Mr. BLOOM. I told Mr. Lance that I had written the letter. I wouldn't say I discussed it with him.

Mr. LEACH. Thank you.

Mr. BLOOM. I will say I did not ask Mr. Lance for help in getting the appointment. I thought that having served as a top staffer to four Comptrollers I was eminently qualified for the job. I know that my name was on lists of possible candidates for the job. I didn't campaign for it actively in the usual sense, but I did write the letter to the Secretary, yes.

Mr. LEACH. Thank you.

Mr. Cleveland, as a basic lending policy of your bank do you have parameters on loans to businesses? For example, let us say a business is capitalized for $1 million. Do you have a basic parameter that says that that business is eligible for a loan of, say, $500,000, $700,000? What would those parameters be more or less?

Mr. CLEVELAND. Well, the capitalization would not necessarily be the major factor. It would be the time that the business has been in operation, its profitability, our evaluation of its management, other relationships with the bank. With a $1 million capitalization, probably $600,000, $700,000.

Mr. LEACH. It has been reported in the press that the National Bank of Georgia loaned to a peanut warehouse owned by the President of the United States up to $41⁄2 million. Is that correct? Mr. CLEVELAND. Yes, that is true.

Mr. LEACH. Did that loan of $42 million reflect a capitalization plus retained earnings of approximately $6 to $7 million?

Mr. CLEVELAND. No, sir. That is a short-term line of credit secured by warehouse receipts, fully secured by warehouse receipts, issued by reputable warehouses, and policed by specialists in policing warehouse receipts.

Mr. LEACH. There has been increased reporting in the press that a substantial amount of bank funds in the State of Georgia have gone into political campaigns, both at the State and Federal level. Are you confident that no National Bank of Georgia funds went into the Presidential campaign that have not heretofore been fully reported?

Mr. CLEVELAND. No, sir. I would have no knowledge of any whatsoever that would have been in that campaign.

Mr. LEACH. I might just say in conclusion that the Comptroller of the Currency and your banks have come under a good deal of criticism today, I think largely warranted, but not exclusively. The Congress itself ought to come into more than a little criticism in that we have allowed very broad laws to exist that lack teeth and fail to protect in some instances either shareholders or depositors. I might say on top of this that some banks that are not represented here should be criticized most severely, those in New York and Chicago and Atlanta that lent substantial sums of money on what looks like inadequate collateral, and what looks like compensating balances from corporate deposits and possibly for political

reasons.

I do commend the chairman for holding these hearings. I think there is a good bit that the Congress can look at and that we ought to turn ourselves inward and take a good deal of the blame, some of which you gentlemen have borne.

Thank you.

Chairman ST GERMAIN. I thank the gentlemen. I state to the gentlemen that in fact we have, some of us, been attempting to legislate in this area. That, in reality, is one of the big reasons for these hearings today. I feel badly for the individuals who are being hurt.

By the same token, the day had to come when these issues would achieve prominence and would become public. Mr. Hyde just read this conclusion on corresponding balances being there, and loans being given to certain individuals as the result of or in return for these corresponding balances. We have known this. But everybody has wanted to deny it.

Again I repeat, when we look at the facts in this particular case, anyone who is attempting to tell us there is no relationship be tween the loans and the corresponding balances in essence is saying that you are bunch of idiots. I don't think that the American people are that insensitive and unaware of what has gone on. It is not exclusive, I will agree, to the institutions represented here today.

We want to thank the witnesses. It has been a long day. Unfortunately, there probably will be longer days ahead. We just received a supplemental report from the Comptroller, some of which has been referred to. It will have to be analyzed.

There are other records that must be reviewed. It well may be that we will be forced to ask you gentlemen to return again in the future. If so, we will give you as much notice as is possible.

We also will be sendng you some questions in writing that have not been asked today-some of the members who have other questions would like to submit them to you in writing. We would like those answered as diligently as possible for the record.

