TESTIMONY OF RALPH STONE-Resumed

Senator COUZENS. Mr. Stone, while Mr. Pecora is looking up some data, let me ask you this question: When you decided to set up these fiduciary trust balances you did not have the money to do it with, as I understood you to testify this morning, did you?

Mr. STONE. Not sufficient money.

Senator COUZENS. What became of the money that was held in the fiduciary department so that you were unable to set up the necessary reserves?

Mr. STONE. It was represented in the company investments and company cash.

Senator COUZENS. What do you mean by "in the company cash "? Mr. STONE. Cash in banks to the credit of the Detroit Trust Co.in various banks.

Senator COUZENS. Couldn't you have withdrawn that money and put it into your fiduciary trust account?

Mr. STONE. Yes; if the amount was sufficient. But we had to keep balances for company use as well.

Senator COUZENS. So you conceived this method of getting deposits to enable you to cover the trust accounts?

Mr. STONE. Yes, sir; until company assets could be converted sufficient to cover it.

Senator COUZENS. I have been wondering how it was that company assets, the fiduciary trust account I mean, became involved in the investment business.

Mr. STONE. Well, they did not until as depreciation progressed it was difficult to make collections, and collections became slower. Prior to that time we generally, or almost always, had on hand an amount in excess of the trust balances. It was that which called our attention to the necessity of making the segregation actual.

Senator COUZENS. Well, at some time or other, then, you must have invested those fiduciary trust balances in company investments, otherwise you could not have used up the balances.

Mr. STONE. Naturally; yes.

Senator COUZENS. Well, do you think that was an ethical practice, to use fiduciary trust balances with which to make company investments?

Mr. STONE. Oh, yes. That was what was done with deposits generally. It is recognized in the Federal Reserve Act. That act provides that national banks with trust departments may deposit their trust balances in the banking department. They are required, by the act I mean, to set aside securities, consisting of United States bonds and other classes of bonds specified by the Federal Reserve Board, as proper for that segregation to secure it.

Senator COUZENS. But you had not followed that practice, otherwise they would have been available to make good your fiduciary

balances.

Mr. STONE. We had not followed actual segregation, but we had the capital, surplus, and undivided profits as security. The same practice prevails in New York State.

Senator COUZENS. I do not understand how your capital could be considered an equivalent security, because it was not available when you wanted it to make good your trust balances.

Mr. STONE. It would not, of course, be equivalent to a special pledge of assets as security.

Senator CouZENS. No.

Mr. STONE. But it was there to protect the trust funds.

Mr. PECORA. Was a 100-percent reserve set up and maintained against those fiduciary or trust accounts?

Mr. STONE. It was not specifically set up, but there was a 100-percent reserve in the form of cash on hand, the most of the time. That is, cash on hand in excess of the trust balances. We were advised by counsel that so long as that was done and the funds were invested with reasonable promptness, and the interest was credited on the balances, we were handling it in the proper manner. Also that the books of the company showed credits to the trusts, with specific amounts due to each.

Mr. PECORA. I want to show you what purports to be photostatic copies of three certificates of deposit, each issued by the Detroit Trust Co., and each dated August 8, 1931, the first one payable to the Peoples Wayne County Bank of Detroit in the sum of 42 million dollars; the second one payable to the First National Bank in Detroit, in the sum of $1,700,000; and the third payable to the Detroit Savings Bank, in the sum of $500. Will you look at them, please, Mr. Stone, and tell me if you recognize them to be true and correct copies of certificates of deposit issued by the Detroit Trust Co. on the date which those certificates bear?

Mr. STONE (after looking at the three photostats). They are.

Mr. PECORA. Now, those are the three certificates of deposit through the medium of which the so-called "reciprocal deposits" were made by the First National Bank in Detroit, the Peoples Wayne County Bank, and the Detroit Savings Bank, were they?

66

Mr. STONE. They were, but

Mr. PECORA (interposing). But you object to calling them reciprocal deposits"?

Mr. STONE. Yes; I wouldn't call them that.

Mr. PECORA. Doesn't it appear to you that the State bank examiner, Mr. Carroll, regarded those as reciprocal deposits when he made reference to them as such in his letter of September 18, 1931?

