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DISCUSSES YEARLINGS

Loans amounting to $250,000 were made by the Baltimore Trust Co. to this enterprise, according to Mr. Sobeloff's report. These were on a series of 60- and 90-day notes. Said Mr. Sobeloff:

"It must have been obvious that yearlings could not become 2-year-olds in so short a time, and the notes were renewed * **the Laurel Park Stud Co. found it impossible to sell the horses at the auctions * * *. Before the Baltimore Trust Co. moved to protect itself, there was nothing left-not even horses.” Of policies leading to the collapse, Mr. Sobeloff reported, in part: "The most striking fact disclosed by the investigation, persisting throughout the entire life of the consolidated institution, is that despite the biweekly meetings of the board, the weekly meetings of the executive committee and the more frequent meetings of the discount committee, the control of the bank's policies. was allowed to gravitate into the hands of the executive officers and to remain there without suitable supervision or restriction, even in the face of repeated and unmistakable danger signals.

CONDITION UNCHECKED

"This condition began as early as Mr. Norton's (Eugene L. Norton) regime and continued unchecked during the administration of his successors. The fatal predisposition of the directors to shirk the responsibility cast upon them by the statutes and their own by-laws was not opposed by an aggressive executive, and the Baltimore Trust Co. became, in reality, a one-man institution.

***Even after Mr. Symington (Donald Symington) was replaced by Mr.. James Bruce as president, and later by Mr. Howard Bruce as chief executive officer and chairman of the board, and the directors had learned of the loss of over $9,400,000, the same unquestioning faith in the decisions of the executive was exhibited.

"The directors failed to take independent action to inform themselves concerning the affairs of the bank, but contented themselves with whatever information the officers chose to present to them."

"Fortunately for the depositors, the losses attributable to the policies of Mr. Symington's successors are small in comparison with those incurred before they took office, but this is not due to increased vigilance of the directors."

CITES NEGLIGEN CE

The prevailing tenedency of the Baltimore Trust toward size of the expense of safety was noted by Mr. Sobeloff, who held, in his report, that, as the bank grew, no proper system was installed by the board to keep informed of the important transactions. He said:

"Because of the directors' negligence in never taking a complete inventory of the bank's assets, independently of the officers, and in failing even to require the officers to make such a comprehensive appraisal, losses were sustained amounting to many millions of dollars."

LENIENT TOWARD EXAMINER

Feeble attempts by the bank examiners to keep the Baltimore Trust in line were noted by Mr. Sobeloff, who included among his recommendations for better banking the extension of bank examiners' activities. Of the checking efforts of the examiner in the Baltimore Trust instance, Mr. Sobeloff said:

"But the examiner should not be too severely censured. One can readily understand the disparity in position between the examiner who received a salary ranging from $1,500 to $2,200 (this was the scale of salaries paid to the State bank examiners prior to 1932), and the commanding figure who headed the bank at a salary of $50,000 per year.

"He would be an unusual examiner who failed to give thought now and then to the probability that the president, if sufficiently antagonized, could, without difficulty, arrange with the superior authorities for his transfer or dismissal. "Considered in this light, some of the criticisms contained in the examiners' reports upon the Baltimore Trust Co. appear quite vigorous and almost daring." Many recommendations for preventing another bank failure comparable to that of the Baltimore Trust are contained in the report and in summary prepared by Mr. Sobeloff and printed elsewhere in The Sun. This summary also was filed as a court record by order of Judge O'Dunne.

ANSWERS JUSTIFICATION PLEA

"It has been urged that the management of the Baltimore Trust Co. was engaged in building Baltimore and thus on civic, if not on strictly commercial grounds, their acts were justified," the report continues.

"It is unnecessary to debate how far a bank may properly risk depositors' money for civic or patriotic purposes; but the fact is that the Baltimore Trust Co. lost most in enterprises that cannot claim this alleged virtue.

"The money that went into Miami and Tampa land developments can hardly be said to have been used to build Baltimore; nor the hundreds of thousands that went into the cypress farm in Florida, and into mortgages in Houston, Tex., and into hotels in Texas, South Carolina, and elsewhere.

"Nor can the millions poured into Kentucky and Alabama coal mines be regarded as a sacrifice for the progress of Baltimore. The same is true of the sand banks and gravel mills on the Mississippi River; the belt line railroad in Cleveland; the sugar plantations and the bank in Puerto Rico; the cotton warehouse in North Carolina, and the international mercantile marine, none of whose ships has ever docked in Baltimore.

