INVESTIGATION OF CONCENTRATION
OF ECONOMIC POWER
HEARINGS
BEFORE THE
TEMPOKAKY NATIONAL ECONOMIC COMMITTEE
CONGEESS OF THE UNITED STATES
SEVENTY-SIXTH CONGRESS
SECOND SESSION
PURSUANT TO
Public Resolution No. 113
(Seventy-fifth Congress)
AUTHORIZING AND DIRECTING A SELECT COMMITTEE TO
MAKE A FULL AND COMPLETE STUDY AND INVESTIGA-
TION WITH RESPECT TO THE CONCENTRATION OF
ECONOMIC POWER IN, AND FINANCIAL CONTROL
OVER, PRODUCTION AND DISTRIBUTION
OF GOODS AND SERVICES
PART 23
INVESTMENT BANKING
FINANCING OF AMERICAN TELEPHONE & TELEGRAPH CO.
FINANCING OF RAILROAD MATURITIES, J935
J. P. MORGAN & CO.
MORGAN STANLEY & CO., INC.
DECEMBER 15, 18, 19, AND 20, 1939
Printed for the use of the Temporary National Economic Committee
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1940
TEMPORARY NATIONAL ECONOMIC COMMITTEE
(Created pursuant to Public Res. 113, 75tb Cong.)
JOSEPH C. O'MAHONEY, Senator from Wyoming, Chairman
HATTON W. SUMNERS, Representative from Texas, Vice Cliairman
WILLIAM H. KING, Senator from Utah
WILLIAM E. BORAH, Senator from Idaho
CLYDE WILLIAMS, Representative from Missouri
B. CARROLL REECE, Representative from Tennessee
THURMAN W. ARNOLD, Assistant Attorney General
* WENDELL BERGE, Special Assistant to the Attorney General
Representing the Department of Justice
JEROME N. FRANK, Chairman
*LEON HENDERSON, Commissioner
Representing the Securities and Exchange Commission
GARLAND S. FERGUSON, Commissioner
*EWIN L. DAVIS, Commissioner
Representing the Federal Trade Commission
ISADOR LUBIN, Commissioner of Labor Statistics
*A. FORD HINRICHS, Chief Economist, Bureau of Labor Statistics
Representing the Department of Labor
JOSEPH J. O'CONNELL, Jr., Special Assistant to the General Counsel
Representing the Department of the Treasury
CLARENCE AVILDSEN, Special Adviser to the Secretary
Representing the Department of Commerce
JAMES R. BRACKETT, Executive Secretary
•Alternates.
CONTENTS
Testimony of — Page
Alexander, Henry C, J. P. Morgan & Co., New York, N. Y. 1184&-11861,
12095-12097
Anderson, Arthur M., J. P. Morgan & Co., New York, N. Y.. 11999-12049
Danielian, Dr. N. R., Washington, D. C 11830-11845
Chapin, John R., Kidder, Peabody & Co., Boston, Mass 11863-11870,
11882, 11926-11928
Gordon, Albert H., Kidder, Peabody & Co., New York, N. Y. 11942-11956
Hall, Perry E., vice president, Morgan Stanley & Co., Incorporated,
New York, N. Y 12069-12086
Keyes, Leonhard A., general manager, J. P. Morgan & Co., New
York, N. Y 11904-11909
Leffingwell, Russell C, J. P. Morgan & Co., New York, N. Y. 12101-12113
Lyons, Barrow, associate financial economist. Securities and Exchange
"Commission, Washington, D. C . 12001-12049
Mitchell, Sidney A., president, Bonbright & Co., New York, N. Y.. 12086-
12095
Stanley, Harold, president, Morgan Stanley & Co., Incorporated,
New York, N. Y 11958-11995,
12049-12086, 12097-12101
Stuart, Harold L., president, Halsey, Stuart & Co., Inc., Chicago, 111.
11935—11941
Swan, Joseph R., Smith, Barney & Co., New York, N. Y 11999-12049
Whitehead, W. S., security analyst, Securities and Exchange Com-
mission, Washington, D. C . 11920-11921, 11999-12000
Whitney, George, J. P. Morgan «fe Co., New York, N. Y 11845-11861,
11870-11887, 11893-11903, 11909-11920, 11921-11926, 11928-
11935, 11995-12049, 12064-12086, 12097-12101
Statement of —
Connely, Emmett F., president, Investment Bankers Association of
America, Detroit, Mich 11887-11889
FINANCING OF AMERICAN TELEPHONE & TELEGRAPH
CO.— J. P. MORGAN & CO.
, Page
Introductory statement on American Telephone & Telegraph Co. financing. 11829
Early development of Bell System and its capital requirements 11832
The management looks to New York for additional capital 11834
The change from competitive to noncompetitive financing . 1 1838
Difficulties in disposing of the 1906 bond issue 11841
The 1906 financing under the leadership of J. P. Morgan & Co 11847
Competition and competitive bidding 11848
Percentage interests of original contractors in 1906 and subsequent syndi-
cates 11850
Appearance in group of First National Bank and National City Co., 1913. 11852
Further issues purchased by the group, 1913-16 11854
Investment banking as a profession 11858
Association of Kidder, Peabody & Co. and Baring Brothers & Co., Ltd., in
Telephone financing 1 1863
Use of term "American Telephone proprietary interests" 11864
Percentage participations of underwriting group in Telephone issues, 1916-
1919 11870
The "Library Agreement" _.. 11872
Mr. Whitney's comments on origin of term "proprietary interests" 11875
First issue after the "Library Agreement" 11885
Summary by counsel of previous testimony on American Telephone &
Telegraph Co. fipanciog 1 1892
IV CONTENTS
Page
New England and Baring Brothers' participations prior to "Library
Agreement' ' 11 893
Informing interested parties of "Library Agreement" 11898
Readjustment of Kuhn, Loeb & Co.'s interest subsequent to "Library
Agreement" 11901
Availability of records of J. P. Morgan & Co., to the Committee 11904, 11920
Percentage participations subsequent to "Library Agreement" 11909
Distribution of spread on Telephone issues 11912
Competitive bidding as an alternative 11915
Length of subscription period 11916
Telephone issues not covered by "Library Agreement" — Applicability of
"trio arrangement" 11 922
Management fee to J. P. Morgan & Co. and Kidder, Peabody & Co 11923
Percentage participations subsequent to "Library Agreement" — The New
England interests 1 1926
Telephone financing subsequent to the Banking Act — Activities of George
Whitney 11928
Request of Halsey, Stuart & Co., Inc., to bid on Illinois BeU Telephone Co.
bonds 11935
Knowledge by the reorganized Eidder, Peabody & Co. of "Library Agree-
ment" of 1920 11942
Reorganization of Kidder, Peabody & Co. in 1931 11945
Discussion of Kidder, Peabody & Co.'s position in Illinois Bell Telephone
Co. issue— 1931 11949
Kidder, Peabody & Co.'s position in Illinois BeU Telephone Co. Issue —
1935 11951
Illinois Bell Telephone financing, October 1935 11958
The Illinois Bell Telephone syndicate ,.. 11960
Former members of Telephone group afi'ected by Banking Act of 1933 11963
Alternative methods of selling securities 1 1968
Understanding among investment bankers with respect to existence of
Telephone group 11971
Percentage participations of principal members of Telephone group in
relation to participations of Morgan Stanley & Co., 1935-39 11973
Accounts "frozen to a far greater extent than others" — The Telephone
account 1 1978
Guaranty of financial responsibility of other members of syndicate by
Morgan Stanley & Co 11981
Several liability of underwriters under purchase contract with issuer 11981
Reciprocity with Morgan Stanley & Co 11938
Underwriting risk relative to Telephone issues 11984
Profits of J. P. Morgan & Co. and Morgan Stanley & Co. on Telephone
financing , 1 1988
Position of dealer 11991
Memorandum on competitive bidding, Morgan Stanley & Co 11993
Testimony of Mr. Whitney in the Niagara Hudson Power hearing relative
to Telephone financing J 1 1995
Recognition of claims of Kidder, Peabody & Co 1 1998
FINANCING OF RAILROAD MATURITIES, 1935
Purpose of the Banking Act 12001
Railroad maturities due 12004
The spread oii the railroad-bond issues under consideration 12005
Function of J. P. Morgan & Co. in refunding operations 12006
The Toledo & Ohio Central Raih-oad Co. refunding 12007
"Matching" for the leadership 12015
Consultation with railroad concerning leadership 12018
Role of J. P. Morgan & Co. in Nypano extension 12021
Advantages which accrue from leadership 12025
Historical relation of E. B. Smith & Co. to Erie Railroad Co. financing 12027
Former association of partners of E. B. Smith & Co. with Guaranty Co. as
a valid claim to leadership .. 12033
Atlantic Coast Line Railroad Co. refunding — Role of J, P, Morgan & Co.. 12035
CONTENTS V
Page
Chicago & Western Indiana Railroad Co. refunding — Role of J. P. Morgan
& Co 12040
Opinion of Messrs. Davis Polk Wardwell Gardiner & Reed relative to
Banking Act of 1933 and relation of J. P. Morgan & Co. thereto. 12044
RELATIONS OF J. P. MORGAN & CO. TO MORGAN
STANLEY & CO.
Officers and directors of Morgan Stanley & Co., Incorporated, and their
prior affiliations 12049
Common and preferred stockholders of Morgan Stanlev & Co., Incorpo-
rated 1 12051
Limitations on disposition of capital stock under articles of incorporation.. 12055
Analysis of business done by Morgan Stanley & Co., Incorporated 12058
]''numeration of former accounts of J. P. Morgan & Co. underwritten by
Morgan Stanley & Co., Incorporated — Accounts not underwritten 12064
Utility underwritings by Morgan Stanley & Co., Incorporated, which were
not underwritten by J. P. Morgan & Co 12068
"Morgan Stanley & Co., Incorporated, have been doing business with the
clients which formerly had patronized J. P. Morgan & Co." 12072
Proportions in which preferred stock of Morgan Stanley & Co., Incorpo-
rated, is held by partners of J. P. Morgan & Co 12076
Partners' interests in J. P. Morgan & Co. in relation to their preferred stock
interests in Morgan Stanley & Co., Incorporated 12079
Organization of Bonbright & Co., Inc 12086
Informal understanding relative to future financing of Niagara Hudson
Power Co. system between Bonbright & Co. and Morgan Stanley & Co.,
Incorporated 12088
Continuity of banker relationship 12094
Question of whether proceeds of issues underwritten by Morgan Stanley &
Co., Incorporated, were placed on deposit with J. P. Morgan & Co 12097
Increases in holdings of Government obligations by J. P. Morgan & Co.
between 1934 and 1939 , 12102
Proposal by Mr. Leffingwell to abandon policy of tax exemption on certain
Government obligations 12104
Advocacy by Mr. Leffingwell of policy permitting price increase 12107
Tax-exempt income to J. P. Morgan & Co. and its partners 12111
Schedule and summary of exhibits vii
Friday, December 15, 1939 11829
Monday, December 18, 1939 11891
Tuesday, December 19. 1939 11957
Wednesday, December 20, 1939 ., 12047
Appendix ^ i 12115
Supplemental data 12316
Index I
SCHEDULE OF EXHIBITS
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659-1. Agreement, dated December 15, 1879, among minority
stockholders of National Bell Telephone Co. agree-
ing to sell no stock to other interests prior to April
1, 1880 .-.
1659-2. Table: List of directors of American Telephone & Tele-
graph Company and predecessor companies prior to
1900
1659-3. Table: Officers and members of executive committee,
American BeU Telephone Co., 1885 to 1900, inclu-
sive
1659-4. Table: Percent of equity ownership by directors, other
officers and their family relations as of selected dates
from July 9, 1877 to September 16, 1935, American
Telephone & Telegraph Co. and predecessor com-
panies
1659-5. Table: Stock outstanding and number of stockholders
from 1881 to 1926. Table: Financial interest of
large stockholders, 1881 to 1926. Table: Financial
interest of directors, 1880 to 1926. Table: Degree
of control by large stockholders, 1881 to 1926.
Table: Potential control by directors, 1880 to 1926.
Table: Estimated number of stockholders in addi-
tion to large holders and in addition to directors
necessary to control annual meeting
1659-6. American Telephone & Telegraph Co. and American
Bell Telephone Co., long term debt issues, 1880 to
1905, inclusive
1659-7. Letter, dated April 8, 1904, from H. L. Higginson,
Lee Higginson & Co., to Frederick P. Fish, presi-
dent, American Telephone & Telegraph Co., re-
garding need of new market for Telephone financing.
1659-8. Letter, dated March 7, 1902, from F. P. Fish to
Francis L. Hine, First National Bank of New York,
offering to seU to George F. Baker 15,000 shares of
American Telephone & Telegraph Company stock;
with option to purchase 25,000 additional shares.
Letter, dated March 8, 1902, from Francis L. Hine
to F. P. Fish confirming the foregoing sale and
option and requesting election of George F. Baker
and. John I. Waterbury to the board of directors.
Letter, dated March 25, 1902, from George F. Baker,
First National Bank, to F. P. Fish exercising fore-
going option to purchase 35,000 of American Tele-
phone & Telegraph Company stock
1659-9. Letter, dated February 16, 1905, from George V.
Leverett, Thomas Sherwin, and William R. Driver,
American Telephone & Telegraph Co., to F. P.
Fish objecting to plan of financing by convertible
bonds proposed by John I. Waterbury and associates
1659-10. Letter, dated February 15, 1905, from F. P. Fish to
J. P. Morgan & Co. regarding delay in proposed
financing
1659-11. Letter, dated February 15, 1905, from Senator W. M.
Crane to F. P. Fish doubting wisdom of convertible
bond issue
11843
11843
11843
11843
12115
12116
12117
12118
11843
11843
11843
12119
12125
12125
11843
11843
11843
11843
12126
12128
12132
12132
vn
vni
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659-12. Letter, dated February "20, 1905, from F. P. Fish to
John I. Waterbury, Manhattan Trust Company,
declining scheme of financing submitted by J. P.
Morgan & Co. Letter, dated February 20, 1905,
from F. P. Fish to J. P. Morgan & Co., declining
scheme of financing suggested. Letter, dated
February 20, 1905, from F. P. Fish to George F.
Baker, First National Bank, declining scheme of
financing submitted by J. P. Morgan & Coi
1659-13. Copy of letter dated August 14, 1905, from F. P. Fish
to Robert Winsor, Kidder, Peabody & Co., regard-
ing possible discussion of future financing
1659-14. Copy of letter dated November 21, 1905, from John I.
Waterbury, Manhattan Trust Company, to F. P.
Fish regarding possible future financing of the
telephone company
1659-15. (1) Proxy for special meeting of stockholders of
American Telephone & Telegraph Co., December
21, 1905, to authorize issue of convertible bonds,
(2) Notice on proxy for stockholders' meeting of
March 26, 1901..--
1659-16. Letter, dated December 6, 1905, from F. P. Fish,
president, American Telephone & Telegraph Com-
pany, to Charles H. Davis urging proxy for converti-
ble bond issue. Resolution, dated December 21,
1905, authorizing directors of American Telephone
& Telegraph Co. to issue $150,000,000 of convertible
bonds
1659-17. Letter, dated December 15, 1905, from F. P. Fish to
W. I. Putman urging support of the Lowell stock
for convertible bond issue. Letter, dated Decem-
ber 15, 1905, from F. P. Fish to George Barclay
Moffat urging support of the Lowell stock for con-
vertible bond issue. Memorandum, dated Decem-
ber 15, 1905, from G. A. W. to F. P. Fish regarding
Mr. Driver's telephone call stating he had not sent in
his proxy (3,750 shares) to the special stockholders'
meeting. Letter, dated December 15, 1905, from
F. P. Fish to Marsden J. Perry urging proxy for
convertible bond issue. Letter, dated December
16, 1905, from F. P. Fish to Joseph S. Fay, Jr.,
urging proxy for convertible bond issue and a hand-
written footnote by Mr. Fay disapproving the
proposed issue. Letter, dated December 16, 1905,
from Marsden J. Perry to F. P. Fish endorsing plan
for the issue of convertible bonds. Letter, dated
December 18, 1905, from Seth Low to F. P. JFish
regarding disapproval in proposed issue
1659-18. Letter, dated January 27, 1906, from F. P. Fish to
William Salomon, Vv'illiam Salomon •& Co., declin-
ing to discuss underwriting. Letter, dated January
29, 1906, from William Salomon to F. P. Fish regard-
ing possibility of making a competitive offer in tele-
phone financing. Letter, dated January 30, 1905,
from F. P. Fish to William Salomon & Co. declin-
ing the foregoing
1659-19. Letter, dated December 16, 1905, from F. P. Fish to
Edgar Speyer regarding delay in financing. Letter,
dated January 27, 1906, from Senator W. M. Crane
regarding proposed syndicate in telephone financing.
Letter, dated February 1, 1906, from Lee Higginson
& Co. toJF. P. Fish requesting opportunity to bid
on new telephone securities
11843
11843
11843
11843
11843
12133
12134
12134
12135
12136
11843
12136
11843
11843
12138
12139
COHsfTENTS
SCHEDULE OF EXHIBITS— Continued
TK
Number and summary of exhibits
^659-20. Purchase agreement dated February 8, 1906, be^tween
American Telephone & Telegraph Co. and J. P.
Morgan & Co., Kuhn, Loeb & Co., Kidder, Peabody
& Co., and Bearing Bros. & Co., Ltd., covermg
$100,000,000 convertible 4 percent bonds of the
Telephone Company, and option agreement cover-
ing $50,000,000 of the bonds. Letter, dated Feb-
ruary 13, 1906, from F. P. Fish to J. P. Morgan & Co.
and others modifying Article Three of purchase
agreement. Letter, dated February 13, 1906, from
J. P. Morgan & Co. and others to American Tele-
phone & Telegraph Company accepting modification.
1659-21. Agreement, dated February 14, 1906, between J. P.
Morgan & Co., Kuhn, Loeb & Co., Kidder, Pea-
body & Co. and Baring Brothers & Co., Ltd., list-
ing percentage participations in American Telephone
& Telegraph Company convertible 4 percent bond
issue ,
1659-22. Syndicate agreement, dated February 15, 1906, cov-
ering $100,000,000 American Telephone & Tele-
graph Company convertible 4 percent gold bonds. .
1659-23. Memorandum initialled by J. P. Morgan & Co., Kuhn,
Loeb & Co., Robert Winsor of Kidder, Peabody &
Co., F. P.. Fish, president, American Telephone &
Telegraph Company and W. M. Crane, regarding
employment of proceeds of sale of Telephone bonds. _
1659-24. Table: Syndicate joint allotments made by Kuhn,
Loeb & Co. and J. P. Morgan & Co. for $100,000,000
convertible 4 percent gold bonds ofifered February
15, 1906 1 .
1659-25. Letter, from George V. Leverett, American Telephone
& Telegraph Company to Charles Steele, J. P.
Morgan & Co., enclosing agreements and memo-
andum between the Telephone Company and
bankers. Memorandum, dated January 8, 1907,
between the American Telephone & Telegraph Com-
pany and J. P. Morgan & Co. et al. modifying agree-
ment between the parties dated February 8, 1906.
Agreement, dated January 8, 1907, between the
American Telephone & Telegraph Company and
J. P. Morgan & Co. et al. regarding reduction of
option price of American Telephone & Telegraph
Co. convertible 4 percent gold bonds. Agreement,
dated January 8, 1907, between the American
Telephone & Telegraph Company an^ J. P. Morgan
& Co. et al. regarding proposed issue of|,$25, 000,000,
5 percent notes dated January 1, 1907. Letter,
dated January 12, 1907, from Kidder, Peabody &
Co. to J. P. Morgan & Co. regarding enclosed agree-
ments. Letter, dated January 16, 1907, from
Robert Winsor, Kidder, Peabody & Co., to Charles
Steele, J. P. Morgan & Co., regarding enclosure
of the redraft of the Telephone coupon note along
with the original draft of the registered note
1650-26. Excerpts from "The Wall Street Journal" and the
"Commercial and Financial Chronicle" regarding
American Telephone & Telegraph Co. financing
1659-27. Letter, dated May 29, 1908, from J. P. Morgan & Co.
and others to the American Telephone & Telegraph
Company terminating the syndicate with respect
to the $100,000,000 convertible 4-percent gold
bonds :
Intro-
duced at
pagr
11843
11843
11843
11843
11843
11843
11843
11843
Appears
on page
12140
12143
12143
12147
12147
12150
11152
12155
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659-28. Letter, dated September 26, 1908, from T. N. Vail,
president, American Telephone & Telegraph Com-
pany, to J. P. Morgan & Co. and others extending
option for purchase of $50,000,000 American Tele-
phone & Telegraph Co. 30-year convertible 4-
percent gold bonds. Letter, dated September 30,
1908, from J. P. Morgan & Co. and others to T. N.
Vail accepting extension of option for purchase of
$50,000,000 American Telephone & Telegraph 30-
year convertible 4-percent gold bonds. Copy of
letter dated November 27, 1908, unsigned (from J.
P. Morgan & Co. and others) to T. N. Vail, presi-
dent, American Telephone & Telegraph Co., con-
firming the purchase of $50,000,000 American Tele-
phone & Telegraph 30-year convertible 4-percent
gold bonds. Letter, dated September 29, 1908,
from Robert Winsor, Kidder, Peabody & Co. to
George W. Perkins, J. P. Morgan & Co. regarding
acceptance of conditions for purchase of bonds as
set forth by American Telephone & Telegraph
Cc -ijany. Letter, dated September 26, 1908, from
Robert Winsor, Kidder, Peabody & Co. to George
W. Perkins, J. P. Morgan & Co., regarding the
signing of form of letter by American Telephone &
Telegraph Co
1659-29. Letter, dated January 15, 1907, from F. P. Fish,
president, American Telephone & Telegraph Com-
pany, to Hon. W. M. Crane enclosing copy of letter
from J. I. Waterbury, Manhattan Trust Com-
pany. Letter, dated January 16, 1907, from Hon.
W. M. Crane to F. P. Fish regarding appointment
of Messrs. Coolidge, Baker, and Vail to a com-
mittee on organization. Letter, dated January 21,
1907, from Hon. W. M. Crane to Mr. F. P. Fish,
regarding possible appointment of a committee on
organization along with recommendations for ap-
pointment of members of such committee. Reso-
lution by the executive committee dated January
23, 1907, regarding special committee to consider
the organization of American Telephone & Tele-
graph Company and its relation to the associated
companies. Letter, dated January 24, 1907, from
F. P. Fish to John I. Waterbury requesting latter
to serve on special committee to consider the or-
ganization of American Telephone & Telegraph
Co. and its relation to the associated companies.
Letter, dated January 25, 1907, from T. N. Vail
to F. P. Fish accepting appointment to committee.
Letter, dated January 30, 1907, from Hon. W. M.
Crane to F. P. Fish regarding meeting of recently
appointed committee. Letter, dated April 2, 1907,
from George F. Baker and others to F. P. Fish
regarding recommendation for increase in number
of the executive committee of American Telephone
& Telegraph Company. Letter, dated April 23,
1907, from F. P. Fish to the board of directors of
the American Bell Telephone Co. tendering resig-
nation as president of American Telephone & Tele-
graph Company. Letter, dated April 23, 1907,
from F. P. Fish to the board of directors of the
American Bell Telephone Co. tendering resignation
as a member of the board
11843
12156
11843 12157
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XI
Number and summary of exhibits
Intro- .
duced at Appears
^ ' on page
1659-30. Letter, dated May 8, 1907, from J. P. Morgan & Co.
and others to T. N. Vail, president, American Tele-
phone & Telegraph Company regarding need for
economies as essential to credit of the company.
Letter, dated May 16, 1907, from T. N. Vail to
Manhattan Trust Company regarding appoint-
ment as New York agent for registration of Amer-
ican Telephone & Telegraph Company stock. Let-
ter, dated May 16, 1907, from T. N. Vail to Guar-
anty Trust Company regarding appointment of
Manhattan Trust Company as New York agent
for registration of American Telephone & Tele-
graph Co. stock. Letter, dated May 21, 1907,
from J. W. Castles, president, Guaranty Trust
Company, to T. N. Vail requesting reason for
change of registration of American Telephone &
Telegraph Co. stock from Guaranty Trust Com-
pany to another company. Letter, dated May
29, 1907, from T. N. Vail to J. W. Castles regarding
reason for change of agents for registration of
American Telephone & Telegraph Co. stock. Let-
ter, dated February 4, 1908, from T. N. Vail to
Hon. W. M. Crane, Henry S. Howe, and J. I.
Waterbury regarding consideration of names for
possible additions to American Telephone & Tele-
graph Co. directory. Letter, dated January 20,
1909, from T. N. Vail to Hon. W. M. Crane regard-
ing election and filling of vacancy in the directory
of American Telephone & Telegraph Company.
Letter, dated March 19, 1909, from Robert Winsor,
Kidder, Peabody & Co., to Rudulph Ellis regarding
acceptance of directorship of American Telephone
& Telegraph Co 11843
1659-31. Letter, dated March 20, 1909, from Robert Winsor to
T. N. Vail, president, American Telephone & Tele-
graph Co. regarding acceptance of Mr. Ru4ulph
Ellis as a director of American Telephone & Tele-
graph Co. with a footnote concerning Mr. Terrell.
Letter, dated November 19, 1909, from T. N. Vail
to George F. Baker regarding possible election of
one of the members of J. P. Morgan & Co. to the
board of directors of American Telephone & Tele-
graph Co 11843
1659-32. Letter, dated April 19, 1910, from T. N. Vail to H. P.
Davison, J. P. Morgan & Co., regarding appoint-
ment of dummy director to hold place on direc-
torate for Mr. Morgan, Jr 11843
1659-33. Letter, dated March 27, 1905, from Clarence H. Mac-
kay, president. Postal Telegraph & Cable Co., to
T. Jefferson Coolidge, Jr., Old Colony Trust Com-
pany, regarding the Mackay Company and its ac-
quisition of stock in the American Telephone &
Telegraph Company 11843
1659-34. Letter, dated March 30, 1905, from T. Jefferson Cool-
idge, Jr., to Clarence H. Mackay reviewing reasons
for organization of the Mackay Company and its
relationship to American Telephone & Telegraph
Company -- 11 843
1659-35. Letter, dated April 3, 1905, from Clarence H. Mackay
to T. Jefferson Coolidge, Jr., regarding future rela-
tions between the Mackay Companies and Ameri-
can Telephone & Telegraph Company 1 1 1843
12160
12162
12163
12163
12164
12165
XII
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659-36. Letter, dated April 11, 1905, from T. Jefferson Cool-
idge, Jr., Old Colony Trust Company, to Clarence
H. Mackay, president, Mackay Companies, regard-
ing resignation as trustee of the Mackay Companies. 1 1843
1659-37. Letter, dated April 12, 1905, from Clarence H. Mac-
kay to T. Jefferson Coolidge, Jr., regarding resig-
nation of Mr. Coolidge as trustee of the Mackay
Companies 11 843
1659-38. Letter, dated June 20, 1905, from John I. Waterbury,
Manhattan Trust Company, to Clarence H. Mac-
kay tendering his resignation as trustee of Mackay
Companies -^ 1 1843
1659-39. Letter, dated June 20, 1905, from Clarence H. Mac-
kay to John I. Waterbury regarding resignation of
Mr. Waterbury as trustee of the Mackay Companies- 1 1843
1659-40. Letter, dated July 3, 1905, from T. Jefferson CooUdge,
Jr., to Clarence H. Mackay tendering his resigna-
tion as a director of Commercial Cable Company. _ 11843
1659-41. Letter, dated July 6, 1905, from Clarence H. Mackay
to T. Jefferson Coolidge, Jr., regretting Mr. Cool-
idge's resignation as a director of Commercial Cable
Company 11843
1659-42. Letter, dated July 7, 1905, from T. Jefferson CooUdge,
Jr., to Clarence H. Mackay giving reasons for his
resignation as a director of Commercial Cable Com-
pany 11843
1659-43. Letter, dated January 2, 1906, from T. Jefferson Cool-
idge, Jr., to F. P. Fish, president, American Tele-
phone & Telegraph Company, regarding traJisfer of
14,000 shares of Telephone stock to Clarence H.
Mackay - ---. 11843
1659-44. Letter, dated March 1, 1906, from Clarence H.
Mackay, president. Postal Telegraph Cable Co., to
F. P. Fish, president, American Telephone & Tele-
graph Company, requesting G. M. Cummings,
president, United States Mortgage & Trust Com-
pany, be substituted for Mr. T. N. Vail as a director
of the telephone company . 11843
1659-45. Letter, dated March 2, 1906, from F. P. Fish to
Clarence H. Mackay indicating difficulties in com-
plying with Mr. Mackay's request of March 1, 1906. 11843
1659-46. Letter, dated March 3, 1906, from Clarence H.
Mackay to F. P. Fish stating reasons why the re-
quest that Mr. Cummings be made a director of the
telephone company is a reasonable one 11843
1659-47. Letter, dated March 5, 1906, from F. P. Fish to Clar-
ence H. Mackay further regarding the removal of
T. N. Vail as a director of American Telephone &
Telegraph Company 11843
1659-48. Letter, dated March 6, 1906, from Clarence H.
Mackay to F. P. Fish further regarding removal of
T. N. Vail as director of American Telephone &
Telegraph Co. and agreeing to await his return from
Europe before making change of directors 1 1843
].,659-49. Letter, dated March 7, 1906, from F. P. Fish to Clar-
ence H. Mackay giving correct date of appointment
of Mr. Vail as a director of American Telephone &
Telegraph Co : 11843
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XIII
Number and summary of exhibits
1659-50. Letter, dated April 14, 1906, from T. N. Tail, director,
American Telephone & Telegraph Company to F.
P. Fish, president, American Telephone & Telegraph
Company, explaining his relationship to Mackay
and to the Postal System and Telephone Company
and offering a plan by which the Telephone Com-
pany may acquire the Postal System
1659-51. Letter, dated April 23, 1906, from F. P. Fish to Hon.
W. M. Crane enclosing copy of letter from T. N.
Vail dated April 14, 1906
1659-52. Letter, dated April 23, 1906, from F. P. Fish to Henry
S. Howe enclsoing copy of letter from T. N. Vail
dated April 14, 1906
1659-53. Letter, dated April 26, 1906, from Hon. W. M. Crane
to F. P. Fish regarding possible talk relative to Vail
matter and hope that latter will not be retired from
the board of directors
1659-54. Letter, dated July 5, 1906, from Clarence H. Mackay,
president, Mackay Companies, to F. P. Fish re-
garding date of T. N. Vail's election to board of
directors
1659-55. Letter, dated October 10, 1906, from Wm. H. Baker,
vice president, Mackay Companies, to the Finance
Committee of the Mackay Companies, regarding
his opinion as to the effect a combination of the
Western Union Telegraph and the American Tele-
phone & Telegraph Co. would have upon the tele-
graph business
1659-56. Enclosure to letter dated October 10, 1906 by Wm. H.
Baker to the Finance Committee of the Mackay
Companies regarding the combining of telephone
and telegraph companies.
1659-57. Letter, dated December 24, 1906, from Clarence H.
Mackay to F. P. Fish requesting list of American
Telephone & Telegraph Co. stockholders with their
addresses in order to send them a copy of the regular
annual report of the Mackay Companies
1659-58. Letter, dated December 28, 1906, from F. P. Fish to
Clarence H. Mackay regarding undesirabUity of
advertising the fact that one large corporation is
interested in the stock of another
1659-59. Letter, dated December 31, 1906, from Clarence H.
Mackay to F. P. Fish regarding effect of annual
report of Mackay Companies upon the public rela-
tive to telephone holdings
1659-60. Letter, dated February 1, 1907, from Clarence H.
Mackay to F. P. Fish regarding representation of
Mackay Companies on the board of directors of
American Telephone & Telegraph Companies
1659-61. Letter, dated February 10, 1907, from T. Jefferson
Coolidge, Jr., Old Colony Trust Company, to F. P.
Fish regarding Mackay Companies interest being op-
posed to interest of other stockholders and represen-
tation, therefore, should not be given to them
1659-62. Letter, dated February 13, 1907, from F. P. Fish to
Clarence H. Maekay relative to undesirabUity of
Mackay Companies having its stock interest specif-
ically represented on American Telephone & Tele-
graph Company board of directors in view of com-
petitive situation of the two organizations
Intro-
duced at
page
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
Appears
on page
12172
12173
12174
12174
12174
12174
12176
12177
12177
12177
12178
12178
XIV
CONTENTS
SCfiEBXJLE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659^63. Letter, dated February 19, 1907, from Clarence H.
Mackay to F. P. Fish taking exception to views ex-
pressed by latter and pointing out desirability of
board representation
1659-64. Letter, dated February 21, 1907, from John I. Water-
bury, Manhattan Trust Company, to F. P. Fish
stating that the matter of directors should be
firmly dealt with in the interest of the telephone
company
1659-65. Letter, dated February 21, 1907, from Hon. W. M.
Crane to F. P. Fish suggesting that President
Mackay be notified that the matter of directors for
the telephone company will be referred to the board
of directors
1659-66. Letter, dated February 25, 1907, from F. P. Fish to
Clarence H. Mackay stating the matter of A. T. &
T. directors has been submitted to members of the
board of directors for consideration
1659-67. Letter, dated March 6, 1907, from F. P. Fish to John
I. Waterbury, Manhattan Trust Company, stating
that executive committee had determined to ask
Messrs. Thayer, Fish, and Waterbury to consider the
question of directors and expressing view as to type
of persons to be considered
1659-68. Letter, dated March 9, 1907, from Hon. W. M. Crane
to F. P. Fish regarding necessity of careful inquiry
before extending invitation to new board members
and a suggestion that Mr. Cutler be chosen as a
member
1659-69. Letter, dated March 11, 1907, from F. P. Fish to Hon.
W. M. Crane stating the desirability of offering to
one of the men Mr. Mackay'suggested a position on
the board of directors and general discussion on
type of men to fill vacancies
1659-70. Letter, dated March 22, 1907, from F. P. Fish to
Clarence H. Mackay stating that the American
Telephone & Telegraph Co. board of directors
thought it UP wise to elect too large a representation
of another and to some extent competing corpora-
tion
1659-71. Letter, dated July 14, 1908, from T. N. Vail, presi-
dent, American Telephone & Telegraph Company
to John I. Waterbury, Manhattan Trust Company,
suggesting that the telephone company acquire
Western Union Telegraph Company and stating
advantages to the telephone company if Postal
Company could be acquired
1659-72. Letter, dated November 24, 1909, from T. N. Vail to
Clarence H. Mackay, president, Mackay Com-
panies, regarding preparation of agenda to be taken
up at next meeting
1659-73. Letter, dated November 30, 1909, from T. N. Vail to
Clarence H. Mackay regarding possible discussion
before making final plans to dispose of telephone
holdings _
1659-74. Letter, dated December 22, 1909, from T. N. Vail to
Clarence H. Mackay requesting conference
1659-75. Letter, dated December 23, 1909, from Clarence H.
Mackay to T. N. Vail regarding purchase price of
telephone stock offered American Telephone &
Telegraph Company
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
11843
12179
12179
12180
12180
12180
12181
12181
12182
12182
12184
12185
12185
12185
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XV
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1659-76. Letter, dated February 18, 1910, from Clarence H.
Mackay to T. N. Vail concerning option for the
purchase of 82,906 shares of American Telephone
& Telegraph Company's stock from the Mackay
Companies and The Commercial Cable Company..
1659-77. Letter, dated February 19, 1910, from Clarence H.
Mackay to T. N. Vail regarding terms of payment
in e.xercLse of. option to purchase teleplione stock
held by the Mackay Companies and the Com-
mercial Cable Company
1659-78. Letter, dated April 27, 1909, from W. A. Gaston, the
National Shawmut Bank, to T. N. Vail regarding
transfer of funds to Kidder, Peabody & Co. and
charged against American Telephone & Telegraph
Co. Letter, dated June 24, 1909, from T. N. Vail
to T. L. Chadbowine, Jr. regarding agreement to
purchase Western Union Telegraph Company capi-
tal stock up to and not exceeding 100,000 shares.
Letter, dated June 24, 1909, unsigned (from T. L.
Chadbourne, Jr.) to Robert Winsor, Kidder, Pea-
body & Co., accepting proposition respecting pur-
chase of Western Uiaion Telegraph Company capital
stock. Letter, dated March 30, 1937, from N. R.
Danielian, Federal Communications Commission,
to W. Shelmerdine, American Telephone & Tele-
graph Company, requesting information as to num-
ber of shares of Western Union Telegraph Company
stock the telephone company received in respect to
the $22,000,000 advanced to Kidder, Peabody & Co.
Letter, dated Api-il 14, 1937, from W. Shelmerdine
to N. R. Danielian supplying information requested
regarding acquisition of Western Union Telegraph
Company stock by American Telephone & Tele-
graph Co. Memorandum covering data from
various records regarding acquisition of Western
Union stock by American Telephone & Telegraph
Co. covering a period from April 28, 1909, to
November 16, 1909
1659-79. Letter, dated September 29, 1915, from T. N. Vail,
president, American Telephone & Telegraph Com-
pany, to N. T. Guernsey, general counsel, American
Teleplione & Telegraph Company, regarding pos-
sible participation in proposed loan to Great
Britain and France. Letter, from N. T. Guernsey
to T. N. Vail regarding legality of Telephone Com-
pany participation in proposed loan to Great
Britain and France. Letter, dated October 1,
1915, from T. N. Vail to Henry S. Howe regarding
the question of participating in the loan to England
and France to be taken up at the next meeting of
the American Telephone & Telegraph Co. execu-
tive committee. Letter, dated Ae^ust 21, 1916,
from H. P. Davison, J. P. Morgan & Co., to T. N.
Vail regarding possible purchase of $5,000,000 of
the new British 2-year loan. Memorandum, dated
August 22, 191b, on American Telephone & Tele-
graph Company letterhead paper by A. C. DuBois
to Mr. Milne regarding necessary refinancing to
participate in British 2-year loan. I^etter, dated
August 23, 1916, from T. N. Vail to H. P. Davison,
J. P. Morgan & Co., enclosing memorandum by
11843
11843
12185
12186
11843
12186
XVI
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
Mr. DuBois. Letter, dated November 2, '926,
from T. W. Lamont, J. P. Morgan & Co., to T. N.
Vail regarding the holding of $5,000,000 of British
Gavernment 3- and 5-year 5}i percent notes until
the telephone company's next meeting. Letter,
dated November 4, 1916, from T. N. Vail to T. W.
Lamont stating participation in the British Govern-
ment 2-year loan by the telephone company im-
possible. Letter, dated November 23, 1916, from
T. N. Vail to J. P. Morgan & Co., requesting an
offer for $80,000,000 30-year collateral trust 5 per-
cent bonds. Memorandum in response to request
of N. R. Danielian, Federal Communications Com-
mission, as to date which American Telephone &
Telegraph Co. received proceeds from sale of 30-
year 5 percent collateral trust bonds and other data
pertaining thereto. Voucher, dated December 14,
1916, on American Telephone & Telegraph Com-
pany paper to J. P. Morgan & Co. relative to
participation of the telephone company in special
6 percent demand loan to the British Government.
Letter, dated December 14, 1916, from G. D. Milne
to J. P. Morgan & Co. enclosing check amounting
to $20,000,000 for participation in 6 percent demand
loan to British Government. Copy of resolution
adopted by the executive committee of the Ameri-
can Telephone & Telegraph Company held De-
cember 20, 1916, regarding a participation of
$20,000,000 in special 6 percent demand loan to
the British Government signed by A. A. Marsters,
secretary. Letter, dated December 30, 1916, from
J. P. Morgan & Co., to American Telephone &
Telegraph Company enclosing check for $60,000
covering interest on Telephone participation of
$20,000,000 in a special demand loan to the British
Government. Copy of letter, dated January 2,
1917, from G. D. Milne, American Telephone &
Telegraph Company, to J. P. Morgan & Co. in
receipt of check for $60,000 covering interest at
rate of 6 percent on $20,000,000 British Govern-
ment demand loan. Copy of letter, dated January
24, 1917, from C. G. DuBois, comptroller, American
Telephone & Telegraph Company, to U. N. Bethell,
senior vice president, American Telephone & Tele-
graph Company, regarding notification by J. P.
Morgan & Co. that the rate of interest in the
British Government demand loan had been reduced
from 6 percent to 5 percent. Letter, dated Febru-
ary 5, 1917, from J. P. Morgan & Co. to American
Telephone & Telegraph Company crediting the
telephone company vi^ith $20,101,666.67, being re-
paynient of participation of $20,000,000 in special
(Jemand loan to the British Government
ll659-80. Letter, dated October 21, 1918, from T. N. Vail, pres-
dent, American Telephone & Telegraph Company,
to Hon. Nevi^ton D. Baker, Secretary of War, re-
questing that W. S. Gifford be released as director
of the Council of National Defense so that he may
be returned to his duties with the telephone com-
pany ^
11843
11843
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XVI r
Number and summary of exhibits
Intro-
duced at
Appears
on page
1659-81. Resolution, dated June 19, 1919, giving U. N. Bethel!
leave of absence for one year as vice president of
American Telephone & Telegraph Company.
Agreement between U. N. Bethell and American
Telephone & Telegraph Company covering trans-
fer of certain securities to American Telephone &
Telegraph and services to be rendered to the tele-
phone company along with payment of salaries.
Resolution, dated July 2, 1919, authorizing the
purchase of certain shares of capital stock held by
American Telephone & Telegraph Company.
Resolution, dated July 2, 1919, by American Tele-
phone & Telegraph Company agreeing to defend
any actions brought against U. N. Bethell growing
out of or based upon any action by him as director
or ofBcer of the telephone company. Resolution,
dated July 2, 1919, by the executive committee of
American Telephone & Telegraph Company that
the full pay granted to U. N. Bethell as vice presi-
dent by resolution shall be construed to include in
addition the salaries paid him by associated sub-
sidiary companies. American Telephone & Tele-
graph Company voucher made out to U. N. Bethell
for purchase of certain shares of capital stock
1659-82. Copy of letter, dated December 19, 1924, unsigned
(from H. B. Thayer, president, American Tele-
phone & Telegraph Company) to Henry S. Howe,
member of executive committee, American Tele-
phone & Telegraph Company, regarding appoint-
ment of a committee for the purpose of filling the
post of president in case of emergency. Letter,
dated December 29, 1924, unsigned (from H. B.
Thayer), to Henry S. Howe arranging for discus-
sion relative to presidency of American Telephone
& Telegraph Company. Letter, dated June 11,
1923, from H. B. Thayer, president, American
Telephone & Telegraph Company, to George F.
Baker, First National Bank, enclosing a suggestion
for a letter to D. F. Houston. Letter, to D. F.
Houston, president, Bell Telephone Securities Co.,
from George F. Baker, First National Bank, in-
troducing Mr. Houston to bankers abroad
1659-83. Letter dated December 12, 1939, from W. Shelmerdine,
American Telephone & Telegraph Company, to
Lloyd C. Mathers, Securities & Exchange Commis-
sion, enclosing photostat copies of certain letters
along with copy of stockholders resolution approved
by stockholders December 21, 1905, authorizing the
issue of $150,000,000 convertible bonds
1660. Letter, dated December 1, 1939, from Leon Hender-
son to J. Lawrence Fly, Federal Communications
Commission requesting use of exhibits relative to
American Telephone & Telegraph Co. investigation.
1661-1. Memorandum, dated November 15, 1939, for Henry
C. Alexander regarding American Telephone &
Telegraph Co. financing
1661-2. Table: Participations in underwriting by J. P. Mor-
gan prior to 1920 in Telephone financing
1662. Copy of telegram, dated February 8, 1906, from
Jacob Schiff, Kuhn, Loeb & Co., to Mr. Winsor,
Kidder, Peabody & Co. regarding necessary changes
in agreement for financing
J24491 — 40— pt. 23 2
11843
11843
11843
11845
11847
11847
12196
12198
12200
12201
12201
12202
11850 12206
XVIII
CONTENI'S
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1663. Letter, dated January 8, 1913, from J. P. Morgan &
Co. to First National Bank regarding a 10-percent
interest in American Telephone & Telegraph Com-
pajiy financing
1664. Letter, dated January 6, 1916, from J. P. Morgan &
Co. to Kuhn. Loeb & Co. regarding a 15-percent in-
terest in American Telephone & Telegraph Com-
pan j^ financing
166.5. Letter, dated November 27, 1916, from J. P. Morgan
& Co. to Kidder, Peabody & Co. regarding a 31 H-
percent interest in American Telephone & Tele-
graph Company $80,000,000 financing
1666. Table: Participations on "original terms" in Tele-
phone financing headed bv J. P. Morgan & Co.,
1906-19 -"-
1667. Summary statement of participations by J. P. Morgan
& Co. in issues of "associated" companies headed
by others 1906-19
1668. Appears in Hearings, Part 22, appendix, p. 11827
1669. Telegram dated December 15, 1939 from R. S. Peter-
son, Halsey, Stuart & Co., Inc., to H. L. Stuart,
Halsey, Stuart & Co., Inc., giving explanation of
penciled notation on "Exhibit No. 1637"
1670. Appears in Hearings, Part 22, appendix, p. 11795
1671. Table: American Telephone proprietary interest,
1906-20
1672. Table: American Telephone & Telegraph Company
proprietary interest, September 19, 1918
1673. Table: "original terms" group on future purchases of
A. T. & T. securities as agreed to at "the Library,"
and dated May 5, 1920
1674. Memorandum, dated September 30, 1920, relative to
New England proprietary interest and interest in
Pennsvl vania Bell selling syndicate
1675. Letter, dated August 17, 1920, from D wight W.
Morrow, J. P. Morgan & Co., to Robert Winsor,
Kidder, Peabody & Co.^ regarding difficulty in al-
lotting extra % oi 1 percent to Kuhn, Loeb & Co.
1676. Letter, from Robert Winsor to D wight W. Morrow,
regarding adjustment in allotting extra % of 1
percent to Kuhn, Loeb & Co
1677. Letter, dated September 28, 1920, from D wight W.
Morrow to Robert Winsor confirming oral agree-
ment relative to % of 1 percent extra allotment for
Kuhn, Loeb (feCo
1678. Letter, dated October 1, 1920, from Robert Winsor to
Dwight W. Morrow confirming the arrangement
as to division of Telephone allotment to be given
Kuhn, Loeb & Co
1679. Table: American Telephone & Telegraph Company
underwriting group showing division suggested
and that finally agreed upon, dated May 6, 1920-
1680-1. Memorandum, dated January 31, 1924, from CHfford
M. Brewer relative .o division of American Tele-
Ehone & Telegraph underwriting between Kuhn,
ioeb & Co. and J. P. Morgan & Co
1680-2. Memorandum, dated January 25, 1924, regarding
different basis for distributing proprietary profit
and including a list of New England proprietary
interest
118.')2
118.56
11857
11861
12207
12207
12208
1220S
11861
11862
12209
11862
11862
12210
11866
12210
11867
12211
11867
12211
11868
12212
11868
12213
11868
12213
11869
11903
11869
12212
11869
12214
11870
12214
11870
12215
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XIX
Number and summary of exhibits
Intro-
duced at
page
1681-1. Letter, dated December 5, 1939, from Henry C.
Alexander, J. P. Morgan & Co., to Peter R.
Nehemkis, Jr. enclosing schedule regarding financ-
ing of American Telephone & Telegraph Co. and
associated companies from January 1, 1920, to
June 16, 1934
1618-2. Table: Financing of American Telephone & Tele-
graph Co. and associated companies from January
1, 1920, to June 16, 1934
1681-3. Table: Financing of American Telephone & Tele-
graph Co. and associated companies, January 1,
1920, to June 16, 1934. (Corrected version of
"Exhibit No. 1681-2") ....
1682. Table: Bankers' gross commissions on issues of
American Telephone & Telegraph Co. and asso-
ciated companies managed by J. P. Morgan & Co.
or Morgan Stanley & Co., Incorporated, 1906-39-.
1683. Appears in Hearings, Part 21, appendix, p. 11380
1684. Memorandum regarding $25,000,000 Bell Telephone
Company of Pennsylvania twenty-five-year first
and refunding mortgage 7 percent sinking fund
gold bonds series "A" syndicate
1685-1. Letter, dated September 29, 1920, from J. P. Morgan
& Co. to Kuhn, Loeb & Co. regarding the purchase
of $25,000,000 Bell Telephone Company of Penn-
sylvania issue
1685-2. Letter, dated September 30, 1920, unsigned (from
Kuhn, Loeb & Co.) to J. P. Morgan & Co. ac-
knowledging letter dated September 30, 1920, con-
firming interest of $2,687,500 in $25,000,000 Bell
Telephone Company of Pennsylvania issue
1686-1. Letter, dated October 30, 1939, from J. P. Morgan &
Co. to the Securities and Exchange Commission
giving summaries of various Telephone issues
1686-2« Memorandum, giving summaries of 14 issues in
which J. P. Morgan & Co. participated in Tele-
phone financing
1687. Table: Percentage participations in issues of Ameri-
can Telephone & Telegraph Co. and associated
companies headed by J. P. Morgan & Co., Septem-
ber 1920-January 1930
1688. Table: Issues of American Telephone & Telegraph
Co. and associated companies headed by J. P.
Morgan & Co. 1920-30 showing length of time
syndicate banks were open and relation of sub-
scriptions to ofiFerings
1689-1. Memorandum regarding $2,155,000 United States
Telephone Company first mortgage 7 percent gold
bonds extending to July 1, 1941
1689-2. Memorandum regarding $2,676,000 Cuyahoga Tele-
phone Company first mortgage 7 percent gold
. bonds extended to July 1, 1941
1690. Letter, dated March 2, 1935, from Albert H. Gordon,
Kidder, Peabody & Co., to John Wilkie, Central
Hudson Gas & Electric Corp., regarding belief of
increased utility refunding and Telephone re-
funding
1691. Stipulation by C. E. Mitchell regarding communica-
tions from the files of Blyth & Co., Inc
11874
11874
11874
11875
11892
11894
11910
11910
11911
11911
11912
11916
11923
11923
11929
11930
XX
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1692. Memorandum, dated June 27, 1935, by C. E.
Mitchell, Blyth & Co., Inc., to George Leib and
others regarding discussion with George Whitney,
J. P. Morgan & Co., with reference to Telephone
financinK p,nd stating it would be a waste of time
to see "Waiter Gifford, president of American Tele-
phone & Telegraph Co _ 11930
1693. Letter, dated June 27, 1935, from C. E. Mitchell,
Blyth & Co., Inc., to Walter S. Gifford, president,
American Telephone & Telegraph Co., relative to
future financing of American Telephone & Tele-
graph Co 11931
1694. Letter, dated December 11, 1939, from Charles A.
Capek, Lee Higginson Corporation, to Peter R.
Nehemkis, Jr., transmitting a letter dated April
4, 1935, by Mr. Hallowell, Lee Higginson Corpora-
tion to Charles H. Schweppe, Lee Higginson
Corporation ^ 11 932
1695. Letter, dated April 4, 1935, from N. P. Hallowell,
Lee Higginson Corporation, to Charles Schweppe,
Lee Higginson Corporation, regarding talk with Mr.
Walter Gifford, president, American Telephone &
Telegraph Company, relative to $50,000,000
Southwest Bell Telephone Company issue 1 1932
1696. Appears in Hearings, Part 22, appendix, p. 11826 11958
1697. Memorandum, dated September 27, 1935, from E. N.
Jesup, Lee Higginson Corporation, to N. P. Hallo-
well, Lee Higginson Corporation, covering talk
with Harold Stanley relative to $45,000,000
Illinois Bell Telephone issue : 11966
1698. Memorandum, dated September 30, 1935, by H. M.
AddinseU, the First Boston Corporation, relative
to conversation between Harold Stanley, Morgan
Stanley & Co Inc., and Mr. AddinseU regarding
Illinois Bell Telephone Co. $45,000,000, 35-year,
3}4-percent first and refunding mortgage bonds 11967
1699. Memorandum, dated November 20, 1935, by H. M.
AddinseU regarding registration of Southwestern
Bell Telephone Company $45,000,000, 3}4-percent
bond offering 11972
1700. Table: Public offerings of securities under Securities
Act of 1933 by the American Telephone & Tele-
graph Company and subsidiary companies 11 972
1701. Memorandum, dated April 14, 1937, by H. M. Addin-
seU, the First Boston Corporation, regarding
Southern BeU Telephone Company $45,000,000,
3>^percent, 25-year debentures 11972
1702. Memorandum, dated June 26, 1939, by H. M.
AddinseU regarding Southern Bell Telephone
Company $22,250,000, 40-year, 3)4 percent deben-
tures r- 11972
1703. Table: Relative participations |in security issues of
Amercan Telephone & Telegraph and associated
companies, 1935-39. Participations of the principal
underwriters in relation to the participations of
Morgan Stanley & Co., Incorporated 11973
1704. Table: Financing of American Telephone & Telegraph
Company and associated companies by Morgan
Stanley & Co., Incorporated, from September 16,
1935, to June 30, 1939 11973
11930
12238
12239
12239
12240
12240
12241
12242
12243
12243
12244
12245
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XXI
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1705. Memorandum, dated September 23, 1936, by George
Leib, Blyth & Co., Inc., to C. R. Blyth, E. M.
Stevens and others, Blyth & Co., Inc., relative to
conversation with Mr. Stanley regarding $175,000,-
000 American Telephone & Telegraph Company
25-year Syis
1706. Letter, dated March 4. 1936, from Charles E. Mitchell,
Blyth & Co., Inc., to Charles R. Blyth, Blyth & Co.,
& Co., Inc», relative to talks with Mr. Stanley
relative to Blyth & Co., Inc., position in Pacific
Telephone financing
1707. Financing of American Telephone & Telegraph Com-
pany and Associated Companies headed by Morgan
Stanley & Co. Incorporated, from October 16, 1935,
to July 20, 1939
1708. Letter, dated February 15, 1905, from Francis Higgin-
son, Lee Higginson & Co., to F. P. Fish^ president,
American Telephone & Telegraph Company, pro-
testing against American Telephone & Telegraph
Company allowing a single firm to dominate its
financing plans
1709-1. Letter, from H. S. Sturgis, the First National Bank,
to Peter R. Nehemkis, Jr. enclosing requested table
showing the First National Bank's participation in
American Telephone & Telegraph Co. financing
1709-2. Letter, from H. S. Sturgis to Peter R. Nehemkis, Jr.,
adding Western Electric Company debentures of
$35,000,000 to table offered as '•'Exhibit 1709-3"_.
1709-3. Table: Particiaptions by issues on original terms of
the First National Bank or the First Security Com-
pany in American Telephone & Telegraph Com-
pany or Associated Companies financing from 1906
to date
1710-1. Letter, dated December 6, 1939, from Kuhn, Loeb &
' Co. to Peter R. Nehemkis, Jr., transmitting a
schedule of the percentage participation in Ameri-
can Telephone & Telegraph Company financing
1710-2. Table: Participations by issues on original terms of
Kuhn, Loeb & Co. in American Te'ephone & Tele-
graph Company or Associated Companies financing
from 1906 to date
1711. Letter, dated June 6, 1934, from William C. Potter,
tluaranty Trust Company of New York to the
stockholders regarding effect of Banking Act of
1933 on the Guaranty Trust Company
1712. Table: Maturities of certain railroad bonds giving
name of Company and description of bonds
1713. Diary entries by John W. Cutler, H. D. Moore, and
Karl Weishgit of Smith, Barney & Co. relative to
New York Central R. R. Co. financing
1714-1. Lett<5r, dated June 18, 1935, from John W. Young,
J. P. Morgan & Co., to Willard Place, New York
Central Ilailroad Company accompanied by table
showing original group and secondary groiip with
amounts of participations in Toledo & Ohio Central
financing .
1714-2. Handwritten note referring to table
J7J$, Letter, dated June 3, 1935, from Willard Place, New
York Central Railroad Co , to Max O. Whiting,
Whiting, Weeks & Knowles, as to whether the
bonds should earry a S% percent or 4 percent
coupon. __,,,y,-„^,, . ,,,,,, y,,_
11980
11984
11989
11993
11993
11993
11993
11993
11993
12002
12004
12008
12010
12012
12250
12250
12251
12252
12253
12254
12254
12255
12256
12259
12260
12260
12261
12262
12013 I 12013
XXII
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
1716. Letter, dated June 13, 1935, from E. Stuart Peck,
Adams & Peck, to Willard Place, New York Central
Railroad Co. regarding talk with Harry Morgan,
J. P. Morgan & Co., relative to Toledo & Ohio
Central bond issue
1717. Memorandum, dated June 17, 1935, by H. M. Ad'din-
sell, the First Boston Corporation, regarding the
Toledo & Ohio Central $12,000,000 refunding and
improvement mortgage S% percent bonds
1718. Telegram, dated June 21, 1935, from Max O. Whiting,
Whiting, Weeks & Knowles, to J. R. Macomber,
the First Boston Corporation, protesting for place
in Toledo & Ohio Central business
1719. Telegram, dated June 21, 1935, from Max O. Whiting
to J. R. Macomber regarding the First Boston Cor-
poration's lack of control over allocating Toledo &
Ohio Central business
1720. Letter, dated June 28, 1935, from J. R. Macomber to
George Whitney, J. P. Morgan & Co., in apprecia-
tion for part in Toledo & Ohio Central financing...
1721. Table: Final selling list and the respective amounts of
the various houses on Toledo & Ohio Central
$12,500,000, 3J4 percent bonds, series "A"
1722. Diary entries of John W. Cutler and Karl Weisheit,
Smith, Barney & Co., relative to New York, Penn-
sylvania & Ohio Railroad financing
1723. Memorandum, dated December 28, 1934, containing
an extract from the minutes of the meeting of the
board of directors of the Erie Railroad Company
1724. Memorandum, dated December 11, 1934, by Horace
D. Moore, Smith, Barney & Co., to J. W. Cutler
regarding major financing of Erie Railroad Com-
pany from June 28, 1924, to July 1, 1930
•1725. Memorandum, dated December 17, 1934, by J. P.
Ripley, National City Company, to H. C. Sylvester
and P. V. Davis, National City Company, relative
to heading New York, Pennsylvania, & Ohio ex-
tension bonds
1726. Memorandum, dated February 13, 1935, by J. W.
Cutler, Smith, Barney & Co., regarding extension
of the $8,000,000 New York, Pennsylvania & Ohio
Railroad Company prior lien mortgage 4^ percent
bonds
1727. Diary entries by John Cutler relative to Atlantic
Coast Line R. R. Co. financing covering a period
from September 20, 1934, to January 11, 1935
1728-1. Letter, dated May 21, 1935, from H. L. Borden, vice
president, Atlantic Coast Line R. R. Co., to W. D.
McCaig, comptroller, Atlantic Coast Line R. R.
Co., relative to Atlantic Coast Line R. R. Co.
$12,000,000 collateral trust 5 percent notes
1728-2. Letter, dated May 22, 1935, from L. Delano, Atlantic
Coast Line R. R. Co., to Roland L. Redmond,
Carter, Ledyard & Milburn, relative to close of
$12,000,000 collateral trust notes transaction
1729. Memorandum by Burnett Walker, Edward B. Smith
& Co., regarding Brown Harriman & Co., Incorpo-
rated, and Edward B. Smith & Co. being invited
by J. P. Morgan & Co. to consider purchase of
Chicago and Western Indiana Railroad Co. first and
refunding mortgage 5)^percent, s^pes "0" bonds. -
Int^o-
duced at
page
12014
12016
12019
12020
12020
12021
12023
12025
12027
12031
12031
12035
12039
12039
12041
Appears
on page
12014
12262
12263
12263
12020
12263
12264
12264
12266
12267
12268
12268
12269
12272
12272
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XXIII
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1730. Memorandum, dated July 2, 1934, by H. D. Moore,
E. B. Smith & Co., to Burnett Walker, E. B.' Smith
& Co., relative to Brown Harriman & Co., Incorpo-
rated having the strongest claim in leadership of
Chicago and Western Indiana Railroad Co. financing.
1731. Memorandum, dated February 21, 1935, by J. P. Rip-
ley, Brown Harriman & Co., Incorporated, to H. C.
Sylvester, Jr., P. V. Davis and W. Harmon Brown,
Jr., Brown Harriman & Co., Incorporated, relative
to having Kidder, Peabody & Co. in group with At-
lantic Coast Line R. R. Co. financing
1732. Copy of letter dated April 30, 1934, from Arthur M.
Anderson, J. P. Morgan & Co., to Ralph Budd,
president, Chicago, Burlington & Quincy Railroad
Co., regarding possible sale of Chicago & Western
Indiana 5J4-percent bonds
1733. Memorandum, dated May 17, 1934, by William
Ewing, J. P. Morgan & Co. regarding conversation
with Mr. A. N. Williams, president, Chicago & Wes-
tern Indiana Railroad Co., about 6 percent collateral
note for $6,000,000 maturing October 7, 1935
1734. Telegram, dated June 28, 1934, from H. D. Moore,
E. B. Smith & Co., to Burnett Walker and Karl
Weisheit, E. B. Smith & Co., regarding statement
by W. R. Coe, Brown Harriman & Co. that J. P.
Morgan & Co. had asked Brown Harriman & Co.
to form Chicago & Western Indiana group
1735. Diary entries by John W. Cutler and Karl Weisheit,
E. B. Smith & Co., regarding Chicago & Western
Indiana Railroad Co. from August 22, 1938, to
February 15, 1935
1736. Memorandum, dated November 9, 1934, by William
Ewing to A. M. Anderson, J. P. Morgan & Co., re-
garding sale of Chicago & Western Indiana bonds..
1737. Letter, dated May 2, 19S4, from Ralph Budd, presi-
dent, Chicago, Burlington & Quincy Railroad Co.,
to A. M. Anderson stating that Mr. Sturgis, Chi-
cago, Burlington & Quincy Railroad Co. is to
handle Chicago & Western Indiana Railroad
financing 1.
1738. Memorandum, dated June 13, 1934, by C. I. Sturgis,
Chicago, Burlington & Quincy Railroad Co. re-
garding talk with Mr. Anderson, J. P. Morgan &
Co. relative to selling Chicago & Western Indiana
Railroad bonds
1739. Memorandum, dated July 26, 1934, by A. N. Williams,
president, Chicago & Western Indiana Railroad
Co'., regarding conversation with A. M. Anderson
covering financial setup of Chicago & Western
Indiana Railroad Co
1740. Telegram, dated November 13, 1934, from W. R. Coe,
Brown Harriman & Co., Inc., to A. N. Williams
regarding 24-hour delay in making Chicago &
Western Indiana issue
1741. Telegram, dated November 9, 1934, from W. Ewing,
J. P. Morgan & Co., to A. N. Williams requesting
Mr. Ewing to talk with Mr. Davis of Brown
Harriman &Co
1742. Telegram, dated November 9, 1934, from William
Ewing to A. N. Williams stating possible close of
Chica go & Western Indiana deal
12042
12042
12042
12042
12042
12042
12042
^.043
12043
12043
12043
12043
12043
12273
12273
12273
12274
12275
12275
12275
12276
12276
12277
12277
12278
12278
XXIV
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
1743. Telegram, dated November 13, 1934, from P. V.
Davis, Brown Harriman & Co., to A. N. Williams
regarding notification of group as to signing of con-
tract for Chicago & Western Indiana financing —
1744. Telegram, dated November 14, 1934, from A. N.
Williams to A. M. Anderson, J,. P. Morgan & Co.,
requesting tliat he discuss bond matter with Mr.
Kurrie, vice president of Chicago & Western
Indiana Railroad Co
1745. Telegram, dated November 14, 1934, from A. M.
Anderson to A. N. Williams stafng willingness to
see Mr. Kurrie regarding Chicago & Western
Indiana Railroad Co
1746. Telegram, dated November 19, 1934, from A. N.
Williams to W. Ewing regarding situation so report
may be given at directors' meeting
1747. Copy of letter dated December 14, 1934, unsigned, to
W. Ewing regarding success of bom' e of Chicago
& Western Indiana Railroad bonds
1748. Memorandum, d^ ed June 17, 1936, by C. E. Mitchell,
Blyth & Co., li c, to C. R. Blyth and others, Blyth
& Co. Inc., regarding $26,000,000 Louisville &
NashviUe Railroad Company first and refunding
SYi percent bonds due 2003
1749. Memorandum, dated November 8, 1939, by Peter R.
Nehemkis, Jr., to H. C. Alexander, J. P. Morgan &
Co., requesting certain information from J. P.
Morgan & Co — ^
1750. Letter, dated November 1, 1939, from H. C. Alexander
to Peter R. Nehemkis sending copies of opinions re-
quested dated May 29, 1934, July 22, 1935, August
21, 1935, and December 14, 1935
1751. Letter, dated May 29, 1936, from Davis Polk Ward-
well Gardiner & Reed, to J. P. Morgan & Co. giving
opinion under section 21a of Banking Act of 1933-
1752. Letter, dated July 22, 1935, from Davis Polk Ward-
well Gardiner & Reed, to J. P. Morgan & Co. rend-
ering opinion regarding extension of the New York,
Pennsylvania and Ohio Railroad Company prior
lien mortgage bonds
1753. Letter, dated August 21, 1935, from Davio Polk Ward-
well Gardiner & Reed, to John P. Meyer, J. P. Mor-
gan & Co. rendering opinion regarding extension of
the Long Dock Company bonds
1754-1. Letter, dated December 14, 1935, from Davis Polk
Wardwell Gardiner & Reed, to J. P. Morgan & Co.
regarding extension of the Long Dock Company
consolidated mortgage 6 percent bonds
1754-2. Memorandum, dated August 20, 1935, by John M.
Meyer, J. P. Morgan & Co., for J. Howland Auchin-
closs, Davis Polk Wardwell Gardiner & Reed, cov-
ering list of drafts relative to Long Dock Company
financing —
1755. Letter, dated November 1, 1939, from Allen Wardwell,
Davis Polk Wardwell Gardiner & Reed, toH. C.
Alexander, J. P. Morgan & Co., regarding opinion
dated May 29, 1934, covering section 21a (1) of
Banking Act of 1933 relative to functions of J. P.
Morgan & Co
1756. Appears in Hearings, Part 22, p. 11795
1757. Appears in Hearings, Part 22, p. 11826
Intro-
duced at
page
12043
10243
12043
12043
12043
12044
12044
12044
12044
12044
12044
12044
12044
12044
12046
12046
CONTENTS
SCHEDULE OF EXHIBITS— Continued
XXV
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1758-1. Letter, dated December 9, 1939, from C. B. Sawyer,
president, the Brush Beryllium Company, to Sena-
tor O'Mahoney enclosing letter supplementing his
testimony '
1758-2. Letter, dated May 17, 1939, from C. B. Sawyer to
Hugh B. Cox, Special Assistant to the Attorney
General, regarding his testimony and that of A. J.
- Gahagan •
1758-3. Chart: Tensile strength of various metals compared
with beryllium
1759-1. Appears in Hearings, Part 22, appendix, p. 11797
1759-2. Appears in Hearings, Part 22, appendix, p. 11798
1760-1. Certificate qf incorporation of Morgan Stanley & Co.,
Inc
1760-2. Certificate of change of name of Morgan Stanley &
Co., Inc., to Morgan Stanley & Co. Incorporated
1760-3. Certificate of increase of the amount of capital stock
of Morgan Stanley & Co. Incorporated
1760-4. Certificate of change of provisions of its certificate of
incorporation of Morgan Stanley & Co. Incorpo-
rated
1761. Letter, dated November 27, 1939, from Harold
Stanley, president, Morgan Stanley & Co. Incor-
porated, to Peter R. Nehemkis; Jr., transmitting
information regarding holders of common and pre-
ferred stock of Morgan Stanley & Co., Incorporated.
Table: Morgan Stanley & Co., Incorporated, com-
mon stockholders of record as at August 31, 1939.
Table: Morgan Stanley & Co., Incorporated, com-
mon stockholders of record as at September 16,
1935. Table: Morgan Stanley & Co., Incorpo-
rated, preferred stockholders of record as at August
31, 1939. Table: Morgan Stanley & Co., Incor-
porated, preferred stockholders of record as at
September 16, 1935
1762. Table: Morgan Stanley & Co., Incorporated, issues
imderwTitten or participated in during period Sep-
tember 16, 1935, through June 30, 1939
1763. Table: Morgan Stanley & Co., Incorporated, issues
managed or comanaged during period September
21, 1935, through April 3, 1939, giving dates of
offering prospectus, names of issuers, titles and
amounts of issues, names of syndicate managers,
counsel for underwriters, advertising agencies, en-
gineering and appraisal firms, and accounting
firms
1764r-l. Table; Utility issues managed or co-managed by
Morgan Stanley & Co., Incorporated, September
16, 1935-June30, 1939
1764r-2. Table: Industrial and railroad issues managed or co-
managed by Morgan Stanley & Co. Incorporated,
September 16, 1935- June 30, 1939
1765. Letter, dated January 2, 1929, from Thomas S. La-
mont, J. P. Morgan & Co., to Lansing P. Reed,
Davis Polk Ward well Gardiner & Reed, enclosing
advertising circulars regarding various investment
trusts which make little pretense of diversification
and whose purpose is to insure control by bankers
and their clients
> See Part 6. pp. 2012 ff and 2079 fl.
» On file with the Committee.
12047 12286
12047
12287
12047
12048
12048
12290
12049
(')
12049
(')
12049
{')
12049
«
12052
12291
12058
Facing
12291
12058
Facing
12291
12067
12293
12067
12296
12070
12296
XXVI
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
Intro-
duced at
page
Appears
on page
1766-1. Report to the stockholders of the United Corpora-
tion for the year ended December 31, 1934
1766-2. Report to the stockholders of the United Corpora-
tion for the j'ear 1938
1766-3. Table: Approximate percentage of capital in J. P.
Morgan & Co. and approximate percentage of
Morgan Stanley & Co., Incorporated, preferred
stock in comparison with total held by Morgan
partners and their assignees
1767-1. Table: Relative participations in utility issues man-
aged or comanaged by Morgan Stanley & Co.,
Incorporated, 1935-39. Schedule B: Issues other
than those of Consolidated Edison Co. of New-
York, Inc., and its subsidiaries
1767-2. Schedule of deposits with and loans by J. P. Morgan
& Co
1768-1 Letter, dated March 6, 1939, from Peter R. Nehemkis,
.Jr., to J. P. Morgan & Co. requesting data in con-
nection with study of investment banking
1768-2. Letter, dated March 15, 1939, from J. P. Morgan &
Co. to the Securities & Exchange Commission sub-
mittmg data in response to request of March 6, 1939,
including: Lists of corporations and governments
for which J. P. Morgan & Co. perform one or more
of the following services: Payment of coupons;
sinknig fund administratic;i; payment of matured,
called, or converted securities; registration or trans-
fer of bonds or stock; payment of dividends. Lists
of corporations and other in..titutions of which part-
ners of J. P. Morgan & Co. are directors or trustees.
Lists of corporations and other institutions of
which employees of J. P. Morgan & Co. are directors
or trustees as a result of an interest of J. P. Morgan
& Co. Public announcements upon formation of
Morgan Stanley & Co^ Incorporated, dated Septem-
ber 6, 1935, and additional information on question
of interest of J. P. Morgan & Co. or a partner
thereof in Morgan Stanley & Co., Incorporated.
Table: Principal amounts of bonds purchased by
J. P. Morgan & Co. in Morgan Stanley & Co., In-
corporated, bond issues
1769. Table: Participation of J. P. Morgan & Co. in issues
of Consolidated Gas Co. and subsidiaries, 1919-32..
1770. Table: Participations of Blyth & Co., Inc., in issues
managed by Morgan Stanley & Co., Incorporated,
September 16, 1935, to June 30, 1939
1771. Table : Relative participations in utility issues managed
by Morgan Stanley & Co., Incorporated, 1935-39.
Schedule A: Issues of Consolidated Edison Co. of
New York, Inc., and its subsidiaries
1772. Table: Financing of Consolidated Edison Co. of New
York, Inc., and its subsidiaries by Morgan Stanley
& Co., Incorporated, September 16, 1935, to June
30, 1939
' On flic with the Committee.
' On file with the Securities & Exchange Commission.
12071
12071
120S6
12296
12093 12297
12096 I (2)
1209e ■ 12298
12096
12096
12096
12097
12097
12298
12310
12312
12314
12315
CONTENTS
SUPPLEMENTAL DATA
XXVII
Number and summary of exhibits
Unnumbered
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Unnumbered.
Letter from N. R. Danielian, Senate Committee
on Education and Labor, to Hon. Joseph C
O'Mahoney, dated January 10, 1940, stating
that the American Telephone & Telegraph
Company at no time has taken exception to
facts presented in testimony of December 15
1939 .. '
Extract from memorandum of corrections sub-
mitted by Arthur H. Dean, Sullivan & Crom-
well, counsel, to Albert H. Gordon
Copy of letter from Lyman Delano, chairman of
Board, Atlantic Coast Line Railroad Com-
pany to W. C. Potter, Guaranty Trust Com-
pany, dated April 30, 1935, regarding Guaranty
Trust Company having been designated as
trustee of $12,000,000 10-year collateral trust
notes
Copy of letter from George Whitneyj J. P.
Morgan & Co., to Leon Henderson, Securities
& Exchange Commission, dated January 25,
1940, submitting amplification of answers
made in testimony of December 19, 1939,
regarding functions by underwriting houses
Letter from Davis Polk Wardwell Gardiner &
Reed to J. P. Morgan & Co., dated Septem-
ber 13, 1935, regarding the incorporation and
organization of Morgan Stanley & Co., In-
corporated
Letter from Peter R. Nehemkis, Jr", toGe'o'rge
Whitney, J. P. Morgan & Co., dated January
23, 1940, requesting information supplement-
ing testimony
Letter from George Whitney to Peter R." Nehem-"
kis, Jr., dated January 26, 1940, submitting
supplementary information
Letter, from E. H. York, Jr., vice presidVnt","
Morgan Stanley & Co., Incorporated, to Peter
R. Nehemkis, Jr., dated February 15, 1940,
listing sales of securities since September 1935,
by companies for which J. P. Morgan & Co.
and Drexel & Co. sold securities from 1921 to
1933
Letter, from Peter R. Nehemkis, Jr., to E" H
York, Jr., dated March 4, 1940, commenting
on list submitted
Letter, from Harold Stanley, president, Morgan
Stanley & Co., Incorporated, to Peter °R
Nehemkis, Jr., dated March 12, 1940, replying
to letter of March 4, 1940
Letter, from J. P. Morgan & Co. to Peter R
Nehemkis, Jr., dated October 26, 1939, sub-
mitting revision of "Exhibit No. 1768-2" list-
ing directorates and trusteeships held by
partners
Letter, from Peter R. Nehemkis, Jr. to Henry C
Alexander, J. P. Morgan & Co., dated Novem-
ber 15, 1939, inquiring as to participation of
partners who were corporate directors in dis-
cussions and voting on security issues
Intro-
duced at
page
Appears
on page
12316
12316
12317
12317
12318
12320
12321
12321
12323
12324
12325
12327
XXVIII
CONTENTS
SCHEDULE OF EXHIBITS— Continued
Number and summary of exhibits
latro-
duced at
Appears
on page
Unnumbered. Letter, from Henry C. Alexander to Peter R.
Nehemkis, Jr., dated December 7, 1939,
setting forth information in response to letter
of November 15, 1939
Unnumbered. Letter, from Irving S. Olds, United States Steel
Corporation, to Peter R. Nehemkis, Jr., dated
October 10, 1939, submitting copy of minutes
of meeting of board of directors held on May
31, 1938
Unnumbered. Letter, from Peter R. Nehemkis, Jr., to Russell
C. Leffingwell, J. P. Morgan & Co., dated
January 29, 1940, requesting amplification of
testimony
Unnumbered. Letter, from Russell C. LeflRngwell to Peter R.
Nehemkis, Jr., dated February 2, 1940, sub-
mitting list of United States Government
obligations held by J. P. Morgan & Co. and
Drexel & Co., classified as tax exempt and
taxable as to surtax
2163. Memorandum, by R. C. Leffingwell, J. P. Morgan & Co.,
dated December 1939, supplementing testimony
12328
12330
12337
12337
12338
INVESTmATION OF CONCENTRATION OF ECONOMIC POWER
FRIDAY, DECEMBER 15, 1939
United States Senate,
Temporary National Economic Committee,
Washington, D. G.
The committee met at 10:20 a. m., purcuant to adjounmient on
Thursday, December 14, 1939, in the Caucus Room, Senate Office
Building, Senator Joseph C. O'Mahoney presiding.
Present: Senator O'Mahoney (chairman), Messrs. Henderson,
Avildsen, and Brackett.
Present also: Willis J. Ballinger, Federal Trade Commission;
Ganson Purcell, Securities and Exchange Commission; Holmes Bald-
ridge, Department of Justice; Clifton M. Miller, Department of
Commerce; Charles L. Kades, Treasury Department j Peter R.
Nehemkis, Jr., special counsel; David Ryshpan, financial analyst;
W. S. Whitehead, security analyst, and Samuel M. Koenigsberg, asso-
ciate counsel. Investment Banking Section, Securities and Exchange
Commission.
The Chairman. The committee will please come to order. The
hearing this morning will open with a statement by Commissioner
Henderson,
introductory statement on AMERICAN TELEPHONE &. TELEGRAPH CO.
FINANCING
Mr. Henderson. This morning the S..E. C, through its Investment
Banking Section, would like to present to the committee a case history
of the financing of America's largest corporation by America's lead-
ing bankers. This story involves the financing of the American
Telephone & Telegraph Co., beginning with the year 1906 and ending
with the last piece of financing in 1939. During this period, when
J. P. Morgan & Co. assumed the leadership over the financing of the
telephone company, A, T. & T. was relatively a small enterprise.
It had assets of about $530,000,000. The number of Bell telephones
was about 2,800,000. Today, A. T. & T. and its associated companies
have assets in excess of $5,000,000,000 and almost 16i/^ million Bell
telephones are in use.
That the services of the bankers in providing a large part of the'
capital required for this- expansion was a matter of the greatest
moment to the A. T. & T. goes without saying.
That the capital was provided at the lowest cost and in a manner
most in the public interest is a question which cannot be answered.
For at no tine during this entire period did the bankers or the
11829
11830 CONCENTRATION OF ECONOMIC POWER
company consi(Jer any alternative method of financing than that of
direct dealings with a single banking group.
I quote now from a letter of Lee, Higginson & Co. to Frederick
P. Fish, president, American Telephone & Telegraph Co., dated
February 15, 1905 [reading from "Exhibit No. 1708"].
As we think we have made it apparent to your Company ever since our firm
and Messrs. Speyer & Co. provided for the last capital requirements, we are
anxious to be afforded an opportunity to show on what terms we can provide
the fresh capital desired by the Company for the coming year. We do not ask
'^ suggest that we should be given the slightest preference over any other
aking firms. The Company is in sound financial condition, and we submit that
.nere is no reason, based on the condition of the Company in the present market
situation, why the Company should not provide for its wants on the best terms
available, and we think it a fair statement to say that the Company cannot
determine what these are if it permits a single firm only to lay before it a
plan to provide for its financial requirements.
The first witness will present testimony dealing with the background
of the telephone industry, and through him there will be developed the
events which resulted in the exclusive financial relations between
the powerful banking group headed by J. P. Morgan & Co. and the
American Telephone & Telegraph system.
Subsequent witnesses will develop the story of the manner in which
the telephone company has been financed, and one of the principal
perquisites to the bankers flowing therefrom — the profits from under-
writing.
Mr, Chairman, in presenting the first witness we have a unique op-
portunity. If we were as an S. E. C. unit to present the material
he will present, it would have required men on our staff to spend
literally months in the examination of documents. There was, as
you know, an inquiry into A. T. & T. by the Communications Com-
mission, and it is fortunate that an economist who undertook to fol-
low the early history of the A. T. & T. and the companies which
wen|^to make it up is available. We are, therefore, in the position
of presenting an expert witness of our own choosing, you might say,
whose information comes from another investigation set in motion
by the Congress of the United States. I think it will develop from
the testimony that this committee is fortunate in availing itself of
this opportunity for a condensation of what represents literally
months of inquiry. I think, Mr. Nehemkis, the questions that you
will address relate particularly to the financing and not to the A. T.
& T. itself. Is that correct?
Mr. Nehemkis. That is correct, sir.
I call Dr. N. R. Danielian, please.
The Chairman. Do you solemnly swear that the testimony you are
about to give in this proceeding shall be the truth, the whole truth, and
nothing but the truth, so help you God ?
Dr. Danielian. I do.
TESTIMONY OF DR. N. K. DANIELIAN, WASHINGTON, D. C.
Mr. Nehemkis. Mr. Chairman, I should like to read into the record
a statement of the qualifications of this witness.
Dr. Danielian holds the degrees of A. B., A. M., and Ph. D. from
Harvard University. He was instructor in the Department of Eco-
nomics at Harvard University from 1929 to 1935. In 1932, while at
CONCENTRATION OF ECONOMIC POWER 11831
Harvard, he assisted Dr. W. W. M. Splawn, counsel of the House Com-
mittee on Interstate and Foreign Commerce, in tliat committee's in-
vestigation of utility holding companies.
In 1933 he participated in the study of stock-market operations, con-
ducted by the Twentieth Century Fund. In 1935 he was appointed
financial and utility expert in the telephone investigation conducted
by the Federal Communications Commission under Public Resolution
No. 8, Seventy-fourth Congress, and continued in that capacity until
1938. Since then he has been director of research for the Subcom-
mittee on I'ducation and Labor under Senate Resolution 266, otherwise
known as die Senate Civil Liberties Committee.
Dr. Danielian, do you accept as a true and correct statement the
resume I have just read into the -ecord?
Dr. Danielian. I do.
Mr. Nehemkis. So that the record may be complete, will you state
your full name and address, Mr. Danielian?
Dr. Danielian, N. R. Danielian, Wishington, D. C.
Mr. Nehemkis. Very briefly, will yea state for the record your
duties in connection with the telephone investigation by the Federal
Communications Commission ?
Dr. Danielian. I was in charge of the economic studies of the
telephone investigation under the direction of the chief accountant.
The Chairman. The cliief accountant of whom?
Dr. Danielian. Mr. John H. Bickley.
The Chairman. Chief accountant for the F. C. C. ?
Dr. Danielian. The telephone investigation.
The Chairman. He was accountant of the Federal Communications
Commission ?
Dr. Danielian. That is right.
Mr. Nehemkis. And you also participated, did you not, Dr.
Danielian, in the preparation of the reports on the investigation?
Dr. Danielian. I did. I prepared some of the reports personally
and participated in the preparing of others.
Mr. Nehemkis. And you are the author, are you not, of a recent
publication called "A. T. & T., The Story of Industrial Conquest"?.
Dr. Danielian. That is correct.
Mr. Nehemkis. Dr. Danielian, may I ask you a question concerning
the documentation upon which your testimony is predicated. Do I
understand correctly that the 83 exhibits which will be offered in
connection with your testimony are matters of official record in the
files of the Federal Communications C ommissicn ? ^
Dr. Danielian. All but about 10 docuTr.ents are on file at the Fed-
eral Communications Commission, having been introduced in official
proceedings before the Commission in Special Investigation Docket
No. 1. I think about 5 documents were obtained from A. T. & T.
recently. They are not matters of record with the F. C. C. There
are a few oiliers which I thmk the S. £. C. made available to me in
connection with the preparation of this particular testimony.
The Chairman. Are any of these documents that were introduced
in the F. C. C. study challenged by anybody ?
Dr. Danie li an. These documents were presented in the following
fashion: They were accumulated in the course of the investigation.
^ Subsequently entered as "Exhibits Nos. 1659-1 to 1659-83," appendix, pp. 12115-12200.
11832 CONCENTRATION OF ECONOMIC POWER
Photostatic copies were obtained from the company, and I might add
that the photostats filed with the Federal Communications Commis-
sion have in back of them the authentication of the company to the
effect that they were taken from the files of the company. I followed
that procedure personally in obtaining these documents from the
company.
The Chairman. So far as the documents which have been taken
from the F. C. C. study is concerned, they have all been authenticated ?
Dr. Danieuan. That is right.
The Chairman. Could you separate those from the others to which
I referred so we could put them in ? Or could that be done without
much difficulty?
Mr. Nehemkis. Suppose I offer these later?
The Chairman. What is the authentication of the other documents
to which you refer?
Dr. Danielian. The files that were obtained from the company
recently have a letter of transmittal by Mr. W. Shelmerdine, of the
company. The others that were made available to me by the Securi-
ties and Exchange Commission
Mr. NEHEMias (interposing). We assume responsibility for their
authenticity.
The Chairman. Unless there is objection, then each of these docu-
ments may be presented and entered into proceedings when offered.
Mr. AviLDSEN. Are you at present connected with any Government
departments or universities?
Dr. Danielian. I am at the present time director of research for
the Senate Civil Liberties Committee, a subcommittee of the Senate
Committee on Education and Labor under Senate Resolution No. 266.
Mr. Henderson. I might say that I communicated with Senator
La Follette and asked his permission to have Dr. Danielian appear
today, and it was graciously accorded.
early development of bell SYSTEM AND ITS CAPITAL REQUIREMENTS
Mr. Nehemkis. Dr. Danielian, will you state for the committee
b. iefly the history of the develbpment of the Bell System prior to
1900?
Dr. Danielian. Briefly, the original Bell patents were under the
control of Alexander Graham Bell and his father-in-law, Gardiner G.
Hubbard. This situation obtained until 1878. In that year, on
accoi it of the financial requirements of the System, they had to obtain
capital from Boston financial and commercial interests. In coimec-
tion with the sale of the stock of the Bell Telephone Co. in that year
to these Bostonians, they had to concede to those Bostonians control
of the Bell patents. That was done by a by-law of the corporation
which reads as follows:
The holders of % of the stock for which money has been paid and subscribed
shall for the space of two years have an equal right and power with the holders
of the % reserved to the patentees.
Thus within 2 years the inventor and his original backer lost control
of the patents to these commercial and financial interests of Boston.-
In 1879, Hubbard was only a director, and Alexander Graham Bell
was ijiveii the official title of electrician.
CONCENTRATION OP ECONOMIC POWER 11833
The new group and their friends remained in power for the suc-
ceeding quarter of a century, A study of the personnel of the boards
and executive committees of A. T. & T. and its predecessors indicates
that these Bostonians remained in power until 1902. In the interven-
ing period, from 1902 to 1907, the control of the corporation was a
matter of contest.
Mr. Nehemkts. Dr. Danielian, will you tell me how the Bell Sys-
tem covered its capital requirements during this period of which you
have been speaking?
Dr. Danielian. The capital requirements of the System during
this period were covered principally by the sale of stock to its stock-
holders and by the reinvestment of earnings and surplus. In the
pei'iod up to 1898 only a very small amount of bonds and notes were
issued, about $8,000,000, and even those were sold to stockholders pro
rata. It was not until 1898 that the System issued bonds for sale
through banking houses. Between 1898 and 1905, inclusive, the Sys-
tem issued some $78,000,000 of bonds, of which all but 25 millions
were sold to bankers after competitive bids were permitted.
Mr. Nehemkis. As I understand you to say, the sale of the System
securities during this period was through what we know as competi-
tive bidding.
Dr. Danielian. That is correct.
Mr. Nehemkis. During this period, Dr. Danielian, the Bell System
had no sustained relations with any single banking house or group,
did it?
Dr. Danielian. There do not appear to be any habitual relations
with any banking house.
Mr. Nehemkis. Dr. Danielian, will you be good enough to describe
briefly the financial needs facing the Bell System at the turn of the
century ?
Dr. Danielian. The financial requirements of the Bell System, of
course, were defined by the business situation in which the System
found itself at the time. It will be recalled that in 1893 and 1894 the
Bell patents expired, and after that there was great competition from
independent telephone interests. As a result of this competition there
was great impetus to the expansion of telephones ; whereas in 1893-94
there were only 266,000 telephones in use by the Bell System — and the
Bell System was a monopoly at that time — 10 years later the Bell
System itself had 1,317,000 stations, and the independents in the
course of the 10 years had themselves developed 1,058,000 stations,
which together meant total telephones in use of 2,371,000, which indi-
cates a tremendous expansion in that period. It also means that the
Bell System was really being pushed by the independents to supply
service to the country. Furthermore, at that time the Bell System
had adopted — the American Bell Telephone Company, which was a
predecessor of A. T. & T. — adopted the policy of acquiring control by
purchasing of stock of subsidiary operating companies. That also
necessitated new money.
Mr. Nehemkis. Did the company during this period. Dr. Danielian,
seek to broaden the n arket for its securities ?
124491 — 40— pt. 23-
11834 CONCENTRATION OF ECONOMIC POWER
THE MANAGEMENT LOOKS TO NEW YORK FOR ADDITIONAL CAPITAL
Dr. Danielian. It does appear that the management of A. T. & T.
was beginning to look outside of New England to find sources of
funds. They naturally looked toward New York to supply some of
their needs. The financial requirements as well as the amount to go
outside of New England are perhaps best described in th^se two
documents.
Mr. Nehemkis. Which documents?
Dr. Danielian. The one is a memorandum from Theodore N. Vail
to Senator W. M. Crane, of Massachusetts, in 1901. I believe that
was just prior to the election of Mr. Crane to the Senate, in which Mr.
Vail described the financial needs as follows [reading] :
The worst of the oppositici has come from the lack of facilities afforded by
our companies — that is, either no service or poor service. For this, circumstances
beyond control are to a great extent responsible, as it was, in the early days,
very difficult to provide money.
To meet these increasing demands, increasing amounts of money will be needed
each year. A low estimate for the next five years would be $200,000,000 — every
probability points to a larger sum.
