same as the one with which the other $30,000,000 note was transmitted with the exception of the last paragraph. For that paragraph was submitted the following: “An original disbursement of $10,000,000.00 was made June 27 and a supplemental disbursement of $30,000,000.00 has been previously authorized on this date. In keeping with the authority contained in Leach's telegraphic advice of approval you are authorized to advance an additional $30,000,000.00 as per directions of the applicant, upon the condition you have under your control not less than $80,000,000.00 face amount of sundry collateral, including $10,000,000.00 equity in collateral now pledged with certain New York Banks against which you hold a proper assignment."

On June 29, 1932, the Federal Reserve Bank disbursed an additional $30,000,000 on the loan and placed the same to the credit of the Bank. This disbursement resulted in an overdraft of the account of the United States Treasury with the Federal Reserve Bank, and on June 30, 1932, the R. F. C.'s board adopted the following resolution:

"Resolved that it is the sense of this Board that the Central Republic Bank and Trust Company, Chicago, Illinois, should return $30,000,000 of the total of $70,000,000 indebtedness without release of collateral and upon such return the accounts between the Central Republic Bank and Trust Company and this Corporation be adjusted as the Treasurer may arrange so that the remaining balance of $50,000,000 of the loan heretofore authorized may be disbursed as provided in the resolutions of the Board and on conditions prescribed therein. It is the intention that this transaction is in no way a repayment of any money advanced but is a deferring of the advance of said $30,000,000 for the better convenience of the parties.

On June 30, 1932, the Bank sent to the Federal Reserve Bank the following: "For the better convenience of the parties and at the instance of the Reconstruction Finance Corporation, we have determined to defer acceptance of the most recent $30,000,000 arranged to be provided on the loan application and commitment of June 27, 1932.

"You are accordingly authorized to take such steps as may be necessary to effectually provide that this particular $30,000,000 is held by you for the account of the Reconstruction Finance Corporation.

"The result of this will be that we are still entitled to receive from the Reconstruction Finance Corporation and its participants the balance of $55,000,000. "For the convenience of the parties you will hold the note referring to the above $30,000,000 as against the future advance of same amount to us.'

On June 30, 1932, the second credit of $30,000,000 to the Bank on the books of the Federal Reserve Bank was reversed by debiting the Bank's account with $30,000,000 and crediting the account of the Treasury with the same amount. The Bank paid interest for one day on said amount of $30,000,000.

After the approval of the $90,000,000 loan the deposits of the Bank continued to decrease, until by July 13, 1932, they had gone down to about $100,000,000. The bank had a rental liability of $780,000 a year. The collateral pledged by the bank for loans yielded 4% per cent per annum, and the Bank was obligated for 51⁄2 per cent per annum on the loans. In view of these expenses it could not continue to operate except at a great loss without a large increase in its deposits. The attempt to restore the standing of the bank and to bring its deposits up to a point where it could continue to operate without loss had failed.

On July 13, 1932, Owen D. Young appeared at a meeting of the R. F. C's directors on behalf of the Bank. He reviewed the condition of the Bank and proposed a plan to meet the difficulties which confronted the Bank. The plan included the organization of a new Bank, the taking over by the new Bank of the deposit liabilities of the old, with cash enough to cover the deposit liabilities and the purchase by the new Bank of a part of the collateral pledged by the old Bank as security for its loans.1

The minutes of the board on this subject are as follows:

Owen D. Young appeared before the Board to discuss the situation confronting the Central Republic Bank and Trust Company, of Chicago, Illinois. He said he desired, first, to advise the Board that he had no personal interest whatever in the matter except his personal friendship for General Dawes, who had asked him to come to Chicago and spend the week-end with him. He stated that he had gone into a partially developed plan which the bank had in mind and which, it was thought, would relieve the situation. He felt that it was obvious that General Dawes could not go ahead in developing the plan without the Board of Directors of the Reconstruction Finance Corporation at least knowing about the matter, and therefore, General Dawes had asked him to put the situation before the Board.

Mr. Young stated that he had asked Mr. Preston, Manager of the Chicago Loan Agency of the Corpora tion, to come with him to Washington because of his familiarity with the subject. He said that his under. standing of the situation was: (1) That the collateral pledged by the bank for loans of $95,000,000 ($90,000,000

On July 19, 1932, the board of directors of the R. F. C. sent one of its attorneys to Chicago to investigate all aspects of the proposed plan for the organization of a new national bank to take over the deposit liabilities of the Bank. If was understood that he would make no commitments on behalf of the R. F. C.