"These enterprises did not build Baltimore; they impoverished many Baltimoreans by taking millions of dollars out of the city.

"MISTAKES OF JUDGMENT"

"There is a disposition among the directors of the Baltimore Trust Co. to excuse their negligence on the ground that the period under discussion was one of unlimited optimism and that caution was generally absent from banking circles. "It is, of course, impossible to offer a detailed comparison between the practices of the Baltimore Trust Co. and other institutions, and the matter is not one susceptible of mathematical demonstration.

"However, one can point to many banks here and elsewhere which did not digress from sound and normal banking, and which have safely weathered the storm. The recent law reports evidence that those bankers who exceeded the bounds of reasonable care and prudence have been held accountable.

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"The huge extent of the Baltimore Trust Co.'s loss is only one proof that it went to greater excesses than others. The charts showing the absurd distribution of this bank's investments in comparison with other banks-a distribution more unbalanced than that of the average country bank-is as objective a test of the Baltimore Trust Co.'s performance as one could wish.

"Mistakes of judgment doubtless occurred in other banks as well as in the Baltimore Trust Co., but here misjudgment became habitual; and to such misjudgment were added gross recklessness, laxity, and inattention to duty, and often absolute digression from the charted course of the bank into forbidden fields.

"If the investigation disclosed only bad judgment, no recommendation to sue the directors would have been made. The facts indicate that even applying the more lenient standards prevailing in that period the negligence was gross and inexcusable.

"If the directors had been reasonably mindful of their duty to supervise the bank's affairs, but despite such exertions disaster had overtaken the institution, the law would not hold them responsible; but, having shut their eyes and allowed their ship to crash, they may not defend on the ground that ships sometimes founder despite all efforts of the pilot to steer a safe course."

CALLED "INTRIGUING"

"Maritime metaphor has also been resorted to in behalf of the directors. It has been said, indulgently, that they were 'bad mariners, but they went down with the ship.' It is an intriguing figure of speech, but it needs to be scrutinized. "The officers and directors as a whole, as this report has noted, did not withdraw their money in greater proportion than others. If such an element were present in this case, a still more serious view of their conduct might have been warranted.

"It is also true that they did not, as a group, sell their shares. This also has been observed in the preliminary report, and the fact should be acknowledged ungrudgingly; but in another sense it is not true that they 'went down with the ship." "

CITES OTHERS' TROUBLES

"Mr. Symington's financial troubles are not due exclusively or even chiefly to the Baltimore Trust Co., but to losses elsewhere. Mr. C. Wilbur Miller's disaster was not primarily in the Baltimore Trust Co., but in the Davison Chemical Co. The Baltimore Trust Co. did not ruin him, but it lost well over a million dollars on him and his companies.

"True, other directors or companies in which they were substantially interested lost money as depositors. To the extent that they were depositors, they are victims along with other depositors.

"The total of their and their companies' deposits at the closing of the bank were approximately 20 percent of the entire deposit line. Most of the directors also subscribed to the guaranty fund, and lost heavily."

SOME DAMAGED SERIOUSLY

"It is undeniable that certain of the directors were quite seriously damaged; and if this is meant to be indicated, the metaphor is unobjectionable; but there would be no warrant for an implication that in the directors' relations with the Baltimore Trust Co. there was an element of extraordinary self-sacrifice which would relieve them of liability for their negligence.

"The fact that directors also lost heavily in the disaster does not absolve them of liability for their misconduct. So the courts have held. They have, in suitable cases, pointed with sympathy to the losses sustained by the director-defendants, but they have, nevertheless, applied the law with proper firmness."

[From the Sun, Baltimore, June 7, 1936]

SOBELOFF'S FINAL REPORT ON AFFAIRS OF OLD BALTIMORE TRUST SUMMARIZED— OFFICER OF COURT FINDS RECKLESS MANAGEMENT RECOMMENDS SUIT AGAINST DIRECTORS, BUT ASSERTS THERE IS NO GROUND FOR CRIMINAL ACTION

The following is a summary of the final report by Simon E. Sobeloff on the affairs of the old Baltimore Trust Co. Mr. Sobeloff was appointed a special court officer by Judge Eugene O'Dunne last August to investigate the bank's conditions before it closed in 1933.