These demands necessitate a broad financial policy covering a period of no lesa
than five years. . . .
The other communication is from Henry Lee Higginson to Fred-
erick P. Fish, who was president of the A. T. & T. from 1901 to 1907.
In this letter, which is dated April 8, 1904, Mr. Higginson stated to
Mr. Fish [reading from "Exhibit No. 1659-7"] :
Of course, we agree with your views entirely that you need a new market, and
we think this can be accomplishing by dealing with Speyer. We know as well
as anybody can that the telephone securities are as good as can be, but they
have not interested the public yet, outside of New England, very much, and
the company has not got the standing which it deserves, and which it will have
by and by. The New Yorkers are always shy of new things from this part of
the country. We think Speyer can help to distribute the securities elsewhere.
I think that these documents indicate, on the one hand, that the com-
pany needed a large-scale financing and, on the other hand, that the
management was looking outside of New England for a source of
capital.
Mr. Nehemkis. Now, Dr. Danielian, will you describe rather briefly
the negotiations for the sale of $150,000,000 bonds to the Morgan
syndicate ?
Dr. Danielian. Preliminary to that particular episode, perhaps a
word should be said about the first attempt to obtain capital from
New York. That came in 1902. In that year, in the month of March,
Mr. Fish, the president of the A. T. & T., carried on negotiations with
Mr. George F. Baker, Sr., for the sale of 50,000 shares of A. T. & T.
stock.
The Chairman. What year was this ?
Dr. Danielian. 1902.
The Chairman. And prior to 1902, the Bell System was prac-
tically locally financed in New England?
Dr. Danielian. That is correct.
The Chairman. And now you are describing the appeal to capital
sources outside of New England?
COXCENTRATIOX OF ECONOMIC POWER 11835
Dr. Danielian. That is right. In March of 1902, they concluded
an agreement with George F. Baker, Sr., whereby the latter would
take 50,000 shares of A. T. & T. stock at 1531/2. In connection with
that agreement, provision was also made for the election of George F.
Baker, Sr., and John I. Waterbury, who was then president of the
Manhattan Trust Co., and was also associated with Mr. Baker in
this particular deal — they were elected, these two, to the board of
the A. T. & T. At the same time, Theodore N. Vail came into the
directorate of the A. T. & T. Mr. Vail became associated with this
system in the early days as general manager, but he had resigned in
1887 to devote himself to his personal affairs. For the first time since
then he came back to the System with Mr. Baker and Mr. Waterbury
as director of the company.
In the next 2 or 3 years, the question of large-scale financing was
still to the fore, although in 1904 the System was again financed by a
competitive offer of bonds.
Mr. Neiiemkis. Do you recall which banking house at the time had
made that offer, Dr. Danielian?
Dr. Danielian. I think you have a tabulation there which indicates
that.
Mr. Nehemkis. Well, it doesn't make any difference, we will bring
it up later.
Dr. Danielian. Lee, Higginson and Kidder, Peabody were quite
active in bidding for the securities of the company at that time.
Now, in 1905, the proposition for large-scale financing received con-
crete expression. In February of that year a plan of financing was
offered to the A. T. & T. by John R. Waterbury and associates. Cor-
respondence indicates that these associates were J. P. Morgan & Co.,
and Kidder, Peabody. According to this plan of financing, $85,000,-
000 of convertible bonds were to be issued. In addition, $50,000,000
more, on which the bankers were to be given an option. This plan
of financing was subject to a great deal of discussion in the company,
for w^ have a memorandum indicating a joint expression of opinion
by officers of the company on this plan of financing which involved
the issue of convertible bonds.
Mr. Nehemms. That was the $150,000,000 which
Dr. Danielian. This, the original plan, involved the issue of really
$185,000,000 of convertible bonds and $50,000,000 of other bonds.
i?his was subjected to criticism by company officials, and in this
memorandum wliich is dated, I believe, February 16, 1906
Mr. Nehemkis. That is correct.
Dr. Danielian. The officers of the company, namely, Vice Presi-
dent Sherwin, Treasurer Driver, and Attorney Leverett of the com-
pany, reach the following conclusion : They said [reading from "Ex-
hibit No. 1659-9"] :
To oar minds there is another risk in the proposed plan which should be had
in mind. If a bankers syndicate should be formed, under the proposed plan, who
should pool their bonds or place them in trust, the trust so formed, by exercis-
ing the option given for the conversion of bonds, would have the power to acquire
so near an absolute controlling interest in this company as practically to control
the whole assets of the company, which they could use for any schemes of
financing that they saw fit. In short, having nearly one-half of the entire
issued capital stock of the company, they could consolidate this company with
other companies, or make any other arrangement in regard to its future
11836 CONCENTRATION OF ECONOMIC POWER
financing that they saw fit. This is a great and extremely valuable option and
is equivalent, until the bonds are distributed or sold to the public, to a
surrender of the powers of the management upon present officers and stock-
holders to a body of bankers who may work to the disadvantage of the present
stockholders in the promotion of other schemes of consolidation.
The Chairman. Who is the author of that statement?
Dr. Danieuan. This memorandum was prepared by Vice President
Sherwin, Attorney Leverett, and Treasurer Driver of A. T. & T., on
the plan of financing proposed by Waterbury and associates.
The Chairman. And to whom was the memorandum submitted?
Dr. Eanielian. To Mr. Fish, the president.
There were other criticisms. Senator Crane, who was director of
the system at that time, also said :
I am beginning to think —
This is a letter of the same date as this memorandum, February 15,
1906 [reading from "Exhibit No. 1659-11"] :
I am beginning to think that we ought to raise the necessary money by the
sale of font percent collateral bonds without the conversion clause. We surely
can find someone who will buy them at a reasonable price. The other proposi-
tion is intricate and uncertain and might lead to a great deal of trouble.
Pursuant to these opinions, Mr. Fish, by letters dated February 20,
1905, to J. P. Morgan & Co., John I. Waterbury, George F. Baker, Sr.,
declined this plan of financing.
Mr. Henderson. That is, basing it on their conclusions which you
have read from this memorandum?
Dr. Danielian. I assume that was the basis on which Mr. Fish
declined the offer, although in his letter he said that there were too
many intricacies in the plan to proceed at the time.
In 1905, instead of this plan of financing, the company issued
$20,000,000 of 6-percent gold-coupon notes, which were sold to Lee,
Higginson & Co., and Speyer & Co., after competitive bids were
offered.
In the fall of 1905 the plan for large-scale financing was revived
again, and in December a stockholders' meeting was called to ap-
prove the issue of $150,000,000 of convertible bonds. Prior to the
meeting, Mr. Fish submitted the circular letter to stockholders which
he was planning to send, to Mr. Baker and Mr. Waterbury for their
criticisms, and lie obtained their suggestions by letter dated Novem-
ber 21, 1905, and then proceeded with the stockholders' meeting. In
connection with that meeting, the president, Mr. Fish, had to canvass,
to some extent, for proxies to the meeting of the stockholders. In
fact, to the best of my knowledge, for the first time in the company's
history a regular proxy committee was formed, with the names of
the committee members on the proxy form and no opportunity was
given on the proxy form for the substitution of the stockholders'
own attorney.
On December 21 the stockholders did approve by two-thirds vote
the issues of $150,000,000 of convertible bonds by the board of direc-
tors. There was no statement in this resolution with regard to the
conditions under which the bonds were to be issued. There was also
some criticism from certain large stockholder^ as to the advisability
of this bond issue.
CONCENTRATION OF ECONOMIC POWEJl 11837
In the succeeding month, January 1906, Mr. Fish was in constant
negotiation with Mr. Waterbury, in conferences with Mr. Crane,
one of the members of the board of directors.
Mr. HENDERSON. Dr. Danielian, will you tell me again who Mr.
Fish and Mr. Waterbury were, what interests they represented, and
what positions they held?
Dr. Danieijan. Mr. Fish was the president of A. T. & T. from
1901 to 1907. Mr. John I. Waterbury was the president of Man-
hattan Trust Co., and he became a member of the board of directors
of A. T. & T., with George F. Baker, Sr., on the occasion of the
sale of the 50,000 shares of A. T. & T. stock in 1902, and Mr. Water-
bury was associated with Mr. Baker and later with J. P. Morgan &
Co. in the financing that they then proposed to A. T, & T. Mr.
Crane was Senator from Massachusetts and was elected a director of
A. T. & T. in K03.
• Mr. Nehemkis. Will you proceed, sir.
Dr. Danieijan. During the month of January negotiations were
being carried on with the bankers. At the same time, other bankers
were insistently trying to obtain an opportunity to bid for the pro-
posed financing.
Mr. Nehemkis. In other words, the situation then was in some
respects not different from the situation as prevails now, in general ?
Dr. Danielian. I wouldn't want to express an opinion on that
because I haven't studied the situation now as thoroughly as I have
studied its past history.
Mr. Nehemkis. Very well, sir.
Dr. Danielian. Speyer & Co., associated with Lee, Higginson &
Co., tried to obtain an opportunity to bid, Salomon & Co. insistently
attempted to secure an opportunity to bid for bonds, and Lee, Higgin-
son & Co. also tried to have such opportunity.
Mr. Henderson. They were trying to get, if I understand you cor-
rectly, the right to make a bid.
Dr. Danieijan. That is right.
There are several letters pertaining lo this. I would like to read
only part of one, part of a letter from Lee, Higginson & Co., dated
February 1, 1906, which was only 7 days before the bonds were
actually sold to J. P. Morgan & Co. and Kidder, Peabody & Gq.
Apparently, in this letter, Lee, Higginson wanted to go on record.
In this letter, the banker stated [reading from "Exhibit No. 1659 —
19"] :
In order that t! ere may be no misunderstanding about our position, I beg to
say that, representing a syndicate formed by Messrs. Speyer & Ck). of New York
and ourselves, we would be glad to have an opportunity to bid on such new
securities as the Telephone Company may contemplate issuing.
At present, we do not know sufficient details as to the character of the securi-
ties and the amount to be Issued, to formulate an offer.
We are ready to make an offer for these securities on short notice, if we are
put in a position by the Company to do so.
The Chairman. You spoke of other letters. Do you mean other
letters of a simila^r character?
Dr. Danieijan. Yes; if you wish, I could read one from Salomon
«& Co.
The Chairman. -I would like to have you do that.
11838 CONCENTRATION OF ECONOMIC POWER
Dr. Dakielian. Yes; this is dated January 27, 1906, 4 days before
the Lee, Hioginson letter. A letter from President Fish to William
Salomon, which indicates Mr. Fish's attitude on competitiAe hid^
[read-ng from "Exhibit No. 1659—18''] :
Nothing has been done as yet but the condition is such that I must be very
careful in all cases not to give any encouragement to any parties in the matter
referred lo.
I very much appreciate your continued interest ii; our financial affairs, and
it would give me great pleasure to be in a position to utilize your very efficient
organization and capacity, but there are innumerabb considerations that must
be taken into account and it is entirely impossible for me to say what can or
what cannot be done.
And two da^'s later Mr. Salomon replied to this letter, on January
29 [reading from "Exhibit No. 1659—18"] :
I understand from your telegram and letter that the matter is still open, and
I would like to learn whether it may be possible to allow me to make for
myself, associated with a satisfactory group, a competitive offer. Your policy
has always been that of allowing competitive tenders to be made and I do not
understand from your letter that it is your intention to follow a different policy
in this instance.
To which, f)n January 30, Mr. Fish replied.
THE CHANGE FROM COMPETITI^^J TO NONCOMPETITIVE riNANCING
The Chaibman. Does your examination of the history of the financ-
ing of this company bear out the statement that you have just r'^ad,
namely, that up to this time when new capital was sought it was
obtained by competitive bidding?
Dr. Danielian. That is correct.
The Chairman. And you are now discussing the period when the
change was made from the competitive-bidding system to the place-
ment system?
. Dr. Danielian. That is right.
Mr. Nehemkis. By that you mean — you said, "That is right." By
the latter part of the Senator's statement, your acquiescence meant
direct negotiations?
The Chairman. What I meant was the selection of a particular
house or group to carry on the financing without competitive bidding.
Mr. Nehemkis. That is your understanding of the situation, isn't
it, Dr. Danielian?
Dr. Danielian. That is true; but that is predicated upon rela-
tionship between the banking group and the corporation which makes
that kind of a procedure in the sale of bonds possible, in other words,
a more intimate relation between one banking group and the manage-
ment of a corporation, in which the noncompetitive sale of bonds is
one of the elements.
The Chairman. Wliat I am trying to brin^ out is that you are
now discussing the change from the competitive to the noncom-
petitive system?
Dr. Danielian. That is correct.
The Chairman. Now then, the letter of President Fish referred to
considerations which should be take"!! into account. Do you know
what those considerations were ? Does your stud^ provide any infor-
mation on that point?
CONCENTRATION OF ECONOMIC POWER 11839
Dr. Dakielian. Frankly, that is one of the mysteries I have not
been able to solve. It is one of those difficult problems on which
evidence cannot be obtained, as to what was going on in Mr. Fish's
mind at the time he was negotiating with this particular banking
group. I am unable to explamj in other words, what considerations
led Mr. Fish to change his policy from one of offering competitive
bids to one of dealing only with one banking ^oup.
The Chairman. As a student of this financing problem, what con-
siderations would suggest themselves to your mind as being of suffi-
cient importance to dictate the dropping of the competitive system
and the adoption of the noncompetitive system of disposing of
securities ?
Dr. Danielian. Possibly the fact that a contractual arrangement
with a banking group providing for financing over a certain number
of years, large-scale financing, may be one consideration. In other
words, the contract, after it was consummated, called for the issuance
of bonds in installments over a period of 2 years, from 1906 to 1908,
these installments to be taken by the bankers at specified dates.
Now, perhaps that facility of insuring the obtainment of funds over
a long period of time may have been one of the considerations that
led the company to make this particular kind of arrangement, but
that is only conjectural on my part because I have no documentary
evidence to indicate what the motives were.
The Chairman. I appreciate that fact, but I wasn't asking you for
any evidence, I was asking for your own conclusions from your own
study, as to what considerations might suggest themselves to your
mind as indicating any advantage of one system over the other,
noncompetitive over the competitive, if there is such an advantage.
Mr. Henderson. Could I ask a question?
The Chairman. You want to amplify the question ?
Mr. Henderson. Yes; because I am interested also. Senator. Do
you think that the coming of Mr. Waterbury into the situation in
the way you described had anything to do with the departure from
the competitive and the selection of a single group ?
Dr. Danielian. I think that Mr. Waterbury and one or two of his
associates were insistent on having this exclusive relation with the
company; that is, the original plan of financing contemplated, the
one that was declined early in 1905, contemplated exactly this sort
of relationship. As to why Mr. Waterbury insisted on that, I think
the rest of the investigation will probably show.
Mr. Miller. May I ask the witness a question, Mr. Chairman ? In
1905 was not $150,000,000 a very large piece of financing?
Dr. Danielian. I assume so; yes.
Mr. Miller. I mean very large. Had there been any financing in
your studies approaching that m size?
Dr. Danielian. I don't recall of any occasions as early as that
involving 150 millions.
Mr. Henderson. What about the financing of the Steel Corporation ?
Dr. Danielian. In 1901?
Mr. Henderson. It was a larger amount, was it not?
Dr. Danielian. But may I make one distinction there? The con-
tract called for the sale of 100 millions of bonds in installments of
10 millions, with the exception of 1 installment which: was 30 mil-
11840 CONCENTRATION OF ECONOMIC POWER
lions in 1907, over a period of nearly 2 years, and that the other
50 millions were optional with the banks, they didn't have to take
the additional 50 millions if they didn't want to exercise the option.
So really this was a firm commitment for 100 millions over a period
of 2 years.
The Chairman. Doctor, going back to my question, which was
merely an attempt to elicit your expert opinion and not an attempt
to develop any facts, because you have testified that you have been
unable to find the facts bearing on this, I was merely asking you
what considerations would suggest themselves to your mind as an
expert in this matter, as indicating any advantage, if there is such
an advantage, in the noncompetitive system over the competitive sys-
tem of disposing of securities.
Dr. Danielian. I mentioned one ; namely, the ability to make long-
term contract with a given banking group, to take care of financing
over a period of time. Now, if these bonds were offered competi-
tively, they would have to be offered, for instance, at different periods
instead of providing for the financing over 2 years.
Another advantage that has been suggested by the bankers, of
course, is the intimate knowledge which the bankers have of the
company's needs and the greater security and, shall I say, depend-
ability of a continued relationship with a banker, where the banker
comes to the aid of the company at the time that the company needs
financing — that has been offered as reason justifying that relation-
ship. I have discussed this problem with bankers myself, and that
is their position. On the other hand, of course, there are advantages
offered for competitive buying: for instance, in the matter of reach-
ing a price for the sale of bonds on a more rational basis than mere
decision across the table, as to how much the bonds should be sold
for, open-market conditions in determining the price at which the
bonds can be sold to the public.
Mr. Mnj.ER. Didn't the company here abandon the historical pol-
icy of piecemeal financing in small amounts, which could be sub-
mitted for competitive bids, and embark at this particular period
on a long-term program which involved financial commitments going
beyond the immediate issue and taking further issues into the pro-
gram? In other words, this was a large amount of money and
they changed the policy in order to assure themselves of this supply
of funds, and they probably had a construction program that went
hand in hand with it, involving forward expenditures for exten-
sion's. Is that not what happened?
Dr. Danielian, Do I understand your questions correctly : Did
the company make provision for long-time financing; is that the
question ?
Mr. Miller. No; the question that I wanted to know is whether
they abandoned the policy of piecemeal financing in which the com-
pany could get competitive bids, to adopt a long-term financial pro-
gram here involving several years, and in order to do that, didn't
they change their form of financing and therefore abandon the
competitive system that they had previously used ?
Dr. Danielian. I stated that this particular financing provided
financing over this 2-year period. That fact in itself I should think
would answer the question.
CONCENTRATION OP ECONOMIC POWER 11841
Mr. Ballinger. Wouldn't it have been possible to have competi-
tive bids on long-term financing? In other words, there may have
been other groups that may have wanted to put in a bid to dis-
tribute securities over a 2-year period.
Dr. Daneelian. From the letters of the other bankers, it does
look as if they were ready to bid for financing.
Mr. Ballinger. But they weren't given a chance.
Dr. Daniellan. In fact, there is evidence to indicate that Lee,
Higginson & Co. wanted a two-thirds interest in the syndicate that
was formed for the sale of this particular issue. They did not
obtain it. They ' ^re kept out of this particular deal.
Mr. Ballinger. But there is nothing inconsistent in competitive
bidding on long-term financing. The idea that you can't have com-
petitive bidding on long-term financing — I just wanted to ask your
opinion about that. As I understand the question put to you, this
contractual relation was entered into because the only way you can
have competitive bidding on financing is when issuing piecemeal. It
seems to me when you have a program you are going to put across
in 2 years, you can open it up on the Street and say, "Let's have the
highest bid that can handle this financing in 2 years."
Dr. Danielian. That was a distinct possibility but it wasn't ap-
plied in this particular case.
Mr. Ballinger. No,; it wasn't; the market wasn't opened up.
Mr. MnxER. But long-term financing doesn't mean necessarily
that the bonds were long in maturity. By the reference you make
here to long-term financing, it is really a long-term program of
financing, where there were financial commitments involved beyond
immediate commitment for issues to be sold immediately, but an
obligation to take further issues which was a firm obligation ?
Dr. Dantetjan. That is correct.
I would like to make this statement, that even though this financ-
ing was projected for a period of 2 years, the firm commitment on the
part of the bankers was to buy the bonds. On the other hand, alter-
native barxking groups were soliciting to see whether this particular
issue under those same conditions could be sold to those othei"S upon
more favorable terms or not.
In other words, there are no alternatives in the situation whereby
you can judge the wisdom of the particular transaction.
Mr. Nehemkis. Dr. Danielian, perhaps the committee shoujd be
informed that it is tentatively hoped, if the time and pleasure of the
committee permit, at some later date, to explore this whole prob-
lem in its technical ramifications in much detail, but in view of
the fact that there are a considerable number of witnesses yet to be
heard, if it is the pleasure of the committee, may we proceed with the
further development of the examination. Is that your pleasure,
gentlemen ?
Dr. Danielian, who was the leader of the successful syndicate?
Dr. Danielian. J. P. Morgan & Co. was associated with Kidder,
Peabody & Co. ' and Kuhn, Loeb & Co. in the purchase of this
large issue of the bonds.
DIFFICUl/nES IN disposing OF THE 19 6 BOND ISSUE
Mr. Nehemkis. Did not the syndicate experience certain difficulties
in getting rid of the bonds?
11842 CONCENTRATION OP ECONOMIC POWER
Dr. Daneeman. These bonds were contracted for on February 8,
1906, and 30 millions of them were taken in the course of 1906. None
of these bonds were offered to the public in 1906.
In January 1907 the bankers went back to the company and ob-
tained certain concessions on the price of the bonds, concessions
amounting to about 3 points on the face value of the bonds, and
at the same time they agreed with the company to offer the bonds for
public sale, which they did in February. They offered $40,000,000
for sale in February, but they couldn't sell any more than about 10
millions of this offer. From then on until the syndicate was dissolved
in June 1908 none of the bonds were offered for sale.
Mr, Henderson. In other words, the bankers carried those through
that panic of 1907?
Dr. Danielian. The bankers carried 90 millions of it which they
had purchased in installments from 1906 to 1908 without selling it to
the public.
Mr. Henderson. And if it hadn't been a strong banking group they
wouldn't have been able to carry those in the way they did, is
that correct?
Dr. Danielian. Perhaps I should make a distinction between — I
ihink that is correct, but I want to make a distinction between the
-•nanagers of the syndicate and the syndicate itself.
A syndicate was formed on February 15, 1906. According to the
syndicate contract, the subscribers, who were, of course, a large num-
ber of bankers all over the country, assumed the obligation to pay
for these bonds 10 days before the managers of the syndicate had to
buy the bonds from the company, and on the other hand, the syndi-
cate contract provided that the bankers, the managers, would have
complete control over the bonds, that the subscribers could not sell
the bonds until the dissolution of the syndicate.
So that we have a situation here where the subscribers undertook
all the liabilities incidental to the contract, and the managers, of
course, undertook the obligations to manage and to distribute the
bonds.
On the other hand, I must also state that the bankers, besides
being the managers of the syndicate, also themselves jDarticipated in
the syndicate by taking certain amounts for their account.
I think Morgan & Co. took $3,588,000; J. S. Morgan & Co. took
$2,000,000; Kuhn, Loeb & Co., $4,915,000; and Kidder, Peabody &
Co. $5,000,000 for its account and $25,000,000 for distribution in New
England.
Mr. Nehemkis. J. S. Morgan & Co. was the London banking house,
was it not?
Dr. Danielian. I think that is correct.
Mr. Henderson. During this period, the managers had on their
shelves quite a bit of the inventory of this bond issue ?
Dr. Danielian. Yes; these amounts that I indicated are the extent
of the financial liability of the managers, as participants in the
syndicate.
Mr. Miller. Was it a joint and several liability that these syndi-
cate members had, where they were all liable for the whole?
Dr. Danielian. No; they had limited liability.
CONCENTRATION OF ECONOMIC POWER 11843
Mr. Miller. In those days, it is my recollection of the historic
form of syndicate, that was the type of syndicate that was made,
where everybody was liable; there was no several liability.
Dr. Danteltan. I don't think that is true of this syndicate. You
have a copy of the syndicate contract that will be placed in the
record.
Mr. Nehemkis. Then, if I understand your testimony correctly, up
until this time we had a system of the company's placing its
bonds through competitive bids. Following the $150,000,000 issue
under *he leadership of J. P. Morgan & Co., the company entered
into a system of direct negotiations with a banking group.
Is it your opinion, Dr. Danielian, based on these studies, that this
situation has prevailed from that time?
Dr. Danielian. That is true; since 1906 the bonds of the A. T. &
T. have been sold to a single banking group managed by J. P. Mor-
gan & Co.
Mr. Nehemkis. Mr. Chairman, gentlemen of the committee, this
will conclude our testimony on this phase of the subject.
I should, while Dr. Danielian is still on the stand, like to offer
in evidence 83 exhibits.
Mr. Chairman, normally I should not ask you to print so volumi-
nous a number of exhibits, but I believe these documents are unique,
and that for future students of the subject of corporate finance they
will prove to be an invaluable case book of early financial transac-
tions.
The Chairman. These are the documents to which reference was
made earlier in the day?
Mr. Nehemkis. Correct, sir.
The Chairman. They have already been admitted.
Mr. Nehemkis. Dr. Danielian, in behalf of my staff, I want to
express our deep thanks to you for the time you have given in the
preparation of this material.
The Chairman. Do you have any choice as to whether they should
be given different numbers?
Mr. Nehemkis. I have just arranged them for the convenience of
the reporter in the order to which reference has been made in the
testimony. They are numbered in sequencej^, 1 through 83.
(The documents referred to were marked "Exhibits Nos. 1659-1 to
1659-83" and are included in the appendix on pp. 12115-12200.)
The Chairman, Do any members of the committee desire to ask any
additional questions of the witness ?
So far as you know. Doctor, is there any controversy over any of
the matters of fact to which you have referred this morning?
Dr. Danielian. Of course, A. T. & T. has taken exception to the
implications and conclusions that may have been derived. Perhaps,
in order to be quite fair, I should depart from ordinary procedure
of offering my own statement, the witness' statement, to the record, and
offer instead the criticisms of A. T. & T. of the particular report of the
F. C. C. from which some of these facts have been recited. In <^hat
way perhaps A. T. & T.'s position in these matters may be a of
the record, too.
11844 CONCENTRATION OF ECONOMIC POWER
The Chairman. It may be that the criticism of the F. C. C. report
would cover matters which you hav^ not covered.
Dr. Danieuan. It does cover a wider field.
The Chairman. My question was merely as to whether or not there
is any controversy over the facts which you have your^lf presented
to the committee this morning, so far as you know.
Dr. Danielian. I don't believe the facts are contested.
Mr. Nehemkis. Mr. Chairman, I think, as coimsel to the committee,
I should like to be heard on that point. I believe, to the best of my
knowledge, that Dr. Danielian has confined his testimony to the ex-
hibits, to the facts stated in the exhibits which have been offered and
received, and, in my opinion, if I may venture to say, I do not think
he has departed from strict facts as presented in the documentation,
and I vouch for the statements.
The Chairman. That really wasn't the question. I am merely
asking for his knowledge. He knows whether there is any controversy
over these facts, and he tells us there is not, so far as he knows.
Mr. AviLDSEN. Does this pamphlet contain criticisms of your re-
port, the particular part of the work you did ?
Dr. Danielian. This particular document covers a report which I
presented before the Federal Communications Commission on the
control of A. T. & T., and it covers, of course, a wider field because
that report covered the whole period from 1875 to 1935, during which
the company's management went through different stages of develop-
ment. This criticism is the company's response to that report, but I
must state that the major part of that report concerns the control of
the corporation, and consequently this particular document would not
be directly related to the
The Chairman (interposing). Is there anything in that which
refers to the matters concerning which you have testified this
morning?
Dr. Danielian. No ; except the first part, I think one section, about
a page and a half.
The Chairman. Let the chairman suggest to you that you take
that document and if there are any matters in it anywhere which
refer to your testimony this morning, that you call it to the attention
of the Chair so that it may. be entered in the record,^ merely express-
ing the opinion of the A. T. & T., so far as that goes, with respect
to your particular testimony here. We Just don't want to go afield.
Mr. Ballinger. You suggested two reasons, Mr. Danielian, as to
why this contract was given to the group headed by J. P. Morgan.
Have you given any thought to the possibility that it might have been
given because of the dominant position of the House of Morgan in
investment banking, and their various means of control of reservoirs
of funds and their ability perhaps to apply coercion, and so forth.
I mean the whole history of the House of Morgan ?
Dr. Danielian. I have looked at it strictly from the point of
A. T. & T.'s relations with the bankers, and the negotiations- for
these bonds, and I have not broadened myself into the general field
of banking control of industry so far as this particular sale is con-
cerned. I think a more intimate relationship did develop after the
^ Dr. Danielian, under date of Januarj 10, 1940, submitted the t^(or^lation requested.
It is included In the appendix on p. 12316.
CONCENTRATION 0^ ECONOMIC POWER 11845
sale of these bonds between a particuar banking house and this cor-
poration, but I wouldn't care to comment as to the position of J. P.
Morgan & Co. in the banking field in general.
Mr. Nehemkis. Thank you very much, Dr. Danielian.
Mr. Chairman, so that the record may be complete in all respects,
I should like to offer a carbon copy of a letter from Commissioner
Leon Henderson to the Honorable J. Lawrence Fly, Chainnan of the
Federal Communications Commission, dated December 1, 1939. It
was pursuant to this letter that the exhibits previously offered into
the record were made available to the Investment Banking Section.
The letter described is offered.
(The letter referred to was marked "Exhibit No. 1660" and is
included in the appendix on p. 12201.)
Mr. Nehemkis. The next witness is Mr. George Whitney. Mr.
Whitney, please.
The Chairman. Do you solemly swear the testimony you are about
to give in this proceeding shall be the truth, the whole truth, and
nothing but the truth, so help you God ?
Mr. Whitnet. I do.
The Chacbman. You may be seated, Mr. Whitnej'.
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.
Mr. Nehemkis. Mr. Whitney, will you state your full name and
address, please?
Mr. Whitney. George Whitney, Westbury, Long Island.
Mr. Nehemkis. What is your business or profession, Mr. Whitney ?
Mr. Whitney. Banker.
Mr. Nehemkis. And you are associated with the banking firm of
J. P. Morgan & Co.?
Mr. Whitney. Yes.
Mr. Nehemkis. And how long have you been associated with that
firm, Mr, Whitney?
Mr. Whitney. Since 1915.
Mr. Nehemkis. And when did you become a partner of the banking
firm of J. P. Morgan & Co.?
Mr. Whitney. December 31, 1919.
Mr. Nehemkis. Were you not prior to becoming a partner of the
firm of J. P. Morgan syndicate manager and in charge of syndica-
tion?
Mr. Whitney. No.
Mr. Nehemkis. Were you ever associated with the bond depart-
ment of J. P. Morgan & Co. ?
Mr. Whitney. Yes.
Mr. Nehemkis. In what capacity ?
Mr. Whitney. Member of it.
Mr. Nehemkis. What is the distinction between being a member of
the bond department and being syndicate manager ?
Mr. Whitney. Because there wasn't any such thing in our office.
We had no allocated duties such as that.
Mr. Nehemkis. Mr. Whitney, weren't you really responsible for
organizing and setting up the first American underwriting syndicate ?
Mr. Whitney. No.
11846 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. Wasn't the first real syndicate, as we know it,
organized by you and your associates?
Mr. Whitney. That is a different question.
Mr. Nehemkis. You understood the second question?
Mr. Whitney. Quite.
Mr. Nehemkis. Will you answer it, please.
Mr. Whitney. I would hate to claim quite as broad an inference
as that, but 1 think substantially, yes.
Mr. Nehemkis. Mr. Whitney, I show you a series of sheets con-
taining syndicate records of financing by your firm. 1 ask you to
examine them and tell me whether you did not cause to have these
sheets prepared in response to a request from me ?
Mr. Whitney. Your request isn't here, is it ?
Mr. Nehemkis. Mr. Alexander, 1 suggest you examine the carbon
copy of a memorandum, the original of which was presented to you.
Mr. Whitney. I have no doubt that is correct. Yes, that is correct.
Mr. Nehemkis. May 1 suggest, Mr. Chairman, that either Mr. Alex-
ander's appearance should be noted, since he will be assisting Mr.
Whitney, or if it is your pleasure, perhaps you would prefer that he
be sworn, if Mr. Whitney will rely upon his teclinical assistance.
The Chairman. If Mr. Alexander is to answer any questions and
becomes a witness, then he should be sworn. Yes, he may be sworn.
Do you solemly swear the testimony you are about to give, shall b«.
the truth' the whole truth, and nothing but the truth, so help you
God?
Mr. Alexander. I do.
TESTIMONY OF HENRY C. ALEXANDER, J. P. MORGAN & CO.,
NEW YORK, N. Y.
Mr. Nehemkis. May I ask, Mr. Alexander, for you to state your
full name ?
Mr. Alexander. Henry C. Alexander.
Mr. Nehemkis. And you are a partner of the firm of J. P. Morgan
&Co.?
Mr. Alexander. I am.
Mr. Nehemkis. And how long have you been a partner of that firm ?
Mr. Alexander. Since February 17, 1939.
Mr. Nehemkis. Did I understand you to identify these documents as
coming from your firm ?
Mr. Whitney. Yes.
Mr. Nehemkis. The documents identified by the witness are offered
in evidence, Mr. Chairman.
Was the firm of J. P. Morgan & Co. interested in Telephone financ-
ing prior to the year 1906 ?
Mr. Whitney. Not as far as I know.
Mr. Nehemkis. It never had any participations in underwriting
groups before the year 1906 ?
Mr. Whitney. Again, not as far as I -know. I have never checked
back. I don't think so.
The Chairman. The memorandum just handed to the chairman by
counsel, entitled "Memorandum for Henry C. Alexander, Esq., re-
American Telephone & Telegraph Co. Financing," is admitted to
the record for printing.
CONCENTRATION OF ECONOMIC POWER 11847
(The documents referred to were marked "Exhibits Nos. 1661-1 and
1661-2," and are included in the appendix on pp. 12201 and 12202.)
Mr. Nehemkis. So that prior to 1906, J. P. Morgan & Co. never
had any leadership over Telephone financing, correct, sir, so far as
your recollection goes?
Mr. Whitney. It is not a question of recollection at all. My first
answer, I should think, would cover the second.
THE 19 06 FINANCING UNDER THE LEADERSHIP OF J. P. MORGAN & CO.
Mr. Nehemkis. Now the first piece of A. T. & T. financing headed
by J. P. Morgan & Co. was in 1906, with the issue of $150,000,000 of
4 percent convertible bonds due March 1, 1936, is that correct, Mr.
Whitney?
Mr. Whitney. I shouldn't think so. And Mr. Henderson, if I
may, I think there were two, inadvertently perhaps, implications.
In the 1906 financing we didn't lead. As the records will show, that
was a joint arrangement, jointly signed with the Telephone Cq.^
by Kidder, Peabody ; Baring Bros, in London ; ourselves, and Kuhn,""
Loeb, and J. S. Morgan in London. We didn't lead in that business.
On the other point, just as a matter of comment, you said in
your statement today that during this entire period the bankers
.,iidn't consider any alternative method of financing. I assume, of
course, you had reference to bond financing, because it is a well-known
fact that during that period they sold vast amounts of common stock,
genef^ly to their own stockholders and a certain amount of con-
vertible bonds during that period, all to their own stockholders,
without any underwriting, and I think it is a fact that they increased
the capital stock during this period something like 10 times without
any relation to the bankers. It seemed to me that that statement of
yours implied that the only financing, or all the financing they did,
was through bankers.
Mr. Nehemkis. But your qualification, Mr. Wliitney, would only
hold good with reference to those phases of financing other than direct
negotiations with the banking group.
Mr. Whitney. I think you will find if you check the records (^as a
matter of fact I have here records that I think are substantially ac-
curate) that substantially more than half the total additional financing
done from 1906 down to the present day was done through stock of-
fered to their own stockholders, always at par and without under-
writing of any kind.
Mr. Nehemkis. But other than that you have no objection to the
statement:^
Mr. Whitney. I have no objection to the statement whatever, but
I thought it would be simpler to get that cleared up.
Mr. Nehemkis. Mr. "V^Hiitney, perhaps it will be more convenient
for both of us if you follow these sheets, a carbon copy of which you
probably have available, as we go through them.
Will you indicate, Mr. Whitney, how this first group of original
contractors came to be brought together — and by the wa^, the term
"original contractors" is correct, is it not, as a designation for the
group ?
Mr. Whitney. I see that is w^hat it says here, yes.
11848 CONCENTRATION OF ECONOMIC POWER
Of course, Mr. Qiairmaii, I can't speak of my own personal knowl-
edge and I am a little loath to testify on matters with which I have
no knowledge, but I have, of course, investigated this matter and I
can only tell you what my understanding is as to how this happened.
My understanding is this, that prior to this period of time, the
A. T. & T. and certain of its subsidiaries had financed themselves as
they went along, more or less what you might call "hand-to-mouth
financing." As you read back over the history of the business, while
the growth \rp to that time had been great, the following period after
1916 marked the tremendously accelerated growth, and it has always
been my understanding that at the time this business came to us,
J. P. Morgan & Co. — Mr. Fish, who was then president, became con-
cerned as to how he was going to handle the financial part of it.
There has been some testimony given here today, which as I under-
stand it was restricted entirely to the financial side of it. I don't
need to tell you of the work and the development of the Telephone
business, which has contributed so much to all of us.
My understanding is that Mr. Fish approached Kidder, Peab'ody.
Mr. Winsor and he had a program, a big program, I don't know the
details of it. The program was so large that he felt the necessity of
getting himself set for it, and the times, if you remember — and some
of us remember — weren't so good in 1906, and he felt he had better
make arrangements to get himself financed over a period of time.
As a result of that, Mr. Winsor approached Kuhn, Loeb & Co. and
ourselves to see whether we would be j^repared to join with them,
with him and Baring Bros., who were very closely associated with
Kidder, in this very large transaction. Mr. Miller said, I think,
that it was one of the largest. I haven't looked that up, but it was a
very large piece of financing for then, or for now.
The steel business, Mr. Henderson, I think was a little different,
because most of the bonds there were sold or delivered to the former
owners rather than offered publicly.
Mr. Henderson. Were there any rail issues in this period equivalent
to that?
Mr. Whitnex. I can't speak fvith any degree of accuracy, but it is
my impression that there hadn't been anything of this size except one.
perhaps, the only one I can think of off the bat — the Burlington joint
4's which was a result of a deposit of stock of Northern Pacific and
Great Northern and was issued to such holders. It was not what you
might call a public issue. Aside from that I don't of my own knowl-
edge think of anything that was as large a financial transaction as
this.
That, Mr. Nehemkis, is my understanding of how this came about.
The business was not originally brought to us, but it came through
Mr. Fish who was a lawyer in Boston, not a Telephone man primarily,
who went in to Mr. Winsor to get his advice as to how to finance, and
it being the size it was, with the picture they had in their mind at
that time of the possible growth of the Telephone Company, he had
felt that he ought to enlist the aid of others than merely New England
bankers.
COMPETITION AND COMPETITIA'E BIDDING
Mr. Whitney. I have listened this morning with great interest to
the words "competition" and "competitive bidding." It seemed to me
CONCENTRATION OF ECONOMIC POWER 11849
tliat the previous witness established that there was a lot of competi-
tion, and this is one of those times, I am afraid. Senator, when. you
are going to find that I raise the question of terms quite a good deal.
I have listened the last few days to a good deal of testimony and par-
ticularly to presentation, and I think terms have shifted in the last 30
years quite a good deal. Competitive bidding, as we understand it
today, means public tender, which today is done in the case of munici-
pals and certain railroad equipments. Competition is quite a differ-
ent thing. There has never been, except for municipals, any re-
quirement of what today is known as competitive bidding. I think
from what I know of the history that there has been a lot of competi-
tion in the Telephone business, but competition doesn't necessarily
mean that the company should just offer its bonds for public tender as
we mean it today. It means that certain bankers would like the chance
to do the dealing with the company rather than the people that the
company elected, to deal with.
The Chairman. In other words, you understand this to be competi-
tion among certain groups to be exclusive agents?
Mr. Whitney. That is it; or not to be the exclusive agent, but to
be the person chosen by the company, and again I try to shift the
emphasis, because it seems to me that extraordinarily little has been
said up to date in the, presentation about where the issuer comes into
this. My recollection and all the history that has been brought down
through the years is to the effect that the company sought Mr. Winsor,
and Mr. Winsor, faced with an undertaking which he believed was
beyond his firm alone, or New England, to handle, approached
Kuhn, Loeb and ourselves as other people who were supposedly
skilled in this business. It happens, if I may identify myself — it
doesn't amount to anything — ^that I was a clerk in Kidder, Peabody
in 1907 and 1908, and one of the earliest recollections I have in my
business life is of this transaction, so my historical recollection stems
not only from what I knew then in office gossip — I was a very lowly
clerk — ^but also from what I have learned since I moved and went
into the employ of J. P. Morgan & Co.
Mr. Nehemkis. Mr. Whitney, did all of the firms in the group of
that February 13, 1906, issue enter into discussion with the company
equally, or were the discussions restricted to one or more of the
participants? Do you recall?
Mr. Whitney. Of course, I don't recall, but as I
Mr. Nehemkis (interposing). Excuse me. How are you going to
establish an answer to the question if you don't recall ?
Mr. Whitney. I was just about to try to give you my best infor-
mation. My historical studies, if you wish, lead me to believe that
the direct negotiations were conducted with the company by Kidder,
Peabody ; Kuhn, Loeb ; Baring Bros. ; and J. P. Morgan & Co.
Mr. Nehemkis. Mr. Whitehead, will you step forward for a mo-
ment, please?
I snow you a memorandum which purports to come from the files
of Kuhn, Loeb & Co. Will you examine this, Mr. Whitehead, and
tell me whether this was a memorandum you obtained from those
files?
The Chairman. Has Mr. Whitehead been sworn ?
Mr. Nehemkis. Yes ; he has.
Mr. Whitehead. That is correct,
124491— 40— pt. 23 — —4
11850 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. This is a copy of a telegram sent to Kidder, Pea-
body & Co., for Mr. Winsor, dated February 8, 1906, signed by
Jacob Schiff. I offer it in evidence.
The Chairman. The telegram may be admitted.
(The telegram referred to was marked "Exhibit No. 1662" and is
included in the appendix on p. 12206.)
Mr. Nehemkis (reading from "Exhibit No. 1662") :
It was not proper to ask us to sign an agreement involving such large
responsibility without giving us an opportunity to carefully consider its contents.
I signed it in the expectation that it had received your own and the Messrs.
Morgans careful scrutiny. I now find that the following rectifications need be
made before the agreement is delivered by you^ —
And then follow suggestions and changes in the agreement.
The Chairman. On whose behalf was Mr. Schiff acting at the
time?
Mr. Nehemkis. If I recall correctly — this is before my time
The Chairman. Then you don't recall either.
Mr. Whitney. I can identify Mr. Schiff. He was senior partner
of Kuhn, Loeb.
The Chairman. At the time of this telegram ?
Mr. Whitney. Yes, sir. \^
Mr. Nehemkis. Each of these original cont^iactors, Mr. Whitney,
had a several liability of a quarter and a liai'bility for a total not
exceeding one-third of the aggregate obligation.
Mr. Whitney. That is what I have understood from this paj^er.
Mr. Nehemkis. You have referred just now to "this paper" and I
believe earlier you referred to "this paper." So that the record may
be clear, would you state now what paper you are referring to ?
Mr. Whitney. It is one of the papers just introduced as evidence
which is headed "February 13, 1906, American Telephone and Tele-
graph Co. Convertible 4 percent due 3/1/36" ("Exhibit No. 1661-2") ;
and down in the one, two, three
Mr. Nehemkis. That is all, just so the record shows what you are
referring to, and that was the exhibit prepared by you in response
to our request?
Mr. Whitney. Yes.
PERCENTAGE INTERESTS OF ORIGINAL CONTRACTORS IN 1906 AND SUBSE-
QUENT SYNDICATES
Mr. Nehemkis. In addition to the original contractors, Mr. Wliit-
ney, J. S. Morgan & Co., and the First National Baiflc of New York
were ceded interests in the syndicate?
Mr. Whitney. Yes.
Mr. Nehemkis. Upon final settlement the interests in the syndi-
cate were — will you follow me on your sheet (referring to "Exhibit
No. 1661-2")— Kidder, Peabody & Co., 25 percent.
Mr. Whitney. Yes.
Mr. Nehemkis. J. P. Morgan & Co., 18% percent.
Mr, Whitney. Yes.
Mr. Nehemkis. Baring Brothers & Co., Ltd., 221^ percent.
Mr. Wihtney. Yes.
Mr. Nehemkis. Kuhn, I^oeb & Co., 22i/^ percent
Mr. Whitney. Yes.
coxcentuation of economic power 11851
Mr. Nehemkis. J. S. Morgan & Co., 5 percent.
Mr. Whttnet. Yes.
Mr. Nehemkis. First National Bank, 61/^ percent.
Mr. Whitney. Yes.
Mr. Nehemkis. The Telephone Company bought from the company
an issue of $25,000,000 of 3-year 5-percent notes— —
Mr. Whitney. Well, you missed one. The second is Pacific Tel.
handled by the Bank of California.
Mr. Nehemkis. And then after that we had the $25,000,000 issue.
Mr. Whitney. The record will be clear that the second issue was
not handled by that group.
Mr. Nehemkis. Did not the Telephone group purchase from the
company an issue of $25,000,000 of 3-year 5-perce'nt notes?
Mr, Whitney. Yes ; so the record shows.
Mr. Nehemkis. And the participants in the syndicate were Kid-
der, Peabody & Co., Baring Brothers & Co., Ltd., with a 47i/2 percent
interest.
Mr. Whitney. Yes.
Mr. Nehemkis. And Kuhn, Loeb & Co. with a 22i/^ percent interest.
Mr. Whitney. Right.
Mr. Nehe]vikis. J. S. Morgan & Co., 5-percent interest.
Mr. Whitney. Right.
Mr. Nehemkis. J. P. Morgan & Co., 25-percent interest.
Mr. Whitney. Right.
Mr. Nehemkis. Were not Kidder, Peabody, and Baring Bros, con-
sidered more or less by the other members of the group as a unit in
this transaction?
Mr. Whitney. Oh, I don't think so at all. Baring Bros, was
one of the leading private banking firms in London and they were
lumped this way; Kidder, Peabody signed for themselves and for
Messrs. Baring Bros, & Co., Limited, for whom they had power of
attorney in this country. There was no possible thought that it was
the sajne.
Mr. Nehemkis. Now the First National Bank did not participate
in this issue, did it?
Mr. Whitney, No.
Mr. Nehemkis. Were there any other bond issu6s of A. T. & T.,
that is to say the parent company, from 1907 through 1913?
Mr'. Whitney. Wliy this record shows, Mr. Nehemkis, that in
January 25, 1911, the American Tel. & Tel. Co, sold some 5i/^-per-
cent notes to the extent of $8,000,000.
Mr. Nehemkis. I asked, if I recall my question, correctly, any
bonds,
Mr. Whitney. Excuse me, I missed it. No.
Mr, Nehemkis, Your answer is "No," then, to the question ?
Mr, Whitney. There were no long-term debts.
Mr. Nehemkis. Continuing on those sheets to which we have been
referring, Mr. Whitney, on January 8, 1913, did the Telephone group
underwrite an issue of $67,000,000 of convertible bonds wMch were
offered for subscription to the stockholders?
Mr. Whttney. What date is that?
Mr. Nehemkis. January 8, 1913.
Mr. Whitney, Yes.
11852 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. As I understand, $1,556,000 that were not sub-
scribed f of by the stockholders were taken by the group ?
Mr. Whitney. That is what the record shows.
Mr. Nehemkis. And the participants of the group in that under-
writing were Kidder, Peabody & Co., Baring Bros. & Co., Limited,
of London with a 35-percent interest, Kuhn, Loeb with 15-percent
interest, Morgan Grenfell & Co. with 5-percent interest — by the way,
does Morgan Grenfell at this time become the new organization
formerly known as J. S. Morgan?
Mr. Whiti^y. No. There was a predecessor firm, originally Pe^,-
bodj <& Co., and back in 1850 or thereabouts it became J. S. Morgan,
and about 19-rJ don't know, about 1908 it became iior^an Gj'enfell.
Mr. Nehemkis. Morgan Grenf ell's interest was 5 percent. Here
the First National Bank of New York has an interest of 10 percent,
the National City Co. has an interest of 10 percent, J. P. Morgan
& Co. has an interest of 25 percent.
Mr. Whitney, I show you a photostat copy of a letter signed by
J. P. Morgan & Co. addressed to the First National Bank of New
York, dated January 8, 1913. Will you look at this and tell me,
if you can, whether this is a true and correct copy of an original in
your files ?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. The letter identified by the witness is offered.
(The letter referred to was marked "Exhibit No. 1663" and is
included in the appendix on p. 12207.)
(Mr. Henderson assumed the Chair.)
appearance in group of first national bank and national city
company, 191.3
Mr. Nehemkis. It would seem that in comparison with the par-
ticipants of the first two issues, First National Bank and National
City Co. appear for the first time as constituent members of the
group with interests of 10 percent each ?
Mr. Whitney. The first part of that question was fine, except that
it isn't the first time that the First National appeared. It is the
first time the National City did. You said something about "as con-
stituent members." What does that mean?
Mr. Nehemkis. Let's take one of your problems up at a time.
WTien was the first time that the First National Bank appeared ?
Mr. Whitney. In 1906, $100,000,000 convertible issue.
Mr. Nehemkis. The first time that First National Bank appeared
did it not obtain its 6i/4-percent interest from the J. P. Morgan &
Co. interest?
Mr. Whitney. I don't know, I should think not.
Mr. Nehemkis. In other words, the statement reads here [reading
from "Exhibit No. 1661-2"] :
By agreement between J. P. Morgan & Co. and the First National Bank
dated March 6, 1907, the First National Bank accepted a participation.
I assume from that they must have gotten it from J. P. Morgan &
Co.?
Mr. Whitney. That, I think, is a fair assumption, but it doesn't
say so.
CONCENTRATION OF ECONOMIC POWER 11853
Mr. Nehemkis. Do you have any doubts on that?
Mr. Whitney. No.
Mr. Nehemkis. My question, Mr. Whitney, was, in the issue that we
are now discussing, whether or not the First National appeared in
this last group as a member of the group for the first time on its own
feet, so to speak. Did it get its participation in that group from
J. P. Morgan or from the company or by some other method?
Mr. Whitney. Well, I should think that it would be a fair as-
sumption that when it came to this underwriting of $67,000,000 con-
vertibles, 1913, the people who had been interested in this financing
up to that time made a realignment of percentages and that the task
that was confronting them of assisting the Telephone Company in
its financial problem was growing all the time, and I should think
it is a fair assumption to say that they sat down and decided they
needed to widen the group.
Mr. Nehemkis. So that you are now correcting your earlier answer ?
Mr. Whitney. No ; I am not correcting that answer at this time.
Mr. Nehemkis. It, was about this time that the security affiliate of
the First National Bank of New York and the National City Bank
was organized, wasn't it?
Mr. Whitney. I don't know.
Mr. Nehemkis. The total participation here of 20 percent was made
up 121/2-percent participation out of the New England group and 71/2
percent from Kuhn, Loeb?
Mr. Whitney. I don't :^ollow your mathematics at all.
Mr. Nehemkis. I was just comparing this group that we have been
discussing with the previous group, and I was wondering how the
1214-percent participation for the New England group was made up?
Mr. Whitney. Mr. Nehemkis, in my answer a minute ago I said I
thought the assumption was that the firms that were interested in this
business previously decided that there would be a realinement, and
I don't believe that there is any subtraction or addition involved in it;
they decided that they were going to broaden the group and include
the First and National City Co., and these figures resulted from that
decision. I don't question your mathematics.
Mr. Nehemkis. I think we can move on. At this time was there
not already in existence the agreement between J. P. Morgan & Co.,
National City Bank, and the First National Bank of New York
whereby each had an option on a one-quarter interest in any business
originated by the other?
Mr. Whitney. There was no such agreement at any time. There
was an understanding (and had been for some years prior to that)
as to these securities transactions, in order to diversify the risk,
which is the essence of the banking business, that any one of the three
should offer the other a participation which that other had a
complete right to refuse or accept at its own option. I only make
that explanation because there was never any option involved, and it
wasn't an agreement ; it was an understanding. Many times it was not
accepted. It was in no sense an option.
Mr. Nehemkis.'' Was the understanding reached about 1907?
Mr. Whitney. I think — again I am speaking more or less from what
I have heard, of course; I have no knowledge — ^that it started in 1907
or 1908. I should think it was 1908, after the panic.
11854 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. Probably grew out of the panic?
Mr. Whitney. Yes.
Mr. Nehemkis. Now, how did it happen that the percentages in this
business which we have been discussing did not conform to the under-
standing concerning which you have just testified?
Mr. Whitney. Well, because they were original members of this
group.
Mr. Nehemkis. In other words, the understanding was not an over-
all understanding?
Mr. Whitney. Oh, certainly not.
Mr. Nehemkis. Now, I note that all of the First National and Na-
tional City interests come out of the Kuhn, Loeb-Kidder, Peabody-
Baring Bros.' interest. Is there any particular reason for that, Mr.
Whitney?
Mr. Whitney. I have not the remotest idea. I was not present.
Mr. Nehemkis. You caji't attach any significance and you have
never heard any gossip about thof ?
Mr. Whitney. Never a word, never saw these things, until you
asked me.
further issues purchased by the group, 1913-16
Mr. Nehemkis. Now, on October 7, 1913, did not the Telephone
group underwrite the distribution of $10,000,000, 5i/^ percent, 6-month
discount notes of companies associated with the A. T. & T. system?
Mr. Whitney. Yes ; so the record shows.
Mr. Nehemkis. And on March 31, 1914, did not the group under-
write $30,000,000, of 5 percent, 2-year notes of associated companies?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. Now, if you will just hold those two pages together,
the percentage
Mr. Whitney (interposing). The reason I hesitated is t|iat there
was an intermediate transaction done at practically the same time,
which I was looking at, with the Southern Bell.
Mr. Nehemkis. Now, you keep those two groups in mind and follow
me on these percentage distributions. On the March 31, 1914, issue,
Kidder, Peabody, and Baring Bros, had a 35-percent interest, and in
the October 7, 1913, offering they had a 35-percent interest. Kuhn,
Loeb & Co. had a 15-percent offering in the first and a 15-percent offer-
ing in the second. Morgan GrenfeTl & Co. had a 5-percent participa-
tion in the first offering and 5 percent in the second. Lee, Higginson
was not included in the first and had a 3% interest in the October 7,
19i3, participation. The First National Bank of New York had II14-
percent interest in the March 31, 1914, offering, and 10^^^ percent in the
October 7, 1913, offering. National City had lli^ in the March 31
offering, and lO/if in the October 7. J. P. Morgan had 221/4 percent
in the 1914 offering and 20% percent in the October 7, 1913, offering.
Is that correct?
Mr. Whitney. Those figures are correct; yes.
Mr. Nehemkis. Now, in the issue of October 7, 1913, it appears that
Lee, Higginson 's name is shown for the first time. Is that con-ect?
Mr. Whitney. You mean in these lists. That is the fact.
Mf. Nehemkis. Its interest of 3%, however, was made up appar-
ently from the Morgan interest: that is, the First National, Na-
CONCENTRATION OF ECONOMIC POWER 11855
tional City Co., and J. P. Morgan & Co. interest. Can you explain
that?
Mr. Whitney. I suppose that it was considered in the interest of
the business to have Lee, Higginson included. And I should further
assume that the others didirt feel that way, so it came out of our
interest.
Mr. Nehemkis. So that in this particular gitualion, it would seem
that the interests of First National, "National City Co., and J. P. Mor-
gan & Co. were in conformity to the understanding between these
three banks as to the division of business, the understanding that we
have referred to?
Mr. Whitney. You remember you corrected me a little while ago
when I talked about bonds instead of notes.
Mr. Nehemkis. Yes.
Mr. Whitney. And if I may refer you to your own comment, you
are talking about short-time bank paper in those instances, which
did not involve any substantial commitment and undoubtedly was
taken for their own investment.
Mr. Nehemkis. But, Mr. Whitney, my question
Mr. Whitney. You said
Mr. Nehemkis. Let me state my question. My question to you, sir,
was. Was not this distribution of percentage interests in conformity
with the understanding — I didn't say anything about notes as dis-
tinguished from bonds.
Mr. Whitney. No; I did. The answer to your question is that
they have a quarter interest, or half of what we had, if you can look
at it collectively. I don't think it is important, but I think it has
been stated that they were original participants. But these were trans-
actions in bank paper, as I said, and the fact is true that they had each
a half of what we had.
Mr. Nehemkis. Now, on January 25, 1911, again on January 10,
1913, did not the firm of J. P. Morgan & Co. place short-term notes
for the A. T. & T. and associated companies with a group of banks?
Mr. Whitney. January 11 — will you excuse me?
Mr. Nehemkis. I think I said January 25, 1911, and January 10,
1913.
Mr; Whitney. Yes.
Mr. Nehemkis. Now, the participants in the first of those place-
ments, the $8,000,000 of 6-month notes, were Guaranty Trust Co.,
with a 25-percent interest; Bankers Trust Co., with a 12^-percent
interest; First National Bank of New York, 1214-percent interest;
National Bank of Commerce, with a 12i/2-percent interest; National
City Bank, 121/2; Mercantile Trust Co., with I21/2; Astor Trust Co.,
33^ interest ; United States Mortgage & Trust Co", 31/3 ; Liberty Na-
tional Bank, 3l^; Chemical National, 2^^; is that correct?
Mr. Whitney. The paper shows ; yes.
Mr. Nehemkis. Now, the participants in the $7,500,000 of 3-month
notes taken on January 10, 1913, were: National Bank of Commerce,
26% percent; Guaranty Trust Co., 26% percent; Bankers Trust Co.,
20 percent ; First National Bank of New York, 16% percent ; Liberty
National Bank, 3V^ percent; J. P. Morgan & Co., 6% percent?
Mr. Whitney. That is correct.
11856 CONCENTRATIOJN OF KOONOMIC POWER
Mr. Nehemkis. Now, on January 5, 1916, did not the group pur-
chase from the American Telephone & Telegraph Co. an issue of
$50,000,000 2-year, 4y2-percent notes, dated February 1, 1916?
Mr. Whitney. Yes,, sir.
Mr. Nehemkis. And were not the participants of this group
Kidder, Peabody, Baring Bros. & Co. of London, sharing between
them a 3314-percent interest: Kuhn, Loeb & Co, with a 14i/t-percent
interest; Lee, Higginson & Co., 5-percent interest; Morgan Grenfell
& Co. with a 4%-percent interest ; First National Bank of New York,
10^^ -percent interest; National City Co., 10^-^ percent interest; and
J. P. Morgan & Co. with 21%-percent interest ?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. I note with this issue Lee, Higginson & Co. appar-
ently has become a member of the group. Would that assumption
follow ?
Mr. Whitney. They are here listed. They certainly had a 5-per-
cent interest.
Mr. Nehemkis. Now, to make up the Lee, Higginson interest of
5 percent, is it not correct that each member of the group gave up 5
percent of his participation?
Mr. Whitney. Five percent of what participation?
Mr. Nehemkis. Of each individual member's participation.
Mr. Whitney. Well I don't doubt it, of course. Our records don't
say anything about it.
Mr, Nehemkis. Your records don't disclose anything?
Mr. Whitney: I don't know what percentage you are talking
about.
Mr. Nehemkis. I am now asking you whether, in order to make
up the Lee, Higginson interest of 5 percent, did not each member of
the group give up a certain amount of his percentage in the previous
group in order to get this 5-percent interest ? In other words, maybe
this will help you: The participation of the New England group —
that is to say, Kidder, Peabody, and Baring Bros. — was reduced
from 35 percent in the previous issue to 3314 percent in this issue.
The participation of Kuhn, Loeb was reduced from 15 percent in the
previous issue to I414 percent in this issue. The participation of
Morgan Grenfell was reduced from 5 percent to 4% percent. The
participation of the Morgan group was reduced from 45 percent to
423^ percent. Do you follow my thought, Mr. Whitney ?
Mr. Whitney. You clarified my thinking when you said it was a
percentage of another piece of business. Obviously, if somebody has
introduced the 5 percent, the total being 100, it would have to come
out of somebody.
Mr. Nehemkis. Now, Mr. Whitehead, will you step forward for a
moment, please? I show you a letter from J. P. Morgan & Co. to
Messrs. Kuhn, Loeb & Co., dated January 6, 1916, marked "confi-
dential." Will you examine this -photostat and tell me if you ob-
tained an original thereof from the files of Kuhn, Loeb & Co. ?
Mr. Whitehead. That is correct.
Mr. Nehemkis. The letter identified by the witness is offered.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1664" and is in-
cluded in the appendix on p. 12207.)
CONCENTRATION OF ECONOMIC POWER 11857
Mr. Nehemkis. On December 1, 1916, did not the group purchase
from the A. T. & T. Co. an issue of $80,000,000 of 30-year, 5-percent
collateral trust bonds, dated December 1, 1916?
Mr. Whitney. That is correct. Yes, sir.
Mr. Nehemkis. And if you will follow me on your sheet; were
not the participants and their respective percentage interests in the
group, as follows : ^
Kidder, Peabody & Co., Baring Bros. & Co.. Ltd., of London, 311/2 ;
Kuhn, Loeb & Co.", 13V2 ; Morgan Grenfell & Co., 41/2 ; First National
Bank of New York, lOy^ ; National City company, lOi/g ; J. P. Morgan,
2014 ; Lee, Higginson, 5 ; Harris, Forbes, 5 ?
Mr. WHmsTET. That is correct.
Mr. Neitemkts. Now, with this issue, I note, Mr. Whitney, that
Harris, Forbes & Co., and Lee, Higginson apparently became per-
manent members of the group.
Mr. WHrrNET. What ? Oh, yes ; at the direction and suggestion of
Mr. Vail.
Mr. Nehemkis. I was coming to that in a moment. Now, I show
you, Mr. Wliitney, a letter from your firm to Messrs. Kidder, Peabody
& Co., dated NoVember 27, 1916. Will you tell me if this is a true
and correct copy of an original in your custody and possession?
Mr. Whttnet. Yes, sir.
Mr. Neht:mkis. It is offered in evidence.
The Chairman. The letter may be received.
(The letter referred to was marked "Exhibit No. 1665" and is
included in the appendix on p. 12208.)
Mr. Nehemkis. Now, from the letter which you have just identified,
Mr. Wliitney, it appears that the inclusion of Messrs. Lee, Higgin-
son & Co., and Messrs. Harris, , Forbes & Co., in the purchase on
original terms was at the request of Mr. Vail, the president of the
company ?
Mr. Whttnet. The letter savs so.
Mr. Nehemkis. Now, Lee, Higginson had not, however, been a
member of the previous group ?
Mr. Whitney. They had been, as I have already testified, a mem-
ber of certain groups.
Mr. Nehemkis. Yes. Now, the members of the group other than
Lee, Higginson & Co., gave up proportionately 5 percent each from
their orijrinal participation to make the Harris, Forbes interest?
Mr. Whitney. I will accept that, I suppose, I have not figured
it out.
Mr. Nehemkis. Now, had not Lee, Higginson and Harris, Forbes
been leaders in financing some of the subsidiaries prior to this time?
Mr. Whitney. They had been. I don't know about leaders, but
I am snre they had been — Mr. Chairman
Mr. Nehemkis. Just a minute, Mr. Whitney. I want to get your
statement. Was it? Do you know?
Mr. Whitney. I think so; yes.
Mr. Nehemkis. Well, all right. Did you want to make a btate-
ment, Mr. Whitney?
1 See "Exhibit No. 1661-2," appendix, p. 12202.
11858 CONCENTRATION OF ECONOMIC POWER
INVESTMENT BANKING AS A PROFESSION '
Mr. Whitney. I merely want to comment there, Mr. Chairman,
if I may. I think that there is just one comment that I would like
to make in order that the committee may follow the trend, per-
haps, of this testimony a little bit better. It seems to me interesting
that during these last 3 days that I have been listening here with
great interest, there never has been any attempt made by anybody
to tell what the banking business, the investment banking business,
has been.
Of course, as you know, I have been out of it for 5i/^ years. I was
in it . for 25. And it seems to me that all these "groups" can be
tremendously simplified in your, the committee's thinking, if it is
accepted, as I firmly believe it to be a fact, that the investment
banking business is a profession. It isn't a fly-by-night thing. It
requires great technical knowledge, great responsibility, financial
strength, and all the other qualities that any other profession does.
At the inception of a piece of business, the basis of it is that cer-
tain people, individuals who are charged with the responsibility
of running large corporations, who are not in their line of business
keeping up in detail with current financial events, seek some group
of people whom they know to be expert in those things, from whom
they ask the advice as to how they should conduct their operations.
My lawyer friends sometimes dislike the analogy, but I always be-
lieve that it is very analogous to the relation the client has with
his lawyer.
Mr. Nehemkis. You say your lawyers don't like that analogy?
[Laughter.]
Mr. Whitney. Not much. I think it is true, and I was in the
business for a long time, and I have watched the business as it is
today, and I think that it is essential, in the study that is going
on, to keep in mind the fact that it is a serious, highly technical,
highly specialized responsibility. It employs a large number of
people; it requires ^eat experience and absolute integrity if it is
going to go on and it is as competitive as the dickens. If a fellow
makes a mistake, if a house makes a mistake, he may make one, and
so may a lawyer, but if he makes a succession of them, his bonds are
not going to sell well and his position changes. It has happened
in my experience, and I could name half a dozen instances. Invest-
ment banKing is divided, roughly, into three parts, and every one
of them is important.
The first part is a knowledge, an intimate knowledge, of the af-
fairs, and aims, and programs of the different borrowing corpora-
tions. That requires highly technical skill, or a certain acquaint-
ance, anyway, with the program that people like Mr. Fish, in this
instance, and then Mr. Vail, had in mind.
It requires enough knowledge to decide what kind of security
is not only to the best interest of the corporation, but to the best
interest of the public to whom those securities will be distributed.
The second thing is the technical knowledge of the Street and of
the kind of security that is apt to be saleable, because if you don't
sell the right kind, the business is going to be a failure, and that
hurts the credit of the borrower. The final and last thing is the
factor in the business that we have heard a good deal about in the
CONX'ENTRATIUN OF ECONOMIC POWER 11859
last few days, the sheerly mechanical part of distribution. There
are various things in that, as you have heard — underwriting strength,
financial strength, distribution ability, and the question of where you
can get that distribution, and the best way you can get it.
Now, obviously, the first thing you have to think about is who is
going to give the best service, and this story here, in which we have
gone a little way, is typical of an ordinary financial program that
thousands of corporations have done. The Telephone Co. today is
a wonderful company, and its bonds command the highest rating.
It is very easy to forget that it was a terrible headache at one time.
Only as lately as 1919 there was an issue of bonds that was a com-
plete flop, and the improvement that has happened in the last 20
years, roughly speaking, has been owing largely to Mr. Gilford, a
name not yet mentioned.
Now, these two men, these two firms that came in here now, were
at that time, as I can say of my own knowledge, the two leading
bond distributors in the country. The bond business has completely
changed since the war. Mr. Nehemkis paid us the compliment of
suggesting that we created the first modern syndicate. Prior to that
time the practice had been to follow the general theory of English
financing, where you had a list of underwriters and a few brokers
or many brokers, who found customers for a relatively small com-
mission.
In other words, the two activities of underwriting and selling were
completely divided. That was true until the time of the war. In
1915, September of 1915, when the first big foreign loan came, the
head of our bond department devised the scheme of a modem syn-
dicate. At that time there were only these two outstanding dis-
tributors of bonds, as contrasted from underwriters.
Mr. Henderson. WTiich two?
Mr. Whitney. Lee, Higginson and Harris.
Mr. Henderson. Did I understand you to say that the arrange-
ment for financing the A. T. & T. is typical of thousands of cases?
Mr. Whitney. I think so. I think it is typical of a case where
the company has a job to do. They go to the people fi*om time to
time that they trust, and as long as those people have a continuing
relationship with them and do good work, it is all right. But if
their advice and their technical performance is not ail right, it will
be changed.
Mr. Henderson. In the latter part of j^our statement, then, I think
you are agreeing with what Mr. Mitchell said yesterday. He said
about the same thing, didn't he?
Mr. Whitney. Did he? I have not read the testimony.
The Chairman. Well, may I say, Mr. Whitney, that there seems
to be a disposition upon the part of many persons who are called
before this committee to assume that the mere fact that they have
been called implies a desire or an intent or a suspicion upon the part
of the committee, or somebody associated with the committee, to
develop some sentiment of criticism, ethical criticism, perhaps, of the
activities of those who are called.
Now, that is the furthest thing from the thought of anybody in
this committee. I am frank to say I have never yet foimd any mem-
ber of the committee express to me, or any person associated with
11860 CONCENTRATION OF ECONOMIC POWER
the committee, a desire to hold any person or any institution, as
such, up to public obloquy. That is out. We are merely studying
the facts as they are.
And may I say to you what has transpired here in the last few
days illustrates that principle which I have been preaching for many
years. Here we have the gradual development of the financing of
large industrial institutions. In the beginning, this financing was
local. By and by, it becomes specialized. As an institution like the
telephone business suddenly branches out into a vastly greater aspect
than it ever had before, it turns iTom specialized financing in New
England to national financing, and your group comes into the picture
with that arrangement which has been described here by the previous
witnesg and by yourself.
Now, the mere fact that we are discussing this does not necessarily
imply any criticism of it, but it does show that big business, indus-
trial business, has brought about a concentration of financing, and
that in turn has led to the building up of government. And the three
things seem to be pretty well tied together as part of the growth of
this cCuntry, and we are merely trying to analyze them. I do hope
thafe"s6>, far as your concern or associates and anybody else who may
be called in the future, you will get out of your head, if you have it
there, that we are really trying to make any personal capital out of
this.
Mr. Whitney. Well, Senator, that was the very last thought in
my mind. As I have said, I have been out of this business 5i/^ years.
The only reason why I said what I did, was not that I thought there
was any criticism or insinuation of anything that was not completely
all right, but it seemed to me that if I were to be asked to explain
this development of the Telephone financing, that it was impossible
to do so unless I could establish what we were trying to do and why
the steps were taken.
It is not my job — and I don't think he needs any defense — to defend
the investment banker, and I am not going to do that. The cormner-
cial bankers have enough to do for themselves. But I think that we
must understand the function that I consider the people like this
group, if you want, served, and we must remember that the initiative
of it always came from the issuing company. It is not my business
to comment on what went before, but if that is correct, you have
these relations and you require intimate knowledge, you require con-
tinuing acquaintance with affairs, if you are going to do a good
job for the company and the investor. They are both in it, and they
are in it importantly. Their interests are not antagonistic, but they
are there, and there is nothing further, I can promise you, from my
thoughts than that you were critical of these people, or anything else.
And I certainly am not going to defend theqj. But t got the feeling
after 3 days of testimony that the impression was being created that
this business was just dividing a lot of profits, where, as a matter
of fact, it is a terribly serious, highly specialized profession. Per-
haps my historical connection with it made me want to say that.
The Chaikman. We are not going to assume you were dividing up
a lot of losses. (Laughter.)
Mr. WHrrNET. Well, there are some of them in here.
Mr. Nehemkjs. I should like to offer in evidence a table predicated
upon data supplied to us by J. P. Morgan & Co., identified by
CONCENTRATION OF ECONOMIC POWER 11861
the witness. The table is entitled, "Participations on 'original terms'
in Telephone financing headed by J. P. Morgan & Co.— 1906-1919."
It is a study of percentage allocations and their significance.
I should also like to offer, Mr. Chairman, if you please, a summary
statement of participations by J. P. Morgan & Co. in issues of asso-
ciated companies, headed by others. This table, likewise, is predi-
cated upon information and data furnished us by J. P. Morgan &
Co., and identified by the witness.
The two documents are offered.
Mr. Whitney. What arc those ? I haven't
Mr. Nehemkis. I have offered an abstract of material in those
papers.
Mr. Whitney. I have not identified those.
Mr. Nehemkis. I have not said that you did. I said you identified
that material on which this was based.
The Chairman. Without objection, the material may be admitted.
(The documents referred to were marked "Exhibits Nos. 1666 and
1667," and are included in the appendix on pp. 12208 and 12209.)
Mr, Nehemkis. Mr. Chairman, I should like at this time your leave
to dismiss Mr. Whitney and call another witness whose time on the
stand will be rather brief, and then I propose to recall Mr. Whitney
in the afternoon.
The Chairman. It is now 12 : 25.
Mr. Nehemkis. I think I can finish with this witness in about 10
minutes.
The Chairman. The Chair was thinking of recessing for only an
hour this noon.
Mr. Nehemkis. Whatever your pleasure is, sir.
The Chairman. The committee will stand in recess until 1 : 30.
(Whereupon, at 12:25 p. m., the committee recessed until 1:30
p. m. of the same day.)
afternoon session
The committee resumed at 1 : 40 p. m., on the expiration of the
recess.
The Chairman. The committee will please come to order. Are you
ready to proceed ?
Mr. Nehemkis. I am, sir. There is some business from this morn-
ing, Mr. Chairman, that I would like to call to your attention.
The witness. Dr. Danielian, indicated to the committee that certain
exhibits had been obtained from the A. T. & T. direct, and I in-
advertently omitted to give you all of the material — a letter of trans-
mittal, with reference to those exhibits — and I now ask that this
letter be offered in evidence, to become part of the record of the
committee.
The Chairman. That may be received, and it will be placed in
the record at the appropriate place.^
Mr. Nehemkis. You will als6 recall, Mr. Ohainnan, that yesterday
afternoon, I stated I would furnish you with a memorandum sup-
plementing the table* on deposit accounts of investment banking
^ See "Exhibit No. 1659-83," appendix, p. 1 2200.
= See "Exhibit No. 1651-2," Hearings, Part 22, appendix, p. 11777.
11862 CONCENTRATION OF ECONOMIC POWER
firms, which had been made available to us by J. P. Morgan & Co.,
describing the nature of maximum and minimum balances. I now
hand you such memorandum.
The Chairman. The memorandum may be received for printing in
the record.
(The memorandum referred to was marked "Exhibit No. 1668"'
and appears in Hearings, Part 22, appendix, p. 11827.)
Mr. Nehemkis. Mr. Chairman, two other matters of old business:
Yesterday, in offering a telegram ^ from the files of Halsej^ Stuart &
Co., it appears that there were on the photostats certain pencil
notations which I did not observe, and I have been requested by the
chairman of Halsey, Stuart & Co. to correct a possible impression
that may have b6en gained from the failure to have read those pencil
notations on the photostat copy. I should perhaps say at this time
that nothing significant as far as Halsey, Stuart & Co. was intended ;
it was merely offered and discussed as part of the practice involved.
But so that the record may be complete, I request, sir, that this
telegram be offered at this time, in explanation of those penciled
notations on the exhibit to which I did not call your attention.
The Chairman. The telegram is from ?
Mr. Nehemkis. The telegram is addressed to H. L. Stuart, this
room, by R. S. Peterson. I believe that Mr. R. S. Peterson is asso-
ciated with Halsey, Stuart in the Chicago office.
The Chairman. The telegram may be received and will be printed
in the record.
(The telegram referred to was marked "Exhibit 'No. 1669" and is
included in the appendix on p. 12210.)
Mr. Nehemkis. You will also recall, Mr. Chairman, that on Tues-
day afternoon, I had occasion to ask Mr. Jesup, one of the witnesses,
whether he had had any discussions with a partner or partners of
J. P. Morgan «S; Co. concerning the future distribution of the old
Morgan interest in Chicago Union Station Co. financing. Mr. Jesup
indicated that he believed a partner of his may have had such conver-
sations and I requested at the time whether he would be good enough
to ascertain, and if so, furnish us with the information. Mr. Jesup
has written to me as of December 13, 1939, as follows [reading
Exhibit No. 1670"] :
In accordance with your request made yesterday at the hearing, I wish to
advise you that my associate, My. N. Penrose Hallowell, remembers distinctly
discussing Chicago Union Station' underwriting with Mr. Harold Stanley of the
firm of Morgan, Stanley & Co., and he also feels reasonably sure that the
partner in J. P. Morgan & Co. with whom he discussed this business in the
early part of 1935 was Mr. Arthur M. Anderson.
May I request, sir, that this be made part of the record and that the
reporter be instructed to insert it at the appropriate place?
The Chairman. It is so ordered.
(The letter referred to was marked "Exhibit No. 1670" and appears
in Hearings, Part 22, appendix, p. 11795.)
Mr. Nehemkis. And now, sir, I call Mr. Jolm R. Chapin.
1 See "Exhibit No. ]«37," Urtirincs, Part 22. jippondix. p. Jl"-".
CONCENTRATION OF PX'ONOMIC POWER 11863
TESTIMONY OF JOHN E. CHAPIN, KIDDER, PEABODY & CO.,
BOSTON, MASS.
The Chairman. Do you solemnly swear that the testimony you are
about to give in this proceeding will be the truth, the whole truth, and
nothing but the truth, so help you God ?
Mr. Chapin. I do.
The Chairman. You may proceed, Mr. Nehemkis, with Mr. Chapin.
Mr. Nehemkis. Mr. Chapin, will you state your full name and
address, please?
Mr. Chapin. John R. Chapin, Brookline, Mass.
Mr. Nehemkis. Mr. Chapin, were you not a partner in the old firm
of Kidder, Peabody & Co. ?
Mr. Chapin. I was.
Mr. Nehemkis. And certain documents which I will have occasion
to ask you to identify, came from the files of the old firm of Eadder,
Peabody & Co.?
Mr. Chapin. They did.
Mr. Nehemkis. You are not at present a partner in the new firm
of Kidder, Peabody & Co., are you ?
Mr. Chapin. I am not.
Mr. Nehemkis. And you are with the Boston office of Kidder,
Peabody & Co., the new firm?
Mr. Chapin. I am.
Mr. Nehemkis. Did you know Mr. Robert Winsor, formerly head
of the firm of Kidder, Peabody & Co. ?
Mr. Chapin. I did.
Mr. Nehemkis. Were you intimately associated with him?
Mr. Chapin, Yes.
Mr. Nehemkis. In fact, you were his personal assistant for a long
time?
Mr. Chapin. In the later years of his life, in Boston.
Mr. Nehemkis. In Boston?
Mr. Chapin. Yes.
Mr. Nehemkis. Did not Mr. Robert Winsor personally handle
Telephone matters for the old firm of Kidder, Peabody?
Mr. Chapin. To the best of my knowledge and belief, he did.
association or KIDDER, peabody & CO. AND B^VRING BROTHERS & CO., LTD.,
IN TELEPHONE FINANCING
Mr. Nehemkis. Had not Kidder, Peabody and Baring Brothers
been engaged in distributing Telephone securities as early as 1900?
Mr. Chapin. I don't recollect about Baring Brothers before 1906.
Mr. Nehemkis. How early had the old firm of Kidder, Peabody
been engaged in distributing Telephone securities, to the best of
your recollection, Mr. Chapin?
Mr. Chapin. I believe the first was in 1899.
Mr. Nehemkis. Now, in 1906, were not Kidder, Peabody & Co.
and Baring Bros, joined by J. P. Morgan & Co. and Kuhn, Loeb in
financing the American Telephone Co.?
Mr. Chapin. That is what my records — our records show
Mr. Nehemkis. Is that your impression at this time ?
Mr. Chapin. That is my impression.
11864 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. Now, was not the Kidder, Peabody, Baring Bros,
interest in the Telephone group originally 47i/^ percent?
Mr. Chapin. To my recollection, from the records.
Mr. Nehemkis. And you so testify at this time ?
Mr. Chapin. Yes.
Mr. Nehemkis. Now, was not
Mr. Chapin (interposing). Excuse me a minute.
Mr. Nehemkis. Yes, Mr. Chapin?
Mr. Chapin. My recollection is that there were other interests in
that so-called New England group.
Mr. Nehemkis. That is correct, sir, and we will come to that in a
moment.
Now, was not that old 47 1^^ percent interest subsequently reduced
to 331/2 percent?
Mr. Chapin. Reduced to 35, my recollection is, and then to 31i/^.
Mr. Nehemkis. Thirty-five, and then 31l^. But were not the orig-
inal participants reduced from 47i/^ to 3IV2 ^ Perhaps my next ques-
tion will help clarify this for you. Do you recall the names of the
original participants of the New England group ?
Mr. Chapin. Kidder, Peabody & Co.; R. L. Day; Estabrook &•
Co. ; and Baring Bros., to my recollection.
Mr. Nehemkis. The Old Colony Trust Co., do you recall that?
Mr. Chapin. Well, you have got it correct there; I don't
Mr. Nehemkis (interposing). I am going to ask you to examine a
table ^ and see whether this does not refresh your recollection. Will
you glance at this, please?
Mr. Chapin. Yes.
Mr. Nehemkis. Now, will you tell me the participants of the old
New England group ?
Mr. Chapin. R. L. Day & Co., 4 percent; Estabrook & Co., 4 per-
cent; Old Colony Trust Co., 6i^ percent; Kidder, Peabody, 18 per-
cent ; Baring Bros. & Co., Limited, 15 percent.
Mr. Nehemkis. And if I were to add for you the total of those per-
centages, it would come to 47l^ percent ?
Mr. Chapin. Forty-seven an^ one-half percent is correct.
USE or TERM "AMERICAN TELEPHONE PROPKIETAKY INTERESTS'"
Mr. Nehemkis. Now, I repeat to you my original question, Mr.
Chapin: Did not the Kidder, Peabody, Baring Bros, interest in the
telephone group consist of the 47V2-percent interest?
Mr. Chapin. The New England group?
Mr. Nehemkis. Yes.
Mr. Chapin. That was 47i/^.
Mr. Nehemkis. Yes. And do you now recall whether or not that
4714-percent interest was subsequently reduced?
Mr. Chapin. It was subsequently reduced to 35 percent and again
to 311/2.
Mr. Nehemkis. Now, Mr. Chapin, will you read the title of that
table?
Mr. Chapin. "American Telephone Proprietary Interests."
• 1 See "Kxhibit No. 1G71," appendix, p. 12210.
CONCENTRATION OF ECONOMIC POWER 11865
Mr. Nehemkis. And was this table obtained from the files of the
old Kidder, Peabody Co.?
Mr. Chapin. Yes; it was.
Mr. Henderson. Mr. Nehemkis, may I ask the witness, did the staff
put that heading on, or was that the heading on the table when it was
located ?
Mr. Nehemkis. Well, I will have the witness answer that. Mr.
Chapin, can you respond to the Commissioner's question?
Mr. Chapin. That was on the table when they had it photostated.
They did not put it on.
Mr. Henderson. Was it customary to refer to these percentage
participations as "proprietary interests"?
Mr. Chapin. Yes.
Mr. Henderson. Now, Mr. Chairman, I have an observation to
make; I am not a witness, but in the last few days, one day which
you missed, we had considerable disagreement on some of the terms
that were used. As I recall, one erf those was "proprietary" interest.
Another one yesterday, which I think you did hear, was "reciprocal
obligation," and another one that has been used is "original terms."
I think it ought to be noted that the staff of the S. E. C. did not create
those terms. This one, evidently, has been in existence for a long
period of time.
Mr. Nehemkis. Since 1906, sir.
Mr. Henderson. And therefore we use them in our presentation;
they are not words of new coinage.
Mr. Miller. Is this recently prepared, this table ?
Mr. Chapin. TMb table ^ was prepared August 16, 1920, for Mr.
Winsor.
Mr. Miller. 1920?
Mr. Chapin. Yes, sir.
Mr. Miller. Was that common usage in Boston, to refer to some
old accounts as "proprietary"?
Mr. Chapin. I know of no other account but the American Tele-
phone account that would term it proprietary interests.
Mr. Henderson. Wliat do you understand they meant by proprie-
tary interest ; a continuing interest ?
Mr. Chapin. Why, I should say yes, it was a continuing interest
in this account; yes.
Mr. Nehemkis. Mr. Chapin
The Chairman (interposing). Perhaps another phrase might be
used to designate it, one that was used yesterday, and I thought with
a good deal of illumination — a sort of a "frozen interest."
Mr. Nehemkis. Well, to make you perfectly at ease, Mr. Chapin,
would you feel happier if I u^ed "proprietary interest" or "frozen
interest" ?
Mr. Chapin. I don't care.
Mr. Nehemkis. It doesn't matter. Thank you, sir. Will you indi-
cate for the committee that on the left-hand side of the table before
you, there appears a pencil notation, and will you indicate to the
committee what that pencil notation is ?
-Mr. Chapin (reading trom "Exhibit No. 1671"):
Compiled for R. W., August 16. 1920.
'Exhibit No. 1671."
124491 — 40— pt. 23 5
118^)6 CONCENTRATION OP ECONOMIC POWER
Mr. Nehemkis. And "R. W." is Robert Winsor?
Mr. Chapin. Robert Winsor.
Mr. Nehemkis. Formerly head of the house of Kidder, Peabody?
Mr. Chapin. Yes, sir.
Mr. Nehemkis. I offer in evidence, Mr. Chairman, the table identi-
fied and described by the witness.
The Chairman. The table may be received.
(The table referred to was marked "Exhibit No. 1671" and is in-
cluded in the appendix on p. 12210.)
Mr. Nehemkis. I show you, Mr. Chapin, another photostat copy
of an original document from your files. I ask you to examine this
document and tell me whether or not it was furnished to us by you
from the files of the old Kidder, Peabody & Co. ?
Mr. Chapin. Yes, sir.
Mr. Nehemkis. Now, will you read the date of this document?
Mr. Chapin. September 19, 1918.
Mr. Nehemkis. And will you read the heading of the table?
Mr. Chapin (reading from "Exhibit No. 1672) :
Proprietary Interests, American Telephone & Telegraph Company.
Mr. Nehemkis. Now, will you read the names of the "proprietors,"
please ?
Mr. Chapin (reading further) :
J. P. Morgan & Co., 25 per cent ; First National Bank, 10 per cent ; Kuhn,
Loeb & Co., 131/2 per cent ; National City Bank, 10 per cent ; Harris. Forbes &
Co., Inc., 5 per cent; Lee, Higginson & Co., 5 per cent; Kidder, Peabody &
Co., 31% per cent.
Mr. Nehemkis. Now. these were
Mr. Henderson (interposing). Just a minute.
Mr. Nehemkis. Excuse me, sir.
Mr. Henderson. In your presentation you used the word "pro-
prietors." That does not occur in the memorandum.
Mr. Nehemkis. No, sir ; it does not.
Mr. Henderson. Is that a proper term to use, do you think?
Mr. Nehemkis. In my judgir^ent, it is, sir. If the witness has any
difference of opinion, I presume he is capable of so stating.
Mr. Chapin. Proprietary interests
Mr. Nehemkis (interposing). That is what it said, and I said,
will you indicate the names of the "proprietors." Those who have
an interest, I assume, are proprietors. But now, am I correct, Mr.
Chapin, this w^as the group that had the proprietary interest in the
American Telephone & Telegraph Co.?
Mr. Chapin. The Kidder, Peabody interest was further divided.
Mr. Nehemkis. Now, will you indicate how the Kidder, Peabody
interest was further divided?
Mr. Chapin. Thirty-one and a half per cent was divided [reading
further from "Exhibit No. 1672"] :
Kidder, Peabody & Co., 14.80 per cent ; Baring Bros. & Co., 4.70% ; Old Colony
Trust Co., 4% ; Estabrook & Co., 2.50% ; R. L. Day & Co., 2.50% ; Hayden,
S'tone & Co., 1.66% ; F. S. Mosely & Co., 1.34%.
Mr. Nehemkis. Making a total of how much, Mr. Chapin?
Mr. Chapin. 3II/2 percent.
Mr. Nehemkis. And it was from the 3IV2 percent, representing the
New England proprietary interest in the Telephone business, that the
CONCENTRATION OF ECONOMIC POWER 11867
old firm of Kidder, Peabody subdivided its proprietary interest among
the houses you have just enumerated?
Mr. Chapin. Correct.
Mr. Nehemkis. Mr. Chairman, I offer in evidence the document
described and identified by the witness.
The Chairman. The document may be admitted.
(The document referred to was marked "Exhibit No. 1672" and is
included in the appendix on p. 12211.)
Mr. Nehemkis. Mr. Chapin, I show you a photostat copy of a
memorandum dated New York, May 5, 1920, and ask you to examine
this copy and tell me whether or not it is a true and correct copy of
an original in the files of the old Kidder, Peabody company ?
Mr. Chapin. Yes ; it is.
Mr. Nehemkis. Mr. Chairman, I ask that the document identified
by the witness be received in evidence.
The Chairman. Let's see it.
(The document referred to was marked "Exhibit No. 1673" and is
included in the appendix on p. 12211.)
Mr. Nehemkis. Will the reporter be good enough to return that
document to me ?
Mr. Chapin, I show you a photostat copy of the document dated
September 30, 1920, containing certain pencil notations. I ask you to
examine this copy and tell me whether or not it is a true and correct
copy of the original obtained from the files of the old Kidder, Peabody
company ?
Mr. Chapin. It is a true and correct copy.
Mr. Nehemkis. Now, there are certain pencil notations, you will
note, under the fii-st title, which, by the way, will you be good enough
to read, the left-hand title?
Mr. Chapin (reading from "Exhibit No. 1674") :
New England Proprietary Interests.
Mr. Nehemkis. And then there appears "Kidder, Peabody & Co.,"
and a' pencil notation, "14-3/4," Can you tell me in whose hand-
writing that pencil notation is ?
Mr. Chapin. That pencil notation is Robert Winsor's handwriting.
Mr. Nehemkis. And at the end of the column there is another pencil
notation, "29-3/4." Whose handwriting?
Mr. Chapin. Robert Winsor's handwriting.
Mr. Nehemkis. And then in bold-face type there appears "Septem-
ber 20." Whose handwriting?
Mr. Chapin. Robert Winsor's handwriting.
