Mr. WYLIE. Maybe Mr. Bloom can answer the question better. It is referred to in the Comptroller's report.

Mr. BLOOM. As I understand it, what happened, Mr. Wylie, at Manufacturers Hanover was that the loan agreement specified that certain shares of stock of NBG would be posted, plus stock dividends, that were later declared in connection with that stock. There was a 10-percent stock dividend. A stock dividend is additional shares of stock that are issued to existing shareholders. Under the Manufacturers Hanover loan agreement I think that stock dividend should have automatically been sent by Mr. Lance or his representatives to Manufacturers Hanover. As I understand it, there was some misunderstanding about what should happen and that didn't happen. That is my understanding.

Mr. WYLIE. What is the amount of the loan from Manufacturers Hanover?

Mr. BLOOM. I will have to check. It is in the record here.
Mr. WYLIE. Something around $390,000, I think.

Mr. BLOOM. I think it was a lot more than that. More like $3 million.

Mr. WYLIE. That is right.

Chairman ST GERMAIN. Could I have a clarifying question?

Mr. Bloom, everybody is under the impression that Mr. Lance could not sell his stock because of this stock dividend; right? Mr. BLOOM. No.

Chairman ST GERMAIN. The 6-month period, you have to wait? Mr. BLOOM. I have read about that. The only 6-month period I know of has to do with the securities laws, and section 16(b). Chairman ST GERMAIN. Right. In other words, if you get the stock at a reduced price, you cannot sell it for a 6-month period because if you do, the profit that accrues has to go to the company rather than to the individual who sells it; is that correct?

Mr. BLOOM. Yes, sir.

Chairman ST GERMAIN. So what we have been reading in the papers here about not being able to sell this stock in reality is a little inaccurate. It is not being able to sell the stock if they want the profit.

Mr. BLOOM. I was puzzled by that too, Mr. Chairman, because I didn't read any stories which indicated to me that Mr. Lance was likely to make a profit. It sounded to me like he was going to be fortunate if he could get out whole.

Mr. GUYTON. Could I answer that, sir?

Chairman ST GERMAIN. Sure.

Mr. GUYTON. I think what you are referring to is that Mr. Lance's trustee exercised certain stock options that Mr. Lance had accrued to his benefit while he had been at the National Bank of Georgia. After he left, the trustee exercised those options in behalf of Mr. Lance, and it is a period of time, 6 months from that time until he can sell the stock, and not be in violation of some securities laws.

Chairman ST GERMAIN. Wait a minute. He paid $7.50 a share for that stock on which he exercised the option; correct?

Mr. GUYTON. That is correct.

Chairman ST GERMAIN. And the law reads if he sells that stock now for $17.50 a share, as is reported may happen, then $10 of that

on each one of those shares on which he exercised the option has to be returned to National Bank of Georgia. That is what the law is. Is that not correct, Mr. Bloom?

Mr. BLOOM. You are talking about section 16(b). Of course that would be a very heavy penalty for a shareholder to pay in this situation.

Chairman ST GERMAIN. It is not a prohibition. What it is is a socalled penalty. Here it is. "Directors, officers, and principal stockholders," section 16.

For the purpose of preventing the unfair use of information which may have been obtained by such beneficial owner, director or officer, by reason of his relationship to the issuers, any profit realized by him from any purchase and sale or any sale and purchase of any equity security of such issuer other than an exempted security within any period of less than 6 months unless such security was acquired in good faith in connection with a debt previously contracted shall inure to and be recoverable by the issuer.

In other words, in this instance it would be the National Bank of Georgia. And that applies to 9,900 shares of stock.

Mr. WYLIE. Thank you, Mr. Chairman.

I found the letter that I had reference to a little earlier, Mr. Bloom. And it is from Betsy Jo Viener, vice president of Manufacturers Hanover Trust. It is almost a year after the stock was pledged for a loan of $2.625 million. That apparently pledged 14,657 shares of stock. Then I think there is a reference a little later on to the pledge of the same stock to Chemical.

Do you know what I am talking about now?

Mr. BLOOM. Yes, sir.

Mr. WYLIE. Is there anything improper in that kind of an operation?

Mr. BLOOM. It sounded as if he may have been in technical violation of his contract with Manufacturers Hanover.

Mr. WYLIE. But there is no violation of the law?

