date, I am enclosing
copies of my letters of October 2, 1939 and
December 12, 1939 to the bank and Mr. Giannini's
reply to the latter.
"If you wish to discuss the matters referred
to in the letters, I shall be glad to arrange a
conference between some member of your Board and
Mr. Upham, Mr. Folger, and our lawyers.
"of course you will recognize the confidential
character of these communications."
That 18 all right. Where is this Board of
Directors of the Federal Reserve, some where
over in Czecho-Slovakia?
Do you know, some of these things, some day we
will get a laugh out of all this.
Foley:
Jerry Frank wrote you a letter --
H.M.Jr:
Has Jim Landis seen this?
Foley:
Yes,
E.).Jr:
He is still with us?
Foley:
Surely. He hasn't seen this.
This is asking for a copy of the order to show
and he said he believed the contents
cause this order were necessary to the conduct of
of proceedings being carried out by the Securities
and Exchange Administration.
Regraded Unclassified
362
- 10 .
H.F.Jri
Are they having B. show cause?
Foley:
No, they want A copy of our show cause.
1.K.Jr:
Whose show comes first?
Moley:
They have got e proceeding on the way.
H.M.Jr:
oh, they are going to follow our example?
Foley:
No, they would like to have a copy of our
order - our proposed order to show cause and
then they would like to follow our proceedings
very closely so that we can be of help to them
in connection with their proceedings.
E.E.Jr:
O. K. Has Landis seen this?
Foley:
No.
H.M.Jr:
"Dear Jerome - "
Who elgns this one?
Foley:
You do.
S.K.Jr:
"Dear Jerome:
"I have your letter of December 19th
requesting for the confidential use of the
Commission copy of the current draft of our
proposed order to show cause concerning the
Bank of America National Trust and Savings
Association.
"I am happy to enclose two copies of the
proposed order. You realize, of course, that
we have not actually determined to issue this
order, nor do we know 1f we should decide to
proceed along these lines that the order will
go out in this form."
Isn't that rather unusual, to send this out in
advance?
Delano:
This is all new to me and I just wanted to
raise that point, if I may, about the question
of sending it out early.
Foley:
Well, he has formally asked you for it and we
have played pretty close together here.
H.M.Jr:
Well, he 18 asking me for something that and I em
thinking about. Tell him to come around
me on the 6th of January. This then becomes are
B. see part of their records, something that we
thinking of doing and may never do.
Regraded Unclassified
363
- 11 -
Foley:
Well, Jim Treanor, who was handling the case for
SEC, and the auditor who had been out on the West
Coast came over and had 8 conference with Cy and
Gus Folger and Norman McDonald and me and we
talked all one morning about their case and what
they were going to do and when they were going
shead and so forth and it was as a result of that
conference that they asked for this proposed
order to show cause.
Upham:
That is when they found out about the show cause
order?
Foley:
Sure.
Upham:
I was just there at the end.
H.M.Jr:
What about this, Mr. Landis?
Landis:
I would suggest two things, one, that Jerry Frank
expunge his letter to you from the records and
two, that you don't reply.
H.M.Jr:
Suggestion accepted.
Landis:
I don't see any objection - I don't see any great
need for them to have that order to show cause,
do you?
Foley:
No, I don't think there is any great need for it,
Jim. The only thing is, I wouldn't want them
to feel that we weren't continuing to cooperate
with them and that we were getting finicky at
the last minute.
Landis:
No, tell Jerry over the phone about it.
H.M.Jr:
Well, when is the last minute?
Upham:
I don't think they ought to be present at our
hearing, either, Ed, do you?
Foley:
No, I don't see how they could.
H.M.Jr:
I think Mr. Landis is right, that Mr. Frank
should withdraw his request. That suits you,
doesn't it?
Delano:
Yes, that 18 the I make.
H.M.Jr;
What else?
Foley:
That is all.
Regraded Unclassified
364
- 12 -
H.M.Jr:
Do you take the chance to talk to Landis about
the possibility of the examiner being - that
we mentioned?
Foley:
Yes, we were talking about that this afternoon
before we came in.