Mr. Nehemkis. And then there appears other handwriting, and I
note the following [reading from "Exhibit No. 1674"] :
Consolidated Interest with First Natl. & sent check for 5% to First Natl. Bank,
on Am. Tel. 5% Deb. 1965 as per J. R. Chapin, Feb. 17—30.
Is that per your instructions ?
Mr. Chapin. It was,
Mr. Nehemkis. But is that in your writing?
Mr. Chapin. It is not. .
Mr. Nehemkis. Now, I wish you would explain to* the committee
whether or not this sheet called "New England Proprietary Inter-
ests," dated September 30, 1920, was kept alive in your files for this
10-year period, and these notations made upon it.
11868 CONCENTRATION OF ECONOMIC POWER
Mr. Chapin. It was in our files for that period.
Mr. Nehemkis. Would you call this a "cuff sheet," as a witness indi-
cated yesterday, an informal memorandum, or does this document
which has been kept alive for over 10 years represent something
more formal than was characterized here yesterday as a "cuff sheet"?
Mr. Chapin. It is simply a memorandum for the people in our
office to divide up the participation when it came along.
Mr. Nehemkis. But this document remained in your files for 10
years. Mr. Winsor apparently had occasion to refer to it. Entries
were made upon it, percentages changed, in Mr. Winsor's own writ-
ing. In short, this was a vital document, was it not, Mr. Chapin?
Let me put it this way, it was not a casual piece of paper?
Mr. Chapin. No; it wasn't casual.
Mr. Nehemkis. May I have it, sir? I offer it in evidence.
(The document referred to was marked "Exhibit No. 1674, and is
included in the appendix on p. 12212.)
Mr. Nehemkis. I show you a letter dated August 17, 1920, from
Dwight W. Morrow to Robert Winsor, and ask you if this is a true
and correct copy of an original in the custody and possession of the
old Kidder, Peabody firm?
Mr. Chapin. That is a copy of a letter which was copied from Mr.
Winsor's private copy book, not in the possession of the old firm of
Kidder, Peabody & Co.
Mr. Nehemkis. Will the record show that that letter was taken
from the personal effects of the late Robert Winsor and not, as counsel
indicated, from the files of the old Kidder, Peabody.
Can you tell me, Mr. Chapin, when Robert Winsor died?
Mr. Chapin. January 1930.
Mr. Nehemkis. January 1930?
Mr. Chapin. Yes.
Mr. Nehemkis. Thank you, sir.
. Mr. Chairman, I ask that the letter identified by the witness be
received in evidence.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1675," and is
included in the appendix on p. 12213.)
Mr. Nehemkis. Mr. Chapin, I show you a photostatic copv of a
letter from Mr. Robert Winsor to Dwight Morrow dated August
18, 1920. Will you identify this as being a true and correct copy
and indicate to me whether or not this came from the personal
effects of the late Robert Winsor or from the files of the old Kidder,
Peabody firm?
Mr. Chapin. That came from the personal effects of Robert Win-
sor.
Mr. Nehemkis. The letter is offered in evidence, if you please.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1676" and is
included in the appendix on p. 12213.)
Mr. Nehemkis. Mr. Chapin, I show you a letter dated September
28, 1920, on the stationery of J. P. Morgan & Co., Dwight Morrow
to- Robert Winsor, Esq. I ask you to identify this and tell me
the original source, that is whether it came from Mr. Winsor's per-
sonal effects or from the files of the old K. P. firm.
CONCENTRATION OF ECONOMIC POWER 11869
Mr. Chapin. Tliat letter came from Mr. Winsor's personal effects.
Mr. Nehemkis. May the letter be received in evidence ?
(The letter referred to was marked "Exhibit No. 1677" and ap-
pears in full in the text on p. 11903.)
Mr. Nehemkis. I show you another letter, Mr. Chapin, dated Octo-
ber 1, 1920, from Robert Winsor to Dwight W. Morrow, Esq., ad-
dressed to Messi-?. J. P. Morgan & Co. Will you identify this letter
for me and tell me its source ?
Mr. Chapin. That letter came from the private letter book of Mr.
Robert Winsor.
Mr. Neiiemkis. The private letter book of Mr. Robert Winsor ?
Mr. Chapin. Yes.
Mr. Nehemkis. I ask that the letter be received in evidence.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1678" and is in-
cluded in the appendix on p. 12213.)
Mr. Nehemkis. I now show you a memorandum entitled "American
Tel. & Tel. Co.," bearing the date May 6, 1920. Will you tell me
if you can identify that document?
Mr. Chapin. I identify the document as taken from the files of
the old firm of Kidder, Peabody & Co.
Mr. Nehemkis. I ask that this be received in evidence.
The Chairman. It may be received.
(The memorandum referred to was marked "Exhibit No. 1679"
and is included in the appendix on p. 12214.)
Mr. Nehemkis. I now show you a memorandum in pencil dated
January 31, 1924, and another document dated January 25, 1924,
containing pencil notations and marks. Will you examine these two
documents and tell me if you can identify them for me, Mr. Chapin ?
Mr. Chapin. These documents came from the files of the old firm.
Mr. Nehemkis. Will you hold it just a moment? You notice the
first document is written in pencil. Do you recognize that writing?
Mr. Chapin. I do.
Mr. J«[ehemki8. In whose handwriting is it?
Mr. Chapin. Clifford M. Brewer.
Mr. Nehemkis. What is the last name?
Mr. Chapin. Brewer.
Mr. Nehemkis. B-r-e-w-e-r?
Mr. Chapin. Yes.
Mr. Nehemkis. Clifford M. Brewer?
Mr. Chapin. Yes.
Mr. Nehemkis. Will you tell me who Mr. Clifford M. Brewer is
or was?
Mr. Chapin. Mr. Brewer was the head of our syndicate depart-
ment in Boston at that time.
Mr. Nehemkis. On the document dated January 25, 1924, I ask
you to read the caption in bold-face type at the bottom of the
document.
Mr. Chapin (reading from "Exhibit No. 1680-2") :
New England Proprietary Interests.
Mr. Nehemkis. And will you read the names of the members of
that proprietary group?
11870 CONCENTRATION OF ECONOMIC POWER
Mr. Chapin (reading further) :
Old Colony Trust Co., 3%; Estabrook & Co., 21/2%; R. L. Day & Co., 2^!%;
F. S. Moseley, 11/3%; Haystone Securities, 1%%; Fir.«t National Bank, 2%;
National Shawmut Bank, 2% ; Kidder, Peabody & Co., 14%%.
Mr. Neheimkis. What is the date of this memorandum, Mr.
Chapin ?
Mr. Chapin. January 25, 1924.
Mr. Nehemkis. Will you look at the bottom of the memorandum
and tell me if you see an entry, a pencil entry or possibly an ink
entry. Do you see that?
Mr. Chapin. Yes.
Mr. Nehemkis. What does that entry say?
Mr. Chapin (reading further from "Exhibit No. 1680-2") :
February 17, 30 — as per J. R. Chapin Old Colony consolidated with First
Natl, and check for 5% interest was sent to First Natl. Bank on American
Tel. & Tel. 5% Deb. due 1965.
Mr. Nehemkis. Do I understand correctly that the notation which
you have just read was placed upon this document at your request?
Mr. Chapin. Yes, sir.
Mr. Nehemkis. Then, I take it that this document which you have
described is not a casual piece of paper but an important document
relating to the New England proprietary interests of the old house of
Kidder, Peabody?
Mr. Chapin. Yes.
Mr. Nehemkis. May I offer these documents just identified?
The Chairman. They may be received.
(The memoranda referred to were marked "Exhibit No. 1680-1"
and "Exhibit No. 1680-2" and are included in the appendix on
pp. 12214 and 12215.)
Mr. Nehemkis. Mr. Chairman, may it please the committee, I ask
that the witness be temporarily dismissed, and that I be permitted to
recall Mr. George Wliitney. Mr. George Whitney, please.
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
Mr. Nehemkis. Mr. Whitney, you may recall that before the recess
I had occasion to offer in evidence a large sheet of paper which I
described as "Participations on original terms in Telephone financing
headed by J. P. Morgan & Co." [Referring to "Exhibit No. 1666."]
I hasten to point out that that word "headed" is used loosely. You
will know what I mean when you see this chart. Here is a mimeo-
graphed copy which I show you. AVill you examine it, please ? There
is a larger one here if you can't see that well enough.
Do you think you are familiar enough with it to discuss it?
Mr. Whitney. What is your question, please?
Mr. Nehemkis. I didn't ask a question, as yet. Are you sufficiently
familiar with this so I may examine you on it?
Mr. Whitney. I have never seen it before, but I will try.
percentage participations of underwriting group in telephone
ISSUi:S, 1016-1919
Mr. Nehemkis. All right; fine. If you will look at thfe issue of
A. T. & T. 41/2's, due 1918, $50,000,000. Are you with me on this, Mr.
Whitney ?
CONCENTRATION OF ECONOMIC POWER 11871
Mr. Whitnet. 41/2 's, 1916. Yes.
Mr. Nehemkis. The date was February 1, 1916?
Mr. Whitnet. Right.
Mr. Nehemkis. And will you read the categories of houses on the
top — Kidder, Peabody ; J. P. Morgan — and run across the percentage
interests for me ; will you, Mr. Whitney ?
Mr. Whitney. Yes, sir. [Referring to "Exhibit No. 1666."] This
is headed Kidder, Peabody & Co. and Baring Bros., Ltd., 331/4 ; J. P-
Morgan & Co., 213/8 ; First National, lOH/ig; National City Co. lOn/ig;
Morgan, Grenfell & Co., 43^; Kuhn, Loeb, 141^; Lee, Higginson &
Co., 5 percent.
Mr. Nehemkis. Now, Mr. Whitney
Mr. Whitney (interposing). This, of course, did not come from our
files.
Mi*. Nehemkis. Will you read the footnote while you have it in your
hand ? You see the source there ? What does that say ?
Mr. Whitney. It says [reading from "Exhibit No. 1666"] :
Compiled from data supplied by J. P. Morgan & Co.
Mr. Nehemkis. Do you recall at the outset of your testimony I
offered you certain large sheets which you identified as having come
from your firm and caused to be prepared by you pursuant to my
request ?
Mr. Whitney. Yes.
Mr. Nehemkis. Do you want to withdraw that last answer?
Mr. Whitney. I never saw this compilation.
Mr. Nehemkis. Did you misunderstand that this was compiled on
the basis of that other data ?
Mr. Whitney. I do now; I didn't before.
Mr. Nehemkis. Are we clear ?
Mr. Whitney. Quite.
Mr. Nehemkis. All right, let's go on. Will you proceed under
Kidder, Peabody & Co. and Baring Bros., Ltd., of London, and go
down the column this time instead of across and give me the per-
centage allocations for that house ?
Mr. Whitney. Well, all the others are 31l^ percent.
Mr. Nehemkis. From then on until the issue of 1919. Correct?
Mr. Whitney. That is what it says.
Mr. Nehemkis. Now, will you go to the column J. P. Morgan &
Co. and give me the percentages from 1916 down ?
Mr. WnrrNEY. 213/8 in 1916, and thereafter 201^.
Mr. Nehemkis. Now, will you turn to the First National Bank of
New York and do the same ?
Mr. Whitney. 10|| ; 10% from there on.
Mr. Nehemkis. I didn't liear the last part of your answer.
Mr. Whitney. 10% from there on. ''
Mr. Nehemkis. Will you turn to the National City Co. and do
likewise ?
Mr. Whitney. 10{^, 1916; 10%, the remaining issues of this list.
Mr. Nehemkis. Will you turn to Morgan Grenfell & Co., Ltd.,
and give me the same information ?
Mr. Whitney. 4% in 1916, the issue referred to, and 4% in the
remaining issues listed here.
Mr. Nehemkis. And will you now turn to Kuhn, Loeb and give me
the identical information ?
11872 CONCENTRATION OF ECONOMIC POWER
Mr. Whitn-et, I414 as to the 1916 issue, and 13i^ the remaining
issues on this list.
Mr. Nehemkis, Now, will you turn to Lee, Higginson & Co.?
Mr. Whttney. 5 in that, and thereafter.
Mr. Nehemkis. "Will you turn to Harris, Forbes and give me that
information ?
Mr. Whitnet. Thereafter 5 percent. Mr. Nehemkis, may I
inquire
Mr. Nehemkis. Just a moment, I hadn't quite finished with you,
Mr. Whitney. I want to now ask you one further question on this
table and then you may comment. This is what has been heretofore
testified to as a more nearly frozen account than other accounts.
Would you accept that as being an accurate characterization?
Mr. WnrrNET. Not in the slightest.
Mr. Nehemkis. Did you have something you wanted to comment
upon ?
Mr. Whitnet, I merely wanted to inquire whether these were all
the issues that were taken from data that I identified this morning.
Mr. Nehemkis. Let me consult with one of my assistants. My
assistant tells me that these were issues headed by J. P. Morgan &
Co. and taken by the group.
Mr. Whitney. That is what my impression has been, but I just
wanted the record to make it clear that there were other Telephone
financings during the same period where these percentages wouldn't
necessarily
Mr. Nehemkis (interposing). We went ovtr some of them this
morning, you recall, on short term notes.
Mr. Whitney. And in this compilation by your investigators, as
this is, these were just selected from the total list of financing of the
Telephone Company,
Mr. Nehemkis. Just so you may complete your statement, based
on information furnished by you.
Mr. Whitney. Yes, sir.
the "library agreement"
Mr. Nehemkis. Mr. Whitney, I want to show you certain docu-
ments which have been identified by the witness who preceded you.
I show you a memorandum headed "New York, May 5, 1920." [Re-
ferring to "Exhibit No. 1673."] Would you glance at this memo-
randum, Mr. Whitney ?
Mr. Whitney. Yes.
Mr. Nehemkis, Are you familiar with the substance of that
memorandum ?
Mr. Whitney. It was shown to me by one of your investigators a
short time ago in New York and subsequently Mr. Chapin sent me a
copy of it so that I am familiar with what it says. Of course it is
not out of our files.
Mr. Nehemkis. Mr. Chapin identified it as having come from the
files of the old Kidder Peabody.
Mr. Whitney. To that extent I am familiar with it.
Mr. Nehemkis. Did you request Mr. Chapin to send you that
copy ?
Mr. Whitney. I did not.
CONCENTRATION OP ECONOMIC POWER 11873
Mr. Nehemkis. Mr. Cliapm volunteered?
Mr. Whitney. Yes.
Mr. Nehemkis. May I have it back, please? I am going to read
to you, Mr. Whitney, from this memorandum.
Mr. Whitney. May I interrupt a second? . There is another memo-
randum you just introduced also; when I come to it, may I talk
about it ?
Mr. Nehemkis. Oh, sure; I want you to talk about all these memo-
randa. That is what you are here for.
Mr. Whit'ney. That's fine.
Mr. Nehemkis. This memorandum is dated New York, May 5, 1920.
[Reading from "Exhibit No. 1673"] :
" 'Original terms' group on future purchases of A. T. & T. securi-
ties — " then the footnote :
Meaning purchase or underwriting of A. T. & T. or subsidiary company
securities.
" — as agreed to, at 'The Library' — "
I am not quite familiar with the meaning of that phrase. What
does that mean ?
Mr. Whitney. I assume it means Mr. Morgan's library.
Mr. Nehemkis. Could you be a little more positive and tell me you
know it means t' a library of Mr. Morgan's home?
Mr. Whitney. If tnere is any difference; yes, sir.
Mr. Nehemkis. All right, I just wanted to know whether you were
sure about that [reading further] :
"Original terms" group on future purchases of A. T. & T. securities as agreed
to, at "the Library" tliis morning between J. P. M. —
Whose initials are those?
Mr. Whitney. Mr. J. P. Morgan.
Mr. Nehemkis. The present Mr. J. P. Morgan ?
Mr. Whitney. Yes
Mr. Nehemkis (reading further). "H. P. D."
Mr. Whitney. H. P. Davison.
Mr. Nehemkis. Mr. Davison is deceased?
Mr. Whitney. Yes.
Mr. Nehemkis (reading further). "And R. W.,'^ — presumably Rob-
ert Winsor ?
Mi\ Whitney. Yes,
Mr. Nehemkis. Now the first statement apparently concerned the
original terms group on the future purchases of ail A. T. & T. secu-
rities as well as all subsidiary financing, and there was a meeting at
the library on May 5, 1920, which was attended by J. P. Morgan, Henr>
P. Davison, and Robert Winsor.
Mr. Whitney, I show you a table entitled "American Telephone &
Telegraph Co. and Associated Companies," and a letter from your part-
ner, Mr. Alexander, addressed to me. Will you glance at this and
tell me whether you recognize this as having been prepared by your
firm?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. Prepared by your people?
Mr. Whitney. Yes ; but I may point out that we have substituted
another one. That one was in error.
Mr. Nehemkis. So that we may do full justice to your workman-
ship, I am going to take the liberty of offering both.
11874 CONCENTRATION OP ECONOMIC POWER
By the way, Mr. Whitney, I intended to ask was Mr. H. F. Davison
a partner of J. P. Morgan ?
Mr. Whitney. He was.
Mr. Nehemkis. Mr. Chairman, may I offer in evidence the tables
identified by the witness?
The Chairman. The tables may be received.
(The documents referred to were marked "Exhibits Nos. 1681-1 to
1681-3" and are incUided in the appendix on pp. 12215 and 12-216.)
Mr. Nehemkis. I note, Mr. Whitney, that from January 1, 1920.
to June 16, 1934, there was $832,000,000 of Telephone financing.^
The selling syndicate interest in that financing was over $50,000,000.
"Our net profit" — meaning the profit of J. P. Morgan & Co. — was
over $900,000, and the total profit before overhead expenses, salaries
and taxes, $2,969,320.64. So that the conference which was held here
on May 5, 1920, concerning the future purchases of A. T. & T.
securities was a pretty substantial conference; it concerned itself
with $832,000,000 of future business.
Mr. Whitney. Oh, no, it didn't, Mr. Nehemkis. What is con-
cerned was the situation at that time, which is quite a loiig story.
It may have resulted, there may have been that amount in the
total business done thereafter, but the memorandum you showed
me had no reference whatever to $800,000,000 of securities.
Mr. Nehemkis. Of course not; I read you from this table.
Mr. Henderson. Technically, Mr. Wliitney is right.
Mr. Nehemkis. I will accept that correction, I want to be tech-
nically correct in all respects here.
Mr. Whitney. That was a very substantial financial program.
Mr. Nehemkis. Mr. Whitney, I have here a table the data for which
was supplied by your firm and this table is entitled [reading from
"Exhibit No. 1682"] :
Bankers' Gross Commissions on Issues of American Telephone and Tele-
graph Company and Associated Companies, Managed by J. P. Morgan & Co.
or Morgan Stanley & Company, Incorporated, 1906-1939.
I find that the bankers' gross commissions on Telephone issues for
the period 1906 to 1930 was $26,905,000. I find that the bankei-s'
gross commissions on issues managed for the period 1935 to 1939
by Morgan, Stanley was $11,470,750. So that the total for the period
1920 to 1930 was $26,905,000.
Mr. Whitney. In the first place, I would be willing to wager you
didn't get that out of our office.
Mr. Nehemkis. Mr. Whitney, I want to offer my documents. You
will have plenty of chance to explain.
Mr. Whitney. You introduced it, didn't you, as saying it came
out of our office?
Mr. Nehemkis. Oh, no; I said this was data supplied by J. P.
Morgan & Co.
Mr. Whitney. By J. P. Morgan & Co. I am pretty sure it
didn't. Part of it may have come out, but all of it I am sure
didn't.
Mr. Nehemkis. I think t indicated in my original statement, Mr.
Whitney, that the source of this was data supplied by J. P. Morgan
& Co. and Morgan, Stanley & Co. and, I am now advised, by the
Federal Connnunications Commission. These figures are perfectly
» See "Exhibit No. 1681-3." appendix, p. 12217.
CONCENTRATION OF ECONOMIC POWER 11875
accurate: one, an official source; two, your own figures; three, the
figures of Morgan Stanley.
Mr. WnrrNEY. I did not understand that you included Morgan,
Stanley & Co. That was an error on my part.
Mr. Nehemkis. I would like to offer this table, Mr. Chairman.
The Chairman. The table may be received.
(The table referred to was marked "Exhibit No. 1682" and is
included in the appendix on p. 12218.)
Mr. Miller. May I ask a question, Mr. Nehemkis? What do you
mean by gross commissions? Does that mean the spread between the
issue price and the purchase price that the company received?
Mr. Whitney. Gross spread between the issue and the net price
before any expenses of any kind or, to put it another way, between
the price paid to the company and the price paid by the ultimate
consumer. If I can take Mr. Miller's point on that, that is gross.
Now, of course, it is well known that a certain portion goes to the
original terms group, a certain portion to any intermediate group
you might have, and a certain portion to the bond-distributing
houses scattered all through the country, seven or eight or nine hun-
dred of them. I think that this figure Mr. Nehemkis referred to in
the first instance, shows that the amount of issue — may I withdraw
that?
Mr. Nehemkis. Why don't you, if you want to comment on that
later, send a supporting memorandum?
Mr. Whitney. I will.
Mr. Miller. It is about 2i/^ percent gross as I see it.
Mr. Whitney. That is about what it averages.
Mr. Nehemkis. Now to return to the conference at the library on
May 5, 1920, Mr. Whitney. I continue reading from that memo-
landum [reading from "Exhibit No. 1673"] :
K. P. & Co.—
Which I take it to mean Kidder, Peabody & Co. —
to manage N. E. & J. P. M. & Co. the rest of the country.
I may assume from that that Kidder, Peabody was to have the
right to manage the New England proprietary interests as described
by Mr. Chapin, and J. P. M. & Co. was to have the exclusive right to
manage the rest of the country. Would you say that was a fair
interpretation ?
MR. Whitney's comments on origin of term "proprikiary interests"
Mr. Whitnet. I am afraid not. If I may be permitted, I should
like to say a word on that "proprietary" interest. That memorandum
does not speak of "proprietary" interests, it speaks of original terms.
I was very glad to learn a few minutes ago where the word started
from, because I had never heard it used before until the other day.
I consider it, if I may say so, a complete misnomer, because if I
understand the word "proprietary" it means ownership, and obvi-
ously there would have to be some agreement by the company to
anything of that kind. I can state unequivocally that in an experi-
ence dating from 1916 down through 1930 that the company had not
the slightest agreement of any kind with us that they would continue
to finance through us. I can't remember a single instance where the
11876 CONCENTRATION OF ECONOMIC POWER
question ever came up. They did consult with us in 1920 as to a
program that Mr. Gifford was planning on refinancing. Tt is quite
a long story, and it may come later. But the question of "proprietary"
interest I consider is a complete misnomer.
The Chairman. Was the word used, Mr. Whitney, to define the
transaction between the Telephone Co. and the investment bankers,
or was it not used to define an understanding among the bankers ?
Mr. Whitney. Well, Mr. Chairman, I can only say of my per-
sonal knowledge, extending as I say in this particular business back
to 1916, that I never heard the word used before until I came down
here to these hearings, and I didn't know where it had come from.
I was very much interested in Mr. Henderson's explanation that the
S. E. C. got the term from Kidder.
I don't remember in all the years that I was working with Kidder
on this business that I ever heard them use it. Of course, the New
England subparticipations, as has been disclosed by this evidence, is
a matter that we never knew anything about. *Ve only knew of it
casually. We never had a record of who they were. I never knew
until way along in the middle 20's who the people were. I am not
questioning Mr. Winsor's use of the word, but I merely want to
explain that we never used it, and if I understand what the word
Itself means, we never considered that there was any such relation-
ship as existing between us and the company, the group and the
company, or between the members of the group itself. It was a
group or2:anized to do a job that in Mr. Gilford's estimation was
going to be a big job, and it was, and it was a fine job. But there
were to be changes if they wanted them, nobody had any question
about it as long as we had the business, but the use of the word
"proprietary" implies some vested right, and I can assure you with-
out any equivocation in our thinking in my office that notion never
had been connected with this business or any other.
The Chahjman. Let me say that, sitting here and istening to this
testimony, it never occurred to me to give to this word any legal,
strict legal significance. I have interpreted it as meaning the general
understanding that had grown up with respect to the manner in
which these distributions would be allocated.
Mr. Whitney. Well, the use of the word is just as new to me as
it is to you.
The Chairman. Nevertheless, apparently it does describe a fact
which did exist, a condition, but not in the legal sense.
Mr. Whitney. I understand, of course, but I merely wanted to
point out that whatever implication may be in the word, whether
legal or otherwise, the use oi the word was completely foreign to us
and to the best of my knowledge I never heard oi it.
The Chairman. Would I be incorrect in drawing the inference that
when there was a division in the "library" that that division would
stand until the "library" again changed it?
Mr. Whitney. As a matter of fact,it didn't even stand in the next
deal.
Mr. Nehemkis. I think we had better wait until the development of
the testimony to see whether the. witness' remark is oorrect,
I want to go back to what this a^eement was all about and
attempt to follow through, if I may, sir, just what wAs decided by
these three men, Mr. Morgan, Mr. Davison, and Mr. Winsor. They
CONCENTRATION OF ECONOMIC POWER 11*. 77
agreed that there was to be a division of the country. Kidder,
Peabody was to Jianage New England, J. P. Morgan was to have
the management of the rest of the country, and then there appears
on this memorandum ^ — I believe you have copies of it before
you — the percentage allocations for the New York group and the
New England group, and the New York group took 70 percent,
the New England group took 30 percent. In turn, the New York
group divided up its 70 percent in the following fashion : J. P. Mor-
gan & Co. got a 20-percent interest in all future purchases of
A. T. & T. securities as well as securities of the subsidiary companies
according to the understanding entered into on May 5. The First
National Bank got a 10-percent interest. The City Bank got a 10-
percent interest; Kuhn, Loeb & Co., a 10-percent interest; Harris,
Forbes & Co., a 5-percent interest; Lee, Higginson & Co., a 5-percent
interest; Guaranty Trust, 5 percent* and the Bankers Trust, 5 pei-cent;
making 70 percent to the New York group.
Now, the New England group had divided up its 30-percent pro-
prietary interest, and I think I now use it correctly as it was intended
by the previous table, as follows : Kidder, Peabody & Co. retained
a 15 percent interest in all of the Telephone business ; the Old Colony
Trust, 3-percent interest; Estabrook & Co., a 2i/2-percent interest;
Day & Co., 2i/^-percent interest; Moseley & Co., 1%-percent interest;
Hayden, Stone & Co., 1% percent.
First, let me find out, Mr. Chairman, what that Boston bank is.
The Chairman. First National.
Mr. Nehemkis. First National of Boston a 2-percent interest and
the Shawmut Bank a 2-percent interest, making the total 30, the
total of New York 70, giving a total of 100 percent.
I also observe, Mr. Chairman, may it please the committee, a very
significant notation. You will notice on the right-hand side [refer-
ring to "Exhibit No. 1673"] the word "negotiations" underscored, and
the statement as follows :
Negotiations to be joint but both free to talk with the Co. and to help them
in any way in their power.
Now, perhaps Mr. Whitney can enlighten us on that. Isn't that a
rather anomalous provision ? Usually one banker does the talking for
the entire group. Do you happen to know — you were the specialist
at this time in Telephone matters — ^how it happened that it was
agreed upon that both houses would talk ? One other question : will
you develop it in your answer: Why is it significant for only one
banker to do the talking to a company ?
Mr- Whitnet. Let me be sure. I think I have got three questions
here.
Mr. Nehemkis. You can take them in any order you wish.
Mr. Whitnet. The question that I didn't answer before related to
the division of the rest of the country. That bore on my own knowl-
edge of handling a selling syndicate, which as Mr. Miller suggested
a few minutes ago, was the ultimate end of the business — getting it
through successfully.
This note that is on the side there has been a great puzzle to me,
because as the evidence shows, this did not come out of our files. It is
not initialed by any of our partners.
1 "Exhibit No. 1673."
11878 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. You have indicated, Mr. Whitney, that this docu-
ment was only shown to you very recently. Now, it has been identi-
fied. I don't think you need discuss that.
Mr. Whitney. Yes. I am not questioning:^ anything about it. I
want to make that very clear. But there is, as I said a minute ago,
another memorandum that you have identified
Mr. Nehemkis (interposing). Well
Mr. Whitney (interposing). Well, now, let me get back. I was
puzzled as to what that does mean, because in my experience — most
of the talks with the Telephone Company, when there was a piece of
financing on, in their bond business, were held mostly with us. But
I think it must refer to the fact that Kidder, Peabody & Co. had a
great deal of talk in connection with the sale of common stocks, of
various plans they had for employees. They had a lot of contacts
completely outside of bond financmg. I don't know the significance
of that statement, because we both had always talked to the company,
and I don't quite know — I can't see any reason why Mr. Winsor was
so specific about it.
Your third question was whether it wasn't unusual for more than
one — well, that depends, of course — it is very difficult for me to gen-
eralize about that, but I suppose the obvious reason why some one
individual or some individual firm is designated by a group of people
for making a joint purchase is that they think it is a great deal
simpler to have one man talk than to have a town meeting about it,
and I suppose it is because that particular firm or individual is
trusted by the other participants in the business to interpret the views
of the group, when tliey have any, and so I don't think that you can
say that was any custom as to how negotiations were han
Obviouslj', when I was in the business, it was generally . for
one or two to discuss matters. I wouldn't say there were
Mr. Nehemkis. Do you mind if I ask you a question now ?
Mr. Whitney. Any !
Mr. Nehemkis. In your long experience with the firm of J. P.
Morgan & Co., can you tell me in how many of the old accounts
managed by J. P. Morgan & Co., you ever took any other bankers
along with you when you talked with company officials ?
Mr. Whitney. Well, I could think of several; I don't quite know
what you mean by account.
Mr. Nehemkis. Well
Mr. Whitney (interposing). If I may designate them as trans-
actions or bond issues
Mr. Nehemkis (interposing). No; I will be more specific, if it will
help you. Take the New York Central Railroad, that was always
regarded as an old account of yours; you were the advisers of the
company, they respected .your judgment, leaned upon you for tech-
nical help. Now, did you drag along with you to your conferences
any members of the community?
Mr. Whitney. No; that was business which we settled solely on
our own responsibility. J. P. Morgan & Co., as you may know
historically, "were fiscal agents of the New York Central Railroad.
I think that was abandoned in 1916. So tliat was a case where all
the negotiations were exclusively with us.
Mr. Nehemkis. Well, now
CONCENTRATION OF ECONOMIC POWER 11879
Mr. Whitney (interposing). Certainly I can tell you, for example,
about the Great Northern and Northern Pacific, in which case — and
the Burlington and others — there were various times when we gen-
erally discussed the matter with the First National Bank. I am going-
back quite a while now, back to 1921. I remember discussing certain
things in connection with General Motors financing with others, going
to conferences, about the general question of policy, what things
should be done, and so forth.
Mr. Henderson. You mean other members of the group went with
you to general conferences?
Mr. Whitney. Well, there was no group, Mr. Henderson, because
it was an isolated thing. As a matter of fact, I think the business
was finally consummated — the transaction was exclusively Avith us —
but the question of going with one or two others is not an isolated
thing. When it comes down to it, down to the actual transactions,
when you get down to what I referred to this morning as the technical
arrangement of a particular bond issue or a particular security, that,
generally, we did alone, for the simple reason that, as we did the
Telephone business — I mean, those negotiations as to the arrangement
of the mortgages, going over all the infinite papers that are required,
the footwork that is required, doing a thing like that, was done by
our statistical department and by our organization. We consum-
mated it with the other members of the group when the time came to
talk prices or to talk general philosophy, and we consulted them as
any prudent man does when he tries to get the best possible advice he
can on an important line of business such as this. But I don't want
to, I can't, as I said before, explicitly, Mr. Henderson, say, or
generalize, as to what is the practice, and that was the first case that
springs to my mind. If you would be interested, I will try to think
up some others.
Mr. Henderson. I think it would be very helpful.
Mr. Whitney. But I don't think it means anything anyway.
Mr. Nehemkis. Well, I just was puzzled, as you were, because
Robert Winsor was a very distinguished banker and he was the head
of one of the great houses of this country.
Mr. Whitney. Absolutely.
Mr. Nehemkis. He was an associate of yours. As a matter of fact,
he was a former employer of yours.
Mr. Whitney. Mine?
Mr. Nehemkis. Wasn't he?
Mr. Whitney. Well, what has that got to do with it?
Mr. Nehemkis. Well, you seemed to be worried about it. And he
came back from this conference, after this discussion, and he made
this entry [reading from "Exhibit No'. 1673"] :
Negotiations to be joint but both free to talk with the Co. and to help them
in any way in their power.
Well, suppose we continue, Mr. Whitney.
The agreement also apparently covered the security issues of sub-
sidiary companies in addition to issues of the parent company. Now,
didn't that mark a departure from the earlier arrangements? If I
recall correctly, you testified
Mr. Whitney (interposing). Well, I will answer that.
11880 CONCENTRATION OP ECONOMIC POWER
I think it did mark a departure in that at that particular time.
Mr. Gifford, of the Telephone Co., was then and until 1919 vice
president in charge of finance. He had been in the employ of the
company before — he came down to Washirigton auring the war.
When lie came back^ — of course, I am not going to talk about Mr.
Gifford — he came to us, and I assume to Kidder, because he felt that
the financial condition of the Telephone Co. needed a complete reset-
ting. You read this morning, or there was introduced, and I testified
from it, a list ^ of a lot of companies. In 1919 there had been a big
issue done with the Southwestern Bell Telephone in 5-year notes — not
a success. He felt that he had to get his balance, his ratio, between
bonds and stocks in better order if, as he saw the picture, there was
going to be this tremendous development of the telephone business.
He made a survey — Mr. Gifford — and he came and said that he had
a program which might run over several years, of resetting the sub-
sidiary financing and the telephone finances, so that, between them,
they would have a more appropriate ratio. If you check up, you
will find that in 1920 the ratio of debt to stock in the Telephone Co.
was the worst that it had ever been — I mean the highest ratio of debt
to stock and that there has been a constant improvement down to
say, 1930 ; and Mr. Gifford had the great ability, he had the fore-
sight, to see that unless something were done in getting this reset,
he was going to get into a position where they couldn't finance
properly.
So we started, and he came and discussed with us, Mr. Chairman,
along the lines I talked about today, as experts, as people who would
plan a campaign, and a part of that campaign with which we had
nothing to do whatever — no one of the bankers, m fact — was the
flotation or sale to his own stockholders of these common stocks.
Now that memorandum — that meeting, if I may say so, was insti-
gated by me. You have introduced in evidence a memorandum in
pencil which is in n^.v handwriting.^ When we were charged with
this job, we felt that me retail distribution of the country wouLl not
stand having 30 percent of the final selling done in New England.
We had introduced into this group two new houses, the Guaranty
Co. and the Bankers who had, about that time, become substantial
national distributors, and we felt that if we were going to get the
benefit of retail distribution of those national houses, the City Co.,
Lee, Higginson, Harris, the Guaranty, and the Bankers, to get the
full strength and power of their organizations, that we ought to have
a larger percentage of the original group profits go to those four
people.
There is a pencil memorandum here
Mr. Nehemkis (interposing). We will come to that in just a
minute.
Mr. Whitney. All right; I will leave that out for now.
Mr. Nehemkis. I wish you would.
Mr. Whitney. I was a partner then. I had been a partner for
about 4 or 5 months, and I went with our bona specialists to Mr.
Davison, who was in charge of Telephone financing in our office, and
said to him, "Will you not take up with Kidder, Peabody & Co., Mr.
' "Exhibit No. 1631-2."
» "Exhibit No. 1679."
CONCENTRATION OF ECONOMIC POWER 11881
Winsor, this program? Mr. Gifford wants to pursue in the Tele-
phone Co. a realinement of these percentages with these two
new people in there." A meeting was held, and Mr. Davison was
not successful in getting the 9 percent that I had suggested should
be taken from the New England distribution and given to the rest
of the country.
Now this is a memorandum obviously written before the meeting,
rhis one I have just been talking about, which shows the figures that
were settled
The Chaipman (interposing). Do 3^ou know why he was not suc-
cessful in inducing the New England group to surrender that 9 per-
cent?
Mr. Whitney. I don't. Mr. Davison is dead, Mr. Chairman, and
Mr. Alexander pnd I have spoken to Mr. Morgan about that, as the
only person who is now living who was at this meeting, and Mr.
Morgan doesn't even remember there was such a meeting and doesn't
remember anything about it.
The Chairman. Now, this
Mr. Whitney (interposing). So I can't tell you.
The Chairman. And your testimony is that you, a new partner,
after examining this situation, made up your mind that for the better
distribution nationally of these securities, a certain percentage of the
so-called proprietary interests should be taken away from New Eng-
land; you suggested that to Mr. Davison, and the account was so
frozen that even he couldn't change them?
Mr. Whitney. Well, you see, Mr. Chairman, at this time there were
being added to this list that we have been talking about this morning,
two additional people, so it was necessary to have a realignment of
the percentages. It wasn't a question of the "proprietary" rights.
Looking back on it, which is always so easy, I now realize that I didn't
know at that time that he^had this subparticipation in New England.
So I can see it was very difficult for Mr. Winsor to do. If I had been
in Mr. Winsor's place, probably I should have felt just as he did. But
that is what this memorandum really conveys to me. The Telephone
Go. was starting their actual program. They had to get reset finan-
cially, and that would take really hours for me to try to explain that
to you in detail, and I would probably do it wrong anyway.
But with those talks I was having then — and I am sure Kidder
was, if my memory serves me right, with Mr. Gifford on his program —
Mr. Gifford wanted us to get set to help him as experts, in the financ-
ing, the execution of his program. These two houses came into the
picture there, so it involved a realignment anyway of any traditional
percentages there might be, and I wanted, being perhaps interested
more then in the rest of the country distribution than I was in New
England, to get them what I thought was a more appropriate per-
centage of the total.
Mr. Davison, I just remember him coming back, saying that it
wasn't settled a.nd, well, I have been told that we wouldn't speak of
the other memorandum, but
The Chairman (interposing). But there was then a traditional
aspect to this thing ?
Mr. Whitney. I think certainly there was, and I think Mr. Winsor
felt that he didn't agree with us. Well, I know he didn't agree with
me from subsequent conversations.
124491 — 40— pt. 23 6
11882 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. You say, Mr. Whitney, that you mstigated this con-
versation of May 5, 1920?
Mr. WuCTNEY. Yes, sir.
Mr. Nehemkis. If I understood you correctly ?
Mr. Whitney. Yes.
Mr. Nehemkis. You weren't present, though ?
Mr. Whitnet. No. Well, I was only a kid?
Mr. Nehemkis. When did you first learn about the results of the
conference ?
Mr. Whitney. Next morning.
Mr. Nehemkis. Who told you ?
Mr. Whitney. Mr. Davison.
Mr. Nehemkis. Mr. Chapin, may I recall you for a moment, please ?
TESTIMONY OF JOHN R. CHAPIN, KIDDER, PEABODY & CO., BOSTON,
MASS. — Resumed
MR. Whitney's aide memoire prepared for the "library" conference
Mr. Nehemkis. Mr. Chapin, above these columns of figures appear
the notations, "Davison's Suggestions," and then in the next column,
"Finally agreed upon."^ Can you tell me in whose handwriting
that is?
Mr. Chapin. Those were in Robert Winsor's handwriting.
Mr. Nehemkis. That is all, Mr. Chapin.
Mr. Whitney, you will find — oh, just a moment, Mr. Chapin ; may
I call you back for a second? 'V\Tiose handwriting is this, "May 6,
L920"?'
Mr. Chapin. Mr. Winsor's handwriting.
Mr. Nehemkis. Thank you, sir.
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
Mr. Nehemkis. Now, Mr. W^iitney, will you look at this memo-
randum that you have been wanting to talk about, and tell me in
whose handwriting the rest of the memorandum is ?
Mr. Henderson. Has that been introduced in evidence ?
Mr. Nehemkis. It has been identified.^
Mr. Whitney. This column here
The Chairman (interposing). You are referring now to the first
and second columns?
Mr. Whitney. Yes; the list of initials and the next one are in my
handwriting.
Mr. Nehemkis. Are in your handwriting?
The Chairman. Which one is in your handwriting?
Mr. Whitney. This original — initial one.
The Chairman. The first column?
Mr. Whitney. Which is headed — I thought it was written by
Davison, but Mr. Chapin says it was Mr. Winsor. That is all right
with me. But I do know my own handwriting and the first column
is my own, and if you will see
» "Exhibit No. 1679."
CONCENTRATION OF ECONOMIC POWER 11883
The Chairman (interposing). Well, now, when you use the phrase,
"the first column," you are referring to the first column of figures?
Mr. AVhitney. No; I am referring to this list and this list [indi-
cating] .
The Chairman. Pardon me, Mr. Wliitney, but the reason I am so
technical about this is so that it may be clear in the record to anybody
who reads it.
Mr. WnrrNEY. May I try to do better? There is a column of
initials of firms— J. 'P. M. & Co., First National, City, K. P. &
Co., K. L. & Co., H. F. & Co., L. H. & Co., Guaranty, Bankers, New
England, you see. Now, the next column is headed "Davison's Sug-
gestions," and Mr. Chapin has just identified that as being in Mr.
Winsor's writing. There is a list of figures down there. The next
one is "Finally agreed upon," and a list of figures, both adding up
to 100 percent. There is "May 6, 1920," down here in the corner and
you will remember the conference of May 5. There is also a re-
ceipt thing by Kidder, Peabody & Co., a time-clock thing, marked
"May 12, 1920."
Mr. Nehemkis. Now, Mr. Whitney, I think I asked you just to
explain the notations, and you are departing from that. Will you
return the memorandum to me?
The Chairman. Well, Mr. Nehemkis, he was just about to testify
as to the handwriting.
Mr. Nehemkis. Oh, I'm sorry.
The Chairman. You see, he was interrupted. Proceed, please.
Now, the first column, giving the list of the names of the firms, in
whose handwriting is that?
Mr. AVhitney. Mine.
The Chairman. Yes; and the second column, being a column of
figures entitled "Davison's Suggestions," is in whoge handwriting?
Mr. Whitney. Mine.
The Chairman. And the third column has just been testified to by
Mr. Chapin as being in Mr. Winsor's handwriting.
Mr. Whitney. I wouldn't know whose it was.
The Chairman. No; but I say, it has been testified to by Mr.
Chapin.
Mr. Whitney. Oh, excuse me. Yes.
The Chairman. And the date, May 6, 1920, ha^s been testified to by
Mr. Chapin as in Mr. Winsor's handwriting, as well as the title "Amer-
ican Telephone and Telegraph."
Mr. Nehemkis. That was testified to, I believe, earlier, as being
someone in the old Kidder, Peabody firm. We don't know who. Did
I understand correctly, Mr. Whitney, that you have described certain
notations in response to the questions as having been made by your-
self?
Mr. Whitney. Yes, ^ir.
Mr. Nehemkis. Now, this document was identified as coming from
the files of the old Kidder, Peabody & Co. Mr. Whitney, will you ex-
plain to this committee how it happens that you did not make avail-
able to the authorized representatives of this committee this docu-
ment, in response to our request?
Mr. WnrrNEY. You just said it came from Kidder, Peabody files.
We didn't have it. I never saw that until — as I testified a little while
11884 CONCENTRATION OF ECONOMIC POWEE
ago, Mr. Chapin = ent me certain papers. This, we haven't anything
like this in our file.;.
Mr. Nehemkis. You mean this mysteriously made its way into the
files of the old Kidder, Peabodv company?
Mr. Whitney. Wliy, Mr. Nehemkis, I was saying that there is still
a further notation on this memorandum which shows, as is the cus-
tomary form stamped on papers when received by an oflfice, the
date mark of May 12, 1920. I can't testify definitely, but I think it is
a perfectly fair assumption that this paper was brought back by Mr,
Davison and shown me, that we made a record of what the agree
ment was for future reference, and that he then sent the original paper
to Mr. Winsor as indicated, he receiving it on the 12th of May.
The Chairman. You recognize your handwriting there?
Mr. Whitney. Certainly.
The Chairman. You remember the occasion on which you made it ?
Mr. Whitney. I might say that I was very much relieved when I
saw this because it did revive my memory as to a lot of details about it.
The Chairman. I said, do you remember the occasion on which you
made that?
Mr. Whitney. Oh, certainly, that is what I said; I instigated the
meeting, because these are the figures we asked Mr. Davison to try to
arrange for better distribution for the country.
Mr. Nehemkis. Mr. Chairman, I am afraid that I have lost some
of Mr. Whitney's remarks. May I ask to have the reporter read them
back?
The Chairman. Yes. Which ones are you referring to?
Mr. Nehemkis. Following my last question.
The Reporter (reading) :
I was saying that there is still a further uotation on this memorandum which
shows — as is the customary form stamped on papers when received by an
oflSce, the date mark of May 12, 1920. I can't testify definitely, but I think it is
a perfectly fair assumption that this paper was brought back by Mr. Davison,
arrd shown me, and that we made a record of what the agreement was
Mr. Neheivikis. Stop. Now, Mr. Whitney, when our representative
called on your firm, did they not ask you, as duly authorized repre-
sentatives of this committee, to make available to us all documents —
memoranda, letters — in your files, pertaining to this transaction?
Mr. Whitney. And everything else.
Mr. Nehemkis. Now — just a moment
Mr. Whitney (interposing). And you got
Mr. Nehemkis (interposing). Mr. Chairman, I must request that
3'ou rule
The Chairman. The witness was answering the question, Mr. Ne-
hemkis, I think. You may proceed.
Mr. Whitney. Any other question therein, I would be delighted to
answer.
Mr. Nehemkis. Fine. I just want to know the meaning of that
statement you just made, that you made a complete record of what
Mr. Davison had told you. Why did you not furnish us that docu-
ment?
Mr. Whitney. Well
Mr. Nehemkis (interposing). Read back that one sentence, if you
will.
CONCENTRATION OF ECONOMIC POWEE 11885
Mr. Whitney. I got the sentence all right, Mr. Nehemkis, and the
last thing I want to do is to appear in any way evasive. The next
thing, and even more important than that, I would hate to have the
commjttee feel that we didn't give you every single document in
our file. We worked hours and hours to produce data for you, anc.
there is no such record as this in our office. If that is clearly under-
stood, 1 would be delighted to explain what I meant by what I said.
Mr. Nehemkis. I wish you would.
Mr. Whitney. We have in our office, or had, back in those days, a
thing called a syndicate department, through which went the tech-
nical bookkeeping entries of syndication of securities. We had there,
obviousl}^ certain things to do with the Telephone Company, and un-
doubtedly, this was some notation for future business, because there
was a piece of business pending.
You have got everj'^thing. I just testified to the chairman that
I was much relieved when I found this because it did stir up my
recollection of this other memorandum.
Mr. Nehemkis. The May 5 memo?
Mr. Whitney. The May 5 memorandum, which I saw 3 or 4 days
before this hearing, and I knew the figures in that were accurate,
although, as I have already testified, they were changed a few
months thereafter. I undoubtedly went to the fellow who handled
the bookkeeping part of our office.
Mr. Nehemkis. Mr. Keyes?
Mr. Whitney. Oh, no ; he is our general manager.
Mr. Nehemkis. Who is that person?
Mr. Whitney. Let's see, in 1920, I couldn't remember who it was,
some head of the department. So that there would be some notation
when another Telephone transaction came up, that we, who had the
handling or the syndication of it, would know what had been agreed
on, for the next deal.
FIRST ISSUE after THE "LIBRARY AGREEMENT"
Mr. Whitney. As I say,' when the next deal came, these percentages
didn't hold. It was a very minor change, you know, but I stand by
my statement, and I also stand by the absolutely unequivocal state-
ment that there isn't a single thing in our office that you gentlemen
have asked us for that you haven't had. It has been difficult some
times to present it the way you wanted it, but we have tried, and
there is nothing like this in our office.
Mr. Henderson. In other words, you haven't even yet located the
record you made before this thing went back to Kidder?
Mr. Whitney. No, because the only record we have kept on this,
Mr. Henderson, is a record of the transactions as they actually took
place. The next issue came in the fall, and I think it was Bell
Telephone of Pennsylvania. The percentages which you will find
there are substantially as stated here, with the very small change of
Kuhn, Loeb, who got 103/4. There was a quarter taken off three other
people. So the only records we would have of a thing like this are
just in the run of business, and if I may say so, it seems to me to
indicate that we didn't take these things as a very permanent, lasting,
frozen arrangement; that when the next transaction came up, we
11886 CONCENTRATION OF ECONOMIC POWER
dealt with it in that wa}^, subject always to the thought that the next
time it might be changed again. And our permanent records you
have got.
Mr. Henderson. You mean to say you didn't attach importance to
Davison's suggestion which originated with you and which involved
questions of future participations? Here is a record of it and you
didn't think it important enough to keep? Does that mean you
had it in your head, or you knew you could go back to the last issue
and get it?
Mr. Whitney. No, I don't think so. It has got to be considered,
Mr. Henderson, in connection with what we were doing at the time.
There was this Bell Telephone thing planned. We did not know
what the longer future held.
Mr. Henderson. But you did know pretty much what the agreement
was as to the division, didn't you ?
Mr. Whitney. We knew, my senior partner told me, that for the
next Telephone operation these percentages had been fixed between
him and Mr, Winsor, including these two new participants in the
group, in that way. Well, what I almost surely would have done
would have been to make a notation somewhere so that I wouldn't
forget about it, because it did not pay to forget things with him.
Wlien the deal came it was translated into actuality, and my "aide
memoire" to remind me of the way he wanted me to do it would have
been destroyed with other working papers, and the fact that the Bell
Telephone was handled in this way is proof that I did what I had
been told to do, plus that very minor alteration of three-fourths of
1 percent.
The Chairman. Was the next issued divided in accordance with
the figures that appear in the second column ? ^
Mr. Whitney. No^ sir. I say
The Chairman (interposing). I meant, when I said the second
column, the second column of figures.
Mr. Whitney. It was, with the exception of Kuhn, Loeb who on
the last column to the right have got 10 percent. They actually got
10%, and the Guaranty, the Bankers, got 4% each, and I think that
Kidder, or the New England group got 29%.
The Chairman. Well, then, the label at the head of that column
finally agreed upon is not, then, accurate?
Mr. Whitney. It was altered. We never worked under that final
column which proves that this was not static.
The Chairman. So there was another distribution, another
Mr. Whitney. Alinement.
The Chairman. Alinement?
Mr. Whitney. Yes, sir.
May I say — I want to make it very clear — I am not questioning in
any sense the accuracy of that memorandum. I never have, or any
of those figures. If I talk about them, I am not questioning them.
The Chairman. I understand that; you have not disputed that
point at all.
Mr. Nehemkis. Mr. Chairman, these are rather precious documents,
and I don't want to be carrying them around. Can I get them into
evidence right now?
» See "Exhibit No. 1679," appendix, p. 12214.
CONCENTRATION OP ECONOMIC POWER 11887
Mr. Alexander. "We have some more copies. [Laughter.]
The Chairman. These exhibits may now be admitted into the
record.^
Mr. Nehemkis, do you wish to suspend at this point ?
Mr. Nehemkis. I think so, if we may, until Monday morning, if
that is the committee's pleasure.
The Chairman. Until Monday morning at 10.
Mr. Nehemkis. Yes; at which time we will resume with Mr. Wliit-
ney and the other witnesses involved in the presentation of the tele-
phone story.
The Chairman. Now, then, for the purposes of this particular
hearing, Mr. Whitney and Mr. Alexander may step aside.
Before the committee adjourns, however, it will now receive a sug-
gestion from Mr. E. F. Connely, president of the Investment Bankers
Association. Mr. Connely will step forward.
Mr. Emmett F. Connely. Mr. Chairman.
The Chairman. You n ay be seated. You are not giving testi-
mony, you are making a request.
Mr. Connely. Thank you, sir.
The Chairman. I may say that Mr. Connely has approached the
chairman and the executive secretary with respect to the desire of
his organization to request an opportunity to be heard. You may
proceed, Mr. Connely.
STATEMENT BY EMMETT F, CONNELY, PRESIDENT, INVESTMENT
BANKERS ASSOCIATION OF AMERICA, DETROIT, MICH,
Mr. Connely. Thank you, Mr. Chairman.
Mr. Chairman and members of the committee, my name is Emmett
F. Connely, I am president of the Investment Bankers Association
of America, a voluntary association composed of 723 dealers in securi-
ties, having 1,410 offices located in 210 cities and in 40 States, I was
elected by the association membership at its convention in October to
serve for 1 year.
Since its inception, early in the year, our members have been keenly
interested in the constructive possibilities of this inquiry. More re-
cently, some of our members, particularly those of us from the West
and South, have evidenced the feeling that any study of the invest-
ment-banking industry, such as comes within the scope of this com-
mittee's powers, should be sufficiently broad as to bring out the local
problems affecting the flow of capital into industry as we know them
from practical day-to-day experience in our several local communities.
After assuming office, I made inquiry as to just what these hearings
would cover, and learned that your committee intended to confine its
investigation for the present, at least, to a small group of large
houses., whose exclusive or principal business is the underwriting and
original distribution of large national issues. It seemed to me that
if this inquiry were confined to such limits that the public might
erroneously assume that your inquiry into the affairs of 8 or 10 very
large houses was a study of the investment-banking business as a
whole.
1 "Exhibits Nos. 1673 and 1679.'
11888 CX)NCENTRATION OF ECONOMIC POWER
Actually, if confined to these limits, we feel that you would be
studying but a single phase of our business; and, what is far more
important, that in so doing you would be depriving yourself of an
opportunity to accumulate a vast amount of additional information
that would be extremely useful for your purposes in your study of this
all-important subject of the flow of capital into industry.
After conferring with members of our board of governors, who ap-
proved of my making an effort to introduce testimony at this hearing,
I wrote Senator O'Mahoney on November 17, requesting an oppor-
tunity to be heard. I asked the Senator if we might introduce
testimony that would be given by dealers from various sections of the
country.
Subsequently, in this connection, I called a special committee meet-
ing which was held on December 5 and 6 at my home city of Detroit,
at which were present some 15 representative members from widely
scattered locations — from Wisconsin to Texas, and from North Caro-
lina to the Pacific Northwesi. I did not know at that time that your
schedule of necessity had to be developed quite far ahead of the actual
appearance of the witnesses, nor did I know until coming to Wash-
ington this week that it was necessary to submit our statements to
you at least 30 days prior to the hearing so that you might have them,
for study.
It became apparent to mc iir.:rx2diately that, willing as you were, you
could not hear our people at this time. Fearing that this investment
banking inquiry might be permanently adjourned on or about
December 22, I felt it desirab-e to get some brief statement into the
record that our position might be set forth in the hope that when
your committee reconvenes you will recognize the importance of our
request and hear the story of the local dealer in our business and what
he thinks can be done to put idle men and machines to work.
This being an economic study, it seemed a pity to close the invest-
ment banking section of the inquiry without hearing from the hinter-
lands, for we honestly believe we can be helpful in making suggestions
that will help to eliminate the lag, leak, and friction referred to in
the President's letter to Senator O'Mahoney, dated May 16 of this
year. Your committee has been both generous and gracious in waiv-
ing its rules and granting me an opportunity to make this brief
statement. I am more than appreciative.
The President in the letter just referred to stated "that the dollars
which American people save each year arc not yet finding their way
back into productive enterprise." There are more than 6,000 dealers
in this business. They are situated from coast to coast and give
employment to over 93,000 people. We believe that we are more
closely connected with the investment banking process than any group
in the country.
We believe that we have an intimate knowledge of the small invest-
ment buyer's problem and tlie problem of the small-business man,
and if given an apportunity at a later date we would hope to give you
important factual data coupled with suggestions as to what might be
done toward the solution of our economic troubles. While we come
from the smaller centers, nevertheless we believe our viewpoint has
worth while social significance.
We are particularly anxious h get before you the problem of small
and medium-sized business when it comes to financing its needs and
CONCENTRATION OF ECONOMIC POWER 11889
also the current attitudes of investors and potential investors in local
communities. If given an opportunity to appear at a later date,
these typical local dealers will be specific in their testimony. They
will present case histories of local investors and businesses, and the
way in which concerns m their own communities have been financed
in the past and are now being financed or hindered in their financing.
Since our testimony will be aimed at presenting to you the situation
which today confronts on the one hand the investor, potential or
nctual, and on the other hand, concerns which seek or might seek
financing — it seems inevitable to me that references will be made to
so-called deterrents, handicaps, and bottle necks.
Effort will no doubt be made to show that business conditions
could improve if <:enain deterrents were removed. Those who testify
will undoubtedly point out that our business is encountering diffi-
culties, real or fancied, with the Securities Act of 1933, as amended.
There are some real problems to be solved as to how to correct the act,
so that businessmen — both large and small — may be more willing to
borrow publicly and thus put idle dollars to work.
The question of private placement will also undoubtedly come up
for discussion as will the question of banking-department regulations
and limitations that these regulations impose upon local banks and
the development of local business enterprises. The influence of the
tax structure upon different kinds of security purchasers and its
effect upon local industries may also be referred to. In a word, it will
be our purpose to offer testimony based on our experience in our own
communities which Ave hope will be helpful in solving the unemploy-
ment problem and, in that way, contribute a definite social service.
If it meets with your approval, we might also ask a professional
economist to review testimony already before your committee, given
in conection with factual data now in the record, since we are not
wholly in accord with certain inferences that have been drawn from
such data.
I trust that I have given you an indication of our intentions which
will be adequate for your purposes, that the topics to be covered in
the testimony which we hope to provide have been set forth with
sufficient precision and that you will feel that this testimony will be
useful in solving ■■l^vx common problem of restoring the economic
mechanism to good working order.
The Chairman, Thank you, very much, Mr. Connely.
Mr. CoNNELT. I thank you and the committee very much.
The Chairman desires to call to the attention of all prospective
witnesses here that o-i Monday we resume this study of A. T. & T.
financing, and all witnesses, who have been subpenaed in this <;onnec-
tion probablj' had letter make their arrangements to be present. The
committee then will stand in recess until 10 : 30 Monday morning.
(Whereupon, at S:20 p. m., the tearing recessed until 10:30 a. m.
on Monday morning, December 18^ 1939.)
INVESTIGATION OF CONCENTEATION OF ECONOMIC POWEK
MONDAY, DECEMBER 18, 1939
United States Senate,
Temporary National Economic Committee,
Washington^ D C.
The committee met at 10:50 a. m., pursuant to adjournment on
Friday, December 15, 1939, in the Caucus Koom, Senate Office Build-
ing, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'Mahoney (chairman), and King; Messrs. Hen-
derson, Avildsen, and Brackett. Present also: Charles L. Kades,
Treasury Department; Ganson Purcell, Securities and Exchange
Commission; Clifton M. Miller, Department of Commerce; Peter R.
Nehemkis, Jr., special counsel; David Ryshpan, financial analyst;
W. S. Whitehead, security analyst; and Samuel M. Koenigsberg,
associate attorney. Securities and Exchange Commission.
The Chairman. The committee will please come to order. Mr.
Nehemkis, are you ready to proceed ?
Mr. Nehemkis. I am, sir.
The Chairman. Commissioner Henderson will make a brief an-
nouncement with respect to the continuance of these hearings.
Mr. Henderson. The S. E. C. had hoped to conclude this week
the presentation involving these three items related to investment
banking, but finds that the committee and the witnesses would
undoubtedly be unduly burdened, and we have suggested to the
chairman and the executive secretary, and they have concurred, that
we conclude Wednesday night and recess until the first week in
January.
The Chairman. You mean, conclude this phase of it.
Mr. Henderson. Conclude the phase relating to the A. T. & T.,
J. P. Morgan & Co., and Morgan Stanley & Co., everything relating
to those three items by Wednesday evening, if possible, and then
pick up with other investment banking houses after the first of the
year.
The Chairman. Well, that will mean that other witnesses who have
not been called to testify with respect to any of these matters are free
to absent themselves from the hearing if they so desire?
Mr. Nehemkis. That is correct, sir.
Mr. Henderson. During the hearings on Friday, there was de-
veloped by counsel a good deal of technical background, showing the
origin and development of the Telephone group and of various per-
centage changes in the original terms group. It seems to me it would
be very helpful to the members of the committee if, before resuming
the hearings, counsel gave us a brief summary of the state of the
record at the time we concluded on Friday afternoon.
11891
11892 CONCENTRATION OP BCONOMIO POWER
The Chairman. May I interrupt there, to insert m the record a
statement which has just been received from Dr. Albert Haring,
professor of marketing of the School of Business of Indiana Univer-
sity, Bloomington, Ind.
When Dr. Haring testified before the committee at the price hear-
ings on December 7, he was requested to submit certain information
concerning the assets and liabilities of the Great Atlantic & Pacific
Co. This material has now been furnished, and without objection,
it will be printed in tl;ie record at the proper place. Now, Mr.
Nehemkis.
(The material j-ef erred to was marked "Exhibit No. 1683" and
appears in Hearings, Part 21, appendix, p. 11380.)
SUMMARY BY COUNSEL OF PREVIOUS TESTIMONY ON AMERICAN TELEPHONE
& TELEGRAPH CO. FINANCING
Mr. Nehemkis. May it please the committee, in accordance with
Commissioner Henderson's request, may I briefly review the im-
portant developments, as we left on Friday ?
On the historical development of the JTeiephone group, first, the
members of the group in the issue of 1906 were as follows : Kiddei',
Peabody & Co., Baring Bros., Ltd., of London. -T. P. Morgan & Co.,
J. S. Morgan & Co., of London, and Kuhn, Loeb & Co. There was
added to the group in the year 1913 the First Narional Bank of New
York and the National City Bank, and in 1916 i:here was added to the
Telephone group the following bank and brokerage accounts: Lee,
Higginson & Co., Harris, Forbes & Co.
This group remained intact until the year 1920. The percentage
participations of the so-called proprietary grorp in Telephone financ-
ing are set forth in the committee's "Exhibit Nr. 1666. ' ^ The per-
centages of the so-called proprietary group remaiiied fixed, begiiming
with the issue of December 11, 1916, and through tho subsequent four
issues of Telephone securities taken by the group. This is shown by
five entries in the committee's "Exhibit No. 1666."
The second item I review for you is the conference of May 5th at
"the library." The evidence shows, Mr. Chairman, that prior to the
conference at "the library" of May 5, 1920, Mr. Whitnej' had prepared
a memorandum for his senior partner, Mr. Davison, committee's
"Exhibit No. 1679." = The evidence will show, Mr. Chairman, that
on this aide memoire, Mr. Whitney prepared a list of abbreviated
names of the group and certain percentage realinements. It appiears
that Mr. Davison took this memorandum with him to the conference
at "tlie library." The final column of figures on the memoire bears
the caption, ''Finally agreed upon." It has been testified that was
in the writing of Robert Winsor.
The evidence does not show in whose writing the last column of
figures was. The caption, "Davison's suggestions," appearing on the
first set of figures written by Mr. Whitney has been testified to as
being in the handwriting of Robert Winsor. "Exhibit No. 1673" ' is
1 Appendix, p. 12208.
•Appendix, p. 12214.
•Appendix, p. 12211.
CONCENTRATION OF ECONOMIC POWER 11893
Mr. Robert Winsor's record of what was decided upon at the confer-
ence in "the library."
The conference at "the library," it would apf)ear from the evidence,
was made necessary by the following factors : First, the desire to intro-
duce into the original-terms group twc n^w houses, the Bankers Trust
Co. and the Guaranty Co., and to increase the share in the original-
terms group of Lee, Higginson and Harri?. Forbes & Co. Second, the
desire on the part of J. P. Morgan & Co. "'to have a larger percentage
of the original-group profits go to these four people." ^ Third, the
pending financing program formulated by Mr. Walter Gifford re-
quired, according to Mr. Whitney's testimony, a realinement of the
percentages with these two new people.
Now, the third item which I review 2oc you
The Chairman (interposing). Perhaps, Mr. Nehemkis, it might be
proper to remark that there was some dispute with respect to the
exact significance of the phrase, "proprietary interest." The witness
wanted it understood — the witness, Mr. TvTiitney — that there was no
legal significance
Mr. Nehemkis (interposing). That's right.
The Chairman. Regardless of what the facts might be.
Mr. Nehemkis. The third item which I review for you, sir, is
the result of the conference of May 5, 1020. It would appear that
Mr. Whitney's proposal for percentage realinements did not prevail.
The conferees, Messrs. Morgan, Davison, and Winsor agreed upon
(1) a 70-30 division of the Telephone business, 70 percent going to
the New York group and 30 percent to the New England proprietary
interests; (2) that negotiations with the company were to be joint;
(3) that future Telephone financing would include subsidiary com-
panies as well as the parent company.
Such, Mr. Chairman, may it please the committee, is my under-
standing of the state oi the record as we concluded on Friday. At
this point, if it please the committee, we shall endeavor to ascertain
what figures did finally prevail, and I should at this time desire
to recall Mr. Whitney.
Mr. George Whitney, take the stand,^ please.
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
NEW ENGLAND AND BARING BROTHERS' PARTICIPATIONS PRIOR TO "LlTTJRARY
agreement"
Mr. Nehemkis. Mr. Whitney, following the conference at "the
library," as you have previously testified, there was a readjustment
of % percent in the percentage allocations which had been agreed
upon on May 5th?
Mr. Whitney. Yes.
Mr. Nehemkis. Now, the next Telephone issue followed the ad-
justed figures. This was the 25 million Bell Telephone of Penn-
sylvania f
Mr. Whitney. Yes.
Mr. Nehemkis. M.\. Whitney, I show you a record sheet describing
the $25,000,000 Bell Telephone Co. offering of Pennsylvania, which
' Supra, p. 11880.
11894 CONCENTRATION OF ECONOMIC POWER
you were good enough to make available to us. I ask you to ex-
amine this record and tell me whether you recognize it as a true
and correct copy?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. The document is offered in evidence, Mr. Chair-
man.
The Chaikman. Without objection, it may be received.
(The document referred to was marked "Exhibit No. 1684" and is
included in the appendix on p. 12219.)
Mr. Nehemkis. Now, on Friday, Mr. Wliitney, you testified, at
the time of the May 5th conference at "the library," you did not
know that Mr. Winsor had subparticipated the so-called New Eng-
land proprietary interests. Do you recall that?
Mr. Whitney. Didn't know he had?
Mr. Nehemkis. Yes. Now, at the time of the Bell Telephone Co.
offering in 1920, did you know that Mr. Winsor had subparticipated
in New England proprietary interests?
Mr. Whitney. Mr. Nehemkis, we knew it was true in the Tele-
phone business, as to the actual distribution by the subscribing
syndicate of seven or eight or nine hundred people throughout the
country that New England lijindled a portion of that, this percent-
age you speak of, roughly 30 percent or 29% percent, distributed
through Winsor's own office. We handled everything outside of
New England. If I were to say when I learned about his sub-
participations on original terms, I would date my knowledge later
than that, when we first learned about it, and very much later than
that when we learned the detail of it. Do I make that clear?
Mr. Nehemkis. You knew it much later than the year 1920 ?
Mr. Whitney. We knew — of course, we knew of the selling ar-
rangement that he had.
Mr. Nehemkis. Yes, you knew
Mr. Whitney (interposing). Which is entirely a different thing
from the original terms, but I would say that we didn't know, or that
I didn't know, that he had any subparticipations on the original
terms until substantially after this day.
Mr. Nehemkis. Well, now, isn't it a fact, Mr. "V\niitney, that even
before the May 5 conference at "the library," you knew that Mr.
Winsor had subparticipated the New England interests?
Mr. Whitney. On the original terms?
Mr. Nehemkis. Yes.
Mr. Whitney. I just said I don't think so.
Mr. Nehemkis. Well, now, Mr. Whitney, I recall
Mr. Whitney (interposing). Of course we knew back in the
Baring days.
Mr. Nehemkis. Yes. Well, now, I recall to you "Exhibit No.
1679," which you have testified to was in your own handwriting, and
on that exhibit appear two figures, Kidder, Peabody, 15; New
England, 9. If you did not know that Mr. Winsor had subpartici-
Sated the New England proprietary interest, on the basis of what
ata in your office could you have possibly arrived at the figures, 15
for Kidder. Peabody, and 9 for the New England subparticipation ?
CONCENTRATION OF ECONOMIC POWER 11895
Mr. Whitney. Why, I testified on Friday that when I prepared
this memorandum for Mr. Davison, it was for the reason that we be-
lieved that the rest of the country was entitled to a larger interest in
the distribution of these securities. And I took these figures as an
indication to Mr. Winsor of what we wanted to do. because you will
notice the reduction from the figures finally agreed upon and those
that I suggested to Mr. Davison are all in that one item. And when-
ever it came to consideration of Telephone financing, there was al-
ways this distinction made. It was not my province to discuss what
the original terms were, but I felt, and the bond department felt, that
we needed more of the original term profits. You read an excerpt ^
from the minutes this morning — to be given to these three large na-
tional distributors for the purposes of distribution. It was not at
all a question of where the original profits went, except insofar as it
affected the quality of the job of distribution which we could do for
our clients, the Telephone Co.
Mr. Nehemkis. Mr. Whitney
Mr. Whitney (interposing). Excuse me, may I just continue?
Mr. Nehemkis. Yes, sir; indeed. I am sorry.
Mr. Whitney. Of course I knew what was being done in New
England, and I wanted to get from New England this 6 percent to
be divided among these four houses, because they were national dis-
tributors. It was ail for the purpose of distribution — my job and
the bond department's job, in our office. It was that, and not the
question of any policy involved.
Mr. Nehemkis. Mr. Whitney, I now show you "Exhibit No. 1671."
I ask you to examine this exhibit.
(Witness examines exhibit.)
Mr. Nehemkis. Will you read the title, please, to the committee
may have it before them ?
Mr. Whitney. Well, may I — I can't identify this.
Mr. Nehemkis. That is in the record, already offered. Just do
as I ask you, if you will.
Mr. Whitney. You asked me to read something.
Mr. Nehemkis. Read the title.
Mr. Whitney (reading from "Exhibit No. 1671") : "American Tele-
phone Proprietaiy Interests."
ivTr. Nehemkis. Now, will you ■■
iMr. Whitney. May I just say there, this did not come from our
files.
Mr. Nehemkis. No one has said so.
Mr. Whitney. No; but perhaps there has been that inference. I
testified, certainly, ad nauseam, that we never heard ihe term, "pro-
prietary" interest.
Mr. Nehemkis. Just follow this; and will you do as I ask, Mr.
Whitnev? Turn to the column headed, "Convertible 41/2's of April
1913. Do you have it?
Mr. Whitney. Right.
Mr. Nehemkis. Now read the names and the amounts of the first
three firms under the New England group.
> Supra, p. 11893.
11896 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney (reading from "Exhibit No. 1671"). "R. L. Day &
Co., Estabrook & Co., Old Colony Trust Co." Well, it names Hayden,
Stone & Co., ¥. S. Moseley & Co., Kidder, Peabody, Baring Bros.
Ltd.
Mr. Nehemkis. Now, will you read the sum of the first entries, three
figures ?
Mr. Whitney. Nine.
Mr. Nehemkis. They total up to 9. Now, still glancing at this
column, wiiryou read the figures set opposite Peabody?
Mr. Whitney. Fifteen.
Mr. Nehemkis. Now, still at this same column, is not the balance
of the 35 percent New England proprietary interest shown to have
been made up of 11 percent, set against Baring Bros. & Co., Ltd.,
of London ?
Mr. Whitney. Yes.
Mr. N-EHEMKis. Now, will you note, Mr. Whitney, that the divisions
are the same in the next column, except that the Old Colony Trust Co.'s
4 percent interest was retained by Kidder, Peabody i Now, follow me,
if you will, Mr. Whitney, to the next column, labeled "American Tele-
phone Subsidiai-y Notes, August 1914." The figures are exactly the
same in this column as the figures for the April 1913 issue. Now,
turn with me, if you will, Mr. Whitney, to the next column, and
you will note that the figures there are again the same except that
Kidder, Peabody ceded to Hayden, Stone a one-ninth interest out of
its 15 percent. But, if you are following iiie, Mr. Whitney, you will
note that the figures 9, 15, and 11, remain intact. Now, turn, if
you will, Mr. Whitney, to the next column, labeled "December 1916."
The proportionate interest, you will note, remained the same. Tiie
participants give up proportionately 10 percent each in order to make
up the 10 percent for Harris, Forbes and Lee, Higginson. Now, if
you will, turn to the next cohimn, and you will note
Mr. Whitney (interposing). What '.vas that last; Harris, Forbes;
Lee, Higginson?
Mr. Nehemkis. The participants, I said, give up proportinately
10 percent each in order to makfe up the 10 percent for Harris, Forbes
and Lee, Higginson.
Mr. Whitney. It doesn't say that here.
Mr. Nehemkis. Well, you follow the next column. In the next
column, you will note that Baring Brothers, Limited, of London has
disappeared and you will also note R. L. Day, Estabrook, the Old
Colony Trust Co. have been restored to their old 9-percent interest.
Now, Mr. Whitney, in your aide memoire for Mr. Davison, insofar
as the New England interests were concerned, you were in reality
proposing to distribute the Baring Brothers, Limited 9.9-percent in-
terest, so that the "9" ' your handwriting, in "Exhibit No. 1679,"^
the aide 'memoire^ is tl. proprietary interest of Day, Estabrook, and
the Old Colony Trust Co. which you proposed to leave untouched and
the "15," in your handwriting, in "Exhibit No. 1679," the aide mem-
oire, is the old 15-percent interest of Kidder, Peabody in the New Eng-
land proprietary group which you also proposed to leave untouched.
So it appears that you were really not concerned with the ability of
New England to distribute the minimum which it had always dis-
> Appendix, p. 12214.
CONCENTRATION OF ECONOMIC POWER 11897
tributed, because you left that untouched. It would appear, Mr.
Whitney, that what you were really concerned about was whether
New England should continue to have the share of the underwriting
which under the New England agreeement had gone to Paring
Brothers of London ?
Mr. Whitney. Well, that is very interesting testimony.
Mr. Nehemkis. You have no further comment to make on that?
Mr. Whitney. I have ^"ust this. It is very brief. As far as our
knowledge goes, your last estimate has got no relevancy. We did not
know a thing about it. The 6 percent we were trying to reallocate
was to go 1% percent to those four houses. And I repeat, definitely,
and all your mathematical calculations notwithstanding, that is hind-
sight. We did not know the first single thing about this. There is
not the slightest thing to show there was any agreement about
Mr. Nehemkis (interposing). We are not discussing that.
Mr. WnrTNEY. I don't want to get in an argmnent about vour last
statement, but I can tell you unequivocally that the fact that these
figures look the same, iias no bearing on our knowledge, and as a
matter of fact, we did not take the 9 percent of Baring's.
Mr. Nehemkis. 9.9 percent.
Mr. Whitney. 9.9 ; we only asked to take 6.
Mr. Nehemkis. But that is the amount you had to distribute.
There is a question I would like to ask you, if I may. How was it
possible for you to make all those calculations without the aid of a
written record? Apparently, Robert Winsor couldn't do it.
Mr. Whitney. We have written records in our syndicate file^, and
all these figures that you presented yesterday — perhaps it may not
be clear to the committee — come from our records — all these percent-
ages and businesses done. We have those records, but, as I said on Fri-
day, Mr. Chairman, these are isolated transactions. There were no
vested rights of a'ny kind, either between the company, this group,
ourselves, and Kidder, no vested rights between the various partici-
pants of the group. And this testimony and this exhibit, I hope it is
quite clear, have nothing to do with our files. I was just asked to read
certain writings on an exhibit that I never saw before until a couple
of weeks ago when the copies were sent to us. And this calculation of
Mr. Nehemkis is more or less — I don't doubt his accuracy, but w<^ just
didn't know about it. And these — my memoranda, my penciled mem-
oranda,^ to Mr. Davison were solely, strictly related to the distribution.
I wouldn't attempt to go into the details of the bond business, be-
cause that would take too long, but we believed that these four houses
who had a large national distributior. needed a bigger percentage on
the original terms in order to insure their full cooperation in doing
the job for the Telephone company that we had iDeen asked to do
When I say "been asked to do," I wish to add that there was no com-
mitment, there was no contract. When Winsor used the word "pro-
prietary" terms, that was his business. It was not our feeling about
it, and there was nothing to support it, and the calculation of Mr.
Nehemkis — I don't doubt they all add up to that, except there were
only 6, it was not 9.
Mr. Nehemkis. Now, Mr. Whitney, how did you know when you
were preparing the aide memoire for your senior partner, Mr. Davi-
» "Exhibit No. 1679."
12449) — 40— pt. 23 7
11898 CONCENTKATION OF ECONOMIC POWER
son, to put after New England, as you did, the 9? How did you
know that after K. P. you were to put 15? You must have known
that the New England subparticipations of Mr. Winsor's group
totaled up to 9?
Mr. Whitney. But they did not.
Mr. Nehkvikis. You just read them for me from the exhibit ^ which
I showed you, and you added 9. And then, for three columns I
went with you and said, now, they are the game, and your answer was
''Yes, Mr. Nehemkis, they are the same, and they total up to nine." I
am asking if you could enlighten us how it was possible for you to
tell Mr. Davison that New England represents nme, if you did not
know what was on those sheets that you just examined?
Mr. Whitney, Well, I am sorry, Mr. Chairman, I am afraid I
can't do any better than I have done, I think. I consider it a pure co-
incidence. Twenty years is a long time, but I am perfectly confident
that I had no knowledge such as you infer I had, and that that memo-
randum, the fact that it leaves them with nine, was the sheerest
coincidence.
Mr. Nehemkis. I accept your word for that, Mr. Whitney.
Mr. Whitney. May I ask a question of you ? What is the point of
this?
Mr. Nehemkis. Well, Mr. Whitney, that is not a proper question
for a witness to ask.
Mr. Whitney. I withdraw it.
(Laughter.)
INFORMING INTERESTED PARTIES OF "LIBRARY AGREEMENT"
Mr. Nehemkis. To continue, if we may. Do you happen to know
whether the terms of the understanding which was arrived at in
the library, were transmitted to the company, the American Tele-
phone & Telegraph Co. ?
Mr. Whitney. I testified, I think, on Friday, that I don't re-
member (and I had most of the discussion with Gifford) that the
percentages were given to them,. They certainly were not given to
them as something that had happened, but I have no doubt that
during the course of the years, he may have acquired a pretty good
understanding without the details. But the question of formation
of the group, or who was in it, or the percentages, as far as I can
testify to what another man knew, Mr. Gifford had no knowledge
of them. He certainly did not have them from me.
Mr. Nehemkis. Now, do you know, Mr. Whitney, whether Mr.
J. P. Morgan, or Mr. Henry P. Davison discussed the revision of
interests with the New York group, prior to the meeting at "the
library"?
Mr. Whitney. I couldn't answer that, except insofar as I told
you the other day, that Mr. Alexander and I asked Mr. Morgan if
he had any recollection of this meeting and of the substance of it.
I think I said he told us he did not even remember there was a
meeting.
Mr. Nehemkis. But of your own recollection and knowledge, you
cannot tell me now whether either Mr. Davison or Mr. Morgan dis-
cussed the revision, prior to the time they went into "the library"?
1 "Exhibit No. 16T1."
CONCENTRATION OF ECONOMIC POWER 11899
Mr. Whitney. Of my own knowledge, of course, I wouldn't pre-
tend to know what two other gentlemen did 20 years ago but I
would be willing to say that I am perfectly confident they did not.
Mr. Nehemkis. Repeat that.
Mr. Whitney. I am perfectly confident they did not.
Mr. Nehemkis. They did not?
Mr. Whitney. No, but that must be a surmise, it can't be a fact.
Mr. Nehemkis. Now, do you know, Mr. Wliitney, when and how
the terms of the agreement arrived at, at "the library," were trans-
mitted to the First National Bank of New York?
Mr. Whitney. I know of no reason to believe they were.
Mr. Nehemkis. Do you happen to know or recall how and when
the terms of the agreement arrived at in "the library" were trans-
mitted to the National City Bank?
Mr. Whitney. I have no reason to believe they were.
Mr. Nehemkis. Would your answer be the same for Kuhn, Loeb &
Co.?
Mr. Whitney. It wouldn't be quite the same, because most of the
discussions there were with Kidder, Peabody, and I would haA^e no
knowledge of that.
Mr. Nehemkis. I'm sorry, I don't follow you. I asked if your
answer was the same with reference to Kuhn, Loeb & Co.
Mr. Whitney. I said
Mr. Nehemkis. And your answer was that it was discussed with
Kidder, Peabody?
Mr. Whitney. I said my answer would not be the same, because,
if you remember, I testified on Friday ^ that in 1906 Kuhn, Loeb were
approached by Mr, Winsor, of Kidder, Peabody & Co., and that gen-
erally speaking, the discussion on Telephone matters had been be-
tween Mr. Winsor, of Kidder, Peabody, and Kuhn, Loeb & Co.
Therefore, my ansvrer would not be the same.
Mr. Nehemkis. I misunderstood you. Would your answer be the
same ^s in the earlier answer with reference to the communication
or possible communication to Harris, Forbes & Co. ?
Mr. Whitney. Yes; it would with all the others.
Mr. Nehemkis. Guaranty Trust and Bankers Trust ?
Mr. Whitney. Yes.
Mr. Nehemkis. So that the most powerful and important banking
houses in the United States, with a 60-percent interest in business
ultimately amounting to $832,000,000, were not consulted concerning
this redivision of their interest in the Telephone business, according
to your own testimony?
Mr. Whitney. Now, Mr. Nehemkis, if I may, there are two or
three things I would like to say. I did not say that they weren't
told about it. You asked me the question, if I knew how the news
had been transmitted to them.
The second thing is that you again draw in the question that this
conference was dividing up $832,000,000 worth of business. I want
to reiterate again — I will have to do it as often as it comes up — that
each transaction stood absolutely on its own legs. We were not
dividing up anything.
The third question was that it was not a matter of consultation.
I have said that they had no vested rights in this thing. Now, if you
» Supra, p. 11848.
11900 CONaENTRATION OF ECONOMIC POWER
go to the end, I don't mean to say that they didn't know, when the
next transaction came along, what their percentages were. That is
obvious; they did.
Mr. Nehemkis. That is something else, again, though, Mr. AVliit-
ney.
Mr. Whitney. Right. But your question was, did I know how
they were advised of this meeting at the library, and I said that I
had no reason to believe they were advised. It is quite a different
question, that sometime later, when there was a piece of business
pending, they were not told what percentages they would have. But
I want the record very clear, Mr. Chairman, if I may, that this
$832,000,000
That was on what date?
Mr. Nehemkis. In 1933, just before-
Mr. Whitney (interposing). '32 or '30.
Mr. Nehemkis. 1930 was the last piece.
Mr. Whitney. That was a completely unknown figure. There
was no contemplation of such financing. Obvaously, it would take
over 10 years. Secondly, this interest in this financing was not a
continuing interest in any sense. Each tian:.,ai.ti<jti was a matter
of negotiation with the Telephone company. Ihere was not a word,
either legal or moral, that would call upon them to continue to do
business with this particular group unless we had done a good job.
We were employed by the Telephone company, to do a job of an
expert aiong the lines of the program that Mr. GifTord had developed,
and each transaction was separate and individual. These percent-
ages were determined in what we thought was the best way. We,
J. P. Morgan & Co., thought that was the best way to do a good job.
Mr. Nehemkis. Mr. Whitney, were there discussions among the
partners of J. P. Morgan & Co., either individually or at partners'
conferences, with re.-^pect to the terms of the understanding reached
at "the library"?
Mr. Whitney. Oh, undoubtedly, because everything was discussed
there.
Mr. Nehemkis. Discussed individually, or at partners' conferences?
Mr. Whitney. Both,
Mr. Nehemkis. is it your practice to have full discussion among
the partners of all understandings or arrangements that may have
been reached by individual partners?
Mr. Whitney. Oh, that statement is too inclusive. CeTi:ainly, any
questions of policies, or any question of detail, would be reported if
they were significant by whatever partners had it in charge. In this
caso I should assume Mr. Davison would have reported the matter,
I don t remember it, but I assume he would, because at our firm meet-
ings we discuss everything.
Mr. Nehemkis. Were you present at the partners meeting when
Mr. Davison reportea it to the others?
Mr. Whitney. I have just said/Mr. Nehemkis, that I did not re-
me^nber his actually doing it m any way. I may or may not have
been there. But I said I am sure he did.
CONCENTRATION OF ECONOMIC POWER 11901
readjustment of kuhn, loeb & co.'s interest subsequent to
"library agreement"
Mr. Nehemkis. Now, it would appear, Mr. Wliitney, that at least
one of the New York group was clissatisfied with the realinement
which had been settled upon at "the library." And I am going to
read to you a letter previously identified as "Exhibit No. 1675,"
from the late Dwight W. Morrow to Mr. Winsor. The letter is dated
August 17, 1920 [reading from "Exhibit No. 1675"] :
You were good enough to suggest that I make the adjustment of % of 1%
in the telephone allotment which is to be given up by some one to furnish
another % of 1% to Kuhn Loeb & Co.
I want you to note the next sentence, Mr. Whitney.
I find almost insurmountable difficulties in taking this out of any of our New
York associates. I am also handicapped —
And I ask you to pay strict attention to the following phrase, Mr.
Whitney — ■
I am also handicapped by not knowing the considerations which affected the
original division of 70 per cent to New York and 30 per cent to Boston.
If you have no objection, I will tell Kuhn, Loeb & Co. that they are to have
a 10%% interest in the group and we can leave for adjustment between Mr.
Davison and yourself wnetLer that is to come from J. P. Morgan & Co. or
from Kdder, Peabody & Co., or, if from both, in what proportions. Mr. Davison
will be hoLie in about two weeks.
Now, the committee will recall that in the exhibit which Mr. Wliit-
ney recently examined, and which is now in the record [referring
to '"Exhibit No. 1671"].
Mr. Whitney. From Kidder, Peabody.
Mr. Nehemkis. And from the files of the old Kidder, Peabody
firm, if you want me to be precise, Mr. Wliitney. There appears at
the bottom of that exhibit the following notation. "Compiled for
Robert Winsor, August 16, 1920." That is one day before Mr.
Dwight Morrow had occasion to write to Mr. Winsor.
From Mr. Morrow's letter it would appear, Mr. Whitney, that by
August 16, Mr. Davison had already agreed with Mr. Wmsor that the
interest allotted Kuhn. Loeb & Co. at the library was to be increased
from 10 percent to 10% percent. The only problem was to find some-
one who was willing to have his interest decreased by the required
amount. And as Mr. Davison says in a letter which I have just
read •
Mr. Whitney (interposing). Mr. Morrow.
Mr. Nehemkis. Mr. Morrow, I beg your pardon. [Reading from
"Exhibit No. 1675":]
I find insurmountable difficulties in taking this out of any of our New York
associates —
And Mr. Morrow further says :
I am also handicapped by not knowing the considerations which affected the
original division of 70 percent to New York and 30 percent to Boston
So that even Mr. Dwight Morrow, Mr. Whitney, was not fully in-
formed by the partners, J. P. Morgan and Henry F. Davison, of all
1 1902 (X)NCENTRATION OF ECONOMIC POWER
the considerations surrounding this allocation of the so-called proprie-
tary interests.
Mr. Whitney. What was that last ?
Mr. Nehemkis. I will have to ask the reporter to read that.
(The previous question was read.)
Mr. Whitney. Did you ask me a question ?
Mr. Nehemkis. Well, I think it was a question.
Mr. Whitney. I thought so, too, but I just wanted to be sure. Mr.
Nehemkis, the question, I think was whether Mr. Morrow did know,
or did not know. Well, he obviously didn't know all the details, be-
cause at the meetings referred to a minute ago we didn't have a steno-
graphic report of conferences. What we probably told him was that
that had been the agreement reached with Mr. Winsor. I should say
from that letter that it is a perfectly clear indication that the other
members of the group didn't have very much to say about what the
percentages were that were taken away from them, because obviously
Mr. Davison had all the talks with Mr. Winsor. He did not know.
Mr. Morrow didn't know what the considerations were that led to
that agreement. Why should he? How could he possibly have?
Secondly, Mr. Morrow had very little to do with Telephone business,
and here you get a letter dated August 17, when there were generally
only two of us left in the office (everybody else was away if they pos-
sibly could be) and he says, perfectly naturally, that lie is going to
leave it with Mr. Davison, who had the original talk with Mr. Winsor,
to settle later. He says, "I find almost insurmountable difficulties m
getting this out of any of our New York associates." I would guess
that those of us charged with distribution, again having been disap-
pointed in the results of the conference in May, raised a howl when it
was suggested that any more should be taken away.
Mr. Nehemkis. But you had better note quickly, so that you may
correct yourself, Mr, Whitney, that this letter refers to underwriting.
Mr. Whitney. They are absolutely locked up together.
" Mr. Nehemkis. You can't separate them, Mr. Whitney ?
Mr. Whitney. Underwriting and distribution are two factors of
that group; underwriting the financial responsibility and the dis-
tribution. And that is all a part of the whole.
Mr. Henderson, Could I ask a question?
Mr, Nehemkis. Yes, sir.
Mr. Henderson. Do you remember why K. L. wanted another %
percent ?
Mr. Whitney. No, sir.
Mr. Henderson. It stands out like a sore thumb there, and evidently
there was a "helluva lot" of going back and forth to get that % percent.
Mr. Whitney. It sounds a little like Oliver Twist, doesn't it?
[Laughter.]
Mr. Henderson. It seems to me it must have been something very
valuable there.
CONCENTRATION OF ECONOMIC POWER 11903
Mr. Whitney. I just don't remember a thing about it. I had clear Ij'
nothing to do with all this. I don't know anything about it except that
I do know that at the first transaction that we had for the Telephone
company after the May conference, these were the percentages that
prevailed.
