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Couzens' Role in Bank Tragedy
(Continued from Page One) itors 100 cents on the dollar, as well as substantial amounts to other depositors. And they have accomplished this by drawing upon a source which should have been just as available in the first place to the banks which were forced out of business. In fact, it was the original purpose of the Reconstruction Finance corporation to keep banks from closing rather than to thaw out deposits frozen in closed institutions. It is the purpose of this article to set forth the circumstances under which banks which could pay off their depositors only a short time after closing were permitted to close, thus dragging down the entire banking structure and stopping practically all business in the country for a period of ten days. The principal roles in the Detroit banking tragedy were not played by bankers, strange to say. They had had their big scenes and were off the stage listening for cues. The leading characters were Detroit's first citizen and his son, Henry and Edsel Ford; James Couzens, multimillionaire nd former partner of Mr. Ford, with whom he had quarreled, ho had gotten out of business into politics and was a member of the United States senate at the time this drama the President of the United States, Herbert C. Hoover and the President Franklin D acting controler (Acme photo.) of the currency capitalized upon honest basis."-Carter Glass. F. G. Awalt and the president of the Reconstruction Finance corporation Charles A. Miller. Incidental characters were Detroit bankers, New York bankers Chicago bankers, bank examiners, bank receivers, and Gov. William A. Comstock of Michigan. New Year's day of 1933 which just precedes the tragedy. found the banks of Detroit in a strong and healthy condition so far as anyone outside and many inside the banks knew. Directors believed that their institutions had shown improvement and were even advised to that effect by the bank examiners. To their superior, the controler of the currency. however. the national bank examiners were telling a different story There is conclusive evidence that faith in the soundness of Detroit's banks was not confined to overtrustful Detroiters. Senator Carter Glass one of the nation's outstanding financial authorities. made the following statement about the Detroit bank groups only six weeks before the banks were closed: am glad to testify from the thorough investigation of the banking and currency committee that the group banking system of the state of Michigan has been as thoroughly and effectively well managed as is possible of a chain banking system and has been of great service to the commercial industrial, and credit requirements of the state. The banks are capitalized upon a fair and honest basis They have not gone out as the managers of some such systems have done and stripped their victims by watering their stock in a shameful way. Detroit banks had been subject to heavy with drawals, as were banks everywhere else but a liquidity was shown in the year end statements which was adequate by any ordinary standards As a result of a series of mergers, Detroit banking was concentrated in two institutions. each subordi nate to a large holding company.
Banks with Many Branches
The larger of the two banks the First National with 175 branches in Detroit and deposits exceeding 400 million dollars, was owned by the Detroit Bankers company. That company also owned a string of banks scattered over Michigan. The second bank was the Guardian National Bank of Commerce with about 50 branches Its capital stock was owned by the Guardian Detroit Union Group, Inc., of which the largest stockholder was Edsel
Ford Both groups attempted to supply a complete banking service and for this purpose had investment affiliates and subsidiary trust companies. The bank which brought things to a head in Detroit was the trust company subsidiary of the Guardian group. The Union Guardian Trust company did not do a general deposit banking business, although it received deposits largely from corporations, municipalities, and wealthy individuals, for which it issued certificates of deposit. Late in January withdrawals from the Union Guardian Trust company had reduced deposits to approximately 28 million dollars. Of this amount the deposit of the Ford Motor company alone was $7,500,000. The withdrawals had brought liquid assets, however, close to the vanishing point. In this extremily the Fords and Edsel Ford in particular, were looked to for assistance. But this was not the first appeal made by the trust company. The Ford Motor company had lent 3½ million dollars to the holding company to take up 3½ million dollars of assets of the trust company rated as worthless by the state bank examiner of Michigan. In addition. Edsel Ford had indorsed a note for 2½ million dollars at the Continental Illinois Bank of Chicago to provide funds for the group company. He also had lent the group 5 million dollars in municipal bonds, and cash amounting to one million dollars more. Other assistance to the Guardian group by the Fords ran the total advances up to 16 million dollars, according to a statement by Edsel Ford before the senate hearing. Beyond that the trust company had borrowed 15 million dollars from the Reconstruction Finance corporation on the security of assets with a face value of 31 million dollars.
Loan Sought from RFC
Conferences in which A. P. Leyburn chief national bank examiner of the Seventh trict had taken a leading part developed that the best solution of the matter was to procure from the Reconstruction Finance corporation sufficient money to pay off the deposits of the trust company in full. And while they were borrowing it seemed advisable to anticipate requirements of any other banks in the Guardian group which were not sure of their footing A plan was taken to Washington calling for a loan of the necessary funds from the Reconstruction Finance corporation and the freezing of 7½ millions of deposits by the Ford company After some negotiation it was agreed that approximately 41 million dollars would turn the trick This was to include the 15 million already lent to the trust company. The RFC sent representatives to Detroit, who went over the assets critically which had been offered as collateral. They placed a valuation of 37 million dollars upon tendered assets, and the RFC thereupon offered to advance not the 41 millions which was required, but only 37 millions, the liquidating value its representatives had arrived at. Even the smaller loan was subject to three conditions: 1. The Ford Motor company should freeze its 7½ million dollar deposit. 2. The additional funds required, amounting to 4 million dollars, should be raised locally. 3. Two million dollars should be subscribed locally as capital for a new mortgage company to liquidate the mortgages put up with the RFC as collateral.