Mr. STONE. He called them that, but we did not agree with him on his terminology.

Mr. PECORA. I will now read to you from committee exhibit no. 110, in evidence on this date, which is the copy of the letter that you produced this morning, addressed by the Detroit Trust Co. to the commissioner of State banking, in reply to the letter of Examiner Carroll, referring to what you say in the matter of reserves:

We have on deposit in the fiduciary account $6,700,000. We have segregated the balances in court trusts, the total of which is $1,918,991. The total cash balances in mortgage sinking fund accounts, other than those wherein the mortgage indenture specifically provides that the fund remain on deposit with us, amounts to $1,218,227.55.

So you will observe that we have much more than enough in our fiduciary accounts to cover these two classes of balances. Our cash reserve in approved Federal Reserve agents at the present time, after deducting the total of the segregated accounts and maintaining a 100-percent reserve against them, is 21.83

And what is that?

Mr. THOMAS. Percent, I think it is.

Mr. PECORA. There is a lead-pencil figure there which I cannot

quite make out.

Mr. STONE. Percent, I think that means.
Mr. PECORA. All right. I continue:

In addition to these, we

is 21.83 on our other matured and demand obligations.
have $2,500,000 par value of United States Government bonds.

Now, that is all that is set forth in paragraph 4 of your letter to the State banking commmissioner in reply to paragraph 4, or item 4, of Mr. Carroll's letter to you, or to your Trust Co. I notice that you do not in any way in your letter to the banking commissioner take issue with Commissioner Carroll's reference to these deposits as "reciprocal" deposits.

Mr. STONE. I did not.

Mr. PECORA. Yet you felt that he had improperly characterized those transactions as evidence of reciprocal deposits.

Mr. STONE. Yes, sir.

Mr. PECORA. Well, now, Mr. Carroll in his letter of September 18 calls attention to the fact that the Trust Co.'s reserves as of August 1, 1931, were short $3,406,125.94 upon the date of the examination. How did that shortage occur?

Mr. STONE. I would not be familiar with that. That was a matter of bookkeeping and accounting, under the jurisdiction of the treasurer.

Senator COUZENS. Well, the treasurer is here.

Mr. PECORA. Very well. I will ask him a few questions.

TESTIMONY OF W. J. THOMAS, TREASURER OF DETROIT TRUST

CO.-Resumed

Mr. PECORA. Mr. Thomas, can you answer that question I have just propounded to Mr. Stone?

Mr. THOMAS. I think so.

Mr. PECORA. Will you please do so.

Mr. THOMAS. We appended our explanation in the paragraph that you read there, that according to our computation we had more than the required reserves. You see, the required reserve, by statute, was 20 percent of our matured obligations, and by deducting from our total of fiduciary accounts, of $6,700,000, the actual amount that was segregated, and using the difference, together with our other cash balances in approved Federal Reserve agents, we had at that time something over 21 percent on our matured obligations. That was our explanation to the banking department, and they made no further criticism of it, I mean pertaining to that particular date.

Mr. PECORA. Now, Examiner Carroll, in his letter of September 18, 1931, stated as follows:

The matter of deducting your fiduciary accounts from your liabilities, and also the 100-percent reserve for same from your assets in making the published report, will be referred to the commissioner, and you will have direct from the office in Lansing his reference to same.

Did you receive any communication from the State banking commissioner on that subject?

Mr. THOMAS. No, sir; I did not. As stated in the last paragraph of our letter, we assumed because we did not hear anything further from them that they wanted us to carry the accounts in our statement. As a matter of fact, they based their cost of the examination on our total footings with these amounts in, which I believe was called to their attention.

Mr. PECORA. Now, Mr. Thomas, Mr. Carroll in his letter refers to the fact that the matters discussed by him in the letter specifically had previously been discussed by him with Mr. Browning, then president of the Trust Co., with Vice President Butler, and with yourself. Do you recall that discussion with Examiner Carroll? Mr. THOMAS. Yes; I do.

Mr. PECORA. Now, what, in substance, was the discussion that took place with respect to these so-called "reciprocal deposits " referred to by Mr. Carroll in his letter under item 4?