Mr. Nehemkis. I was very much interested, Mr. Whitney, in one
word that Mr. Morrow used. Now, Mr. Morrow was a very dis-
tinguished lawyer, and he used, in referring to this agreement or
understanding arrived at at "the library," a word that has always
great significance for lawyers, "considerations."
Mr. Whitney, I am not a lawyer.
Mr. Nehemkis. So that, apparently, he
Mr. Whitney. I use it sometimes myself.
Mr. Nehemius. So apparently Mr. Morrow felt that there was some-
thing about this agreement that was a little bit more than a casual
piece of paper.
Mr. Whitney. Oh, but now, Mr. Nehemkis ! I should hate to have
you or the cormiiittee get the impression that I think it is a casual piece
of paper. But obviouslj' Mr. Morrow — there couldn't have been some
consideration vdiich has the technical meaning that you say, "value
received," or whatever it was, or Mr. Davison would have obtained that
extra 6 percent that we wanted for nation-wide distribution. You can
read the purely technical legal phraseology into it, but it makes sense
to me, a layman, without that construction.
Mr. Nehemkis. Now, with the return of Mr. Davison from vacation,
an agreement was arrived at whereby New England was to provide
1/4 and New York i/^ in order to make up the % percent required for
Kuhn, Loeb. Now, I read you a letter written September 28, 1920,
from Mr, D wight W. Morrow to Robert Winsor, on the stationery of
J. P. Morgan & Co. [reading from "Exhibit No. 1677"] :
Referring to my letter of August 17, this is to confirm our oral arrangement
that the % of 1% in the telephone allotment which is to be given up to Kuhn
Loeb & Co. one-halt is to come out of the New York members of the group and
one-quarter out of the Boston members.
Mr. Nehemkis. Now I read you another dated October 1, 192C,
from Robert Winsor to Dwight W. Morrow, Esq.^ addressed to J. P.
Morgan & Co., New York, N^ Y. [reading from "Exhibit No. 1678"] :
I have your letter of September 28th, and confirm the arrangement as to the
division of the additional Telephone allotment to be given up to Kuhn, Loeb &
Co. * * *
Mr. Nehhvikis, I should like at this time, Mr. Chairman, to ask
that Mr. Whitney be temporarily dismissed, and call another witness.
The Chairman. That will be quite agreeable.
Mr. Nehemkis. I call to the stand Mr. Leonhard Keyes.
The Chairman. Do you solemnly swear that your testimony in
this proceeding which you are about to give will be the truth, the
whole truth, and nothing but the truth, so help you God ?
Mr. Keyes. I do.
11904 CX)NCENTRATION OF ECONOMIC POWEB.
TESTIMONY OF LEONHAKD A. KEYES, GENERAL MANAGER, J. P.
MORGAN & CO., NEW YORK, N. Y.
AVAILA15IIJTT OF RECORDS OF J. P. MORGAN & CO., TO THE COMMITTEE
Mr. Nehemkis. Will you state your name-
The Chairman (interposing). May I interrupt, Mr. Nehemkis?
On this "Exhibit No. 1678" I note certain handwricing in the margin.
Is that a part of the exhibit?
Mr. Nehemkis. It is a part of the exhibit, Lut I have not com-
mented upon it because I do not know what it means.
Will you state your full name, Mr. Keyes?
Mr. Kktes. Leonhard A. Keyes.
Mr Nehemkis. And 3'our residence?
Mr. Keyfs. Ninety-one Durand Eoad, Maplewood, N. J.
Mr. Nehemkis. Mr. Keyes, are you general manager for the firm
of J. P. Morgan & Co.?
Mr. Ketes. I am.
Mr. Nehemkis. And how long have you held that position ?
Mr. Keyes. About 6 or 7 years.
Mr. Nehemkis. And prior 10 that period, were j;ou likewihe em-
ployed by the firm of J. P. Morgan ?
Mr. Ketes. I was.
Mr. Nehemkis. What were your duties prior to becoming general
manager ?
Mr. Ketes. Chief clerk.
Mr. Nehemkis. How long were vou chief clerk?
Mr. Ketes. From December 1913 to 1982.
Mr. Nehemkis. At which time you became general manager?
Mr. Ketes. Right.
Mr. Nehemkis. Now what are your duties as general manager for
the house of J. P. Morgan & Co. f
Mr. Keyes. Supervision and management of the office.
Mr. Nehemkis. What does that mean, in a little bit more detail?
Mr. Kete's. In charge of all the books and records.
Mr. Nehemkis. In charge of all the books and records ?
Mr, Keyes. Right.
Mr. Nehemkis. That means the files?
Mr. Keyes. Right.
Mr. Nehemkis. When papers come in, presumably after they have
been read by the partners and initialed, are they sent to you?
Mr. Keyes. Well, they are sent to the files, they don't all come to
me personally.
ISlr. Nehemkis. But the general supervision of that department of
tb.e house known as the files, that comes under your jurisdiction?
Mr. Keyes. It does.
l\Ir. Nehemkis. Now, Mr. Keyes, on Friday Mr. "\Vliitney testified
before the committee as follows. I am going to read from page 156
of the transcript : ^
I can't testify definitely, but I think it is a perfectly fair assumption that this
paper —
And Mr. Whitney was referring to this paper [exhibiting paper],
Mr. Keyes
» Supra, p. 11884.
CONCENTRATION OF ECONOMIC POWER 11905
The Chairman (interposing). What is that paper?
Mr. Nehemkis (reading) :
I can't testify definitely, but I think it is a perfectly fair assumption that
this paper was brought back by Mr.
The Chairman. Mr. Nehemkis.
Mr. Nehemkis (interposing) :
by Mr. Davison.
The Chairman. Please identify the paper, the exhibit number.
Mr. Nehemkis. I'm sorry, I don't recall this memorandum by the
exhibit number. We have been referring to it here as Mr. Whitney's
aide niemoire^ prepared for Mr. Davison,
The Chairman. "Exhibit No. 1679," being the list of percentages
showing Mr. Davison's suggestions and those finally agreed upon.
Mr. Nehemkis. That is correct, sir, thank you. I had better repeat
the statement:
I can't testify definitely, but I think it is a perfectly fair assumption that
this paper was brought back by Mr. Davison and shown me, that we made the
record of what the agreement was for further reference, and that he then
sent the original paper to Mr. Winsor as indicated, he having it on the 12th of
May.
Now, Mr. Keyes, will you be good enough to explain the mechanics
by which the record of an agi^eement to which Mr. Whitney referred
in his testimony, and which 1 have just read to you, is filed for future
reference?
Mr. Keyes. The agreement itself would be filed for future refer-
ence.
Mr. Nehemkis. Now, what happened to the record to which Mr.
Whitney referred in his testimony, and which you have just said was
filed for future reference?
Mr. Keyes. Well, I don't consider this an agreement.
Mr. Nehemkis. Well, what happens to that piece of paper which
was filed?
Mr. Keyes. We have no record of it. Tt was not filed, it was not in
our files. We have no trace of it.
Mr. Alexander. Didn't you ask Mr. Wliitney, the same question,
and didn't he testify about that on Friday ?
Mr. Nehemkis. That may well be. 1 am now calling the person
directly in charge of such matters, and I think it is perfectly appro-
priate for me to ask that person the same question.
Now is there any record available?
Mr. Henderson. Just a minute. Do you have a question as to the
appropriateness of it, Mr. Alexander?
Mr. Alexander. I just want to call attention to the fact that Mr.
Whitney had testified about the same question and had given some
explanation or possible explanation.
Mr. Henderson. It was a possible explanation of how he thought
it might have been handled.
Mr. Alexannder : That is it; I wanted to make mention of that.
Mr. Nehemkis. Mr. Keyes, I show you now a copy of an aide
■memoire, since we are using that term, re American Telephone &
Telegraph Co. financing, addressed to Henry C. Alexander, Esq.,
1 190G CONCENTRATION OF ECONOMIC POWEK
dated Washington, D. C, November 15, 1939, prepared by me. 1 'ask
you to examine this copy, which is already in evidence, and tell me
whether you have ever seen it before?
Mr. Keyes. I have,
Mr. Nehemkis. Will you read the last paragraph, pleasel
Mr. ICeyes [reading from "Exhibit No. 1661-1"] :
Will you be good enough to make available to Mr. W. S. Whitehead, any memo-
randa, ieUei-s or other documents which bear upon the foregoing questions?
Mr. Nehemkis. Is it not a fact, Mr. Keyes, that it is an unwritten
law of the House of Morgan that partners' files are never destroyed?
Mr. Keyes. I don't know that we have any unwritten law, or written
law.
Mr. Nehemkis. You have no laws?
Mr. Keyes. Maybe not under that subject.
Mr. Nehemkis. Haven't you so indicated that partners' files are
never destroyed?
Mr. ICeyes. No, sir,
Mr. Nehemkis. Now, Mr. Keyes, I show you four letters ^ in evi-
dence from Mr. Dwight W. Morrow to Mr. Winsor, from Robert Win-
sor to Mr. Morrow. I ask you to examine these letters, if you will?
(Witness examines documents.)
Mr. Nehemkis. Have you examined them?
Mr. Keyes. I have.
Mr. Nehemkis. I ask you, Mr. Keyes, why these letters were not
made available to a duly authorized representative of this committee
in response to my request?
Mr. Keyes. Mr. Nehemkis, I know very positively that two of
these were made available to members of your committee.
Mr. Nehemkis. These letters were identified as coming from the
old files of Kidder, Peabody.
Mr. Keyes. Well, I will correct that. A carbon copy of that Jetter ^
was made available to members of the committee. This is the original.
We didn't have that.
Mr. Nehemkis. That's right.
Mr. Keyks. It is not in our files nor do we have it.
Mr. Henderson. Wliat is the date of that letter ?
Mr. Keyes. The date of that letter is September 28, 1920. Nor do
we have
Mr. Hendekson (interposin"'). From whom to whom?
Mr. Keyes. From Senator Morrow — pardon me, Mr. Morrow — to
Robert Winsor, of Kidder, Peabody. He was not Senator at that
time.
IVIr. Nehemkis. And you say that letter was made available to us?
Mr. Keyes. I know that that letter is in one of our folders that
we made available to the examining officei-s of your committee.
Mr. Nehemkis. Mr. Chairman, may I have an off-the-record discus-
sion for a minute?
The Chairman. Surely.
(Off-the-record discussion.)
» "Exhiblta Nos. 1675, 1G7C, 1677, and 1678."
2 ••Exhibit No. 1677.''
CONCENTRATION OF ECONOMIC POWER 11907
Mr. Nehemkis. May we proceed? There were four letters shown
you, Mr. Keyes. I want you carefully to tell me which ones, again,
you allege were furnished to representatives of the committee ?
Mr. Keyes. Mr. Nehemkis, may I refresh my memory on a sum-
mary of each bond issue that we gave to members of your committee,
and I would like to say that the summary— about this time, on one oi
those bond issues, I don't recall which
The Chairman (interposing). Will you please hand the witness
the summary ?
Mr. Nehemkis. Mr. Alexander has it right before him.
Mr. Keyes. One of these letters refers to the Pennsylvania issue.
Mr. Nehemkis. That is correct.
Mr. Keyes. I don't recall that particular letter.
Mr. Nehemkis. You don't? Just a moment. So that — this is very
crucial, Mr. Keyes, you will appreciate. I want to follow you with
the minutest care. You say you don't recall that particular letter ?
Mr, Keyes. I don't recall now.
Mr. Nehemkis. What does that mean ?
Mr. Keyes. That is, I have no recollection.
Mr. Nehemkis. Oh, you have no recollection ?
Mr. Keyes. Of seeing that particular letter.
Mr. Hendebson. Which one is that ?
Mr. Keyes. That one is the one from Mr. Robert Winsor to Mr.
Dwight Morrow, of October 1, 1920.
The Chairman. Read the number on the back.
Mr. Nehemkis. These are already in, but this Is a set I am working
with, Mr. Chairman.
The Chairman. I beg your pardon.
Mr. Keyes. And this letter ^ contains a statement saying that "I
am most thankful that things went along all right on the Pennsyl-
vania issue." The Pennsylvania issue is undoubtedly the issue of the
Bell Telephone Co., brought out in September.
Mr. Nehemkis. That is perfectly correct.
Mr. Keyes. In 1920.
Mr. Nehemkis. But we are not discussing that, Mr. Keyes.
Mr. Keyes. No; but these matters relate to that, and they are in a
folder of the Bell Telephone Co.
Mr. Nehemkis. Well, where are they? Why can't they be given
to us?
Mr. Keyes. They were — you should have made copies of them.
They were included in that folder of contracts under the Bell Tele-
phone Co. and which you had — it had all our correspondence with
the First National Bank, with Kuhn, Loeb & Co., with all these
companies, and that letter, I am quite sure, is in that folder, because
that related to 1034 percent that Kuhn, Loeb & Co. had; and that
agrees with this memo.
Mr. Nehemkis. What about the remaining letters?
Mr. Keyes. Well, those three, I think, are in that folder, and pos-
sibly that fourth is in there, but I don't recall that now.
Mr, Nehemkis. So you now think that those letters are in your
files?
» "Exhibit No. 1878."
1 ] 908 CONCENTRATION OF ECONOMIC POWER
Mr. Keyes. Oh, I think so, but I would like an opportunity to
again look it up.
Mr. Nehemkis. Should Mr. Keyes, sir, be given that opportunity?
Mr. Henderson. I think so.
Mr. Nehemkis. And then advise the committee?
The Chairman. Certainly that may be given. You may have
that opportujiity, if it is desired.
Mr. Henderson. You think that these four letters, that is, the
originals from Mr. Winsor to Dwight Morrow, and the carbons from
Dwight Morrow to Mr. Winsor, are in the Pennsylvania Telephone
file?
Mr. Keyes. I think so, and I think that — the date of that issue, the
Pennsylvania issue, was September 29, 1920, and that ran until the
syndicate — until December 1, 1920 — and these letters relate to the
fixing of percentages of tliat issue.
Mr. Henderson. All right. Then it is your impression that you
did give those, in giving the Pennsylvania Telephone
Mr, Keyes (interposing). V7e gave our entire folder. We made
available the entire, the full folder, to your examiners at the time they
called, as we did on all of those, but you didn't make copies. I am
not sure that you took any copies on that, of those that we had the
summaries written for.
Mr. Nehemkis. I have Jio further questions of the witness, Mr.
Chairman.
The Chairman. Thank yon. Mr. Keyes.
Mr. Henderson. May I ask something? "Wlien Mr. Wliitney comes
back, I will ask him the same thing. Now, have you read Mr, Whit-
ney's testimony as to what is likely to have happened to the aide
memoire?
Mr. KJEYES. I have read Mr. Whitney's testimony ; yes, sir.
Mr. Henderson. And I think he said, or he indicated, that probably
they made the notation in the syndicate department, and it was then
sent to Kidder, Peabody. \\' asn't that it, Mr. Whitney ?
Mr, Whitney. That is what 1 said, substantially.
Mr. Henderson. Well, have you examined your syndicate records
since that time?
Mr. Keyes. Yes, sir,
Mr. Henderson. And you find no copy either of the "library agree-
ment" ^ or of the aide memoire. f "
Mr. Keyes. No, sir,
Mr. Henderson. Welh do you find any document that was con-
structed from them to sho-v what the final understanding was?
Mr. Keyes. No; no dofnment, except that each issue was an under-
standing by itself, and when you come into this next issue, that was
issued after May or in September 1920, that is what we would say
was the only
Mr. Henderson (interposing). Yes; but you mean you may have
kept something up until that time?
Mr. Keyes. No; I would say not; no.
Mr. Henderson. Your impression then would be that there never
was any record after, say. May 12, of either the May 5 conference
> "Exhibit No. 1C73."
•"Exhibit No. 1679."
CONCENTRATION OF ECONOMIC POWER 11909
Mr. Keyes (interposing). Yes.
Mr. Henderson. Or of the May 6, I believe it was, understanding
that Davison and Winsor arrived at?
Mr. Keyes. Tiiat is right, sir.
Mr. Henderson. Well, is that customary in your house, not to keep
a record of that kind ?
Mr. Keyes. Mr. Henderson, it wasn't that we did not keep a record
of it. If there was a record to be kept, we would have kept it. We
have found nothing indicating the execution of any contracts such
as described by you.
Mr. Henderson. Just a minute. Mr. Chairman, I suggest that Mr.
Whitehead, our S- E. C. field man, go back to Mr. Keyes at the
appropriate time, and look over the records on the Bell Telephone,
on these. I think that is the appropriate thing to do,
Mr. Nehemkis. That is all, Mr. Keyes. Thank you very much for
having come down this morning.
Mr. Whitney, recalled, please.
TESTIMONY OF GEORGE WHITNEY. J. P. MORGAN & CO., NEW
YORK, N. Y.~Resumed
percentage participations subsequent to "library agreement"
Mr. Nehemkis. Shall I wait until Mr. Alexander returns ?
Mr. Whitney. No.
Mr. Nehemkis. By comparing the original allotments, ^Mr. Whit-
ney, with the interests of the participants in the Pennsylvania Bell
Telephone issue of September 27, 1920, it appears that Kidder, Pea-
body yielded the one-quarter ceded by Boston, and the one-half
which was to conje from New York came out of the interest of
Bankers Trust and Guaranty Trust, the two new members of the
group ; is that correct, sir ?
Mr. Whitney. Yes. Mathematically, if you predicate your calcu-
lations on the May 5 memo,^ the facts are very simple, that in the
Bell Telephone issue, Kidder, Peabody had 29% and the Guaranty
and Bankers had 4%, respectively. If I were to explain this myself,
I would say that it merely showed that was the final alinement at
that time, for that particular issue, and it was what our records show,
Mr. Henderson, because w^e are only interested in the records and not
in the arguments that led up to them.
Mr. Nehemkis. I show you, Mr. Whitney, a copy of a letter which
purports to be written on the stationery of J. P. Morgan & Co., dated
September 29. 1920, addressed to Kuhn, Loeb & Co., and a carbon copy
of a reply from Messrs. Kuhn, Loeb & Co. to J. P. Morgan & Co.
I ask you to examine these two papers and tell me if you recognize
them as being true and correct copies of material in your files?
Mr. Whitney. Well, of course, these couldn't come from our files,
because this original must have come from Kuhn, Loeb.
Mr. Nehemkis. That wasn't my question, Mr. Whitney. You have
counterparts of those in your files; the letter to Kuhn, Loeb is writ-
ten by Mr. Anderson.
Mr. Whitney. Certainly.
Mr. Nehemkis, You identify the' °
» "Exhibit No. 16TS.
11910 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney. I identify them as a photostatic copy of a letter we
wrote, and a copy of the answer by Kuhn, Loeb & Co.
Mr. Nehemkis. I oflfer in evidence the two letters identified by the
witness, Mr. Chairman.
(The letters referred to were marked "Exhibits Nos. 1685-1 and
1685-2" and are included in the appendix on pp. 12219 and 12220.)
Mr. Nehemkis. I ask you to note, sir, a notation which appears on
the bottom of the letter of September 29,^ which reads, "$2,687,500
equals 10% per cent." Before I hand you this, Mr. Whitney, it is a
fair assumption, is it not, that Avhen this letter was sent out by Mr.
Arthur Anderson, he didn't write that?
Mr. Whitney. Certainly not.
May the record show, Mr. Chairman, that I didn't identify any pen-
cil notation? I identified the original as having come from us.
The Chairman. The record will so show.
Mr. Nehemkis. Now the significance of that notation, Mr. Chair-
man, is that Kuhn, Loeb was very anxious to know whether the
amount given to them by J. P. Morgan & Co. equaled 10% percent.
Obviously, the partner who got that letter made a quick mental nota-
tion and wrote down that two million-and-odd dollars equals 10% per-
cent. He knew that the agreement had been kept.
Mr. Whitney. He was checking the correctness of the figures.
The Chairman. The $2,687,500 which appears in handwriting on
the bottom of the letter, those are the figures mentioned in the third
paragraph of the letter which says [reading from "Exhibit No.
1685-1"] :
Your interest in the purchase on original terms is $2,687,500.
Mr. Nehemkis. Yes. As Mr. Whitney observed in an aside, they
were checking up to make sure it was right.
Mr. Whitney, in the Bell Telephone Co. issue of $25,000,000 7's
offered on September 1920, the first issue to be floated under the terms
of the new arrangement, can you tell me what the interests were of the
participants ?
Mr. Whitney. Do I understand your question correctly — you put
in some aside about the first under the new arrangement; you mean
the first since the Guaranty, the Bankers — the original terms •
-Mr. Nehemkis (interposing). The first after the understanding
reached in "the library" on May 5, 1920.
— Mr. Whitney. That is chronologically correct, and it also is more
correct to say the first piece of business done for the Telephone Co.
or its subsidiaries after the Guaranty Trust Co. and the Bankers Trust
Co. were included in the original group.
Mr. Nehemkis. Well, now, we have both bits of information in the
record. Will you see if you can give me the names of the participants
and the. percentage amounts?
Mr. Whitney. Do you want me to just read it?
Mr. Nehemkis. Yes.
Mr. Whitney. I can almost do it by heart.
Mr. Nehemkis. Well, then, do it either way.
Mr. Whitney. Kuhn, Loeb & Co., 103^; Kidder, Peabody, 293^;
Lee, Higginson, 5; Harris, Forbes, 5; First National Bank, 10; Na-
> "Exhibit No. 1686-1."
CONCENTRATION OF ECONOMIC POWI^ 11911
tional City Co.. 10; Guaranty Trust Co., 43^; Bankers Trust Co., ^%;
J. P. Morgan & Co., 20.^
Mr. Nehemkis. Now, Mr. Whitney, I show you a cover letter, a
letter of transmittal, from your firm, together with 14 syndicate ab-
stracts. I ask you to examine these and tell me whether you recognize
them as being true and correct copies and whether this be in fact a
letter of transmittal from your firm ?
Mr. Whitney. I am sure, but may I say here that that list is incom-
plete? AVe have subsequently turned up two very small extensions.^
Mr. Nehemkis. I have those. But I don't want the record to have
what you just said, Mr. Whitney, that it is incomplete. I asked a very
specific question.
Mr. Whitney. The answer is "yes."
Mr. Nehemkis. All right.
Mr. Whitney. Tlie only reason I mentioned it at all, Mr. Nehemkis,
is that the other day, I think in a hurry, you didn't put in a correct
list.
Mr. Nehemkis. I have those.
Mr. Whitney. You said you were going to put those in and I
didn't see them.
Mr. Nehemkis. In due course, Mr. Whitney, we will come to them.
Mr. Chairman, may it please the committee, I now offer in evidence
the documents identified by the witness.
(The documents referred to were marked "Exhibits Nos. 1686-1 and
1686-2" and are included in the appendix on pp. 12220 and 12221.)
Mr. Nehemkis. Mr. Wliitney, I have before me a table entitled,
"Percentage participations in issues of American Telephone & Tele-
graph Co. and associated companies, headed by J. P. ISIorgan & Co.,
September 1920-January 1930." ^ The inform'ation upon which this
table is predicated is based upon the syndicate abstract sheets which
you just identified as having been furnished to us. Do we have a
copy which Mr. Whitney could look at?
Mr. Whitney, you will note that under J. P. Morgan & Co., 'begin-
ning with the year 1920, the percentage participation for your house
is 20, and thereafter, until the last issue, it continues to be 20 with no
changes; and for the First National Bank, you will notice in 1920,
after the "library conference," the participation of the First National
was 10 percent and thereafter, until 1930, it remained 10 percent;
and you will notice that the National City Co.'s participation in 1920
was likewise 10 percent and thereafter, until 1930, it continues to be
10 percent; and you will notice that Kuhn, Loeb's participation,
begining with 1920, was 10.75 percent and continues fixed and un-
alterable until 1930, when it remained 10.75 percent; and Harris,
Forbes & Co., you will note, Mr. Whitney, beginning with 1920, was
5 percent and thereafter, until 1930, continued to be 5 percent; and
Lee Higginson Corporation's interest in 1920 was 5 percent and there-
after, until the last piece of financing in 1930, continued to be 5 per-
cent ; you will notice that the Guaranty Co.'s interest was 4.75 percent
in 1920 and until the year 1930, the last piece of financing, continued
to be 4.75 percent; and the Bankers Trust Co.'s interest in 1920 was
likewise 4.75 percent, and thereafter continuing to be 4.75 percent;
I See "Exhibit No. 1684," appendix, p. 12219.
« See "Exhibits Nos. 1689-1 and 2,'' appendix, p. 12236.
» Referring to "Exhibit No. 1687," appendix, p. 12234.
11912 CONCENTRATION OF ECONOMIC POWEK
you will notice in the final column, Kidder, Peabody's interest was
29.75 percent in 1920, after the ac^reement reached at the library, and
thereafter until the last piece of financing under the leadership of
your firm, it remained 29.75 percent.
May it please the committee, I now offer ^in evidence the table
from whicli I have been reading, compiled from records supplied
to this committee by J. P. Morgan & Co.
The Chaipjviax. Tlie table may be received.
^The table referred to was marked "Exhibit No. 1687" and is
included in the appendix on p. 12234.)
Mr. Whitkey. Do I owe you an answer?
Mr. Nehemkis. Oh, no; not unless you wish. You needn't say
anything.
Mr. Whitney. Well, I would like to just comment there, even
though it is not in the form of a question ; this is very unimportant,
of course, but our records were not — they would not have showed Lee
Higginson as Lee Higginson Corporation.
The Chairman. I didn't get that remark.
Mr. Whitney. Lee, Higginson & Co. it was, during those days.
It is now Lee Higginson Corporation, whicli is an entirely different
thing. The fact that they were unchanged is questionable, too.
The Chairman. Let that correction appear on the record, please.
Mr, Nehemkis. Mr. Wliitney
Mr. Whitney (interposing). Mr. Chairman, as I said, it is a fact
that tliey were unchanged during this period, as a fact. But Mr.
Nehemkis in his statement used one word in reference to one of them,
I don't know which, that they were "unalterable." That is not a fact.
It is a matter of almost public record that during these 10 years this
group did do these pieces of financing for the Telephone Co., and the
only reason, the only point I want to leave with the committee is
that that is a fact ; we did the business, but that each piece of busi-
ness rested on its own feet, and that these percentages, or our arrange-
ment with the Telephone Co., were completely alterable at the in-
stance, primarily, of the company, and, secondarily, as the perform-
ance of these different people, in their different functions in this iob
or this service which we were undertaking for the Telephone Co.,
would change, then the percentages would have changed, as a prac-
tical manner. There was no need to change them, however, because
the jobs were done satisfactorily. I would be- —
The Chaikvian (interposing). Then your statement to the com-
mittee, Mr. Whitney, is that these 14 -abstracts covering a period from
1920 to 1930, though not unalterable, were nevertheless unaltered
during that 10-year period.
Mr. Whitney. Quite so, and that the reason they weren't altered
was the relative importance of these houses to the success of the Tele-
phone Co. financing.
distribution of spread on telephone issues
The Chairman. Now, what was the total of all of these issues, do
you recall? Perhaps that could be run up very quickly.
Mr. Whitney. $832,000,000. That is the par value of the issues
which is invoh^ed on this sheet.
CONCENTRATION OF ECONOMIC POWER 11913
The Chairman. Kow, of course, there was a big dilierence between
the pa^' value and the amount which the Telephone Co. or its various
subsidiaries received for the issue?
Mr. Whitney. That would involve, of conrse, the fact that they
were sold on a yield basis — depending on the price to yield a proper
return— and, of course, the price to the public had to include what is
called the "spread," which, as Mr. Miller pointed out the other day
on this whole business, is approximately 21/2 percent gross. Now,
that is customarily divided on original terms so much, then there
might be an intermediate group, or there might not be, but then
there would be the distributing syndicate, which would have seven
or eiglit or nine hundred people in the country, depending on the
size ot
The Chairman (interposing). Let me call your attention to ''Ex-
hibit No. 1C85" which you identified a little bit earlier in the day.
I observe from that, which is a letter which refers to a $25,000,000
issue, that J. P. Morgan & Co. bought that issue from the Telephone
Co. at 901/2 ?
Mr. Whitney. Yes, sir.
The Chaibmax. And then sold it to the syndicate at 9II/2?
Mr. Whitney. Yes, sir; that is the 1 percent gross profit to the
original terms group.
The Chairman. J. P. Morgan & Co. then received a profit of 1
percent of $25,000,000; did it?
Mr. Whitney. Oh, no, sir.
The Chairman. All right, then what did it receive?
Mr Whitney. This letter says [reading from "Exhibit No.
1685-1"] :
We beg to advise that we hare today purchased for the account of ourselves
and associates $25,000,000 ... at 90 1/2.
Then it goes on to say [reading further] :
We are forming a syndicate, iri which we shall participate, to purchase these
bonds Irom ourselves and associates at 91 1/^.
The Chairman. So that J. P. Morgan & Co. sold the issue to tlvj
syndicate of which it was a part?
Mr. Whitney. But the associates
The Chairman (interposing). At 1 percent more than it paid the
Telephone Co.?
Ml. Whitney. No, sir.
The Chairman. Ail right, then explain it.
Mr. Whitney. N(., sir; the associates referred to are this original
group in the techiaca] language of the street, the original group of
people who participated in the purchase direct ii'v-m the company.
If you will remember this famous memorandum of May 5, 1920,^ it
says "Original terms group" — doesn't it ?
Mr. Nehemkis. Right.
Mr. Whitney. Now, we and our associates are associates of this
whole group, in which we had a 20-percent interest.
The Chairman. Well, now wait a minute. Who paid 90i/^ to the
Telephone Co.?
i "Exhibit No. 1673."
124491— 40— pt, 23 -8
11914 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney, This group, Kidder, Peabody; Kuhn, Loeb; Lee,
Higginson; Harris; First; National City; Guaranty Trust; Bankers
Trust ; J. P. Morgan, in the percentages you have heard this morn-
ing.
The Chairman. Yes; so that in all, when that letter refers to the
purchase from the Telephone Co. at 901/^, it is referriiig to a purchase
not by J. P. Morgan alone, but a purchase by J. P. Morgan and
associates.
Mr. Whitnct. That's right. It says so.
The Chairman. Yes. Well, I haven't read the letter carefully.
Then there was a resale to a syndicate, a distributing syndicate?
Mr. Whitney. A distributing syndicate; yes, sir.
The Chairman. Now, was that syndicate different from the
associates ?
Mr. Whitney. Well, that would have had, as I said — I don't recall
actually in this case, but five, six, or seven hundred people all over
this country, in every State of the Union or practically every State
in the Union. There would be somebody, a bank, or a dealer, a bond
dealer, who would do the actual distribution to the ultimate con-
sumer, and this letter here again, Mr. Senator, the third paragraph
of it, if I may read it [reading from "Exhibit No. 1685-1"] :
Tour interest in the purchase on original terms is $2,687,500. We have al-
lotted to you, in the distributing syndicate, a participation of $750,000,
Now, Kuhn, Loeb, as ourselves, were not retail distributors of
bonds; we didn't have siilesmen, we never had had, either of us, and,
therefore, our participation on original terms is materially reduced,
as in this case, from $2,687,500 to $750,000, and the balance of that
original term participation was spread all over the country.
The Chairman. Well, I am trying to get at the spread. So, now
we begin with a price of 90^2, which was all that the Telephone Co.
got out of the issue?
Mr. Whitney. Yes, sir.
The Chairman. Then we find that is sold by the managers, if I
may use that phrase, at an increase of 1 percent?
Mr. Whitney. Right, sir.
The Chairman. And then we find from that letter that these new
purchasers, in turn, distribute to the public at 95 percent?
Mr. Whitney. That is right; yes, sir.
The Chairman. So that the spread here is not 2^^ but 4^ ?
Mr. Whitney. In this issue, right.
The Chairman, Yes. Now, i^-^ percent of the $25,000,000 issue was
how much?
Mr. Whitney. Well, it would be something over
The Chairman, I mean 4i/^ points.
Mr. Whitney. It would be something over a million dollars.
Mr. Henderson, It is on the sheet.
The Chairman. Where is it?
Mr. Whitney. But of that, Mr. Senator, the original group with
which we have been dealing, got 1 percent, leaving §14 percent to go
to this very large group — I can find out how many but I don't remem-
ber unless it says here — ^to a very large number where we allowed,
out of that SY2 — that was again subdivided — IV2 percent for a man
who sold, 2 percent for whatever bonds he took "firm," as we call it,
which when he went into the syndicate he had to buy.
CONCENTRATION OF ECONOMIC POWER 11915
COMPEnTI\'E BIDDING AS AN ALTERNATI%'E
The Chairman. Well, you see, Mr. Whitney, the question that nat-
urally suggests itself to my lay mind is whether or not, if this method
of financmg were not frozen, to use a word that was brought out by
one of the witnesses, whether the Telephone Co. would have had to
pay the total of $1,125,000 for the privilege of selling some high-class
bond, and whether, if these bonds had been sold in the open market,
at competitive bidding, the Telephone Co. might not have received
more. That is the question which naturally suggests itself.
Mr. Whitney. Well, may I try to answer that to the best of my
ability?
The Chairman. Yes. sir.
Air. Whitney. Of course, the first answer is that 20 years after-
ward, we don't know; but in the first place, the Telephone financ-
ing
The Chairman (interposing). Well, of course, this is the system
that existed with respect to 14 issues over a period of 10 years.
Mr. Whitney. But if you look at it successively, if you take each
one of these up in detail, you will find that this particular issue was
refunded within 2 or 3 years on a 5-percent — and then some further
bonds were sold on a 4y2-percent — ^basis. In 1920, the Telephone Co.
had not reached its position of high credit that it has today. Only
6 months before that there had been an issue which was not handled
by this group, in connection with the Southwestern Bell Tei&phone
Co., that had been a failure, and those were 5-percent 5-year notes
on a 7-percent basis. Now, we come along here, if you remember,
times were pretty bad in 1920 and. in September 1920, we had a
Eanic, a little bit of a one compared with our recent or present one,
ut it was a panic, ^nd this was about the best company in the sys-
tem, or one of the very good ones, and tliis was priced right on
the market; this 4i/^ -point spread was used to try to induce the
dealers throughout the" country by very generous treatment, more
generdus, I think, than any of the subsequent issues, to get them
interested in the time they didn't believe it was possible.
The second thing we must remember is that at that time, there
wasn't the bond organization built up that there has subsequently
been built up, and it was harder to get people to do it. But it is a
question of merchandising. Now, whether or not the price could
have been an eighth of a point or a quarter of a point higher, I
can't tell you, but, of course, the ^.rice, if I may say so, Mr. Chairman,
is only one factor. When you are doing a job for a man, you want
to preserve his credit. In those days, we wanted to build it up.
That is what I referred to the other day when I said Mr. Gifford was
so anxious to reestablish the credit of his company and reset the
Telephone issues. Whether you get an eighth or a quarter of 1 per-
cent more isn't the final consideration. The question is whether they
are properly sold, whether you are going to ge!: vout* credit popular
through the country — all those factors come into the distribution,
if you consider, as I did, that then — and I believe today^-that this
business is giving professional advice to your client. You tell him
what you think is the best thing for his credit. Nothing hurts so
much as a failure, and I think you will find that if anything during
this lO.years that are under discussion here, we overpriced the tele-
11916 CONCENTRATION OF ECONOMIC POWER
phone issues rather than underpriced them. "Whether the coinpetitive
bidding, which you used in the present or colloquial sence of putting
things up for tender at the instigation of the corporation — that was
not done here because the corporation in its sole, exclusive authority,
elected, in view of the size of the job. to come to a certain group
of experts rather than to just throw tliem on the market for what
they would bring.
But the price thing isn't the ultimate thing. It-^-yaur credit. It
is involved, Mr. Chairman.
Mr. Miller. Well, Mr. Whitney, isn't the policy — isn't this the
policy in pricing rhat the United States Treasiuy seems to follow in
pricing its own issues? I have seen all of these recent issues go to an
immediate premium which has made those issues popular with the
buying public. I have not seen any go to a discount..
Mr. Whitney. That is exactly so. May I reniird you, Mr. Chair-
man, that at that time, in 1920, the Federal Eesrrve bank discount
rate was 7 percent, and the United States G^rvernment Liberty bonds
v.ere 4i/i and sold at 83. So it is a competiiive market, which those
figures show better. Now, this price was expensive, but relatively it
was not expensive. As Mr. Miller says, this policy has been carried
out by the Government persistently in putting their bonds out at what
they thought were an attractive price.
The Chairman. Well, the Treasury, I fancy, doesn't have any lists
that cover a 10-year period, in which certain selected firms only are
participating.
Mr. WnrrNEY. But they don't have competitive bidding, either, sir,
except in connection with their Treasury bills, these 90-ciay Treasur}'
bills. They put them on the counter and anybody may buy tliem.
They are a .syndicate all to themselves.
LENGTH OF SUBSCRIPTION PERIOD
Mr. Nehemkis. Mr. Chairman, in connection with the first ques-
tion you asked Mr. Whitney, which prompted this discussion, I have
had prepared by the staff a table which bears directly on your point;
and since it is relevant at this place, I ask leave of the committee to
offer it in evidence and discuss it with you briefly. It is a rather
unique bit of information. May I offer it, sir ?
The Chairman. Certainly. What does this represent, Mr. Ne-
hemkis?
Mr. Nehemkis. This table shows the issues of the American Te^e-
nhoiie & Telegraph Co. and associated companies headed by J. P.
Morgan during the period we are discussing, 1920 to 1930.
The Chairman. This table was compiled by whom?
Mr. Nehemkis. Compiled by the staff from records furnished by
J. P. Morgan & Co. and identified a few moments ago by the witness,
now in evidence.
The Chairman. Without objection, the table may be admitted.
(The table referred to was marked "Exhibit No. 1688" and is in-
cluded in the appendix on p. 12235. )
Mr. Alexander. Are we goin"- to have the opportunity sometime
later on, for instance, to check tnis?
Mr. Nehemkis. Oh, quite ! Absolutely ! I should be disappointed
if you didn't, Mr. Alexander.
Mr. Alexander. We haven^t seen it until this moment.
CONCENTRATION OF ECONOMIC POWER 11917
The Chairman. You may check any of these exhibits, Mr. Alexan-
der; that is perfectly understood.
Mr. Nehemkis. You will note, Mr. Chairman, from this exhibit,'
it shows the length of time that the syndicate books were open. You
will note that in the $50,000,000 offering of Illinois Bell Telephone
Co, 5's, offered on June 14, 1923, the amount of subscriptions was
$126,000,000. Now, note
Mr. AVhitnet (interposing). Will you go back to the Bell Tele-
phone Co.?
Mr. Nehemkis. Well, suppose we run down them in order. The
Bell Telephone Co. of Pennsylvania, offered in 1920, an offering
of $25,000,000. The books were opened at 10 o'clock, and they werr
closed at 1 o'clock. The books were, in short, open 3 hours, and the
number of times the issue was oversubscribed was 2.7, or 270 per-
cent. Now. the next issue is the Northwestern Bell Telephone,
offered in '21. That was a $30,000,000 issue, and the information
on this, I regret to say, isn't available. Now, take the New York
Telephone Co.
Mr. Henderson (interposing). It does show, Mr. Nehemkis, that
the issue was three and one-tenth times OA^er tiie
Mr. Nehemkis (interposing). Correct, sir. Now, if you will drop
down a bit and go to the Illmois Bell Telephone i's of 1923, which
was a $50,000,000 offering, the books were opened at 10 o'clock and
closed at 10 : 30. They were open 30 minutes, and they were over-
subscribed 2.5 times. Now, if you will go to the American Tele-
phone & Telegraph issue of 1923, which was one of the largest to
date, $100,000,000, the books were opened at 10 o'clock, closed at 19
o'clock, a period of 2 hours, and oversubscribed 190 percent. New.
if you will go to the next largest one, the $125,000,000 offering, I
think I had better continue — the Southwestern Bell Telephone offer-
ing, which was $50,000,000, in 1924, the books opened at 10 o'clock
and closed at 10 : 01, They were open 1 minute, and were oversub-
scribed 510 percent.
The' Chairman. The credit of the company was improving.
Mr. Nehemkis. Apparently. And the Bell Telephone issue of
Pennsylvania offered in '25 which was a $50,000,000 offering, ^he
books were opened at 10 o'clock and closed 5 minutes later, and the
issue was oversubscribed 640 percent. In the next offering of New
England Telephone & Telegraph bonds, wliich v/as a $40,000,000
issue, the books were opened at 10 o'clock, , closed 10 minutes later,
and were oversubscribed 800 percent.
Mr. Whitney. May I be excused, if I make just two comments,
Mr. Chairman. One of them is more or less regret that there are so
few people now living who remember the state of the bond marxet
in the twenties. The second thing is that as we ail remember, ■j-Te
didn't have any 20-day clause that we now have in the Security Act of
1933 so that this sellins; had all been done beforehnnd. And throush-
out the twenties we ran into what was colloquially known as "padding,"
when the dealers throughout the country thought it would gain them
credit with somebody, if they wanted 10 bonds, to put in for a han-
dred. That is again not very different from what sometimes nap-
pens with the Treasury issues, where a fellow puts in for his full
legal limit. The;^^ have learned that trick, too.
» "Exhibit No. 168S."
11918 CONCENTRATION OF ECONOMIC POWER
The Chairman. You mean the Treasury has learned that from
you?
Mr. Whitney. The bond business of the twenties. Anything that
took over 2 or 3 liours in those days was almost a failure. You gen-
erally had vour books full the dav before the books opened. It was
more or less of a technical matter. You opened and shut them to
prevent getting too much padding, but you couldn't prevent people in
those happy days from coming in and taking all there were. You
see, these Avere undivided joint accounts, without exception, in other
words, a man in the selling or distributing syndicate had a firm
commitment for so many bonds and then he would sell. And they
used to, really — it sounds perhaps silly to say it, but it was a great
problem as to know how to handle an issue, unless you take the
worst of these, one of the worst, New York Telephone. $50,000,000 in
1921, which you got 8 times oversubscribed. You didn't give any-
body what he asked for, because that was what was known collo-
quially as "padding."
Mr. Miller. Did a dealer make an additional commission if he
oversold his commitment, and had a confirmation of the oversale?
Mr. Whitney. He got an additional commission on the oversale
if allotted to him; yes.
"Mr. Miller. In other words, he had the chance to make a large
profit?
Mr. Whitney. In this instance, he had an extra commission of
11/2 percent.
Mr. Nehemkis. Mr. Chairman, may I ask Mr, Whitney if he
would be good enough to tell us, in this connection, for how long a
period of time the syndicate books were opened for the 1906 offernig
that we have discussed with you, the $150,000,000 offering?
Mr. Whitney. Well, Mr. Nehemkis, of course, all this time-clock
business doesn't come off our files.
.Mr. Nehemkis. Well, you know that, Mr. Whitney
Mr. Whitney (interposing). And I think it is pretty well known,
at least I have tried to make it clear, that the 1906 issue was any-
thing but a success and, thirdly, the method of distribution in 1906
was completely different.
Mr. Nehemkis. You know the period of time, Mr. Whitney; can
you tell me quickly?
Mr. AYhitney. Several years, I think.
Mr. Nehemkis. It was open for 2 years, wasn't it?
. Mr. Whitney."! think it was a great failure.
Mr. Nehemkis. Just one other thing, just a minute, Mr. Whitney,
when you say
Mr. Whitney (interposing). But may I make the statement that
we did not have a time clock on this. We didn't, did we ?
Mr. Nehemkis. Mr. Whitney, you identified your documents and
it was on the basis of your documents ^ which themselves show the
lengths of time the syndicate books were open that we prepared this
table.
Mr. Whitney. The 1900 thing, I don't quite know where I am
failing in an answer, because the 1906 issue was known to be open
for a long time.
» See "Exhibit No. 1688-2."
CONCENTRATION OF ECONOMIC POWER 11919
Mr. Nehemkis. Well, I just asked you, Mr. Whitney, so that the
record would be perfectly clear. You have done something that is
very interesting. You have compared the bonds of the Telephone
Co. with the bonds and notes of the Treasury of the United States,
and I just wanted to show the comparison. ,
Mr. Whitney. No, sir ; I beg your pardon, that is a complete rnis-
understanding, and I very much regret if the committee got that im-
pression. All I meant was that the Treasury Liberty 4i4's were sell-
ing at 83, which was an explanation of the 7-percent price at 95 or 91,
whichever price you want to take, the 1906 issue was notoriously a
failure, as was the syndicate, not the original group, but a long list
of people that we furnished to you, which were mostly bankSj stock
companies, and people of that kind and a great many individuals.
They carried that for a long time, and it was finally washed out in
1908. Of course, a panic intervened in there in 1907. But there is no
conceivable analog^' between the bond business in 1906 and the bond
business in 1920, and if I have given any impression that I was trying
to compare the bond business as done in private issues with the Treas-
ury, of course, I do not.
The Chairman. It might be worthy of comment at this point, since
you made the comparison between the price of Liberty Bonds in 1920
and the price of an industrial issue like the Bell Telephone Co., that
these Liberty Bonds had been sold during the war, in very small
amounts, $50 bonds and $100 bonds, to a large number of people, and
in many instances, members of the naval and military forces of the
United States had purchased those bonds, and that for several years
after the boys had come back, some of them were selling those bonds,
and that the charge was made then and later on that they were get-
ting a price that was far below the price for Liberties, and that these
bonds were moving from what was technically known as weak hands
into strong hands during this period.
Perhaps, therefore, the comparison is not altogether as justifiable
as it might appear.
Mr. Whitney. Mr. Chairman, that is all true, but the market price
of money is determined by money rates. It isn't in the hands of
bankers or anybody else. It is determined by the trend of money
rates, and I only refer to those two things, first, that the Federal
Reserve Bank rediscount rate was 7 percent, and, second, that as a
result of those money rates, plus the factors you speak of, the liquida-
tion by weak holders, even Liberty Bonds, with their credit, Mere
selling at 83 — 41/4's, which was, I don't know what the yield was, but
it was high. Now, any kind of private corporate financing can only
follow money rates, which are determined Avithin microscopic differen-
tials, as to what you offer bcmds for. I didn't mean there was any
analogy with the Liberties which were sold, as you say, under quite
different money conditions, but the fact remains that no one could
control money rates, and I merely gave those as an example, perhaps
it was an unfortunate one, but the important one there is the Federal
Reserve Bank rediscount rate of 7 percent, which determines the gen-
eral level of money.
Mr. Miller. Did the Standard Oil companies, during 1920, do some
financing at 7-percent coupon rates ?
Mr. Whitney. Yes, sir; two issues of preferred stock at $100,000,-
000 each. '
11920 CX)NCENTRATION OF ECONOMIC TOWER
Mr. Miller. Standard Oil of California and Ne-w t ork, as I recall,
did some linancing?
Mr. Whitney. That is outside of my own kroT^'edge, Mr. Miller.
The Chairman. Are you ready to take a recess now?
Mr. Nehemkis. Yes, sir.
Tlie Chairman. The committee will stand in recess until 2 p. m.
(Whereupon, at 12:30 p. m,, a recess was taken until 2 p. m., the
.same day.)
atternoon session
(The committee resumed at 2 : 15 p. m. on me expiration of the
recess.)
The Chairman. The committee will please coiLie to order.
Mr. Nehemkis, are you ready to proceed?
Mr. Nehemkis. I am, sir.
Mr. Henderson. Will you call Mr. Whiteh'^ad, Mr. N^^hemkis?
Mr. Nehemkis. Mr. Henderson requests that I call Mr. William
Whitehead, of my stall. Mr. Whitehead, take vj.e witness stand,
please.
TESTIMONY OP W. S. WHITEHEAD, SECUEITY ANALYST, SECU-
RITIES AND EXCHANGE COMMISSION, WASHINGTON, D. C—
Eesumed
The Chairman. Mr. Whitehead has been previously sworn?
Mr. Nehemkis. He has, Mr. Chairman.
Mr. Henderson. In order to clear up what seems to be a misunder-
standing, and so as not to have any confusion, I want ^o ask you a
few qjjestions relating to Mr. Keyes' testimony this morning.
I understand that you have been working on this Telephone in-
quiry ?
availability or records of j. p. morgan & CO. TO the committee
Mr. Whitehead. That is correct.
Mr. Henderson. And that you secured from the old Kidder, Pea-
body records the Winsor copy of the so-called "library agreement"? '■
Mr. Whitehe^\d. That is correct.
Mr. Henderson. And that you went to J . P. Morgur and consulted
various members of the firm and stall there a,ti lo wiieiner or not
Morgan & Co. had similar records?
Mr. Whitehead. Yes; that is correct.
Mr. Henderson. And I gather from the testimoi\j both of Mr.
Whitney and of Mr. Keyes that as far as the or^gir.al memorandum
was concerned, they had no record of that?
Mr. WhitehExVD. That is correct.
Mr. Henderson. And this inorning, •.\ lien inquiry v*a<^; niaJe as to
the four letters ^ passing between Morrow and Winsor, Mr. Keyes
thought that they were in the Bell Telephone syndicate records which
were made available to you, i^ that cor"-:>ct?
Mr. Whitehead. That is correct, commissioner.
1 "Exhibit No. 1673."
3 "Esbibits Noa. 1675, 1676, 1677, and 1678."
CONCENTRATION OF ECONOMIC POWER 11921
Mr. Henderson. Well, now, you knew something of the importance
attached to the "library agreement." I want to ask yon, as far as
your memory is concerned, do you feel that if copies of the Winsor-
Morrow correspondence had been there when you examined them,
you would probably have noticed them and asked for them?
Mr. WnrrEHEAD. The answer is yes, without equivocation.
Mr. Henderson. I think it is more a matter that you knew clearly
what you were looking for.
Mr. Whitehead. Yes; very definitely, I knew what I was looking
for.
Mr. Henderson. And it is higlily possible that Mr. Ke^^es, not hav-
ing any knowledge, as he has testified, of those things, did not attach
as mucli importance to them as you might?
Mr. Whitehead. Possibly so, but that is problematical.
Mr. Henders^on. And when you went to Kidder, Peabody and got
there the originals and the carbons, you instantly recognized them
as having something to do with the modification of tne so-called
"library agreement"?
Mr. Whitehead. That is correct.
Mr. Henderson. Mr. Chairman, this is merely for the purpose of
emphasizing the professional status of the investigator. I am not
raising any question of veracity.
The Chairman. You want it understood that he did not think he
was overlooking anything?
Mr. Henderson. Yes. I want to have it understood that the S. E.
C. is very proud of its investigators, and I would hate anything
that might cause confusion to be recorded against their professional
ability.
Senator King. You testified as to your own competence?
Mr. Whitehead. Yes, sir.
Mr. Henderson. Another thing. We have arranged for Mr. Keyes,
as you heard this morning, to see whether they were there. That
is entirely the point. It Is a question of making available to the
committee these originals or anjrthing else that might pertain to
this particular item. That is all.
The Chairman. Very well.
Will you call the next witness, please ?
Mr. Nehemkis. I recall Mr. WTiitney.
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
Mr. Nehemkis. Mr. Wliitney, I show y-'u a copy of a syndicate
record of the $2,155,000 Telephone Co. First Mortgage 7 Percent Gold
Bonds, and a copy of a syndicate record of the $2,676,000 Cuyahoga
Felephone Co. 7 Percent Gold Bonds.
You will recall, Mr. Whitney, that during the testimony this morn-
ing you had occasion to make reference to these two sheets which were
furnished to us by your colleague Mr. Alexander, last week. Will
you examine these and tell me whether you recognize them to be true
and correct copies of originals ?
11922 CX)NCENTRATION OF ECONOMIC POWER
Senator King. While Mr. Whitney is making that examination,
Mr. Nehemkis, for my own information — unfortunately I have been
detained in other places than the District of Columbia until a few
minutes ago — will you tell me the purpose of this investigation and
the relevancy to any matter that is under consideration by the com-
mittee, so that I may determine for my own benefit, its relevancy and
materiality ?
Mr. Nehemkis. I think Commissioner Henderson could do that
with much more propriety than I could, Senator King.
Mr. Henderson. I think I can answer that with the introductory
statement I made, and I will secure a copy of that right away.
Senator King. Thank you. That may not do it for me until I
read it, but I will not delay you.
Mr. Nehemkis. Shall I go on, sir?
The Chairman. Proceed.
telephone issues not covered by "library agreement" — APPLICABILITY
or "trio arrangement"
Mr. Whitney. Those are the copies of the papers furnished by us.
Mr. Nehemkis. Now, these records, Mr. \Vhitney, refer to two
pieces of underwriting, October 25, 1921, one I have already indi-
cated involving an offering of $2,155,000 of Telephone First Mortgage
7 Percent Gold Bonds, and the other the Cuyahoga Telephone Co.
First Mortgage 7 Percent Gold Bonds.^
Mr. Whitney. That is right.
Mr. Nehemkis. Do you have copies before j^ou ?
Mr. Whitney. Yes.
Mr. Nehemkis. NoWj who were the members of the original terms
group in that underwriting?
Mr. Whitney. Well, they were both the same, I think. The First
National Bank of New York,- 221/2 percent ; National City Company,
221/2 percent; Huntington National Bank, Columbus, Ohio, 10 per-
cent. J. P. Morgan & Co., 45 percent.
Mr. Nehemkis. Now, earlier in your testimony, Mr. Whitney, you
had occasion to refer to the "trio arrangement" between the First
National Bank, the National City Co., and J. P. Morgan & Co.^
Do you recall?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. Was this piece of underwriting to which reference
has just been made, involving these three institutions, part of the old
•'trio arrangement" ?
Mr. Whitney. Well, the percentage figures would lead one to be-
lieve that, but I am afraid my memory, except as it has been revived by
these documents, is practically nonexistent,
Mr. Nehemkis. I would merely call to your attention, Mr. "Whitney,
that this underwriting took place after the conference of May 5, 1920,
and that the participants in the syndicate of this underwriting are
not the same as in the other, and therefore I merely inquired of you
•1 Referring to "Exhibits Nos. 1689-1 and 1689-2."
• Supra, p. 11853.
CONCENTRATION OF ECONOMIC POWER 11923
whether this was another instance of where the old "trio arrange-
ment" operated, but you have given me your answer that you do not
recall.
Mr. Whitney. It clearly indicates it is entirely outside of any per-
centage which we discussed this moriiing.
Mr. Nehemkis. Mr. Chairman, I offer these two documents in evi-
dence as identified by the witness.
The Chairman. Without objection, they may be received.
(The two syndicate records of $2,155,000 and $2,676,000 referred to
were marked "Exhibits Nos. 1689-1 and 1689-2," and are included in
the appendix on p. 12236. )
Mr. Nehemkis. Mr. Whitney, what justification was there for in-
cluding Kidder, Peabody in the management fee ?
MANAGEMENT FEE TO J. P. MORGAN & CO. AND KIDDER, PEABODY & CO.
Mr. Whitney. The management fee, as you have just stated, ap-
pears for the first time in this issue, and the justification for having a
management fee at all, and particularly in this business, was that here
in the telephone business we and Kidder, Peabody & Co. did all the
clerical, manual work involved in the distribution. You will re-
member that this morning I pointed out that this 70 percent country
and 30 percent for New England had to do with the distribution of
telephone securities or any other securities as they came along.
Now, all the syndicate records, all the examination of documents,
all the preparation of whatever papers were necessary in the various
transactions, were handled through either J. P. Morgan & Co., or
Kidder, Peabody & Co., and we felt that the amount of actual out-of-
pocket expense to which our two organizations were put justified a
management fee, so-called.
That fee, if you will follow through the bookkeeping, was charged
only to members of the original group. It was not charged against
the syndicate and must not be confused with so-called syndicate ex-
penses. It was merely that Kidder and ourselves in this instance did
all the manual work, the clerical work, for the members of the original
group and as such we felt it was justified.
Your question was, Why was Kidder justified in its share? And I
hope that I have included that in my answer. They did the leg work
for New England, and I think you will find the percentage they got
was 30 percent of the total management fee.
Mr. Nehemkis. I would like to read into the record, if I may, sir,
at this time, a memorandum which was previously offered. This
is, as you will recall, Mr, Chairman, from the files of the old Kidder,
Peabody firm, previously identified.
January 25, 1924
The Chairman (interposing). May I ask you what was the origin
of "Exhibit No. 1680-2"?
Mr. Nehemkis. These were obtained from the files of the old
Kidder, Peabody firm.
The Chairman. Both sheets?
Mr. Nehemkis. Yes, sir ; identified by Witness Chapin.
The Chairman. Was the handwriting identified?
11924 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. No, sir ; it is of no consequence to the testimony.
Shall I proceed, Mr. Chairman?
The Chairman. Please.
Mr. Nehemkis (reading from "Exhibit No. 1680-2") :
At the time of the purchase of Southwestern Bell Telephone First 5%,
Series "A," of 1954, the Proprietary Profit was distributed on a different basis,
in accordance with letter from J. P. Morgan under date of January 25th, 1924,
as per following extract.
I now quote from the extract [reading further] :
We are forming a syndicate in which we shall participate to purchase these
bonds from ourselves and associates at 91% and accrued interest and to
offer them for public subscription at 93%% and accrued interest. In accord-
ance with our discussion at the meeting at which the above purchase was
reported verbally today, we plan to charge a managing commission of one-eighth
per cent on the principal amount of bonds to be issued. After full considera-
tion of the matter and in line with the understanding that the decision as to the
allocation of this one-eighth would be left to us. we have thought it was
advisable to charge it against the profit of the original purchasers.
And the original document continues [reading furtlier] :
The above method to be foUowf^d in all subsequent telephone issues, i. e. :
1% of issue less %% for managers' commission.
% of said 1/8 to go to K. P.
% of said Vs to go to J. F. M.
leaving % percent to be divided among the Proprietors.
And then follows a caption indicating who the New England pro-
prietary interests were.
I call to your attention, sir, the notation which again has been
identified by Witness Chapin, at the bottom [reading further from
"Exhibit No. 1680-2"] :
February 17-30—
although the original document is dated January 25, 1924 —
as per J. R. Chapin Old Colony consolidated with First Natl, and check for
5% interest was sent to First Nail. Bank on American Tel. & Tel. 5% due 1965.
The Chairman, Tlie significance of that, I assume, is that Old
Colony under the original listing received 3 percent and the First
National received 2 percent, so that the combination, the sum of the
two, was 5 percent?
Mr. Nehemkis. Yes.
Mr. Whitney. Mr. Chairman, I inadvertently made a misstatement.
I said the management fee was divided 70-30, and I would like
to correct that, if I may, because reading from the so-called syndicate
record, which we have furnished the committee, the management fee
of one-eighth percent amounted to $62,500, Kidder, Peabod}' receiving
a quarter of this fee.
May the record be perfectly clear that the letter ^ that ISIr. Nehemkis
quoted, mentioning the original terms, and the word "proprietary"
again is Mr. Winsor's word and not ours.
The Chairman. Yes ; and I observe that the proprietary interests,
as set forth in this exhibit, are all New England interests.
Mr. Whitney, Right, sir.
Mr. Henderson. I think, Mr. Chairman, I had a general rebuke
for counsel the other day for using the word "proprietors" and I see,
again, he is on firm ground in having used it.
» "Exhibit No. 1680-2."
CONCENTRATION OF ECONOMIC POWER 11925
Senator Kjno. Mr. Nehemkis, I note in one of the papers which
have been handed to me concerning which you are now interrogating
the witness, the words and figures, "May 6, 1920." Do these transac-
tions to which you have just referred go back to 1920 to some trans-
action then?
Mr. Nehemkis. Yes.
Senator Kjng. In other words, you are now investigating con-
cerning transactions under which the syndicate was formed to acquire
and take over and dispose of certain stocks and bonds away back in
1920?
Mr. Nehemkis. Wb have done even worse than that, Senator, we
have gone back to tlie year 1906. [Laughter.]
Senator King. Why don't you go back to the begmning of time?
[Laughter.]
Mr. Henderson. I think the record, Senator, will show why we
went back to 1906.
Senator King. 1 suppose there is some valid reason.
Mr. HENDERPCiN I assure the Senator that there is, and it is
consistent with the terms of reference set down by the resolution
creating this conmiittee.
Mr. Nehemkis Mr. Whitney, before I dismiss you, may I just ask
one or two questions so that I may be clear in my own mind and
that the record may be perfectly clear?
Mr. W^HiTNEY. Yes, sir.
Mr. Nehemkis. There is no question in your mind, is there, sir,
that there was a meeting at "the library" on May 5, 1920?
Mr. Whitney. Not the slightest.
Mr. Nehemkis And that the persons who were present at this
meeting were Mr. J. P. Morgan, Mr. Henry P. Davison, and Mr.
Robert Winsor?
Mr. Whitney. There is no question in my mind that they were
there, although, to make the record perfectly clear, we have no record
of such a meeting.
Mr. Nehemkis. And the only living person today who could testify
concerning what transpired during that meeting is Mr. J. P. Morgan ?
The other two gentlemen who were present are deceased?
Mr. Whitney. Mr. Nehemkis, you used "could." I have already
told you that Mr. Morgan says he can't, and if this is an. attempt
to disqualify my statement
Mr. Nehemkis (interposing). Heavens, no! You misunderstand,
Mr. T\niitney.
Mr. Whitney. May I finish?
Mr. Nehemkis. Surely.
Mr. Whitney. The facts are as you state, but the inferences are
not, because I am perfectly competent to testify what went on at that
meeting from my own recollection. The question was technically cor-
rect. Mr. Morgan is the only one of the three gentlemen who is now
living that attended that meeting. That is true.
Mr. Nehemkis. And the only record in evidence concerning what
transpired at that meeting and the agreement resulting therefrom is
Mr. Winsor's memorandum ^ dated May 5, 1920 ?
1 "Exhibit No. 1673."
11926 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney. That is not correct, because there is another memo-
randum ^ in evidence in which the first part of it is in my hand-
writing.
Mr. Nehemkis. The aide Tneinoiref
Mr. Whitney. It is a memorandum, isn't it?
Mr. Nehemkis. What we have been calling the aide memoire?
Mr. Whitney. Well, whatever you want to call it, it is still a
memorandum which was on the purpose for which the meeting was
called, and of that I have personal knowledge so that you can't, I
think, correctly ^ay that the memorandum found in Kidder's files un-
signed, and otherwise unidentified, except being there, is the only
memorandum that has to do with that meeting.
Mr. Nehemkis. Mr. Chairman, may I now recall Mr. Chapin ?
The Chairman. Mr. Chapin.
Is this witness dismissed? Do you wish the present witness to
step aside?
Mr. Nehemkis. If he will, Mr. Chairman.
The Chaikman. Thank you A^ery much, Mr. Whitney.
TESTIMONY OF JOHN R. CHAPIN, KIDDER, PEABODY & CO., BOS-
TON, MASS.— Resumed
percentage participations subsequent to ''library agreement"
the new ENGLAND INTERESTS
Mr. Nehemkis. Mr. Chapin, I observe that you have been present
at the session this morning, and you have no doubt followed the
testimony ?
Mr. Chapin. Yes, sir.
Mr. Nehemkis. I nave recalled you simply to review with you what
I have already reviewed with Mr. Whitney, the realinement in the
percentage interests after the arrangement or agreement of May 5,
1920. The percentage participations, as finally agreed upon, differed
from those suggested by Mr. Davison, in that Mr. Davison had pro-
posed to allot a 6V2-percent interest to Lee, Higginson, Guaranty
Trust Co., Bankers Trust Co., and a 9-percent interest to New
England, but the finally agreed-upon decision gave 5 percent to the
houses I have just mentioned, and 15 percent to New England, is
that correct?
Mr. Chapin. That is correct.
Mr. Nehemkis. Mr. Whitney's testimony has disclosed that as a
result of Kuhn, Loeb's dissatisfaction with the redistribution reached
at "the library," an additional three-fourths of 1 percent was given
to Kuhn, Loeb, is that correct, sir.
Mr. Chapin. An additional three-fourths of 1 percent was given.
I presume it was through Kuhn, Loeb's dissatisfaction with their
10 percent.
Mr. Nehemkis. I was merely asking you to tell rne whether the
three-fourths of 1 percent was made available.
Mr. Chapin. I understand.
Mr. Henderson. I asked Mr. Whitney whether he knew why Kuhn,
Loeb was such a stickler for that other three-fourths percent. Do you
of your own knowledge know the reason ?
» "Exhibit No. 1679."
CONCENTRATION OF ECONOiMIC POWER 11927
Mr. Chamn. I do not, sir.
Mr. Nehemkis. If I were to suggest that it might perhaps have been
that that immediately took them out of the 10-percent class and
gave them a standing probably third in the issue, is that likely to
have been it?
Mr. Chapin. I should think that might very well have been it.
Mr. Nehemkis. Mr. Chapin, of this three-fourths of 1 percent, did
not Kidder, Peabody cede one-quarter out of its own participation?
Mr. Chapin. It did.
Mr. Nehemkis. The New England proprietary interests, therefore,
as finally agreed upon, were as follows [referring to "Exhibit No.
1674"]:
Kidder, Peabody & Co., 143^ percent; Old Colony Trust Co., 3
percent; Estabrook, 2i/2 percent; Day, 2i/^ percent; Moseley, II/2
gercent; Hayden, Stone, 1% percent; The First National, 2 percent;
hawmut Bank, 2 percent; making a total of 29% percent. Do you
recall ?
Mr. Chapin. Well, my remembrance was that Hayden, Stone were
1%, and Moseley li.-s.
Mr. Nehemkis. I show you a memorandum, "Exhibit No. 1674,"
previously identified by you. I ask you to examine this and see
whether this refreshes your recollection.
Mr. Chapin. Moseley, one and one-third of this.
Mr. Nehemkis. Correct.
Mr. Chapin. And Hayden, Stone & Co., one and two-thirds, as 1
stated.
Senator King. Mr. Nehemkis, I notice Shawmut, 2 and 30. You
stated 2.
Mr. Nehemkis. I am not sure that I know which document.
Mr. Henderson. It is the last one.
Senator King. The last one, the last item there on one of these
sheets. Shawmut, 2. Then there is a space, then, 30. The 30 would
not be a fractional part of the assignment to Shawmut ; would it ?
Mr. Henderson. That is the total of all New England interests.
Mr. Nehemkis. Except, Mr. Chapin, for the changes in name and
identity, those were the proprietary interests of the New England
group in all A. T. & T. and associated financing from the year 1920
until the last issue of A. T. & T. securities prior to the passage of the
Banking Act of 1933?
Mr. Chapin. From 1920 to 1930, those were the interests of the New
England group.
Mr. Nehemkis. And they remained as you have just testified?
Mr. Chapin. They remained that way.
Mr. Nehemkis. And the changes were as follows: The consolida-
tion of the 3 percent interest of the Old Colony Trust Co. with the 2
percent interest of the First National Bank upon the consolidation of
these corporations in the year 1930?
Mr. Chapin. Yes. There was a consolidation of the securities de-
partments of these two banks.
Mr. Nehemkis. And the transfer of the 2 percent interest of the
Shawmut Bank to the Shawmut Corporation in the year 1925 ?
Mr. Chapin. Yes.
Mr. Nehemkis. And the transfer of the Hayden, Stone & Co. inter-
est of 1% percent to Haystone Securities Corporaiion in 1923 ?
11928 CONCENTRAsnON OF ECONOMIC POWER
Mr. Chapin. Made at their request.
Mr. Nehemkis. That is all, Mr. Chapin.
I recall Mr. Whitney.
Senator King. I would like to ask the last witness one question, if I
may. It may not be relevant to his tcotimony.
The Chairman. Mr. Chapin, will you again take the stand?
Senator King. Were you familiar with the allocations which were
made o^ ..^se?
Mr. CHAPrN. Only from the record.
Senator King. Do you know whether or not the price paid for the
bonds, the stock, whatever were ^'^sued
The Chairman (interposing). Bonds.
Senator King. Bonds — was a reasonable price, or whether, if this
syndicate had not been formed, a better price might have been ob-
tained by those seeking to dispose of the bonds from the general
public ?
Mr. Chapin. Well, Senator, I can't go back as far as that to give
you any reasonable opinion on it.
Senator King. That is all.
(The witness was dismissed.)
Mr. Nehemkis. Mr. Whitney, please?
TESTIMONY OF GEORGE WHITNEY, PARTNER, J. P. MORGAN & CO.,
NEW YORK, N. Y.— Resumed
TELEPHONE FINANCING SUBSEQUENT TO THE RANKING ACT — ACTIVITIES OF
GEORGE WHITNEY
Mr. Nehemkis. Mr. Wliitney, after the enactment of the Baulking
Act of 1933, did not J. P. Morgan & Co. elect to discontinue its secu-
rities business?
Mr. Whitney. We elected to continue in the banking business.
Mr. Nehemkis. Which is saying the same thing that I asked you.
Mr. Whitney. It is the same thing, put a little more accurately.
Mr. Nehemkis. Now, during this 1933-34 period, was there not a
good deal of consideration given to refundings as a result of the decline
in the interest rate?
Mr. Whitney. 1933-34?
Mr. Nehemkis. Yes.
Mr. Whitney. I don't remember any. Was there a decline in the
interest rate? I don't remember any.
Mr. Nehemkis. Now, since you were recognized in the financial com-
munity as your firm's specialist in Telephone financing, did anj^ of
the investment banking houses have occasion to discu.ss with you
Telephone business?
Mr. Whitney. Of course, I must deny your qualification, and in the
second place, you are talking about 1933 and 1934.
Mr. Nehemkis. Yes.
Mr. Whitney. I don't remember any.
Mr. Nehemkis. During the period 1933 through 1935, did any part-
ners of investment banking firms have occasion to discuss with you
Telephone matters ?
Mr. Whitney. Oh, I think so.
Mr. Nehemkis. Do you recall M'hat partners of what firms?
CONCENTRATION OF ECONOMIC POWER 11929
Mr. Whitney. Well, I should hesitate to attempt to try to recol-
lect such an unimportant thing as that, inclusively. I remember cer-
tain ones who did. But I would be bound to say that my recollection
lias been rather stimulated by these paper? yoii have asked from us-
I can remember a partner in the new firm of Kidder. Peabody &
Co., 1 remember talking about it with Mr. Mitchell.
Mr. Nehemkis. What part)ier of the new Kidder, Peabody firm ?
Mr. Whitney. Several.
Mr. Nehemkis. By chance, Albert H. Gordon ?
Mr. Yv^HITNEY. No.
Mr. Nehemkis. VkTiich ones, do you recall ?
Mr. Whitney. Well, there were ^hree others. tAvo others — ^Mr.
Chandler Hovey and Mr. Herman R. Kinnicut.
Mr. Nehemkis. Mr. Mathers, will you step forward, please? He
has already been sworn.
I show you a letter on the stationery of Kidder, Peabody & Co.,
dated New York, Mai'ch 2, 1935, which purports to hcav the signa-
ture of Mr. Albert H. Gordon. Will you examine this and tell me
vrhether you obtaint 1 this from the files of the Central Hudson
Gas & Elpctric Corp.
Mr. Mathers. I did, sir.
Mr. Nehemkis. That is all, thank you.
I read to you from the second page of his letter — -
Senator King. By whom written?
Mr. Nehemkis. Albert H. Gordon, partner of the firm, of Kidder,
Peabody & Co., to John Wilkie, Esq., of Central Hudson Gas &
Electric Corp., dated March 2, 1935. I read frou.-. thb second page
of this letter [reading from "Exhibit No. 1690"] :
It is my guess that there will be much utility refunding within the next sis
months. At the moment Pacific Gas & Electric Company is working actively on
the refunding of its $40,000,000 5%% bonds due 1952, The Tilcpboue Com-
pany has been giving serious consideration to refunding its Illinois Bell Tele-
phone and Southwest Bell Telephone i.ssues, but has decided for the time being
to do nothing because of political fears. Confidentially, Gi-orge Whitney told
the company that it might be possible to sell these issues ou a 3% basis, less
2Y2 points to the bankers. Whitney feels that the company should proceed on a
refunding operation and is endeavoring to obtain reassurances from Washington
which will be satisfactory to the management.
I offer in evidence, Mr. Chairman, the letter just identified and
from which I have read.
(The letter referred to was marked "Exhibit No. 1690" and is in-
cluded in the appendix on p. 12237.)
Mr, Nehemkis. Now, Mr. Whitney, do you recall, during this
period, ha\'ing any conversations with Mr. Charles E. Mitchell con-
cerning prospective Telephone financing?
Mr. Whitney. I have already safd I did.
Mr. Nehemkis. Mr. Chairman, I would like you to examine a
stipulation signed by Mr. Mitchell, dated December 14, 1939, in con-
nection with certain letters which I shall have occasion to offer in
evidence.
Senator King. Is it your purpose to offer these letters without
further corroboration of their authenticity ?
Mr. Nehemkis. That is what I requested Mr. Mitchell to do when
he signed that stipulation, so it would not be necessary to bring him
124491—40 — pt. 23 9
11930 CONCENTRATION OF ECONOMIC POWER
back. He had been a witness before the committee earlier last
week.
Mr. Whitnet. Of course, the record shows that first letter from
Gordon has nothing Whatever to do with us.
Has that been identified?
The Chairman. It was identified by one of the staff of the S. E. C.
Mr. Wehtney. It has nothing to do with us, of course.
The Chairman. Is it your purpose to offer these various letters
and memoranda which Mr. INIitchell, by his stipulation, indicates
he would identify if he were present?
Mr. Nehemkis. Correct, sir.
The CiiAii^MAN. Unless there is objection, they may be admitted as
they are presented.
iSenator King. Excuse me. Why didn't you offer the letters when
Mitchell was on the stand, if they are material?
Mr. Nehemkis. They were not material in connection with Mr.
Mitchell's testimony. Thej^ are now, with this witness' testimony,
and I wanted the record to have the letters at this time, rather than
in another place, that was all.
The Chairman. You did not offer this stipulation. Perhaps you
had better do that.
Mr. Nehemkis. Shall I? I offer, Mr. Chairman, Mr. Mitchell's
stipulation.
The Chairman, It may appear in the record.
(The stipulation referred to was marked "Exhibit No. 1691" and
is included in the appendix on p. 12238.)
]\Ir. Nehemkis. I now read from a memorandum by Charles E.
Mitchell, dated June 27, 1935, addressed to three of his associates,
Messrs. G. Leib, E. Bashore, and S. Hawes [reading from "Exhibit
No. 1692"] :
In Ji general
The Chairman (interposing). This is one of the memoranda men-
tioned in the stipulation?
Mr. Nehemkis. It is. I shall try and remember in each instance
to specify they are covered by the stipulation.
In a general discussion yesterday with Mr. George Whitney of J. P. Morgan
& Company, the subject of A. T. T. financing was brought up. Mr. Whitney
said that Mr. Walter Gifford was being pestered by proposals and calls from
investment banking houses and that he was doing nothing about any of them
other than to give full reports to Mr. Whitney.
Mr. Whitney intimated that J. P. Morgan & Co. would have very complete
domination in the matter of funding plans and the selection of bankers to
do the business, and suggested that aside from writing Mr. Gifford a personal
note, he felt it would be not only a waste of time but unwise to press financing
ideas upon him, and that when the time came for financing I need have no
fear that we would lose out by this procedure. I have written Mr. Gifford
as he suggested.
Initialed C. E. M.
Mr. Chairman, I offer this memorandum, covered by Mr. Mitchell's
stipulation, in evidence.
The Chairman. This is the memorandum dated June 27, 1935. It
may be received.
(The memorandum referred to was marked "Exhibit No. 1692" and
appears in full in the text.)
CONCENTRATION OF ECONOMIC POWER 11931
Senator King. Of course, your contention is it would not bind Mr.
Wliitney or anybody else. It is Mr. Mitchell's.
Mr. Nehemkis. I have not made any allegations or characteriza-
tions at all. I merely present the facts to you for your evaluation.
Mr. Mitchell wrote to Walter S. Gifford, president^ American Tele-
phone & Telegraph Co., as follows [reading from exhibit No. 1693] :
As you doubtless have read, I am back in the investment banking business, my
connection being that of Chairman of the Board of Blyth & Company.
Senator King. Chairman of what ?
Mr. Nehemkis. Of the board of Blyth & Co. That is Mr. Mitchell's
firm.
I would be inclined to chat with you about your financing but I have no doubt
that you are being pestered from all quarters, and believing that whether the
banking house that has handled your financing in the past is in the investment
banking business or not, you will undoubtedly be guided by their views, I am
not going to count myself in among the pesterers. I merely remind you that I
am again active and if at any time I can be of service in any way, I shall be
delighted.
Mr. Chairman, I offer in evidence the letter of Mr. Mitchell, dated
June 27, 1935, covered by the stipulation.
The Chairman. It will be received.
(The letter referred to was marked "Exhibit No. 1693" and is
included in the appendix on p. 12238.)
Mr. Nehemkis. I have here, Mr. Chairman, a letter from Mr. C. A.
Capek, C-a-p-e-k, assistant treasurer of Lee Higginson Corporation,
dated December 11, 1939, addressed to the committee's counsel. I read
to you from that letter [reading from "Exhibit No. 1694"] :
At the request of Mr. W. S. Whitehead^ through Mr. N. P. Hallowell in our
New York office, we are enclosing a copy of a letter dated April 4, 1935, written
by Mr. Hallowell to Mr. Charles H. Schweppe in Chicago.
I now read to you from the letter transmitted as described.
Senator King. Who were those persons referred to by you just now?
Mr.,NEHEMKis. These are all parties associated with the investment
banking house known as Lee Higginson Corporation, with offices in
New York and Chicago, and elsewhere, and the letter is as follows
[reading from Exhibit No. 1695] :
I had a very interesting luncheon yesterday with Walter Gifford of the
Telephone Company. They are considering registering a $50,000,000 issue of
Southwestern Bell Telepbone Co. The bonds outstanding were offered in 1924
by J. P. M. & Co., K. L. & Co., Kidder, Peabody & Co., First National Bank,
Bankers Trust Co., Harris Forbes, National City Co., Guaranty Co. and L. H. &
Co. These bonds are callable at 105 whereas most of the telephone Issues are
callable at 110.
He said-
Referring to IMr. Gifford —
they were tied up to no one and they had not discussed how to take up
the matter of selling. He said that a great many houses on the street have
been to him for telephone refunding and that he realized there was quite a
problem ahead of them to do the thing right so as not to stir up enmity among
the various houses on the street. I said "Why not use those members of the
old telephone group who are still in the business as a starter, and invite in
others who are the leading distributors?" He said that very possibly that
might be a good way to do it. He told me that J. P. M. & Co. would not
be the guiding hand as to who was to come in. I told him that if he wanted
to sell us $50,000,000 Southwestern Bell Telephone 3y2S at 100 less 2y2%
commission we would take them. That led to the question which I was hoping
11932 CONCENTRATION OF ECONOMIC POWER
he would ask of the set-up of our corporation and aur capabilities for doing
business and Rave me the chance to tell him the amount of business we have
been in duniig 1934. He said it has been suggesi ed that they sell this i50,000,0*'X)
issue to one or two insurance companies but he did not think that that was
a very good idea b\it even if they did that they would want to register tLie
bonds as he ?culd have nothing to do with private sales. I toic; him that
if he did have <:hem registered we could sell them t© insurance companies as
well as anybody else but he said In case they did the Company would do it
direct, but there again that probably was not the best thing for the Company
to do.
He understands our position in the old telephone group and I am sure
would not object, in fact, I think he would be glad, to have us in any group
doing telepho- e financing in the future but he reiterated that they had not
discussed any group and that they were beholden to no one. Re told me
to call him iro ^;)7,ardP the end of i:he month and perhaps he co ild tell me
more. He was very friendly and I feel free to go to him at any rime and I
certainly will not leave it until the end of the month before seeing him again.
I want yc;u to note, if yuu will, Mr. Chairman and members of
the committee, this last paragraph [reading further] :
In spite of his saying that Morgan would not wield the guiding hand
he said of course he would talk everything over with George Wli'tiiey and it
might be a good idea for me to talk to George Whitney also, which I v.-ill do
next week on his return. So far so good. If you can offer any suggestions
which would help me in making more sure of our position, please let me
know.
Mr. Chairman, I offer in evidence the letters which I have just
read to you.
The Chaikman. They may be received.
(The letters were marked "Exhibits Nos. 1694 and 1695 ' and are
included in che appendix on p. 12239.)
Senator Kiivg. I have gathered, during the short time that I have
been here this afternoon — and I apologize that I iiave not oeen here
before — I was west and didn't return to Washmgton until a few
minutes ago — that an issue vras to be made by the Telephone Com-
pany of a considerable sum for the purpose of refunding, if not
for original issue, and the talk to which you have referred and the
letter to which you have referred, dealt with the possibility or the
probability or certain organizations, certain investment banking
companies and corporations, taking these various issues?
Mr. Nehemkxs. Yes.
Senator King. Well, is it your contention that that was a violation
of any law if issues were divided among a large number >f people
where millions and hundreds of millions were involved ?
Mr. Nehemkis. It's not my function, Senator King, to make alle-
gations of that sort, I present to you facts, and you evaluate them.
Senator King. I think I understand you, Mr. Xehemkis.
Mr. Nehej»,ikis. Just so that we may review the matter to date,
review the sequence of events together, Mr. Whitney, I understand you
to testify iiuit at this time, J. P. Morgan & Co. had elected to remain
a bank of deposit; right?
Mr. Whitney. At what time are you talking about ?
Mr. Nehemkis. 1933-35, the period of time now under liscussion
Mr. Whitney. Just in the interest of accuracy, we did not make that
election until June 1934; in '35, obviously we had made the election
Mr. Nehemkis. And J. P. Morgan & Co. at this time was no longer
in the securities business?
Mr. Whitney. No.
CONCENTRATION OF ECONOMIC POWER 11933
Mr. Nehejnikis. That is correct'?
Mr. Whitney. Certainly.
Mr. Nehemkts. At that time, Mr. Wiiitney, were you a inembor of
the board of directors of the A. T. & T. Co. ?
Mr. Whitney. jSTo. I 7iever have been.
Mr. NEirE:\LKis. But Mr. Gilford frit constrained to make reports to
yon about all discussions that he v.as having witli other members of
the investment banking community^ according to Mr. Mitchell?
"Mr. Whitney. My ^inderstanding, Mr. Chairman, is that Mr.
Nehenikis wants me to take up these exhibits ar-d discuss them, bat
I can't discuss ariything about Mr. Gilford quoted by other people.
I can comment on all these, and I hope I -will have the opportunity
(o do so as far as they •aif'^ct me, but 1 can't ans^ver the question.
The Chairman. Yoa are at liberty to make any conimenl you
care to.
Mr. Whitney. The question counsel asks vvouid be impossible for
me to answer of mj own knowledge. He asked me if Mr. Gilfor 1 1 ;it
free to call upon me.
Mr. Nehemkts. I was referring to a memorandum ^ which I xul
Tiow refer directly to the witness, in which Mr. Charles E. Miixii.ll,
whom we had the pleasure of hearing recently, reported to his asso-
ciate Mr. Bashore on Jmie 27, li)35, that he had a conference with
Mr. Wiiitney ar^d that Mr. Whitney and he had discussed Telephi.r,-
matters. I think it is perfectly proper under ti-e circumstances for
me to ask the witiiess wlie^-her he iias any knowledge about a i:on Ter-
ence of that sort.
The Chairman. Well, that question has not been raised. Of couise,
there would be no obiGction to 3'our asking the nuestion, and tne wit-
ness has already indicated his desire to make comment upon these
matters, and, of couise, the committee will be very glad to ^stend
him that oppoi-tuiuty
Mr. Whitney. W^ell, that last question is a very simple one to
answeu, if there were a question in that statement, because, of course,
I did, as I testified earlier, have a talk with Mr. G. E. Mitchell about
Telephone financing. H' tvas one of the three men I mentioned w iLh
whom I had talked. 'The fact is also true that I had several talks
during '35 with Mr. Gifford about his financing Bians.
I would like, if I may, to recall to the committee the fact tn-ii I
have testified several times in the last 2 days that my firm had oeen
employed in tiie past vvith others by Mr. GiliOj-d to do a ceitajn
mechanical part of the financing and resetting of the Teiephons pic-
ture. My firm, and partly myself — perhaps' largely myselt as --in.
individual — had been advising the Telephone Gcmpany on financial
matters since 1920 anyw.p.y, and probably befoK. t-Mt, and whi'.e wt
were out of the security business from June 1934 there was notiiing
implied or anything else in the law that wo cou.d not conti^me to
serve our clients, and vve have tried to do 30 ever since and will
continue to do so in a way that is entirely proper.
Mr. Gilford came to me because he wanted to get advice on hir.
financial program. It is a matter of almost common knowledge that
the passage of the Banking Act in 1934 necessarily threw out oi gear
1 "Exhibit No. 1692 "
11934 CONCENTRATION OF ECONOMIC POWER
the existing machinery of investment banking. We were only one of
many whom that affected, as has been testified here.
Mr. Gifford certainly came to us and asked our advice, and I
certainly gave him all the advice and the best advice that I could
possibly do. This second paragraph of this memorandum,^ as the
Senator pointed out, says or intimates certain things. Well, I just
think, if I may be so bold as to say this, it is just nonsense. I could
not have ever intimated that I could dominate or ever wanted to
dominate Mr. Gifford, and anybody who had ever seen him would
know this statement was ridiculous; at best, it only says intimated,
that I intimated, whatever that means.
Now, you have read other letters, from Mr. Hallowell,^ and you
have read a letter — well, that is the only other one, I guess, which
says that Mr. Gifford was talking to me, but Mr, Gifford's own
exposition of his attitude toward the problem, it seems to me, is the
most accurate one. Nobody dominated him — which I have been try-
ing to say all morning and Friday. He was talking to various peo-
ple, had given consideration to many plans, and as a matter of fact.
Senator, there was no immediate contemplation of any financing.
That was merely one of many things that he did consider, and it
wasn't that particular issue that was the first one after this interval.
There wasn't any other issue, if my memory is correct, until 6 months
after all these conferences.
But I can't — Mr. Mitchell brought an inference from me, but I
would like to take this opportunity to just say that when he claimed
that I claimed or intimated or anything else, that I had complete
domination, it just is silly.
Senator King. That is, it isn't true ?
Mr. Whitney. It isn't true.
Mr. Nehemkis. Mr. Chairman, unless it is the pleasure of the com-
mittee to direct any further questions to Mr. Whitney, he may be
dismissed. I desire to call another witness. *
The Chairman. Well, now, have you finished
Mr. Nehejmkis (interposing). I nave finished with Mr. Whitney
now.
The Chairman. You are not going to recall him ?
Mr. Whitney. Oh, I think so.
May I read just one very short statement, because I should like to
do it to make it perfectly clear ? This came up in the very beginning.
Just to clarify things, I should like to read this statement issued by
J. P. Morgan & Co. made on June 7, 1934. It is as follows [reading] :
In order to comply with existing banking laws, both state and federal, we have,
under Article IV of the New York State Banking Law, made application to
Joseph A. Broderick, State Superintendent of Banks, to continue as private bank-
ers. The Superintendent has made an examination of our affairs as of June 1,
19S4, and in the event that he approves the application, we shall, in accordance
with the law, be prepared to publish our statement whenever called for by the
State Superintendent of Banks.
Just SO that the record will be clear as to what we did do.
Senator King. Tliat is, after J. P. Morgan & Co., if it had not been
before, was incorporated, it existed under and by virtue of the laws of
the State of New York?
'Exhibit No. 1692."
'Exhibit No. 1696."
CONCENTRATION OP ECONOMIC POWER 11935
Mr. Whitney. Yes, as required by the banking law of 1935.
Senator King. I see.
Mr. Whitney. Or license.
Senator King. License law, and that license stiU exists?
Mr. Whitney. Yes, sir.
Senator King. And any operations to which reference has been made
since you have been on the stand have been under and by virtue of
the position of the corporation to which you referred?
Mr. Whitney. Yes, sir.
Senator King. After the last
Mr. Whitney (interi^osing). We have been rendering a service to
our clients which is in no sense investment banking service. It is in
full compliance with the Federal laws and the State laws.
The Chairman. Thank you, Mr. Whitney. The committee is very
grateful for your very ready responses to the many questions which
ave been asked.
Call your next witness, Mr. Nehemkis.
Mr. Nehemkis. Mr. Harold Stuart, take the witness stand, please.
TESTIMONY OF HAEOLD L. STUAKT, PRESIDENT, HALSEY, STUART
& CO., INC., CHICAGO, ILL.
The Chairman. Do you solemnly swear that the testimony which
you are about to give in this proceedi^ig will be the truth, the whole
truth, and nothing but the truth, so help you God ?
Mr. Stuart. I do.
The Chairman. Please be seated, Mr. Stuart.
request by HALSEY, STUART & CO., INC., TO BID ON ILLINOIS BELL
TELEPHONE CO. BONDS
Mr. Nehemkis. Mr. Stuart, will you state your name and address,
please ?
Mr. Stuart. Harold Leonard Stuart, 999 Lake Shore Drive,
Chicago.
Mr. Nehemkis. And you are associated with the investment bank-
ing firm of Halsey, Stuart & Co. ?
Mr. Stuart. I am the president of Halsey, Stuart & Co.
Mr. Nehemkis. Mr. Stuart, will you tell me about how large your
distributing organization is at the present time, what your facilities
are for distributing securities throughout the country?
Mr. Stuart. Well, we have a great many salesmen. I can't give
you the amount oflFhand.
Mr. Nehemkis. Well, just indicate the size.
Mr. Stuart. Oh, I should say we have upward of a hundred.
Mr. Nehemkis. Upward of a hundred?
Mr. Stuart. Yes.
Senator King. May I ask a question?