Ford on the Warpath
Since the bank was of the Ford group and the Fords already had put up 16 million dollars to take care of the requirements of that group, and since, further, there had been some suggestions from representatives of Henry Ford that he would subordinate the deposit at the bank. the RFC had in mind that the Fords should put up the 6 million dollars. This, however, was carrying the thing too far. When Mr Ford was told what was expected of him he went on the warpath. Having played Santa Claus already in a big way, and having offered to continue to wear the long white whiskers a while longer he resented an attempt to pull his leg. He withdrew his offer to allow the 71/2-million-dollar deposit to be frozen. He was through. The others and the government could save the banks, but count him out Feb. 11 was Saturday The next day being Lincoln $ birthday Monday the 13th became a legal holiday. When, during that period following the closing of the bank at noon on Saturday an at empt was made to bring pressure to bear upon Ford to go farther, he gave his ultimatum. He would do no more, no matter by whom he should be asked But if the Union Guardian Trust company, with his 7½million-dollar deposit in it, did not open for business on Tuesday he would withdraw all of his money from the other banks. And the withdrawal of deposits the size of Ford's at one time would have been a problem for banks anywhere The Ford balance at the First National bank was 25 million dollars and at the Guardian National Bank of Commerce 15 million dollars. The Ford ultimatum put the avoidance of a crisis squarely up to the government. President Hoover invited Senator James Couzens of Michigan, Secretary of the Treasury Ogden Mills, the head of the RFC and some others to confer with him. The facts were stated The question was whether the RFC should lend the entire amount required- million dollars-to liquidate the trust company that was in difficulties.
White House Conference
At this conference in the Lincoln room of the White House was enacted one of the most dramatic scenes of the depression. The Reconstruction Finance corporation had been set up to prevent panic from developing. The intention was to lend solvent banks money on slow assets to enable them to have sufficient funds to meet extraordinary demands. The facts about the loans and the names of the borrowers were not to be made public Subsequently, however, an amendment to the legislation had been passed providing for the publication of the names of the banks the RFC had aided. Senator Couzens had an important part in the passage of this amendment. He had been the outstanding critic of RFC management, and as he told the Detroit grand jury, had introduced a resolution and asked for the appointment of a committee of the senate to investigate all the loans that had been made by the RFC under the secrecy section of the law. He had secured the adoption of the resolution and was actively in charge of the investigation which resulted. Senator Couzens' own state now was involved The RFC board members were still smarting from the lashes by the senator for what they had done elsewhere. And the administration was about to change. The situation had caught up with Senator Couzens. He faced a dilemma The bitter critic of the RFC would be forced to ask for an O. K. on a loan which was not strictly kosher, or he would refuse to ask for it and be responsible for precipitating a banking crisis in his own state. In testifying about the incident before the one-man grand jury the following summer Senator Couzens stated that he lost no time in making his decision known. He declared that if the loan were made for an amount exceeding the values placed upon the collateral by the RFC appraisers he would denounce the transaction from the housetops." Without raising the appraisal of the collateral the loan could not have been made legally. But on a loan of that size where a great deal was at stake, it seems likely that more generous valuations could have been made if there was a strong desire to make the loan. How magnanimous the RFC could be in appraising collateral of an applicant for a loan when there was no threat of criticism to be shouted from housetops is suggested by the valuations in the loan of 90 million dollars to the Central-Republic Bank of Chicago in June, 1932. Senator Couzens told the Detroit grand jury that the Chicago bank's collateral had been given an RFC valuation of 120 million dollars. But according to a statement of Jesse Jones, RFC chairman, on Aug. 13, 1934, it has been po3sible to realize only 29 million dollars on the collateral after two years of liquidation.
Couzens Settles Matter
But when the senior senator from Michigan declared that he was not only against the loan which would have saved the banks of his state, but also would give widespread publicity to his opposition, raising collateral valuations was out of the question Senator Couzens position settled the matter The government would not lend the Union Guardian Trust company enough money to pay off its depositors. Unless it prepared to pay them off it And if-it-did not open Ford would draw out his deposits, totaling 40 millions from the other banks. And that meant certainly heavy runs on the other banks as soon as they opened. For this eventuality they had been preparing and the two-day holiday would be over
Sunday, Octo