On July 22, 1932, the board of directors of the R. F. C. approved the action of the loan agency in releasing to the Bank collateral of the face value of $20,000,000. The manager of the loan agency stated that the release was necessary so that the Bank could carry on its business and function as a bank.

On August 3, 1932, Henry M. Dawes and Harry B. Hurd, directors, and C. C. Haffner and Arthur T. Leonard, vice-presidents of the Bank, appeared before the R. F. C.'s board of directors. The minutes of the board contain the following: "Mr. Dawes, stressing the urgent nature of the matter, stated it was desirable to have the new bank start business with a large capital. He said that deposits of between $50,000,000 and $55,000,000 were reasonably assured, not counting secured deposits and corporate trusts. He felt that it would be unsafe for the new bank to make a commitment involving more than $15,000,000 with respect to loans to enable makers to take up paper held by the Corporation. The opinion was expressed by members of the Board that the new bank should arrange to retire at least $35,000,000 worth of the collateral now held by the Corporation against its loan to the Centra! Republic Bank & Trust Company. Mr. Bogue raised the question as to whether the liability of the stockholders of the Central Republic Bank & Trust Company is preserved under the plan, and stated that the Legal Division would have to study the matter further, before expressing an opinion. The representatives of the bank thereupon withdrew from the meeting.' A committee consisting of four members of the staff of the corporation was appointed to confer further with the representatives of the Bank, and report to the board. The committee made a report on August 4, 1932, and gave its by the Corporation and $5,000,000 by Chicago banks) yields 45%%% interest per annum, while the bank pays 54% interest per annum on the loans, this difference in interest resulting in an accumulating deficit; (2) Having a rental liability of $780,000, the institution has an organization set-up for a bank of $300,000,000; its deposits have gone down to approximately $100,000,000. They have shrunk $27,000,000, added Mr. Young, since the Board's commitment was made. It was quite obvious, therefore, he said, that, with deposits shrinking, seepage going on, with such a huge rental, and an organization altogether too large for the present size bank, each day means its surplus is going. Mr. Young stated that it was impossible for General Dawes to do anything to prevent this situation continuing and that, if it does continue, there is nothing ahead except liquidation of the bank, calling upon the Board for the undisbursed proceeds of the loan that has been authorized and paying out the funds to depositors.

Mr. Young said that it was now suggested that a new National bank be organized with $4,000,000 of capital, if that amount could be found. General Dawes, he stated, was very apprehensive that he could not find that much, but felt that he could find $3,000,000. Mr. Young thought that General Dawes, in his present state of mind, probably underestimated his capacity to get capital for the new bank. Mr. Young said that if it were possible to find $4,000,000 in capital and organize a new National bank now, not taking over the personnel of the present bank, except the younger men who have demonstrated their capacity, and possibly having someone from the outside, in whom there would be complete confidence as President, and the old bank could be furnished by the Reconstruction Finance Corporation with the full amount of its commitment, the new bank then could take over the deposits of the old bank with cash enough to cover the deposit liability, so that the new bank would have X deposits against X in cash, and $3,000,000 or $4,000,000 in capital. The new bank, he added, then would, if the Board were willing, purchase from the Corporation between $20,000,000 and $30,000,000 of prime collateral pledged by the old bank as security for its loan, paying cash for such collateral at its face value. He thought that the new bank would not want to take anything over for which it could not pay face value. The result would be, he added, to diminish the Corporation's loan to the old bank from $90,000,000 to approximately $60,000,000 or $65,000,000. He pointed out that the ratio of the face value of collateral securing the loan in that amount would be much greater than the ratio of collateral supporting the $90,000,000 loan.

Mr. Young expressed the opinion that the consummation of such a plan unquestionably would be a good thing from the standpoint of the situation in Chicago. He said there would be a new sound bank, which the banks in Chicago agree is needed and desirable in the present circumstances. It it was helpful from the Board's point of view, he felt it could be assumed that it would be helpful in Chicago, and, if the Board saw no objection to the proceeding, he would notify General Dawes at once to mobilize all his efforts and resources to see if he could get the capital for the new bank. Mr. Young said that the proposal could not be put in definite form until the new capital had been arranged for.