Mr. Neuesikis. Surely.
Senatt)r King. Is the corporation organized under the laws of
Illinois?
Mr. Stuart. It is, and its main office is in Chicago.
Senator King. It has branches in various other parts of the United
States, or representatives, rather?
Mr. Stuart. Yes, and branch office
11936 CONCENTRATION OF ECONOMIC POWER
Senator King. That is since it became a corporation. When did it
become a corporation ?
Mr. Stuart. In 1911.
Senator King. And it existed since that time without modification
of its charter?
Mr. Stuart. The name was changed to Halsey, Stuart & Co. in
1916.
Senator King. All right.
Mr. Nehemkis. In about the year 1935 or 1934, were the distribut-
ing facilities of your firm less than they are at present?
Mr. Stuart. They were fully as big as now.
Mr. Nehemkis. Fully as big. Without giving me any precise fig-
ures, but just responding, if j^ou will, to my question ger;(ually, would
it be fair to say that the capital position of your ho::: e compares
favorablv to that of any other investment banking h )use in the
United States?
Mr. Stuart. I wouldn't have a direct knowledge of nit, but that
is my impression.
Mr. Nehemkis, Would that also have been true on t about the
years 1934, 1935?
Mr. Stuart. I believe so.
Mr. Nehemkis. Is it a correct assumption on my part, Mr. Stuari.
that outside of the city of New York, your firm is one of the largest
houses?
Mr. Stuart. I think so; yes.
Mr. Nehemkis. And that your general securities business compares
favorably to most houses in the city of New York ?
Mr. Stuart. I think that is a fair statement.
Mr. Nehemkis. Now, during — have you been in the room this after-
noon?
Mr. Stuart. I have.
Mr. Nehemkis. As a matter of fact, you have been here for several
days, haven't you?
Mr. Stuart. I have been here since last Tuesday.
Mr. Nehemkis. You heard the testimony of the previous witness?
Mr. Stuart. Yes; I did; most of it.
Mr. Nehemkis. So you are familiar with the time sequence that
we are now discussing, the period 1934-35?
Mr. Stuart. I think I am ; yes, sir.
Mr. Nehemius. At about that time, Mr. Stuart, were you interested
in Telephone financing?
Mr. Stuart. I tried to be interested in Telephone financing.
Mr. Nehemkis. In what way did you try to get interested in Tele-
phone financing?
Mr. Stuart. In the summer of 1935. I understood that the Illinois
Bell Telephone Co. were going to refund their bonds — were talking
of it — and I sought an o])portunity to bid on those bonds.
Mr Nehemkis. Wliom did you see? You say you sought an
opportunity ?
Mr. Stuarv. T sought an opportunity from Mr. GifTord.
Mr. Nehemkis. The president of the Telephone Company?
Mr. Stuart. The president of the American Telephone & Tele-
graph Co.
CONCENTRAT'ION OF ECONOMIC POWER 11937
Mr. Nehemkis, In other words, you came on from Chicago to New
York presumably and arranged an appointment and saw Mr. Gifford ?
Mr. Stuart. I did.
Mr. Nehemkis. Can you recall at this time the general nature of
your discussion with Mr. Gifford?
Mr. Stuart. Yes; I can. I was particular to be introduced to
Mr. Gifford, whom I didn't know, so that he would feel that he was
talking to someone of responsibility, and I told him that I was there
for the purpose of seeking an opportunity to bid on the Illinois Bell
Telephone bonds if, as, and when refunded. He was very pleasant
and very brief; he told me that all his affairs were in the hands of
Morgan Stanley & Co. and if I wanted to participate in any bond
issues, it could only be through them.
Mr. Nehemkis. No further questions, Mr. Chairman.
Senator King. How large were the bond issues that you were
interested in?
Mr. Stuart. Forty-five or fifty million.
Senator King. For the one company?
Mr. Stuart. Of that company ; yes, sir.
Senator King. Did you seek an opportunity to bid on the bonds,
other than that which you have just related?
Mr. Stuart. That was as far as I could go.
Senator King. You didn't see anybody else?
Mr. Stuart. No.
Senator King. Did you attempt to buy any of the bonds after they
had been floated?
Mr. Stuart. I think we had a small participation in the selling
group.
Mr. Miller. Wliat was the siz;e of the participation, Mr. Stuart?
Small?
Mr. Stuart. Well, I would have to guess at it. I would say $350,000
to $500,000, which would be small for us.
Mr. Miller. That was in the selling syndicate?
Mr. Stuart. That was in the selling syndicate; yes, sir.
Mr. Miller. Did you speak to Morgan Stanley after Mr. Gifford
suggested it? . .
Mr. Stuart. My recollection is that I asked Mr. Gifford if he would
care to, when he refused to give me a chance to bid, that I asked him
if he would feel like oflScially requesting Morgan Stanley & Co. to
allot a very substantial amoimt of that issue to the Chicago dealers,
including my own firm, and he said "no" ; that he would not make any
such request, but that he would mention the matter to Mr. Stanley,
and he advised me to telephone Mr. Stanley.
Mr. Miller. But you didn't do so ?
Mr. Stuart. I went back to Chicago and thought it over, and then
telephoned Mr. Stanley, not for the purpose of asking him for a posi-
tion in the underwriting, but really to check up to see whether Mr.
Gifford had telephoned Mr. Stanley. Mr. Stanley said Mr. Gifford
had spoken to him about it.
Mr. Miller. And you said nothing further then ? You said nothing
further to Mr. Stanley?
Mr. Stuart. No, sir ; that was all.
The Chairman. How long have you been engaged in the investment
banking business?
11938 CONCENTRATION OF ECONOMIC POWER
Mr. Stuart. Well, I am 58 years old, and I have been in it since
I wns 13.
Mr. Henderson. Did you have much capital at that time ?
Mr. Stuart. I didn't have a dime.
Senator King. Has it been profitable ? It has been profitable, hasn't
it?
Mr. Stuart. On the whole, yes ; I think it has.
The Chairman. And are you familiar with this method of financing
referred to by one of the witnesses as a "frozen" system?
Mr. Stuart. I have learned more in the last week than I ever
dreamed about the manner in which these syndicates in the East are
handled. I have always lived in Chicago and have done business in
Chicago.
The Chairman. Well, do they have any "frozen" accounts out
there?
Mr. Stuart. I have never been a party to one.
Mr. Nehemkis. That was not the question.
The Chairman. Well, do they have them?
Mr. Stuart. I say, they may have them, but I have never been a
party to them.
The Chairman. Well, do you know of them?
Mr. Stuart. I do not, but that doesn't mean that one doesn't exist.
The Chairman. Yes; then what has been the type of financing in
which you have been engaged, if it has not been the frozen type?
Mr. Stuart. All types of financing but
The Chairman (interposing). I mean with respect to this particu-
lar issue of the frozen account as against one that is not frozen.
Mr. Stuart. Well, my experience in general is that when every
deal comes up, it is considered on its own basis at the time.
The Chairman. Well, by that do you mean that an issuer does
not ordinarily go to one banker and say, Will you handle this ac-
count for me, or tliat he always offers it to a group of bankers, to
get competitive bids, as it were?
Mr. Stuart. Well, since, I think before the passage of the Securi-
ties Act in 1933, it was the general custom for a corporation to pick
out an investment banker that they wanted to take charge of their
business and do it with them, but since that — since the passage of the
act, why, it has been anybody's business.
The Chairman. Well, was that the custom in Chicago prior to the
passage of the act?
Mr. Stuart. Yes; I think that was the custom generally prior to
the passage of the act, yes, sir.
The Chairman. Then j^ou have had experience of that kind, in
Halsey, Stuart?
Mr. Stuart. Oh, indeed, we have had experience, but you asked a
while ago, as I understood it, about whether such accounts were
frozen, and we were always sure of a certain percent of something,
and I had to say no, we were not.
The Chairman. Well, I am trying to get a thorough picture of just
how you understand this business to have been handled.
Mr. MiiXER. Mr. Chairman, may I ask a question?
The Chairman. Go ahead.
Mr. Miller. Mr. Stuart, have you no accounts of corporations that
you handled over jieriods of years, or have you always done financing,
at least headed up groups, that did their financing?
CONCENTRATION OF ECONOMIC POWER 11939
Mr. Stuart. Yes ; we have such, or we had, until the passaj^e of the
Securities Act, but since then, it has been very much scattered. The
business that we used to have we don't have now.
Mr. Miller. Have you done no financing since the passajje of the
Securities Act for an}^ of these corporations that you previously had?
Mr. Stuart. Yes, we have done some.
Mr. Miller. Wliich ones, Mr. Stuart?
Mr. Stttart. Well, now, let me give you — you take the Middle
West Utilities Co.: Prior to the passage of the Securities Act, we
did a great deal of it; we were head of the financing, the bond financ-
ing. All we handled were bonds, of many of the companies. But
since that time, I should say, of a dozen different issues that we
formerly were the head of, we have not been the head of now but
have had some participation in them.
Mr. Miller. Well, I asked you if there were any that you had done
the financing for since, that you had always done before?
Mr. Stuart. That we did before?
Mr. Miller. Yes.
Mr. Stuart. Yes.
Mr. Miller. And I asked you if you would tell me a few of the
accounts.
Mr. Stuart. Well, take the Commonwealth Edison Co., People's
Gas Co., Central Illinois Public Service Co., Northern Indiana Pub-
lic Service Co., Public Service of Indiana.
Mr. Miller. The accounts, then, have carried over since the pas-
sage of the Banking Act, and you still are doing the financing and
heading up the groups?
Mr. Stuart. Quite right.
Mr. Miller. Are any of those — have you still associated with you
some of the previous syndicate members who were associated in the
beginning bef oi-e the passage of the Security Act ?
Mr. Stuart. Well, some, yes, sir, but tliey are very largely new
names, very largely new people.
Mr. Mili^er. Wliy is that, because of changes in houses?
Mr. Stuart. Changes in business, houses going out of business,
consolidations, disappearance of bank affiliates.
Senator King. Then there has been mortality among the invest-
ment bankers as well as those engaged in commercial banking?
Mr. Stuart. Yes, sir.
Senator King. You know, in the West, the name Halsey, Stuart &
Co. is very familiar to us. You have done a good deal of business in
the West, have you not?
Mr. Stuart. Yes, sir.
Senator King. In the mountain region?
Mr. Stuart. Yes, we have done quite a good deal.
Senator King. You had competition, I suppose, but still you under-
wrote a good many of the bonds, didn't you ?
Mr. Stuart. Yes, sir.
Senator King. And sold a great many issues?
Mr. Stuart. Yes, sir.
Senator King. You had no competition from the banking houses
in New York, did you, the investment-company houses in New York?
124491 — 40— pt. 23 —8
11940 CX)NCENTRATION OF ECONOMIC POWER
Mr. Stuart. Well, if there is any business that we have got in
Chicago that the New York investment houses haven't tried to get
since the passage of the Securities Act, then I don't know what it is.
Senator King. Well, it is a wholesome thing if there is competi-
tion, isn't there?
Mr. Stuart. Oh, I agree to it.
Senator King. But, I say, in the West, and I am particularly re-
ferring to the western coast and to the intermountain region, you
have done a large amount of business there, and you haven't had very
much competition from the investment houses of New York, have
you
Mr. Stuart. Weli, we haven't done so very much out in the west
coast region. Our business has been done mostly in the Central West.
Senator King. And when you built up a reputation for integrity,
as I assume you did, and I am very happy to confirm that assump-
tion
Mr. Stuart (interposing). Thank you, sir.
Senator King. Then you attem-pted, of course, to hold your clien-
tele, did you not?
Mr. Stuart. We tried to give them our best service ; yes, sir.
Senator King. And would you take over their bond issue, the en-
tire bond issue, if you could?
Mr. Stuart. Yes, sir.
Senator King. Without dividing it with A. B, and C, if you could ?
Mr. Stuart. If I could get it all, we'd do it.
Senator King. Exactly. And that has usually been the case of the
investment companies, hasn't it?
Mr. Stuart. I think it has. That is what we are in business for.
Senator King. And the largest investment companies, of course,
have been established, and, having established themselves and ob-
tained their clientele, had some little advantage, the same as you had
a little advantage, over the smaller investment companies; that is,
not investment companies, but patrons who desired credit, and spe-
cially those that were new corporations, new sources, new organiza-
tions that desired capital?
Mr. Stuart. No ; I wouldn't say that is so. I would say that there
are a good many organizations that have been formed since the pas-
sage oi the Banking Act that do get the business of former concerns
who were not in the business then.
Senator King. Well, isn't it a fact it is the same \^ith investment
companies as it is with lawyers; if a lawyer has established himself
as in the confidence of a large clientele, when a corporation or an
individual gets into trouble, who have been the clients of this lawyer,
they go to him rather than to some other lawyer who might be just
as good, or perhaps even better?
Mr. Stuart. I should think that was natural ; yes, sir.
Senator King. And the fact that very large bond issues, as a rule,
seek large investment companies — that is, investment companies of
integrity and prestige and capital guch as yours, Morgan, and others,
I am not sure of the names — seek them for the floating of their bonds
or the sale of their securities?
Mr. Stuart. I think that is generally true; yes, sir.
CONCENTRATION OF ECONOMIC POWER 11941
Senator King. Now, there is no inhibicion or no prohibition
against an individual or a corporation seeking capital, going to any
person where they could get the best results?
Mr. Stuakt. I don't think there is, but some of my competitors
don't agree with that. I think that Halsey, Stuart's policy is that
they will bid on any bonds that they want to buy, where invited to
do so by the responsible official of the corporation, regardless of who
has been the banker before, and we are constantly seeking such con-
tacts or opportunities.
Senator King. But 3'ou have a chance to bid on any issue that is
made by a corporation?
Mr. Stuart. Well, we didn't have a chance on the Illinois Bell
Telephone Co.
Senator King. ^\Vliy?
Mr. Stuart. I can't answer.
Senator King. Why didn't you go to the corporation and ascer-
tain ?
Mr. Stuart. Why, we thought that Mr. Gifford was the man to see.
Perhaps I made a mistake there; perhaps I should have gone to som»e-
one else.
Senator King. Well, did he tell you to go to anybody else?
Mr. Stuart. He did not; no, sir.
Senator King. Well, why didn't you go to somebody elso?
Mr. Stuart. Well, again, I repeat that I thought he was the man
to see.
Senator King. Did you tell him that you would bid more than any-
body else?
Mr. Stuart. I didn't get that far.
Senator King. You didn't get that .far ? Well, if you were very
earnest to obtain the business, why didn't you make hira an offer?
Mr. Stuart. Well, I don't think we would want to do that. I
don't think wq would want to make an offer unless we were invited
to do it.
The Chairman. Mr. Stuart, if I understood you correctly, you said
that you had learned more about the manner in which the investment
banking business is conducted in the East during the few days you
have been attending this committee hen ring than you had known
before; Did I understand you correctly?
Mr. Stuart. You did, sir.
Tlie Chairman. Would you mind telling us what is the outstand-
ing fact that you have learned about this business?
Mr. Stuart. Well, briefly, it amused me very much to find out that
the boys all divide up something they don't own. [Laughter.]
The Chairman. Anything else?
Mr. Stuart. I think that covers a lot, Senator,
The Chairman. Very well. Thank you very much, Mr. Stuart.
Mr. Nehemkis. I call Mr. Albert H. Gordon,
The Chairman. Do you solermily swear that the testimony you are
about to give in this proceeding will be the truth, the whole truth, and
nothing but the truth, so help you God ?
Mr. Gordon, I do.
11942 CONCENTRATION OF ECONOMIC POWER
TESTIMOirr OF ALBERT H. GORDON, KIDDER, PEABODY & CO.,
NEW YORK, N. Y.
The Chairman". Please be seated.
Mr. Gordon. Thank you.
Mr. Nehemkis. Mr. Gordon, will you state your full name and ad-
dress to the reporter, please ?
Mr. Gordon. Albert H. Gordon, New York City.
Mr. Nehemkis. Arc you not a partner of the new firm of Kidder,
Peabody«&Co.?
Mr. Gordon. Yes, sir.
Mr, Nehemkis. How long have you been a member of that firm?
Mr. Gordon. I became a partner in March 1931.
KNOWIiEDGE BY THE REORGANIZED KIDDER, FEABODT & CO. OF "lIBRART
^ agreement" OF 192
Mr. Nehemkis. Were you present today during the earlier testi-
mony, Mr. Gordon ?
Mr. Gordon. I have been here during all the time today and on
Friday.
Mr. Nehemkis. Mr. Gordon, were you familiar with the agreement
of May 5, 1920, in a general way, before you heard the testimony here ?
Mr. Gordon. I was not familiar with the agreement set forth in
the papers until those papers were shown me after they had been taken
from the files of our predecessor firm in Boston. In a general way,
I knew of Kidder, Peabody's position in the Telephone business in the
past, and I knew the specific amounts that Kidder, Peabody & Co.
had underwritten in the past, but as to the agreement, I had no knowl-
edge of it. Before we took over the business of Kidder, Peabody &
Co. in 1931, we made a very thorough study of its background. Obvi-
ously^ in 1931, we were not going to risk our capital unless we made a
study which, to our satisfaction, was thorough. It was obvious to us
that the most important phase of Kidder, Peabody's business had been
the distribution of Telephone securities. Kidder, Peabody had prob-
ably, or has probably, distributed more Telephone securities than any
other concern in the United States.
In spite of the financial difficulties of Kidder, Peabody in 1931, it
seemed to us tliat the name could be rehabilitated because there must
have been a great many satisfied clients who had bought Telephone
securities from Kidder, Peabody & Co. We did not think that there
was any agreement, that Kidder had any proprietary interest or any
agreement for Telephone financing. We did leel, however, that if we
built back the business, that if we could keep our caj)ital intact, which
we put into the })usiness, and if we could build up the distribution, that
we would be approached by whoever led the Telephone business, to
take part in it.
In passing, I would like to comment, if I may, on the term "pro-
prietary." I never heard the term until these papers were shown to
me, when they were taken from our Boston files. I understand that
Mr. Winsor, the senior partner of the old firm, was very adept at
coining phrases, and, therefore, I think that the term "proprietary"
is an invention of his.
CONCENTRATION OF ECONOMIC POWER 11943
The Chairman. Well, you noticed that it went through a large
number of exhibits^
Mr. Gordon. Mr. Chairman, Mr. Winsor was the dominant partner
of Kidder, Peabody from 19 — I can't say the exact date, but from
around 1910 or 1915, until his death. Practically nothing was done
in Kidder, Peabody & Go. without Mr. Winsor's full knowledge and
approval.
The Chairman. The first exhibit^ that I recall was that of, oh,
sometime during 1920. Perhaps my recollection may be a little
vague, but it appeared then, and then again as late as 1924 with the
memo ^ on which there was a notation as late as February 1930,
and in this exhibit of 1924, not only do you have the heading, "Pro-
prietary Interests," but on the attached memo ^ you have this phrase:
"Balance of seven-eighths divided as usual to proprietors." So that
the idea is used in two ways, proprietary and proprietors.
Now, are you testifying that though this apparently appeared on
various memoranda in the files of the old Kidder, Peabody Co., you
never had any knowledge of it at all?
Mr. Gordon. No, sir ; I never had any knowledge of it.
Mr. Nehemkis. Mr. Gordon, did I understand you correctly to say,
in response to my question, that you never had any knowledge of the
agreement of May 5, 1920? Now, before you answer, I want you to
think very carefully.
Mr. Gordon. I had no knowledge of any such agreement. As I
have said, in studying the records, the syndicate records, which were
available to me, T knew that Kidder, Peabody had a certain per-
centage in various issues of the Telephone Co. and of its subsidiaries.
I had no knowledge of any agreement that had been made between
Mr. Winsor and the partners of J. P. Morgan & Co.
INIr. Nehemkis. You did know, did you not, that the old firm of
Kidder, Peabody had operated under some kind of an arrangement
for many years, whereby it had the exclusive distribution of Tele-
phone securities in New England?
Mr. Gordon. Yes; I kneAv that.
Mr. Nehemkis. Now, Mr. Gordon, about the early part of Septem-
ber of the year 19-35, did you have occasion to discuss the matter with
Mr. Harold Stanley of the newly organized firm of Morgan, Stanley
& Co., Incorporated?
Mr. Gordon. If I may do so, I should like to go back to 1931, to
the conversations regarding Telephone business and tell about them.
Mr. Nehemkis. Well, I will give you full opportunity, as every
witness has always had, as you know, since you have been here, but
may I ask if you answer my question as best you can?
Mr. Gordon. May I have that question again?
(The question was read.)
Mr. Gordon. To the best of my knowledge, I did,
Mr. Nehemkis. Now, what was the nature of your discussions with
Mr. Stanley, as you recall them now?
Mr. Gordon. When I learned that Morgan, Stanley had been asked
by the Telephone Company to form a syndicate to underwrite and dis-
tribute the Illinois Bell Telephone bond^, I went to Mr. Stanley to
1 "Exhibits Nos. 1672 and 1674."
»"Eslilbit No. 1680-2."
•"Exhibit No. 1680-1."
11944 CONCENTRATION OB^ ECONOMIC POWER
ascertain what our position would be. I told him of it, reminded him
of the past background of Kidder, Peabody in Telephone securities.
I told him of what we had done to build up our position in distribut-
ing over the period of 1931 to 1935. I told him that because Kidder,
Peabody had distributed so many securities, Telephone securities, that
we felt that we were in an unusually good position to do an effective
job in the prospective is3ue.
Mr. Nehemkis. Did you not also
Mr. Gordon. I used
Mr. Nehemkis. Oh, excuse me. I'm sorry.
Mr. Gordon. The matter was of very great importance to us, ob-
viously. I used evGry argument at my command to get as large a
position as possible for my firm.
Mr. Nehemkis. Did you not also discuss with Mr. Stanley at this
time whether or not 3'our firm would have, as it did in the old days,
the exclusive distribution of Telephone securities throughout New
England ?
Mr. Gordon. No, sir; and I wished to go back to 1931 in order to
explain that.
Mr. Nehemkis. I will give you a full opportunity to do that, Mr.
Gordon.
Mr. Gordon. But by that tim.e we knew that there was not the
slightest chance of our wholesaling securities in New England and, to
the best of my knowledge, that subject w^as not mentioned. It is dif-
ficult to remember exactly what took place 4 years ago.
Mr. Nehemkis. Now, you said, if I understood you correctly, that
you knew by that time that you would not have any chance to get the
New England distribution. Just how did you know that fact?
Mr. Gordon. If I may, Mr. Chairman, I would like to go back, as I
said before
Senator King. You can go back.
Mr. Gordon. It is very difficult for me to put back pieces. I can do
it as a whole. I h ; . e never been a witness in this kind of thing before,
and it makes it very difficult for me to answer the question as perhaps
you wi^h.
(Senator King assumed the chair.)
Acting Chairman King. It might be wise not to state conclusions on
hearsay testimony. If you have primary testimony
Mr. Gordon (interposing). Yes, sir; thank you.
Before we took over the business, we investigated the background.
It was obvious, as I said, that one of the main reasons for our being
interested was the performance of Kidder, Peabody in Telephone
securities. We negotiated the purchase of the goodwill of the business
from the old partners, represented by a revolving credit which was
headed by J. P. Morgan & Co. Most of our conversations for purchas-
ing goodwill of the business took place Avith Mr. George Whitney.
Mr. Whitney told us that "if any Telephone financing came in tfte
future to J. P. Morgan & Co. there would have to be a change in the
status of Kidder, Peabody & Co. in the account; that wholesaling by
two different concerns of an issue w\as not sound, control should be
imified, and that Ave would just have to reconcile ourselves to the
change — not reconcile ourselves, but take into account that there
would be such a change.
CONCENTRATION OF ECONOMIC POWER 11945
He told us that our position would depend on circumstances pre-
vailing at the time of a future issue, and would be decided on
Mr. Nehemkis (interposing). May I interrupt you just a moment,
Mr. Gordon. What was the time of this conversation with Mr.
Whitney ?
Mr. Gordon. This conversation took place, roughly, in January,
either January, February, or March, of 1931.
Mr. Nehemkis. Will you proceed, Mr. Gordon.
Mr. Gordon. Then that answers the question of when we learned
that Kidder, Peabody & Co. would not have the rif^ht to wholesale
Telephone securities in New England — that is, Kidder, Peabody &
Co., as a new firm, would not have the right if we organized it. When
we talked to Harold Stanley in 1935, Harold Stanley said Morgan,
Stanley was a new firm; Kidder, Peabody was a new firm, and the
situation would have to be — the circumstances would have to be de-
cided.
Acting Chairman King. Well, Kidder, Peabody was not a new firm,
was it ?
Mr. Gordon. Yes, sir.
REORGANIZATION OF KIDDER, PEABODY & CO. IN 1931
Acting Chairman King. T understood you to say that it was a new
firm and you used the word, "we" several times. "We took it over."
You mean reorganized it ?
Mr. Gordon. Yes, sir ; reorganized it. The old firm of Kidder, Pea-
body changed its name to the Devonshire Corporation, and we pur-
chased the goodwill and continuing nature of the business, and went
on with the name of Kidder, Peabody & Co.
Acting Chairman King. Did you purchase anything besides the
goodwill ?
Mr. Gordon. No, sir, but we purchased certain assets.
Acting Chairman King. D^'d you have any capital?
Mr. Gordon. Yes, sir; v.e start i business with a capital of $5,300,-
000. We purchased certain assets of a going nature, accoimts receiv-
able, securities, with readily marketable value.
Acting Chairman King. What was the value of that ?
Mr. Gordon. Sir, I can't tell you from memory. I would think that
we might have, at the time Kidder, Peabody had deposits and we
assumed the deposits. Naturally, there are assets against those de-
posits. I can supply a balance sheet of them
Acting Chairman King. No ; I am not asking for that.
Mr. Gordon. As of that time. Kidder, Peabody at that time had
deposits, I guess, of about six to eight million dollars, which we
assumed.
Acting Chairman King. That is, those are liabilities ?
Mr. Gordon. Those are liabilities; and we were given assets on the
other side.
Acting Chairman King. Equivalent to the liabilities ?
Mr. Gordon. Yes, sir.
Acting Chairman King. So you started out then with practically
$5,000,000?
Mr. Gordon. Yes, sir; capital.
124491— 40— pt. 23^—10
11946 CONCENTRATION OF ECONOMIC POWER
Acting Chairman King. Would you expect a corporation with only
five million — an investment company with only $5,000,000 of capital —
to be as favorably situated in the market to take over the handling of
large i>sues, say, forty, fifty, sixty, or seventy million dollars refund-
ing operations, as a corporation that had a much larger capital?
Mr. Gordon. No, sir.
Acting Chairman King. I understood you to say that it was advan-
tageous to — or rather it would be disadvantageous to have a number
of wholesalers of securities and it would be far better to have one
wholesaler to handle this distribution?
Mr. Gordon. I did not make myself clear.
Acting Chairman King. All right, go on.
Mr. Gordon. It was disadvantageous to have one wholesaler in New
England keeping one set of books, another wholesaler handling the
rest of tlie country and keeping another set of books; a wholesaler
in New York, not being acquainted with the wholesaler in New Eng-
land arid wliat he was doing, could not keep the control that, in an
infi'icate. largo-sized operation, was essential for efficient operation.
IMr. 1Ikn!)ekson. Is that your conclusion, or was that what the
representations made by Mr. Whitney were?
Me. (joRDCN. Sir, v.e had hoped that we would be continued as the
wholesaler in New England, but we all along were realists enough
to realize that the hope was very m.uch of a rainbow.
Mr. HE^;DIR^oN. Well, you didn't answer my question directly.
I ask(!d yon whether that conclusion
Mr. G(iRnoN (interposing). Oh, excuse me!
Mr. T1j:ndfkson. That you gave to Senator King was your own or
AvheHior it was one that was made by Mr. Wliitney in this conversation
you said you had, when you discussed the matter in 1931?
Mr. Gordon. "Wo liad to, it was obvious that we had to recognize
the Iruth of the statu.s.
Acting Chairman King. Don't state a conclusion, just what did he
say? Wo wili determine what the conclusion will be.
Mr. GoiiDON. As I remember, sir, this was 10 years ago — 8 years
ago. lie sjiid
Acti!)!!; Clsairman King (interposing). Now, you are speaking of
Mr. Whitney?
Mr. Gordon. Yes, sir.
Acting Chairman King. And he said this to you about 8 years ago?
Mr. GoifDON. Eight or nine years ago.
Acting Cliairrnau King. Was that before you became interested?
Mr. Gordon. Wlien we were considering becoming interested.
Acting Chairman King. All right, proceed.
Mr. Gordon. That it was wise for the business to have it handled
in one source, the books to be handled in one source, that as tim.e
went on and as the Telephone issues became bigger and bigger, the
fact that Kidder, Peabody & Co. were wholesalers of securities in
New England, was making it less easy for J. P. Morgan & Co. to do
the job that was necessary to be done. I believe that certain of the
Telephone securities that were being wholesaled, supposedly, in New
England, were coming up in other parts of the country, and it made
it difficult for J. P. Morgan to have an orderly marketiiig operation.
Acting Chairman King. May I ask another question? Suppose that
an issue you have, say, of $50,000,000 of New England securities, were
CONCENTRATION OF ECONOMIC POWER 11947
divided $20,000,000 to J. P. Morgan, $30,000,000 to you, and the
balance to Halsey, Stuart & Co., each one having, or fixijig, the price
at which they were to be sold. Would not that be a discouraging
factor or have a discouraging effect upon the market, or would it be
better, not only for the distributor, but for the corporation that was
obtaining the money, to have one sole distributor i I am asking for
information.
Mr. Gordon. It would be to the advantage of the corporation to
have one sole distributor.
Acting Chairman King. That would be the advantage, then, of the
utilities organization to have one distributor, so that there would
be
Mr. Gordon (interposing). That is, one main distributor with rela-
tion to other dealers.
Acting Chairman King. Yes; I understand that.
Mr. Miller. You really mean one manager, don't you?
Mr. Gordon. Yes, one manager; that's what it is.
Mr. Miller, One manager handling all of the sjTidicate books,
making allotments to these dealers throughout the country. He could
handle it better than dividing it up into two managers operating in
nearby areas.
Mr. Gordon. That is correct.
Mr. Nehemkis. Mr. Gordon, I am sorry to say that I am a little bit
confused about this conversation that you described in January or
February or March of 1931 with Mr. Whitney. I would like to retrace
that with you and perhaps you can help me understand that. On or
about January or February or March of 1931 you had some discus-
sions with George Whitney. Who instigated those discussions ?
Mr. Gordon. We instigated them. As I recall it, we instigated the
discussions because at that time, that is, by we, I mean Webster, Hovey,
and myself, who were the original partners of the new firm of Kidder,
Peabody & Co., were negotiating for the purchase of the goodwill
and certain of the assets of the old firm of Kidder, Peabody & Co.
Mr. Nehemkis. Now, what has that got to do with your seeing
George Whitney at that time ?
Mr. Gordon. As I said, Mr. George Whitney — we purchased the
goodwill and the assets of the old partners who were represented by
a revolving credit which had advanced money to the old firm of
Kidder, Peabody & Co. This revolving credit had been headed by
J. P. Morgan & Co.
Mr. Nehemkis. You mean, J. P. Morgan & Co. bailed you out at
that time, is that what you are talking about ?
Mr. Gordon. No, sir ; it did not bail us out. We had no previous
connection with Kidder, Peabody & Co.
Mr. Nehemkis. Oh, they loaned you the money?
Mr. Gordon. No, sir; nobody loaned us any money. Can I make
that — let me
Acting Chairman King (interposing). You had the $5,000,000, you
and your associates ?
Mr. Gordon. Yes, sir. If I may — this is the letter I wrote to Mr.
Nehemkis, and I think it will explain it.
Mr. Nehemkis. Before you start, may the record show at this
point very clearly that Mr. Gordon is introducing a letter> — —
11948 CONCENTRATION OF ECONOMIC POWER
Acting Chairman King (interposing). Wait until we see what it is
wlien he introduces it,
Mr. Nehemkis. He is reading a letter which has not been offered
by counsel.
Acting Chairman King. Well, let's see if it is material. You wrote
a letter to whom ?
Mr. Gordon. This is a letter, sir— I can describe what happened, I
think, but I would like to have — I can do it without reference to this
letter, but I will stand in back of what I say in this letter. Or I can
say it verbatim, if you wish.
Acting Chairman King. Hand the letter to Mr. Nehemkis and if
he thinks, under the terms of the authority that this committee has,
that it is proper, it will be received.
Mr. Nehemkis. I should say, Senator, that I have seen this letter.
This letter is addressed to me. I had hoped that Mr. Gordon
wouldn't make any reference to it, but if he wants to make any
further reference to it, he will be perfectly at liberty to do so.
Acting Chairman King. If it is self-serving, what are the facts
in it? If it is material, what are the facts brought out by the
letter?
Mr. Gordon. All right, sir. In 1931, we purchased the goodwill
and certain of the assets of the prior firm of Kidder, Peabody & Co.
Acting Chairman King. Yes; you stated that.
Mr. Gordon. Yes, sir. I am sorry to — I have never been a witness
before, and you have got to excuse my redundancy. The Kidder,
Peabody & Co. had obtained — the prior firm of Kidder, Peabody &
Co. — had obtained a $HK),000,000 credit from a revolving credit headed
by J. P. Morgan & Co., in order to carry on its business.
Mr. Avildsen. Just what is a revolving credit?
Mr. Gordon. $10,000,000 was placed at the disposal of the prede-
cessor firm to be used, if necessary
Mr. Avildsen (interposing). By J. P. Morgan & Co?
Mr. Gordon. No, sir; by a group of banks headed bj J. P. Morgan
& Co., including the First National Bank of New York, the Guaranty
Trust Co., the First National Bank of Boston, and half a dozen
others, the Chase National Bank. J. P. Morgan's interest in the
credit was $2,500,000 out of the $10,000,000.
Mr. Avildsen. All right.
Mr. Gordon. In addition, $5,000,000 of new capital was raised by
the old partners. In the course of a half-dozen months, 3 months,
it became apparent that there was not enough money to carry on
the business. We then
Acting Chairman King (interposing). Pardon me, but you had
the $5,000,000 plus the- —
Mr. Gordon. The old firm.
Acting Chairman King. Yes, plus the $10,000,000, of which J.
Pierpont Morgan had furnished two million plus?
Mr. Gordon. Yes, sir.
Acting Chairman King. That is to say, the old firm was then in
part indebted to Morgan and other corporations or other banks, for
its capital or for the. revolving fund which it utilized to carry on its
business ?
Mr. Gordon. Yes, sir.
Acting Chairman King. But its capital consisted of a much smaller
sum than the $10,000,000?
CONCENTRATION OF ECONOMIC POWER 11949
Mr. Gordon. Well, it raised $5,000,000 in new money.
Acting Chairman King. I see.
Mr. Gordon. It then became obvious, as the depression went on,
that it was necessary to raise more money in order to carry on the
business.
We interested ourselves in purchasing the goodwill. We put the
old firm in an airtight compartment, so to speak, and started
a new firm with the name of Kidder, Peabody & Co. and with
certain of the assets, for which we paid. We agreed to pay for the
goodwill. Our only connection with the past was our agreement to
pay for the goodwill, by paying 25 percent of our earnings until we
had paid a total of $2,000,000.
Acting Chairmar King. Well, did the new firm have the advantage
of that $10,000,000 re . oiving fund credit which was furnished by the
banker?
Mr. Gordon. No, sir.
Acting Chairman King. You released that, or rather, it was with-
drawn from the fund?
Mr. Gordon. The old firm went into liquidation.^
Acting Chairman King. Proceed.
DISCTJSSION or KIDDER, PEABODY & CX).'s POSITION IN ILUNOIS BELL TELE-
PHONE CO. ISSUE — 1931
Mr. Nehemkis. Now, Mr. Gordon, I am sorry you got into this
thing. It is of no concern to us. But I presume you want to mention
this as being the motivating factor which led you at this time to
have a discussion with George Whitney.
Mr. Gordon. We had many discussions with George Whitney, and
several other partners in J. P. Morgan & Co.
Mr. Nehemkis. Now, just so that we may move fast, I will ask
simple questions and I think they will lend themselves to simple
answers. In connection with a discussion growing out of, perhaps,
this revolving fund, you discussed Telephone matters with Mr. Whit-
ney; is that correct?
Mr. Gordon. Yes, sir ; that is right.
Mr. Nehemkis. At this time, Mr. Wliitney suggested to you tha^t
the old arrangement, which we have been discussing here for several
days, whereby the New York group got 70 percent of the Telephone
business and the New England group, under the leadership of Kidder,
Peabody & Co., the old Kidder, Peabody, got 30 percent, wasn't
satisfactory. Is that correct ? I am asking for just a general answer.
Mr. Gordon. Just a minute, until I get that straight.
Mr. Nehemkis. Well
Mr. Gordon. I think I can answer that by saying that the old posi-
tion of Kidder, Peabody & Co. came up for discussion and we were
advised that there would be a change if
Mr. Nehemkis (interposing). Now, just a minute. You have indi-
cated that you want a little help, being a novice in this witness busi-
ness. Now, let me suggest how you can be helpful and I can be
helpful to you. I will ask you a question and you answer it, and then
stop.
1 See extract from "memorandum of corrections" submitted by Arthur H. Dean, counsel
to Mr. Gordon : appendix, p. 12316.
11950 (CONCENTRATION OF ECONOMIC POWER
Acting Chairman Kino. Answer "Yes" or "No" if you can. Coun-
sel can ask you for an explanation if you haven't made it clear.
Mr, GoRix)N. All right, thank you.
Mr. Nehemkis. Now, you discussed, apparently at this time, the old
arrangement, the 70-30 arrangement. You have indicated that Mr.
Whitney suggested to you that the old 70-30 arrangement wasn't sat-
isfactory, and that there would have to be another change, is that
correct ?
Mr. Gordon. I don't know that he said the old 70-30 arrangement ;
he said that the position that Kidder, Peabody had had in the past
would be changed.
Mr. Nehemkis. Fine. Now, did you know at that time, and I refer
to the time of your discussion with Mr. Whitney, what the old Kid-
der, Peabody distributing arrangement had been for telephone
securities ?
Mr. Gordon. I knew that Kidder, Peabody had distributed a cer-
tain number of — had a position in pieces of Telephone financing. I
knew that Kidder, Peabody had wholesaled the bonds in New Eng-
land.
Mr. Nehemkis. And Mr. Whitney at that time was suggesting that
instead of having in effect two syndicate managers, one operating in
New York, with jurisdiction over the entire country, and another
syndicate manager operating in Boston, with jurisdiction over New
England, that there would be one syndicate manager and that the
books would be kept in one shop ; is that correct ?
Mr. Gordon. That's right.
Mr. Nehemkis. But the shop would not be Kidder, Peabody, but
rather J. P. Morgan; is that correct?
Mr. Gordon. That is right, assuming that J. P. Morgan & Co.
obtained the business from the Telephone Company.
Mr. Nehemkis. Well, they already had it.
Mr. Gordon. Not the future issues, they didn't have.
Mr. Nehemkis. Well, all right.
Acting Chairman King. Did J. Pierpont Morgan have the whole-
saling of issues in New England?
Mr. GornoN. Up to that time, I believe that the old firm of Kidder,
Peabody had distributed in New England, wholesale, to the dealers,
the Telephone securities,
Actiny; Chairman King. All of them?
Mr. Coi^don. As far as I know, sir.
Acting ChuM-ni'm King. J. Pierpont Morgan or other investment
conipniies had nothing to do, then, with the distribution or sale of
securities?
Mf. Gordon. Tlie wholesaling.
Actino; Ch:iirman King. The wholesaling?
^li". GoHDON. Yes: as far as I loiow.
Mv. Nehemkis. Now, Mr. Gordon, I want to leave this particular
period
Acting Chairman King (interposing). Pardon me, but was that
only Tebphone secui'ities?
Mr. Gordon. Yes; Telephone bonds.
Acting Chairman King. Well, that is a security, isn't it?
Mr. Gordon. Yes ; but not common stocks.
CONCENTRATION OP ECONOMIC POWER 11951
KIDDER, PEABODY & CO.'S POSITION IN ILLINOIS BELL TELEPHONE CO.
ISSUE — 19 35
Mr. Xehemkis. Now, I would like to leave the period now under
discussion, of 1981, and go back to your earlier testimony, when you
indicated that sometime m 1935, around the fall of the year, you had
occasion to call upon Mr. Harold Stanlej^ the president of the newly
organized firm of Morgan Stanley & Co. Incorporated. Did you
not, at this time, when you discussed and reviewed with Mr. Stanley
the old Kidder, Peabody arrangement for New England distribution,
indicate that the new firm hoped it might get the same old arrange-
ment, namely, distribution for New England?
Mr. Gordon. To the best of my knowledge, I think that the most
we could have said was that since we weren't going to wholesale in
New England, we hoped that we would have as good a position as
possible to offset it.
Mr, Nehemkis. But at the tmie of your discussion with Mr. Stan-
ley, you had no personal knowledge that tliere had been an under-
standing reaching back to the year 1920 between Mr. Morgan, Mr.
Davison and Mr. Wmsor, under which
Mr. Gordon (interposing). Yds
Mr. Nehemkis. Let me finish. Your old firm had been operating
for over 10 years?
Mr. Gordon We knew, when we took over the business of Kidder,
Peabody & Co. that we weren't taking over any agreements, that
we would have to stand on our own feet.
Mr. Nehemkis. Now, that isn't what I asked you. Now I am
going to repeat it, because I think you are probably leaving a little
difficulty with my questions. I am going to repeat what I indicated
in my previous question. Let me repeat it for you and listen very
carefully, if you will, Mr. Gordon.
At the time that you conferred with Mr. Stanley, in the fall of
1935, did you have any personal knowledge that there had been an
agreement entered into in the year 1920 between J. P. Morgan,
Henry P. Davison, and Kobert Winsor, under which your old firm
had been operati^ig for at least 10 years? Now, what is your answer
to that?
Mr. Gordon. I did not know of any such agreement, and once
again, I knew that the business had been conducted along the lines
which it had been conducted, but I did not know of any agreement.
Mr. Nehemkis. You knew, however, the end results of what may
have been arrived at through an agreement?
Mr. Gordon. Yes; I knew what positions Kidder, Peabody & Co.
had had in Telephone business in the past.
Mr. Nehemkis. In other words, no one ever told you specifically
that on such-and-such a date, this was decided?
Mr. Gordon. Nc.
Mr. Nehemkis. Now, when you went to see Mr. Stanley, in an en-
deavor to have the new firm of Kidder, Peabody & Co. brought into
the Illinois Bell issue^ which everyone knew was coming at that time,
didn't you claim for your new firm as much as you could get, namely,
the distribution over New England?
Mr. Gordon. I think I have answered that, Mr. Nehemkis. We did
not claim it, to the best of my knowledge..
11952 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. What caused you not to put forward that claim,
which seems rather unusual?
Mr. Gordon. Well, we were realistic enough to know that we
weren't entitled to it.
Mr. Nehemkis. Because of the
Mr. Gordon (interposing). Because
Mr. Nehemkis. Break-up of the old firm, nev^ situations, and that
it wasn't a sound arrangement?
Mr. Gordon. Yes; all of those reasons. We could recognize that.
Acting Chairman King. You didn't expect to have that revolving
fund of $10,000,000 available for you, did you?
Mr. Gordon, No, sir. I hope never to have a revolving credit avail-
able to me.
(Senator O'Mahoney resumed the Chair.)
The Chairman. What do you mean by saying that you knew it
wasn't a sound arrangement?
Mr. Gordon. As I said before, my expression has been loose, but
I do not think that it is sound, under today's circumstances or under
the circumstances prevailing in 1935, for an issue to be wholesaled by
two different houses. Since the days in which Kidder, Peabody
wholesaled the issue in New England, relatively it is not as important
in financial markets as it was in those days. Furthermore, in the
early days, Kidder, Peabody had a great deal to do with the Tele-
phone business. The Telephone Company started in New England,
and there was a great deal more interest in the Telephone business
in New England than anywhere else. As the telephone spread over
the country, that gradually wore off.
The Chairman. New England, then, became a small factor in the
Telephone business and in the issuance and purchase of Telephone
securities ?
Mr. Gordon. Relatively ; yes, sir.
Mr. Nehemkis. Now, after your conversation with Mr. Stanley,
what was the final position that the new firm of Kidder, Peabody
received in the first telephone offering, the Illinois Bell issue, under
the leadership of Morgan Stanley ?
Mr. Gordon.. I believe that we received an underwriting interest of
approximately 12 percent.
Mr. Nehemkis. And do you recall what the old underwriting inter-
est had been of the Kidder, Peabody firm?
Mr. Gordon. As testimony brought before the committee has indi-
cated, it had been 29% percent in the past.
Senator King. You knew that from your studies of the twenties,
did you not?
Mr. Gordon. Yes, sir.
Mr. Nehemkis. Of which the old firm of Kidder, Peabody retained
16 percent for itself?
Mi-. Gordon. Yes, sir.
Mr. Nehemkis. No further questions, Mr. Chairman.
Senator I^nq. Was a much larger issue — strike that out.
The Chairman. I was called to the telephone, so I don't recall how
long you were associated with the old company.
Mr. Gordon. I became a partner of Kidder, Peabody & Co. in
March 1931. I had no prior connection with tiie old firm.
CONCENTRATION OF ECONOMIC POWER 11953
The Chairman. I see. So that whatever happened in the old firm
is merely hearsay to you ?
Mr. Gordon. Yes, sir; other than information we obtained from
the records of the old firm.
The Chairman. Yes; but you have no personal experience?
Mr. Gordon. No; none whatsoever.
The Chairman. All right.
Mr. Gordon. May I say one word about groups in the investment
banking business ?
The Chairman. Surely.
Mr. Nehemkis. Before the witness does that, it occurs to me, I
would like to have clarified one question which I inadvertently
omitted to ask, and then, Mr. Gordon, you may proceed. You have
probably learned, as a result of hearing the testimony of this morn-
ing and last Friday, that your old firm, under the agreement entered
into at "the library" on May 5, 1920, had the right to approach the
Telephone Company directly with J. P. Morgan & Co. for discussions.
Did you know about that?
Mr. Gordon. No, sir ; I did not.
Mr. Nehemkis. If you had known about it, it wouldn't have been
necessary for you to see Mr. Harold Stanley; is that correct?
Mr. Gordon. I would not have gone to the Telephone Company
directly. We did not think that we could head the Telephone Com-
pany business. I had known Mr. Gifford. He and I have been on
the visiting committee of the Harvard Business School, but I did
not think of talking to him about Telephone business.
The Chairman. Now, you are about to make so«ie comment on
your own behalf?
Mr. Gordon. In the formation, I would like to say"^ a word or two
about the formation '^f groups. In order to do a busines effectively,
it is necessary to get as good a team as possible, to select people
with whom you can work effectively and sympathetically. When
business was done under competition with competitive bids or done
privately, houses would have to go out and form groups to do the
business in the best possible manner. Several years ago the Potomac
Electric Co., the Potomac Edison, I believe, wished to. issue bonds,
and according to the laws of the District of Coliunbia it had to call
for competitive bids rather than to accept bids from a great many
different houses with resultant expense of consulting with those
houses. It said that it would accept bids from four different houses,
and it selected four houses.
Our firm was one of the houses asked to form a group to make a
bid. Each of the four groups, each of the four houses, formed groups
to make the bids. Anybody who was not in any of those groups
could not have bid, so that even under that system, you would have
people who would be on the outside, perhaps, trying to get in.
We started business, as I have explained, in 1931. We have gotten
mto, I would say, forty to fifty new accounts in which the prior
firm of Kidder, Peabody had no past connection. It seems to me
that the Telephone business and the Telephone account are no more
frozen for the best interests of the business, the Telephone business,
than it should be. We started with 12 percent, we are now down
to 6 percent. The 6 percent hasn't been taken from us because we
haven't built up our* distribution, because we have failed, it has been
11954 CONCENTRATION OF ECONOMIC POWER
taken from everybody in order to get more and more people into
the business, in order to do the job more and more effectively.
The Chairman. Well, what assurance do you have that you can
retain the percentage that you now have ?
Mr. Gordon. We have no assurance, sir. Our only assurance comes
from our doing a satisfactory job. If we ever fall down on our dis-
tribution, then we would expect to be reduced.
The Chairman. Well, who would exercise the judgment, the deci-
sion, upon which that distribution would be taken away from you?
Mr. Gordon. As long as the business came to Morgon Stanley &
Co., and as long as we were a member of the Morgan Stanley group,
we would expect that the officials of Morgan Stanley would make
that decision, unless the Telephone Company learned that we were
distributing the bonds, perhaps cutting prices as we shouldn't, and
should ask that we be excluded.
Today, more than ever, corporations, issuers, are selecting the
members of the groups in order to make certain a gatisfactory job is
done.
Senator King. They have got to be satisfied that the issue will be
subscribed foi- and sold to the public generally?
Mr. Gordon. They have to be satisfied, I believe, sir, a group is
formed which can make the best possible offer for the bonds and dis-
tribute it in the best possible manner.
Senator Kjng. Supposing there were no groups at all, just left to
individual banks or investment companies, or corporations, or part-
nerships, to buy an issue of 50 oi- 60 million dollars; don't you tnink
it would be very uncertain as to the consequences and the results?
Mr. Gordon. It would be very uncertain.
Senator King. And unsatisfactory ? ^
Mr. Gordon. And unsatisfactory, unless the issuer put such a price
on his issue that it was obviously very attractive.
Now, in the case of the recent issue of the Southwestern Bell Tele-
phone Co. bonds, which I believe were 314-percent bonds, offered at
IO71/2 — my figures may be a little bit wrong — I don't believe that half
of the bonds were originally distributed, and they subsequently,
within a few weeks, went down to as low as 97i/2- The loss fell on the
underwriters and the members of the selling groups who had the
bonds. Had the Telephone Company offered the bonds to the public,
it would have had a great many unsold bonds on its hands, and had
it been using the money for new construction, it wouldn't have had
the money.
Senator King. After all, it comes back to the question of the pres-
tige 'and the financial ability of the group or an individual or a corpo-
ration to underwrite the bond issues ?
Mr. Gordon. That is mv conviction.
Senator King. And if the public has confidence in Morgan or Kid-
der, Peabody, that they can absorb and dispose of an issue of $40,-
000,000, why, probably they become^, the wholesalers.
Mr. Gordon. Yes, sir.
Senator King. All right.
The Chairman. Are there any other questions?
Mr. AviLDSEN. Mr. Gordon, is your firm, the new Kidder, Peabody,
a corporation ?
Mr. Gordon. No, sir.
CONCENTRATION OF ECONOMIC POWBB 11955
Mr. AvxLDSEN. It is a partnership?
Mr. Gordon. Yes, sir.
Mr. AviLDSEN. I notice that practically all the large underwriting
firms that appeared before this committee are corporations. Halsey,
Stuart is a corporation. I believe Morgan Stanley is a corporation.
Is your firm an exception in that regard?
Mr, Gordon. No, sir; there are two groups; Smith, Barney & Co.,
I'or example, a large distributor, is a partnership, and there are a
great many others. I would say that there are more partnerships than
there are corporations.
Mr. AviLDSEN. What is your opinion as to the advantages of a
partnership over a corporation? I assume you feel there are advan-
tages in it as compared with the corporal ion ?
Mr. Gordon. We are members of the New York Stock Exchange,
and as members of the New York Stock Exchange we must be a
partnership.
Mr. AviLDSEN. In other words, that is the primary reason for not
being incorporated, is it?
Mr. Gordon. Yes, sir.
Mr. AviLDSEN. Thank you.
The Chairman. Are there any other questions?
Mr. Nehemkis. I am through with the witness, sir.
The Chairman. Mr. Gordon, thank you very much.
Mr. Gordon. Thank you, sir.
Mr. Henderson. Mr. Gordon
The Chairman. Oh, I beg your pardon. There is another
question.
Mr. Kades. Mr. Gordon, does Kidder, Peabody & Co. do any State
or municipal business?
Mr. Gordon. Yes; we do.
Mr. Kades. Do you arrange your groups the same way in that
business ?
Mr. GrORDON. Yes; we do. When we are making a bid for an
issue, and when we are heading the account, we form as strong a
group as we can.
Mr. Kades. Do you bid after competitive bidding at public sale ?
Mr. Gordon. On municipal sales?
Mr. Kades. Yes.
Mr. Gordon. Yes; we do.
Mr. IkADEs. And State issues?
Mr. Gordon. Yes; we do.
Mr. Kades. Substantially large issues?
Mr. Gordon. Yes; we do.
Mr. Kades. Is that an unsatisfactory method of doing business?
Mr. GrORDON. It is quite a different method of doing business.
Mr. Kades. That is not my question.
Mr. Gordon. If it is a satisfactory way of doing a municipal busi-
ness ? Yes.
The Chairman. Any other questions?
Thank you very much, Mr. Gordon.
Mr. Nehemkis. Mr. Chairman, I would point out to you that the
next witness is Mr. Harold Stanley, who begins a new phase of the
11956 CONCENTRATION OF ECONOMIC POWER
discussion. I would estimate that his testimony will take about an
hour and a half. If it is the pleasure of the committee, I can go
forward, or if it is the committee's pleasure to recess and start with
Mr. Stanley in the morning, I am prepared to do that.
The Chairman. Well, speaking for myself, I would prefer to re-
cess. Do I find any objection?
Well, then, without objection, the committee will stand in recess
until 10 : 30 tomorrow morning.
(Whereupon, at 4 p. m., a recess was taken until Tuesday, Decem-
ber 19, 1939, at 10 : 30 a. m.)
INVESTIGATION OF CONOENTEATION OF ECONOMIC POWER
TUESDAY, DECEMBER 19, 1939
United States Senate,
Temporary NATiONiVL Economic Committee,
Washington, D. C.
The committee met at 10 : 40 a. m., pursuant to adjournment on
Monday, December 18, 1939, in the Caucus Room, Senate Office Build-
ing, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'Mahoney (chairman) and King; Messrs. Hen-
derson, Avildsen, Hinrichs, O'Conneli, and Brackett.
Present also : Ganson Purcell and Baldwin B. Bane, Securities and
Exchange Commission; Willis J. Ballinger, Federal Trade Commis-
sion; John W. Hanes and Charles L. Kades, Treasury Department;
Clifton M. Miller, Department of Commerce. Holmes Baldridge, De-
partment of Justice; Peter R. Nehemkis, Jr., special counsel; David
Ryshpan, financial analyst; W. S. Whitehead, security analyst;
Lawrence Brown, investigator; and Samuel M. Koenigsberg^ asso-
ciate attorney, Securities and Exchange Commission.
The Chairman. The committee will please come to order.
Mr, Nehemkis, are you ready to proceed?
Mr. Nehemkis. I am, sir.
The Chairman. Will you call the first witness ?
Mr, Nehemkis. Will Mr. Harold Stanley please take the witness
stand ?
The Chairman. Do you solemnly swear that the testimony you are
about to give in this proceeding shall be the truth, the whole truth,
and nothing but the truth, so help you God ?
Mr, Stanley. I do.
The Chairman. You may be seated, Mr. Stanley.
The Chairman desires to take note of the fact that the committee
is honored this morning by the presence of Under Secretary Hanes,
of the Department of the Treasury, The Secretary will be privileged
to ask any questions, if he feels so moved.
Under Secretary Hanes. Thank you, very much.
Mr. Nehemkis. Mr. Chairman, before proceeding with the examina-
tion of the witness, there is a bit of old business that should be taken
care of. You may recall, sir, that in connection with the examination
of Mr. Woods, I asked Mr. Woods certain questions pertaining to the
stock holdings in other investment houses by himself and some of his
associates.^ Mr, Woods was not quite clear on the pointy and we asked
whether he would not be good enough to furnish the committee with
that information. I am in receipt this morning of a letter from Mr.
I Mr. Woods' testimony appears in Hearings, Part 22.
11957
11958 CONCENTRATION OF ECONOMIC POWER
Woods' counsel, Messrs. Sullivan & Cromwell, supplying that informa-
tion, and I now ask leave of the committee that this information be
offered in evidence, and that the reporter be instructed to place it at
the appropriate place in the testimony.
The Chairman. Without objection, it is so ordered.
(The letter referred to was marked "Exhibit No. 1696" and is in-
cluded in Hearings, Part 22, appendix, p. 11826.)
TESTIMONY OF HAKOLD STANLEY, PKESIDENT, I^ORGAN STANLEY
& CO. INCORPORATED, N2W YORK, N. Y.
Mr. Nehemkis. Mr. Stanley, will you state your full name and
address, please?
Mr. Stanley. Harold Stanley, 30 Sutton Place, New York City.
Mr. Nehemkis. What is your present business connection, Mr.
Stanley ?
Mr. Stanley. I am president of Morgan Stanley & Co. Incorpo-
rated.
Mr. Nehemkis. Incorporated?
Mr. Stanley. Incorporated.
Mr. Nehemkis. And prior to your present oiEce, what was your
previous business connection?
Mr. Stanley. I was a partner of J. P. Morgan & Co.
Mr. Nehemkis. On what date did you become a partner of J. P.
Morgan & Co., Mr. Stanley?
Mr. Stanley. January 1, 1928.
Mr. Nehemkis. And on what date did you cease being a partner
of J. P. Morgan & Co.?
Mr. Stanley. Sejitember 13, 1935.
Mr. Nehemkis. And will you state on what date the investment
banking house of Morgan Stanley & Co. Incorporated, was organ-
ized?
Mr. Stanley. September 3, or September 5, 1935.
Mr. Nehemkis. When were, if you recall, the papers of incorpo-
ration filed ?
Mr. Stanley. On one of those dates I mentioned.
Mr. Nehemkis. September 3 or 5?
Mr. Stanley. Yes. I can check that, if you like.
Mr. John M. Young (Morgan Stanley & Co. Incorporated). Sep-
tember 5.
Mr. Nehemkis. You accept the answer of Mr. Young as your
answer ?
Mr. Stanley. I do.
ILLINOIS BELL TEI.JJPH0NE FINANCING, OCTOBER 193»
Mr. Nehemkis. Was not the first Telephone offering under the
leadership of Morgan Stanley the Illinois Bell Telephone 3i^s of
1970, an offering of $43,700,000?
Mr. Stanley. It was.
Mr. Nehemkis. And was not that offering made on October 16,
1935?
Mr. Stanley. At about that date. I can check that also if you like,
Mr. Young. What date is that?
CONCENTRATION OP ECONOMIC POWER 11959
Mr. Stanley. October 16.
Mr. Young. The date is correct.
Mr. Stanley. Correct.
Mr. Nehemkis. Do you happen to recall, Mr. Stanley, the date on
which the registration statement for the Illinois Bell 3^s was filed
with the Securities and Exchange Commission ?
Mr. Stanley. Well, 20 days prior to October 16, or 21 days.
Mr. Nehemkis. That would be September 26, 1935?
Mr. Young, Approximately that.
Mr. Nehemkis. That was about 11 days after Morgan Stanley
began doing business?
Mr. Stanley. It was.
Mr. Nehemkis. Mr. Stanley, would you be good enough to tell me,
generally speaking, about how ioiig it takes to make up the data
which goes into a registration statement ?
Mr. Stanley. Anywhere from 1 month to 3 months.
Mr. Nehemkis. And is that generally true of most registration
statements of substantial issues, $50,000,000 or $40,000,000?
Mr. Stanley. It is, if it is the first issue that that particular com-
pany has made.
Mr. Nehemkis. Would you enlighten me as to how it was possible
to have a registration statement filed 11 days after your organiza-
tion when usually there are many detailed problems in connection
with the setting up of a new business enterprise?
Mr. Stanley. I will be glad to.
Mr. Nehemkis. Would you?
Mr. Stanley. The Telephone Company had been considering the
question as to whether or not it could conform to the requirements of
the Securities Act and whether or not it might do some financing.
For some time prior to this date that you mentioned, in October, it
had prepared — it had its own staff working on the matter for some
months previous to that time, and the officials of the Illinois Bell
Telephone Co. had been also working on it prior to that time.
Mr. Nehemkis. When you were a partnei- of J. P. Morgan & Co.,
had you had any discussions with Mr. Gilford or other officials of
the American Telephone Co.?
Mr. Stanley. Yes.
Mr. Nehemkis. Relative to this issue.
Mr. Stanley. Well, relative to the possibility of an issue.
Mr. Nehemkis. So that at the time you were still a partner of
J. P. Morgan & Co. you were discussing prospective Telephone re-
funding.
Mr. Stanley. I wasn't discussing it; I knew they were consider-
ing it.
Mr. Nehemkis. I may have misunderstood you, Mr. Stanley. I
hope you will correct me. Did I understand you to say earlier in
your testimony that you had had some discussion?
Mr. Stanley. That I had some conversations.
Mr. Nehemkis. Conversations?
Mr. Stanley. Right.
Mr. Nehemkis. And were those conversations relative to Telephone
refundings?
Mr. Stanuey. Correct
11960 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. And were those conversations more specifically
with reference to the Illinois Bell offering subsequently under the
leadership of Morgan Stanley?
Mr. Stanley, They were.
Mr. Nehemkis. So that it is correct that while you Avere a partner
of J. P. ]\Iorgan & Co., you did discuss with Mr. Gifford Telephone
matters.
Mr. Stanley. Well it is very hard for me to say what you mean
by discussion. I knew they were considering an issue. They had
told me so.
Mr. Nehemkis. Well, when you have a conversation with any com-
pany official about a prospective refunding, I assume you discuss
details, what is to go in the registration statement, accounting matters,
price matters, and things of that sort ?
Mr. Stanley. Very often ; but in this particular case they did not
discuss the details.
Mr. Nehemkis. What were the nature of your discussions?
Mr. StanixEY. They were considering the whole question of whether
or not to do refunding. They were considering whether they could
conform to the Security Act requirements and they were considering
whether or not they would issue some securities in the fall.
Mr. Nehemkis. Can you tell me at this time, Mr. Stanley
Mr. Stanley (interposing). These conversations, I might saj',
were in August.
Mr. Nehemkis. Were in August?
Mr. Stai.xey. Right.
the ILLINOIS BELL TELEPHONE SYITOICATE
Mr. Nehemkis. Can you tell me at this time how many underwriters
composed the group for the Illinois Bell Telephone issue ?
Mr. Stanley. Nine.
Mr. Nehemkjs. Do you recall at this time, Mr. Stanley, the names
of the underwriters who composed the group in the Illinois Bell
issue ?
Mr. Stanley. Yes ; I do. '^ 's-
Mr. Nehemkis. Will you state them, please ?
Mr. Stanley. Morgan Stanley & Co. ; Kuhn, Loeb & Co. ; Kidder,
Peabody & Co.; Lee, Higginson & Co.-r-or Lee Higginson Corpora-'
tion, I suppose
Mr, Nehemkis. I think you and I understand each other.
Mr. Stanley. First Boston Corporation ; Brown Harriman & Co. ;
E. B. Smith & Co. ; Bonbright & Co. ; Mellon Securities Corporation.
Mr. Nehemkis, The last one is Bonbright ?
Mr. Stanley. Yes.
Mr. Nehemkis. Mr. Chairman, you .will recall that yesterday I
asked you to examine a stipulation ^ which Mr. Charles Mitchell was
good enough to make available to us, concerning certain documents
which I would have occasion to introduce at vario.us places in connec-
tion with the testimony. One of the documents covered by that stip-
ulation is a letter, now in evidence, from which I should like to read
» "Exhibit No. 1691."
CONCENTRATION OP ECONOMIC POWER 11961
an appropriatxe 3*:atement. This is a letter from Mr. Mitchell to Mr.
C. R. Blyth, dated September 26, 1935.
Mr. Hendebson. Has that been identified ?
Mr. Nejtsmkis. It has not been identified, sir. It is covered by a
stipulatic I reading from "Exhibit No, 1644"] :
Harold Stanley, of the new firm of Morgan, Stanley & Company, asked me
to luncL with him .yesterday and we had an hour and a half's discussion, the
main points of which I am sure you will find of interest.
He pened the conversation by saying that he wanted to get the bad news off
his chest first and he was doing that net only because of our relations, but because
George Whitney, who had to leave town the night before for several days, asked
him particularly to ste me and explain the situation. The bad news was that
we were not going to be in the underwriting of the Bell Telephone of Illinois. To
make a long story short, they found that if they were to go beyond the very short
underwriting list that they have, and are bound to more or less by past relations
to the br^ir IS, to a point of including us^ they would necessarily have to include
four or five firms more.
Mr. Nehemkis. Mr. Stanley, does Mr. Mitchell accurately reflect
your attitude toward the Telephone business, that is to say, that you
recognized that you were bound more or less by the past relations of
different houses to the business?
Mr. Stanley. It does not.
The Chaikman. The letter^ which you have just handed rae, Mr.
Nehemkis, is not signed. I take it, however, that it was signed by Mr.
Mitchell?
Mr. Nehemkis. That is correct, sir.
The Chairman. Whose stipulation identified it?
Mr. Nehemkis. That is correct, sir.
The Chairman. And that is the letter of September 26, 1935, from
C. E. Mitchell to Mr. C. R. Blyth?
Mr. Nehemkis. Yes, sir.
Mr. Henderson. Mr Stanley, what was your answer to Mr. Nehem-
kis' question?
Mr. Stanley. It does not correctly represent it.
Mr. Henderson. Even to the point of "more or less" ?
Mr. Stanley. Yes; I would say even to that extent.
Mr. Henderson. Even to that extent ?
Mr. Stanley. If you use the word "bound"; yes.
Mr. Nehemkis. Did Mr. Mitchell completely' mismiderstand you,
sir?
Mr. Stanley. I haven't any idea.
Mr Nehemkis. In other words, if I now understand you correctly,
the statement which I have just read from Mr. Mitchell to his west
coast partner, reporting a conversation with you, is inaccurate ?
Mr. Stanley. I should say so ; yes.
Mr. Nehemkis. I am perfectly willing to accept your word for that,
Mr. Stanley, with one conmient. It seems to me, roughly
Mr. Sr/i^NLJii y mterposing) . I am glad that you accept my word.
Mr. Nehemkis. I do, sir, in every respect, but I would merely
observe that it seems rather difficult to believe that a responsible mem-
ber of the financial community would so thoroughly misunderstand an
old friend.
1 "Exhibit No. 1644."
124491 — 40 — pt. 23 11
11962 CONCENTRATION OF ECONOMIC POWER
Mr. Stanley. Well, Mr. Nehemkis, there lias been a lot of talk and
some testimony I have heard about the use of words. Certainly, we
considered the past connections of people witli the Telephone Com-
pany, but as far as being bound, there was nothing bound at all.
Mr. Nehemkis. Yes. Well, I accept your explanation.
Mr. Stanley. Well, I hope so.
Mr. Nehemkis. It is perfectly all right.
The Chairman, You object to the strict definition of the word
"bound"?
Mr. Stanley. Correct.
The Chairman. That is the interpretation that you desire to avoid ?
Mr. Stanley. There wasn't any obligation to anybody.
The Chairman. Was there such a conversation?
Mr. Stanley. I had a conversation with Mr. Mitchell, yes.
The Chairman. And in that conversation, did you tell him that
Blyth & Co, would not be included in this financing?
Mr. Stanley. I did.
The Chairman. Did you intimate to him at that time that the
reason that that firm was not to be included was that it would make
necessary, or possibly necessary, the inclusion of other firms that had
not previously been allowed to participate in the issues ?
Mr. Stanley. There was nothing necessary about it, Senator.
That goes back to what the job and function of a manager of a syndi-
cate is. When we were selected by the Telephone Company to man-
age this financing, they looked to us to have a suitable group of
people do it, and have the issue a success. The inclusion of the
people and our decision as to whom to include covers a variety of
things, I mean, their capital, their standing, their judgment of mar-
' kets, their judgment of prices, and their distributing ability, and the
whole general question of all the factors that any one house would
bring into a piece of business; and we considered what we thought
was the suitable group to be in this business, who could do it
adequately.
The original purchasers, who are called now the underwritei'S — I
mean, underwriter today means the man who buys direct from the
company with a lot of people or several other people. In this case,
there was no real underwriting; it was simply a purchase, and we
decided this was an appropriate and suitable group to do the business
properly, and there wasn't any need of considering everybody who
was eligible. There were a lot of other people who might perhaps
have been worthy people or able people to oe m the business, but they
weren't needed. We ourselves felt that we didn't want to have a large
underwriting group in this issue. Remember, this was a sort of time
of flux in the business, it was soon after the markets were opened,
there were a lot of new firms. We thought it was best in this thing
not to have too big a syndicate. We weren't afraid of the issue, or
that it had to be spreaa around too far, but we did decide to have a
very big selling group. So we had these nine underwriters and five-
hundred-odd other people sell the bonds all over the country, and they
were scattered in Chicago, 111., California, everywhere. But we
thought these people were the appropriate people. Different ele-
ments were considered in the selection of each fellow; one man for
one reason or a combination of reasons, and another man or another
CONCENTRATION OF ECONOMIC POWER 11963
firm for another combinaiion of reasons. And certainly I considered
the past connection of Kidder, Peabody & Co.; Kuhn, Loeb, to the
Telephone business, or their predecessor firms, in the case of Kidder.
But there was nothing bound, no obligation to anybody.
FORMER MEMBERS OF TELEPHONE GROUP AFFECTED BY BANKING ACT OF 193 3
Mr. Nehemkis. Shall we proceed ?
Mr. Stanley, the previous testimony has shown that the Telephone
group from the year 1920 up to the issue that we are now discussing,
was comp i3ed of the following firms: Kidder, Peabody; J. P. Morgan;
First National Bank ; National City Bank ; Kuhn, Loeb & Co. ; Harris,
Forbes & Co.; Lee Higginson Corporation; Guaranty Trust Co.;
Bankers Trust Co. Now, you indicated a moment ago what I think
my next question will cover. As a result of the Banking Act, did not
the First National Bank, National City, the Guaranty Trust, and the
Bankers Trust cease to have any participation in miderwriting
matters ?
Mr. Stanley. They did.
Mr. Nehemkis. However, the houses still in existence, and which
did have a relation to the business, were the following : Lee Higginson
Corporation; Kuhn, Loeb & Co.; First Boston (having succeeded to
the goodwill and business of Harris, Forbes & Co.) ; Kidder, Peabody
& Co. Is that correct, Mr. Stanley?
Mr. Stanley. If I understand your question correctly, those firms
who were in business in 1935, or thei; predecessors, had some connec-
tion with Telephone business in the past.
Mr. Nehemkis. That's right. And those four houses were included
in the first Telephone offering under the leadership of Morgan
Stanley?
Mr. Stanley. They were.
Mr. Nehemkis, Now, the new houses that were included in this
business were Brown Harriman & Co (then Brown Harriman, now
Harricfian Ripley & Co., Inc.) ?
Mr. Stanley. Right.
Mr. Nehemkis. And Edward 6. Smith & Co. ?
Mr. Stanley. Correct.
Mr. Nehemkis. I don't know whether you were here at one of the
earlier sessions, Mr. Stanley, but if my memory serves me correctly,
Mr. Boyenizer, of Kuhn, Loeb, testified that his firm recognized Brown
Harrim'an as the heir to the National City Co. Did you likewise re-
gard Brown Harriman as the heir to the National City Co.?
Mr. Stanley. No; not any more than
Mr. Nehemkis (interposing). Excuse me, sir.
Mr. Stanley. Not, any more than I consider anyone the heir of
anybody else, we or anybody else.
Mr. Nehemkis. Yes. Do you regard E. B. Smith «^ Co. as the heir
of the Guaranty Co., or is your answer the same for that?
Mr. Stanley. It is the same.
Senator King. I suppose you use the word "heir" in the same sense
it would be used in legal terminology in connection with estates ?
Mr. Nehemkis. Not quite, sir. No, I used it in a much more popular
sense than that.
Senator King. Popular or unpopular?
11964 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. Well, it may be both before these hearings are con-
cluded.
Mr. Henderson. Senator, when we had Mr. Bovenizer of Kuhn,
Loeb on the stand, he readily acknowledged that he did regard them
as the heirs, and counsel has asked this witness whether he had the
same view.
Mr. Nehemkis. In the letter from Mr. Mitchell which is in evi-
dence, there appears the following sentence, Mr. Stanley [reading
from "Exhibit No. 1644"] :
For this reason, and the added reason that they are eliminating completely
four houses who have heretofore been connected with the business, they felt that
they were under the necessity of not including our name.
Mr, Stanley, were the four houses which you felt constrained to
eliminate the following: Estabrook & Co.; R. L. Day & Co.; F. S.
Moseley; Hayden, Stone & Co.?
Mr. Stanley. I didn't feel constrained to eliminate anybody. I
don't know where the use of the word "constrained" comes from.
They were both excluded, but there was no necessity or an\ hing of
that kind. Those houses were not included who had been included
in the previous business.
Mr, Nehemkis. Do I understand you correctly to have replied to
my question that the four houses whose names you eliminated were
not included?
Mr. Stanley. Not as underwriters.
Mr. Nehemkis. Now, these four houses were still in existence and
still able to underwrite, and these four houses were members of the
old Kidder, Peabody New England proprietary group, so trat if I
understand what transpired at this time, Mr, Stanley, your rirm de-
clined to recognize, insofar as the new Kidder, Peabody firm was
concerned, that the agreement of May 5, 1920, was binding, or that
the interest of the New England group on original terms in the
A. T. & T. financing was binding, or the right of the new Kidder,
Peabody firm to share in the management fee or the right of the
new Kidder, Peabody firm to talk to the company ?
Mr. Stanley. Well, that is an awfully long question,
Mr, Nehemkis, You may have all the time you wish, Mr. Stanley,
to respond to it.
Mr. Stanley. I will answer it, but I think I perhaps can get what
you are after. The consideration we gave in 1935 to including dif-
ferent houses in the proposed Illinois Bell issue which was made in
October was based on what we thought their relative contribution
to the business could be at that time. We were not concerned with
past history, we were looking at conditions that existed in 1935, and
I and my associates decided who would be the underwriters in that
issue, as I have said, based on what we thought they could contribute
to the good of the business at that time.
Senator Kin(5, The first part of your question assumes that those
four houses were competent, Mr, Nehemkis, and had the necessary
standing to underwrite. Did you desire to commit him to that state-
ment or yours as a question of fact?
Mr. Nehemkis. I think the witness
Senator Kino (interposing). It seems to me you ought to have
asked him if they were competent. You state tha. +hey were, you i,0o.
Mr. Nehemkis. I stated that they were in existence.
CONCENTRATION OF ECONOMIC POWER 11965
Senator King. You assumed that they were in the first part of your
question, 3^ou assumed that they were in a position to do that. I
think he ought to be permitted to state that, rather than to accept
your statement,
Mr. Nehemkis. Let me ask the witness the question you suggest.
I thank you, Senator King, for proposing it.
Are you clear, Mr. Stanley, as to Senator King's question? As I
understand it, it is, were these four houses, Estabrook & Co.; E,. L,
Day & Co. ; F, S. Moseley & Co. ; Hayden, Stone & Co. ; former mem-
bers of the old New England proprietary group, competent to engage
in underwriting at the time of the offermg of the Illinois Bell issue?
Mr. Stanley. Well, you combine a lot of things, Mr. Nehemkis.
There has been a lot of testimony about the proprietary group, which
I am not going to try to cormnent about- I say this, and I would like
to say to Senator King, that I did not understand that I was accept-
ing the other question in the form given, because I didn't. I don't
admit that the question was correct or the assumptions were correct,
necessarily, but I will say in answer to the last question, eliminating
all of the questions of groups and things of that kind, that those four
firms you mentioned Mere in previous Telephone business during the
period 1920-30.
Mr. Nehemkis. And those four firms, for purposes of this testi-
mony, were not included in the Illinois Bell offering of '35 ?
Mr. Stanley. As underwriters, no.
Mr. Nehemkis. As underwriters?
Mr. Stanley. No.
Mr. A\^LDSEN. I have a question at this pc nt, Mr. Chairman, if I
may ask it.
Mr. Nehemkis. I wonder if the witness has really responded to
Senator King's question.
Senator King. I think he has.
Mr. AviLDSEN. I notice, Mr. Nehemkis, in this same letter I have
read fBom, that the ver} next sentence after the one I just read reads
as follows [reading from "Exhibit No. 1644"] :
He-
Meaning Mr. Stanley —
assured me at the same time that this would not in any seuse be considered a
telephone group, that they intended to consider each individual business sepa-
rately, and as an illustration, indicated that i' they were to do a piece ot
Pacific Telephone business, they would certair' ^ee that we were in a strong
position in the underwriting.
Mr. Nehemkis. That would have confirmed what Mr. Stanley has
been saying.
Mr. AviLDSEN. Is that correct, Mr. Stanley ?
Mr. Stanley. I remember talking to Mr. Mitchell about Pacific
Telephone at that time. I don't think I was as definite about the fact
that he would be included, but certainly he would be considered in
Pacific Telephone because his firm is a west-coast firm.
Mr. Nehemkis. Mr. Chairman
Mr. Henderson. I don't believe that covers, Mr. Stanley, the im-
port of the sentence Mr. Avildsen has read.
Mr. Stanuet. I see.
11966 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson [reading from "Exhibit No. 1644"] :
He assured me at the same time that this would not in any sense be considered
a telephone group, that they intended to consider each individual business
separately.
Mr. Stanley. Undoubtedly I said that to Mr. Mitchell.
Mr, Henderson. Therefore, you remember saying tlds, but you
don't remember saying that you were bound to consider the past rela-
tions, and you don't remember that you said you were eliminating
completely four houses?
Mr. Stanley. Well, I may very well have said that these four
houses were not included, but I don't remember anything about the
latter part of that sentence, that they were mider the necessity of
not including Mr. Mitchell. Do you see?
Mr. Henderson, Yes.
Mr, Nehemkis. Mr, Chairman, I have a number of exhibits which
I propose to offer in the next few minutes. Unfortunately, the mem-
ber of my staff who was to have identified them was taken ill. May
I suggest for your consideration that they be marked at this time
subject to definite identification tomorrow, or as soon as the staff
member has regained his health.
The Chairman. These are exhibits secured by a member of the
staff who, by reason of illness, is not able to be here this morning?
Mr. Nehemkis. That is correct, sir.
The Chairman. Unless there is objection, they may be so marked
and identified in tlie future. Do you intend to submit them to the
witness ?
Mr. Nehemkis. They do not come from his particular office.
The Chairman. But do you intend to submit then- to him?
Mr. Nehemkis. He will have copies, just as we all do.
I now ask in accordance with the arrangement just proposed, that
a memorandum dated New York,^ September 2'^, 1035, for N. P.
Hallowell from E. N, Jesup, of the investment banking house of Lee
Higginson Corporation, be marked subject to the terms just indi-
cated
The Chairman. The memorandum may be so marked.
(The memorandum referred to was marked "Exhibit No. 1697" and
is included in the appendix on p, 12240,)
Mr Nehemkis. I read to you, Mr, Stanley, a memorandum pur-
porting to be a conference which you had v/ith Mr, Jesup in con-
nection with the Illinois Bell offering which we are discussmg.
Harold Stanley emphasized the fact
The Chairman (interposing). Mr. Jesup was the author of that
memorandum? Only ini 'als appear upon the memorandum.
Mr. Nehemkis. "E. N. J." is Mr. E. N. Jesup Treading from
"Exhibit No. 1697] :
Harold Stanley emphasized the fact that these Interests were for this piece of
business only and they were not at the moment forming a telephone group.
Apparently Mr. Jesup correctly understood you, Mr. Stanley.
Mr SrANLEY. Undoubtedly. Certainly I don't know what "at
the moment" means, but we certainly were not forming a Telephone
group.
Mr. Nehemxis. Mr. Chairman, may it please the committee, pur-
suant to the same arrangement, I ask that there be LnurKed a memo-
CONCENTRATION OF ECONOMIC POWER 11967
randum by H. M. Addinsell, chairman of the executive committee of
The First Boston Corporation, dated September 30, 1935.
The Chaieman. The memorandum may be so marked.
(The memorandum referred to was marked "Exhibit No. 1698" and
is inchided in the appendix on p. 12240.)
Mr. Nehemkis. Mr. Addinsell's memorandum of a conference with
you on or about the same time, referring to the Illinois Bell offering
now un'i r discussion, reads as follows [reading from "Exhibit No.
1698'-] :
The Mf'i ,u Securities will have an interest of |2,000,000 and Bonbright will
have an i, 1 st of $1,000,000 but neither of these last two names will appear in
the adver;>: g. * * *
While Lj: ligginson will appear technically ahead of us in spite of the fact
that they hit e a smaller interest, I assume that the reason for this is that the
first four names aie the only names that appeared as such in the former adver-
tising of til is issue.
Jumpin-: ahead in that memorandumi, the first four names are:
Kuhn, Loeb; Lee Higginson; Kidder, Peabody; and First Boston.
Continuing witli the memorandum [reading further from Exhibit
No. 1698] :
The old Harris Forbes interest in Bell Telephone financing was approximately
5%, and it will be seen under the new arrangement, First Boston will have
10% of the entire issue, or 10.59% of the $42,500,000 to be sold by the under-
writing syndicate.
Mr. Stanley said that these percentages did not necessarily constitute a
precedent for any other Bell Telephone financing that might be done, because in
special cases other bankers might have to be. introduced, etc.
Mr. Stanley, did Mr. Addinsell correctly understand that last
statement I read?
Mr. Stanley. It is very hard to follow as you read. What is the
wording, that the other banks woiild have to be
The Chairman. Please hand the exhibit to the witness.
Mr. Nehemkis. Do you have a copy of it?
The Chairman. No; I haven't.
Mr. NEHEa.'iKis. All right. Now will you glance at the last para-
graph of the memorandum you have, Mr. Stanley, and tell me whether
that, generally speaking, correctly interprets the purport, of your con
versation at the time with Mr. Addinsell?
Mr. Stanley. Just let me take a minute to see this. Will you repeat
""hat question, please?
Mr. Nehemkis. Will the reporter please read the last question?
(The previous question was read.)
Mr. Stanley. Well, I think it gives it in substance, excepting that I
don't know what Mr. Addinsell meant by other brnkers having to be
included in the future, perhaps. I undoubtedly told him other
bankers might be included, but there was no obligation to include
them. I can't imagine what obligation there could be, unless the
company wanted other people included, but I only question the words
"have to be."
The Chairman. The whole issue, as I take it, so far as your testi-
mony is concerned, merely has to do with the interpretation of the
word, whatever it may be, that might be taken by some persons to
indicate a legal obligation ?
Mr. Stanley. Right.
11968 CONCENTRATION OF ECONOMIC POWER
The Chairman. You desire to have it understood that there was no
legal obligation?
Mr. Stanley. Correct, sir.
The Chairman. That applies to the use of the word "proprietary"
which came up so frequently in the last few days; it applies to the
word "bound" and it applies now to this phrase. But, on the other
hand, you do not question the fact that there existed in you or in your
pred'ecessors the absolute power to say who should be in this financing
group or underwriting group, and that you exercised that power.
Mr. Stanley. Well, without attempting to go back, Senator, to the
question of the firm of which I was formerly a member, because that
I do not want to testify about because there are other witiiesses who
are now members of the firm who can so testify — that was^one into
at quite some length yesterday. But so far as Morgan Stanley &
Co., formed in 1935, was concerned, I would like to explain a little
bit about how it came about that we were asked to decide, asked by
the Telephone Co. to decide who should be included.
Now the Telephone Co., as I have testified earlier, had been con-
sidering the question of financing. In August of 1935 when they
learned that Morgan Stanley was going to be formed, Mr. Gifford
and Mr. Cooper said they might want to talk to us about the financ-
ing that they had been working on with help, after that. They
talked to us about that after we were formed. That was in Septem-
ber and the issue was made in October.
They said they would like to look to us for the proper distribution
of these securities, and they would leave to us as to who should be
selected, the appropriate and adequate people, and they would charge
us with the responsibility of getting the right people.
They did not know the people in the business and we did. "We
should manage this for them. But they would hold us responsible
for the results, and they made us guarantee the performance of all
of these underwriters, and they have made us do it ever since on each
issue, which involves various things. I mean, we assume, we believe,
very much greater liability, civil liability in the Securities Act than
we would do otherwise if we only took a part instead of guaranteeing
the whole, but- we became bound for the solvency of the people we
select and their performance.
Senator King. AVlioever you select then, you guarantee their sol-
vency and their ability to handle whatever allocation of the bonds
was made to them ?
Mr. Stanley. That is correct.
alternative m'^.thods of selling securities
The Chairman. The question of public interest, which is involved
so far as I am concerned in all this testimony, is merely the com-
parative value of the two methods of disposing of securities of a
particular type, namely, the securities of large businesses which occupy
a public relation like a railroad or a telephone company.
Now, you are aware that in 1926 the Interstate Connnerce Commis-
sion handed down a decision requiring the saTcof equipment trust
certificates at public bid.
Mr. Stanley. I am.
CONCENTRATION OF ECONOMIC POWER 11969
The Chairman. The Interstate Commerce Commission rendered
that decision presumably in the belief that that was the more desir-
able way of disposing of the securities of such companies.
Now, here, on the other hand, we have illustrated over a long
period of years the sale of the securities of the Telephone Co.
than which it may be presumed there is not a stronger industrial
organization in the country if not in the world.
Mr. Stani^y. I think that is quite true.
The Chairman. And that company's securities are disposed of
without competitive bidding by turning the whole job over to J. P.
Morgan for a number of years prior to the passage of the Banking
Act, and from that time on apparently to your company.
Mr. Stanley. Well, Senator, on that I would like to say this, sir.
The question of competitive bidding is a subject which I should like
to go into and talk upon at length, because I have thought about it a
lot. But
Mr. Henderson (interposing). Mr. Chairman, on the matter of
competitive bidding, counsel announced at an earlier session that the
staff had considerable information prepared for a hearing on that
subject, which is very vital, and hoped that the committee would
have time to hear at a later date.
Mr. Stanley. But to comment more
Senator King (interposing). I don't think that would preclude
Mr. Stanley giving his views as to whether or not the policy adopted
•and which was participated in was a satisfactory one to secure the
best results.
Mr. Stanley. I would like to comment briefly, and in detail as
much as you have time for later, on
The Chairman (interposing).. But in propounding the question,
Mr. Stanley, it was not my desire particularly at this time to open
up a debate as to the comparative merits of the two plans, but merely
to make clear that that is the division.
Mr. Stanley. Right. And without attempting to go into detail,
I
Mr. Henderson (interposing). Before Mr. Stanley goes into that,
may I make a
The Chairman (interposing). Mr. Stanley was making a state-
ment or a comment not upon the merit now, but in direct response to
my question.
Mr. Henderson. I would like to make a statement. I think the
record ought to note, Mr. Chairman, so far as I am concerned, that
at the present time the S. E. C. has before it an issue which has been
argued but not disposed of, involving some of these questions and
involving Morgan Stanley; therefore, as I see it, I am precluded, of
course, from participating in this discussion because we sit in quasi-
judiciai- capacity.
I should like the record to note also that none of the questions
which counsel in this hearing will raise with Mr. Stanley have been
suggested by me. Is that correct, Mr. Nehemkis ?
Mr. Nehemkis. Absolutely correct, Mr. Commissioner.
Mr. Henderson. None of the questions have I directed. And there-
fore, they are not to be taken as having any relation at all to the
issues which are before the S. E. C. in the instant case.
11970 CONCENTRATION OF ECONOMIC POWER
The Chairman. I take it that the S. E. C. in presenting this par-
ticular study is not attempting to bring in any questions which is
pending before the Conniiission on this other issue of which you
speak ?
Mr. Henderson. Not only that, but counsel's brief was prepared
before the application of the declarant was filed.
Mr. Nehemkis. As Mr. Stanley knows, we have been living in his
shop for months.
Mr. Stanley. Yes; I know it.
The Chairman. He says that with an air of resignation.
[Laughter.]
Mr. Stanley. Well, Senator, to comment more appropriately on
what you just said a moment ago about the two methods of doing
business, I would like to say jusit this, without going into the other
matter which Mr. Henderson referred to at all : Of course, corporate
securities can be sold by competitive bidding; there is no question
about it. But in my opinion — and I am not trying to argue it now —
it is very much better in the interest of the borrower and of the
investor not to sell issues through competitive bidding. If you do it
by competitive bidding, there are a lot of things that come up. points
that I think are bad. I mean, it is sort of a catch-as-catch-can propo-
sition — casual intermittent connections, the company does not get
the benefit of professional expert advice, the banker either has to
take it as is, as the company has it, or pass it up.
It tends to overpricing, tends to poorer character of securities,
tends to eliminating the small dealer in my opinion, because the
people who bid competitively have got to have capital; they have
got to pay high prices, and I believe that it eliminates the small
dealer and will concentrate the business in the hands of the large
dealers more than today.
Also, you are going to have groups in competitive bidding, because
anybody can't come along and do it. You have the group question,
whatever that is; if it is a matter of being democratic, it will be just
the same as it is today.
Now, I have thought a great deal about it, and I would like to come
back to it later on if you will permit me and if you have time, but I
would like to also comment on one other thing t,hat you said, sir, and
the same statement or a similar statement was made in the opening
statement, I think, yesterday morning, namely, that during the period
of 1906, I think, to 1939, the Telephone Company had done all of its
bond business with J. P. Morgan & Co. and associates, or Morgan
Stanley & Co. and associates.
Aside from the transactions prior to 1935 which Mr. Whitney re-
ferred to, of various bond issues and loans that they did not handle
with J. P. Morgan & Co., there Avere a very lai-ge amount of con-
vertible bonds and stock that were sold by the company without the
intervention of bankers at all, which frequently were sold to their
own stockholders, running to a very large amount of money.
