times both, and a rather sudden deterioration in the character of their assets. After the fourth failure, in Belleview, Mo., my colleague, Director K. A. Randall, and I decided that we should try to plug up this hole in our authority. We announced our intention to ask for legislation much along the lines of the bills which you have before you today. Within a week after our announcement, the fifth failure occurred in Covelo, Calif., and it fell into precisely the same pattern as the four previous failures. For those of you who are interested in reading the details of recent bank failures, you will find them spelled out in appendix A, which is attached to this statement. We have purposely not identified the banks in appendix A because some of these matters are currently in litigation before the courts. My purpose here today is to explain what this proposed legislation will do and why we have requested it. It is not my purpose to explain to you what it will not do. However, I do want to make it abundantly clear that we are not asking in this legislation for the authority to control or veto changes of ownership or management. Mr. Chairman, in conclusion, it is my opinion that the enactment of this legislation will give the Federal Deposit Insurance Corporation, and the other Federal banking agencies, a useful tool to meet their obligations and responsibilities to individual depositors as well as to the American commercial banking system. The Corporation intends to transmit the information which it received, pertaining to State banks, to the State bank supervisors of the various States. I can say flatly that we intend to transmit this information immediately. Working in cooperation with the supervisors of the various States, and armed with this information, I believe that we can keep new managements or new owners under scrutiny until we are assured of their character and their ability. The Bureau of the Budget has advised me that this proposed legislation is consistent with the administration's objectives. (The appendix to Mr. Barr's statement follows :) APPENDIX A CASE HISTORIES: RECENT BANK FAILURES In each Between May 1963 and July 1964 seven insured banks have failed. instance, the cause of failure was a change of ownership of the particular bank followed by the assumption or making of bad loans which in some instances were fraudulent. The seven banks varied in amount of assets from about $1,224,000 to $19,132,000. In the aggregate their total assets amounted to appro imately $36,302,000. The estimated loss to the Federal Deposit Insurance Corporation in these seven cases is approximately $2,500,000. What is not realized generally is that similar circumstances have been responsible for the closing of one-third of the last 18 insured banks to be placed in receivership prior to May 1963. It is important to discuss these earlier cases briefly before going into more detail regarding our last seven bank failures. In 1955 a young man with only a high school education and no experience in banking put on a better demonstration of how to buy a bank with its own money and wreck it than more experienced people have done before or since. He located two banks only 40 miles apart in a rural area where the controlling stockholder in each instance desired to sell at substantially above book value and had therefore been unable to locate purchasers. He and his associates made an unsecured loan in the first bank to purchase stock control of the second bank and thereafter, after taking over the second bank, borrowed enough on an unsecured basis to go back and purchase the first bank. After installing himself and his friends as officers and directors in each of the banks, he then proceeded to make a series of unsecured loans to a number of out-of-State individuals with no credit worthiness, pocketing a great portion of the proceeds of such loans himself. This resulted in the closing of both banks and secured for the new owner of the two banks involved a ticket to the penitentiary. Two more cases occurred in 1958 where, after changes of ownership, risky loans made by the new owners resulted in the closing of the banks. In one of these cases the new owner had control of some 15 corporations that were for the most part mere shells. Promptly following his acquisition of the bank, each of the corporations borrowed the maximum amount the bank could lend unsecured. All of these loans proved to be loss items and rendered the bank insolvent. This new owner and two of his associates went to the penitentiary. Another such case occurred in 1959 where the new owner, after purchasing control of the bank, put his inexperienced son in the bank as chief executive officer. The son promptly rendered the bank insolvent due to risky loans which appear to have been made largely because of his lack of experience. One case occurred in 1960 where the owner of an insolvent insurance company and his associate purchased a bank with some $750,000 of its funds and proceeded in the same transaction to attempt to rehabilitate the life insurance company, resulting in a loss to the bank of approximately $1,500,000. The bank was forced to close and these