Mr. Cowles asked what would happen to the present lease on the bank building, which amounts to $780,000 a year, and Mr. Young replied that General Dawes had an arrangement with the landlord that the new bank would be permitted to take over the large banking floor for $150,000 a year for two years. Mr. Bogue inquired if the plan would relieve the stockholders of the old bank of their stockholders' liability, and Mr. Young replied that it would not. It is the purpose of General Dawes, he added, to offer the stock of the new bank to the stockholders of the old bank on a pro rata basis.

Mr. McCarthy said he assumed that it was Mr. Young's judgment that the bank would have to go into liquidation in any event. Mr. Young replied that in his opinion there was absolutely no question on that point.

After general discussion of the matter, the Chairman advised Mr. Young that it would be necessary for the Board to have the General Counsel and Examining Division of the Corporation make a careful study of the proposal. The matter, he said, would be taken under advisement, and, in the meantime, it would not be possible for the Board to express any opinion with respect to the plan. Thereupon, Mr. Young withdrew from the meeting.

opinion that the board would be justified in indicating that it had no objection to the plan provided certain conditions were satisfied."

The minutes of the board do not show any action of the board on the report of the committee, and there is not any evidence showing that the board ever considered the report again or took any formal action with reference to it.

On September 23, 1932, Mr. Clarke, the president, and Mr. Hurd, director and attorney for the Bank, appeared before the board, and the following took place, as shown by the minutes:

"In reply to a question as to whether the new bank would purchase paper pledged with the Corporation to the extent of $25,000,000, with the result that the Corporation's loan would be reduced by that amount, Mr. Clarke replied in the negative, explaining that it had been previously stated that the new bank would purchase $15,000,000 of the paper and that it had also been suggested that other Chicago banks purchase $10,000,000 of the Corporation's collateral.

"Mr. Clarke stated that he did not now believe other banks of Chicago would take any of the paper of the Central Republic Bank and Trust Company, because, in their opinion, such action would be prejudicial to the best interests of the newly organized bank. He further pointed out that since the statement was made that the new bank would purchase $15,000,000 of the paper, there had been payments on it, so that the amount which would be purchased would be approximately $13,000,000.

"Mr. Hurd told the Board that, through the organization of the new bank, the Corporation would not lose any of its legal rights to proceed against the stockholders of the old Central Republic Bank and Trust Company in connection with their liability as stockholders.

"Mr. Clarke and Mr. Hurd thereupon withdrew.

"The Board further considered the questions involved in the liquidation of the Corporation's loan to the Central Republic Bank and Trust Company, but took no action."

The deposits of the Bank were as follows: July 25, 1931, $240,746,647.25; June 30, 1932, $112,308,320.76; October 5, 1932, $72,208,816.60.

As a result of the disbursement by the R. F. C. of $10,000,000 on June 27, 1932, and $60,000,000 on June 29, 1932, to the Bank, the cash, including money due from other banks, of the Bank, increased from $18,620,916.84 at the close of business on June 25, 1932, to $76,448,754.62 at the close of business on June 29, 1932. Within those four days the deposits of the Bank decreased in an amount in excess of $14,000,000. After the reversal of the second $30,000,000 credit on June 30,

The minutes of the board are as follows:

The Board considered the following memorandum presented by Messrs. Bogue, Talley, Paulger and McKee, the committee named at the afternoon meeting of the Board on August 3, to confer with representatives of the Central Republic Bank and Trust Company, Chicago, Illinois, with respect to a plan for the readjustment of its affairs looking to the better liquidation of the loan authorized by this Corporation and protection of its interests:

Your committee has considered the proposed plan for a readjustment of the affairs of the Central Republic Bank and Trust Company. In the opinion of your committee the Board of directors would be justified in indicating that it had no objection to the consummation of the plan, provided the following conditions were satisfied:

(1) That the new bank be organized with a capital and surplus of at least $5,000,000;

(2) That the new bank undertake to loan to the makers of paper held by the Corporation amounts sufficient to permit such makers to take up paper held by the Corporation in an amount equal to 50 per cent of the deposits of the new bank as of its date of opening.

(3) That the new bank agree to service the activities of the real estate loan and trust departments of the present bank for the life of the loan from the Corporation, and that the aggregate net earnings of such departments and of the corresponding departments of the new bank be divided between the present bank and the new bank during such period on the basis of 40 per cent to the new bank and 60 per cent to the present bank.

(4) That the New York bank creditors of the present bank and the Federal Reserve Bank of Chicago indicate their approval of the plan and agree that the collateral held by them will be liquidated in an orderly manner without sacrifice of the equities pledged to the Corporation.