I would like to correct what may be an erroneous impression inad-
vertently made by Mr. Henderson in a previous statement, probably
referring to public offerings, by saying that ;ince Morgan Stanley &
Co. has been in business, the Telephone Companj^ and subsidiaries,
or, rather, it was only subsidiaries, and certain companies that are
CONCENTRATION OF ECONOMIC POWER 11971
considered as part of the Bell System that are not controlled by it
but of which the Telephone Companj^ has 20 or 30 percent stock
interest have sold a total of $150,000,000 of securities direct to insur-
ance companies without bankers at all, so they have tried alternative
methods and have not confined themselves to one method.
The Chairman. $150,000,000?
Mr. Stanley. Yes, sir.
The Chauiman. Out of a total of?
Mr. Stanley. Well, we have managed issues of $580,000,000 I
think, and in addition they have sold $150,000,000 since 1935. I don't
think this really bears on it very much, but Mr. Young tells me that
the amount they have sold to their pension fund is about $60,000,000
additional.
UNDERSTANDING AMONG INVESTMENT BANKERS WITH RESPECT TO EXISTENCE
OF TELEPHONE GROUP
Mr. Nehemkis. Mr. Stanley, from the three documents ^ which I
had occasion to read to you, it would appear that you were very
anxious that the arrangement for the Illinois Bell oifering should not
constitute a precedent for the future interests in that business, is that
substantially correct, Mr. Stanley?
Mr. Stanley. I never made commitments for the future to anybody
anyway, but at that particular time, as I have said l^efore, the in-
dustr}', the investment banking business, was changing. People were
very anxious to obtain a standing, to become established, these new
firms, and were very eager to get into good business. We were
equally anxious and definite in our minds that we were not going to
let them get any kind of position in the future.
Mr. Nehemkis. Is that the reason for your not desiring to estab-
lish a group or create an impression that there might be a precedent ?
Mr. Stanley. That is one reason, but as I said, I never made com-
mitments for the future to anybody anyway.
Mr. Nehemkis. Mr. Stanley, I had occasion to refer to a memo-
randum of the telephone conversation between you and Mr. Jesup.
I am going to read to you another statement that appears in Mr.
Jesup's memorandum.
You will recall, Mr. Chairman, that this is identified pursuant to
your arrangement with me. Mr. Jesup said as follows [reading
from "Exhibit No. 1697"] :
My guess i.s that they do uot want to be committed to this group in these
amounts for future telephone business, owing to the possibility of some of the
banks being able to underwrite in the future. If this came about, I would
imagine that they might have to include the First National, Guaranty and
National City.
Could Mr. Jesup have understood you correctly, or was that your
impression at the time?
Mr, Stant^ey. That was what Mr. Jesup said.
Mr. Nehemkis. That was not possibly your view, or one of the
reasons why you were not anxious to establish a group ?
i "Exhibits Nos. 1644, 1697, and 1698."
11972 CONCENTRATION OF ECONOMIC POWER
Mr. Stanley. Well, my reasons, very simply, were that we were
just considerin*^ this transaction, and we were not at that time mak-
ing any plans for the future.
Mr. Nehemkis. Mr. Chairman, in accordance with our prevailing
understanding, I should like to offer a memorandum by H. M. Addin-
sell, whom I have previously identified to the committee, dated No-
vember 20, 1935. with reference to the Southwestern Bell Telephone
Co. $45,000,000 offering. May it be marked, sir?
The Chairman. It may be marked.
(The memorandum referred to was marked "Exhibit No. 1699" and
is included in the appendix on p. 12241.)
The Chairman. Are thes letters to be marked, all of those?
Mr. Nehemkis. You want them marked at one time?
The Chairman. Suppose we have them all marked, and that will
dispose of them.
Mr. Nehemkis. All right.
The Chairman. That includes all of these exhibits that are to be
identified by the staff member when he returns?
Mr. Nehemkis. Correct, sir.
(The documents referred to were marked "Exhibits Nos. 1700,
1701, and 1702" and are included in the appendix on pp. 12242-12243.)
Mr. Nehemkis. Mr. Stanley, may I react to you a rather brief state-
ment of Mr. Addinsell in which he says [reading from "Exhibit No.
1699"] :
All participants giving up pro rata to them ♦ • *
I take it this indicates that in spite of your strong admonition,
some of the banking houses still believed there was a group and
tJiat they had definite claims on the business. Suppose I read you
the whole statement [reading from "Exhibit No. 1699"] :
We are offered a $4,000,000 interest which is a slight reduction from our pro-
portionate interest in the Illinois Bells and is occasioned by the fact that
Dillon Read will be introduced into the business (in a non-appearing position)
and all participants are giving up pro rata to them. The amount of their
interest is not stated. Mr. Morgan is sending us the proposed registration
statement —
And so forth.
Now, I repeat my question, if I may, Mr. Stanley, that language
seems to indicate that despite your very strong admonition that there
was no group, some of the houses still believed that there was a group
and that they had some claim on the business, and it would further
indicate, Mr. Stanley, that you apparently were forced to recognize
the existence of a group since you cut the participants pro rata ?
Mr. Stanley. Well, Mr. Nehemkis, I don't see where you get the
idea that we were forced to give, to start with. I don't know what
the other people thought. I thought you intjroduced a memorandum ^
from Mr. Addinsell saying there was no precedent.
Mr. Nehemkis. I have, but this is a subsequent memorandum ^ on
the Southwestern Bell issue dated November 20, 1935.
Mr. Stanley. But what of it ?
Mr. Nehemkis. I am asking for your comment. Here is a responsible
member of the investment banking commimity. You have been very
1 "Exhibit No. 1698."
'"Exliibit No. 1699."
CONCENTRATION OF ECONOMIC POWER 11973
careful to admonish the various houses that there was no precedent.
Apparently, Mr. Addinsell, a responsible banker, believes that there
was a group. You seem to indicate, in spite of your own statements,
that there was a group, because it was necessary to cut the group
pro rata.
Mr. Stanley. I wouldn't think that his memorandum indicates he
thought there was a group. What he is saying is that there is a read-
justment of the amounts these people had, different from the time
before.
Senator King. Has this witness, the person who wrote the letter,
testified ?
Mr. Nehemkis. No, sir. This is a memorandum by Mr. H. M.
Addinsell.
Senator King. How would that bind Mr. Stanley?
Mr. Nehemkis. I am not saying that it does.
The Chairman. He doesn't contend that it binds Mr. Stanley, and
of course it doesn't, but it is merely an expression of opinion, that is all,
so that any question based upon it would be an argumentative question.
Mr. Nehemkis. Correct.
Mr. Stanley. I think all he is saying is that the same people are
going to be in this Southwestern issue plus another one who wasn't in
the previous issue.
Mr. Nehemkis. Mr. Chairman, may I at this time offer in evidence
a table entitled "Kelative Participations in Security Issues of American
Telephone and Telegraph and Associated Companies, 1935-39." The
source of the data which appears in this table was compiled from the
registration statements filed with the Securities and Exchange Com-
mission relating to the respective issues on file with that Commission.
The Chairman. It may be admitted.
(The table referred to was marked "Exhibit No. 1703" and is in-
cluded in the appendix on p. 12244.)
Mr. Nehemkis. In the same connection, Mr. Chairman, I also offer
in evidence a table upon which the one you now have before you was
predicated. This table likewise is compiled from the information ap-
pearing in the registration statements on file with the Securities and
Exchange Commission. However, I do not intend to discuss the sec-
ond table which I request be admitted.
The Chairman. The table may be admitted.
(The table referred to was marked "Exhibit No. 1704" and is in-
cluded in the appendix on p. 12245.)
PERCENTAGE PARTICIPATIONS OF PRINCIPAL MEMBERS OF TELEPHONE GROUP
IN RELATION TO PARTICIPATION OF MORGAN STANLEY & CO., INCORPO-
RATED, 1935-39
Mr. Nehemkis. Does Mr. Stanley have a copy of this table ? ^
Here is one, Mr. Stanley. A word concerning this table and why it
is being offered at this time. This table was prepared, may it please
the committee, by dividing the amount taken by each underwriter
by the amount taken by Morgan Stanley; in other words, a series
of fractions: Kuhn, Loeb over Morgan Stanley equals Kuhn, Loeb's
amount ; Kidder, Peabody over Morgan Stanley would equal Kidder,
1 Referring to "Exhibit No. 1703."
11974 CONCENTRATION OF ECONOMIC POWER
Peabody's amount, and so on. In each Telephone issue you will
observe, INIr. Chairman, that Kuhn, Loeb gets exactly 50 percent of
whatever is taken by Morgan Stanley, You will further observe, may
it please the committee, that Kidder, Peabody's participations have
been exactly 40 percent, or very close to 40 percent, in all issues other
than Pacific Telephone, in which issue Kidder, Peabody i-eceived
33i/;i percent. You will further note, Mr. Chairman, that Lee Hig-
ginson's participation in 7 out of 11 Telephone issues has been exactly
50 percent of the amount taken by Kidder, Peabody. Now, you
will note on the table, there next appears a group of houses. First
Boston, Brown Harriman, E. B. Smith. These three houses have all
obtained precisely the same amounts beginning with the Pacific Tele-
phone and Telegraph 3I/4S of April 1936. You will further note,
Mr. Chairman, that a new firm appears as a participant in the
issue, Harris, Hall & Co. This firm thereafter appears in fdl sub-
sequent issues. Harris, Hall & Co.'s participation would appear to
have been ceded to it by First Boston. From this time on First
Boston gets the same percentage as E. B. Smith & Co. and Brown
Harriman, and this would appear to be the explanation for First
Boston's obtaining the same percentage as E. B. Smith and Brown
Harriman beginning with the Pacific Tel. & Tel. issue, whereas in the
prior issues First Boston's percentage exceeded that of the other two
houses.
Now what is the moral to be drawn from this chart? Yesterday,
you win recall, Mr. Chairman, that there was offered a table ^ which
showed that in all Telephone issues headed by J. P. jMorgan & Co.,
from 1920 until 1930, the percentage amounts taken by the group of
houses in that syndicate were absolutely static, no variation. This
chart was prepared, Mr. Chairman, to show whether or not there
had been any crystallization of a group in Telephone financing under
the leadership of Morgan Stanley & Co. comparable to the group
under the old J. P. Morgan & Co. leadership.
I submit, sir, that despite Mr. Stanley's desires that there be no
group, as expressed to the participants, this chart indicates that there
has been a crystallization.
The Chairman. Well, it is not the chairman's understanding that
the witness has ever denied that there was a group. He has mei'ely
denied that there was any obligation by which particular members
must of necessity be included in the group, and that is the only dif-
ference that I see. Am I correct in that?
Mr. Staklky. Not quite, sir. It depends on what you mean by
the word "group," I suppose. A group of underwriters — may I just
finish ?
The Chairman. Yes, sir.
Mr. Stanley. A group of underwriters are the people who buy the
bonds from the company. Now it is quite true that since 1935, since
Morgan Stanley & Co. have managed these Telephone issues, all of
these people that have been mentioned have been in the business,
but a great many others have, too, on exactly the same terms. For
instance, in some issues they bought the entire amount. The first
issue — no ; I am not sure whether you said seven names or nine.
» "Exhibit No. 1C87."
C0NC12NTRATI0N OF ECONOMIC POWER 11975
Mr. Nehemkis. In that table? '
Mr. Stanley. Yes.
Mr. Nehemkis. Nine names.
Mr. Stanley. Anyway, it doesn't make any difference, a certain
number of people bought the entire issue of the Illinois Bell, 9 people.
The next issue, 10 people bought the entire issue; the next issue 10
l>eople bought the entire issue; tlie next issue 47 people, all on
exactly the same terms. In the next issue
The" Ch.\irman (interposing). Wlien you say "all on exactly the
same terms," what do you mean?
Mr. Stanley. I mean they paid the same price to the com]:)any.
The Chairman. Yes; but the proportionate share of each partici-
I^ant was necessarily different.
Mr, Stanley. Not to the total. I will come to that in a moment, sir,
if I may.
The next issue, 97 people bought the issue; the next issue 10 people,
the next issue 48, the next issue 8, and how anybody can say there is
anything ^ery frozen about that I don't see. The next issue 37
people bought it, the next issue 43 people, the next issue 47 people
bought it.
The Chairman. Are you referring now to the underwriters?
Mr. Stanley. Yes, sir.
The CH.m{MAN. Or to the distributors?
Mr. Stanley. To the underwriters. If you would like the number
of distributors I can give them to you in each issue. They run from
three to eight hundred people in each issue.
Mr. Henderson. Mr. Stanley
Mr. Stanley (interposing). May I just finish the question that the
chairman raised? The i^eople whose names Mr. Nehemkis has given
here, that is ourselves; Kuhn, Loeb; Kidder, Peabody; Lee Higgin-
£on; First Boston; Brown Harriman; Smith, Barney; Blyth & Co.,
in the first issue bought 93 percent of the issue; in the next issue 89
percent. The next 83 percent, the next issue 53 percent of the issue,
the next issue bought 46 percent of the issue.
The Chairman. Now, you are referring to the exhibit which has
been
Mr. Stanley (interposing). No, sir, I am not; T am referring to a
table of my own.
The Chairman. Well, I mean when you say the next issue, are you
referring to the issues that appear on this chart?
Mr. Stanley. Yes, sir; I am.
Mr. Nehemkis. Would the
Mr. Stanley (interposing). The next issue is
Mr. Nehemkis (interposing). Excuse me a moment, Mr. Stanley.
Would the Chair request for the convenience of those who are try-
ing to follow the testimony, that the witness discuss them in the order
in which they appear on the chart?
The Chairman. Yes, let's do that ; Mr. Stanley, would you do that ?
Mr. Stanley. I will read the names, if I may.
The Chairman. If you will hold in your hand, or conveniently, a
copy of this exhibit - and then, for the benefit of the members of the
committee, identify each issue from it, reading from the top down
1 "Exhibit No. 1703."
2"Exliibit No. 1703."
11976 COiSfCENTRATION OF ECONOMIC POWER
Mr, Stanley. Right, sir. In the first issue-
The Chairman (interposing). Which is the Illinois Bell?
Mr. Stanley. The Illinois Bell issue, seven underwriters purchased
97 percent of that issue, the balance being taken by two more under-
writers, presumably.
The Chairman. Pardon me?
Mr. Stanley. The balance was taken by two more underwriters
whose names are already in the testimony.
The Chairman. Well, now, let's see. Appearing on that table,^
among the participants, are Morgan, Stanley & Co.; Kuhn, Loeb &
Co. ; Kidder, Peabody & Co. ; Lee Higginson Corporation ; The First
Boston Corporation; Brown Harriman & Co., Incorporated; Smith,
Barney & Co.; later also identified as E. B. Smith & Co.
Mr. Stanley. Those are the first seven to whom I referred.
The Chairman. And then the Mellon Securities Corporation and
Bonbright & Co. ?
Mr. Stanley. Ri<Tht.
The Chairman. A total of nine underwriters?
Mr. Stanley. Yes, sir. The figures are in this chart, Senator, and
those figures are the ratio that Mr. Nehemkis has figured out of the
respective amounts that each firm purchased as compared to the
amount we purchased. The figures that I am giving you are the
« mounts in the aggregate of seven people, of the total issued. I don't
question the accuracy of Mr. Nehemkis' statement here or his compu-
tation of mathematics, but what I am trying to say is that it doesn't
tell the story at all, because you have got to consider the whole issue.
You can't give just part of the issue and
Mr. Nehemkis (interposing). Mr. Chairman, may I venture to say
that it is impossible to make the kind of comparison that Mr. Stanley
wants to make ? I merely indicated, sir, that these were ratios and you
can't compare ratios with absolute figures. Mr. Stanley should ad-
dress himself to the chart in evidence, and then, if he wishes to
The Chairman (interposing). He is doing that, Mr. Nehemkis, and
what he is trying to do, as I understand him, is to point out to the
connnittee what proportion of the entire issue was purchased by what
underwriters and how many unclerwriters participated in each issue,
and, of course, the committee is willing to have him make his explana-
tion.
Senator King. I think the explanation is quite proper and compe-
tent in connection with the transaction.
Mr. Stanley. Thank you.
The second issue, the Southwestern Bell Telephone Co. issue, the
first seven names at the top of Mr. Nehemkis' sheet purchased 89 per-
cent of the total issue.
The Chairman. But there were 10 participants in that issue, all
told?
Mr. Stanley. Yes, sir; the next issue was the Pacific Tel. & Tel.
31/^ 's, and those 7 people, the same 7 people, purchased 83 percent of
the entire issue, and there were a total of 10 underwriters. The next
issue, the American Tel. & Tel. issue of 1961, those same 7 people pur-
chased 53 percent of the issue, and there were 47 underwriters ; that is,
39 other people.
» "Exhibit No. 1703."
CONCENTRATION OF ECONOMIC POWER 11977
The Chairman. Now, may I interrupt you there to ask whether
Mor<iun btunley & Co. determined the identity of all the persons who
participated and all of the firms that partici[)atcd in that?
Mr. Stanley. AVe did, sir; we discussed the names with the com-
pany, but they said the responsibility was ours, and as I said before,
we had to guarantee performance.
The Chaikman. Then the seven first names purchased how nuich
of that secui'ity?
Mr. Stanley. 53 percent.
The Chairman. Now, that allocation was made by you?
Mr. Stanley. Yes, sir.
The Chairman. And you allocated the other 47 percent to these
additional underwriters whom you brought in of your volition?
Mr. Stanley. Correct; entirely.
The Chairman. And that was done at your discretion, and I
assume you were guided by a sort of — what would be the best form
of distribution?
Mr. Stanley. Correct, based on our opinion of the merits of the
people.
The Chairman. Very well.
Mj'. Neiiemkis. Mr. Stanley, do you want to point out that that was
a $150,000,000 issue?
Mr. Stanley. Quite. The amounts are shown, I think, on your
list.
Mr. Nehemkis. Yes.
Mr. Stanley. The next issue of A. T. & T., of $140,000,000, the
7 people bought 46 percent of the issue, and there were 97 underwriters.
The next issue of Bell Telephone was S'/oS — Sy^s it should be — those
same 7 people purchased 82 percent of the issue.
Senator Kino. Purchased what?
Mr. Stanley. 82 percent, sir; and there were how many under-
writers?
Mr. Young. Ten underwriters.
Mr. Stanley. Ten underwriters. The Southern Bell issue, which
was the next one, 7 people issued, it was a $42,500,000 issue, and the
same 7 people purchased 54 percent of the issue and there were 48
underwriters. The next issue was New York Telephone Co., a $25,-
000,000 issue, and those 7 people purchased 98 percent of the issue,
and there were 8 underwriters. The next issue, the Mountain States
Telephone, the 7 people purchased 56 percent of the issue, and there
were 37 underwriters.
On the Southwestern Bell issue, the 7 people purchased 56 percent of
the issue, and there were 43 underwriters. That was a $28,000,000
issue. The Southern Bell issue, which is the last one, was $22,250,000,
and 7 people purchased 55 percent of the issue, and there were 47
underwriters.
The Chairman. What was the largest percentage?
Senator King. Who purchased the rest, on that last one, 45 percent ?
Mr. Stanley. There were 40 other people who joined in the pur-
chase.
The Chairman. What was the largest percentage that you just
gave us, allotted on any single issue, to the first seven firms ?
124491 — 40— pt. 23 12
11978 CONCENTRATION OF ECONOMIC POWER
Mr. Stanlet. Tlie largest percentage was 98.40, and tliat is in the
case of the New York Telephone Co., which the company wanted dis-
tributed primarily in the East and particularly in New York.
The Chairman. And the smallest was 50, or
Mr. Stanley (interposing). Forty-six percent.
The Chaihman. Forty-six percent in what issue?
Mr. Stanley. In the $140,000,000 A. T. «& T.
The Ch.vjrman. And in all other issues, these seven participated in
more than 50 percent?
Mr. Stanley. Yes, sir.
The Chairman. Now, those seven firms which in each instance ex-
cept one took more than half of the total, were Morgan, Stanley &
Co., Inc."; Kuhn, Loeb & Co.; Kidder, Peabody & Co.; Lee Higginson
Corporation; The First Boston Corporation; JBrown Harriman.& Co.,
Inc.; and Smith, Barney & Co., also known as E. B. Smith & Co.?
, Mr. Stant^ey. Yes, sir.
The Chairman. And the various proportions which they took are
substantially those set forth on the exhibit offered by INIr. Nehemkis?
Mr. Stanley. I have no reason to question the accuracy of it.
The Chairman. That is a mathematical calculation; but as you
glance at it, j-ou see no reason to dispute the proportions?
Mr. Stanley. Quite correct.
The Chairman. Very well,
Mr. Nehemkis. Air. Stanley, you have referred to the first seven
names, or a phrase substantially similar to that. Will you now give
me the names represented by that phrase, the first seven?
Mr. Stanij:y. Well, the first seven names on your list.
Mr. Nehemkis. No; the first seven names which you had occasion
to refer to in your exposition of a moment ago. What are those seven
names ?
Mr. Stanijey. Well
The Chairman (interposing). Well, I just read them, and he ac-
knowledged them.
Mr. Stanley. They are the first seven names on your list; they are
tlie same names at the top of yaur table.
Mr. Nehemis. I see. I just wanted to make clear that we were
talking about the first seven names.
Do you recall Mr. Charles Mitchell's testimony in regard to Tele-
phone matters when he was here? I'believc you were present.
Mr. Stanley. I was present, I think, most of the time.
ACCOUNTS "frozen TO A EAR GEEATER EXTENT THAN OTIIERs" THE
telephone account
Mr. Nehemkis. I am going to read to you what Mr. Mitchell had
to say on the point now under discussion, may it please the com-
mittee : ^
Mr. Nehemkis. Mr. Mitchell, we left off this morning with a discussion of Tele-
phone matters. You were good enough to indicate to the committee that you would
m;ike avaihible ('ertaiii information. Let me repeat to you sniue of the questions
at this time. You had this to say, "There are certain accounts that are frozen
to a far greater extent than others. For instance, what we know as the Tele-
phone account.
"The Chairman. Is that a frozen account?
» Supra, p. 11573.
CONCENTRATION OF ECONOMIC POWER 11979
"Mr. Mitchell. As to its leadership and the first few names on that account
I think it is more nearly frozen, perhaps, than most accounts."
I skip a portion and I continue with Mr. Mitchell's testimony:
Mr. MiTCHEix. I would say that for a long period of years — and I give you that
from recollection — the business has been headed by J. P. Morgan and latterly by
Morgan Stanley & Co., and there have always been in that gfoup, always according
to my recollection, Kuhn, Loeb & Co. ; Kidder, Peabody & Co. ; Lee, Higginson &
Co.; and latterly, Lee Higginson Corporation. Since Morgan Stanley & Co.
have handled this financing, those names have headed the list. They have also
followed them in all of the issues. The First Boston Corporation; Brown Harri-
man & Co. ; and Edward B. Smith & Co., and those names by and large have been
the names that have appeared in the public advertising.
Mr. Nehemkis. And it was that list of names of those underwriting houses which
you have just enumerated that you regard as being the group?
IMr. Mitchell. Those names have appeared so often with the head of the
group, with the head of the underwriting syndicate, that I would say that they
were regarded as the principal names in the Telephone business.
Mr. Stanley, is there a Telephone group under the leadership of
Morgan Stanley & Co., Incorporated?
Mr. Stanley. Not as I understand the meaning of the word.
Mr. Neheme.is. Mr. Stanley, I now read you from a memorandum
covered by stipulation of Mr. Charles E. Mitchell, may it please the
committee.
The memo is dated September 23, 1936, and is adaressed to members
of the firm by Mr. George Leib, who was a witness here, as you will
recall, Mr. Chairman. 1 now read you, INIr. Stanley
Senator King (interposing). Did that witness identify the state-
ment?
Mr. Nehemkis. This memo. Senator King, has been offered under a
stipulation by the chairman of the board of Blyth & Co., who identi-
fies it as coming from his files, and that stipulation ^ is in the record.
Senator King. Well, the point I am trying to get at is, could that
be regarded as having been sworn to by some person, some witness?
The Chairman. Yes, that was the understanding. Mr. Mitchell
was here, and in order that he might not be required to remain, he
acknov^ledged that, that that memo came from his files.
Senator King. But he wouldn't swear to its accuracy and Mr. Leib
was not here on the stand so he couldn't swear to it.
Mr. Nehemkis. I am still saying, sir, that for purposes of identi-
fication, and that the record may be clear, Mr. Mitchell has stipulated
and I am offering in connection with that stipulation, a memo coming
from the files of Blyth & Co. I say nothing further with reference
to its contents.
Senator King. Well, you see, it is sort of getting the testimony in
the back door, withoirt bringing in the Avitness, Mr. Leib, on the stand
and letting him swear that he made that statement.
Mr. Nehemkis. Mr. Chairman, I must take exception to that.
Senator King. Is Mr. Leib going to be called?
Mr. Nehemkis. The record may show that counsel takes exception
to that statement.
Senator King. Let it be noted, but can Mr. Leib be called as a
witness; yes or no?
Mr. Nehemkis. Mr. George Leib, in connection with this proceed-
ing, is not to be called as a witness. Senator.
» "Exhibit No. 1691."
11980 CONCENTRATION OF ECONOMIC POWER
Senator Kjng. Well, I want to know — if lie doesn't have his testi-
mony here. "VYe will continue.
Mr. Nehemkts. Shall I proceed?
The Chairman. Proceed.
Mr. Nehemkis [reading from "Exhibit No. 1705"].
Harold Stanley called up while you were out ou the subject of American Tele-
phone & Telegraph. There will be a $175,000,000, 2r)-year, 314s filed either today
or tomorrow, to be offered about October 15. $25,000,000 of this will be retained
by the company for the pension fund.
It will be two point profit business with % going to Morgan Stanley. Under-
writers will receive '/». subject to expenses and the .selling group will receive
%. * * * There will probably be about 45 underwriters —
And then appears a list of names. Now, the last paragraph [read-
ing further].
Mr. Stanley went on to explain that there is absolutely no precedent in this
business as the next issue will be a small one and ir may be that tbey will go
back to the original seven underwriters who appear publicly.
Mr. Chairman, I merely offer this in evidence at this time as an
indication of what Mr. George Leib, whom the committee has seen
and the committee has heard, understood at the time. It is offered in
evidence.
The Chairman. It may be received.
(The memorandum referred to was marked "Exhibit No. 1705"
and is included in the appendix on p. 12250.)
Mr. Nehemkis. And if I may use an expression
The Chairman (interposing). Of course, Mr. Nehemkis, there is
no argument about the facts so far as I see them. The witness
acknowledges that there were several principal underwriters. He
merely concedes that those could be changed. These various exhibits
that you are offering do not in any sense controvert that declaration.
I don't see how it can be controverted because it is a matter of inter-
pretation.
Mr. Nehemkis. That is correct. I think you and I understand
each other perfectly.
Mr. Henderson. I think also, Mr. Chairman, that some of the
things we do offer support some of the contentions Mr. Stanley has
made.
Tlie Chairman. Yes, surely.
Mr. Nehemkis. Now, Mr. Chairman, in accordance with your previ-
ous arrangement concerning identification, I would like now to ask
you to examine "Exhibit No. 1700," after I briefly touch on it, you
will — if you will, sir, look at it. This exhibit was obtained from the
Hies of E. B. Smith & Co., now known as Smith, Barney & Co. You
will observe, sir, its very significant statement
The Chairman (interposing). Now, is that one of the exhibits
which we put in subject to futui'e identification?
Mr. Nehemkis. Subject to future identification, correct, sir. This
exhibit sets forth in one column the vai-ious underwriting houses that
have participated in TeIe})hone securities from the time of the passage
of the Securities Act in 11)33 u[) until the Mountain States Telephone »!t
Telegraph offering of June 9, 1938, and on the left-hand side appears
a list of underwriters, but the significant thing about this is that only
the percentages and further reference marks that I will come to are
made with reference to the first seven, always the percentage of the
fiirst seven and always the position in advertising of the first seven.
CONCENTRATION OF ECONOMIC POWER 11981
It would seem — I make no other comment about it — that at least one
important and responsible investment bankinjT iiouse thought that
only the first seven houses were significant in this business.
Will you examine it, Mr. Chairman ?
GUARAXTT OF FINANCIAL RESPONSIBILITY OF OTHER MEMBERS OF
SYNDICATE BY MORGAN STANLEY & CO., INC.
Mr. Miller. Might I ask a question ? Mr. Stanley, were all of these
Telephone issues handled in the same manner, that is, you had to
guarantee the account and all the members' responsibility in the
account ?
Mr. Stanley. In each issue.
Mr. MiLLx,... I wonder if the committee have the impression that
that is a normal type of account? Isn't that an extraordinary thing?
Mr. Stanley. Well, it is not general, Mr. Miller. We have done
it in a few other cases, but it isn't general. I don't know whether any
other managers have done it or not. I don't recall any, but it seems
to me that some have done it. But I might point out that there are
various other kinds of guaranties that other managers arrange in
other syndicates, a partial guaranty, up to 10 percent or the first
5 percent that might default, or whatever it might be, some guaranty
of that kind. But I don't remember at the moment any other instance
by any other manager of a complete guaranty of the entire under-
writing.
Mr. Miller. The usual thing is no guaranty on the part of the
manager?
Mr. Stanley. The usual thing is a separate, several contract between
the underwriter and the company and that, of course, is one of the
proofs that the company, in many cases, has a lot to say as to who the
underwriters are, because they have a contract direct with them.
Mr. Miller. I understand.
Senator Kino. I didn't vmderstand that last observation.
SEVERAL liability OF UNDERWRITERS UNDER PURCHASE CONTRACT WITH
ISSUER
Mr. Stanley. The way business is done now, sir, a group of people
buy an issue of bonds, whatever the amount may be, from a borrowing
company. : The procedure under the present laws makes it better, or
less difficult, to have each underwriter sign a contract with the bor-
rower. One man buys a million bonds, another man buys two million
bonds — or another firm, in both cases, rather — another firm buys "x"
number of bonds, and in the aggregate they comprise the entire issue,
and that is a several contract between each firm and the borrower, so
naturally the borrower knows something about whom he is doing
business with.
Senator King. From your experience in the business to which you
have been referring, is there any advantage to the borrower in know-
ing just what he will get for his entire issue, and knowing that he
will not have to go out and look around for a purchaser, to peddle
them here and there in various parts of the United States?
Mr. Stanley. Oh, absolutely; a very great advantage. It is essen-
tial that he know that he has got the entire amount to be paid to him
on the date set.
11982 CONCENTRATION OF ECONOMIC POWER
Senator Ktno. From your exporience over a lonjr period of years,
is it more advant:i<reous to the borrower and to the public to have
a plan such as you have indicated, or rather to just let each issue
be advertised and sold to any purchaser desiring to buy any portion,
witliout any guaranty?
Mr. Stanley. Well, I think it is very much more to the advantage
of the borrower and the investor to have continuing relations with
responsible, competent people in the investm.nt business, with a
borrowing concern. I don't want to enlarge on it too nnicli, but the
investment banker who knows about the company for a loi:g time
and lias gotten wliere they have mutual confidence in each other
and have had satisfactory relations with each other, it is normal
that they will cont'iiue and certainly they can do business better and
more effectively tlinn just a new man every time. Now, so far as
the investor goes, sach a person wlio has continued relations, whose
advice is heeded and followed — they may be disagreed with but they
talk it out and the coinpany and the banker agi'ee on what is the
proper thing for the investor's interests — certainly the investor's
interest is looked after a great deal better than in a case where the
investment banker has nothing to say about a certain issue at all.
Senator King. Another question : Are there many issues of bonds,
not coming within the category to wliich you have referred in Mr.
Nehemkis' memo, that have defaulted? In other words, in the gen-
eral issue of bonds, not those that are guaranteed, are there many
in default during the past few years?
Mr. Stanley. By the undeiwriter to the borrower, you mean, sir,
or do you mean by the public?
Senator King. The purchaser.
Mr. Stanley. You mean the borrower?
Senator King. By the issuer.
Mr. Stanley. There have not been many defaults of American
corporations in recent years. Perhaps I don't understand your ques-
tion correctly.
Senator King. Well, are there many companies wiiich have pur-
chased bonds not in this — small group or individual groups, pur-
chased bonds — have they defaulted?
Mr. Stanley. Oh, I think perb.aps I understand your question as,
Do the investment banking firms — ^liave they defaulted? No, sir,
not often.
Senator King. Where the investment banker has made a guaranty
such as is indi.^ated in these, have there been any defaults?
Mr. Stanley. We haven't been called on to make up any defaults.
Senator King. That is all.
Mr. Nehemkis. Mr. Stanley, may I clear up one point about your
earlier testimony? As you were going over a list which was avail-
able to you, you indicated that in the Southern Bell Telephone Co.
$42,500,000 offering in 1937, the imderwriting group had been in-
creased from either 9 or 10 to 48. Is it not a fact that you increased
that underwriting group at the express request of the Telephone
Co.?
Mr. Young. Is that Southwestern?
Mr. Nehemkis. Southern iSell Telephone, $42,500,000, 3i/4's, 25-year
debentures.
CONCENTRATION OF ECONOMIC POWER 11983
Mr. Stanley. Well, I think very likely, Mr. Nehemkis. I can't
be sure of the dates, but as I have testified, as business went on, as
business began, we — this was 1937.
Mr. Nehemkis. Right.
Mr. Stanley. But I am coming back in a moment. In the initial
Bell issue, we thought the most appropriate and best thing to do —
and I would like to explain some of the reasons in a moment — was
to have a fairly small group and a very large distributing group.
That was — we were just starting in business, and you know the con-
ditions in the investment markets were uncertain. People's ability
wasn't fully tested, these new firms and all that. As we went on
and did more business, we became convinced, and the company also
felt that it was very wise, on large issues, national issues, to have
a much larger underwriting, and between us, we agreed. The deter-
mination of the people, however, was left to us.
Mr. Nehemkis. Mr. Chairman, I should like to refer
Mr. Stanley (interposing). We started that m 1936, Mr. Young
says.
Mr. Nehemkis. I should like to refer at this time to a memo-
randum which has already been received in evidence, as "Exhibit
No. 1701," subject to our prevailing understanding. This memo-
randum confirms substantially what Mr. Stanley just said. It is a
memorandum from Mr. H. M. Addinsell with reference to the
Southern Bell offer, dated April 14, 1937. I should like also to refer
to another memorandum by Mr. Addinsell, "Exhibit No. 1702," on
the Southern Bell Telephone offering of 1939,
RECIPROCITY with MORGAN STANLEY & CO., INC.
Mr. Nehemkis. Now, may it please the committee, I should like
to read to you a letter from Mr. Mitchell. Tliis letter is covered by
Mr. Mitchell's stipulation^ in evidence. This letter is directed by
Charles E. Mitchell to his partner on the west coast, Charles R.
Blyth, and reads as follows [reading from "Exhibit No. 1706"] :
I have had several talks with Harold Stanley regarding Pacific Telephone
business and have used every argument that I can muster that we should be
up around the top in that offering. He started out with the proposition, that It
was going to be impossible to revise the old account. Later he conceded us
a position of $1,000,000 in the underwriting and the last appearing name. Then
he told me that there was just as much pressure from the Coast for the care
of Dean Witter as there was for us and if he revamped the account to take
us in, he would have to find some place for Dean Witter, and now in a letter
written just as he was leaving for a holiday, he writes me as to the set-up
as follows:
"As to Pacific Telephone, we have tried to consider all the different aspects
of that issue. It is not coming for some time, but I think that the partici-
pants will be invited on the following basis."
Then appears the first seven names that we have been referring to,
and three additional names, Blyth & Co., Dean Witter, and Harris &
Co.
Continuing with Mr. Stanley's letter, which Mr. Mitchell quotes
[reading further] :
"The names to appear in the advertisement in the order given.
"I know you will keep the above confidential, as we haven't spoken of any of
the other houses, and the above program may be changed.
» "Exhibit No. 1691."
11984 CONCENTRATION OF ECONOMIC POWER
"After giving not only yonr wishes hut the entire mntter a lot of thought
I am convinced that the above arrangement is fair ail around and to the best
interests of the business.
And now, sir, I call your attention particularly to the next para-
graph [reading further] :
"I note what you say about yonr having offered us the participation in Pacific
Gas & Electric, wliich of course we appreciated and which we were very glnd
to accept, but really there can be no connection between that and the Pacific
Telephone business in your mind or ours."
Mr. Stanley, did that mean that you recognized that Blyth & Co.
could not possibly reciprocate to you by having offered you a piece
of P. G. & E. business for Telephone business?
Mr. Stanley. Well, I don't know what it meant, because I don't
know what was said in Mr. Mitchell's letter, but it certainly has no
connection ; there is no connection between the two in my mind.
Mr. Nehemkis. You still maintain that?
Mr. Stanley. Yes.
(The letter referred to was marked "Exhibit No. 1706" and is
included in the appendix on p. 12250.)
Mr. Nehemkis. Now let me read to you from Mr. Mitchell's testi-
mony : ^
Mr. Nehemkis. You can't ever hope really to reciprocate to Morgan Stanley?
Mr. Mitchell. No ; oh, no ; they are not in our line of business.
Mr. Stanley. Well, I don't know whether you want me to comment
on that or not.
Mr. Nehemkis. Only if you wisl^i, sir.
Mr. Stanley. Well, I don't see any reason at all why people can't
do business with people who want to do business with them, but I
say, in connection with the testimony that has happened here on reci-
procity, that a man or firm cannot run a syndicate that he is man-
aging on a basis of anything except merit and performance and use-
fulness to the business.
underwriting risk relative to telephone issues
Mr. Nehemkis. Mr. Stanley, we have been discussing a case history
of American Telephone & Telegraph Co. for 3 days. We have de-
veloped for the committee the origins of that business and we have
carried it through the leadership of Morgan Stanley. May I ask you
this question. What risk is actually involved in managing a Telephone
issue ?
Senator King. What was the second word of your question?
Mr. Nehemkis. What risk, Senator, is there actually involved in
going in a Telephone issue?
Mr. Stanley. Well, Mr. Chairman, I don't see how you can apply
that, if you are implying that there is no risk in any business you do.
For instance, when tlie war happened
Mr. Henderson. Mr. Chairman, I don't think that that was called
for by the witness at all. I think the question was very plain and
the witness has in my opinion no right to read an implication into
that statement.
The Chairman. It was a conditioniil implication.
» Supra, p. 11600.
CONCENTRATION OF ECONOMIC POWER 11985
Mr. StanI/Et. May I add to my answer in this way, that the risks
involved in handling Telephone issues which are of the highest char-
acter are similar to the risks of handling all bond issues: The matter
of markets, changing markets; the matter of proper pricing; there
might be no risk as to insolvency.
Mr. Hendeieson. What was that?
Mr. Stanley. There might be no risk as to the insolvency of the
Telephone Company. For instance, when rumors of war happened
in September, the outstanding Telephone bond issues went off 10 points,
and if the- syndicate had had a commitment at that time they would
have had a loss. If you overprice the issue, as we did in the last
Southern Bell issue, you may have a loss there, the bonds went down.
I am very glad to say that on most of the issues we happened to have
priced them very properly. Now, I might inject here, Senator — you
have asked myself and I think some of the other witnesses whether,
there was any assurance that the price that was obtained by this
method of negotiations was a fair and adequate price.
Leaving aside the question of the spread for the moment, which is
all a matter of record in the S. E. C. and most of the utility issues are
passed upon by one commission or another as to its propriety, I
think the best answer, for instance, on the Illinois Bell issue was the
price it sold at in the open market. I have those figures here. It was
offered at 1021^ and a month after it sold in the wide-open market
at 102%. Now, it is a matter of judgment, and you have got to have
experience in pricing and in merchandising. The same questions
of judgment come into competitive bidding— I mean there isn't any-
thing automatic about competitive bidding; a fellow forms an opin-
ion as to what the proper price is, and he may be right or wrong.
The Chairman. What you are saying now is that in this particu-
lar issue
Mr. Stanley (interposing). Yes.
The Chairman. A month or so after the underwriting had been
completed
Mr. Stanley. Right.
The Chairman. The issue was commanding in the open market a
price which was at least a point above— —
Mr. Stanley, No, sir.
The Chairman. That at which it was disposed of.
Mr. Stanley. It was selling at a J)rice approximately the same,
fractionally above the price at which it was ottered, an eighth above.
It was offered at IO21/2.
The Chairman. So at this period, after the underwriting, the issue
was commanding in the public market not only the price at which
the underwriters purchased from the issuing ^company but also the
entire spread.
Mr. Stanley. Right. The spread in my opinion is the compensa-
tion you pay for distribution, the same as you distribute any kmd of
commodity. You buy at wholesale and sell at retail.
The Chairman. Well, of course the point in a matter of this kind
is whether so large a compensation should be paid for the distribution
«f so high-grade a security.
Mr. Stanley. That may be one question. That is also a question
of pricing and markets.
The Chairman. Si^rely; and I recognize th , different answers
might be given.
11986 CONCENTRATION OF ECONOMIC POWER
Mr. Stanley. Further than that, I think there is another point
not often thought of. You get into the question of whether wide pub-
lic distribution is a good thing or not, or whether concentrated hold-
ings are preferable. Generally speaking, it has been my experience
that the corporation which has to borrow every year, or every 2
years, with an expanding business, which I hope we are going to have
again soon,^ those people would rather, generally speaking, have
their securities widely distributed and have a market as a gage of
their credit in the case of future issues. Now the only way you can
get wide distribution from here to California and any other place is
y having hundreds of dealers all over the country work and sell
those bonds. The big houses can't do it all, the entire amount. They
can do part but not all of it, and you have to pay those fellows or
they won't work, and that is where part of your spread goes. There
has been a lot of talk about dividing up the profits of business that
people didn't own here
The Chairman (interposing). There wasn't a great deal of talk;
there was one simple short sentence.
Mr. Stanley. Well, that I agree with, Senator, completely. The
selling commission is about half of the total spread, but on the ques-
tion of division of profits among various bankers and their partici-
pations in issues, I am not sure that it has been brought out, I don't
think that it has in the testimony I have heard, that, when a man
takes a million-dollar commitment as underwriter, if things go well
he may make $6,000; if things go wrong. Lord knows what ne will
}ose. I mean we talk in such large figures that the compensation is
lost sight of in the maze of large figures. Now another thing in
distribution, and it is related to this Telephone business, that I would
like to say very briefly is that most of these Telephone issues were
refunding issues, and in considering the appropriate people who
would be useful in the new syndicate, we naturally thought of people
who had sold Telephone securities before. They were in touch with
those people, those securities were to be taken away from them by
redemption and new securities issued in their place. They naturally
were in a much better position to place the new Telephone issues
because of their knowledge and their clients having had old Telephone
issues. As has been testified to here, the Telepnone Co. developed
in New England; the securities were largely held in the East. We
had a list of the holders of the Illinois BeU issue that was to be re-
deemed. It was public information in the manuals of institution
holdings, trusts, charities, insurance companies, and so forth, and of
that issue those institutions alone held over half the issue. So it is
obvious that the markets, generally speaking, as well as the holdings
of the telephone bonds, are in the East rather than the West. We
did put bonds in the West in' the selling group and in other places
too. Incidentally, we put quite a large amount in Chicago.
I may say that Mr. Stuart is an old friend, but his figures were
wrong in the amount of his selling participation. He had $1,000,000
which he accepted.
The Chairman. What about the distribution of Telephone stock?
Is that carried on in the same way?
Mr. Stanley. That is generally, or latterly, by the company offer-
ing directly to its own shareholders, nobody else having anything
CONCENTRATION OF ECONOMIC POWER 11987
to do with it, and the price is very attractive and way below the
market. There have been times in the past where the Telephone Co.
had a campaign of selling stock to the public, but that hasn't been
done lately.
Mr. Aatldsen. You said that the Southwestern Bell issue was over-
priced, I believe?
Mr. Stanley. No; the Southern Bell.
Mr, AviLDSEN. Would you explain what you mean by overpriced?
Mr. Stanley. Well, priced at a figvire where it wasn't attractive
to all the public, and all the bonds were not sold and the price went
oflf.
Mr, AvTLDSEN. Who got the benefit of the overpricing, the under-
writers or the Company?
Mr. Stanley, The Company.
Mr. AviLDSEN. The Company got the benefit of the overpricing?
Mr. Stanley. Yes,
Mr, A\iLDSEN. How about the investor?
Mr. Stanley. The investor lost, if he bought bonds at that price,
unless he bought them after they had gone down,
Mr. Hendekson. Do you mean the investor lost if he bought a
bond and then sold?
Mr. Stanley, Yes; if he retains it he may not have a loss at all.
Senator King. Have you concluded your statement, Mr. Stanley?
Mr. Stanley. Yes, sir.
Senator King. I want to ask one question. From your experience,
is it more satisfactory to the public in general to have underwriting
than where you sell without any underwriting? In other words, you
sell more readily where the bonds are underwritten by responsible
organizations ?
Mr. Stanley. Much more so in the latter case, and, in addition to
that. Senator^ of course when a company has a bond that is coming
due, as the New York Telephone Co. did this fall — seventy five mil-
lion, or vhatever the figure was — they have got to have somebody
agree to provide that amount of money on October 1, or whatever the
date is. They can't go out and make an effort to sell things and get
half of it and not the rest of it at all, and the same thing applies in •
these refunding issues, of which there have been a great many in the
last year, calhng an outstanding security, paying perhaps 5 or 6
percent, to refund at 3 percent. When they make a call to the
bondholders those bonds come due, and they have got to have the
money in their pockets to pay them.
Senator King. That would necessitate — or at least it is believed to
be necessary to go out then, and organize a syndicate for the purpose
of taking up the refunding issue?
Mr. Stanley. Yes, sir.
Mr. Nehemkis. May I interpose at thi^ moment and ask the com-
mittee's indulgence to continue a little longer than we usually do so
that we may conclude with Mr. Stanley's testimony before lunch and
not run over our schedule? As you recall, we have already advised
certain witnesses that their appearance would not be necessary.
The Chaikman. How long do you expect?
Mr. Nehemkis. About 20 minutes.
The Chaibman. Proceed.
11988 CJONCBNTRATION OF ECONOMIC POWER
Mr. Nehemkis. Mr. Stanley, I believe you were present here yes-
terday when the committee received in evidence a table ^ showinoj that
on the old J. P. Morgan syndicates of Telephone bonds the syndicate
books frequently closed in 1 minute, 6 minutes, 30 minutes, an hour • 2
hours was considered a flop. Now, do you find any substantial dif-
ficulties in disposing of Telephone bonds since Morgan Stanley has
had the leadership o^ the telephone business?
Mr. Stanley. I thuik the bond^ have gone very well in most cases
excepting the last Southern Bell issue.
I want to point out that what you have said, your description ol tne
method prior to 1935, is not correct.
Mr. Nehemkis. Excuse me, sir; do you want to testify about a
matter pertaining to J. P. Morgan & Co. ?
Mr. Stanley. I can testify about the general practice in the securi-
ties business because ihat is what I was in charge of at the Guaranty.
The general practice in subscription issues prior to the 1933 Bank-
ing Act was that selling syndicates were formed, and they were told
a few days in advance that subscription books would open on a certain
date, ana between the time they got that notice and the opening of the
books they sold the bonds; maybe it took 2 or 3 days. The idea the.':
they sold the bonds
Mr. Nehemkis (interposing). That isn't what has ever been
said. The table and any comments on the table merely said that the
books were closed, not that the bonds were sold. The books were
closed ; that is what we are talking about.
But let me proceed, sir, if you have finished. Hasn't Morgan Stan-
ley's biggest difficulty in Telephone issues really been in keeping out
other underwriters who wanted participations?
Mr. Stanley. Well, as in almo3t all good business, Mr, Nehemkis,
there are underwriters who would like to have been included in the
Telephone issues, who were not, but you can't include everybody who
is eligible in any piece of business.- The conversation on the part of
certain people who may have desired to be included, when they talk
to us, isn't very realistic. They talk about being included, and they
don't even know what the price is going to be, it is just conversation,
they are soliciting business.
Mr. Nehemkis. Mr. Stanley, the Illinois Bell offering of 1935, with
which we started this morning, was a refunding, was it not, of the
Illinois BeM of 1923, headed by J. P. Morgan & Co. ?
Mr. Stanley. I don't know; I think so. It was a refimding issue
of an outstanding bond.
Mr. Nehemkis. Will you ask one of your assistants?
Mr. Young. It was.
Mr. ITehemkis. ^ ou accept Mr. Young's answer as your answer?
Mr. Stanley. Yes, quite.
profits or J. p. MORGAN & CO. AND MORGAN STANLEY & CO. INCORPORATED,
ON TELEPHONE FINANCING
Mr. Nehemkis. From an exhibit ^ previously offered and now in
evidence it appears that the 1923 issue had a total spread of 3^, or
> "Exhibit No. 1688."
•--Exhibit No. 1681."
CONCENTRATION OF ECONOMIC POWER 11989
$1,625,000, and the total profit to J. P. Morgan & Co. from the flota-
tion of the 1923 issue was $144,000.
Now in 1935, Mr. Stanley, on the issue of Illinois Bell which was
brought out under the leadership of Morgan Stanley, there was a
spread of 2 points or $874,000, and from the table ^ that you now have
before you, you will note that the total profit to Morgan Stanley
from the flotation of the 1935 issue was $211,345. Note, Mr. Stanley,
that J. P. Morgan & Co.'s gross profit was less than 10 percent of the
gross spread. Morgan Stanley's gross profit was almost 25 percent
of the gross spread.
Now would you care to indicate why there should be such a glaring
discrepancy ?
Mr. Stanley. I don't think there is any connection between the
two things.
Mr. Nehemkio. Do you want the record to show that that is your
answer ?
Mr. Stanley. Yes.
Mr. Nehemkis. Is not the ability to collect a quarter point manage-
ment fee on the entire issue one of the major perquisites of leader-
ship in syndication?
Mr. Stanley. Well, any one of the — I don't know that I would call
it a major perquisite, I think that is an improper designation, but I
would say one of the moot important parts of any syndicate offering
is the work that the manager does in preparing the issue, advising the
company, forming the underwriting group, forming the selling group,
sponsoring the issue, putting his own money up to back his own
judgment.
Mr. Nehemkis. Let me put my question to you bluntly, sir. Under-
writers don't work for nothing. Is not the quarter-point manage-
ment fee very important?
Mr. Stanley. Yes.
Mr. Nehemkis. Now Morgan Stanley's, management fees on Tele-
phone business have amounted, have they not, to approximately
$2,000,000?
Mr. Stanley. I will have to add them up, but I should think our
total profits, incli-Jing management fees, ran somewhere around a
half of 1 percent.
Mr. Nehemkis. Will you accept my figure, subject to your correc-
tion?
Mr. Stanley. Certainly.
(Senator King took the chair.)
Mr. Nehemkis. I should like to offer at this time a table which
gives the figures that I have been referring to. You will note, sir,
that the source of the data upon which this table has been predi-
cated was furnished us by Morgan Stanley & Co. Incorporated.
Acting Chaieman KIing. Have you seen it, Mr. Stanley?
Mr. Stanley. I have not seen it, sir. .
Acting Chairman King. It may be received.
(The table referred to was marked "Exhibit No. 1707," and is
included in the appendix on p. 12251.)
Mr. Nehemkis. Would it not be possible for the witness to accept
that subject to correction at his leisure if he finds any inaccuracies?
1 "Exhibit No. 1707."
11990 CONCENTRATION OF ECONOMIC POWER
Acting C^ airman King. During the recess, if you desire to make
any suggestions or corrections you may do so when the committee
r^^eets.
1^1 i. Nehetikis. I merely say that so we may go ahead.
Mr. Stanley. Certainly.
Mr. Nehemkis. Is it not a fact, sir, that Morgan Stanley's total
profits on Telephone business has amounted to $2,800,000.
Mr. Stanley. The total gross profits, which in .your ta^'" sb'^-^?
before taxes, overhead, and return on capital
Mr. Nt^hemkis (interposing). Two million eight hundred thou-
sand dollars.
Mr. Stanley. That is the figure before those expenses and other
items which I have just mentioned, taxes and overhead
Acting Chairman King (interposing) . Out of that there would be
expenses, rent of your office, and employees?
Mr. Stanley. Yes, indeed, sir.
Acting Chairman King. Social Security.
Mr. Stanley. It is a very expensive Kind of organization to keep.
You have business, sometimes a lot of it at once, and sometimes it is
a long time before you have it. You have to keep a staff of exp irt
people, and, of course, after taxes are paid nowadays there is not
so much left.
Mr. Nehemkis. Mr. Stanley, you may recall, having been present
here yesterday, that the committee received in evidence a table '
showing the amount of securities floated under the leadership of
J. P. Morgan, and the profits realized thereon.
Mr. Stanley. I was here, but I missed that.
Mr. Nehemkis. I will give it to you now. Between 1920 and 1930,
according to the table now in evidence, J. P. Morgan & Co. floated a
total of $832,000,000 of Telephone securities on which it realized a
profit of $2,969,000. Now the total spread on this business, in dol-
lars, amounted to approximately $27,500,000, and the Morgan pror.t
was about 11 percent of the total.
Now Mr. Stanley, Morgan Stanley & Co., Incorporated, has man-
aged approximately $580,000,000 of Telephone securities on which its
gross profit, as you have indicated the use of the term, has been
$2,778,000. The banker's gross commission in your business, that is to
say, under your leadership, has been $11,500,000 and Morgan Stanley's
percentage of the total gross commissions has been^ according to my
calculations, in excess of 25 percent as compared with but 11 percent
for J. P. Morgan & Co.
Would you accept that?
Mr. Stanley. Well, I would say that it certainly is 2 or 3 or 10
times as hard to do business now as it used to be, with all these laws
and regulations and what not. I am a firm and strong believer and
in favor of the underlying ideas of the Securities Act, but actually it
is awfully expensive to do business today, and further than the
expense of it, you have civil liabilities that run for 3 years and
you don't know what they mean.
I might say. Senator, that our guaranty of performance in the
Telephone issues alone raises a civil liability — if tney were all within
» "Exhibit No. 1681-3.'
CONCENTRATION OF ECONOMIC POWER 11991
a 3-year period, which I am not sure they were — of a total of $580,-
000,000. Theoretically, conceivably we are liable on that whole
amount.
POSITION or DEALER
Mr. Nehemkis. You have indicated, Mr. Stanley, that the possi-
bilities of profit are becoming more and more difficult. Has the
proportionate share in the business been felt by the distributor, has
he shared equally with the underwriter in these profits?
Mr. Stanley. I am not sure that I get your question clearly, Mr.
Nehemkis.
Mr. Nehemkis. You have indicated that it is more difficult
today
Mr. Stanley (interposing). More expensive, and more difficult.
Mr. Nehemkis. More expensive for the vinderwriter to do business ?
Mr. Stanley. Yes.
Mr, Nehemkis. You have given some of the reasons. What about
the little dealer scattered over the country? Does he share in the
profits realized by the underwriters to the same extent?
Mr. Stanley. Does he share in the profits realized by the under-
writers to the same extent as he previously did?
Mr. Nehemkis. Yes.
Mr. Stanley. The business is done on an entirely different basis.
In the old days the dealers — it is hard to say this without being tech-
nical^ Senator. Let m& begin again. In the old days the selling
syndicate usually included a lot of dealers, the principal people in the
business and other people; all of those people had a firm commit-
ment in the syndicate. To go back a minute — beyond that, usually in
those days a group of a few people bought an issue and then formed
a syndicate which they sold it to, but everybody had a firm commit-
ment! in the syndicate. Nowadays the dealer doesn't have a firm
commitment. Underwriters buy a block of bonds from a company,
buy an entire issue; they hold the bag, they offer the dealers around
the country an opportunity to sell those bonds, give them an option
for a day, and he gets less compensation working on a commission
or on an option than he used to get when he made a firm commitment.
Mr. Nehemkis. Let me see if I can make a little clearer what I
had in mind a moment ago. The gross spread, as you have, indi-
cated, as the evidence shows, has been cut roughly in half. The
underwriter's proportion, however, has been increased about 250
percent. Now here was what I was trying to get out. Has the
dealer been getting a smaller share than he got before ?
Mr. Stanley. The dealer who is not an underwriter?
Mr. Nehemkis. Yes.
Mr. Stanley. Well, he functions — yes, I think the dealer who sells
today on an option gets less compensation than the dealer who in the
old days sold not as a dealer but as a member of a selling syndicate
which is different from an underwriter.
Mr. Nehemkis. That is what I was trying to get.
Mr. Stanley. He does a different job. He doesn't have liabilities
under the Securities Act. The underwriter does.
Mr. Nehemkis. Let me ask you a question at this point. Is the
result of what you have just said, namely, the smaller share, which
11992 CONCENTRATION OF ECONOMIC POWER
has been going to the dealer, result from anything the dealer has
done? Has he asked for it?
Mr. StajOjEY. The dealer prefers it. The dealer would rather
make a commission on selling what bonds he is able to sell in a day
than to take up bonds that he doesn't know whether he can sell or
not. You see, under this method he doesn't have to take them up
until after he is able to sell them, and naturally he is much safer and
most of these smaller dealers haven't got very much capital. It also
has another feature which has nothmg to do with your question
which is a good feature; it cuts out this high pressure selling to a
great extent.
Mr. Nehemkis. Mr. Chairman, I don't think you were here at the
opening of the hearings, but we opened at that time with Commis-
sioner Henderson reading a very historic letter. He read at that
time a letter from Le^ Higginson & Co. to Frederick P. Fish, Esq.,
president of the American Telephone and Telegraph Co. The letter
was dated February 15, 1905. With your leave I want to conclude
these hearings by reading to Mr. Stanley one paragraph of that
letter. Will you follow me on this, sir?
Acting Chairman King. Did you hear it?
Mr. StanIiET. No, sir.
Mr. Nehemkis (reading from "Exhibit No. 1708") :
As we think we have made it apparent to your Company ever since our
firm and Messrs. Speyer & Co. provided for the last capital requirements, we
are anxious to be afforded an opportunity to show on what terms we can pro-
vide the fresh capital desired by the Company for the coming year. We do
not ask or suggest that we should be given the slightest preference over any
banking firms. The Company is in sound financial condition, and we submit
that there is no reason, based on the condition of the Company in the present
market situation, why the company should not provide for its wants on the
best terms available, and we think it a fair statement to say that the Company
cannot determine what these are if it permits a single firm only to lay before
it a plan to provide for its financial requirements.
Mr. Stanley, isn't the situation which Francis Higginson, one of
the most distinguished bankers of his time, was writing about in 1905
just as true at the present time?
Mr. Stanley. Well, I would iay two things in answer to that, Mr.
Nehemkis. First, if the Telephone Company doesn't think we do a
good job it is not going to keep us, and they are very competent people.
In the second place, I would say when we as manager convey our
ideas to the company as to what we think are the proper terms of an
issue it represents the combined opinion of the best firms in the busi-
ness, the best distributors.
Mr. Nehemkis. Thank you, sir, very much.
(Senator O'Mahoney resumed the chair.)
Mr. Nehemkis. Mr. Chairman, there are a few documents to be
offered at this time. The table to which I made reference earlier and
the .source has been identified. I should like this historic letter from
Francis Higginson to Mr. Fish printed in full, if you will, sir. A
letter to me from Mr. Henry S. Sturgis, giving certain percentages
in the participations of Telephone issues under the J. P. Morgan
& Co. leadership, and a similar table and a letter of transmittal from
Kuhn, Loeb & Co.
The Chairman. Without objection, the documents may be admitted.
CONCENTRATION OF ECONOMIC POWER 11993
(The documents referred to were marked "Exhibits Nos. 1708,
1709-1 to 1709-3, and 1710-1 and 1710-2," and are included in the
appendix on pp. 12252-12256.)
The Chairman. Are there any other questions to be addressed to
Mr. Stanley?
MEMORANDUM ON COMPETITIVE BIDDING BY MORGAN STANLEY & CO., INC.
Mr. Stanley. I am not sure but that in the last sentence I spoke
of the best firms in the business. I would like to have it made clear
I mean the best other firms in the business.
There is one other thing I would like to say, sir. There has been
a good deal of reference to competitive bidding and what is in the
public interest in the two methods of doing business. We had hoped
this subject would come up in these hearings and we tried to put our
own ideas in shape to present them as completely as we could on that
subject and to be prepared to be examined and cross-examined on it.
I am very sorry that there isn't time in these hearings to go into that
subject fully, but in order not to waste time on it I put my own ideas
in the form of a memorandum which I would like very much to sub-
mit to the committee and have it put in the record.
The Chairman. Mr. Stanley, Mr. Henderson pointed out earlier
this morning that the S. E. C. is apparently preparing a complete
study on that very question. We have endeavored to have these
various matters presented in an orderly way so that all sides could
. be reviewed at one and the same time. The insertion now of a state-
ment by you would immediately subject the committee to requests
from persons who t£»ke a different view, don't you see?
Mr. Stanley. Quite right.
The Chairman. And if you will bear with the committee or the
chairman in that respect I think perhaps it would be best.
Mr. Stanley. I quite understand that you can't attempt to argue
the question when there are other points of view, but if it isn't possible
to put it in the record may I submit it to you and the other members of
the committee for them to read ?
The Chairman. We would like very much to have you do that, and
I assure yoii that it will be given the very closest attention.
Mr. Stanley. First rate, sir.
The Chairman. When that particular question comes up it will be
thoroughly reviewed.
Mr. Stanley. First rate, sir. I will then submit it.
Mr. Henderson. Mr. Chairman, I object to the submission at this
time even for members of the committee, for these reasons : The sub-
ject of ompetiti^ 3 '"^iddino- as it relates to Mr. Siunley's firm ar- ^ .;
number of other firms ±s one of the most acute and most often dis-
cussf^d We in the P, T". C. and in the Investment Banking Section
have been pressed by others of different and opposing views to have
a hearing. We have told each one who asked to be heard, some of
whom are presently engaged in controversy with Mr. Stanley's firm
for pieces of business, that this hearmg was not going to take up
this particular rhatter. I feel that we have given a certain amount
of promise to those of opposing view who wanted to be heard, and
they would have a right to resent it if Mr. Stanley in a hearing
that was decidedly limited were able to intrude his views, no matter
what the guise. This committee is at liberty to do as it pleases,
124491— 40— pt. 23 18
11994 CONCENTRATION OF ECONOMIC POWER
of course, but I want to register, in no uncertain tenns and in the
strongest language I can command, ar opposition to this particular
introduction even to members of the cominittia ;t this time, for the
reasons I have stated.
Mr. Stanley. I didn't suggest this thing v ''^i any idea of going
into arguments or into controversj' that Mr. Henderson speaks of.
There is no reference whatever in this memorandum to that subject.
I only suggested doing it because the topic has come up repeatedly in
these hearings at which I have been present.
The Chairman. Let me say it is a matter » " greac personal interest
to me, and Mr. Stanley and the otheis would be at per"^ zt liberty to
leave this room and go down to the post office and mai o o each o
of us. He has agreed that it shall not be entered as a part of the
record, and I really can't see any objection to the members of the com-
mittee receiving it.
Mr. Henderson. I regard it, Mr. Chairmr.n, as decidedly a disre-
gard of the orderly presentation of inforniatio" before this com-
mittee. If it needs any stronger language I will he glad to offer it at
this time. I want this committee to be under nc do not as to how I
feel about the submission of one point of view hj vrhat I would con-
sider a backdoor method. Mr. Stanley is at liberty to do anything
he wants in America with his point of view, but for this committee
to recognize it I say does not 'leep faith with the otiiers whom we
have assured that this matter would not come ip here.
The Chairman. But the committee is not recognizing it urider the
agreement that ^ announced would ne perfectly wiilir ': :» aaopt.
Mr. HJE^TDERSON. It makes no diii'erence.
The Chairman. I feel mj^elf, by some inadvertent questions whi'^h
I address i to the committee without first submitting them to le
S. E. C, that I provoked this matter, and for mytelf I am perfect' •
willing and happy to receive the letter and I don't believe that
in any way interferes with the presentation of this hearin ' bv ti
S. E. C.
_ mator Kjng. I would like to ask Mr. Stanley one question. Does
that in any -v^ay explain or cover ■ , testimony which you have been
giving here today, or deal with that same subject ?
Mr. Stanley. It refers to the sair'^ general subjects.
Mr. Henderson. To the A. T. & T. financing?
fr, Stanley. InTo, sir; not to any specific piece of financing; th3
general t ibjej^s of what an investment lam.^r do'^s and sb/ id •""
for his client.
Mr. Henderson. I call the witness' attention to the fact that the
subject matter before us was the A. T. & T. financing.
Senator King. If that were true, and we asked questions that trans-
gressed thoso limitations, it seems to m^^ ..' ' '' ime""" ^i ''
counsel representing the Government and the witness, they would
have a right to make an explanation of anything that w^as developed
herein the hearing, and I would accept the views of the chairman.
Mr. Stanley. It is a question of doing business in general without
relation to an;' oarticular companv
Thank you.
The Chairman. Are there other questions? Are you going to
.iiive other witnesses this afternoon ?
CONCENTRATION OF ECONOMIC POWER 11995
Mr. Nehemkis. We have three witnesses for this aftemoorf Shall
I tell you their names now?
The CHAraMAN. It might be well.
Mr. Netezjikis. Mr. George Whitney and Mr. Arthur Anderson
of J. P. Morgan & Co., and Mr. Joseph R. Swan, of Smith, Barney &
Co.
The ^.lAiRMAN. The committee will stand in recess until 2 o'clock
this s.-^ ;rnoon.
(^Hiereupon, at 12 : 50 p. m., the committee recessed until 2 p. m.
of o e same day.)
AFTERNOON SESSION
The committee resumed at 2 : 12 p. m., on the expiration of the
rocess.
The Chairman. The committee will please come to order.
Mr. Nehemkis. I apologize, Mr. Chairman, for holding you up.
The Chairman. It is the first time you have done it.
LIr. Nehemkis. I hope that you will forgive me. May I ask for
your further indulgence for one moment more? May the Commis-
sioner and I have an off-the-record discussion for a few seconds with
Mr. George Whitney before his testimony ?
The Chairman. You may.
Mr. Henderson. I should say, Mr. Chairman, that Mr. Nehemkis
was trying to see me all noon hour and I was conferring with you.
The Chairman. You were buying my lunch. [Laughter.]
(Off-the-record discussion.)
The CHA.IRMAN. Are you ready to resume, Mr. Nehemkis?
Mr. Nehemkis. I am, Mr. Chairman, I apologize again, sir.
Mr. Chairman, members of the committee. In view of certain evi-
dence which has just come to my knowledge I find it necessary at this
time to recall Mr. George Whitney who, of course, will appear later,
but I am now recalling him on the Telephone matter.
Mr. peorge Wliitney, please.
TESTIMOirr OF GEORCtE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
Mr. Nehemkis. Mr. Whitney, have you ever had occasion to give
sworn testimony which is contradictory to anything which you have
had occasion to testify to before this committee in the past few days ?
Mr. Whitney. No.
TESTIMONY OF MR. WHITNEY IN THE NIAGARA HUDSON POWER HEARING
RELATIVE TO TELEPHONE FINANCING
Mr. Nehemkis. Mr. Whitney, I read to you testimony taken at a
private hearing before the Securities and Exchange Commission in
the matter of the application of Niagara Hudson Power Corporation
for exemption as a subsidiary of the United Corporation.
This appears on page 153 [reading] :
Question. There were no commitments, formal or informal
The Chairman (interposing). By whom was the question?
Mr. Nehemkis. By Mr. Lawrence S. Lesser, acting as counsel for
the Securities and Exchange Commission [reading] :
11996 CONCENTRATION OF ECONOMIC POWER
Question. There were no commitments formal or informal, were there?
Answer. No.
Question. In those days, there user! to be form»^d what were known as groups?
Answer. I suppose if you want to, you have to acknowledge — I mean, men
acquired certain vested rights in these groups which they have bitterly resented
if they were changed, but as far as any agreement on our part, or any paper or
contractual thing in any of these, or in any other, the only group that we ever
had anything to do with in the last 25 years that I know about is telephone. In
the old days there was a traditional position, percentages, in the so-caUed tele-
phone group which we managed, but there there was a definite arrangement.
That is the only one.
Do you care to make any comment, sir?
Mr. Whitney. Merely this, Mr. Chairman. Mr. Nehemkis was
kind enough to show me this testimony to see if it refreshed my
memory in connection with my first answer, which he thought was
contradictory. I don't consider that that is in any way contradictory.
I said there, if I can remember exactly, that certain people bitterly
resented changing percentage that they considered they had vested
rights, but that we never had contract or arrangement. I have never
on the stand in the last few days questioned the accuracy of the memo-
randa Mr. Nehemkis has presented from Kidder's in which they had
used the word "proprietary," and so forth.
There was quite a lot of discussion in the last 2 or 3 days about how
we tried to change those percentages, about this pencil memorand'^m
of mine which I have specific reference to,^ and how we were unsuc-
cessful in that. And while I haven't so testified, it would have seemed
to me to be clear that Mr. Winsor felt from his exhibits — from his
actions when we have tried consistently through the twenties to con-
tinue to extract from the New England distribution for the national
distribution, a larger percentage, that he felt he had a right, going
away back from 1906 when he introduced us to the business, and
right on down through, and I am perfectly clear that in that testi-
mony I gave a year or two ago, or whenever it was, I had in mind
that he did consider they hnd vested rights. But I would like to just
say
The Chairman (interposing). When was that testimony given?
Mr. Whitney. January 24, 1939, less than a year ago. But I said
here, as Mr. Nehemkis read, that as far as any agreement on our part
or any paper or contractual thing, the only group that I know is the
Telephone where Mr. Winsor was successful in resisting any wish
that we in the distributing end of my office had. While I don't
know this, I am pretty sure because I had some conversations on the
same subject in 1930 with Mr. Winsor; I have not felt it was my duty
to answer a lot of things that were irrelevant to the questions, but I
don't consider — and I still stand on my answer — that there is any-
thing contradictory. The facts are simply these, that we had a job of
work to do. We thought we could do it better by changing the per-
centages. Mr. Winsor felt that he had a right in it that we never
recognized, and that we never considered true.
The Chairman. You tried to change the percentages as long ago as
May 6, 1920?
Mr. Whitney. Yes ; and practically constantly through the next 10
years.
1 "Exhibit No. 1679."
CONCENTRATION OF ECONOMIC POWER 11 99*7
The Chaibman. So that this effort on your part, this unsuccessful
effort, to change the percentages, lasted down to January 1939, and it
was of such a character that at that time in your testimony you spoke
of it from the point of view of those who were holding the interests
as a vested right? •
Mr. Whitney. That is right. And, of course, perhaps it is irrele-
vant to mention the context, that this came up against a suggestion by
the S. E. C. lawyers that there was another case in connection with
Niagara Hudson, where certain people considered they iiad vested
rights.
The Chairman. My impression, you know, was that you testified
that the word "proprietary" came to you as a complete surprise.
Mr. Whitney. And that it was Winsor's word. I have never
questioned the accuracy, or his attitude. I never was asked what
Mr. Winsor thought about it. Obviously, I wouldn't know, but I
have never questioned that he considered he had a vested right. I
was talking about J. P. Morgan & Co.
The Chairman. You knew at all times, concerning which you have
testified, that Winsor and his associates did think they had a vested
or proprietary interest in this matter?
Mr. Whitney. Certainly.
Senator King. In the New England matter?
The Chairman. No; in the distribution of the Telephone securities.
Mr. Whitney. You notice, also, that I used the word "traditional,"
which is what Mr. Winsor said.
Senator King. Well, so that I may be clear in regard to the matter,
did Mr. Winsor claim any interest in any of the Telephone issues
except those relating to corporations engaged in Telephone business
in the New England States?
Mr. Whitney. Oh, certainly. All the American Telephone System
and its subsidiaries throughout the country. These are financial
operations, Senator King, that I have testified about during t^ese
last 21A days, which had to do with the whole system. This memo-
randum of May 5, 1920,^ had to do with the A. T. & T. and subsi-
diaries. He thought it went to everything.
Senator Kjng. The reason I asked the question was that I under-
stood you to say that he brought you the business from the New
England States, and that you tried to change the percentage there,
and that his testimony, or your testimony there, related to his con-
tention with respect to the New England issues and not with respect
to any other Telephone issues.
Mr. Whitney. No, sir; that goes back to the very first days, tra-
ditionally back to 1906, the financing of the Telephone system was
handled in New England in 1906. I testified the other day that
because the financial program got to be of such size, Mr. Winsor felt
that it could no longer be handled successfully in New England alone,
so he approached Messrs. Kuhn, Loeb & Co. and ourselves for as-
sistance in a transaction of convertible bonds, and that was where
we became in the first instance connected with Telephone financing.
And^ I think Mr. Winsor felt that that — let me put it a different way.
I think we felt that that was very difficult, to insist on things with
Mr. Winsor, when Mr. Winsor claimed certain rights. But we never
» "Exhibit No. 1673."
11998 CONCENTRATION OF ECONOMIC POWER
believed in tho ■>. We never felt that we had any vested rights to
the business um ss we did a good job for our clients, and it was
their election in e >ch issue that came along.
RECOGNITION OF CLAIMS OF KIDDER, PEABODY & CO.
Mr. Henderson. During the twenties, you did recognize the claim
that he set up ?
Mr. Whitney. Vv^e had no option but to recognize it.
Mr. Henderson. Wliat do you mean by that, "no option"? You
have testified there was no legal right, derived from the library
agreement, that he could assert against you.
Mr. Whitney. Oh, well, teclmically, if we wanted to be perfectly
ruthless, we would have made an issue of it, but that isn't the way we
do business.
Senator King. I want to ask one question. I omitted to ask it of
one of the witnesses who was on the stand. What proportion or per-
centage of the underwriting during the past — oh, 5, 6, 8, or 10 years,
has been with respect to new issues and what proportion with respect
to refunding operations?
Mr. WnrrNEY. Well, if I may testify — it is very hard to distin-
guish between them. I think. Senator, it is fair to say that Morgan
Stanley could testify better on that because I have not been familiar
with the issue business since 1935, but I think the issues of 1935 and
1936 and 1937 were very largely refunding. I think since then there
has been a portion of both. Prior to 1935, with the exception of some
financing done in 1920 and 1921, which was refinanced in 1924 and
1925, when money rates changed, it was practically all new money.
Mr. Henderson. Mr. Nehemkis, Senator King asked a question as
to how much was new money and how much was refunding. Did
we not have a calculation of the Morgan Stanley issues which shows
how much was new money and how much was refunding?
Mr. Nehemkis. No, sir; we did have a general calculation which
I think is the direct answer to Senator King, in the testimony that
was presented last spring, on savings and investment, and as soon
as I retiim to the office, I will be very happy to send you a copy.
Senator King. If it is already in the record, there will be no neces-
sity for that.
Mr. Henderson. I mean about the Telephone Co.
Mr. Nehemkis. No, sir.
Shall we proceed ?
I now call to the witness stand, Mr. Arthur Anderson and Mr.
Joseph R. Swan-
Senator King. Are you through with Mr. Wliitney ?
Mr. Nehemkis. Mr. Whitney will remain on the stand.
(Senator King assumed the Chair.)
Acting Chairman King. Have you been sworn?
Mr. Nehemkis. Mr. Swan has not been sworn and Mr. Anderson
has not been sworn.
Acting Chairman King. Do you each of you solemnly swear that
the testimony you are about to give in this proceeding is the truth,
the whole truth, and nothing but the truth, so help you God?
Mr. Anderson. I do.
Mr. Swan. I do.
CONCENTRATION OF ECONOMIC POWER 11999
TESTIMONY OF AKTHUR M. ANDERSON, J. P. MORGAN & CO., NEW-
YORK, N. Y.; J'OSEPH R. SWKN, SMITH, BARNEY & CO., NEW
YORK, N. Y.; AND WILLIAM S. V/HITEHEAD, SECURITY AN-
ALYST, SECURITIES AND EXCHANGE COi'IMISSION, WASHING-
TON, D. C.
Acting Chairman King. You may proceed.
Mr. Nehemkis. Will Mr. Lyons and Mr. Whitehead step forward,
please? In the interests of economy, Senator, I will have members
of my staff identify a number of documents so there will be no
interruptions later. Mr. Whitehead, will you examine the documents
before you and indicate for the commiitee the name of the docu-
ment and where you obtained it. and that you recognize it to be a
document that you so obtained irom the files of the company, that
you will mention?
Mr. Whitehead. This first list consists of a selling group of 22
names, that came from the files of The First Boston Corporation.
It is headed, "Toledo & Ohio Central Railway Co., Refunding and
Improvement Mortgage, 314 bonds."
This next piece of material came from the files of the New York
Central Railway. It is a letter written by Mr. John M. Young,
dated June 18, 1935, address, 23 Wall Street, and the accompanying
memo is a list of the original and secondary groups. The memo
which accompanied that letter is also from the New York Central
files.
Acting Chairman King. You found the memo in the files with
the letter ?
Mr. Whitehead. Exactly ; together.
Acting Chairman King. Would anything in the files indicate who
prepared the memo? Was it a part of the letter or attached to it?
Mr. Whitehead. It is attached. He says, Senator, "I am enclos-
ing herewith a list concerning which," and so forth.
Acting Chairman Iving. I see.
Mr. Whitehead. Letter dated June 3, 1935, to Mr. M. O. Whiting,
of Boston from Mr. W. F. Place, vice president of the New York
Central Railway, from that company's files.
Another letter from Mr. Stuart '^E. Peck to Mr. Willard Place,
of the New York Central Railway, dated June 13, 1935, from the
New York Central files.
Memo entitled, "Toledo &, Ohio Central Railway," over the sig-
nature of H. M. Addinsell, dated June 17, 1935, from the files of
The First Boston Corporation.
Telegram from iSlx. Max O. Whiting, of Boston to Mr. John R.
Macomber, chairman of The First Boston Corporation, dated June
21, 1935, from the files of The First Boston.
Telegi^am initialed "J. R. M.," to M. O. Whiting, of "Wliiting,
Weeks & lOiowles, dated June 21, 1935, from the files of The First
Boston Corporation.
Mr. Nehemkis. Mr. Whitehead, did you ascertain at the time you
obtained that document whose intials "J. R. M." were?
Mr. Whitehead. That has reference to ±»Ir. Macomber.
Mr. Nehemkis. Mr. John R. Macomber?
Mr. Whitehead. Correct.
12000 CONCENTRATION OF ECONOMIC POWER
Acting Chairman King. And who is he?
Mr. Nehemkis. John R. Macomber is an official of The First
Boston Corporation.
Mr. Whitehead. Letter to Mr. George Whitney, on The First
Boston Corporation stationery, dated June 28, 1935, signed J. R. M.,
also identified as John R. Macomber, from the files of The First
Boston.
Memo obtained from the files of the Erie Railroad signed by C. B.
Post, from the files of the Erie.
Two letters, one to Mr. MacCraig, comptroller of the Atlantic
Coast Line, from Mr. H. L. Borden, vice president, dated May 21,
1935, and a letter to Mr. Roland Redmond, dated May 22, 1935,
the original of which was signed by Mr. Lyman Delano, and both
from the files of the Atlantic Coast Line.
Acting Chairman King. Is Mr. Delano a director of the company?
Mr. Whitehead. He is chairman of the board.
Another letter dated April 30, 1935, to Mr. Potter, chairman of the
Guaranty Trust Co. of New York, the original signed by Mr. Delano,
from the files of the Guaranty Trust Co.
A letter to Mr. Anderson, Arthur M. Anderson, of 23 Wall Street,
New York, to Mr. Ralph Budd, from the files of the Burlington, dated
May 2, 1934.
Another memo initialed "C. I. S." from the files of the Burlington,
dated June 13, 1934.
File memo dated July 26, 1934, over the name of A. N. Williams,
from the files of the Chicago & Western Indiana Railroad.
Telegram to A. N. Williams, dated November 13, 1934, from W. R.
Coe, from the files of the Chicago & Western Indiana.
Telegram from Mr. A. N. Williams, dated November 9, 1934, to
Mr. W. Ewing, of J. P. Morgan & Co., from the files of the Chicago &
Western Indiana Railroad.
Telegram dated May 9, 1934, from Mr. Ewing to Mr. Williams, from
the Chicago & Western Indiana files.
Telegram from Mr. P. V. Davis, of Brown Harriman, to Mr. Wil-
liams of the same railroad, dated November 13, 1934, and telegram
from Mr. Williams, dated November 14, to Mr. xVndei'son, from the
same files.
Another telegram dated November 14, 1934, to Mr. A. N. Williams
from Mr. A. Anderson, from the Chicago & Western Indiana Rail-
road files.
Another telegram from Mr. A. N. Williams to Mr. W. Ewing, dated
November 19, 1934, from the files of the Chicago & Western Railroad.
A letter from, presumably, Mr. Williams to Mr. Ewing, dated De-
cember 14, 1934, from the files of the Chicago &. Western Indiana.
Mr. Nehemkis. Thank you veiy much, Mr. Whitehead.
Mr. Lyons, step forward, please. Will you look at the document
shown you and tell me whether that was obtained from the files of
Harriman Ripley & Co., Incorporated, please?
Mr. Lyons. Do I have to be sworn ?
Mr. Nehemkis. Oh, I forgot. This gentlcmaii has not been sworn.
Acting Chairman King. Do you solemnly swear that the testimony
you are about to give is the truth, the whole truth, and nothing but
the trutli, so help you God ?
Mr. Lyons. I do.
CONCENTRATION OF ECONOMIC POWER 12001
TESTIMONY OF BARROW LYONS, ASSOCIATE FINANCIAL ECON-
OMIST, SECURITIES AND EXCHANGE COMMISSION, WASHINGTON,
D. C,
Mr. Nehemkis. Now, Mr. Lyons.
Mr. Lyons. This is a memo to Mr. H. C. Sylvester, Jr., vice presi-
dent of Brown Harriman & Co., and Mr. P. V. Davis, vice president of
Brown Harriman & Co., which is from Joseph P. Ripley, dated
December 17, 1934, from the files of Harriman Ripley & Co.
Mr. Nehemkis. Thank you very iiTuch, Mr. Lyons.
Mr. Lyons. There is another. A memo dated February 21, 1935,
to Mr. Sylvester, Mr. Davis, and ilr. W. Harmon Brown, from
•'J. P. R.,'' from the files of Brown Harriman.
Mr. Nehezvikis. Who is J. P. R. ?
Mr. Lyons. Same as the previous, Mr. Joseph P. Ripley.
Mr. Nehemkis. Mr. Chairman, may it please the committee, you
have been discussing with us for the past few days a number of case
histories, concerning specific pieces of financing. This afternoon we
should like to discuss with you a series of transactions which, however,
occurred during one interval of time. We are going to discuss with
3'Ou the maturities of certain railroad bonds which fell due during the
year 1935, and as we go along we shall have occasion to identify each
issue as we come to it.
Mr. Swan, will you state your full name and address, please?
Mr. Swan. Joseph R. Swan, 14 Wall Street, New York.
Mr. Nehemkis. And what is your present business coimection ?
IVIr. Swan. Partner in the banking firm of Smith, Barney & Co.
Mr. Nehemkis. Mr. Anderson, will you state your full name and
address, please?
Mr. Anderson. Arthur M. Anderson, Bedford Hills, N. Y.
PURPOSE OF THE BANKING ACT
Mr. Nehemkis. And what is your business or profession, Mr. An-
derson ?
Mr. Anderson. Partner of J. P. Morgan & Co.
Mr. Nehemkis. JSir. Anderson, did not the Banking 'Act of 1933
have as itSi essential purpose to prohibit any firm receiving deposits
from engaging in the issuing, underwriting, selling, or distributing of
securities ?
Mr. Anderson. Yes.
Mr. Nehemkis. Mr. Anderson, was not the effective date of this
provision June 16, 1934?
Mr. AndeiJson. Yes.
Mr. Nehemkis. Did not J. P. Morgan & Co , pursuant to the terms
of the banking act, elect to continue its commercial banking business ?
Mr. Anderson. Its deposit business; yes.
Mr. Nehemkis. And to discontinue its securities business ?
Mr. Anderson. As a result.
Mr. Nehh^ikis. So that after June 16, 1934, pursuant to the provi-
sions of the banking act, J. P. Morgan & Co. was barred from engaging
in the business of issuing, underwriting, selling, or distributing
securities ?
12002 CONCENTRATION OF ECONOMIC POWER
Mr. Anderson. Yes.
Mr. Nehemkis. Mr. Swan, immediately prior to the effective date
of the Banking Act, were you not president of the Guaranty Co. of
New York, tlie security affiliate of the Guaranty Trust Co.?
Mr. Swan. I was.
Mr. Nehemkis. Did not the Banking Act of 1933, Mr. Swan, also
provide by section 20 that no member bank of the Federal Reserve
System was to be affiliated with any organization engaged in the issue,
flotation, underwriting, public sale, or distribution of securities?
Mr. Swan. I understand so.
Mr. Nehemkis. Mr. Andei-son, the mechanical separation of the
two types of business that we have been referring to was required
under the act, was it not?
Mr. Anderson. Yes. The securities business, as you defined it by
quoting the act.
Mr. Nehemkis. Is that your understanding, Mr. Swan?
Mr. Swan. Yes; that is my understanding.
Mr. Nehemkis. And this separation, Mr. Anderson, was consid-
ered necessary by the Congress to accomplish the divorce of invest-
ment banking from deposit banking?
INIr. Anderson. I can't state what was their purpose.
Mr. Nehemkis. Do you have any opinion?
Mr. Anderson. That was the effect.
Mr. Nehemkis. That was the result achieved?
Mr. Anderson. Yes.
Mr. Nehesikis. Mr, Swan, the separation that we have been dis-
cussing was considered necessary in order to accomplish the divorce
of investment banking from deposit banking, is that your understand-
ing?
Mr. Swan. I believe that was the purpose of the act; yes.
Mr. Nehemkis. And the objective of the act was to accomplish
such a divorce, Mr. Anderson?
Mr. Anderson. I assume so.
Mr. Nehemkis. And is that your understanding, Mr. Swan?
Mr. Swan. That is my understanding; yes.
Mr. Nehemkis. Now, Mr. Swan, do you recall Chairman Potter's
letter to the stockholders of the Guaranty Trust Co. of New York of
June 6, 1934, in which he expressed his understanding of the intent
of the act ?
Mr. Swan. I do not recall the letter.
Mr. Nehemkis. I show you, Mr. Swan, the letter to which I have
referred, and ask you to glance at it to see if it refreshes your recol-
lection. (The witness examined the letter.) Mr. Swan, permit me
to interrupt you. Did you ever recall seeing that letter?
Mr. Swan. I do recall seeing the letter.
Mr. Nehemkis. That's fine, that's all I wanted.
INIr. Swan. I didn't know whether you were going to ask me to
testify to it or not. I remember the letter.
Mr. Nehemkis. The letter identified by Mr. Swan, Mr. Chairman,
is offered in evidence.
(The letter referred to was marked "Exhibit No. 1711" and is
included in the appendix on p. 12259.)
CONCENTRATION OF ECONOMIC POWER 12003
Mr. Nehemkis. Before I relinquish it, may I read just one sen-
tence from it. Chairman Potter had been discussing with his share-
holders a number of alternatives confronting the bank after the
passage of the act, and he had this to say [reading from ''Exhibit
No. 1711"]—
With respect to the second alternative, since it is tlie intent of the Banking
Act of 1933 to divest commercial banks of a continuing interest in the securi-
ties business, this course seemed objectionable —
with reference to one of the objectives.
May it be offered?
(Senator O'Mahoney resumed the Chair.)
The Chairman. It may be received.
Mr. Nehe:>.ikis. In short, I take it, Mr. Anderson and Mr. Swan,
that it was the objective of the Banking Act to disassociate deposit
banking from the underwriting of securities; is that your under-
standing, Mr. Anderson?
Mr. Anderson. From the risk of the underwriting bu.siness ; yes.
Mr. Swan. That's right.
Mr. Nehemkis. Now, Mr. Swan, pursuant to the Banking Act, the
Guaranty Co. of New York was liquidated by the Guaranty Trust
Co., was it not?
Mr. Sw^AN. I understand — ^I don't know whether it is completely
liquidated or not. It went into liquidation.
]Mr. Nehemkis. Fine. In June of 1934, did not
Senator King (interposing). Voluntarily or involuntarily?
Mr. Swan. Voluntarily.
Mr. Nehemkis. In June of 1934, Mr. Swan, did not the principal
officers of the Guaranty Co. join Edward B. Smith & Co.?
Mr. Swan. Four of the officers of the Guaranty Co. joined Edward
B. Smith & Co. as partners. Other officers joined in other capacities.
Mr. Nehemkis. Will you give me the names of the former officers
of the Guaranty Co. who became partners of Edward B. Smith
& Co. ?
Mr. Swan. Myself, Mr. Burnett Walker, Mr. Ritchie Kimball, and
Mr.
Mr. Nehemkis. Fish?
Mr. Swan. Mr. Fish; yes.
Mr. Nehemkis. Mr. Irving D. Fish ?
Mr. Swan. Yes; Mr. Irving D. Fish.
Senator King. I assume the Guaranty Co. was a corporation?
Mr. Swan. The Guaranty Co. was an affiliate of the Guaranty
Trust Co.
Senator King. You mentioned partners
Mr. Swan (interposing). A number of the officers of the Guaranty
Co., when the Guaranty Co. ceased under the terms of the Banking
Act to be able to do business, we became partners of a private banli-
ing house of Edward B. Smith & Co.
Senator King. But not merely stockholders in that corporation,
but partners?
Mr. Swan. Partners; yes, sir.