H.M.Jr:
The former Dean of Michigan?
Delano:
You just mentioned Bates, isn't that right?
Foley:
Yes, Dean Bates.
Landis:
What I said was, I don't know Bates personally.
I may have met him on one occasion. I know a.
great deal about his reputation and by his
reputation he 1a a great scholar. He 18 not
the greatest, but he 18 a very fine scholar.
He 1a certainly a respected man among his
associates and a person whose character 18
irreproachable. He is a competent person.
H.M.Jr:
Can we do better?
Landis:
I haven't yet heard a suggestion.
Foley:
Norman knows him very well. He was under him
for three years at the University of Michigan.
H.M.Jr:
Why don't you check with the Dean of Wisconsin,
see, and if he says it is all right I think we
would have him come on and talk to him. We
can't get the one man - the greatest man in the
world, but if this fellow is a man of high
character --
Foley:
He has just retired.
H.M.Jr:
Do you see how we could do any better?
Delano:
No.
H.M.Jr:
We can't get the man --
Landis:
As I was telling Ed years ago, we had & reception
once for the faculty. I think he was present.
That was several years ago. It didn't turn out
that there was 8. job for a man of Bates' quality.
H.M.Jr:
If Lloyd Garrison thinks as well of him as you
do, I don't see how we could go wrong.
Regraded Unclassified
365
- 13 -
Well, Mr. Comptroller, what else?
Delano:
I think that is quite sufficient for this
afternoon.
366
December 20, 1939
my dear Mr. Wrighbo
I - sending you sealed letters addressed to
certain of the Directors of the Bank of America National
Trust and Servings Association. These letters are to be
held to you at are to be delivered only if you are -
quested w the addresses to nake delivery. In case no
request is unde by a particular addresses, please hold
the uncelled for letters pending further instructions.
Very truly years,
/a/ Preston Delane
Comptroller of the Currently
Mr. Have No. Wright,
100 695 Impoles, California
& 1. Hollam Building,
mother's 12/28/39
Regraded Unclassified
367
December 28, 1939
My desp Mr.
.
is requested in the resolution of your Board dated
September 30, 1938, copdes of correspondence between this
effice and Mr. 4. Po Classini, Chairman of the Board of your
Bank, which is of vital importance to you as a Director, are
being sent today to the Secretary of the Board in Ban Francisco
for treasmission to you.
If you are mable to secure your copy from the
Secretary of the Board, - additional any, sealed and
addressed to you, will be available at our office at 635 E. No
Hallman Building, Les Angeles, California.
I I james
10/ Prosten Dalano
Comptroller of the Currency
the above letter was met to the Members of the Board of the
Bank of America N. % a S. heg listed belows
Mr. 7. We Flint, Jr.
Mr. J. Caregidne
Dr. 4. E. diseasini
Mr. John & Marble
Regraded Unclassified
368
December 28, 1999
* any in
I
is requested in the resolution of your Board
dated September 30, 1938, copies of correspondence between
this office and E. 4. P. Giamini, Chairman of the Beard
of your Bank, which is of vital importance to you as &
Director, are being sent today to the Secretary of the Board
in San Prencisco for treasulasion to you.
If you are unable to secure your copy from the
Secretary of the Board, - additional copy, sealed end
addressed to you, will be available at der office at
1 Montgemery Street, Room 921, San Francisco, Colifornia.
Very sincerely yours,
(Signed) Preston Delane
Comptroller of the Currency
The above Letter weg sent to the Members of the Board of the
Bank of Amries. No To & 8, Ass listed belows
il
& Sentemer
Mr. herry be Massage
No 1, Histor
I in w s
George J. Memini
demands if J in
Marchal Male
I I in
s s
Mr. Prod Lee Drober
John 4 Ceretito
Date Celestine do Sulliven
Dr. c. & Caglieri
Mr. William Vallace Moin
á
so Intelume
I 2 s in
Mr. a &
Mr. Angele Petri
Regraded Unclassified
369
Dear Mr. Gianninis
This will acknowledge receipt of your letter dated
December 22, 1939, which contained your refusal to distribute
to the other members of the Board of Directors of the Bank of
America National Trust and Savings Association copies of my
letter to you dated December 12, 1939.