We will be continuing hearings on the supervisory amendments. They are scheduled to start again on September 14. Certainly all of the facts that have come forth today, those that will be elicited in the future, I think there will be more forthcoming in this very case, will be taken into account. I am hopeful they will be helpful to us in legislating. For those who feel that regulations can do it I have to defer because in this very case it had to be admitted that you can tell people not to continue to do something, but you cannot force them not to continue to do it, even though it is an unsound practice.

For that reason, I feel that legislation is necessary, and I am hopeful that the committee will agree with me and that we can go to the full House and get the consent and agreement of the Senate in this area.

The subcommittee will now

Mr. ROUSSELOT. Mr. Chairman-Mr. Bloom, are you aware of questions that have been raised by Richard Reeves and Barry Hager in an article that appeared in several newspapers regarding the Carter campaign borrowing substantial amounts of money from two banks in the Georgia area?

Mr. BLOOM. No, sir, I have not seen those articles.

Mr. ROUSSELOT. I will submit it for your consideration because the implication is that it was an open ended arrangement during

very critical periods in the election, the primary elections from January to June.

I have not the slightest idea how real they are, except I find in talking to some of the journalists that they think the practice is somewhat doubtful. But I don't now how real it is. I just wondered if the Comptroller has looked into that.

I thank the gentlemen.

Chairman ST GERMAIN. Do you have a copy for the reporter? Mr. ROUSSELOT. I will supply it for the record.

Chairman ST GERMAIN. Without objection, the article will be placed in the record at this point.

[The article referred to follows:]

[From the Los Angeles Times, Thursday, September 1, 1977]

BERT LANCE'S BANKING GAME: THE PRESIDENT KNOWs How To PLAY IT, TOO CARTER USED IT TO FINANCE HIS CAMPAIGN, WHILE HIS OPPONENTS WENT BROKE

(By Richard Reeves and Barry M. Hager)

Bert Lance is not the only member of the Carter Administration who financed a political campaign with loans from friendly Georgia banks. That's how his friend Jimmy Carter got to be President.

It's an old story in Georgia politics, and it may explain part of why, as President, Carter seems to feel that his director of the Office of Management and Budget has done nothing wrong in years of playing around with other peoples' bank deposits. Both men financed Georgia gubernatorial campaigns with bank loans, but the real payoff in knowing how to play the banks came for Carter in the 1976 presidential campaign.

Fourteen loans totaling $1.5 million from two Atlanta banks were what kept the Carter campaign going through crucial days of the spring of 1976, when a Supreme Court decision on the constitutionality of the new Federal Election Commission suspended matching fund payments to presidential candidates for two months. While Henry Jackson and Morris Udall were going broke in Pennsylvania and Ohio, Carter was tapping what looked like an unending, and unsecured, pipeline of Southern cash. In addition to the bank loans, the Carter campaign also had what amounted to short-term loans of almost $1 million from Southern suppliers and vendors who agreed not to demand quick payment in order to help the local boy making good. As a result, Carter was able to outspend Jackson, $459,653 to $167,149, in the Pennsylvania primary.

Looking at the 5,169 pages of Carter campaign records filed with the FEC shortly after the 1976 election, it is hard to figure out how all that money would have been paid back if the local boy had stumbled and contributions to the Carter campaign had stopped snowballing. Somebody was gambling with other peoples' money.

Lance stumbled in his 1974 campaign for the Democratic nomination for governor of Georgia, and as a result his campaign committee still has not paid back $390,000 it borrowed from Atlanta's Citizens & Southern bank. C&S, however, apparently thought the Carter campaign would be a better risk, and lent it $175,000 in March and April of 1976, Fulton National Bank in Atlanta began making loans after that. By the end of May, the campaign owed the two banks just over $1 million. Add to that $1.27 million in supplier bills and another $82,000 in loans from smaller banks and individuals, and the Carter campaign was well over $2 million in debt. Its tangible assets at the time were accounts receivable of about $300,000, most of it transportation costs billed to the Secret Service and press; and bills submitted to the FEC, but not approved, totaling $650,000. If the Carter campaign had collapsed— those things do happen in politics-some of those generous Southerners, banks and suppliers, stood a chance of being stuck for more than $1 million, because only $100,000 of the loan money was guaranteed by Carter's personal assets. According to FEC records, the "guarantor" of the other loans was: "None."

