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CONDEMNSTHEIR METHODS Kilburn on Trust Co. of Republic and Building Loan Banking. Albany. Jan. 3 (Special).-Scathing arraignment of the methods and operations of the Trust Company of the Republic in connection with the United States Shipbuilding Company, and also of the NewYork Building Loan Banking Company, characterizes the three salient features of the annual report of Bank Superintendent Frederick D. Kilburn, made public to-day. The undertakings of the Trust Company of the Republic in connection with the United States Shipbuilding Company are censured as flagrantly transgressing the law-as "ill judged and reckless commitments" while the explanations of D. Le Roy Dresser of his borrowings from the trust company are flatly controverted by Superintendent Kilburn, who refers to the United States Shipbuilding Company directly as "the shipbuilding folly." Various recommendations for changes in the present banking laws, based upon the evils illustrated by the difficulties of the Trust Company of the Republic and the New-York Building Loan Banking Company, are also contained in the report. Concerning the conditions which he discovered when he began his investigation of the affairs of the Trust Company of the Republic Superintendent Kilburn writes: I was amazed to find that undertakings had been entered into and liabilities incurred which not only jeopardized the solvency of the trust company, but flagrantly transgressed the law. The company had made numerous loans without collateral other than shipbuilding stock and securities, one of them to Mr. Dresser, the president of the company. and to Mr. Nixon, for nearly a million and three-quarters of dollars. It had. besides, guaranteed loans made by other institutions to Mr. Dresser and Mr. Nixon amounting to two million dollars. required, under the alternative that the company be referred at once to the Attorney General for proceedings in insolvency to be instituted against it. that there be some very thorough straightening out of the trust company's affairs. The direct loan to Mr Dresser and Mr Nixon was excessive under the law, regardless of Mr. Dresser's official relation to the company and to him it was more than ten times the amount that could lawfully be Under loaned my insistence a half million of it was soon repaid, the loans for two millions guaranteed to other Institutions were taken up, and later the balance of the Dresser and Nixon note to the Trust Company of the Republic was paid in full. This seemed to me a far better procedure than to refer the company to the Attorney General summarily, for it recovered nearly four million dollars that in the other alternative might have proved a loss. Moreover one plan for reorganizing the shipbuilding trust would have involved loss of $600,000 to the trust company if carried through. which, however, was objected to. and finally abandoned. It was Impossible, however, to avert of the consequen of the ill judged and kless commitments in which the company had become involved and it preserved its solvency only by cutting its capital in two. Its losses on account of investment in the shipbuflding foliy and from loans upon shipbuilding collateral aggregated nearly $900.000 and with other minor losses and depreciation in wiped the company tire surplus and necessitated the sacrifice by stockholders of one-half of their holdings. Over $1,000,000 was charged to profit and loss. To avoid repetition of the disaster of, the Trust Company of the Republic Superintendent Kilburn recommends that trust companies should be prohibited by law from engaging in underwriting schemes and from investing any more than 10 per cent of their combined capital and surplus In the stock of any corporation, except in the case of trust companies whose charters expressly authorize them to invest in the stocks of private companies in the discretion of their management. Concerning the former recommendation, Superintendent Kilburn writes: The experiences in New-York within a year or two where bonds put out have had very great depreciation, regardless of the strength of their support. have occasioned many regrets and sore memories hold, therefore that it is not enough that the door be closed effectually against excessive purchases of stocks of private corporations, but that It should be shut also against a too close and dangerously large identification in any manner of the fortunes of a trust company with experimental and hazardous schemes for the financing and development of properties which, even if eventually successful. may have before them long years of uncertainty and difficulties. The public's deposits deserve to be guarded against such reckless employment, and the statute should be changed as least to impose a limit beyond which operations along such lines cannot be lawfully carried. Of the crash attending the investigating of the affairs of the New-York Building Loan Banking Company and the subsequent appointing of a receiver, Superintendent Kilburn writes with considerable severity. He asserts that the report of his department's investigation in 1902 showed "that the company. which was the largest building and loan association In the State of New-York, if not in the United States, was hopelessly insolvent, and was conducting Its affairs with 80 great extravagance, and upon a plan SO utterly false and vicious in principle, that it could not hope to improve its condition, but must inevitably go from bad to worse. Of the methods of the New-York Building Loan Banking Company Superintendent Kilburn has this to say: Withdrawals had SO accumulated as to foreshadow the end, for it was only by the procuring of new business-a sort of dless chain operationthat the institution could possibly live: and it was lesing more members than it gained. Some of these withdrawals It was paying or out of the order of their filing, which is a violation of law, and It had been crediting dividends that not only had not been earned. but was apportioning them inequitably between different classes of stockholders The premiums that it was charging to borrowing members for loans-including them in the mortgages it took were SO exorbitant that no other conclusion was possible than that the borrowers must regard their transactions as a virtual sale of property to the company, whose real estate holdings were increasing rapidly, and were being carried at a heavy annual loss. It was treating the premiums which it charged for loans, and which it included in its mortgages as though they were cash receipts. and using them for the crediting of dividends to shareholders and for the payment of expenses, notwithstanding such premiums would not be actually paid for years, and perhaps never. Numerous other irregularities were estabished also, an intolerable extravagance in management was set forth, and in short, the company had reached a condition where it must be manifest to any impartial mind that it had become hopelessly insolvent. As a result of the lessons taught by the downfall of the New-York Building Loan Banking Company Superintendent Kilburn makes the following recommendations to the legislature: First, that the qualified prohibition contained in the Banking Law prohibiting building and loan associations from loaning their funds in second mortgages be made absolute: second. that there should be a positive prohibition against any association operating upon the gross premium plan, at once making such a premium as an asset fully earned. and, therefore, made available for the payment of dividends and expenses. and, finally. that the law of 1894 relating to savings banks and loan associations be extended to all other associations. The total resources of the several classes of institutions which report to the State Banking Department, as shown by their reports as of the dates indicated, are as follows: Banks of deposit and discount, August 25, 1903 $367,613,345 Savings banks. July 1, 1903 1,221,425,002 Trust companies, July 1903 1,146,370,755 Safe deposit companies, July 1, 1903 6,798,843 Foreign mortgage companies, January 1, 1903 4,857,435 Building and loan associations, January 1. 1903 53,952,387 Domestic mortgage and security company 1,311,850 Building lot associations, January 1, 1903 538,810 Security and mortgage companies. 4,500,142 Total $2,807,368,569