Mr. BLOOM. It is a contract violation between the two parties assuming the facts are as they appear.

Mr. WYLIE. Well, should the law be changed to make a transaction like that illegal?

Mr. BLOOM. Well, the lender is presumably able to take care of himself in this regard. I don't think banks need a statute to tell them to get the collateral that they are supposed to get. You can go too far passing laws.

Mr. WYLIE. Wouldn't the bank examiner catch that? Doesn't it affect the collectibility of the loan? Doesn't it make it a dangerous loan?

Mr. BLOOM. Our bank examiners don't catch every tiny little event that occurs on every loan, Mr. Wylie. We go in on a sampling basis.

Mr. WYLIE. Let me just say this is one of the things that an average solid citizen in the 15th district doesn't understand, and I don't understand it very well either, how this could happen, how two loans of that magnitude could be made, pledging the same security.

Mr. BLOOM. It seems to me the lending banks are the ones to look to as to how they let that happen to them.

Mr. GUYTON. Sir, I can answer that from a banker's standpoint to some extent, if I may. It can happen in that there can be, and very unintentionally, which I am sure was the case here—

Mr. WYLIE. You mean unintentionally on Mr. Lance's part.

Mr. GUYTON. Yes. If a bank makes a loan against stock, and there is a stock dividend, then that stock dividend is sent by the transfer agent to the person of record of that particular stock. The transfer agent has no knowledge of the stock earlier serving as collateral to another loan. It goes to that transfer agent. The transfer agent sends it to the person registered owning the stock. And oftentimes that person does either keep that stock in his lockbox for awhile, or lets it sit on his desk without sending it to the bank on which that other stock is serving as collateral. Now, oftentimes from a banker's standpoint usually we pick that up, the account officer picks it up, calls it to the attention of the borrower, and it is submitted.

Mr. WYLIE. This is a rather substantial amount, and a rather substantial number of shares of stock. I guess the point I was really making is that there were at least a couple of letters during that period from Manufacturers Hanover suggesting that "We have not received the stock that you pledged for this loan yet." And at the same time, and during the same period, it seems as if the same stock was being pledged for another loan.

And my question is: Is that proper banking practice?

Mr. GUYTON. I don't think-I think it is unintentionally done often from a lending standpoint. I have seen it happen. It is usually corrected reasonably quickly after the dividend is mailed out. But there is some period of time there where it can and does happen occasionally.

Mr. ROUSSELOT. Mr. Guyton, you are chief operating officer of a bank.

Would you make a loan based on stock that was already pledged? Would you do that?

Mr. GUYTON. No, sir, I would not.

Mr. ROUSSELOT. So from your standpoint it is not a very good practice.

Mr. GUYTON. I don't think there is a practice here. I think it is the intent you have to ask here, whether there was an intent to

Mr. ROUSSELOT. I am just asking: Is it a good banking practice? Mr. GUYTON. No, sir, it is not.

Mr. ROUSSELOT. I have had a lot of people, while I was home, ask me, "How do I arrange one of those deals?" I just wonder if you thought it was a good idea.

Mr. GUYTON. I don't think it was intentional on anyone's part, the bank or the borrower.

Mr. ROUSSELOT. You have defended the intent of Bert Lance very well. I am just asking if it is good banking practice. And your answer is "No."

Thank you.

Mr. WYLIE. I think you are being very generous when you say it was maybe an unintentional oversight, though, when there were several pages of correspondence, we have now found three, to Mr. Lance, suggesting that he ought to come up with the stock pretty

soon. I just make that observation for the record. As I said a little earlier, as Mr. Rousselot observed, it is the sort of thing that does not lend to the credibility of the gentleman in his job as Director of the Office of Management and Budget.

You think that is fair statement?

Well, I see you nodded affirmatively.

The next question that came up rather frequently was: Did Calhoun National Bank and the National Bank of Georgia in effect finance Mr. Lance's campaign for Governor?

I noticed in the book here, on page 279, from the Comptroller of the Currency, that a loan in the amount of $390,000 was made at the same time that other types of loans in the amount of $1,155,000 were made from various-from Citizens and Southern. And I didn't mention them.

I guess my question is: Is there any relationship between the services which Georgia National received from Citizens and Southern, would you say, which would be sufficient to justify those large amounts in compensating balances and loans and the transfer of moneys back and forth?