(5) That the new bank agree to service the administration and collection of collateral pledged to secure the loan from the Corporation, subject to its reimbursement for all out-of-pocket expenses including compensa. tion paid to others than members of its regular staff involved in such service.

(6) That the Central Republic Company (the securities affiliate of the present bank) agree to indemnify the Corporation from any loss which it may incur by failure to realize in full on the stockholders' liability of stockholders of the present bank and further agree not to make any distribution to its stockholders during the life of the loan from the Corporation.

(7) That the holders of a majority in number of shares of stock of the present bank approve the plan and agree to vote therefor and to use their best efforts to secure ratification of the plan by at least 2/3 of the total number of shares of stock of the present bank.

(8) That the details involved in the satisfying of the foregoing conditions be carried out in a manner satisfactory to General Counsel of the Corporation.

The committee pointed out that the old bank had approximately 7,500 stockholders, but that a relatively small number held a controlling interest. Mr. Cowles was of the opinion that all stockholders should have an opportunity to pass on the plan, and, in this connection, Mr. Bogue stated that stockholders who did not sign consent might undertake to resist suit to enforce stockholder's liability. After discussion of the matter. the Board deferred action for further consideration.

1932, and as a result of continued withdrawals of deposits, the cash, including money due from other banks, of the Bank declined to $43,949,673.14 at the close of business on June 30, 1932. From June 30, 1932, through October 5, 1932, this item of $43,949,673.14 decreased to $21,078,183.90.

At the close of business on July 25, 1931, the total resources of the Bank amounted to $277,933,760.26. At that time the Bank had no bills payable outstanding and none of its resources were pledged. At the close of business on July 30, 1932, the total resources of the Bank decreased to $173,264,741.81. Of these resources, loans in the amount of $93,744,836.66, and investments in the amount of $33,969,933.70, or total resources in the amount of $127,714,770.36, were pledged at this time to secure bills payable and rediscounts in the amount of $47,678,587.07. Against deposit liabilities in the amount of $92,304,835.57, the Bank, at the close of business on July 30, 1932, had the following unpledged

resources:

Loans to customers.

Real Estate Department loans.

Overdrafts..

Investments..

Cash and due from banks.

Acceptances of other banks sold..

Customers liability a/c travelers checks, letters of credit, and

acceptances

Real Estate owned..

Advances to trust department.

Other resources..........

Total resources unpledged. --

$1, 666, 688. 90 67, 634. 84 79, 168. 99 3, 772, 841. 56 27, 687, 291. 96 1, 246, 560. 20

3, 231, 351. 02 4, 703, 220. 09 350, 000. 00 2, 745, 213. 89

45, 549, 971. 45

At the close of business on October 5, 1932, the total resources of the Bank had declined to $139,069,238.88. Of these resources, loans in the amount of $85,436,608.79 and investments in the amount of $19,186,768.61, or total resources in the amount of $104,623,377.40 were pledged at this time to secure bills payable and rediscounts in the amount of $38,270,174.59. Again deposit liabilities in the amount of $72,208,817.60, the Bank, at the close of business on October 5, 1932, had the following unpledged resources:

Loans to customers..

Real Estate Department loans

Overdrafts..

Investments_

Cash and due from banks.......

Customers liability a/c travelers checks, letters of credit, and

acceptances..

Real Estate owned.

Advances to trust department..

Other resources..

Total resources unpledged.--.

$4, 374, 156. 33 110, 225. 29 51, 393. 88 27, 973. 04

21, 078, 183. 90

602, 331. 34 4, 772, 059. 28 350, 000, 00 3, 079, 538. 42

34, 445, 861. 48

The Bank, by the terms of the resolution of the R. F. C.'s board passed on July 27, 1932, was entitled, upon compliance with the terms of the resolution as to collateral, to an additional disbursement of $50,000,000.