Mr. THOMAS. Well, to the best of my recollection, they realized why we opened the accounts, and that it was the

Mr. PECORA (interposing). You say they realized why you opened the accounts; but did Mr. Carroll indicate that he knew why you opened them?

Mr. THOMAS. I believe so.

Mr. PECORA. How did he indicate that? What did he say that showed that to you?

Mr. THOMAS. I do not remember his language.

Mr. PECORA. Don't attempt to give us his language, but the substance of what he said.

Mr. THOMAS. Well, that he knew why the accounts were opened, and that

Mr. PECORA (interposing). Why were they opened?

Mr. THOMAS. To segregate those fiduciary balances.

Mr. PECORA. Why were those corressponding deposits evidence by those certificates of deposit that have been identified by Mr. Stone obtained and used?

Mr. THOMAS. Well, as Mr. Stone has testified, that we either had to solicit deposits or sell assets at a very great depreciation. We considered that by doing it this way it was to the advantage of the company and to depositors and everyone concerned. We could have secured sufficient cash by dumping a tremendous amount of assets on the market at very low market values, but

Mr. PECORA (interposing). Mr. Chairman, I want to offer at this time the three photostatic reproductions of the certificates of deposit, which have already been identified by Mr. Stone; I now want to offer them in evidence.

The CHAIRMAN. They may be received and made a part of the record.

(A photostat of a certificate of deposit dated Aug. 8, 1931, issued by the Detroit Trust Co. and payable to the Peoples Wayne County Bank of Detroit for $4,500,000, was marked "Committee Exhibit No. 111, Jan. 31, 1934", and will be found at the end of the day's proceedings.)

(A photostatic reproduction of a certificate of deposit issued by the Detroit Trust Co., dated Aug. 8, 1931, payable to the First National Bank in Detroit for $1,700,000, was marked "Committee Exhibit No. 112, Jan. 31, 1934 ", and will be found at the end of the day's proceedings.)

(A photostatic reproduction of a certificate of deposit issued by the Detroit Trust Co., dated Aug. 8, 1931, payable to the Detroit Savings Bank for $500,000, was marked "Committee Exhibit No. 113, January 31, 1934 ", and will be found at the end of the day's proceedings.)

Mr. PECORA. Mr. Thomas, do you recall whether Mr. Carroll indicated that he knew of the existence of these three certificates of deposit just offered in evidence?

Mr. THOMAS. Yes; I believe he did.

Mr. PECORA. How did he learn of them, and by what means?
Mr. THOMAS. Probably through that examination.

Senator COUZENS. Does he examine all of your deposit accounts when he makes an examination?

Mr. THOMAS. Well, I don't know, Senator Couzens, whether he examines all of them. I am quite sure they go through the certificate of deposit register.

Senator COUZENS. They do that differently, then, than in the case of the ordinary checking account, do they? Mr. THOMAS. Oh, I think so; yes, sir.

Senator COUZENS. In the case of all banks?

Mr. THOMAS. Of course, as to that I cannot say. But as I recall they have men go through the certificate of deposit register and so on and, of course, the man doing this particular work balances the certificates, and I suppose observes names, and so forth. I do remember particularly a discussion about whether or not we should carry the amounts in our published statement, because we at first did not carry them as such. We did not want to create the impression that we were inflating our totals or deposits. So from the time the account was opened in August until this examination we did not show them in our daily statement at all. We simply carried them as a memorandum control amount on the general ledger. Then after this discussion that you mention with Mr. Carroll it was the concensus of opinion that they should be carried in the C.D.'s representing a deposit liability of the company, just like any other C.D.'s. But up until that time we did not include them in our daily

statement.

Senator COUZENS. How did you carry the deposits that you carried in these other banks for your fiduciary account? How did you carry those on your statement?

Mr. THOMAS. As fiduciary accounts.

Senator COUZENS. Deposited in other banks?

Mr. THOMAS. That is right. At first, you see, we left them out on both sides of the statement. We did not show the fiduciary accounts in the bank, and we did not show the segregated balances in our trust balances. But after that examination we put them both back into the account.

Senator COUZENS. So that was in fact a padding of your deposits, after you put them back in.