Mr. Sobeloff prepared the summary, which was filed yesterday as a court document, from a 649-page report. With the report and summary were filed a letter by Judge O'Dunne to the receiver of the bank and his attorneys, summing up Mr. Sobeloff's work and advising them of their rights, and a court order which will be found elsewhere in the Sun.

INTRODUCTORY

Owing to exigencies of space, details, however important and interesting, must be omitted. Many transactions involving large sums cannot be discussed here even in outline, but the facts and reasoning supporting the opinions and conclusions expressed in this summary are treated in detail and fully documented in the report.

The preliminary report traced the development of the Baltimore Trust Co., the history of its mergers, its quest for bigness, its growing overhead, the expansion of its business interests outside of Baltimore and its divagations in unorthodox financial enterprises. It was shown how both before and after the raising of the guaranty fund, the executive officers resisted the feeble attempts of the public authorities to compel proper chargeoffs and reserves. The transactions of officers and directors in the stock of the bank and their withdrawal of deposits were reviewed. Numerous large losses in improvident loans were also noted.

The final report supplies in section I additional significant data pertaining to the period preceding September 1931. Section II includes transactions after the guaranty fund and prior to the adoption of the plan of reorganization. Section III is devoted to analysis of the bank's management policies and the conduct of the directors. The period of liquidation, including settlements, is covered in section IV. Section V discusses the law applicable to the facts reported in both reports. Section VI contains conclusions with respect to liability, and recom79696-5613

mendations for suits against the directors, and for improvements in banking practice by legislation to prevent similar catastrophes in the future.

I. ADDITIONAL DATA PERTAINING TO PERIOD PRECEDING RAISING OF THE GUARANTY FUND

Guaranty Company of Maryland

The Baltimore Trust Co. ignored timely warnings of the mismanagement of this company and lost $159,164.54 on loans to it. In addition, $26,035 was lost in settling a suit brought by the Guaranty Co.'s noteholders for breach of trust. Despite this, the trust officers were not disciplined and no steps were taken to prevent similar misconduct (pp. 4–12).

First National Co.

The incredible complacency of the bank's directors in the Guaranty Co. experience made possible similar breaches of duty in the handling of the First National Trust. The bondholders' suit involving a loss of $600,000 and its attendant publicity seriously injured the prestige of the bank and were major factors in its collapse.

The bank as trustee had accepted ineligible collateral; committed other breaches and countenanced false statements and advertising by the First National Co., making the bank a virtual guarantor of the bonds. Certain officers of the bank connived with the First National Co. to deceive the Pennsylvania insurance commissioner as to the financial condition of the Pennsylvania Surety Corp., a surety on First National bonds (pp. 15-48).

One feature of these complicated transactions was a scheme to buy off threatening bondholders by giving them second mortgages on a chain of hotels to be purchased from a bankrupt estate (pp. 47-48). For this purpose the bank advanced, without proper credit investigation, an additional $204,185.85 to a director of the Surety Co., whose earlier loans had been criticized by the bank examiners. This audacious scheme collapsed and the bank was left with the equities in the hotels which have proved worthless (p. 42).

An additional loss of $272,000 was sustained on loans made by the banking department on collateral the records in the trust department showed to be impaired (pp. 53 ff.).

The fact that a number of men were directors of both the Baltimore Trust Co. and the First National Co. did not serve to protect the bank. Indeed, a further loss of $28,712.50 was suffered on loans to Bank Director T. Garland Tinsley, president of the First National Co. (pp. 96 ff.).

Davison Chemical Co. and C. Wilbur Miller

The bank lent over $600,000 to C. Wilbur Miller, one of the directors, chiefly on stock of the Davison Chemical Co. and securities of its subsidiaries; $1 million to the chemical company on its unsecured note, and $358,297.70 on a note signed by 3 trustees to finance the purchase of chemical company stock for employees of that company (pp. 107 ff., 122 ff.).

It was grossly improvident to lend $2 million to this company, its affiliates, and its president, for the loans depended almost entirely on the prosperity of this one company.

The bank could have escaped loss on the direct loans to the Davison Chemical Co. if it had not resumed lending it money in 1931, almost a year after other banks ceased to extend new credit. Mr. Miller's account, although originally well margined, was allowed to become depreciated and to remain so for several years until the chemical company went into receivership and the collateral became almost worthless.