An outsider might guess that Georgia bankers and businessmen were either very smart, very lucky, high-stakes gamblers or the the best political analysts in the country.

Insiders might say, as Carter does about Lance's financial dealings, that that's just the way they do business down there. "In terms of campaign financing," according to Campaign Money, edited by Herbert Alexander, director of the Citizens

Research Foundation, "the granting of personal loans to supporters has apparently been the standard mechanism for injecting bank money into (Georgia) political campaigns. For instance, former Gov. Carter has said that seed money for his 1970 campaign came from supporters who raised about $250,000 in personal notes." And that's what they do say-business as usual. Officials of C&S and Fulton told the authors of this article that the loans were "routine," and totally secured by the Carter campaign's due bills and the anticipated FEC money. But the numbers don't appear to support that, and six of the loans were made when there was some doubt whether the FEC would be reconstituted by Congress. The C&S vice president who approved the first four Carter loans, incidentally, was Hubert Harris, now Lance's assistant for congressional relations.

Besides the bank loans, there were also the claims of creditors, the friendly suppliers, most of whom worked through the small advertising agency of Gerald Rafshoon, Carter's media adviser. At the end of May, Rafshoon owed his suppliers $647,997. He, in turn, was owed that amount by the campaign. Rafshoon, who had substantial personal loans from Lance's National Bank of Georgia, said that none of his campaign debts were underwritten by banks. "They were Atlanta companies," he said, "which were willing to wait for money because they wanted Jimmy to win as much as we did."

And what of Carter's opponents? They could not, or would not, borrow from banks. Jackson, facing the same problems as Carter, borrowed only $42,700. "Bankers and our finance people were very skittish about the bankability of the FEC due money, whether it could be used as collateral," said Jackson's campaign manager, Robert Keefe. "No one was sure for weeks whether there was ever going to be any FEC money. Scoop could have taken some personal notes, but he really has no net worth to borrow against. And, frankly he just didn't want a debt hanging over him." Udall borrowed $70,000 on his signature, but that was it. "We had no access to real money markets," said John Gabusi, director of the Udall campaign, "and we couldn't get loans like that. And we had no deal like the Rafshoon thing-nobody would give us credit.'

The chronology of the Carter campaign borrowing really began on Jan. 30, 1976, when the Supreme Court ruled that the Federal Election Commission-with some members appointed by Congress and some by the President-was an unconstitutional hybrid of legislative and executive powers. With the FEC in suspension while Congress debated new legislation, the last matching fund checks went to presidential candidates on March 22. All campaigns soon were in a cash-flow bind. Carter took his first loan on March 15-$70,000 from C&S. By the end of the month his campaign was $556,000 in the red.

What followed was classic, and successful, deficit financing. The Atlanta banks and suppliers provided money and services against anticipated revenues-revenues that would keep coming if Carter kept winning primaries. For the duration of the primary season, the campaign would borrow money-or fail to pay its Georgia creditors for "upfront" cash to buy television time and field organization. With each media barrage-answered less and less frequently as Jackson and Udall ran out of cash-came a victory, or at least a strong showing, and with each triumph came contributions to keep going.

On April 2, the Carter campaign went to C&S for another $30,000. Then: April 15, Fulton, $40,000; April 20, Fulton, $60,000; April 23, C&S, $25,000; April 29, C&S, $50,000; May 14, Fulton, $130,000; May 14, Fulton, $120,000; May 25, Fulton, $200,000; May 28, Fulton, $200,000; May 28, Fulton, $100,000; June 7, Fulton, $200,000; June 22, Fulton, $300,000. The loan total of $1.525 million does not necessarily mean that $1.5 million was owed at any one time because the campaign began repaying loans in June. But at times the campaign owed the two banks at least $1 million.