I AM enclosing a copy of a self-explanatory letter
which I have addressed to Mr. h. P. A. Everard.
Very sincerely yours,
Comptroller of the Currency
Mr. A. P. Giamnini,
Chairman, Board of Directors,
Bank of America National Trust
and Savings Association,
San Francisco, California.
Enclosures
NOT:vls - 12/29/39.
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370
TREASURY department
COMPTROLLER OF THE CURRENCY
WASHINGTON
ADDRESS REPLY TO
"COMPTROLLER OF THE CURRENCY"
December 28, 1939
Dear Mr. Everard:
Pursuant to the resolution of the Board of Directors of the
Bank of America National Trust and Savings Association, dated September
30, 1938, requesting that all communications to the Board of Directors
from the Comptroller of the Currency be transmitted through the Secretary
of the Board of Directors, I an enclosing herewith for the information
and consideration of each member of the Board of Directors of the Bank of
America National Trust and Savings Association, a copy of a letter which
was transmitted on December 12, 1939 to Mr. A. P. Giannini as Chairman of
the Board of Directors. That letter was addressed in the first instance
to Mr. Giannini, inasmuch as he had recently conferred in Washington with
me concerning the matters covered in the letter.
Since my letter to Mr. Giannini was of vital interest to each
Director of the Bank, I requested him to transmit a copy to each of the
Directors and I enclosed sufficient copies for that purpose. By letter,
dated December 22, 1939, Mr. Giannini refused to comply with that request.
Accordingly, it is necessary for me to transmit to each Director, through
you as Secretary of the Board of Directors, a copy of my letter of December
12, 1939 to Mr. A. P. Giannini and of his reply of December 22, 1939. I
also request that you transmit to each Director a copy of this letter to
you. Sufficient copies for that purpose are enclosed. If you are unable
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371
- 2 -
to deliver copies of the above letters to any Director, please advise
me immediately of that fact by telegram collect.
In fairness to your Board and, in view of Mr. Giannini's refusal
to transmit copies of my letter of December 12, 1939 to the Directors,
I an willing to consider a request, if received on or before January 5,
1940, that I defer resorting to my legal remedies for a reasonable time
in order to give your Board an opportunity to act.
Very sincerely yours,
Comptroller of the Currency
R. P. A. Everard, Esq.
Secretary, Board of Directors
Bank of America National Trust
and Savings Association
San Francisco, California
Enclosures
copy
372
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION
SAN FRANCISCO, CALIFORNIA
in York
December 22, 1939
Mr. Preston Delano,
Comptroller of the Currency,
Treasury Department,
Washington, D. c.
Dear Sirt
I asknowledge receipt of a communication from you dated
December 12th, 1939, and addressed to as as Chairman of the Board of Directors
of the Bank of America, National Trust and Savings Association, Ban Francisco,
California. The letter and a portion of the enclosures have been forwarded
to ao at the St. Regis Notel in New York City.
In the letter, you specifically request that a copy of it
be transmitted to each of the Directors of the Bank of America, National Trust
end Servings Association, and you state that you are emelosing sufficient copies
for that purpose.
Upon advice of my counsel, I have to advise you that I must
decline to comply with your request, insearch as your letter contains matter
which is grossly defanatory and libelous. 1 must therefore refuse to become
a party to the publication or circulation of a libel upon the Corporation of
whose Board of Directors I as Chairman, upon its officers and upon all or sess
of its Directors, including ayself. If it is now the policy of the Cosptroller
of the Currency, under the direction of the Secretary of the Treasury, to -
force agreement to such opinions as be, or the Secretary, night have formed
regarding the Bank of America, Rational Trust and Savings Association, or the
officers or Directors thereof, by openly charging violations of law and
disbomesty, both corporate and personal, I shall have to ask that you use some
instrumentality other than - for this purpose.
Yours very truly,
(Signed) 4. P. Giamini
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