Mr. Nehemkis. Without being precise, Mr. Swan, how many
former employees of the Guaranty Co. joined the staff of Edward
B. Smith & Co.? About a hundred, would you say?
120U4 CONCENTRATION OF ECONOMIC POWEJR
Mr. Swan. Oh, no ; maybe 200.
Mr. Nehemkis. About 200?
Mr. Swan. Or maybe 300.
Mr. Nehemkis. A large number?
Mr. Swan. Yes; a large number.
RAILROAD maturities DUE
Mr. Nehemkis. Mr. Whitney, during the interim between the time
Avhen Section 21 of the Banking Act became operative and the time
when Morgan Stanley & Co., Inc., was organized, were there not a
number of railroad maturities of companies for whom J. P. Morgan
& Co. had previously acted as banker?
Mr. Whitney. Probably.
Mr. Nehemkis. Do you Icnow?
Mr. Whitney. Well, you want me to anticipate?
Mr. Nehemkis. I want you to answer the question "Yes" or "No",
if you are able.
Mr. Whitney. That is the best of my recollection.
Mr. Nehemkis. I show you a statement showing a number of
maturities wliich came due at the time we have been discussing,
and ask you to glance at these railroad securities and tell me, if you
can give me a positive answer. For your information, Mr. Whitney,
there were many others. This is but a random sampling.
Mr. Whitney. This doesn't say anything about maturities here.
Mr. Nehemkis. You were in the banking business for a long time.
You should know that question.
Mr. Whitney. Why?
Mr. Nehemkis. Well
Senator King (interposing). Don't argue with the witness; ask
him a question.
Mr. Nehemkis. I did ask him
Mr. Whitnej (interposing). I do know, Senator, that these — I
know from my recollection and from the fact that these properties
consulted us about these matters, that these bonds did mature during
that period. I was probably over precise because I wasn't exactly
sure that they matured or whether they were anticipating maturities.
Mr. Nehemkis. That is all I wanted to know, Mr. Whitney. You
will recall — excuse me, for the convenience of the record, it might
be well that I offer this statement at this time, since we will have
occasion throughout this hearing
The Chairman (interposing). ^Vliat is the source of the statement?
Mr. Nehemkis. Moody's Steam Railroads for the year 1933.
The Chairman. It may be offered.
Mr. Nehemkis. I offer in evidence a table of the maturities which
we will be discussing during this session of the committee.
(The table referred to was marked "Exhibit No. 1712" and is
included in the appendix on p. 12260.)
Mr. Nehemkis. Mr. T\niitney, you will recall that in connection
with your testimony on A. T. & T.', I had occasion to ask you whether
any other banking houses ever discussed financial problems with
companies for whom J. P. Morgan & Co. was the recognized banker?
Now, these railroad companies whose maturities were imminent and
placed on the sheet which you glanced at a moment ago, do you
CONCENTRATION OF ECONOMIC POWER 12005
recall whether any other banking houses joined J. P. Morgan & Co.
in talking to the management at the time of the refundings?
Mr. Whitney. May I be sure I got that question right?
Mr. Nehemkis. Will the reporter please read the question?
(The question was read.)
Mr. Whitney. The answer is "No."
Mr. Nehemkis. That is, Mr. Whitney — just a minute, I want to
get your answer, and if you want to comment, we will, as we have
always done, when we havie finished with the direct examination,
give you an opportunity to do so.
Mr. Swan, have you the sheet ^ before you ?
Mr. Swan. No, sir.
THE SPREAD ON THE RAILROAD BOND ISSUES UNDER CONSIDERATION
Mr. Nehemkis. Will you borrow it from Mr. Anderson ? You will
note that the first item is $8,000,000 for the Nypano or the New
York, Pennsylvania and Ohio Railroad. The spread on that issue
was 1 point, was it not, or $80,000 — of course, when it was ulti-
mately extended ?
Mr. Swan. The spread on the issue was arranged — its terms were
that it was 1 point to be paid on the extension and half a point
extra on such bonds as might be purchased by bankers.
Mr. Nehemkis. But no new bonds, I am advised by my assist-
ant
Mr. Swan (interposing). No new bonds were so purchased.
Mr. Nehemkis. Were so purchased, so that the figure I gave you
is correct?
Mr. Swan. Substantially.
Mr. Nehemkis. Now, Mr. Swan, the next item is the Toledo &
Ohio Central Railway maturity, $7,500,000, but $12,500,000 were ac-
tually issued. Was there not then a spread of 2 points on the $12,-
500,000, or $250,000 ? Shall I repeat my question ?
Mr. Swan. I was just looking at my records; I just wanted to con-
firm that. My records show — no, excuse me, I have the wrong one.
I find from my records that that is correct.
Mr. Nehemkis. Now, the next maturity was $4,000,000 of the Wil-
mington and Weldon Railroad Co., an Atlantic Coast Line subsidiary,
of July 1935. Twelve million dollars of the Atlantic Coast Line were
actually issued, so that the spread was 2^ points, amounting to
$300,000, Mr. Swan?
Mr. Swan. Tliere was a spread of 2i/2 points in that issue; yes.
Mr. Nehemkis. Now, the next offering was $6,300,000 of the Clii-
cago & Western Indiana, due in September and October of 1935, is
that correct, sir? Shall I repeat that? Six million three hundred
thousand dollars was the actual issue; $6,100,000 was the amount
that matured.
Mr. Swan. $6,100,000, according to my record, is the amount which
we underwrote.
Mr. Nehemkis. And the spread was 21^ points, or $157,000 ?
Mr. Swan. The spread was 2^/^ points.
Mr. Nehemkis. Thank you, Mr. Swan. Mr. Swan, would you
1 "Exhibit No. 1712,"
12006 CONCENTRATION OF ECONOMIC POWER
accept my arithmetic if I said that the total of those spreads which
you have gone over with me amounted to $688,000, subject to your
correction f
Mr. Swan. Subject to my correction; yes.
Mr. Nehemkis. Now, Mr. Whitney, may I direct a question to
you? The power to designate the houses which were to be in the
underwriting and selling syndicates for the refunding of these
railroad maturities was the power to distribute nearly $700,000, is
that correct?
Mr. Whitney. You are asking me to accept your arithmetic, too?
Mr. Nehemkis. By implication.
Mr. Whitney. If there were that power, if there were that ability
to direct, I suppose it would be a fair assumption.
Mr. Nehemkis. Mr. Swan, was it not in fact the decision of J. P.
Morgan & Co. which determined among which firms this $700,000 was
to be divided?
Mr. Swan. I had not thought so. I had thought that it was the
decision of the railway companies which were doing the financing.
Mr. Nehemkis. Mr. Whitney, was it not the decision of J. P.
Morgan & Co. which determined among wliich firms this $700,000
was to be divided?
Mr. Whitney. Certainly not.
FUNCTION OF J. P. MORGAN & CO. IN REFUNDING OPEKATIONS
Mr. Nehemkis. Mr. Whitney, what function did J. P. Morgan &
Co. have in the refunding of these railroad maturities?
Mr. Whitney. A very simple function. We had been in varying
degrees financial advisers to these properties for a great, great many
years. As you have so clearly pointed out, on the 16th day of June
1934 the law forced a decision upon us as to what branch of banking
we were going to continue in, and we followed our historic practice
and continued in the deposit business. As I said yesterday, there
was, however, nothing in the banking law, and there isn't as far as I
know to this day, anything which told us that we shouldn't continue
to serve our clients in any way that they requested us to, other than
the distribution of securities. In each one of these cases these people
who had had banking relations with us for years came to us, pre-
dicated on the fact that we no longer could sell securities for them,
and said, "What shall we do about these maturities?" In other
words, they asked our advice as bankers.
In each one of these cases they were confronted with the fact that
the investment banking business had faced the very serious readjust-
ment because of the Banking Act and they wanted to know oi the
houses which were still in the business which we thought were the
ones that would serve them best. The situations are each different,
but the underlying reason why they came to us, J. P. Morgan & Co.,
was because they always had sought our advice and I presume they
didn't think merely because we were out of business — out of the
investment banking business — that we were also out of the deposit
business; and we gave them, as we always have tried to do — we are
still doing this — our clients for some reason still come to us for
advice — we still give it to them to the best of our ability, and unless
the law is changed again I hope that we always will continue to do
CONCENTRATION OF ECONOMIC POWER 12007
SO. And that is the simple function that we perform of service to
our clients.
Mr. Nehemkis. Mr. Anderson, did your firm
Mr. Whitney (interposing). May I just finish, as I didn't answer
your question? We did not designate these houses. In -"' ch case
these houses had direct contacts with the issuing corporati ..i. ^hat is
why a minute ago I asked to be perfectly clear in my answer to Mr.
Nehemkis' question, Did they join you in discussing these matters
with these issuing cn'Mi-ja!..^'s?, and ly answer was, "No; they did
not join us; they had direct negotiations, direct contacts with these
houses in each case." They never to my remembrance (I conducted
certain of these conversation? — some I didn't ; Mr. Anderson did some
and Mr. Ewing others), but in no case did we talk to the company
with these houses; we were purely and simply advisers to these com-
panies in a rather new field, as it was then, with the personnel in
it, and we did not conduct the negotiation; we had nothing to do
with the distribution; we had nothing to do with the underwriting
whatsoever. In fact, although the law would let us, we didn't even
take a fee for this service.
Mr, Nehemkis. I turn now to the financing of the Toledo & Ohio
Central, the wholly owned subsidiary of the New York Central. Mr.
Swan, who decided what firms were to be included in the under-
writing and what firms were to be excluded ?
THE TOLEDO & OHIO CENTRAL EAILKOAD CO. REFUNDING
Mr. Swan. I don't know.
Mr Nehemkis. Mr. Anderson?
Mr, Anderson. I have no knowledge; I had no contact with that.
Mr. Nehemkis. Mr. W^hitney, the same question?
Mr. Whitney, Which company was that?
Mr. Nehemkis. Toledo & Ohio Central; who decided what firms
were to be included and what firms were to be excluded?
Mr. Whitney. Mr. Harold S. Vanderbilt and Mr. Willard F.
Place of the New York Central.
Mr. Nehemkis. Will you identify each one as to their position?
Mr. Whitney. Mr. Willard F. Place was vice president at that
time; he is now financial vice president of the New York Central;
and Mr. Harold S. Vanderbilt is a member of the executive com-
mittee of the New York Central and was at that time handling their
financial affairs.
Mr. Nehemkis. Mr. Swan, I show you a diary entry entitled "New
York Central R. R. Co.," from the files of your office. Do you want
to examine it in view of the fact that it is stamped on the back here
"Smith, Barney & Co."?
Mr. Swan. I should like to. Do you expect to examine me on
this, or do you just want to identify?
Mr. Nehemkis. I merely want you to tell this committee if that
is a true and correct copy of an original now in your possession?
Mr. Swan. I believe so.
Mr. Nehemkis. This sheet identified by the witness is offered in
evidence.
The Chairman. It may be admitted.
12008 CONCENTRATION OF ECONOMIC POWER
(The sheet referred to was marked "Exhibit No. 1713'" and is in-
cluded in the appendix on p. 12260.)
Mr. Neiiemkis. Mr. Chairman, I now read to you two entries from
that sheet, an entry dated P ^-bruary 13. 1935 : You will find that in the
first i^aragraph of the photostat entered by John W. Cutler, a partner,
is he not, of yours, Mr. Swan?
Mr. Swan. Yes.
Mr. Nehemkis. Aii'l the entry by John W. Cutler [reading from
"Exhibit No. 1713"] :
George Whitney spoke to JRS —
That is Mr. Swan—
and a secoad time to me, as to coming financing of the Road, about tliree weeks
ago. Anderson —
That refers to you, sir, —
spoke to me again last v.eek and asked what detaiis, if any, GW —
Meaning George Whitney —
had given us. He said he himself was not familiar witli the last discussion
between GW —
Mr. T\^iitney —
and H. S. Vanderbilt, and therefore thought^ it best to wait until Whitney's
return about February 18th. He indicated they had not yet, but would probably,
a so .speak to Brown Harriman.
I ask you, sir, now to follow me to the third paragraph from the
end, a further entry by J. W. C, May 3, 1935 [reading further] :
Re Toledo & Ohio Central, spoke to G. Whitney. He said nothing would be
done for two or three weeks, and that everyone in town had been in to see
him about it. Will probably mean that the railroad or JPM&Co. will make up
an account and hand it to someone to put thru. (Re Canada Southern, Pruden-
tial and Metropolitan went direct to the railroad.)
And now, sir, I ask you to skip to the next, to the last paragraph,
diary entry by H. D. M. ; that is Mr. Moore of your organization,
is it not, sir ?
Mr. Sv/AN. That is correct.
Mr. Nehemkis. And this is dated June 22, 1935 [reading fur her
from "Exhibit No. 1713"] :
Working on $12,500,000 Toledo & Ohio Central offering which it is hoped to
release last of next week. First Boston will be leader of business.
Mr. Swan, are these entries that I have read correct?
Mr. Swan. It is my recollection that the first statement, the state-
ments, to answer your question, I believe are correct transcripts. I
should like to comment on the. .
Mr. Nehemkis. ISIay I ask 3^ou one question and then have you
comment, if you will, please? "Who did make up the account, Mr.
Swan T. T*, Morgan & Co. or the road? Now, if you will answer
and then comment.
Mr. Swan. This business was not handled by my firm. We were
Earticipants in it. It was handled, in my recollection, as it says
ere, by The First Boston Corporation. We had nothing to do with
making up *^he account and I can't answer your question.
Mr. Nehemkis. Well, then you don't care to comment on your own
entries?
CONCENTRATION OF ECONOMIC POWER 12009
Mr, Swan. I should like to comment on this as far as the first of
these paragraphs is concerned. My recollection is that that refers
not to Toledo & Ohio Central financing but to jjossibly future New
York Central financing. The other paragraph, like all of the para-
graphs in this memorandum, was rather a shorthand account of con-
versations with Mr. Whitney. We were, like everyone on the Street,
eagerly out and aggressively out seeking business, and we went to
all of the large institutions everywhere, not only in New York City,
but Chicago, I3oston, Cleveland, everywhere that we could, to try to
get busiiiess. Amongst other people that we went to was J. P. Mor-
gon & Co., and this refers to our approach to getting business.
Mr. Nehemkis. I want to merely comment on one statement you
made. You said this did not refer to Toledo & Ohio, but to New
York Central?
Mr. Swan. Will you let me just refer^to my files?
Mr. Nehemkis. If you will, sir. I think it refers to Toledo &
Ohio. If I am mistaken will you correct me at a later time?
]\Ir. Swan. I can correct you now. This is headed, this sheet
which you first showed me is headed "New York Central R, R. Co.,"
and it then goes on [reading from "Exhibit No. 1713"] :
George Whitney spoke to JRS and a second time to me as to coming
financing of the road—
And I think it refers to New York Central R. R. Co.
Mr. Nehemkis. I accept your word for that, but I would merely
. point out that the only pending refunding at that time was Toledo
& Ohio. Mr. Whitney, I am sorry, I want
Mr. Swan (interposing). Excuse me. I just want to continue
that point with you. The next sentence says [reading further from
"Ex!iibit No. 1713"] :
During lunch today at First National Bank with Sam Weldon discussion
turned to railroad matters and New York Central was brought up.
That was less than a month later and I don't think that that was
brouglit up on account of Toledo & Ohio Central.
Mr. Nehemkis. Mr. Chairman, I now read from a letter identi-
fied by one of the members of the staff. This letter is from 23
Wall Street. That is your house, isn't it [to Mr. Whitney] ?
Mr. Whitney. The office.
Mr. Nehemkis. And the letter is dated June 18, 1935, addressed
to Willard Place, New York Central R. R. Co., and is signed by
John M. Young. Mr. Young was then associated with J. P. Morgan ?
Mr. Whitney. Wliat date is this?
Mr. Nehejikis. June 18, 1935.
Mr. Henderson. I gather, Mr. Whitney, you don't refer to it as
"the House of Morgan"?
Mr. Whitney. I do not.
Mr. Henderson. Do you refer to it as "the corner" ?
Mr. Whitney. I do not. J. P. Morgan & Co.
Mr. Nehemkis. The letter reads as follows [reading from "Ex-
hibit No. 1714-1"] :
Deab Willard: I am enclosing herewith "a list concerning which I spoke
to you today.
And attached to it a list on which appear the following: "Orig-
inal Group," and the following names : Brown Harriman & Co., Inc. ;
124491—40 — pt. 23 14
12010 CONCENTRATION OF ECONOMIC POWER
E. B, Smith & Co. ; First Boston Corporation ; Lee, Higginson & Co. ;
Kidder, Peabody & Co. Then appears the caption "Original group"
and the amounts for that group; and then the following caption,
•'Selling group" and the amounts for ihat group. Underneath that
you will find "Secondary group" and a list of houses, together with
their names and amounts. I offer in evidence this document.
The Chairman. It may be received.
(The documents referred to were marked "Exhibit No. 1714^1" and
are included in the appendix on p. 12261.)
Mr. Nehemkis. Mr. "Wliitney, would it be correct to conclude that
the make-up of the list was determined by J. P. Morgan & Co.?
Mr. Whitney. It would not. Mr. Chairman, this whole proceeding,
it seems to me, could be very much simplified for the committee if
again I repeat, because I may have to repeat it a good many times
otherwise, that I haven't made any question of the fact that we were
very active in this business. I have said, or tried ^o make clear a few
minutes ago, that our clients who had dealt with us in this past came
to us for advice as to how to conduct a certain piece of business; on
all these cases the story is exactly the same. In each case we recom-
mended to them that there were certain people who were then the most
prominent people in the investment banking business in New York
who would be proper people and would give proper service in the job
of work they had to do.
We had discussions with — I did, Mr. Anderson did, and Mr. Ewing
did, who was then one of our partners — with the seniors, senior part-
ners of these various concerns, or senior officers. We went to this
party and that party, as a service for the railroad, to inquire whether
these gentlemen would be interested in handling this financing. We
went to the railroad company and said we would suggest this or
that course. I don't want to give any possible indication that we
didn't, that we didn't work just as hard as we could to help our
clients. We did. We still do. But when it comes to the infer-
ence that we had anything to do with the actual business, I just want
to make very clear that we didn't certify these people. When it came
down to a decision, it was made by the officers of these various corpo-
ra "ons on their own discretion, on their own responsibility, and we
merely gave them the best advice that we could as to ho5\' they were to
handle their job.
The Chairman. As I understand your explanation of the situation,
J. P. Morgan & Co., in compliance with the Banking Act, was going
out of the business of investment banking
Mr. Whitney (interposing). Was out.
The Chairman. And it was not, however, going out of the business
of advising its clients, both former clients and new clients, with re-
spect to all matters which might properly come before a banker ; that
you considered it to be a perfectly proper and legal procedure for
J. P. Morgan & Co. to advise a client, the New York Central Railroad,
for example, with lespect to the maimer in whicli securities might be
distributed or by whom they might be underwritten? That in giving
that advice- you did not consider yourself as being engaged in the
business? That you had numerous conversations with the responsible
officers of the New York Central Railroad and that you do not deny
that from J. P. Morgan & Co. went this letter ^ of June 18, addressed
1 "Exhibit No. 1714-1."
CONCENTRATION OF ECONOMIC POWER 12011
to Mr. Willard Place, Esq., of the New York Central Kailroad, con-
taining a list of security coiVipanies ; that in making the suggestion you
were not engaged in exercising the discretion, but that the discretion
was exercised by the company^ Have I correctly stated the
Mr. Whitney (interposing). Just exactly.
The Chairman. So that if the railroad followed your suggestion
you considered that to be the responsibility of the railroad and not
yourselves ?
Mr. Whitney. Just exactly.
The Chairman. Though of course we might also conclude that
the railroad, having taken your advice for so many years, it was only
natural that it should follow your suggestions and wlien you made
them you had a pretty good idea that the railroad would follow your
suggestion ?
Mr. Whitney. WpIL Mr. Chairman, in the banking business, like
so many other businesses, yon have to be right certainly 51 percent
of the time before people think of you. So that it is reasonable —
if they came to us and asked our advice — it is reasonable to believe
they thought it was advice at least worthy of consideration. Mr.
Nehemkis didn't ask me to comment on that particular letter. That
of course is a letter from John Young to Place ; ^ whether that was
a final list I don't know- it may have been; but undoubtedly who-
ever was. the leader in this business — there seems to be some dispute
about that — probabl}^ told him what they had done. We never had a
thing to do with that second list of names there. We dealt in this
case, and in one of the others at least, with three principal people,
namely E. B. Smith, First Boston, and Brown Harriman. They
made up a list of what they thought was an adequate list to dis-
tribute these 12 millions of bonds, and I suppose they sent John
Young, who was the head of our bond department, this list and he
forwarded it to Willard Place.
The Chairman. Wliat was your testimony with respect to com-
pensation on J. P. Morgan & Co. ?
Mr. Whitney. I said we weren't even paid a fee for the advice
we gave, although we were advised we were legally entitled to it.
Senator King. Would this be an analagous parallel case : A lawyer
of standing in any community with a large clientele is elected to
office, or engages in some other business, and concludes that he shall
not any longer take the business of his large clientele, and having
confidence in him, having taken his advice for years, and been guided
by him in all their legal controversial matters, when he advises
them that he no longer can act in that capacity but they ask him
who would be good lawyers, who is a good man, to look after bonds,
another for torts, and so on, and he suggests A, B, C, and D, and
they go, pursuant to his suggestion, to the other law3^er whom he
recommends. Would that be something analagaus to your situation ?
Mr. Whitney. I think so. Senator King. I ventured to suggest
in earlier testimony that I think there is a very close analogy between
the relationship between a client and his lawyer, and a client and his
banker; it is a professional relationship.
The Chairman. But you also testified — I remember — that the
lawyers didn't want to agree to that analogy.
1 "Exhibit No. 1714-1."
12012 CONCENTRATION OF ECONOMIC POWER
Mr. Whitnet. I said sometimes they questioned it; I didn't say
they disagreed.
Mr. Nehemkis. Mr. Chairman, there is to be attached— but I am
offering them separately for the reason that I will explain to you —
to the memorandum previously offered, a penciled addition to those
lists and those amounts, and they
The Chairman (interposing). To the list attached to the letter of
June 18,1925?
Mr. Nehemkis. Correct, sir.
May I ask, Mr. Wliitney, if I understand you
The Chairman. Now, let's get this understood; you are offering
now this penciled memorandum on the sheet bearing the figures ''216"
which is to be regarded as part of the previous exhibit ^
Mr. Nehemkis. Yes, correct sir. The reason I offer them in sepa-
rate pieces is because they were found in separate places, but our
man was told that they belonged together.
The Chairman. By whom? Who told you that?
Mr. Nehemkis. The responsible official of the railroad who opened
up the files to us. But I want to be thoroughly correct and strict in
this thing, and so I am offering them in two pieces.
The Chairman. They may be admitted.
(The memorandum referred to was marked "Exhibit Nos. l7l4r-2"
and is included in the appendix on p. 12262.)
Mr. Nehemkis. Did I understand you to say that you thought
that a possible explanation for that list of proposed underwriters and
selling gi'oup, with amounts, may have resulted from the fact that
some of the underwriters had suggested those names to John Young,
and he in turn had passed them on ?
Mr. Whitney. No; I did not suggest that at all. I think the
word I used was that I was merely commenting on them. Willard
Place, as I said a little while ago, was a vice president of the New
York Central in charge of finance, and as I also tried to show, we
were in this advising the New York Central on a financial matter.
Now, I am not attempting to draw any conclusions of what that
list was. It merely was that obviously John Young, head of our
bond department, was passing on to our client a list of names which
M'Ould be in the business. I don't kiioAV who made it up. I shouldn't
doubt that he discussed it with Willard Place. I just don't know. I
merely say that my comment was that he was putting this up to our
client along the lines of advising with them.
Mr. Nehemkis. Mr. Swan, do you have any recollection of ever
having made such suggestions to J. P. Morgan & Co.?
Mr. Swan. Made suggestions about people who should be included
in the syndicates?
Mr. jNeuemkis. Yes.
Mr. Swan. Yes, indeed.
Mr. Nehemkis. You did?
Mr. Swan. Yes.
Mr. Nehemkis. Why have you not furnished us with that infor-
mation?
Mr. Swan. I don't know. In connection with the Chicago &
Western Indiana, which we managed, you have the list of the syndi-
cate members.
1 "Exhibit No. 171-1-1.'
CONCENTRATION OF ECONOMIC POWER 12013
Mr. Nehemkis. I now read you, Mr. Chairman, a letter-
Mr. Henderson (interposing). Mr. Neherakis, may I ask this
question : Did you [to Mr. Swan] in connection with this furnish to
Mr. Young any suggestion as to the make-up of the list?
Mr. Swan. I couldn't tell you. Yo^r men went through our files —
everything that was discussed. It is very possible that after the busi-
ness was finally definitely arranged, that tlipy were sent by Mr.
Young a list of the people who composed the principal group and
any that may have been added. I can't answer that. It would have
been the regular thing to have done..
Mr. Nehfmkis. I now read from* the letter previously identified,
Mr. Chairman, from Mr. Willard Place to Mr. Max O. Whiting, 36
Federal Street, Boston, Mass., June 3, 1935 [reading from "Exhibit
No. 1715"] :
Thanks for your letter of the 29tli. It is a serious question as to whether
the bonds should carry a 3%% or 4% coupon, '-■^t so far the leaning has been
to the 3% rate. It is also yet to be deternaineri as to just how the sale should
be made. The matter is shaping up rather quickly now, however, and I think
it will be pretty well decided upon within the next week or 10 days, so you
ought to keep rather closely in touch with our frieuds on the corner.
Mr. Anderson. What business is that you are talking about?
Mr. Nehemkis. Toledo & Ohio, the subject matter under discus-
sion. I offer it in evidence.
Mr. Anderson. I don't think it is.
Mr. Whitney. No, sir.
The Chairman. The exhi^^^t may be received. To what does this
refer ?
Mr. Whitney. The Boston & Albany, another subsidiary of New
York Central.
(The letter referred to was marked "Exhibit No. 1715" and appears
in full in the text.)
Mr. Whitney. As I remember — and I am speaking from memory —
New York Central had Boston & Albany bonds in the treasury, and
it was k question whether they could sell them. It was not in connec-
tion with the maturity, as these
Mr. Nehejsikis (interposing). While I do not concede what the
witness has said, it is interesting to note, Mr. Chairman, assuming that
what he says is true, that the point still holds good. The place to
get a participation was not the railroad but "the corner."
Mr. Henderson. Mr. "V^Tiitney
Mr. Anderson (interposing). He doesn't say that.
The Chairman. The sentence here, which is the center of this little
conversation, reads as follows [reading from "Exhibit No. 1715"] :
The matter is shaping up rather quickly now. however, and I think it will
be pretty weli decided upon within the next week or 10 days, so you ought to keep
rather closely in touch with our friends on the corner.
Now, what is your interpretation of that, Mr. Whitney?
Mr. Whitney. I am not trying to interpret, but I suppose it is that
Mr. Place had been consulting with us about how they should do their
financing. This man, Whiting, Weeks, or somethii)_g, was up in Bos-
ton and was a very close friend of his, and he thought if he wanted to
be recommended he had better come in and tel' us to recommend him.
12014 CONCENTRATION OF ECONOMIC POWER
That would be perfectly reasonable. He was trying to get business,
too.
Mr. Henderson. He was trying to get on the list ? I gather from
what you say that Mr. Place was telling him to go down to your
firm and see whether he couldn't be included.
Mr. Whitney. No, no.
Mr. Henderson. That is what your answer was, I think ; am I in-
correct ?
Mr. Whitney. Yes ; I'm sorry you got a wrong impression because
both Mr. Anderson's recollection and my recollection is that it is an
entirely different piece of business. There is no question of a list. I
think there were bonds sold for the New York Central to Boston,
The Chairman. There seems to be no dispute with respect to the
facts. Recommendations were made. Your dispute is on the meaning
of the facts.
Mr. Whitney. Certainly. There was no list about it. I have testi-
fied with respect to advising these people. 1 1^ ,ve, in fact, boasted of
the fact that we were performing a ser\'ice for ihem.
The Chairman. That is it ; you made certain recommendations, and
these recommendations apparently were followed. That is all there
is to it.
Mr. Whitney. Yes. But that would be good advice, wouldn't it?
The Chairman. That is not for me to pass on.
Mr. WnrrNEY. Perhaps not for me, either.
Mr. Neiiemkis. Will the committee take judicial notice that, accord-
ing to all the public manuals, the only railroad refunding at this
time that was being considered was the Toledo & Ohio ? ^
I pass to the next document. T wish to ask you to consider, sir.
This is a letter previously identified on the stationery of Adams &
Peck, 63 Wall Street, dated June 13, 1935, from E. Stuart Peck to
Mr. Willard Place.
Senator King. Who are tbev?
Mr. Nehemkis. Mr. Pe^k, I assume, is a member of the firm of
Adams & Peck, and they deal in guaranteed bonds and railroad se-
curities, a New York House. Mr. Peck writes as follows [reading
from "Exhibit No. 1716"] :
I called at J. P. M. & Co. today and as George Whitney was away for the day,
I spoke to Harry Morgan about that matter. I have known him for a long
time, mostly in connection with sailing, and somewhat in connection with busi-
ness. We had a very luce chat about the Tole<lo bond issue, and he said that
they did not know yet Low it would be handled, but that he would be very glad
to put in a good word for Adams & Peck with whatever group of investment
bankers might handle it.
So we will hope for the best ; and I thank you very much for giving me your
valuable time.
Mr. Swan, do you recall whether Mr. Henr}' Morgan put in a word
for Adams & Peck with E. B. Smith & Co ?
Mr. Swan. In the natural course of events they would not.
Mr. Nehemkis. I offer in evidence the letter, Mr. Chairman.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1716" and appears
in full in the text.)
Mr. Nehemkis. Mr. Anderson, to the best of your recollection, who
decided to leave Adams & Peck off the list ?
* See infra, p. 12048.
CONCENTRATION OP ECONOMIC POWER 12015
Mr. Anderson. I have never had any conversations about any such
list that you are referring to, Mr. Nehemkis, so I can't answer that.
Mr. Nehemkis. Mr. Whitney, who decided to leave Adams & Peck
off the list?
Mr. Whitney. Off what list?
Mr. Nehemkis. The list of underwriters that Mr. Peck was refer-
ring to, that he called on Mr. Harry Morgan about.
Mr. Whitney. I don't know.
"matching" for the leadership
Mr. Nehemkis. Mr. Chairman, I now read to you from a memo-
) andum previously identified, dated June 17, 1935, by Harry M. Ad-
dinsell. Mr. Addinsell, Senator King, is the chairman of the execu-
tive committee of The First Boston Corporation, and the memoran-
dum is entitled "The Toledo & Ohio Central Railroad."
I read from it as follows [reading from "Exhibit No. 1717"] :
Mr. Whitney, of J. P. Morgan & Co., invited Mr. Ripley of Brown Harriman &
Co., Mr. Swan of Edward B. Smith & Co. and myself to come over to their
office today to discuss the above proposed issue. The road wishes to sell these
bonds to the public at par and proposes to allow the bankers two points. The
principals' interests will be as follows :
There appear five names, and the respective amounts after that:
First Boston
Brown Harriman
E. B. Smith
Kidder Peabody
Lee Higginson.
Morgan have a list of, I think, about fifteen or sixteen names of people whom
they want to have an amount of bonds, which they have not yet discussed with
us, at a set-up of % of 1%.
Mr. Whitney, would it not appear from Mr. Addinsell's memo-
randum that J. P. Morgan & Co. did make up the list ?
Mr. Whitney. It would not; what it says, of course
Mr. Nehemkis. Now, don't quibble with me, Mr. Whitney, in that
way.
Mr. Whitney. I am not trying to quibble
Mr. Nehemkis (interposing). I am trying to be courteous and
polite to you, and
Mr. Whitney (interposing). I don't mean to quibble, Mr. Nehem-
kis, I promise you I don't, but they said we had a list of about 16 or
16.
Mr. Henderson. You think this refers not to the list, but to
whether it is 15 or 16?
Mr. Whitney. Yes.
Mr. Nehemkis (reading further from "Exhibit No. 1717") :
At the outset Mr. Whitney said they did not want to decide what the order
of precedence should be as between Brown, Smith and ourselves.
Mr. Anderson, were you present at that conference?
Mr. Anderson. No. I had nothing to do with any part of the
negotiations of this business.
Mr. Nehemkis. Mr. Whitney, according to the statement that I
have just read, is it not a fact that J. P. Morgan & Co. could have
decided the precedence, but did not?
Mr. Whitney. They asked us to.
12016 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. I'm sorry, Mr. Wliitney, I must insist that you
answer my question. Is it noi a fact tliat J. P. Morgan & Co. could
have decided the precedence?
Mr. Whitnet. Yes ; they asked us to.
Mr. Neiiemkis. Thank you, Mr. Whitney [reading further from
"Exhibit No. 1717"] :
So we matched for it —
[laughter]
and that resulted in our being in first place, Brown second and Smith third. In
the absence of Mr. Whitney I have advised Mr. Young of J. P. Morgan & Co.
to that effect and also of the meeting referred to 'jelow.
Mr. Whitney asked us to speak to Kidder and Lee Higginson about it, which
I have done, and tliere will be a meeting of the five principals at tliis office
Tuesday at two o'clock. The raortgage, circular, etc., are already pretty well
lined up under the direction of Davis, I'olk, Wardwell, Gardiner & Reed •
Just for the sake of the record, Mr. Whitney, who are Davis
Polk Wardwell Gardiner & Reed ?
Mr. Whitney. A firm of counselors in New York, vvho are our
counselors.
Mr. Nehemkis (reading further) :
and understand Mr. Howland Auchincloss and Mr. MacVeigh of that firm are
handling the matter and will act as counsel for the bankers.
So it would appear, Mr. Whitney, that the lawyers were already
selected, had already done their work. Who selected the lawyers,
Mr. Whitney?
Mr. Whitney. I don't remember, but — I don't remember.
Mr. Nehemkis. The document from which I have read, Mr. Chair-
man, may it please the committee, is offered in evidence.
(The document referred to was marked "Exhibit No. 1717" and is
included in the appendix on p. 12262.)
Mr, Swan. May I comment on this a moment, please, because
according to this [indicating document] I certainly knew more about
this business than I have previously testified. Our files do not have
any record of this meeting. My recollection of the business is that
The First Boston Corporation was selected to handle this business,
and that we were in a less important position than this here appar-
ently shows. I apparently was at a meeting which I have entirely
forgotten.
Mr. Nehemkis. The committee does not care to have us call Mr.
Addinsell, does it, on this point? Or is Mr. Swan's explanation
sufficient ?
Mr. Swan. I quite accept that. I am just — my memory is at fault.
Mr. Nehemkis. I understand, Mr. Swan.
Mr. Henderson. This was dated June 17, 1935, this memorandum ^
of Mr. Addinsell's. The principal interests that Mr. Young outlined
to Mr. Place are the same as those indicated in Mr. Addinsell's
memorandum ?
Mr. Nehemkis. That is correct, sir, to the best of my recollection.
So that Mr. Swan, apparently from Mr. Addinsell's statement of
who were present at the conference which you were present at with
Mr. "Whitney, it would appear that neither E. B. Smith & Co., nor
The First Boston Corporation, composed the list.
1 "Exhibit No. 1717."
CONCENTRATION OP ECONOMIC POWER 12017
Mr. Swan. Well, my recollection of that was that The First Boston
Corporation were chosen to handle this business, in which event
they would have gone ahead, and in consultation w^ith the road with
the' advice of J. P. Morgan, the road having the advice of J. P.
Morgan, and they would compose the list.
I cannot testify as to how the list was composed. I don't know.
Mr. Nehemkis. Can you testify at this time that E. B. Smith &
Co. did not compose the list?
Mr. Swan. I would be quite confident that they did not.
Mr. Nehemkis. You did not?
Mr. Swan. I would be quite confident we did not.
Mr. Nehemkis. Now, may I ask, Mr. Swan, that further, while
J. P. Morgan & Co.
Mr. Swan (interposing). -Excuse me. May I add to my answer?
Mr. Nehemkis. Certainly, Mr. Swan.
INfr. Swan. It is possible— and it is subject, I think, to my getting
the information, if j^ou want it — that we made suggestions for it.
Mr. Nehemkis. I accept that, Mr. Swan.
Although J. P. Morgan & Co. declined to decide who should lead,
is there any question in your mind that they had the power to do so
if they so desired?
Mr. Swan. Well, I think that is a rather difficult question to
answer. In my mind, there isn't any question that in the last analy-
sis the borrowing corporation would decide what bankers they wanted
to have. If J. P. Morgan & Co. had wanted any particular firm to
lead this business, I don't think they would have arranged for that
firm to lead the business without the acceptance of that recommenda-
tion by the borrower.
Senator King. By whom?
Mr. Swan. By the borrowing corporation.
Mr. Nehemkis. I want to recall to you, Mr. Swan, what Mr.
Addinsell said v,^ho was also present at the conference with you
[reading from "Exhibit No. 1717"] :
At the outset Mr. Whitney said they did not want to decide what the order
of precedence should be as between Brown, Smith and ourselves, so we matched
for it.
Mr. Whitney. Mr. Nehemkis
Mr. Nehemkis (interposing). Excuse me, Mr. Whitney.
Mr. Whitney. I just
Mr. Nehemkis (interposing). No; I'm sorry, I am addressing my
question to Mr. Swan.
Mr. Swan. I read that, and it is obvious that they did not want
to make the decision. Now, whether that decision was on behalf of
the road or not, I am not prepared to say, but I presume it was that
they were acting as the road's advisers.
Mr. Nehemkis. Mr. Swan, as a banker of manj'^, many years' ex-
perience in the financial community, under the circumstances here
set forth, see if you can answer my question : Could J. P. Morgan &
Co., if they so desired under the circumstances we have been discuss-
ing, have decided who was to lead ?
Mr. Swan. If J. P. Morgan & Co. had said to one of the three
houses, "We want you to lead," we would have followed their sug-
gestion.
Mr. Nehemkis. Thank you, Mr. Swan.
12018 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney, you wished to make a comment ?
Mr. Whitney. I very much regret, Mr. Nehemkis, that you thought
I was quibbling a minute ago, beca.use I did not mean to. That was
the first thing I wanted to say. As I said a few moments ago, I did
not know about the list. But on this particular phase of it that you
have been questioning Mr. Swan about, I have the liveliest recollec-
tion of it, because of this :
When I first spoke to these people in behalf of the New York
Central, I spoke to them together. We have heard something in the
last week about this ambition to have certain positions in the busi-
ness — prestige, and the various reasons such as that. I had deliber-
ately talked to them as three people, and had recommended that one
of the three people lead it, also indicating Kidder and Lee Higginson.
I remember this very well, because they said, "We can't agree who is
going to lead in this business — " in other words, who was going to
have precedence in name, "won't you settle it between us?" This
was not in my capacity as adviser to New York Central.
I said, "I have nothing to do with it." And I just remember as
well as I am sitting here, that I said, "^Vliy don't j^ou match for it?"
I never thought they would. And they said, "That would be the
only way we could settle it."
Now, there is the simple story, and I remem.ber it because I had
never seen business settled quite so (juickly as that before. [Laugh-
ter.]
CONSULTATION WITH RAILROAD COXCERXIXG LEADERSHIP
Mr. Nehemkis. Now, Mr. Swan, do you have any recollection at
this time whether the railroad was ever consulted about who should
be the leader?
Mr. Swan. I have no recollection of that ; no.
Mr. Nehemkis. In other words, after Mr. Whitney suggested that
you toss for it right then and there, depending upon the outcome of
the toss of the com, the leader of that business was determined ?
Mr. Swan. Well, I am prepared to stand by this memorandum ^
here. As I said
Mr. Nehemkis. Mr. Addinsell's memorandum?
Mr. Swan. Yes; I daresay that is good evidence that we did toss
for it. My memory is hazy about this transaction.
Mr. Nehemkis. Thank you, sir.
Mr. Chairman, I now read you from a telegram previously identi-
fied from Max O. Whiting to The First Boston Corporation, dated
1935, June. 21, 11 a. m. [reading from "Exhibit No. 1718"] :
I understand that Toledo & Ohio business has been turned over to you, Smith,
and Brown Harriman much as Albany issue was given to us to handle —
By whom, under what circumstances?
Mr. Whitney. By the company.
Mr. Nehemkis. Are you sure, Mr. WTiitney?
Mr. Whitney. You remember a little while ago I rather hesitat-
ingly suggested that Mr. Place's letter ^ to Mr. WHiiting had to do
1 "Exhibit No. 1717."
2 "Exhibit No. 1715," supra, p. 12014.
CONCENTRATION OF ECONOMIC POWER 12019
with Albany finance? This confirms it.
Ml-. Nehemkis. Mr. Whitney, before you get yourself into diffi-
culties, the dates are very different.
Mr. Whitney. They are?
Mr. Nehemkis. Oh, yes.
Mr. Whitney. But the fact remains that this was the Albany
transaction. When was this?
Mr. Nehemkis. I think it was in April.
Mr. Whitney. All I remember, frankly, was that Whiting had
done the Albany issue. It was turned over as I said before, and I
regret that I don't make myself clear. We advised the railroad to
do the business with these four or five houses, whichever you want,
and in that sense the railroad had the direct negotiations wnth these
houses, The First Boston, Smith, Brown Harriman, and in the
Boston and Albany debenture issue, they had the railroad, and so
the records of Whiting, Weeks, and Knowles show.
Mr. Nehemkis. I would like to have you listen to the remainder
of this telegram [reading further from "Exhibit No. 1718"] :
that the bankers decided among themselves wl-.o was to head the business and
that some suggestions were made as to who might be Included Stop As this
is New Yorli Central business and at least distantly related to Albany I don't
see how the First Boston Smith and Brown Harriman can fail to include
Whiting Weeks and Knowles on terms equal to anyone appearing after the
three principals and we feel we are entitled to an interest of five percent as
you know Brown and Smith each had seven per cent in Albany.
Could Whiting by chance have been referring to what Mr. Mitchell
explained to us, the doctrine known, shall I say, as reciprocal
obligation ?
Mr. Whitney. I have not the remotest idea.
Mr. Nehemkis. Mr, Chairman, the telegram is offered in evidence.
The Chairman. It may be admitted.
(The telegram referred to was marked "Exhibit No. 1718" and is
included in the appendix on p. 12263. )
Mr. Nehemkis. I now read to you a telegram previously identified,
from John R. Macomber of The First Boston to Mr. Whiting, the
sender of the previous telegram, who wires as follows [reading from
"Exhibit No. 1719"] :
Telegram received. Understand Nevil Ford went over this situation with
you yesterday and explained it fully. Stop As a matter of fact business re-
ferred to came to First group which included two other houses than those you
named all set up and with secondary group named by the road with amounts.
Stop
I want you to note that, Mr. Wliitney [reading further] :
As a matter of fact, business referred to came to First group —
Meaning First Boston group —
which included two other houses than those you named all set up with second-
ary group named by the road.
Now, as a subsequent telegram will show, Mr. Macomber was
a little confused [reading further] :
We had nothing to do with guiding this and have got to handle as in-
structed by them. You are of course included in this but cannot see how we
can do anything but accept the schedule as presented and over which we
have no control Stop Will be in Boston Monday.
12020 CONCENTRATION OF ECONOMIC POWER
The telegram which I have read is olfered in evidence, Mr.
Chairman.
(The telegram referred to was marked "Exhibit No. 1719" and is
included in the appendix on p. 122G3.)
Mr. Nehemkis. It would seem from the telegram I have just read,
Mr. Swan, that Mr. Macomber felt no firm m the group had any
power to decide who was to be in and who was to be out. Would
that be a fair interpretation from that telegram?
Mr. Swan. That was what Mr. Macomber says.
Mr. Nehemkis. But he was apparently at that time under the
misapprehension that the railroad selected the underwriters, since 4
days earlier, on June 17, Mr. Addinsell was clearly aware that the
list was made up by J. P. Morgan & Co.,^ and as you will see from the
document I am about to offer, by June 28 he got straightened out.
I now read you from Mr. Macomber's letter dated Jmie 28, 1935,
to George Whitney, Esq., J. P. Morgan Sc Co., 23 Wall Street, New
York City [reading "Exhibit No. 1720"] :
The opportunity which was offered us to take part in the Toledo & Ohio
Central 3%% bonds was naturally most satisfactory to us and I do want to
thank you very much indeed for your thought of us. "We are very grateful.
One of the things which has given me the most satisfaction in the last year
has been the attitude of our old friends towards us who had to make quite a
readjustment in our business lives and, as I said to a friend of mine this
morning, it is sometimes almost embarrassing to have some of our friends do
all they do for us. Nevertheless, it is gratefully accepted and I only hope in
due course we may be able to be helpful on our side and we are trying to do
our part. Your firm certainly has been very good to us and we do appreciate it.
I offer it in evidence, Mr. Chairman.
The Chairman. It may be admitted.
(The letter referred to was marked "Exhibit No. 1720" and appears
in full in the text.)
Senator King. Your firm, Mr. IVliitney, had been doing business
with this railroad company before, had it, acting as vendor of or
underwriter of its securities?
Mr. Whtney. Yes, sir. The T. & O. C. is owned 100 percent by
the New York Central, and we have been banlcers for them since —
oh, since 1880, 1 think, and we have been fiscal agents of that property
up to 1916 when we abandoned that position. They come to us just
as they would go to people they had done business with before,
and we were trying to help them. The record will show all this.
I don't want to do what Mr. Nehemkis might think was quibbling^
but I think the record here is perfectly clear. The list was made
up by the road, in the final analysis. We advised them — but thac
doesn't matter. The road made the decision. We advised them as
to houses. I have testified that Avay time and again.
Mr. Nehemkis. Mr. Chairman, do you recall that Commissioner
Henderson inquired earlier whether the list that was submitted was
the same as the list finally made up ?
I now offer in evidence a document previously identified which
contains that information, may it please the committee.
The Chairman. Wliat is this ?
Mr. Nehemkis. It was identified by Mr. Whitehead as having
been obtained and given to him by The First Boston Corporation.
1 "Exhibit No. 1717," supra, p. 12015.
CONCENTRATION OF ECONOMIC POWER 12021
It shows the final selling list and the respective amounts of the
various houses on the issue we have been discussing.
Mr. Henderson. Made up after Mr. Addinsell got straightened
out?
Mr. Nehemkis. After Mr. Macomber got straightened out, sir.
The Chairman. This is the secondary group?
Mr. Nehemkis. That is correct, sir.
Senator King (to Mr. Nehemkis). So that I may properly under-
stand the testimony, is it your contention that if J. P. Morgan for
a number of years had been the fiscal agents, financial advisers, of a
corporation and had underwritten its securities, and after the Act
was passed which called for the dissociation of the corporation, that
it was improper for J. P. Morgan, if one of their former clients
whom they had served, should ask their advice as to who would be
competent to underwrite their securities or buy their securities for
them, to suggest somebody?
Mr. Nehemkis. Senator King, I am afraid that what I am about
to say will shock my good friend Commissioner Henderson who
knows I have a lot of opinions on a lot of subjects. Unfortunately
at this time I have no opinions whatsoever.
Senator King. I am very glad to know that. Proceed.
role of J. p. morgan & CO. IN NYPANO EXTENSION
Mr. Nehemkis. We now turn, maj'^ it please the committee, to the
financing of the
The Chairman (interposing). Has this been marked?
Mr. Nehemkis. Not yet.
(The document referred to was marked "Exhibit No. 1721" and
is included in the appendix on p. 12263.)
Mr. Nehemkis. Now we turn, may it please the committee, to the
financing of the Nypano.
Mr. Swan, who determined who the underwriters were to be for
the extension of the New York, Pennsylvania & Ohio bonds?
Mr. Swan. I expect the Erie Railroad.
Mr. Nehemkis. Mr. Anderson, I ask you the same question.
Mr. Andfj?son. I know it was the Erie Railroad Co.
Mr. Nehemkis. Mr. Wliitney, will you give me your answer to
that same question ?
Mr. Whitney. I assume the Erie Railroad. I know nothing
about it. "^
Mr. Nehemkis. Mr. Swan, I show you a series of diary entries
labeled "New York, Pennsjdvania & Ohio Railroad," which purport
to come from your files. Will you examine this and tell me whether
this is a true and correct copy of an original in your possession?
Mr. Swan. That is a true and correct copy.
Mr. Nehemkis. Mr. Chairman, may I read from the diary entries
which have just been identified by the witness? This is an entry by
Mr. Swan's partner, Mr. Cutler, December 10, 1934 [reading from
"Exhibit No. 1722"] :
George Whitney spoke to me December 7th reference underwriting extension
of the $8,000,000 4M>s due March 1st 1935. Said he thought it should be
handled 50-50 Brown Harriman and ourselves, and asked me to advise Ripley
and arrange a meeting. He suggested the 4% bond be underwritten at par for
1% commission, on theory that about two-thirds of the present holders would
take new bonds.
12022 CONCENTRATION OF ECONOMIC POWER
Another entry, 2 days later, by Mr. Swan's partner, Mr. Cutler
[reading further] :
BW—
Is that Burnett Walker, Mr. Swan ?
Mr. Swan. Yes.
Mr. Nehemkis (continuing) :
and I —
Meaning Mr. Cutler —
with Ripley and Davis met with Messrs. Whitney and Anderson yesterday.
Ripley is Joseph Ripley, and Davis is Pierpont Davis, of Harri-
man Ripley & Co.
The above was substantially confirmed, with the exception of maturity wliere
10 to 15 years was suggested.
Suggested by whom, Mr. Anderson?
Mr. Anderson. I have no recollection of any such meeting at all.
Mr. Nehemkis (reading further) :
Time element involved in underwriting approximately 30 days and commit-
ment on such basis would have to be made about February 1st. We assume
we would head this account as bankers for Van Sweringens —
Mr. Swan, E. B. Smith & Co., to the best of my knowledge, had
never been bankers for the Van Sweringens. You meant the
Guaranty Trust Co., didn't you ?
Mr. Swan. Well, the Guaranty Co. had been bankers for them,
I think. He used the word
Mr. Nehemkis (interposing). He used the word loosely?
Mr. Swan. He used it rather loosely, yes.
Mr. Nehemkis. He seems to have wrapped himself up with
Guaranty for the moment [reading further from "Exhibit No.
1722"] :
We assmne we would head this account as bankers for Van Sweringens, but
Whitney and Anderson did not want to discuss this phase of it, suggesting
we work it out between ourselves and B H & Co.
Mr. Anderson, do you have any recollection of that meeting?
Mr. Anderson. Not the slightest.
Mr. Nehemkis. Mr. Whitney, do you have any recollection of that
meeting?
Mr. Whitney. No. I don't doubt it, but I haven't got any recol-
lection of this meeting at all.
Mr. Nehemkis. Mr. Whitney, for the sake of the record, I would
like you to give plain and clear statements. I asked you a simple
question. I will repeat it. Mr. AVliitney, do you have any recol-
lection, of that meeting?
Mr. Whitney. No.
Mr. Nehemkis. Thank you, Mr. Whitnev [reading further from
"Exhibit No. 1722"] :
'.hat is, Burnett Walker —
ind I lunched with Messrs. Ripley and Davis.
I don't think the next one is particularly pertinent. It continues
the discussion.
CONCENTRATION OF ECONOMIC POWER 12023
I now offer in evidence the diary sheets from which I have been
reading and which have been identified by Mr. Swan.
The Chairman. They may be received.
(The diary sheets referred to were marked "Exhibit No. 1722" and
are included in the appendix on p. 12264.)
Senator King. Do you want the whole thing in or just what you
have read? You indicated which you did not read, didn't you?
Mr. Nehemkis. Yes, sir. May I say that my assistant calls my
attention to the fact that inadvertently I should have read another
paragraph, and this answers your question. I guess we had better
put it all in. The line is this [reading from "Exhibit No. 1722"] :
Question of LongDock Co. 6's due next year, brought up, but was left to be
discussed if and wlien it came up. JWC and/or BW arrange to continue with
Anderson of JPM & Co.
And that is a dairj^ entry written by Mr. Cutler, Mr. Swan's
partner, dated December 17, 1934.
Mr. Swan. Is there any reason whj' the last paragraph shoidd
not be read? I mean, it just bears out
Mr. Nehemkis (interposing). I should be happy to, in the interest
of getting it complete. Certainly [reading further] :
Agreement with Railroad Company and our associates signed today; letter
is being sent t)ut tonight and Railroad Company's Extension Offer and our
purchase offer to be advertised tomorrow.
This is a diary entry of February 13, 1935, the new year, and it is
entered by Mr. Swan's partner, Karl Weisheit "KW," is that right ?
Mr. Swan. That is correct.
Mr. Henderson. Did you have some special reason, Mr. Swan?
Mr. Swan. Only to show that we were dealing directly with the
railro«i company.
Mr. Henderson. Well, that was at the time of winding up the deal,
was it not? There is nothing in the previous sentence to show that
you were dealing with anybody else except the Morgan group, is
there?
Mr. Swan. That is, it was written at the time of winding up the
deal, but the conclusion of negotiations with the railroad company.
Mr. Henderson. And the concluding act, technically, was when
you went to the railroad, of course?
Mr. Swan. No; we conducted the negotiations with the railroad
company. I think the gentleman we conducted them with was Mr.
Walsh.
Mr. Nehemkis. Do you recall, Mr. Anderson, whether the Erie
suggested the leadership in that financing?
Mr. Anderson. My best recollection of it, Mr. Nehemkis, is that
Mr. Walsh came in to see me during the latter part of 1934. He
asked for suggestions of various people who would be qualified to do
this business, and we discussed their pros and cons. My recollec-
tions, and that is not borne out by the record, is that I recommended
his going in to talk to the Brown Harriman people, or rather to Mr.
Davis, in that office, who, I was confident, had already familiarized
himself with the problem.
Senator King. With whom? Who is Mr. Walsh?
Mr. Anderson. Treasurer of the Erie Railroad.
12024 CONCENTRA'J^ION OF KCONOMIC i'OWEU
Senator King. He represented the railroad company in that trans-
action ?
Mr. Anderson. Yes, sir.
Senator King. Do you know v/hat was the initiation of the negotia-
tions which cuhninated in the transaction referred to in the closing
paragraph just called attentictn to by Mr. Nehemkis?
Mr. Anderson. The first recollection of any discussion with
Mr. Nehemkis. (interposing). The reason t wanted Mr. Ander-
son's recollection on that was that the diary entry from the files of
Smith, Barney & Co., beginning in December of 1934,^ when the
negotiations were taking place, contained no reference to discussions
with the company, and the first reference which Mr. Swan requested
me to read into the record, referring to anything pertaining to the
company, appears after the new year, February 13, 1935, and relates
merely to the formal signing of the papers.
Mr. Swan. May I state, Mr. Chairman, that these records, such
as we have here, are really quite incomplete? I mean, they constitute
memoranda, some of which are from time to time omitted, but they
do not constitute memoranda of conversations and they are by no
means complete.
Mr. Nehemkis. Mr. Swan, do you have any additional memoranda
bearing on these subjects?
Mr. Swan. No ; I do not.
Mr. Nehemkis. Because if you have, I Avould like you to give them
to us.
Mr. Swan. Your examiners bad access to all our files.
Mr. Nehemkis. Then do you withdraw your statement that these
diary entries are not complete?
Mr. Swan. No; I can't withdraw that statement. I think that
many times we had conversations which we did not enter in the diary.
Mr. Nehemkis. What did you do with those memoranda, destroy
them?
Mr. Swan. They were not memoranda. I am just talking about
conversations.
Mr. Nehemkis. Oh, I see. I beg your pardon. I misunderstood
you. So anything that is recorded in writing
Mr. Swan (interposing). Anything that is recorded in writing is in
the diary
Mr. Nehemkis. It is in the diary entries?
Mr. Swan. Not everything was recorded in writing in the diary
entry, but you had access to everything that is recorded in writing.
Mr. Nehemkis. I just wanted to be clear that I understood you.
Mr. Swan. I am very confident of that.
Senator King. Do you recall any of the railroad executives or
representatives, lawyers, or otherwise, with whom j'ou had an}' —
you or your firm — conversations?
Mr. Swan. Well, we had conversations with Mr. Walsh of the
Erie, we had conversations with Mr. Delano of the Atlantic Coast
Line, we had conversations with Mr. Williams of the Chicago &
Western Indiana.
Senator King-. Those preceded your entering into this understand-
ing to buy some of the securities ?
1 "Exhibit No. 1722."
CONCENTRATION OP ECONOMIC POWER 12025
Mr. Swan. That is correct, yes, sir.
Senator King. That's all.
Mr. Nehemkis. Mr. Anderson, do you recall at this time whether
or not Mr. Bradley, chairman of the Erie, had been holding discu.'i-
sions with your firm ?
Mr. AndersoisC. Prior to that time ?
Mr. Nehemkis. At that time.
Mr. Anderson. I remember having one talk with him. I can't
relate the date to these discussions at all.
Mr. Nehemkis. But as you previously testified, J. P. Morgan &
Co. were bankers Avho could, of course, do no underwriting at this
time?
Mr. Anderson. That is correct.
Mr. Nehemkis. Mr. Swan, have you any recollections as to
whether or not Mr. Bradley had been negotiating with E. B. Smith
c^' Co. at this time, bankers, who could do underwriting?
Mr. Swan. I have no recollection. May I just comment upon that,
that is, with regards to the Erie business? We were trying to get
Erie business at that time. I think it would have been more than
probable that Ave would have gone to Mr. Bradley and asked for his
support in getting that business, and also to the other interests, with
whom, over a lon^ period of years, we had quite close relations.
Senator King. Do I understand that J. P. Morgan & Co. was not
underwriting or wns not, in fact, giving you any part of this busi-
ness, that you were dealing with the railroad company?
Mr. Swan. We went to them, as we went to all of these other peo-
ple, to try to get their support with the railroad company or with the
issuer, believing that they would very quickly be consulted and that
they would be advising them.
Mr. Nehemkis. Mr. Chairman, I offer at this time a copy, previ-
ously identified, of the minutes of the railroad. Shall I proceed,
sir?
The Chairman. The exhibit may be received.
(The copy of the minutes referred to was marked "Exhibit No.
1723" and is included in the appendix on p. 12264.)
ADVANTAGES WHICH ACCRUE FROM LEADERSHIP
Mr. Nehemkis. At this time, Mr. Swan, was there not some ques-
tion as to whether E. B. Smith & Co. or Brown Harriman should
lead the business?
Mr. Swan. Oh, I believe we always, on all of these issues, had
great discussion as to who should lead the business. It seemed very
importan^to us, the leadership seemed very important to us.
Mr. Nehemkis. Now, what are the advantages accruing to a bank-
ing house in leading a piece of business ?
Mr. Swan. I think prestige.
Mr. Nehemkis. Position in advertising?
Mr. Swan. Position in advertising.
Mr. Nehemkis. Sometimes management fees ?
Mr. Swan. Well, in this case
Mr. Nehemkis (interposing). In this there tvasn't.but generally
speaking ?
Mr. Swan. Well,- if
124491—40 — pt.23^ 15
12026 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis (interposing). Isn't also one of the advantages of
leadership the ability to conduct negotiations with the company
officials?
Mr. Swan. I don't think particularly.
Mr. Neiiemkis. How about keeping the syndicate books? Isn't
that one of the advantages of leadership?
Mr. Swan. It is sometimes thought to be.
Mr. Nehemkis. And why would it be an advantage to keep the
books ?
Mr. Swan. Well, it always is an advantage, I suppose, to be the
people who can give out interests in the business.
Mr. Nehemkis. Isn't it a fact, jSIr. Swan, that the house that keeps
the books has the right to make the selections of the other members
of the group, and by virtue of having the power to make the selections
is in a position to place those other houses under a reciprocal
obligation ?
Mr. Swan. I think that sometimes can be inferred. As a matter of
fact, in a situation of this sort, I think that everybody — that is, the
three leaders, or the two leaders in this account — allocated business on
this thing. I would like to say as regards any reciprocal gains, or
any reciprocal advantage, that the first job of the banker every time
is to do a good piece of business. If he doesn't do a good piece of
business, he does not survive. Any reciprocal, so-called reciprocal,
advantages are very incidental to any piece of business. The first job
of the banker is to try to do a good piece of business in order to have
another piece of business, and if he doesn't do a good piece of business
he won't have another piece of business.
Mr. Henderson. Mr. Swan, do you keep a little black book of
reciprocal obligations ?
Mr. Swan. We keep a card in our files which shows the business
that we do with other people and the business they do with us.
Mr. Nehemkis. I might saj^, Mr. Henderson, that Mr. Swan has
been good enough to make that available to n^.
Senator King. May I ask a question ?
Mr. Swan. But I would like to emphasize that any reciprocal rela-
tions are very incidental to this business.
Mr. Henderson. They are part of the company records?
Mr. Swan. We have this card,^ which is a part of our records, of
which you have a copy.
Senator King. Would the leader be interested, if there were a
leader, in the facility with which his associates were distributing and
disposing of the securities allocated to them?
Mr. Swan. That is our first thought. The only way Ave might
choose one person rather than another, where they had equally good
abilities to distribute, but our first thought in these things is that
every member of a syndicate should make a contribution to the syndi-
cate of some kind, either distributing ability or even, in many cases,
the value of a name associated with the business is a contribution.
Senator King. Would I be wrong in assuming that a leader would
be interested in knowing that all of his associates in the syndicate
were properly carrying out their function and were selling the securi-
ties as rapidly as the market required ?
iSee "Exhibit No. 1S8S."
CONCENTRATION OF ECONOMIC POWER 1202'
Mr. Swan. We keep a very complete record of the performance ol
dealers in all syndicates, so that we think we know how well they can
perform, what their abilities are, and that is of major importance
to us.
Senator King. Each member of the syndicate would be interested,
of course, in the proper discharge of the duties and obligations rest-
ing upon the other members of the syndicate ?
Mr. Swan. Very much so.
Senator King. And I suppose would be in contact with the other
members of the syndicate to determine whether or not they were
discharging their obligations and making proper sales and distribu-
tions of the allocations to them ?
HISTORICAL RELATION OF E. B. SMITH & CO. TO ERIE RAILROAD CO. FINANCING
Mr. Swan. The principal members of a syndicate are very apt to
be in consultation about the formation of the group and best interests
of the syndicate. Their advice to each one of the leaders is generally
sought, and is very valuable.
Mr. Nehemkis. Mr. Swan, will you examine the three sheets I now
show you and tell me whether you recognize them to be true and
correct copies of originals in your custody and your possession?
Mr. Swan. That is a true copy.
Mr. Nehemkis. Will you tell me who Mr. Moore is? I think he is
the writer of the memo.
Mr. Swan. He was an employee of Edward B. Smith & Co.
Mr. Nehemkis. I now offer the memo identified by the witness in
evidence.
(Senator King assumed the chair.)
Acting Chairman King. It may be received.
(The memorandum referred to was marked "Exhibit No. 1724"
and is included in the appendix on p. 12266.)
Mr. J^EHEMKis. Jij the Avry, Mr. Sw an, may I have
Mr. Swan (interposing). Have I some right to comment on that?
Mr. Nehe>ikis. Would you let me develop my questions, and then
as we always do, comment afterward ?
Acting Chairman King. You will have full opportunity to com-
ment upon it, Mr. Swan.
Mr. Nehemkis. Was not Mr. Moore formerly an employee of the
Guaranty Co. ^ ,, - ,. _ .
Mr. Swan. He was.
Mr. Nehemkis. Do you have a copy of this with you, in your orig-
inal file? It might be easier to follow as I ask you questions. If
not, we will furnish you with a copy.
Mr. Swan. Would you give me the date of that ?
Acting Chairman King. December 11, 1934.
Mr. Nehemkis. Mr. Swan, I notice that Mr. Moore first lists the
bond issues of the Erie, the leadership of the syndicate, or the first
three or four houses in the syndicate since 1924, and then he goes on
as follows [reading from "Exhibit No. 1724"] :
The Guaranty did not have an original interest in any of the above Erie financ-
ing but did have a 6% interest in the selling groups formed in connection with
the two offerings of $50,000,000 of First and Refunding Mortgage 5s. I did
not check the smaller issues for selling group interests.
12028 CONCENTRATION OF ECONOMIC POWER
He then says, in the second paragraph on tlie bottom of page 1 :
The Guaranty did not have an original interest in any of the above Erie
financing.
He next traces the ownership of the Erie stock, and you see that
set forth there. He next traces the original interests and outstanding
bank loans, Guaranty Trust, First National's interest being the
largest.
He says, in the middle of page 2, under the caption, "Bank loans*'
[reading further] :
In connection with the outstanding banli loans, the original interests were
to be as follows —
And then he lists the various banks.
Then he continues [reading further] :
It should also be noted that the National City Co. was not included.
Do you follow me, Mr. Swan?
Mr. Swan. Yes.
Mr. Nehemkis. Now, I am going to read to you from the first
paragraph under the caption, "Miscellaneous" [reading further from
"Exhibit No. 1724"] :
In February 1930, Mr. Swan spoke to J. P. Morgan & Co. regarding the
Guaranty's interest in Erie financing. J. P. Morgan & Co. thought that they
should go over all of their financing in which the Van Sweringens were inter-
ested and review the Guaranty's interests. They — •
Meaning the J. P. Morgan Company —
recognized the Guaranty's claim on Pere Marquette financing but did not
revise the Guaranty's interest in the Erie financing of $50,000,000 Refunding
and Improvement Mortgage Bonds the following April.
Now, will you turn with me, Mr. Swan, to the section called,
"Comments," at the bottom of page 3, and Mr. Moore continues
[reading further] :
I am inclined to the belief that we should limit our claim to the leadership
of the proposed underwriting of the Erie extension to the basis that it is
Van Sweriijgen financing. If we take the position that the stock is owned
by Chesapeake & Ohio it is possible that we may open up the claim of Kuhn
Loeb to a leading position whether or not they have been invited to consider
the business.
And Mr. Moore continues [reading further] :
We must also consider the extent, if any, to which we may be committed to
Lee Higginson. In this connection they were included in Chesapeake Corpo-
ration (initial issue) because part of the C. & O. stock was at that time
owned by Nickel Plate. It was stated, however, at the time that their
inclusion and interest were not to constitute a precedent. Also, while they
appeared in Allegheny financing the Guaranty Company retained the manage-
ment fee and warrants.
Mr. Swan, what relation did E. B. Smith and Co. have to Van
Sweringen financing, which entitled it to base its claim on the facts
herein set forth and which I have read to you ?
Mr. Swan. Well, it was purely on the basis of what we would call
a professional, or a personal-professional relationship. "V\nien the
Van Sweringens did their financing, which my impression was in the
year 1922, it was handled by the Guaranty Co. I think it was largely
handled by myself and Mr. Burnett Walker.
Mr. Nehemkis. Wlien you wei-e with the Guaranty Co. ?
Mr. Swan. When I was with the Guaranty Co.; yes, sir.
CONCENTRATION OP ECONOMIC POWER 12029
Mr. Nehemkis. Mr. Swan, I am sorry, but will you ask the gentle-
man who gave you that information to come back to the stand ?
Mr. Swan. Mr. Walker?
Mr. Nehemkis. B. W.? '
Mr. Swan. B. W.
Mr. Nehemkis. I am not at all interested in what Mr. Walker said,
but in the interests of orderly procedure
Mr. Swan (interposing). May I tell you exactly what he said?
Mr. Nehemkis. It is not necessary. I shall just ask you, Do you
accept what Mr. Walker gave as j-our answer to me ?
Mr. Swan. Yes. It is quite clear.
Mr. Nehemkis. All right, I just w^anted to have the record show
that.
Mr. Swan. What Mr. Walker said was that a registration statement
had just been filed in connection with an issuance for the Chesapeake
Corporation, which owned the stock of the Chesapeake & Ohio Rail-
way Co. and was one of the so-called Van Sweringen companies.
Mr. Nehemkis. Mr. Swan, did Mr. Moore mean that because Van
Sweringen financing had been part of the Guaranty Co. business, that
E. B. Smith & Co. had a claim to it ?
Mr. Swan. I didn't finish my answer to the last question. I will
start it by saying that we had this very close relation with the Van
Sweringens, when we were doing the Nickel Plate financing, in 1922.
I think we had continued that close personal relationship ever since.
Mr. Nehemkis. When you say, "we," sir, you mean the Guaranty
Trust?
Mr. Swan. No ; the Guaranty Co. first and then when Mr. Walker
and myself went into Edward B. Smith & Co., the close personal
relationship continued, and we renewed it or extended it, whatever
word you want, when we went into Edward B. Smith & Co. When we
went into Edward B. Smith & Co. we were using every legitimate
means in our power to secure business, and this professional relation-
ship w,hich we had, and which we believe is a very important thing
in the investment banking business, as Mr. Whitney has explained—
the investment banking business has a very professional character.
When the Guaranty Co. ceased to exist, we thought that that profes-
sional relationship extended to the persons who had helped to create
it, and when we were in the Guaranty Co. we did our best to get the
relationship with the Van Sweringens and with other issues just as
close as we possibly could. When the Guaranty Co. was no longer able
to do investment business, we then went to these clients and we urged
on them the close personal relationships which we had previously had
with them, through our contact when we were members of the
Guaranty Co.
• Mr. Nehemkis. You felt, then, Mr. Swan, that when you and your
associates left the Guaranty Co. of which you had been the head, and
entered the private banking house of E. B. Smith & Co. that because
of your personal and close and intimate relationship to that business,
naturally that business followed you?
Mr. Swan. We made an effort to see that it did follow, and in those
cases it did.
Mr. Nehemkis, Now, National City Co., Mr. Moore noted, was not
included in the banks that had made loans to the Erie, do you recall
that?
12030 CONCENTRATION .OF ECONOMIC POWER
Mr. Swan. The memorandum ^ so states.
Mr. Nehemkis. Now, the National City Co. appeared after the
Guaranty Co. in the original group of C. & O., Pere Marquette ani^
Missouri Pacific, is that correct?
Mr. Swan. Those pieces of business were not handled by Guaranty
Co.; we were participants, through syndicates, but we were not the
managers.
Mr. Nehemkis. Would you examine page 3 of Mr. ]Moore's memo-
randum.^ You will note there that National City Co. appeared after
the Guaranty Co. in each instance.
Mr. Swan. Oh, I
Mr. Nehemkis. Did you misunderstand me ?
Mr. Swan. I think I probably misunderstood you. I didn't say
they didn't appear, but I just said those pieces of business were not
pieces of business Avhich we managed; they were not so-called our
pieces of business.
Mr. Nehemkis. Sorry. Was the piiority of Guaranty Co. over
National City Co. the basis for E. B. Smith's claim of priority over
Brown Harriman ?
Mr. Swan. I think our claim of priority over Brown Harriman &
Co. was any legitimate claim we could make. We were trying to get
the leadership of this business and we put forward every argument
that we could think of. Now this memorandum * that you see here
was a memorandum prepared by Mr. Horace Moore.
Mr. Nehemkis. I will give you a chance to explain that in detail as
soon as we finish the questions.
Mr. Swan. That is part of your question now. •
Mr. Nehemkis. You will have full opportunity — the committee will
afford it to you, I am sure.
Acting Chairman King. You will have opportunity to make expla-
nation.
Mr. Nehemkis. Mr. Moore recognized in the memorandum * that
we have been discussing that the mantle of Guaranty Co. had fallen
on E. B. Smith and that the mantle of the National City Co. had
fallen on Brown Harriman. . This committee has heard testimony
from Mr. George Bovenizer of Kuhn, Loeb & Co., who likewise recog-
nized that the mantle of the National City Co. had fallen on Brown
Harriman. Now, did Mr. Ripley recognize the validity of these
contentions ?
Mr. Swan. I don't know w^hat Mr. Ripley thought.
Mr. Nehemkis. I now read to you, Mr. Chairman, from a memo-
randum by Mr. Joseph P. Ripley to Mr. H. C. Sylvester and Mr.
P. V. Davis on the subject of the Erie Railroad which we are dis-
cussing, and this memorandum has been previously identified [read-
ing from "Exhibit No 1725"] :
After hearing the whole story, I have seen fit to let E. B. Smith Company
head the account on New York. Pennisylvania and Ohio Extension bond proposi-
tion. Their name comes first, ours second ; interest to be 50/50 ; managership
is to be shown as it was in the Chicago & Western Indiana. Nobody else should
be brought into the account until both of us approve, and we t "h thiilk only the
two of us should do the business.
1 "Exhibit No. 1724."
a Ibid,
s Ibid.
* Ibid.
CONCENTRATION OF ECONOIMIC POWER 12031
I offer this in evidence, Mr. Chairman.
(The memorandum referred to was marked "Exhibit No. 1725"
and is included in the appendix on p. 12267.)
Mr. Nehemkis. Do you recall, Mr. Swan, that it was only E. B.
Smith and Brown Harriman which were to do the entire issue?
Mr. Swan. At that particular time that apparently was the thought
in Mr. Ripley's mind, as expressed to his associates.
Mr. Nehemkis. How did it happen that Kuhn, Loeb; White,
Weld; Clark, Dodge; and Goldman, Sachs & Co. were subsequently
included ?
Mr. Swan. I think that we thought they would be an addition
to the business and help it.
Mr. Nehemkis. Mr. Swan, will you examine the document I now
show you and tell me whether you recognize this to be a true and
correct copy of an original in your possession?
Mr. Swan. That is a true copy.
Mr. Nehemkis. INIr. Chairman. I offer in evidence the document
identified by the witness,
(The document referred to was marked "ExKibit No. 1726" and
is included in the appendix on p. 12268.)
Acting Chairman King. It may be received. Now, Mr. Swan,
you niay make the explanation.
Mr. Swan. All I wanted to say in regard to this memorandum,^
was that Mr. Moore, who was an employee of ours, and was very
anxious to bring to our attention any arguments that we might make
whereby we would gain leadership or advancement in our cause of
business, prepared this memorandum. Some of it is prepared from
data ; he tells me some of it came out of his memory. It is his presen-
tation of the arguments that we might use to try to get leadership
of this business. Very little of it, in my opinion, had validity.
The real argument which we thought we had for getting lead-
ership in this business was the close connection of many years of
Mr. Walker and myself with the Van Sweringens who were at this
time — or who had previous to tliis time — or who at this time, yes,
who at this time controlled Erie Railroad, one of their railroads. We
had very close associations with them.
I have no doubt that in the course of this discussion that we
probably talked to the Van Sweringens; we probably talked to Mr.
Bradley; we missed a trick if we didn't; we were doing everything
we could to get business and to get important positions in the business.
IMr. Nehemkis. Is there any question in your mind, Mr. Swan,
concerning the accuracy of any of the statements made by Mr.
Moore ?
Mr. Swan. I don't doubt the accuracy of the statements, but I
doubt the validity of the inferences.
Acting Chairman King. Let me ask a question there. Was there
during the period covered by the memorandum to which reference
has been made, anterior and subsequent to that period, was there
and is there rivalry among bond houses to secure positions in the
syndicates for the sale of securities, and having securities?
Mr. Swan. I think there is the most intense competition in our
business, both before business is secured and after business is secured.
1 "Exhibit No. 1724.
12032 CONCENTRATION OF ECONOMIC POWER
to get position and large interests in the business. I think the com-
petition is very keen all the time.
Acting Chairman King. Did the Guaranty Co. have rather an im-
portant place in the vending of securities?
Mr. Swan. I think the Guaranty Co. — it would probably be im-
modest to say it — I think we were probably about the best distribu-
tors of securities, retail distributors of securities. [General laughter.]
Acting Chairman King. I think that modesty is entirely war-
ranted. When did it cease to operate and when did this mantle —
using the expression of my friend here — fall upon somebody else's— r
if it did — shoulders?
Mr. Swan. The Guaranty Co. ceased to operate. 1 think, on the
15th of June 1934. At that time Edward B. Smith & Co. took over
the major part of their organization; four officers of Guaranty Co.,
as I have testified, became partners in Edward B. Smith & Co. This
sales organization to which j^^ou have refered I think was taken over
practically in its entirety Edward B. Smith & Co. was perfectly
qualified ; had the qualities which I think are necessary for an invest-
ment banker to have, to handle the business that the Guaranty Co.
previously handled.
We naturally went out and pressed that as much as we could and
pressed previous relationships as hard as we could. We succeeded
in retaining, I should say, most of the business that the Guaranty
Co. had previously done.
Acting Chairman King. Is the investment business so uncertain
and subjected to so many dangers so that its mortality, speaking
generally over a long period of years, is very great?
Mr. Swan. I wouldn't like to go intp that too intimately.
Acting Chairman King. At any rate' it isn't absolutely watertight
business ?
Mr. Swan. I think it is an extremely hazardous busin.ss and as
far as the present time is concerned, the profits of it are mcst limited.
Acting Chairman King. When you guarantee the issues of rail-
road companies particularly, is there any certainty of any profits at
all? Judging from the past?
Mr, Swan. Judging from the past, these issues I have been re-
viewing, these issues here, and thinking about them, th'^se issues
were all issues wliich needed good salesmanship, needed pvfjple who
could properly explain securities and who were known as people
who could do a good placing job.
Acting Chairman King. Isn't there he'^itancy — I will put it that
way — upon the part of some of these investment companies in under-
writing the guaranteeing of the bonds which they take ov^r, or is
there very great desire to underwrite obligations?
Mr. Swan. Well, of course, it depends upon the character of the
obligation. The very highest class obligations are very mucli sought
for; there "re some other obligations which presumablj- are per-
fectly good, but are less easily salable that are not so much sought
for. I think it varies as to the eagerness with which people seek
interests as to their apparent salability.
Acting Chairman King. I assume that when a corporation desires
to obtain capital with which to refund or to meet new issues that it is
concerned as to the charncter, standing, and prestige of the various
investment companies with which it seeks affiliation?
CONCENTRATION OF ECONOMIC POWER 12033
Mr. Swan. I think I would put it this way: I think they require
sufficient capital to know that the obligation which the underwriter
may take is assured. I think the next — I think all of these — no one
of these is good without the other. An investment banker must
have capital, he must have integrity, and he must have competence.
Acting Chairman King. I assume, then, that some investment
bankers have larger capital than others?
Mr. Swan. Yes; that is true.
Acting Chairman King. And to that extent if they have a good
name, good character for integrity and honesty, they may have some
advantages over other investment bankers?
Mr. Swan. Well, I don't think — I don't think I would go too far
on that. Capital is only one attribute which is necessary, and after
you get up to capital of a certain amount, the capital which is suffi-
cient to guarantee the obligation which you take, capital beyond
that is not so particularly necessary.
Acting Chairman King. The moral stamina and moral character
have a great deal to do with the position which an investment bank-
ing organization will have in the community ?
Mr. Swan. I thoroughly believe so and I think that isn't enough.
I mean capital and integrity aren't enough. I think that the banker
has to be competent; he has to know his business.
Mr. O'CoNNELL. May I ask a question, Mr. Swan? A moment
ago you expressed some concern about possibly unwarranted infer-
ences that might be drawn from Mr, Moore's memorandum.^ What
did you have in mind more specifically than that?
Mr. Swan. I just meant that some of the things that he put for-
ward as arguments as to why we should have that business didn't
seeiii to me very good arguments.
Mr. O'CoNNELL. Specifically were you referring to the nature
.and extent of the so-called reciprocal obligation that has been
discussed ?
Mr. Swan. No. Well, may I just look at that ? I don't know that
I know just what you are referring to.
Mr. O'CoNNELL. I am not at all clear on what you were referring
to when you made the general statement.
Mr. Swan. All I was saying was that here are a number of things
that are recorded here on these several pages which are put forward
as arguments as to why we might claim position over Brown Har-
riman & Co. in the leadership of this business, and one or two of
the things that I have spoken of here were valid arguments. I
think a good many that were spoken of here did not constitute valid
arguments, and I think the inference is — maybe this will answer your
question — the inference is that all of this constituted valid argu-
ments. It really was just bringing up before us the things that we
might consider as to whether they were valid or not.
FORMER association OF PARTNERS OF E. B. SMITH & CO. WITH GUARANTY
CO. AS A VALro CLAIM TO LEADERSHIP
Mr. O'CoNNELL. Well, would you consider the fact that you and
other members of E. B. Smith & Co. had formerly been connected
1 "Exhibit No. 1724."
12034 CONCENTRATION OF ECONOMIC POWER
with the Guaranty Co. is a valid argument to be used in this con-
nection ?
Mr. Swan. Yes; I certainly thought that was a valid argument,
that our old relationship over a period of years with the people who
now controlled this property constituted a valid argument as to why
we should get leadership in this business.
Mr. Henderson. Have you finished?
Mr. O'CoNNELL. Go ahead.
Mr. Henderson. I have no desire to interfere with the proper
questioning by the committee. I would like to point out, however,
we gave a sort of commitment to Mr. Whitney and his associates
that we would try to get them through by tomorrow night.
Acting Chairman King. If you will stop speaking now ws will
hurry along.
Mr. Nehemkis. You recall, Mr. Swan, I asked you if you had any
knowledge as to why White, Weld & Co., or Kuhn, Loeb or Clark,
Dodge were subsequently included. I want to read you from a mem-
orandum which you have just identified and which is now in evidence,
as follows [reading from "Exhibit No. 1726"] :
We were advised by Mr. Arthur Anderson, of J. P. Morgan & Co., that White,
Weld & Co. had been associated with J. P. Morgan & Co. or Drexel & Co. in
the underwriting of a number of former Erie extensions and commented that
they had approached him in connection with the underwriting of this exten-
sion. Mr. Anderson did not .specifically request that we include White, Weld
& Co. but he was pleased when informed that we had offered White, Weld &
Co. an interest of 15%.
After Kuhn, Loeb & Co. had been offered and had accepted an interest of
10%, we learned that they had approached J. P. Morgan & Co. concerning the
business.
I note, there, Mr. Swan, that K., L. went direct to J. P. Morgan
& Co., rather to E. B. Smith or Brown Harriman. I continue to read
from this memorandum by Mr. Cutler [reading further] :
An interest of 5 percent was offered to Clark, Dodge & Co.
By the way, Mr. Anderson, do you know Mr. Francis Ward?
Mr. Anderson. Very well.
Mr. Nehemkis. Had Mr. Francis Ward formerly been with J. P.
Morgan & Co.?
Mr. Anderson. Yes.
Mr. Nehemkis. And then he went to Clark, Dodge & Co.?
Mr. Anderson. Yes.
Mr. Nehemkis. I continue reading from the memorandum of Mr.
Cutler, Mr. Swan [reading further from "Exhibit No. 1726"] :
An interest of 5 percent was offered to Clark, Dodge & Co. because of Mr.
Francis Ward's recent affiliation with the firm.
We considered offering a participation to Morgan Grenfell & Co., Limited.
Mr. Swan, why did you consider it necessary to offer a participa-
tion to a London house?
Mr. Swan. A great many of these bonds were held in Holland and
England. As a matter of fact in making up this list strength was
^dded to the business by the fact of having. Kuhn, Loeb; White,
Weld; Clark, Dodge, in this business, because they were all very well
known names abroad. That was one of the influences in choosing
those people.
Now as far as Clark, Dodge is concerned, it says here we included
them becauss of Mr. Francis Ward's recent affiliation. That is true.
CONCENTRATION OF ECONOMIC POWER 12035
Mr. Nehemkis. I was just asking about Morgan Grenfell.
Mr. Swan. Morgan Grenfell of course were located in London
where their name also^ — where it would be useful to have them helping
this business along, which required deposits and exchanges, and so
forth.
Mr. Nehemkis. Would I be entirely mistaken, Mr. Swan, if I sug-
gested that one reason why you may have wanted to offer a partici-
pation to Morgan Grenfell & Co., Ltd., of London was because of its,
shall I ssij, association with J. P. Morgan & Co. of New York?
Mr. Swan. I haven't any doubt but what that — that we, of course,
knew that and maybe that is the reason their name was suggested to
our minds. Of course they are very well and favorably known over
there and would add to the business. Each one of these people
TS'ould help the business.
Acting Chairman Kjng. Were securities sold abroad in Holland?
Mr. Swan. This was not a question. Senator, of selling securities.
This was the extension of an outstanding issue and there were a great
many of these bonds held in Holland and in England.
ATLANTIC COAST LINE RAILROAD CO. REEUNDING ROIE OF J- P. MORGAN
& CO.
Mr. Nehemkis. Mr. Whitney, did J. P. Morgan & Co. arrange the
$12,000,000 Coast Line financing in May of 1935?
Mr. Whitney. Well, we advised a great deal with Mr. Delano, the
chairman of the board of the Coast Line, because they had this record
that you introduced earlier, not only these maturities but also a bank
loan was coming due.
Mr. Nehemkis. Bank loan to J. P. Morgan & Co.?
IVIr. Whitney, We had an interest in a six and a half million
dollar loan, if I remember right. Again here we had, I think, started
doing business with the Atlantic Coast Line Railroad and Louis-
ville & Nashvillt Railroad back somewhere prior to 1880, and our
relations there had been particularly close. Mr. Delano, who was the
chairman, was a verj^ close personal, friend of ours and he had
shortly before succeeded Mr. Henry Walters, who had been chairman
for years, and we certainly did everything in our power to assist in
it. I think I arranged— we were very active — this particular trans-
action myself, up to the point of discussion, and I know I did every-
thing I possibly could to help Mr. Delano.
Mr. Nehemkis. Mr. Swan, will you glance at these diary entries
which purport to come from your files, and tell me whether they are
true and correct copies of originals in your possession?
Mr. Swan. They are.
Mr. Nehemkis. I offer them in evidence, Mr. Chairman.
Acting Chairman King. They may be received.
(The diary entries referred to were marked "Exhibit No. 1727" and
are included in the appendix on p. 12268.)
Mr. NEHEMias. Mr. Whitney, will you follow me as I read you
some of these entries by Mr. Cutler, Mr. Swan's partner?
Diary entry, 9/20/34 [reading from "Exhibit No. 1727"] :
JRS—
12036 CONCENTRATION OF ECONOMIC POWER
Mr. Swan —
an<l I spoke to GW regarding possible financing. Road wants to sell about
$12,000,000 bonds when it can. Business pretty fair first six months but falling
off now. No reason why we .should not approach Lyman Delano direct, which
we plan to do.
Would that mean, Mr. Swan, that Mr. Whitney consented to your
approaching Mr. Delano, chairman of the Atlantic Coast Line?
Mr. Swan. I think it meant that Mr. Whitney thought it would be
an advisable thing for us to do.
Mr. Nehemkis. I'm sorry, I didn't quite get it.
Mr. Swan. I think it meant that Mr. Whitney thought that it
would be an advisable thing for us to do. As a matter of fact, Mr.
Cutler happened to be a personal friend of Mr. Lyman Delano, and
we went to Mr. Whitney because of his well-known connection with
the road. Mr. Whitney said, or we asked possibly, Shall we talk to
Mr. Delano, and he said, "Well, yes, go ahead."
Mr. Nehemis. And you did talk
Mr. Swan (interposing). And we talked to Mr. Delano.
Mr. Nehemkis. To Mr. Delano, because Mr. Cutler subsequently
noted in his diary that he [reading further from "Exhibit No. 1727"] :
and JRS lunched with Lyman Delano, Chairman, today. Delano said he had
extended his six months' loan with the banks (JPM & Co. loans secured by Gen-
eral 4%% bonds) for another six months from October 1st.
I am just skipping along here [reading further] :
JWC to see GW—
Mr. Whitney —
and follow. I reported the above conversations to Anderson of JPM & Co., in Mr.
Whitney's absence abroad.
Continuing [reading further] :
Reported to Whitney conversation JRS and I had with Delano as above.
Loan extended to April 1st. George Whitney called JRS yesterday and said
that Mr. Delano had seen him and he thought it was time to consider doing
something. He —
Meaning George Whitney —
also spoke of our discussion with him some months ago as reported above. It was
left we were to study the situation and decide what, in our opinion, could be
done, and go back to GW.
I continue, Mr. Swan [reading further] :
JRS and I talked with G. Whitney and told him we would be very much inter-
ested in considering the underwriting of $12,000^,000 of above bonds, but felt
before talking more definitely we would like to have additional information.
Skip along a few sentences, if you will [reading further] :
Whitney will speak to Brown, Harriraan and then advise Delano he has spoken
to both of us. He further indicated on account of the old three-way account that
he assumed BH & Co. should lead.
Mr. Whitney, the old trio account was made up of J. P. Morgan &
Co., First National, and National City, according to your previous
testimony ? Is that correct ? Can you answer me yes or no ?
Mr. Whitney. Yes ; I think so. May I ask for that again ?
Mr. Nehemkis. I said, Mr. Whitney, that the old trio, according to
your previous testimony before this committee, had been made up of
CONCENTRATION OF ECONOMIC POWER 12037
J. P. Morgan, Fii-st National, and National City. Will you answer
that yes or no, if you can?
Mr. Whitney. Yes.
Mr. Nehemkis. So that, Mr. Whitney, you recognize Brown Harri-
man as the heir of the National City Co. ?
Mr. Whitney. No.
Mr. Nehemkis. You repudiate that statement?
Mr. Whitney. What statement?
Mr. Nehemkis. That I have just read to you purporting to be a con-
versation.
Mr. Whitney. The best answer will be the next sentence.
Mr. Nehemkis. I am now continuing with the diary entries [read-
ing further from "Exhibit No. 172T"] :
Ran into G. Whitney again and in view of what we thought he indicated
yesterday regarding leadership, reminded him that in the three issues of Coast
Line securities since the war, J. P. M. & Co. had appeared alone, the last issue
for the three-way appearance being in 1915. He said he realized that and merely
indicated to us yesterday that he considered ourselves and B. H. & Co. 50-50,
leaving us to work out leadership between us.