two individuals have since been convicted. We turn now to our seven most recent failures which have occurred between May of 1963 and the present. We will also refer to two instances where checking out rumors of a change in control helped prevent insolvency. A $7 million bank that had been operated in an ultraconservative manner with enough of its funds in cash, due from banks and bonds to pay all of its deposits, was purchased by two individuals with no banking experience. In a period of 5 weeks they placed more than $1,200,000 in bad loans with a large percentage of this paper exceeding the limitations prescribed by applicable State law. Their actions resulted in the closing of the bank and indictments. Our next case involves a bank considerably larger where several individuals, inexperienced in banking, by devious methods improperly used approximately $900,000 of the bank's own funds as part payment for stock control. They promptly selected a new executive officer of their own choosing and were principally responsible for the granting of a large volume of simulated loans with the proceeds of a large number of such loans eventually being used for their own benefit. The bank's loan volume increased $5 million within 120 days after the change of ownership of the bank. Further, some $1,600,000 in the bank's funds were placed in dormant, non-interest-bearing deposit accounts with three other banks, for the sole benefit of the new owners, as a partial consideration for a $750,000 loan. Their actions resulted in the bank being placed in receivership and most of the principals involved are now under indictment. In another case, two individuals with criminal records and inexperienced in banking, through a newly created corporate entity and a frontman, or agent, acting for them as undisclosed principals, purchased the controlling stock interests in a $2.5 million bank. In a few weeks, because of the bank's lack of liquidity and by means of the payment of a bounty of 1 percent, they caused $1 million in cash to be placed in the bank. They in turn used this to purchase approximately $970,000 in mortgage notes (worth 50 cents on the dollar) which they bought at a 23 percent discount and placed in the bank at slightly less than their face value. During the few months the bank remained open after the change in stock control, they also are accused of having agreed to purchase approximately $900,000 more in mortgage notes worth from 30 to 40 cents on the dollar. ever, this transaction was not consummated inasmuch as the first mortgage note transaction described above resulted in the bank's insolvency, and its liquidation is now in progress. How And recently, approximately 2 years after purchasing stock control in an insured bank, an individual inexperienced in banking commenced paying checks of certain favored customers, including checks drawn by his sole proprietorship and two of his corporate interests. This series of paid but uncharged checks in substantial amounts were eliminated by substituting eight expertly forged notes. He then solicited $100,000 in the form of $10,000 certificates of deposit through a money broker by paying a 1-percent bounty above the maximum 4-percent interest allowable. Upon obtaining these funds he only entered four of the $10,000 items on the bank's books as deposit liabilities. The remaining $60,000 was misapplied to eliminate from the bank's books additional loss items that had arisen as a result of loans to his corporate interests. This course of action rendered the bank insolvent and resulted in the Corporation being appointed receiver. His conduct also resulted in a 19-count grand jury indictment involving misapplication of funds and false entries. Next, we have another bank that had encountered no unusual difficulties until mid-1963, when an individual from out of the State first became associated as a minority stockholder. This minority stockholder assumed dominating control of the bank in mid-1963, but did not actually consummate purchase of majority stock ownership until April 11, 1964. By the end of that month, April 1964, the bank's loans had more than doubled to a completely unrealistic 81 percent of total deposits. These loans included five bad notes in the aggregate of $45,000 signed by the new owner. Due to the bank's extreme lack of liquidity by mid-May 1964, the new owner had caused outstanding certificates of deposit to increase to an aggregate of $430,000, all of which represented out-of-territory money, except for approximately $27,750. On approximately $330,000 of these total outstanding certificates of deposit additional interest or bounties of from 1 to 2 percent were paid to cause the funds to be placed in the bank. The new controlling stockholder resigned as president in June and the bank was closed for liquidation by action of its own board in early July 1964. In another case the new owners of a small country bank purchased control over 3 years ago. They proceeded to use the bank to assist their other enterprises. They augmented the funds of the bank by bringing in out-of-territory money through money brokers and issued certificates of deposit therefor. In