Visitors and governors of St. John's College

The bank lent St. John's College $150,000 without collateral or endorsement by any of the rich men on the college board, although its property was heavily mortgaged. Of this sum, $75,000 went to repay a loan of the Annapolis Banking & Trust Co., whose president was James A. Walton, treasurer of the college. The loss was $114,119.77. A further loss of $48,138.37 is estimated on a collateral loan to Mr. Walton personally, which was allowed to become undermargined (pp. 156 ff).

Federal Materials, Inc.

The Baltimore Trust Co. entered a speculative enterprise to effect a monopoly of the sand and gravel business in the Ohio and Mississippi River Valleys be

tween Louisville and New Orleans. When the project fell through the bank found itself the owner of a sand company at Paducah, Ky., which it operated for several years at a loss. Despite this, the bank later bought another sand and stone company at Cape Girardeau, Mo. Frozen in these enterprises is $317,451.24, one-half of which is believed lost (pp. 167–74).

Horses from Europe

The bank was induced to lend the Laurel Park Stud Co. $225,000 on a scheme to import horses from Europe, to train them for racing and then to sell them at the Saratoga auctions. No security was taken; the enterprise proved a failure, and the bank delayed protective action until nothing was left, not even horses. An additional loss of $45,116.93 has been sustained on individual loans to the backers (pp. 174–85).

Puerto Rican sugar transactions

In September 1928 the bank lent the United Puerto Rican Sugar Co. $500,000, without properly investigating the impairment of its assets in a recent severe hurricane. Over a year later, although the first loan had not been reduced, another for $221,375 was made to enable the sugar company to buy fertilizer from the Miller Fertilizer Co., a subsidiary of the Davison Chemical Co.

In addition, the bank invested $55,000 in the stock of a Puerto Rican bank formed by the sugar company and made it loans aggregating $215,806.25.

In exchange for these claims, the bank received approximately $1 million of the preferred stock of the reorganized company, Eastern Sugar Associates, now worth about 50 percent of par (pp. 185–92).

II. TRANSACTIONS AFTER THE RAISING OF THE GUARANTY FUND AND PRIOR TO THE ADOPTION OF THE PLAN OF REORGANIZATION

Baltimore-Gillet Co.

The Baltimore-Gillet Co. acquired in the Gillet deal capital investments amounting to $1,365,278.13 in a number of subsidiaries and took over $937,230.21 of notes of these companies. Thus, the bank, the only source of the BaltimoreGillet Co.'s funds, became the owner of large equities in such enterprises as a hotel, land developments, a garage, apartment houses, a cold-cream factory, and a fruit warehouse. Then, after the guaranty fund, it advanced $500,000 more to enable them to carry on. Nearly all of this is lost (pp. 192–203).

Loan of $350,000 to Gillet & Co.

In order to terminate the mesalliance with Gillet & Co., the bank permitted the Baltimore-Gillet Co. to lend Gillet & Co. $350,000 in 1932 for 5 years without security to set it up again in business, although it was known that the borrower's capital had been wiped out. The Baltimore-Gillet Co.'s funds had only one source-the Baltimore Trust Co.

As a result of losses in subsequent operations of Gillet & Co., its receivership and other involved corporate maneuvers, the bank had lost $215,000 and may lost more (pp. 203–209).

Loans on Baltimore Trust stock

Customers of the bank who had bought its stock on recommendation of its officers, offered the stock as collateral for loans. The bank, unable to make such loans, referred the applicants to other banks. After the stock became practically worthless in September 1931 the directors of the bank, on recommendation of Howard Bruce, took over these loans from other banks, without collateral or upon insufficient collateral, and without regard to the borrower's financial standing. On these loans approximately $34,000 was lost (p. 210 ff.). Mr. Bruce's position is that his predecessors' conduct compelled this action.

Loans to embarrassed banks

Although the Baltimore Trust Co. was operating on borrowed capital it lent money to assist other embarrassed financial institutions, upon insufficient collateral, and lost $29,283.27 on Stein Bros. & Boyce Co.; $23,099.97 on Mortgage Guaranty Co. and its affiliate, Title Guarantee & Trust Co., and $13,587 lent for the benefit of the Mercantile Savings Banks (S. P. R. 3–5).

C. W. Hendley & Co.

C. W. Hendley, a director of the bank, subscribed $50,000 to the guaranty fund. Not having the cash, he borrowed $50,000 from the bank, pledging $60,000

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