As a result of decreased earnings and heavy interest charges accruing on its outstanding bills payable, the Bank operated at a substantial loss during the months of July, August, and September, 1932. During this period the income of the Bank declined materially, primarily as the result of a substantial decrease in the interest and discount earned by the Bank. For the month of June, 1932, the total income of the Bank amounted to $703,449.22; for the month of July, $574,383.98; for the month of August, $591,606.88; and for the month of September, $486,454.42. Concurrently with this decline in income, the expenses of the Bank increased substantially. For the month of June, 1932, the total expenses of the Bank amounted to $559,341.24; for the month of July, $743,296.92; for the month of August, $686,133.59, and for the month of September, $611,799.15. The increased expenses of the Bank resulted from the payment and accrual of heavy interest charges on the outstanding bills payable of the Bank. For the month of June, 1932, interest accrued and paid amounted to $115,657.50; for the month of July, $297,962.48; for the month of August, $275,837.85; and for the month of September, $213,771.97. The combination of decreased income and

114681-37-64

increased expenses caused the Bank to change from a net profit of $144,107.98 for the month of June, 1932, to a net loss of $168,912.94 for July, 1932; a net loss of $94,526.71 for August, 1932; and a net loss of $125,344.73 for September, 1932. In view of the circumstances of the Bank, the plan for the reorganization of a new bank to take over its deposit liabilities was carried forward by its sponsors.

On September 29, 1932, the Federal Reserve Bank of Chicago returned to the Bank the second $30,000,000 note of that Bank, delivered on June 29, 1932, with a letter to the Bank which read in part as follows:

"In view of present developments it is evident that this instrument will not be used, and it is therefore returned for your files."

On September 28, 1932, the Bank sent to the Federal Reserve Bank its note for $50,000,000 in terms as prescribed by the resolution of June 27, 1932, with a letter as follows:

"Pursuant to the agreement made under the loan application of the undersigned to the Reconstruction Finance Corporation dated June 27, 1932, we are handing you herewith our promissory note, payable to the order of Reconstruction Finance Corporation, dated October 3, 1932, maturing December 24, 1932, in the principal amount of $50,000,000, bearing interest at the rate of 5% per annum payable at maturity.

"Please notify the Reconstruction Finance Corporation of the receipt by you of the aforementioned note of the undersigned and arrange to credit our account with the proceeds of the note on October 3, 1932."

On September 29, 1932, the Bank requested the return of the $50,000,000 note in a letter to the Federal Reserve Bank, as follows:

"Referring to our letter of the 28th with reference to payment of the balance of the loan of the Reconstruction Finance Corporation to us, we will not need the balance of the loan earlier than October 5th and possibly not before the 10th of October.

"Accordingly it will be a sufficient compliance with our request to make such payment on October 5th or such later date as we may request. If you will return to us the note enclosed in our letter we will at the proper time substitute a new note bearing the proper date.

"You may advise the Reconstruction Finance Corporation accordingly." The note was returned to the Bank and never became an effective obligation of the maker.

On the afternoon of October 4, 1932, the organization papers of the City National Bank and Trust Company of Chicago were filed with the Comptroller of the Currency, and the certificate of the Comptroller was issued late in the day on October 5, 1932. The books of the City National Bank were opened on the morning of October 6, 1932.

At a special meeting of the directors of the Bank at 2:00 P. M., on October 5, 1932, Charles G. Dawes, chairman of the board, Philip R. Clarke, president of the Bank, and certain other directors resigned. Joseph E. Otis was elected chairman of the board. The board then passed a resolution authorizing officers of the Bank to transfer to the R. F. C. any notes and securities pledged to the R. F. C. in payment of all or any part of the loan from the R. F. C. and the Chicago banks. The board also authorized a lease of certain premises from the Bank to the Central Republic Company. The payment of rent was to be secured by the pledge of 5,000 shares of the capital stock of City National Bank to be issued to Central Republic Company. The board further authorized the execution of agreements between the Bank and the R. F. C., whereby the Bank should assign to the R. F. C. the rentals to be paid under the aforesaid lease, together with the security rights of the Bank in said 5,000 shares of stock of the City National Bank, pledged by the Central Republic Company, as additional security for any indebtedness of the Bank to the R. F. C. The board of directors also passed a resolution, in which after reciting that "in view of existing conditions the Board of Directors of this Corporation deem it to be in the interests of this Corporation and its stockholders to enter into and carry out the agreement", the board authorized the execution of a contract between the Bank and the City National Bank, whereby the latter bank would agree to assume the deposit liabilities of the former in consideration for the payment of cash funds aggregating the amount of said deposit liabilities. The board also authorized the payment in cash to the City National Bank of the unsecured deposit liabilities to be assumed by the City National Bank. The board also authorized the execution of an agreement between the Bank and the City National Bank, whereby the latter bank would supply office space and personnel for servicing the real estate loan department and the trust department of the former bank.