order to generate income rapidly they substantially increased the number and dollar amount of out-of-territory, high-risk loans. Their operations endangered the bank and necessitated a change in ownership early this year. The new owners continued enlarging the bank and providing liquidity with the aid of the money brokers. They restored the capital funds of the bank by purchasing about $200,000 of criticized assets shortly after taking over. However, their operations were unsuccessful and the bank was closed for liquidation. And again, stock control of a bank changed in June of 1963. The new owner placed large credits in the bank over the objection of other directors. In early 1964, he, in turn, sold stock control to an out-of-State farmer and cattle raiser who lost no time in placing large credits in the bank of his own and various out-ofterritory interests. Preliminary reports concerning $316,000 in questionable loans caused the State banking authority to visit the bank in mid-July of 1964 to determine whether its solvency might be impaired. The bank was ordered to remove the loss loans on July 10, 1964, and when this was not accomplished the bank was closed by the State authority on July 20, 1964. The new controlling stockholder in this most recent case is the brother-in-law of a new controlling stockholder in one of our cases described previously and the next case described below wherein the bank involved was saved from insolvency. In this case the bank, due to fortuitous circumstances, was saved from insolvency. A situation arose in mid-1963 where two individuals, one of whom is the brotherin-law of the new owner described in the case immediately above, attempted to buy controlling interest in the bank for $211,000 through fraudulent manipulations (issuance of cashier's checks and a bank draft totaling $178,000). Inasmuch as the checks had not cleared at the time our examiners arrived for a regular routine examination of the bank, the cashier's checks were not paid and the scheme was thwarted before consummation and the bank suffered no loss. The brother-inlaw has been indicted for his actions in this case. Our last case involves another bank that has thus far been saved from insolvency after having been recently purchased by two new owners. They are the same two individuals who were the new controlling owners in one of the cases described above where a bank was rendered insolvent in early 1964. In this instance, control was purchased early in 1963. Here again, they caused the bank to obtain funds in the form of 57 certificates of deposit issued to savings and loan associations throughout the country in the aggregate of $2,715,000. There is a strong indication that acquisition fees may have been involved. There is evidence of a $5,000 loan commission. New extensions of credit were granted, in the form of borrowings, by the new owners of the bank to concerns controlled by them in the aggregate of approximately $950,000, with approximately half of this aggregate classified "Loss." While under pressure to rehabilitate the bank, the new owners sold their stock interests under an arrangement whereby the purchase price is held in escrow for the purpose of taking care of losses on the bad paper placed in the bank by the sellers. This bank remains an operating insured bank due to early knowledge of the situation by the State banking authority and the Federal Deposit Insurance Corporation and the supervisory techniques employed. Name Frontier Bank, Covelo, Calif Chatham Bank of Chicago, Chicago, Ill The First State Bank of Westmont, Westmont, Ill. The State Savings Bank of Minden City, Minden City, Mich. Belleview Valley Bank, Belleview, Mo.. First State Bank, Dell City, Tex- The First National Bank of Marlin, Marlin, Tex.. Total... Estimated total loss, about $21⁄2 million. The CHAIRMAN. I wish you would read the letter from the Bureau of the Budget and the Secretary of the Treasury. Mr. BARR. This is a letter from the Bureau of the Budget: DEAR MR. CHAIRMAN: This will acknowledge your letter of July 31, 1964, transmitting a draft bill to provide for notice of change in control of management of insured banks, and for other purposes, which you desire to present to the Congress. Confirming our previous informal advice, you are advised that there is no objection to the presentation of your proposed draft bill to the Congress and that its enactment would be consistent with the administration's objectives. Sincerely yours, PHILLIP S. HUGHES, Assistant Director for Legislative Reference. Mr. BARR. I submit this for the record. (The letter referred to follows:) EXECUTIVE OFFICE OF THE PRESIDENT, BUREAU OF THE BUDGET, Washington, D.C., August 10, 1964. Hon. JOSEPH W. BARR, Chairman, Federal Deposit Insurance Corporation, (Attention: William M. Moroney). DEAR MR. CHAIRMAN: This will acknowledge your letter of July 31, 1964, transmitting a draft bill to provide for notice of change in control of management of insured banks, and for other purposes, which you desire to present to the Congress. Confirming our previous informal advice, you are advised that there is no objection to the presentation of your proposed