Mr. GUYTON. Sir, is there a particular month? Are you referring again to December and January of 1976 and 1977?

Mr. WYLIE. Thank you very much.

December 1976 and January 1977.

Mr. GUYTON. In December 1976, there were 95,000 items, that being checks primarily, that were sent through the Citizens and Southern National Bank for collection. In January this went up to some 144,000 items that were collected by the Citizens and Southern Bank for the National Bank of Georgia. That is the reason primarily for the increase in those balances. Those balances were necessary to cover those checks and to cover the services rendered. Mr. WYLIE. Was there any cost involved in sending that many checks through the account?

Mr. GUYTON. There was. And Citizens and Southern in effect on their analysis sheet, from which these figures came, did charge us for those for the float and for the activity that went through the account.

Mr. WYLIE. Could you supply that information for the record, please?

Mr. GUYTON. I believe you have it in the Comptroller's report there. We will provide you with the analysis sheet, yes, sir.

Mr. WYLIE. OK. Now, I would like to ask just one more question, Mr. Chairman.

I would like to go back to this reference to the Central States pension fund.

Did you know Dan Shannon, Mr. Cleveland?

Mr. CLEVELAND. Did I at that time?

Mr. WYLIE. Yes.

Mr. CLEVELAND. No, I did not.

Mr. WYLIE. But you know him now.

Mr. CLEVELAND. Yes, I do.

Mr. WYLIE. Did you ever have a meeting with Mr. Rosanova? You know Mr. Rosanova?

Mr. CLEVELAND. I don't recall the name.

Mr. WYLIE. You don't know his name at all?

98-440 - 77 - pt. 2 - 4

Mr. CLEVELAND. I don't recall the name.

Mr. WYLIE. Do you know him, Mr. Henderson?

Mr. HENDERSON. No.

Mr. WYLIE. He is associated with the Teamsters. Apparently he has since been kicked out. But he was involved in setting up some of these pension fund accounts. He did not come to you or you didn't talk to him, or you didn't have any knowledge of Mr. Rosanova or his connection with the Teamsters' pension fund?

Mr. CLEVELAND. I simply do not recall anything. The original recommendation that we pursue this account came through our law firm and I followed up immediately. Mr. Shannon, who was I believe the executive director of the pension fund, arranged a meeting for the banks that were interested in Chicago to present their credentials. From that were selected five banks on a geographical basis who were reinvited back to make a presentation as far as their services and the fees were concerned. My contact essentially with them was through Mr. Shannon.

Mr. WYLIE. And you made the contact yourself. You went out to get the fund as you said.

Who was it in your law firm that suggested that you go see Mr. Shannon?

Mr. CLEVELAND. One of the representatives of our law firm, who also represents one of the members of the board of trustees.

Mr. WYLIE. Do you recall his name?

Mr. CLEVELAND. Yes. Mr. Robert Pollard.

Mr. WYLIE. OK. Thank you very much, Mr. Chairman.
Chairman ST GERMAIN. Mr. Cavanaugh.

Mr. CAVANAUGH. Mr. Henderson, if I might maybe ask a few questions that interest me in terms of the procedure of your recapitalization, and your relationship with the Comptroller, and the agreement in that regard.

I know you described for the chairman earlier your agreement with the Comptroller. On page 2, article 2 states that the board of directors has agreed to raise $625,000 of new capital funds as outlined in their application, and so on.

You are familiar with that.

Mr. HENDERSON. Yes.

Mr. CAVANAUGH. Have you done that?

Mr. HENDERSON. Yes.

Mr. CAVANAUGH. You have raised the $625,000?

Mr. HENDERSON. Yes.

Mr. CAVANAUGH. Through the sale of common stock?

Mr. HENDERSON. We sold, as best I remember, Mr. Cavanaugh, we sold $413,000 worth of capital stock, and we passed our dividends until we retained enough earnings to put the balance in. Mr. CAVANAUGH. All right.

Then I don't understand your previous explanation to the chairman with regard to the $400,000 that you borrowed from-was it the Railroad Bank of Augusta?

Mr. HENDERSON. Yes.

Mr. CAVANAUGH. That was not in connection with this recapitalization.

Mr. HENDERSON. Yes, it was. That is the moneys that the directors of the bank borrowed to buy the additional capital with.