By the end of April, the Carter campaign had a net indebtedness of $960,000 including bank debts and $350,000 owed to Rafshoon. On May 31, the net indebtedness had reached $1,898,000, with $645,997 owed Rafshoon. After the key victories over Jackson and Udall in Pennsylvania and Ohio, and the resumption of FEC payments beginning May 22, the net debt was reduced to $1,160,000 on June 31, with $431,000 owed to Rafshoon. By the end of July, the debt had been reduced to a little more than $500,000, and by Aug. 31 the Carter campaign was in the black for good.

So, unlike Lance's debts, Carter's campaign loans were repaid. As far as the Atlanta banks are concerned, that's proof enough that they were sound business risks all along. Herbert McKoy, the Fulton vice president for commercial credit who handled the loans, said the bank had "a commitment" to the Carter campaign, and accepted repayment pledges discussed in conversations with Carter's campaign treasurer, Atlanta attorney Robert Lipshutz. Lipshutz is now counsel, to the President.

"Each loan stood on its own merits," McKoy said. "These were short-term, selfliquidating loans to help them with their cash-flow problems."

The letters between Lipshutz, McKoy and Harris during the spring of borrowing are friendly, almost chatty, things-some beginning, "Dear Herkie," which is Harris' nickname. The Southern politicians, bankers and lawyers may have seen themselves as "outsiders" as far as Washington was concerned, but they sure sound like Atlanta insiders helping a buddy take over the country.

With a little help from his friends, Carter was the only survivor of the dollar drought caused by the FEC's court-ordered inactivity. By the time Udall and other candidates had some ready cash in early June, it was too late to stop the front runner. The "common practice" of politicians and bankers in Georgia-to use Carter's phrase in defending Lance-apparently was not common enough elsewhere to do Carter's competitors any good.

Carter now has endorsed that common practice by endorsing-proudly, he saidLance's behavior. What is most disturbing is that our post Watergate President does not seem to understand why other Americans are genuinely shocked by Lance's "common" behavior. Carter has accepted, for now, the standard of doing what you can get away with. And it turns out that the bankers and their favored politicians can get away with a hell of a lot. He has disillusioned a few of us who thought or hoped that he was really running against privilege. It looks as though he did not understand that most people are not as privileged as Lance-or Carter. Apparently he never expected to be held to the standard he articulated in his now-famous May, 1974, Law Day speech at the University of Georgia:

"Well, I've read parts of the embarrassing (Nixon) transcripts, and I've seen the proud statement of a former attorney general, who protected his boss, and now brags on the fact that he tiptoed through a minefield and came out 'clean.' I can't imagine somebody like Thomas Jefferson tiptoeing through a minefield on the technicalities of the law, and then bragging about being clean afterwards."

No, it's hard to imagine that. Or that, after he got out of the field, Jefferson would be met by George Washington saying: "Tom, I'm proud of you!"

Chairman ST GERMAIN. Mr. LaFalce wants to address an inquiry to Mr. Bloom.

Mr. LAFALCE. Mr. Bloom, could you perhaps, not today, but at some subsequent time, give your opinion or the Comptroller's opinion regarding an interpretation of 18 U.S.C. 656, "Theft, embezzlement or misapplication by a bank officer or employee," particularly the words "willfully misapplies," what would constitute willful misapplication, and whether or not detriment must be shown to the bank in order for willful misapplication to exist.

Mr. BLOOM. Yes, sir.

Mr. LAFALCE. You stated a minute ago there was controversy in the Department concerning that or that you disagreed with the opinion of some of your attorneys?

Mr. BLOOM. As to what constituted a violation of statute, yes, sir. [At the request of Congressman LaFalce, the following memorandum from the Office of the Comptroller of the Currency was submitted by Mr. Bloom for inclusion in the record:]

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