draft bill to the Congress and that its enactment would be consistent with the administration's objectives. Sincerely yours, PHILLIP S. HUGHES, Assistant Director for Legislative Reference. Mr. BARR. I also have a statement from the Secretary of the Treasury. I will skip the first portion of the statement and move into the statement on the merits, if this is agreeable. The CHAIRMAN. You may include the entire statement as a part of the record. Mr. BARR. I will just read this portion: This Department has been informed by the Chairman of the Federal Deposit Insurance Corporation that in the last 4 months five banks have failed shortly after changes in control or management. It appears that at least in some of the cases, the new owners or management may have been responsible for the sudden deterioration of the bank's assets. This is a pattern which, if allowed to continue, could have serious consequences in the banking community. It is possible that the arious Federal banking agencies may be able by regulation to obtain reports containing some of the information which would be required by these bills. However, the question is not free from doubt. It is our view that the authority of the Federal banking agencies in this field should be by clear congressional mandate. We should not lose sight of the fact that these bills are designed to curb misuse of our banks. Those who would misuse our banks are likely to resolve any doubts which may exist against notification and in favor of a program of personal profit. They should not have this opportunity. In order to make certain that our Federal banking agencies are in a position to prevent possible misuse of our banks, the Treasury Department supports the enactment of this proposed legislation. I have been advised by the Pureau of the Budget that this proposed legislation is consistent with the administration's objectives. The I should also note that the Federal Home Loan Bank Board has also forwarded legislation to the Congress which would give it similar authority over savings and loan associations as these bills would provide over banking institutions. same reasons which lead us to support enactment of these bills apply to such proposed legislation in the savings and loan field. The Department has been advised by the Fureau of the Budget that there is no objection from the standpoint of the administration's program to the submission of this report to your committee. The CHAIRMAN. The entire statement will be placed in the record, Mr. Barr. (The letter referred to from the Secretary of the Treasury follows:) THE SECRETARY OF THE TREASURY, Washington, August 11, 1964. Hon. WRIGHT PATMAN, DEAR MR. CHAIRMAN: This letter is in response to your request for the views of the Treasury Department concerning H.R. 12267 and H.R. 12268, identical bills to provide for notice of change in control of management of insured banks, and for other purposes. These bills would require the president or other chief executive officer of any bank insured by the Federal Deposit Insurance Corporation to report promptly to the appropriate Federal banking agency facts concerning any changes which occur in the outstanding voting stock of the bank and which will result in a change in control of the bank. The term "control" is defined as "the power to directly or indirectly direct or cause the direction of the management or policies of the bank." Reports of changes in control would be made by national banks to the Comptroller of the Currency, by State banks which are members of the Federal Reserve System to the Federal Reserve Board, and by insured, nonmember State banks to the Federal Deposit Insurance Corporation. The bills also require a prompt report in the event of a loan or loans by any insured bank which loan or loans are secured by 25 percent or more of the voting stock of the bank. These reports would be made by the lending bank to the appropriate Federal banking agency supervising the activities of the bank whose stock is pledged. No report is required where such a loan is secured by stock where the borrower has been the owner of record for 1 year or more or where the stock is that of a newly organized bank prior to its opening. The bills require reports to the appropriate Federal banking agency of any changes in the chief executive officer or directors in the 12-month period following any change in control. The bills set forth the information to be included in all the required reports. Exchange of information among the Federal banking agencies is also required. Present law does not require that Federal supervisory agencies be informed of changes in control of the banks which they supervise. It is therefore possible that a change of control could occur shortly after a bank had been examined, and in the period prior to the next examination of the bank, unprincipled or inexperienced new owners could drastically change the bank's assets and bring about its insolvency. Without notice of the change, no Federal agency would be on guard against such an eventuality, and the result could be grave damage to the community, the bank's depositors, its customers and minority stockholders. |