That is not in conflict with any question I have asked you.
Mr. Hendekson [to Mr. Whitney]. You didn't give him an answer
to the question. He asked you whether you repudiate Cutler's dairy
entry there?
Mr. Whitney. I merely meant, Mr. Henderson, that I thought the
next sentence which I had read ahead rather showed there had been
some mix-up in Cutler's recollection of what I had said. He said, "he
merely indicated to us yesterday that he considered ourselves and
B. H. & Co. 50-50."
So" apparently the next day I hadn't meant quite what Mr. Cutler
meant in his previous memorandum.
I acknowledge perfectly freely there had been a three-three account,
but I don't remember ever saying to Mr, Cutler that I thought Brown
Harriman should lead, and that is supported by what Mr. Cutler
himself says the next day. Isn't that right?
Mr. Nehemkis. Just a moment, Mr. Whitney. I want to point out,
if I may, to the Chair, the diary entry by John W. Cutler dated
January 10, 1935, which reads as follows [reading from "Exhibit No.
1727"] :
Whitney will speak to Brown Harriman and then advise Delano he has spoken
to both of us. He further indicated on account of the old three-way account —
That is the old trio arrangement, Mr. Chairman —
that he assumed B. H. & Co. should lead.
Mr. Whitney, of course, having this before him, jumps ahead and
then reads from Mr. Cutler's entry of January 11, 1935, but those two
things are separate statements, and my reference and my question,
sir, was directed to Mr. Cutler's diary entry of January 10, 1935.
Acting Chairman King. Then the statement made by Mr. Whitney
is sufficient answer, it explains it. He repudiates it in the sense of a
categorical statement, but he makfes the explanation.
Mr. Whitney. I thought, sir, you asked me whether I recognized
that Brown Harriman inherited the City Company business and I
said "No" to that.
Acting Chairman King. Proceed.
12038 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. Just one more question on that. Mr. Cutler said
very plainly that you had said to him that you assumed, on account
of the old three-way arrangement, that Brown Harriman & Co.
should lead, and your direct answer to that is what? Did you or
didn't you tell Mr. Cutler that?
Mr. Whitney. I haven't the slightest recollection of that, Mr. Hen-
derson. It was a long time ago. It is quite extraordinary that I
should have spoken to E. B. Smith first, if I had thought that Brown,
Harriman should lead.
Mr. Nehemkis. I would merely observe, Mr. Chairman, and I will
promise to move on rapidly, that it would appear from the^e diary en-
tries that Mr. Whitney was not able to make up his mind until after,
when Mr. Cutler brought to him certain additional facts which ap-
parently had escaped Mr. Whitney's attention, such as that J. P.
Morgan & Co. had appeared alone in the last issue for the three-way
appearance, being in 1915, and it would seem that after these addi-
tional facts had been brought to Mr. Wliitney's attention, he changed
his earlier view.
I shall proceed as I have indicated.
Acting Chairman King. But I assume that the entry there should
be construed as the whole procedure.
Mr. Nehemkis. Mr. Whitney, you indicated that there was an At-
lantic Co^st Line loan at this time with J, P. Morgan & Co. Is that
correct?
Mr. Whitney. I indicated there was a loan with the banks of
which we had a participation, if my recollection serves me, which was
a six and a half million loan altogether. We had a million dollar par-
ticipation, and we had arranged the loan for Mr. Delano with the
other things.
Mr. Nehemkis. Mr. Whitney, is it not a fact that part of the pro-
ceeds of this issue were used to pay off some of the railroad's bank
loans ?
Mr. Whitney. Certainly. That was the purpose of the loan.
Mr. Nehemkis. And J. P. Morgan & Co. was likewise paid off when
the issue was floated?
Mr. Whitney. Certainly ; they paid us all.
Mr. Nehemkis. Mr. Whitney, you and I sometimes have difficulties
about precision in language, so will you do me the great courtesy of
listening attentively to my next question? Wliile I do not wish to
imply that this particular repayment was in anj' way improi:>er, it
did, however, involve the very situation which the Banking Act
sought to obviate. Is that not so, Mr. Whitney ?
Acting Chairman King. You mean the Banking Act prohibited
making a loan to pay off an obligation of the bank?
Mr. Nehemkis. No, sir. As I understand the provisions of the
Banking Act, it was to prevent" the proceeds derived from flotation
of securities to pay off obligations owing to a bank.
Acting Chairman King. How would a corporation then, owing to
a bank, pay its obligations if it had no credit and had no more
monejj^, that is if it had no money and had to borrow or sell
securities.
Mr. Nehemkis. I don't want to testify. If you want me to, I
will take the stand.
Mr. Whitney. The answer to j^our question, Mr. Nehemkis is
"No."
CONCENTRATION OP ECONOINIIC POWER 12039
Mr. Nehemkis. You don't consider that the situation described was
in conflict in any way with the Banking Act ?
Mr. Whctnet. I do not. I never even heard it suggested.
Mr. Nehemkis. Bearing in mind, of course, that I have clearly
indicated I personally see nothing improper about the transaction.
Mr. Chairman, I now offer in evidence a memorandum and letter
previously identified, from the files of the Atlantic Coast Line
Railroad Co.
Acting Chairman King. It may be received.
(The documents referred to were marked "Exhibits Nos. 1728-1
and 1728-2" and are included in the appendix on pp. 12269 and
12272.)
Mr. Nehemkis. Mr. Whitney, is not generally patronage one of
the advantages sometimes derived from underwriting? Perhaps if
you find difficulty in answering that, I will read to you from this
letter by Mr. Delano.
Mr. Whitney. May I have the question first?
Mr. Nehemkis. Would you read back the question ?
(The reporter read Mr. Nehemkis' last question.)
Mr. Nehemkis. Did you get that? By that I mean the ability of
a banker to name trustees and registrars, and where funds are to be
placed on deposit, and so on. We have had some testimony to that
effect earlier.
Mr. Whitney. It is a new idea to me.
Mr. Nehemkis. Let me read you this letter, Mr. Wliitney. This
is by Mr. Delano, to Mr. William C. Potter, chairman of the Guar-
anty Trust Co. of New York, dated April 30, 1935 [reading] :
Dbae Mr. Pottee: The Atlantic Coast Line Railroad Company has agreed
to sell to Brown, Harriman & Co., Incorporated, and Edward B. Smith & Co.
$12,000,000 Ten- Year Collateral Trust Notes, secured by $25,000,000, of our
General Unified 414% Bonds.
Mr. Whitnej'-, if you will please listen to the following [reading
further] :
At the suggestion of Mr. George Whitney, we have designated the Guaranty
Trust Company of New York to act' as Trustee of this indenture.
Did you understand my question, Mr. Wliitney, when I referred
to patronage as being one of the attributes of a banking house?
Mr Whitney. I understood your question, but I was doing a little
work for the Guaranty Trust Co. of which I was a director.
Mr. Nehemkis. And also you were a member at that time of the
executive committee, if I recall correctly.
Mr. Whitney. That is quite so.
Mr. Nehemkis. And J. P. Morgan had elected to discontinue its
underwriting business in 1934, wasn't that what you said, Mr.
Anderson ?
Mr. Anderson. Your date was June 16, 1934.
Mr. Henderson. I ought to say, Mr. Whitney, that I think coun-
sel was compelled to ask you to give your opinion on these two
matters that have been brought up, since they came to our attention
in the course of the inquiry. It was an obligation on the part of
counsel to raise' those two questions and to get your answer.
Mr. Whitney. It is all right with me.
12040 CONCENTRATION OF ECONOMIC POWER
CHICAGO & WESTERN INDIANA RAILROAD CO. REFUNDING ROLE OF J. P.
MORGAN & CO.
Mr. Nehemkis. We no^v turn, Mr. Chairman, unless you think
nightfall is too much upon us, to the Chicago & Western Indiana
E. R. refunding, and I think Ave will be through in about 15 minutes.
Acting Chairman King. Do you guarantee that, underwrite it?
[Laughter.]
Mr. Nehemkis. I underwrite it. [Laughter,]
Acting Chairman King. We will take a recess until 10 o'clock
sharp.
Mr. Nehemkis. As soon as we conclude this.
Acting Chairman King. I didn't say that.
Mr. Nehemkis. Mr. Swan would have to stay overnight.
Acting Chairman King. Would you like to leave this capital of
the Nation tonight, Mr. Swan ?
Mr. Swan. Senator, I would like to meet your wishes in any
respect, but I would love to go home. [Laughter.]
Acting Chairman King. I would like to meet your wishes, pro-
ceed.
Mr. Swan. There is a conflict of interest here that I think should
be divorced. [Laughter.]
Mr. Nehemkis. Mr. Whitney, the Chicago & Western Indiana
financing in the fall of 1935 was a matter of purchasing a block of
Chicago & Western Indiana bonds from the Burlington and also
selling a block from the Chicago & Western Indiana's treasury,
wasn't it?
Mr. Whitney. I really can't testify of my own knowledge, except
from these records that I have seen. I had nothing whatever to
do with it.
Mr. Anderson can answer, of course.
Acting Chairman King (to Mr. Nehemkis). Can you answer the
question ?
Mr. Nehemkis. It was purely a technical question for the record.
As I understand it, the Chicagq & Western Indiana financing in the
fall of 1935 was a matter of purchasing a block of Chicago & Western
Indiana bonds from the Burlington and also selling a block from the
Chicago & Western Indiana's treasury, wasn't it [to Mr. Anderson] ?
Mr. Anderson. The financing of the Western Indiana was the sale
of treasury bonds. The sale of bonds for the Burlington was not
of any immediate importance to the Chicago & Western Indiana R. R.
Co. They had already passed out of their possession some j^ears
before.
Mr. Nehemkis. Mr. AndersoUj did J. P. Morgan & Co., manage that
business and select the underwriters?
Mr. Anderson, No.
Mr. Nehemkis. Mr. Swan, will you examine a document which my
assistant will show you, and tell me whether it is a true and correct
copy of an original in your possession?
Mr. Swan. It is. Do you want me to read it?
Mr. Nehemkis. No, I don't want you to read it, I want you to
identify it.
Mr. Swan. I do.
Mr. Nehemkis. I would like to offer this in evidence.
CONCENTRATION OF ECONOMIC POWER 12041
Acting Chairman King. It will be received.
(The memorandum referred to was marked "Exhibit No. 1729"
and is included in the appendix on p. 12272.)
Mr. Nehemkis. I want to read you a part of this memorandum
which has been identified as cominj? from the files of E. B. Smith &
Co. [reading from "Exhibit No. 1729"] :
Brown Harriman & Co., Incorporated, and Edward B. Smith & Co. were in-
vited by J. P. Morgan & Co. to consider tlie purchase and sale of a block of
$1,658,000 Chicago and Western Indiana R. R. Co. First and Refimding Mort-
gage 51/2% Series C Bonds owned by the Chicago, Burlington and Quincy R. R.
Co. It also developed that the Chicago and Western Indiana wished to sell
$6,340,000 51/2% Series A Bonds for refunding purposes. An investigation of
the Chicago and Western Indiana was undertaken jointly by Brown Harriman
and ourselves without any determination by J. P. Morgan «& Co., or the two of
us concerned of the question of leadership. Morgan said it was up to the two
houses to settle this matter between themselves. Brown Harriman claimed
the leadership primarily on the grounds that the National City Company had a
historical and appearing position in former syndicate offerings. Our claims
to the leadership were based primarily on the ownership of 2/5 of the capital
stock of the Company by the Van Sweringen interests which were to acquire
an additional 1/5 when and if the Wabash decided to withdraw. Our offer
to toss a coin for the leadership was declined ■ond as a counter proposal it was
suggested that the question be referred to J. P. Morgan & Co. for decision.
Mr. Anderson, will you follow me on the next paragraph ? [reading
further] :
These conversations were concluded on a Friday night by Messrs. Davis,
Sylvester and the undersigned and on the next morning Mr. Davis arranged for a
meeting with Mr. T. S. Lamont who was the Morgan partner available that
morning. In the meantime, however, I talked to several partners and it was
decided that we would offer the leadership to Brown Harriman, we, however,
to be joint in everything else, including managership.
So, Mr. Swan, from that statement by your associate, Burnett
Walker, admittedly J. P. Morgan & Co. had the power and the right
to assign leadership between Brown Harriman and E. B. Smith, but
simply preferred, for whatever reasons available at the time, not to
exercise it. Is that correct ?
Mr. Swan. My interpretation, of it would be that they would say
to us that we were joint and we were to decide it between ourselves.
We were finding it difficult to decide it between ourselves and we
therefore tried to get them to arbitrate it. We made up our minds
that it was a much wiser thing for us to say to Brown Harriman & Co.,
"You go ahead and lead it."
Mr. Nehemkis. And on the basis of the opening paragraph I read,
is it not a fact, Mr, Swan, that clearly J. P. Morgan & Co. selected the
underwriters and was considered to be in cojnplete control of the
situation ?
Mr. Swan. I think if that had been written in completeness it would
have said, "J. P. Morgan on behalf of the Railroad Company."
Acting Chairman King. At any rate, Brown Harriman were selected
as leaders ?
Mr. Swan. We conceded the leadership to them without further
action,
Mr. Nehemkis. Will you examine that and tell me if that is a true
and correct copy of the original in your possession? Identify the
document for me, please-
Mr. Swan. I do.
Mr. Nehemkis. I offer this in evidence.
Acting Chairman King. It may be received.
124491—40 — pt. 23 16
12042 CONCENTRATION OF ECONOMIC POWER
(The memorandum referred to was marked "Exhibit No. 1730"
and is included in the appendix on p. 12273.)
Mr. Nehemkis. I now offer in evidence a document previously
identified.
(The memorandum referred to was marked "Exhibit 1731" and is
included in the appendix on p. 12273.)
Mr. Nehemkis. Mr. Anderson, will you examine a letter from your-
self to Mr. Ralph Budd, of the Chicaojo, Burlington & Quincy Railroad
Co., dated April 30, 1934, and tell me if that is a true and correct copy?
Mr. Anderson. Yes, sir.
Mr. Nehemkis. Will you look at this nnd tell me if you are familiar
with that memorandum ?
Mr. Anderson. Yes, sir.
Mr. Nehemkis. These are offered.
(The letter and memorandum referred to were marked "Exhibits
Nos. 1732 and 1733" and are included in the appendix on pp. 12273
and 12274.)
Mr. Nehemkis. Will you examine these, Mr. Swan, and tell me
if they are true and correct copies?
Mr. Swan. They are.
Acting Chairman King. I assume without reading that they have
some relevancy tO' the inquiry ?
Mr. Nehemkis. I am trying to "underwrite this deal" for j'ou,
Senator.
Acting Chairman King. They jnlay be received.
(The telegram and the diary entries referred to were marked
"Exhibits Nos. 1734 and 1735" and are included in the appendix on
p. 12275.)
Mr. Nehemkis. Mr. Anderson, will you glance at this memoran-
dum and tell me if you recognize it as a true and correct copy?
Mr. Anderson. Yes.
Mr. Nehemkis. Offered.
Acting Chairman King. It may be received.
(The memorandum referred to was marked "Exhibit No. 1736" and
is included in the appendix on p. 12275.)
Mr. Nehemkis. I now offer ^ 11 documents previously identified
and bearing upon the subject of this discussion.
Acting Chairman King. Who is Mr. Sylvester?
Mr. Nehemkis (to Mr. Whitney). Mr. Sylvester is vice president of
the investing banking house of Harriman Ripley & Co., Inc. ; correct?
Mr. Whitnet. Correct.
Mr. Anderson. Mr. Nehemkis, this memorandum seems to be
dated around the middle of July 1934. I was absent on a holiday
abroad at the time, I think.
Mr. Nehemkis. Which memorandum?
Mr. Anderson. This memorandum from Walker.
Mr. Nehemkis. That is an undated memorandum.
Mr. Anderson. It refers to a meeting on July 17, 1934. I never
heard of this meeting which is referred to, and at which T. S. Lament
was present.
Mr. Nehemkis. May I suggest after the meeting is adjourned you
and Mr. Walker and Mr. Swan get together on this? I am merely
offering what is written here.
Acting Chairman King. You may correct it; if you were out of
the United States, you may indicate it in the record. These docu-
ments may be received.
CONCENTRATION OF ECONOMIC POWER 12043
(The documents referred to were marked "Exhibits Nos. 1737 to
1747" and are inckided in the appendix on pp. 12276-12279.)
Mr. Nehemkis. Mr. Whitney, I asked you a question at the outset
of these hearings. I am now going to repeat that question to you
and see if y^n don't perhaps care to change your answer. It would
appear, Mr. Whitney, that the power to determine to whom these rail-
road refundings were to be distributed was the power to distribute
about $700,000 of gross income. Would you agree, Mr. Whitney ?
INIr. Whitney. I see no reason to change my former answer. But
Mr. Chairman
Mr. Nehemkis (interposing). Thank you, sir. I want to get my
documents in and then you can comment. Does it relate to that
point?
Mr. Whitney. Oh, yes; it relates to that point.
Mr. Nehemkis. To the specific point or the general subject matter?
Mr. Whitney. I will be glad to wait.
Mr. Nehemkis. You will recall we discussed this morning, Senator
King, a stipulation ^ by C. E. Mitchell, concerning a number of
documents which I have been offering. I now want to offer another
document pursuant to that stipulation, but before handing it to you,
let me read it to you. You will recall that we have been discussing
the refunding of the Atlantic Coast Line. Now on June 17, 1936,
after Morgan Stanley & Co. was organized, Morgan Stanley brought
out an offering of $26,000,000 of Louisville & Nashville Railroad Co.
first and refunding bonds.
"VVliat is the relationship, Mr. Anderson, between the Louisville &
Nashville Railroad and the Atlantic Coast Line?
Mr. Andekson. The Atlantic Coast Line controls the Louisville &
Nashville by ownership of a majority of the capital stock.
Mr. Nehemkis. This is a memorandum, you will recall, by Mr.
C. E. Mitchell [reading from "Exhibit No. 1748"] :
Morgan, Stanley & Co. will offer the above mentioned issue probably next
week, 9r possibly the week following. * * *
Harold Stanley explained that, owing to the fact that when J. P. Morgan &
Co. withdrew from the investment banking business, the First Boston Cor-
poration, Brown HaiTiman, and E. B. Smith & Co. had handled some Louis-
ville & Nashville financing, they had been obliged to. give them a preferential
position over us.
Do you know anything about that, Mr. Swan?
Mr. Swan. I am sorry, I thought you were asking Mr. Arderson.
Mr. Neiiemkis. Did you hear what I just read? Mr. Stanley ex-
plained to Mr. Mitchell who was hoping to get a better position for
his company that he couldn't do it in the L. & N. issue because of
the fact that during this period we have been discussing J. P. Morgan
& Co., he says, withdrew from the investment banking business and
your firm. Brown Hariiman and First Boston handled some of the
Atlantic Coast- Line business. Therefore, he said he was obliged
to give your firm and the other two a preferential position.
Mr. Swan. It is very difficult for me to testify, I should think,: on
a memorandum of Mr. Mitchell's referring to a conversation with
Mr. Stanley.
Mr. Nehempcis. I thought you might by chance know something
about it.
I offer this in evidence.
1 "Exhibit, No. 1691."
12044 CONCENTRATION OF ECONOMIC POWER
Acting Chairman King. It may be received.
(The memorandum referred to was marked "Exhibit No. 1748"
and is included in the appendix on p. 12279.)
OPINION OF DAVIS POLK WARDELL GARDINER & REED RELATIVE TO BANKING
ACT OF 193.'! AND RELATION OF J. P. MORGAN & CO. THERETO
Mr. Nehemkis. Mr. Alexander, may I trouble you for a moment?
I show you a carbon copy of a memorandum addressed to you from
myself dated Washington, D. C, November 8, 1939. Do you recall
seeing and receiving the original ?
Mr. Alexander. Yes ; I do.
Mr. Nehemkis. It is offered in evidence.
Acting Chairman King. What is the purpose of that? Is it infor-
mation you asked for?
Mr. Nehemkis. That is correct, sir, just to complete the record.
Acting Chairman King. Is there any contention about it?
Mr. Nehemkis. No. This was an aide 7nemoire to assist him in
getting the material for us.
Acting Chairman King. It may be received.
(The memorandum referred to was marked "Exhibit No. 1749" and
is included in the appendix on p. 12280.)
Mr. Nehemkis. Mr. Alexander, I show you a letter dated November
1, 1939, and ask you if that is a copy of a letter you sent me.
Mr. Alexander. It is.
Mr. Nehemkis. I have here four opinions from Davis Polk Ward-
well Gardiner <& Reed to Messrs. J. P. Morgan & Co. Examine those
and tell me if they are true and correct copies.
Acting Chairman King. What is the relevancy?
Mr. Nehemkis. These are legal opinions obtained by the firm of
J. P. Morgan & Co. from their counsel indicating to them certain
factors about which I wish to examine one of the witnesses.
Mr. Alexander. These are the copies of opinions that I sent to you.
Acting Chairman King. There is nothing about relations between
client and counsel?
Mr. Nehemkis. No, sir.
Mr. Whitney. We gave them voluntarily, sir.
Mr. Nehemkis. I misunderstood you. These were made available
by Mr. Alexander.
Acting Chairman King. They may be received.
(The documents referred to were marked "Exhibits Nos. 1750 to
1755" and are included in the appendix on pp. 12282-12286.)
Mr. Nehemkis. Mr. Alexander, will 3M)u read the next to the last
paragraph on page 4 of the aide in-einoh'e of November 8, 1939.
Mr. Alexander (reading from "Exhibit No. 1749") :
In tbis connection, it is to be noted that the only general opinion of counsel
I'urnished by J. P. Morgan & Co. is the opinion dated May 29, 1934, and that no
specific opinion nor memorandum of specific discussions has been furnished that
bear upon the aspect of the question raised by Mr. Wardwell. Three opinions
dated July 22, August 21, and December 14, 1935, have been furnished by J. P.
Morgan & Co., but each such opinion deals with legal problems connected with the
respective bond issues, but not with the position of J. P. Morgan & Co. under
Section 21a of the Banking Act of 1933.
May I read from the opinion of Mr. Wardwell, of November 1,
1939, concerning the applicability of section 21a of the Banking Act
of 1933 [reading from "Exhibit No. 1755"] :
CONCENTRATION OF ECONOMIC POWER 12045
We have reviewed this question from time to time and have had no occasion
to change our opinion.
As you know, we consider it advisable for the firm to follow the existing prac-
tice of examining with us the character of any particular transaction that may
be under consideration in order that the firm be assured that such transaction
falls within the scope of the general opinions which we may have given the
firm from time to time.
Mr. N^HEMKis. At this time, do you care to make any comment in
regard to my communication to you from which you have read?
Mr. Alexander. No.
Mr. Nehemkis. Thank you, sir.
I have no further questions, sir.
Acting Chairman King. Mr. Wliitney, you had some further expla-
nation.
Mr. Whitney, This last evidence just given shows that we were
obviously very much alive in ^4 and '35 to what we could and could
not do under the new set of affairs. All I really wanted to say
before that was, as I said in the beginning, if I can do a little boast-
ing, I would like to say we would have trieil to do our duty for our
clients, wliich is to give them every possible service we can, and
that this whole arrangement was forced upon us and the rest of the
banking community by the change in the laws, and w^e were trying
to adjust ourselves to that position, and these all follow the same
pattern. The clients came to us and asked us to do a job. We did
it as well as we knew how, and advised them to the best of our
knowledge and belief as to who would perform a proper service for
them.
That is really all I have to say.
Acting Chairman King. I assume you had some uncompleted busi-
ness, you had many clients and they came to you in the course of
business and called for persons to take over some of the activities in
which you had been engaged, and you gave them the advice upon
their questions as to the persons or corporations or investment com-
panies that could best serve them ?
Mr. Whitnet. And assisted them just as much as we could within
the legal limitations by which we were bound.
Mr. Henderson. Mr. Whitney, in that connection, you take the
position, I gather from your last statement, that none of the services
you performed in this period contravene the Banking Act?
Mr. Whitney. Absolutely.
Mr. Henderson. Leavmg aside for a minute the legal phases, or
leaving them aside entirely, a number of those functions you per-
formed in this "switch-over" period are functions which are per-
formed by underwriting houses, is that not correct?
Mr. Whitney. No, sir ; I don't quite agred with that, because what
we did was to advise clients of ours who in the past had traditionally
come to us for advice and they didn't have the acquaintanceship,
the relationship that Mr. Swan referred to that he had established
with his clients, with anybody but with us at the time. They had to
deal with others, and what we did in an extended service to these
people varied a little bit in these issues, but none of those services had
to do with the service of negotiation on price except insofar as we
advised the borrowing corporation in two instances, to my knowl-
edge, as to whether we thought the terms suggested by the under-
writers were fair.
12046 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. I was late and I don't want to get into an ex-
tended argument, but I would like you to go back to the explanation
you gave to this committee, which you volunteered at one of the
earlier hearings, as to the functions performed by an investment
banker, and I would like you to lay that alongside of some of the
functions you performed in these cases under discussion this after-
noon. I would like to have your considered answer, whether it would
still be "No."
Mr. Whitney. Do you want me to attempt to do this now, or do
you want a considered answer reviewing the situation?
Mr. Henderson. I would like your considered statement of the
functions you perform. You have made several statements for the
record as to what you consider that function to be. There has been
laid on the table today a series of functions which you performed
which you say were strictly banking functions for certain former
clients of yours. I would like you to lay them together and tell me
at some future time whether the answer is still "No." ^
Mr. Whitney. The answer is "No."
Mr. Nehemkis. Mr. Chairman, there is one document I forgot to
offer. This has been identified by Mr. Whitehead who appeared
earlier. " '" .
Acting Chairman King. It may be received.
(The memorandum 'referred to was marked "Exhibit No. 1756"
and appears in Hearings, Part 22, appendix, p. 11795.)
Mr. Nehemkis. I would like to have a telegram admitted from
Mr. George Leib, and may I give you a word of explanation why I
ask you to do this.
Mr. Henderson. Is that the telegram which was sent collect?
[Laughter.]
Mr. Nehemkis. Yes, sir. Mr. Leib was asked the question as to
whether or not Harrison "V\'illiams had ever held any stock in Blyth
& Co. Strictly speaking, Mr. Leib's answer was responsive to my
question. Mr. Leib, howe- er, feels that there may be some misunder-
standing about that in the minds of some of the members of the
committee, and so that there may be no misunderstanding he has
indicated and shown how and why and where Harrison Williams
has held stock in Blyth & Co.
Acting Chairman King. It may be received.
(The telegram referred to was marked "Exhibit No. 1757" and
appears in Hearings, Part 22, appendix, p. 11826.)
Acting Chairman King. Have you additional questions of these
witnesses? May they all be excused, including Mr. Whitney?
Mr. Nehemkis. Oh, no, sir; Mr. Whitney is going to be with us
tomorrow.
(The witnesses, Mr. Anderson and Mr. Swan, were excused.)
Acting Chairman King. The committee will stand adjourned until
10 : 30 tomorrow morning.
Mr. Henderson. The Insurance Subcommittee will meet at 10 : 30
tomorrow in room 357, Senate Office Building.
(Whereupon, at 5:15 p. m., a recess was taken until Wednesday,
December 20, 1939, at 10:30 a. m.)
T/f5<^;-.^Hi!,°?^vl° * ^^"^F; ^'^^^^ J^y'a'y 26. 1940, submitted the information requested.
It is included in the appendix on p. 12321.
INVESTIGATION OF CONCENTRATION OF ECONOMIC POWEE
WEDNESDAY, DECEMBER 20, 1939
United States Senate,
Temporary National Economic Committee,
Washington^ D. G.
The committee met at 10:45 a. m., pursuant to adjournment on
Tuesday, December 19, 1939, in the Caucus Room, Senate Office
Building, Senator Joseph C. O'Mahoney presiding.
Present: Senators O'iMahoney (chairman) and King; Messrs. Hen-
derson, Lubin, Avildsen, Kades, Hinrichs, and Brackett.
Present also: Holmes Baldridge, Department of Justice; Clifton
M. Miller, Department of Commerce; Willis J. Ballinger, Federal
Trade Commission; Ganson Purcell, Securities and Exchange Com-
mission; Peter R. Nehemkis, Jr., special counsel; Samuel M. Koenigs-
berg, associate attorney ; David Ryshpan, financial analyst ; Oscar L.
Altman, financial analyst; and Lawrence Brown, investigator, Secu-
rities and Exchange Commission.
The Chairman. The committee will please come to order.
Will you call your first witness, Mr. Nehemkis ?
Mr. Nehemkis. Mr. Harold Stanley.
The Chapman. The chairman has received a letter from Mr. C. B.
Sawyer, president of The Bruslr Beryllium Co., submitting certain
material for the record in connection with the hearings on beryl-
lium.^ Without objection, this may be printed in the record at the
appropriate place.
(The letter and material referred to were marked "Exhibit No.
1758-1 to 1758-3," and are included in the appendix on pp. 12286-
12290.)
Mr. Nehemkis. Mr. Chairman, you will recall that -the day we
opened our proceedings, in the afternoon session we had occasion to
discuss the financing of the Chicago Union Station bonds. In the
course of the testimony of Mr. Bovenizer, there was a question as to
whether or not certain contentions made by counsel were accurate,
and as our usual procedure is, I requested Mr. Bovenizer to check
his own books and advise us whether he still felt that way.-
1 am in receipt of a letter under date of December 18, 1939, from
Mr. Bovenizer, who advises as follows [reading from "Exhibit No.
1759-2"] :
Deae Mr. NEHiaiKis : I have your letter of the 14th instant in connection
with my testimony of the other day on Chicago Union Station bonds and I find
upon further examination that your figures are quite correct, not only as to
percentage but as to amount also.
Regretting that my error should have caused you this additional trouble and
with appreciation of your courtesy —
1 Hearings on the development of the beryllium industry appear in Part 5.
2 Hearings, Part 22, p. 11436.
12047
12048 CONCENTRATION OF ECONOMIC POWER
and so forth and so on.
May this be inserted in the record at the appropriate place, sir?
The Chairman. Without objection, it may be so inserted.
Mr. Nehemkis. Together with the accompanying letter to Kuhn,
Loeb.
(The letters referred to were marked "Exhibits Nos. 1759-1 and
1759-2 and appear in Hearings, Part 22, appendix, pp. 11797 and
11798.)
The Chairman. The Chair wishes to announce that a subcommittee
of this comimttee is conducting insurance hearings in room 357 in
this building. If there are any witnesses who have been subpenaed
for the insurance hearing who are in this room, they should be in
room 357.
Mr. Nehemkis. Mr. Chairman, may it please the committee, one
further matter before proceeding with the business at hand : Yester-
day afternoon, you may recall, Mr. Chairman, that we were discuss-
ing one of the interim pieces of financing, the Toledo & Ohio, and
the question was raised by Mr. Anderson whether it was actually
the Toledo & Ohio financing or some other financing.^ I have refer-
ence now to our "Exhibit No. 1715," and so that the record may be
clear, I merely want to read briefly from yesterday's proceedings:
Question. I now read from the letter previously identified, Mr. Chairman,
from Mr. Willard Place to Mr. Max O. Whiting. . . .
Mr. Anderson. What business is that you are talking about?
Answer. Toledo & Ohio, the subject matter under discussion. I offer it in
evidence.
Mr. Anderson. I don't think it is.
Mr. Whitney. No, sir.
Then the exhibit was identified, and Mr. Whitney continued:
The Boston & Albany, another subsidiary of the New York Central —
And then Mr. Whitney continued to explain how it had to be the
Boston & Albany.
Now, Mr. Wliitney was in error, and I have prepared for you, sir,
an abstract from Moody's Manual on Investments of Railroad Se-
curities, which indicates that it was the Toledo & Ohio that we were
discussing, and that under no conceivable stretch of the imagination
could it have been the Boston & Albany ; since so distinguished a
banker as Mr. Whitney should have known that the Boston & Albany
main line I's were 41/2 's. We were talking about 3i/2's.
Mr. Miller. Mr. Nehemkis, didn't Mr. Whitney say that those
Boston & Albany bonds were bonds held in some fund? It wasn't
a new issue, it was a block of bonds held by the railroad. They were
talking about selling those.
Mr. Nehemkis. If he did
Mr. Miller (interposing). It is my understanding from the
testimony.
Mr. Nehemkis. I don't recall it, sir, but I have the testimony
before me and a rather hasty glance at it does not indicate, if he
said that, that it arose in this connection. I think, Mr. Miller, that
you may have reference to an answer by Mr. Anderson in connection
with the sale of certain Burlington bonds. I will be very glad to
check it for you later.
1 Supra, p. 12013.
CONCENTRATION OF ECONOMIC POWER 12049
Do you want this in the record or are you satisfied with the state-
ment? [pointing to exhibit].
The Chairman. I think it is all right.
TESTIMONY OF HAROLD STANLEY, PRESIDENT, MORGAN STANLEY
& CO. INCORPORATED, NEW YORK, N. Y.— Resumed
Mr. Nehemkis. Mr. Stanley, will you state the date on which
Morgan Stanley & Co. was incorporated?
Mr, Stanley. I testified yesterday that it was September 5, 1913.
I now understand that it was September 6 — I mean 1935.
Mr. Nehemkis. Now, what is the correct answer to the question ?
Mr. Stanley. The correct answer is September 6, 1935.
Mr. Nehemkis. IMr. Stanley, I show you certain documents pur-
porting to be the certificate of incorporation of Morgan Stanley, and
various amendments thereto. "Will you be good enough to examine
them and identify them for mo '.
For your information, Mr. Chairman, these documents will be sub-
sequently offered. They were obtained from the Secretary of State at
Albany, N. Y., and bear his authentication.
Mr. Stanley. I so identify them.
Mr. Nehemkis. The four items identified by the witness are offered
in evidence, Mr. Chairman.
The Chairman. They may be received.
(The documents referred to were marked "Exhibit No. 1760-1 to
4" and are on file with the committee.)
OFFICERS and DIRECTORS OF MORGAN STANLEY & CO., INCORPORATED, AND
THEIR PRIOR AFFILIATIONS
Mr. Nehemkis. Mr. Stanley, will you be good enough to name the
officers and directors of Morgan Stanley & Co. Inc., and will you
also at the same time state the business affiliations of these officers
and directors prior to their becoming associated with Morgan Stanley
& Co. Inc. ?
Mr. Stanley. Have you the list there?
Mr. Nehemkis. I do; but I prefer that you give it to me from
your material.
The Chairman. This exhibit,^ being the certificate of incorpora-
tion, is filed with the committee, not printed.
Mr. Stanley. The list of officers and directors of Morgan Stanley
& Co., which we have already furnished you, are as follows: Harold
Stanley, president and director. Prior affiliation, partner of J. P.
Morgan & Co.
Do you want the date of employment as well?
Mr. Nehemkis. If you have it there, you might as well give it.
Mr. Stanley. Date emj^loyed, September 6, 1935, which is the day
we opened our office.
William Ewing, executive vice president and director, same date of
employment; prior affiliation, partner J. P. Morgan & Co.
Henry S. Morgan, treasurer, secretary, and director, same date of
employment; prior affiliation, partner J. P. Morgan & Co.
1 "Exhibit No. 1760-1 to 4."
12050 CONCENTRATION OF ECONOMIC POWER
Perry E. Hall, vice president and director; former affiliation, part-
ner Drexel & Co.
Edward H. York, Jr., vice president and director, same date of
employment ; prior affiliation, partner Drexel & Co.
John M. Young, vice president, director, same date of employ-
ment; former affiliation, manager bond department, J. F. Morgan
& Co.
Allen Northey Jones, vice president and director, same date of
employment; prior affiliation, manager statistical department, J. P.
Morgan & Co.
Alfred Shriver, vice president and director, date of employment,
February 17, 1936; prior affiliation, president and director of Guar-
anty Co. of New York, in dissolution.
Sumner B. Emerson, vice president and director, date of employ-
ment, October 19, 1936; prior affiliation, vice president Fire Associa-
tion of Philadelphia and associated companies.
Archer M. Vandervoort, assistant treasurer and assistant secretary,
date of employment, September 16, 1935; prior affiliation, employee
J. P. Morgan & Co.
Mr. Nehemkis. At the time of the organization of Morgan Stan-
ley, you, Mr. Stanley, Mr. William Ewing, and Mr. Henry S. Morgan
had resigned from the firm of J. P. Morgan & Co., had you not?
Mr. Stanley. We had.
Mr. Nehemkis. But the arrangements in regard to the organiza-
tion of the new firm were made, were they not, at the time when
these individuals whose names I have just mentioned were still
partners in J. P. Morgan & Co.
Mr. Stanley. The arrangements?
Mr. Nehemkis. For the organization of the new firm.
Mr. Stanley. Quite correct,
Mr. Nehemkis. The capital stock of Morgan Stanley & Co., Inc.,
consists, does it not, of preferred stock and common stock?
Mr. Stanley. It does.
Mr. Nehemkis. Were there not issued 70,000 shares of preferred
stock at par $100 per share and 50,000 shares of common stock at
$10 per share, $5 of which was set up on the books as paid-in capital,
$5 as paid-in surplus?
Mr. Stanley. That is correct.
Mr. Nehemkis. So that Morgan Stanley & Co., Inc., started busi-
ness with a paid-in capital of $7,500,000?
Mr. Stanley. Kather a paid-in capital of $7,250,000 and $250,000
paid-in surplus. Seven and a half million dollars of money.
Mr. Nehemkis. ^ accept that. On August 7, 1939, was there not
authorized an issue of common stock and was not the common stock
increased from 50,000 shares to 200,000 shares ?
Mr. Stanley. I am not sure of the date. You undoubtedly have it.
Mr. Nehemkis. You may accept my dates subject to correction, if
you wish.
Mr. Stanley. I think that on the date you mention the authorized
number of shares increased to 200,000 shares and 150,000 shares as
stock dividend.
Mr. Nehemkis. And the additional 150,000 shares were distributed
to the common stockholders as a stock dividend, as you just indi-
CONCENTRATION OF ECONOMIC POWER 12051
cated, increasing the amount of outstanding common stock to 200,000
shares. Is that correct, sir?
Mr. Stanley. That is correct.
Mr. Nehemkis. And this is the amount of common stock now out-
standing?
Mr. Stanley. It is.
COMMON AND PREFEERED STOCKHOLDERS OF MORGAN STANI:EY & CO.,
INCORPORATED
Mr. Nehemkis. Were not the three principal common stockholders
at the time of incorporation, yourself, Mr. William Ewing, and Mr.
Henry S. Morgan ?
Mr. Stanley. They were.
Mr. Nehemkis. By the way, is Mr. Henry S. Morgan the son of
Mr. J. P. Morgan ?
Mr. Stanley. He is.
Mr. Nehemkis. Mr. Stanley, as each of these individuals took
something over 20 percent of the stock, do they not now hold be-
tween themselves over 60 percent of the common stock ?
Mr. Stanley. They hold, I think, exactly 60 percent between them.
Mr. Nehemkis. So that, Mi'. Stanley, the controlling interest in
the new firm was held by these three former partners of J. P. Morgan
&Co.?
Mr. Stanley. Well, it depends on what you mean by controlling
interest. Sixty percent of the voting stock was held by these three
individuals.
Mr. Nehemkis. Does that mean anything to you ?
Mr. Stanley. The control of a company is in the hands of all the
stockholders.
Mr. Nehemkis. Mr. Stanley, let's be precise. When three individ-
uals hold 60 percent of the voting stock of the company, does that
have any significance ?
Mr. Stanley. If they act together they vote the majority of the
stock, certainly, but if you take any one of them and the balance of
the stockholders, I don't see how they could have a majority.
Mr. Nehemkis. The other common stockliolders were Mr. Perry E.
Hall. Mr. A. N. Jones, Mr. E. H. York, Jr., and Mr. John M. Young?
Mr. Stanley. I am sorry, I didn't follow all the names. Undoubt-
edly it is correct.
Mr. Nehemkis. Perry Hall, A. N. Jones, E. H. York, Jr., John M.
Young.
Mr. Stanley. That is correct.
Mr. Nehemkis. I believe you have already testified, but I should
like you to state again at this time that the other common stock-
holders whose names I have just given to you were former employees
of J. P. Morgan & Co.
Mr. Stanley. Well, former employees of J. P. Morgan & Co. or
partners of Drexel «S; Co,
Mr. Nehemkis. Who was a former partner of Drexel ?
Mr. Stanley. Mr. Hall and Mr. York.
Mr. Nehemkis. What is the difference between Drexel & Co. and
J. P. Morgan?
Mr. Stanley. They are the same firm, but Drexel & Co. is the
name of the business down in Philadelphia.
12052 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. I see, same firm, different name.
Mr. Stanley. Yes. Understand, that isn't the legal definition. I
am not trying to be legalistic about it.
Mr. Nehemkis. I quite understand you, Mr. Stanley. So that all
of the' common stock was held by either former partners or employees
of J. P. Morgan & Co. ?
Mr. Stanley. And Drexel & Co.
Mr. Nehemkis. In the light of your explanation.
Mr. Stanley. Quite right.
Mr. Nehemkis. At the time of the incorporation of Morgan Stan-
ley & Co., was not the bulk of the preferred stock taken by Morgan
partners ?
Mr. Stanley. The bulk of the preferred stock was purchased by
certain individual partners.
Mr. Nehemkis. If you can answer my question at this time I will
give you further opportunity to clarify it by detailed questions later.
(The reporter read the immediately preceding question.)
Mr. Stanley. The bulk of this preferred stock was taken by Mor-
gan partners individually, certain Morgan partners individually.
Mr. Nehemkis. Mr. Stanley, I show you a letter from you addressed
to me, dated November 27, 1939. Tell me if this is your signature
and whether this is a letter which you did send to me ?
Mr. Stanley. It is.
Mr. Nehemkis. Will you examine the four sheets attached to the
original letter of transmittal? Do you recognize those as having
been prepared by your organization?
Mr. Stanley. I do.
Mr. Nehemkis. The documents identified by the witness, Mr. Chair-
man, are offered in evidence.
The Chairman. They may be admitted.
(The documents referred to were marked "Exhibit No. 1761" and
are included in the appendix on p. 12291.)
Mr. Nehemkis. Of the original holders of the preferred stock, only
William Ewing and Henry S.. Morgan were associated with the new
company. Were not all of the other holders partners of J. P. Morgan
&Co.?
Mr. Stanley. I think that is correct.
Mr. Nehemkis. As Messrs. Henry S. Morgan, yourself, William
Ewing, each purchased about 20 percent of the common stock of
Morgan Stanley & Co., was not their investment in the equity of the
new company approximately $100,000 each ?
Mr. Stanley. That is correct.
Mr. Nehemkis. Did not Mr. Henry S. Morgan purchase 2,500
shares of preferred stock for $250,000, and did not Mr. William Ewing
purchase 1,500 shai _ of preferred stock for $150,000?
Mr. Stanley. They did.
Mr. Nehemkis. So that the total capital investment of Mr. Harold
Stanley, president of the new company, was approximately $100,000 ?
Mr. Stanley. As of September 16, 1935, but shortly after that
Mr. Nehemkis (interposing). Just answer the question as you
have been given it.
Mr. Stanley. As of September 16, 1935, yes.
Mr. Nehemkis. And that of Mr. Henry S. Morgan, vice president,
wns approximately $350,000?
CONCENTRATION OF ECONOMIC POWER 12053
Mr. Stanley. Yes.
Mr. Nehemkis. And that of Mr. William Ewing, vice president,
was approximately $250,000?
Mr. Stanley. As of that date.
Mr. Nehemkis. Did not other officers invest something under
Mr. Stanley [interposing]. Excuse rhe, Mr. Nehemkis, it was
somewhat larger, but that is approximately correct.
Mr. Nehemkis. You accept that?
Mr. Stanley. Substantially so.
Mr. Nehemkis. Let's see that the record clearly shows your answer.
I asked you a series of questions concerning the amount of the in-
vestment of yourself, Mr. Henry S. Morgan, Mr. William Ewing,
and is your answer, "Substantially correct"? Is that what you want
the record to show?
Mr. Stanley. The amounts you mention are substantially correct.
Mr. Nehemkis. Thank you, sir. Now, did not the other officers
invest something under $200,000 in the common stock of Morgan
Stanley?
Mr. Stanley. Yes.
Mr. Nehemkis. So that $6,600,000 of capital in the form of pre-
ferred stock was supplied by Morgan partners ?
Mr. Stanley. I don't think I have that.
Mr. Nehemkis. Why don't you accept that subject to check?
Mr. Stanley. I will be glad to.
Mr. Nehemkis. So that the officers of Morgan Stanley & Co., In-
corporated, supplied but $900,000 of the origmal $7,500,000 capital
of the firm?
Mr. Stanley. That is correct.
Mr. Nehemkis. Will you tell me who now hold the common stock
of Morgan Stanley & Co., Incorporated?
Mr. Stanley. Do you want the whole list?
Mr. Nehemkis. Run them off quickly.
Mr. Stanley. Mr. Emerson, Mr. Ewing, Mr. Hall, Mr. Jones,
Henry Morgan, Mr. Shriver, myself, Mr. York, Mr. Young.
Mr. Nehemkis. Does not Mr. Ewing; yourself, Mr. Henry S. Mor-
gan, each still hold approximately 20 percent of the common stock?
Mr. Stanley. Mr. Ewing, Mr. Henry Morgan and myself do each
hold approximately 20 percent of the common stock.
Mr. Nehemkis. Is not the only new holder of common stock Mr.
Alfred Shriver?
Mr. Stanley. And Mr. Sumner B. Emerson.
Mr. Nehemkis. And Mr. Sumner Emerson?
Mr. Stanley. Correct.
Mr. Nehemkis. When did Mr. Sumner Emerson acquire common
stock in addition to that — I think you covered that in your previous
answer when you told me the names of the common-stock holders,
didn't you?
Mr. Stanley. I didn't cover your last question. It is a very
simple answer. He acquired it on or about the time he became an
officer of our company, which was sometime after he became an
employee — I don't know the exact date.
Mr. Nehemkis. It is not important. Tell me who the holders of
the preferred stock are, if you will ?
12054 CONCENTRATION OF ECONOMIC POWER
Mr. Stanley. As of August 31, 1939, the close of our fiscal year,
the holders of our preferred stock were as follows. Do you want
the amounts?
Mr. Nehemkis. Just give me the names,
Mr. Stanley. Arthur M. Anderson.
Mr. Nehemkis. Well, to save time you might give me the amounts.
Mr. Stanley. Arthur M. Anderson, 1000 shares. Gaspar G. Bacon
and George "VYliitney, trustees under deed of trust, dated November
13, 1914, 1,700 shares. Robert L. Bacon and Gaspar G. Bacon, as
trustees for Martha B. Whitney, 1,700 shares. Francis D. Bartow,
1,000 shares. William Ewing, 1,500 shares. Allen Northey Jones.
200 shares. Thomas W. Lamont, 19,500 shares.
Mr. Nehemkis. Let me make sure I have that. Thomas Lament,
19,500. That is in evidence ^ but I want to put it on my copy.
Mr. Stanley. Russell C. Leffingwell, 3,400 shares. H. Gates Lloyd,
Jr., 850 shares. H. Gates Lloyd, Jr. and Charles D. Dickey, trus-
tees for Richard W. Lloyd, under the will of Horatio G. Lloyd, de-
ceased, 850 shares. Richard W. Lloyd, 850 shares. Richard W.
Lloyd and Charles D. Dickey, trustees for H.^ Gates Lloyd, Jr.,
under the will of Horatio G. Lloyd, deceased, 850 shares. Henry
S. Morgan, 9,800 shares. J. P. Morgan, 3,000 shares. Junius S.
Morgan, 2,800 shares. Harold Stanley, 1,000 shares.^ Charles Steele
estate, deceased, 20,000 shares.
Mr. Nehemkis. I note that among the new holders of the preferred
are yourself, holding 1,000 shares and Mr. Allen Jones holding 200.
shares. Mr. Stanley, has any person other than those appearing in
the four lists which you have previously identified in the names and
amounts you have just given me ever been, to your knowledge, a'
holder of record or beneficial owner of any shares of either common
or preferred stock of Morgan Stanley & Co., Incorporated ?
Mr. Stanley. Well, I can only answer the question about the
holders of record; no one has, to my knowledge, in that respect. I
can't answer of course about beneficial ownership.
Mr. Nehemkis. Who can answer that question?
Mr. Stanley. Each stockholder, I suppose.
Mr. Nehemkis. You, as a principal officer of Morgtui Stanley are
not aware of that?
Mr. Stanley. We have no knowledge of the transfer of stock.
Mr. Nehemkis. You have no knowledge or informatioh or belief
on the subject?
Mr. Stanley. No; I have none.
Mr. Nehemkis. Is not the preferred stock ^,umulative up to 4 per-
cent, and is it not a nonvoting stock entitled to 6 percent if earned?
Mr. Stanley. It is.
Mr. Nehemkis. It has no rights, however, of any kind other than
to receive dividends when, as and if declared, and certain payments on
liquidation. In shorty it has no right to vote for officers?
Mr. Stanley. No right to vote for officers or directoi-s.
Mr. Nehemkis. In other words, the common stock alone elects the
officers and directors?
Mr. Stanley. It does.
1 Referring to "Exhibit No. 1761."
CONCENTRATION OF ECONOMIC POWER 12055
LIMITATIONS ON DISPOSITION OF CAPITAL STOCK UNDER ARTICLES OF
INCORPORATION
Mr. Nehemkis. Now, is it not a fact, Mr. Stanley, that under the
articles of incorporation it is virtually impossible for either the com-
mon or preferred stock of the corporation to be sold to anyone who
is not satisfactory to the present directors or their successors?
Mr. Stanley. Well, there are restrictions on transferability.
Mr. Nehemkis. Do you accept my statement as a description ?
Mr. Stanley. I am not sure that it doesn't go too far. They can't
sell it without offering it to us but if we don't take it they can sell it.
Mr. Nehemkis. If one of the holders of stock offers it to you and
you are not interested, could it be sold to me, for example — this being
a very hypothetical case?
Mr. Stanley. I think so. You wouldn't get your dividend this
year if you bought it. [Laughter.] '
Mr. Nehemkis. Is that really so, that anyone, for example, could
acquire stock of Morgan Stanley if you decided that you weren't
interested in purchasing it?
Mr. Stanley. I will be glad to give you the exact situation subject
to correction by my counsel. In brief, the restrictions are on trans-
ferability. If the holders of preferred stock want to sell it they would
have to offer it to us first, and if Ave don't take it within a certain time
limit then they can sell it to somebody else.
Mr. Nehemkis. To anybody else
Mr. Stanley (interposing). That they want to, within a time limit.
Mr. Nehemkis. Within 30 days?
Mr. Stanley. Is that correct?
Mr. George A. Brownell.^ Yes.
Mr. Stanley. And if they don't sell it in that 30 days to somebody
else and subsequently want to do it again they have to offer it to us.
Mr. Brownell. Sixty days is right.
Mr. Nehemkis. Do I understand you correctly that John Jones
could under the circumstances that you have just narrated become
a stockholder of Morgan Stanley & Co. ?
Mr. Stanley. Yes.
Mr. Nehemkis. You are quite sure of that?
Mr. Stanley. I think so. May I ask counsel if that is correct?
Mr. Brownell. Yes.
Senator O'Mahoney. It would seem, Mr. Nehemkis, from your
questions that you might be interested in acquiring some of this
stock. [Laughter.]
Mr. Nehemkis. After seeing exhibits here showing the profits in
the underwriting business I ought to be. [Laughter.]
The Chaerman. This is set forth in the charter.
Mr. Stanley. It is all set forth in the papers that you have.
The Chairman. Does counsel recall the particular section of the
charter ?
Mr. Nehemkis. Articles 13 and 14, Mr. Chairman.
The Chairman. Let's read this into the record.^
1 Counsel to Mr. Stanley.
'Reading from "Exhibit No. 1760-1," on file with the committee.
12056 CONCENTRATION OF ECONOMIC POWER
13. No holder of either Preferred or Common Stock shall be entitled as
of ri^ht to purchase or subscribe for any part of any unissued stock of either
class or any additional Preferred or Common Stock to be issued by reason
of any increase of the authorized capital stock of the Corporation of either
class, or bonds, certiticates of indebtedness, debentures or other securities con-
vertible into stock of the Corporation, but any such unissued stock or such
additional authorized issue of new stock or of other securities convertible
into stock may b(^ issued and disposed of pursuant to resolution of the Board
of Directors to such persons, firms, corporations or associations and upon such
terms as may be deemed advisable by the Board of Directors in the exercise
of their discretion.
14, With the exception of transfers in the case of a deceased stockholder
to his executors or administrators and, as to the Preferred stock only, with
the further exceptions of transfers (1) to a person who is already an existing
stockholder of the corporation and (2) to testamentary trustees, no shares
of the Preferred Stock or the Common Stock of the corporation shall be
sold, assigned, bequeathed, or otherwise transferred, whether by any holder
or owner thereof, or by the executor, admiiiisti-ator, trustee or other repre-
sentative of any stockholder or by any receiver, trustee in bankruptcy or any
representative of the creditors of any stockholder, or by the grantee or assignee
of any such shares sold on execution, or otherwise, unless the same first
shall have been offered for sale to the corporation, or, if the corporation shall
so elect, to a nominee or nominees of the corporation, as hereinafter provided.
Whenever any such holder, owner, executor, administrator, trustee, receiver,
bankruptcy trustee, grantee, assignee or representative shall desire to sell
or dispose of shares of Preferred Stock or Common Stock of the corpora-
tion, such holder, owner, executor, administrator, trustee, receiver, bankruptcy
trustee, grantee, assignee or representative shall first notify the Board of
Directors, and shall offer to sell said Preferred or Common Stock to the cor-
poration or to its nominee or nominees at a price per share not exceeding
the value thereof determined as follows :
(a) In the case of the Preferred Stock said value shall be determined by
computing the amount which each share of Preferred Stock would have
received, after payment of all liabilities, of the corporation, if dissolution of
the corporation had taken place at the end of the month last preceding the
date of receipt by the corporation of the aforesaid offer.
(b) In the case of the Common Stock said value shall be determined by
computing the amount which each share of Common Stock would have received,
after payment of all liabilities of the corporation and of all amounts payable
to the holders of Preferred Stock on dissolution, if dissolution of the cor-
poration had taken place at the end of the month last preceding the date of
receipt by the corporation of the aforesaid offer.
(c) In case any dividends shall have been declared by the corporation on
such stock, payable to stockholders «f record of a date subsequent to the end
of the month last preceding the date of receipt by the corporation of the
aforesaid offer, but prior to the transfer by such holder, owner, executor, ad-
ministrator, trustee, receiver, bankruptcy trustee, grantee, assignee or repre-
sentative to the corporation or to its nominee or nominees of the stock
covered by such offer, the amount of such dividends per share shall be
deducted in determining the value per share as above provided.
In computing the value of the I'referred Stock or of the Common Stock
for the foregoing purposes the value of the assets and the amount of liabilities
of the corporation shall be as determined by the Board of Directors, except
that no allowance shall be made for good will or any other such intangible
asset, and the determination of the Board of Directors shall be final ; pro-
vided, however, that if the offerer of the stock so desires and so specifies
in his offer, such value shall be determined by the independent accountants
who last audited the books of the corporation, and in such case the determina-
tion of said accountants .shall be final. If an offerer elects to have such
value determined by said accountants, he shall pay the fees and charges
of the accountants for such service.
The aforesaid offer and notice shall be in writing addressed to the cor-
poration at its principal office in the Borough of Manhattan, City of New
York. Nothing herein contained shall be deemed to prevent an oft'erer from
offering to sell his stock for less than the value thereof as above determined.
If an offerer shall have specified a price in excess of the value of his stock,
determined as above provided, the price at which the corporation, or its
CONCENTRATION OF ECONO:\IIC POWER 12057
nominee or nominees, shall have the right to buy the stock shall be automatically
reduced to the value as so determined by the Board of Directors or the
independent accountants, as the case may be.
If any such offer be accepted by the corporation for itself, or on behalf of
its nominee or nominees, it shall be the duty of any such holder, owner, execu-
tor, administrator, trustee, receiver, bankruptcy trustee, grantee, assignee or
representative to transfer said stock to the corporation, or to its nominee or
nominees, upon payment of the purchase price (i. e., the offering price or
the value as above determined, whichever is less), and no dividends or interest
shall be paid or allowed on such stock after failure to comply with any
request by the corporation to make such transfer.
If within thirty (30) days after the delivery of any offer of sale as afore-
said, the corporation shall not accept for itself, or on behalf of its nominee
or nominees, such stock or any part thereof, the offerer shall be at liberty,
within sixty (60) days after the expiration of such thirty (30) days, to
sell and transfer such shares of stock as are not bought by the corporation,
or by its nominee or nominees, to any person at any price not less than the
price at which the corporation had the right to purchase such shares (i. e.,
the offering price or the value as above determined, whichever is less). If,
however, such shares of stock shall not have been so sold or disposed of, and
the certificates therefor presented to the corporation for transfer within such
sixty (60) days, such shares must again be offered to the corporation as here-
inabove provided, before the same or any pnrt thereof can thereafter be sold,
assigned, bequeathed or otherwise transferred.
From and after the sale, assignment, bequest or transfer of any stock made
in violation of the foregoing provisions, and until after the notice and offer
as heretofore provided shall have been given and the time of the corporation
to exercise said option shall have expired, the corporation shall have, and it
is hereby expressly given, the right and option to purchase all or any part of
such stock at a price equal to the value thereof determined as above provided.
No transfer of any stock made in violation of the foregoing provisions shall
• be valid or effective or be recorded on the stock books of the corporation.
Whenever the corporation shall exercise any of the rights and options herein-
above given, either for itself or on behalf of its nominee or nominees, in accord-
ance with the terms thereof, and shall deposit or cause to be deposited with
any bank or trust company in the City of New York for the account of the
holder of record of said stock, his legal representatives and assigns, the purchase
price determined as hereinabove provided of any stock which it has so elected
to purchase for itself or on behalf of its nominee or nominees, and shall give
notice in writing to such holder of record, sent by registered mail to his address
as the same appears on the stock books of the corporation, of the place and
amount of such deposit, and that such deposit will be payable to him upon
surrender of the certificates for such stock, duly endorsed and stamped for
transfer, then and thereupon all rights of the owner and holder of such stock, his
legal representatives and assigns, in law and in equity as a stockholder of the
corporation shall cease and such stock shall be and become the property of
the corporation or of its nominee or nominees, as the case may be, and the
certificate or certificates representing such stock so purchased, shall be deemed
to be and shall be cancelled and of no effect, and the custodian of the stock
books of the corporation shall note such cancellation in the stock books of the
corporation.
Any notice hereinabove provided to be given by the corporation shall be
sufficient if given to the holder of record of any stock at his address appearing
on the stock books of the corporation, and shall bind the legal representatives
or assigns of such holder of record.
The Board of Directors shall have power to sell and dispose of the shares
which may be transferred as aforesaid to the corporation whenever, in their
judgment, it can be done with advantage to the corporation.
Those are the two sections.
Mr. Nehemkis. Shall I proceed, sir?
Tlie Chairman". You may proceed.
Mr. Nehemkis. Mr. Stanley, I show you two sheets containing data
on issues underwritten or participated in by your firm during the
period September 16, 1935, to June 30, 1939, "and the second sheet
containing information with respect to counsel for underwriters, ad-
124491 — 40 — pt. 23 -17
12058 CONCENTRATION OF ECONOMIC POWER
vertising agencies, engineering, appraisal firms, accounting firms.
Will you examine these sheets and tell me vhether you caused them
to be prepared in response to my request?
Mr. Stanley. We did, sir.
Mr. Nehemkis. The docniuents identified by the witness are offered
in evidence, Mr. Charmiin.
The CiiAiKM.xN. They may be received.
(The documents referred to were marked "Exhibits Nos. 1762 and
1763, respectively, and are included in tlie appendix facing p. 12291.)
ANALYSIS OF BUSINESS DONE BY :M0KGAN STANLEY & CO. INCORPORATED
Mr. Nehemkis. Mr. Stanley, was not Morgan Stanley & Co.'s first
offering on September 21, 1935? Was not that an issue of Consum-
ers Power Co.?
Mr. Stanley. It was. We were joint managers with Messrs.
Bonbright.
Mr. Nehemkis. I was going to come to that. This offering ap-
peared how many days after the organization of Morgan Stanley
& Co. Incorporated ?
Mr. Stanley. The date you mentioned is the date of the prospectus.
Tlie offering was September 23, and I have testified that Morgan
Stanley & Co. was organized on September 6.
Mr. Nehemkis. So that your answer is now, how many days after
the organization of Morgan Stanley was this issue of Consumers
Power offered ?
Mr. Stanley. Seventeen days.
Mr. Nehemkis. And I believe you have already indicated that you
were co-managers of this offering with Bonbright & Co.?
Mr. Stanley. We were.
Mr. Nehemkis. Now, if my memory serves me correctly, a previous
witness, Mr. Gordon, has testified ^ concerning some of the difficulties
that arise when you have a joint-managership account. Would you
indicate briefly to the committee how it happened that j^ou had a co-
managership of this account with. Bonbright & Co. ?
Mr. Stanley. Well, I should like to say first that I think your
reference to Mr. Gordon's testimony, which I heard in part, at least,
was not quite on the subject. His testimony — his reference was to
having one manager in one part of the country and another manager
in another part of the country.
Mr. Nehemkis. Certain difficulties arising from joint managership,
but since you and the Bonbright firm were both in New York, that
difficulty or that kind of difficulty would not ensue ?
Mr. Stanley. No.
Mr. Nehemkis. Then will you answer my question, if stated to you
in this fashion: How did it happen that you were joint managers
with Bonbright & Co. ?
Mr. Stanley. We so acted because Mr. Wendell Willkie requested
us to.
Mr. Nehemkis. Mr. Wendell Willkie?
Mr. Stanley. Yes.
1 Supra, p. 11046.
CONCENTRATION OF ECONOMIC POWER 12059
Mr. Nehemkis. Now, is Mr. Wendell Willkie a partner of the in-
vestment banking house of Bonbright & Co., Mr. Stanley?
Mr. Stanley. Mr. Wendell Willkie is chainnan of the Common-
wealth & Southern Corporation and chairman of the Consumers
Power Co.
Mr. Nehemkis. And Mr. Wendell Willkie requested you to make
Bonbright your joint manager of the account ?
Mr. Stanley. Yes; he requested us to be joint manager of the
account with Bonbright.
Mr. Nehemkis. What was the amount of the offering, Mr. Stanley?
Mr. Stanley. $19,172,000.
Mr. Nehemkis. And how much was your participation?
Mr. Stanley. Our participation in the underwriting group was
$5,711,000.
Mr. Nehemkis. Now, keep your eyes on the same line and go to the
last column and tell me hoAv much your gross profit was.^
Mr. Stanley. Our gross profit before deductions of expenses, which
were set forth in the heading, was $60,575.66.
Mr. Nehemkis. In the first 4 months of j-our existence, during the
period September 16 through December 31, 1935, did not Morgan
Stanley & Co. Incorporated participate in underwriting amounting
to $195,835,000?
Mr. Stanley. We participated in issues amounting to that. Our
underwriting was fifty-five-million-odd dollars.
Mr. Nehemkis. Now, having in mind the two figures we have be-
fore us. what was the amount of the gross spread on these issues?
Mr. Stanley. You mean dollars?
Mr. Nehemkis. Yes; in dollars.
Mr. Stanley.- $4,186,527.
Mr. Nehemkis. Now, after deducting your share of the syndicate
expenses, what was your gross profit? I am aware that your termi-
nology is different from the one which I am using, which I take to
be the 'accepted one. You refer to gross receipts or losses, but I think
we understand each other.
Mr. Stanley. Gross receipts. I think your question was our share
of gross profits after
Mr. Nehemkis (interposing). — deduction of syndicate expenses;
correct.
Mr. Stanley. "Wliich are the expenses of the syndicate as such?
Mr. Nehemkis. Right.
Mr. Stanley. None of our own expenses or overhead taxes, and
so forth.
Mr. Nehemkis. Right. What is the figure?
Mr. Stanley. The figure is $933,245.79.
Mr. Nehemkis. Right.
Senator King. Out of that you paid taxes and your office expenses ?
Mr. Stanley. Yes, sir; overhead, rent.
Mr. Nehemkis. Now, was not j^our profit on these issues about 22
percent of the gross spread? You don't have the figures there; Mr.
Young had better make some calculations. Put down $933,246 over
$4,186,528, and tell me if that isn't 22 percent of the gross spread;
approximately 22 percent, Mr. Young?
1 "Exhibit No. 1762."
12060 CONCENTRATION OF ECONOMIC POWER
Mr. Young. Yes; that is correct.
Mr. Nehemkis. Now, was not this profit a little less than half
received from management fees, Mr. Stanley?
Mr. Stanley. Yes.
Mr. Nehemkis. Now, during the 4-year period September 16, 1935,
to June 30, 1939, did not Morgan Stanley & Co, manage or co-manage
issues amounting to $2,534,968,530 ?
Mr. Stanley. From September 16, 1935, to June 30, 1939?
Mr. Nehemkis. Correct, sir.
Mr. Stanley. We managed or co-managed issues amounting to
$2,534
Mr. Nehemkis (interposing). You accept my figure?
Mr. Stanley. Yes. I wasn't sure whether I had the right place.
Senator King. Was there a guaranty — were these underwritten ?
Mr. Stanley. Yes, sir; these were all underwritten by various
firms, including ours.
Senator King. That meant a guaranty of the amount for which
you had underwritten?
Mr. Stanley. Not of the entire amount, sir. All of the Telephone
issues were guaranteed and certain other issues, but not the entire
figure just stated.
Mr. Nehemkis. Did not, ckiring the same period that we are dis-
cussing, Morgan Stanley participate in issues managed by others,
amounting to $629,901,200?
Mr. Stanley. They did,
Mr. Nehemkis. And again, during the same period under discus-
sion, did not Morgan Stanley manage or participate in issues amount-
ing to $3,164,000,000?
Mr. Stanley. That is the correct figure — the face amount of
bonds — the amount of our own underwriting — —
Mr. Nehemkis (interposing). I will come to that. Morgan Stan-
ley participated in issues or co-managed — the Morgan Stanley par-
ticipation in issues managed or co-managed by it was $522,991,050?
Mr. Stanley. That is correct,
Mr. Nehemkis. Now, that is something over 20 percent, isn't it ?
Mr. Stanley. About.
Mr. Nehemkis. Approximately?
Mr. Stanley. Yes, approximately.
Mr. Nehemkis. Do you want to check the figures, Mr. Young, or
do you accept them ?
Mr. Young. No.
Mr. Nehemkis. Morgan Stanley's participations in issues managed
by others was $66,525,000, or something over approximately 10 per-
cent?
Mr. Stanley. That is correct.
Mr. Nehemkis. So that Morgan Stanley's participation in issues
managed by itself was twice as large as in issues managed by others?
Mr, Stanley. That is correct.
Mr. Nehemkis. Now, do you have before you the total spread on
the issues managed by IMorgan Stanley during this period under
discussion?
Mr. Stanley. I have. The figure is $50,450,210.
Mr. Nehemkis. Now, of this amount, Mr. Stanley, did not IMorgan
Stanley transfer to its gross profit account, referred to in your table
as receipts and losses, $12,227,613, or about 24 percent?
CONCENTRATION OF ECONOMIC TOWER 12061
Mr. Stanley. Well, the figure that you mentioned is in this last
column of gross receipts.
Mr. Nehemkis. Is your ansAver "Yes" or "No"?
Mr. Stanley. Well, you said transferred to our gross
Mr. Nehemkis (interposing). Profit account, referred to in your
table as receipts and losses.
Mr. Stanley. Now, you are speaking about bookkeeping now and
after all, presumably
Mr. Nehicmkis (interposing). Well, where
Mr. Stanley. There is no bookkeeping-
Mr. Nehemkis (interposing). Well, "transfer" need not be taken
that literally. What is your answer to my statenient? I want the
record to show your answer. What appears in that column? What
is the figure, $12,227,613?
Mr. Stanley. Correct.
Mr. Nehemkis. Then your answer should be "Yes," should it not,
sir ? •
Mr. Stanley. I don't know; I mean, you are talking about trans-
ferring to a gross profit account. There is no such account.
Mr. Nehemkis. All right.
Senator King. Make such explanation as you care to.
Mr. Stanley. Well, there is no doubt. Senator, that the figure he
mentioned in the column, the last column of the table, which we
prepared at his request, is there, but I thought he was referring
to our books of record.
Mr. Nehemkis. No; I think you were taking me too literally.
Mr. Stanley. I'm sorry.
Mr. Nehemkis. Now, can you tell me what the total spread was on
the issues which were managed by other houses?
Mr. Stanley. May I have that read?
(The question was read.)
Mr. Stanley, The spread in the issues managed by other firms in
which, we participated was $12,621,294.
Mr. Nehemkis. That's correct. Now, of that amount, it appears in
the gross-profit account, does it not, $462,315 or about 3% percent of
the spread?
Mr, Stanley. It appears in that column ; yes,
Mr, Nehemkis. Thank you, Mr. Stanley.
Now, of the 73 issues managed by Morgan Stanley, am I correct
in understanding that not one issue showed a loss?
Mr. Stanley. No.
Mr. Nehemkis. That is to say, loss to Morgan Stanley & Co.
Incorporated.
Mr. Stanley. That is correct.
Mr, Nehemkis. In fact, it only shows — the only loss shown from
the Morgan Stanley participations is the 1936 Shell Union issue,
which was managed by some other house; is that correct?
Mr, Stanley, That is correct,
Mr, Nehemkis. And your loss on that participation was $32,000,
roughly ?
Mr. Stanley. It was.
Mr. Nehemkis. So that this was the only issue out of the 90 man-
aged or participated in by Morgan Stanley during these 4 years
that showed a loss?
12062 CONCENTRATION OF ECONOMIC POWER
Mr. Stanley. That is correct.
Mr. Nehemkis. Now, is this correct. Mr. Stanley, that the ottoss
profit to Morgan Stanley on the issues managed or co-managed by
it was slightly less than half a point?
Mr. Stanley. That is correct.
Mr. Neiiemkis. What is your answer, Mr. Stanley?
Mr. Stanley. That is correct. I have answered.
Mr. Nehe.aikis. Now, was not the gross profit that Morgan Stanley,
on issues managed by others, made, $462,315, or about one-fifteenth
of 1 percent, on the gross spread, of course ?
Mr. Stanley. I can't follow you.
Mr. Nehemkis. Accept it subject to correction,
Mr. Stanly. I will be glad to.
Mr. Nehemkis. Now, was not the total spread on the issues man-
aged by others $12,621,000, rouglitly speaking?
Mr. Stanley. Yes,
Mr. Nehemkis. Is it correct that only two firms ever served as
co-managers with Morgan Stanley?
Mr, Stanley, I don't think
Mr. Nehemkis (interposing). Perhaps I can help you if I give
you this question : Have any other firms, other than Bonbright & Co.
and Kuhn, Loeb & Co., ever served as joint managers with you ?
Mr. Stanley. I think not.
]Mr. Nehemkis. AVliat is your answer ; "Yes" or "No" ?
Senator King. He said, "I think not."
Mr. Nehemkis. I wasn't sure. You think not?
Mr. Stanley. Yes.
Mr. Nehemkis. Now, Bonbright & Co., prior to the organization
of your firm, was always associated with utility business, was it not?
Mr. Stanley. Well, it had done a very large
Senator Kjng (interposing). Do you mean exclusivel}^ associated?
Mr. Nehemkis. I wouldn't
Senator I^ng (interposing). Or others?
Mr. Nehemkis. I wouldn't say exclusively, but my understanding
is that it was a house that was famous for its utility business.
Did I get your answer, sir? [to Mr. Stanley]
Mr. Stanley. There are several Bonbright firms that had existed
over a period of years. Those firms had been identified largely with
utility financing, but it had done other business, particularly some of
the firms.
Mr. Nehemkis. Now, the
~ Senator King (interposing). Pardon me, but there were several
firms by the name of Bonbright?
Mr. Stan'eey. Yes, sir. Not more than one at one time, but over a
period of time there were several distinct firms.
Senator King. Under the same management or same ownership?
Mr. Stanley. Different management, Senator.
Mr. Nehemkis. I believe you said, Mr. Stanley, that the other co-
manager with you was the house of Kuhn, Loeb. Has not Kuhn, Loeb
& Co. been particularly associated with railroad issues.
Mr. Stanley. Well, they have done a great deal of railroad financ-
ing. They have done a great deal of otner kinds of business over a
long period, too.
Mr. Nehemkis. You feel you can't answer my question in the form
in which it was put to you ?
CONCENTRATION OF ECONOMIC POWER 12063
Mr. Stanley. I can't answer it precisely. I can express the opinion
that they probably have done more railroad business — still, I don't
know how much.
Mr. Nehemkis. I think that is fairly helpful. Was not Morgan
Stanley's total gross profits from security flotations, during this en-
tire period that we have been discussing, $12,689,928?
Mr. Stanley. That is correct — subject, of course, to all the deduc-
tions that I have mentioned several times.
Mr. Nehemkis. Right. Did not ^,774,280 or a little over 60 per-
cent come from management fees?
Mr. Stanley. Management compensation, yes. We pay ourselves
part of that.
Senator' King. You what?
Mr. Stakley. We pay ourselves part of that. I don't know if that
is clear, Senator.
Senator King. No ; it is not.
Mr. Stanley. Well, the management compensation is paid by all
of the underwriters to the management. There might be 10 under-
writers and each of the 10 pay something to the management. When
we are one of the 10, as we always are, we pay ourselves that por-
tion, you see.
Senator King. Oh, vou take it out of one pocket and put it in the
other ?
Mr. St»anley. That's right. When we have taken the under-
writing, or 20 percent of the underwriting, we pay ourselves 20 per-
cent of the total, as managers.
Mr. Nehemkis. Will Mr. George lYhitney please take the stand,
and will you remain, Mr. Stanley?
Senator King. May I ask one question before he does ?
Grenerally speaking, Mr. Stanley, what would be the expenditures
that would be paid out of the gross returns or gross profits?
Mr. Stanley. The expenditures that any firm would have?
Senator King. Yes; I am speaking of taxes or whatever they
were.
Mr. Stanley. Yes. Well, first, of course, there is the return on
capital, that being the most important thing in the underwriting
business, which, if idle for a long time — ov we may be busy at other
periods. The business has peaks and valleys, you know. You do a
lot of business or you don't do business for a long time. We did a lot
of business in the first 2 years of our existence, and the last year
we haven't done very much. As I said to Mr. Nehemkis, if we had
been the owner of our preferred stock this past year, we wouldn't have
received full dividends, because we didn't earn it.
Senator King. Well, that is to say, you have to keep available a
large amount of capital which brings no I'^turns whatever?
Mr. Stanley. Right. We have to keep a staff of people who are
available, if we want to maintain this existing form of investment
machinery for the need of the market, so that they are available to
perform certain expert services to a borrower, and they are compe-
tent, experienced men. They have to be kept and paid whether we
are busy or whether we are not. Of course, we have that overhead ;
we have rent, we have taxes, all the things that any business has to
pay in the way of expenses.
Senator King. Have you ever made any computation as to the
amount which might be considered as a profit after meeting all of
12064 CONCENTHATION OF ECONOMIC POWER
these obligations to whicli you have referred, taking into account the
idle capital which for some periods would not be used and which,
of course, calls for some compensation, and what would be the ulti-
mate amount which would be regarded as a profit?
Mr. Stanley, Well, you can t — I don't think you can in this busi-
ness decide what would be an average return on capital over a period
of time. The business is very "spotty." An awful lot depends on
where you say "Yes" or ''No" as to going into certain issues. For
example, during this period there were certain issues that were
brought out on the market that didn't turn out very well, and the
underwriters had substantial losses. If we had said "Yes" to the
invitation to become an underwriter in those issues, we might not
have had any money at alL or, rather, we might not have had profits
anytliing like these that Mr. Nehemkis has brought forth, the gross
profits. We didn't go into those issues, as it happened.
Seniator King. Well, were there many corporations or investment
bankers or companies in -the field during the period covered by the
inquiries of counsel?
Mr. Stani^y. I should say "Yes."
Senator King. Was the field open to every investment company
to bid for or enter into negotiations with corporations that were
seeking capital?
Mr. Stanley. The field was entirely open to anyone if the cor-
poration wanted to do basiness with them.
Sena,tor King. There was no coercion upon your part to compel
them — corporations seeking money — to deal with you?
Mr. Stanley. No, sir ; none at all, Senator.
Senator King. I suppose the fact that you made a pretty good
record, as evidenced by %iY. Nehemkis' questions, would bring to Mor-
gan Stanley and those with whom they were associated considerable
prestige, and people would have confidence in them and go to them
when they had large flotations to make?
Mr. Stanley. Well, all of us. Senator, I might say, have been in
the business of investments for quite some time and knew a great
many people in the business and in the big corporations. We had
a certain, or we were supposed to have a certain knowledge of the
business over that period,
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
yore:, N. Y.— Resumed
ENUMERATION OF FORMER ACCOUNTS OF J. P. MORGAN & CO. UNDERWRITTEN
BY MORGAN STANLEY & CO, INCORPORATED ACCOUNTS NOT UNDER-
WRITTEN
Mr. Nehemkis. Mr. Whitney, will you glance at the sheet spread
out on the table there, indicating the originations and participations
of the firm of Morgan Stanley, and run through that list and read
off, if you wirll, the companies on that list which were formerly
accounts of J. P. Morgan & Co.?
Mr. Whttney. I don't know anything about that.
Mr. Nehemkis. Do as I ask, if you will, Mr. Whitney. You are
a banker and you have testified that you had 25 years' experience
in. the banking business. That should be simple for a banker.
Mr. Whitney. I think I can try to do that, Mr. Chairman. I
am not sure that I can remember, but I will do my best. This is
a sort of an unrehearsed — do you want me to read them aU ?
CONCENTRATION OF ECONOMIC POWER 12065
Mr. Nehemkis. Sure. You go down the list and tell me every
one of those accounts which was formerly an account of J. P.
Morgan.^
Mr. Whitney. All right.
Consumers Power Co., no ; Dayton Power & Light Co., no ; Illinois
Bell Telephone Co., yes ; Ohio Edison Co., no ; New York and Queens
Electric Light & Power Co., no; Southwestern Bell Telephone Co.,
yes; New York Edison Co., no; Central Illinois Light, no; Consum-
ers PoAver Co., no; Louisville & Nashville Railroad, yes; New York
Central Railroad, yes, twice; Consolidated Edison Co., no; Pacific
Telephone & Telegraph, yes ; Chesapeake & Ohio Railway, yes ; Cin-
cinnati Union Terminal Co., yes; Chicago & Western Indiana, yes;
Brooklyn Edison Co., yes — I mean, no, on that. What was your
question, whether we did bond issues or
Mr. Nehemkis. Whether they were an account of yours.
Mr. Whitney. What do you mean by that, may I ask ?
Mr. Nehemkis. Whether you did any form of financing, bonds,
notes, stocks.
Mr. Whitney. Crane Co., no; Niagara Falls Power Co., yes;
Louisville & Nashville Railroad Co., yes; Chesapeake & Ohio Rail-
way, yes; Indianapolis Water Co., I wouldn't know; New York
Edison Co., no; Chesapeake & Ohio Railway, yes; General Motors
Acceptance, twice yes; Cincinnati Gas & Electric Co., no; Amer-
ican Telephone & Telegraph, yes; Central Hudson Gas & Electric,
yes; Argentine Republic, yes; American Telephone & Telegraph
again, yes; Consumers Power Co., no; Pacific Telephone and Tele-
graph, yes; Ohio Edison Co., no.
Great Northern Railway, I guess yes ; Government of the Dominion
of Canada, yes — that's twice.
Mr. Nehemkis. Just" keep to the corporate issues — well, ^ ahead,
since you are doing it, you might as well do it all.
Mr. Whitney. You interrupted my crain of thought.
Mr. Nehemkis. I'm sorry !
Mr. Whitney. Argentine Republic, yes; Johns-Manville Corpora-
tion, yes; Philadelphia Electric, yes; Argentine Republic, yes; South-
ern Bell Telephone & Telegraph, yes; Crane Co.,, no; Phelps Dodge,
no; Cincinnati Gas & Electric, no; Standard Brands, no; New York
Telephone, yes ; Niagara Electric, twice, yes ; duPont, yes ; West-
chester Lighting, no; Ohio Edison, no; Central New York Power,
no.
Consolidated Edison, no; Consumers Power, no; Duluth, Missabe
and Iron Range Railway, yes; Consolidated Edison of New York,
no; U. S. Steel, yes; Mountain States Telephone and Telegraph,
no; Standard Oil of New Jersey twice, yes; "Southwestern Bell Tele-
phone, yes; Public Service Electric and Gas, yes; New York Steam
Corp., no ; Argentine Republic again, yes ; Dominion of Canada, yes ;
Continental Oil, no — well, a predecessor company, a very different
company we had then.
Mr. Nehemkis. That's right.
Mr. Whitney, Railway Express, yes ; Consumers Power, no ; East-
man Kodak, no; Inland Steel, no. That wasn't their business
anyway.
1 "Exhibit No. 1762."
12066 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. That was a participation.
Mr. "Whitney. Oh, excuse me !
Mr. Nehemkis. I want to get the record straight.
Now, Mr. Whitney, I want to thank you. That was a very refresh-
ing experience, because I think j'ou have been overmodest about your
memory heretofore.
Mr. Whitney. Thank you !
Mr. Nehemkis. Now, Mr. Whitney, all railroad issues that you have
enumerated on that sheet were former J. P. Morgan accounts?
All Telephone issues were
Mr. Whitney (interposing). Excuse me, sir, what was that?
Mr, Nehemkis. I said all railroad issues that you enumerated —
suppose we make it a little more systematic. I am going to show
you this table of industrial and railroad issues managed or co-man-
aged by Morgan Stanley during the period under discussion, and ask
you to look at them and tell me if there is any railroad issue on this
list that was not one that you enumerated a moment ago.^
Mr. Whitney. That is correct, except
Mr. Nehemkis (interposing). Just hold it for a moment!
Mr. Whitney. May I answer your question ?
Mr. Nehemkis. Certainly.
Mr. Whitney. That is correct, except the Great Northern Railway
was at First National Bank.
Mr. Nehemkis. But part of the old trio, that is
Mr. Whitney (interposing) . No, no ; it wasn't, not a bit ! Excuse
me!
Mr. Nehemkis. All right. Now, hold that for just a moment.
You see a number of industrial accounts there. All of those accounts
w^ere formerly managed by J. P. Morgan & Co. except
Mr. Whitney (interposing). You mean bond issues?
Mr. Nehemkis. Bond issues — except — now, you pick out the ones
that were not managed by J. P. Morgan & Co.
Mr. Whitney. Well, Crane, it is down here twice; Phelps Dodge
is here, and Eastman Kodak. Now, let me start again : Crane
Mr. Nehemkis (interposing). Excuse me, but just to get the record
plain on this, these are industrial issues underwritten by Morgan
Stanley which were not formerly accounts of J. P. Morgan & Co.
Proceed.
Mr. Whitney. Crane Co., the Phelps Dodge Co., the Eastman
Kodak Co., and I think Standard Brands.
Mr. Nehemkis. One other. Shell Union Oil.
Mr. Whitney. Wlio?
Mr. Nehemkis. Oh, I'm sorry, that is not on your list. But that
is one other account that you people didn't have.
Mr. Whitney. I wouldn't know — one other. I didn't hear what
you said to start with.
Mr. Nehemkis. I said Shell Union Oil was not formerly an account
of J. P. Morgan & Co.
Mr. Whitney. Oh, no! And Continental Oil, of course, is so
changed in its present situation, it is really not proper to say
'See "Exhibit No. 1764-2," appondix. p. 12295.
CONCENTRATION OF ECONOMIC POWER 12067
Mr. Nehemkis (interposing). With reference to Standard Brands,
is it not a fact, Mr. Whitney, that your firm organized and was
instrumental in setting up Standard Brands?
Mr. Whitney. We had something to do with it, but we weren't
either of the two functions you suggested.
Mr. Neiiemkis. Now, Mr. Chairman, may it please the committee,
I would like to offer in evidence at this time these two tables from
which we have been working, the source of the data having been
furnished to us by Morgan Stanley & Co., Incorporated, in both
instances.
The Chairman. They may be received.
(The tables referred to were marked "Exhibits Nos. 1764-1 and
1764-2," respectively, and are included in the appendix on pp. 12293
and 12295.)
Mr. Nehemkis. Mr. Whitney, do you recall any company for which
J. P. Morgan & Co. was formerly principal banker, which has floated
securities through some house other than Morgan Stanley & Co.,
Incorporated ?
Mr. Whitney. I couldn't possibly answer that question. I never
thought of it before.
Mr, Nehemkis. Will you do some thinking about it and send me a
memorandum on it?
Mr. Whitney. You mean check up e\eTy industrial company
financed during the last few years ?
Mr. Nehemkis. Somebody in your^ organization. We would like
the committee to have the benefit of your advice on it.^
Mr. Stanley, do you recall any company for which J. P. Morgan &
Co. was formerly principal banker which has floated securities
through some other house than Morgan Stanley & Co., Incorporated?
Mr. Stanley. I would like to be able to think about it, because I
might miss some. I recall some at the moment ; perhaps I can think
of more later. Those I recall are the Connecticut Light & Power
Co., a subsidiary of the United Gas Improvement Co., which sold
securities by Putnam & Co., of Hartford; Cincinnati Union Terminal
Co., which sold some bonds through Lehman Brothers; the C & O.
Railroad which sold securities through Halsey, Stuart, and Otis &
Co. ; the Terminal Railroad of St. Louis, who sold securities through
a syndicate headed by Halsey, Stuart & Co.
Mr. Nehemkis. Mr. Stanley, do I follow you correctly that the
three you have mentioned thus far, Terminal Railroad, C. & O.,
Cincinnati Union Terminal and Connecticut Light & Power
Mr. Stanley (interposing). That is four. I would like to have
the opportunity to think further about it. There may be many
others, I don't know,
Mr. Nehemkis. If you will and at your leisure send us a memo-
randum, we will be very grateful.^
Mr. Stanley. I will be very glad to.
Mr. Nehemkis. Now, Mr. Stanley, will you glance at the sheet ^
I am about to show you, the original of which is in evidence, and
1 Mr. Whitney, under date of January 26, 1940, submitted the Information requested.
It is included in the appendix on p. 12321.
a See letters from Mr. E. H. York, Jr., Feb. 15, 1940 ; Peter R. Nehemkis, Jr., Esq.,
March 4, 1940 ; Mr. Harold Stanley, March 12, 1940, in the appendix, pp. 12321-12324.
« "Exhibit No. 1764-1."
12068 CONCENTRATION OF ECONOMIC POWER
go over this very quickly and tell me which of these utility issues
you recognize as having been managed or co-managed by Morgan
Stanley. Just tell me first which of those you recognize as having
been managed or co-managed by Morgan Stanley.
Mr. Stanley. This entire list purports to be a list of certain utility
issues managed or comanaged by Morgan Stanley & Co., and I have
no doubt it is correct. Some of these companies, of course, sold — I
think in all cases of these groups here the sales were in quite sub-
stantial amounts of securities direct by private placement to insti-
tutions.
Mr. Nehemkis. Substantially you accept the table ?
Mr. Stanley. It seems to be correct. It is subject to check.
UTILITY UNDERWRITINGS BY :M0RGAN STANLEY & CO. INCORPORATED, WHICH
WERE NOT UNDERWRITTEN BY J. P. MORGAN & 00.
Mr. Nehemkis. All of this is subject to check.
Will you pass it to Mr. Whitney ? Mr. Whitney, will you run over
that list ^ and tell me which of those utility accounts were formerly
accounts of J. P. Morgan & Co.? Take them by groups, the first
one being the Consolidated Edison Co. of New York. Were any of
that group formerly Morgan accounts?
I\Ir. Whitney. No.
Mr. Nehemkis. Take the next group, Commonwealth & Southern
Corporation, any of that group of companies J. P. Morgan accounts?
Mr. Whitney. No.
Mr. Neheimkis. Turn to the next, Niagara Hudson Power Cor-
poration, were any of those J. P. Morgan accounts?
Mr. Whitney. Some of them in part, I mean, in other words, we
had done isolated business for some of these; yes. Some we hadn't;
Central New York we hadn't.
Mr. Nehemkis. Will you indicate the ones for which you believe
that some isolated financing had been done, subject, of course, to
check ?
Mr. Whitney. I would want to check them because I don't like
guessing on something I haven't checked up, but we did once, many,
many years ago, the Niagara Falls Power, and I have an idea it
related to another. Central Hudson I think we did in Drexel. I
wouldn't know. Buffalo Niagara we did some, and other people,
if I recollect, did some, the Central New York Power, so that I think
we may have done isolated transactions for Central New York
Power.
Mr. Nehemkis. Will you turn to the next section, Columbia Gas
& Electric Corporation?
Mr. Whitney. No.
Mr. Nehemkis. United Gas Improvement Co.
Mr. AVhitney. Through our Philadelphia office; yes, sir.
Mr. Nehemkis. Public Service Corporation of New Jersey.
Mr. Whitney. Well, back in the 1890's or something like 1900
I guess it was, we did a piece of business for them in J. P. Morgan &
Co. and since then Drexel has.
I "Exhibit No. 1764-1."
CONCENTRATION OF ECONOMIC POWER 12069
Mr. Nehemkis. And the last, Indianapolis Water Co.?
Mr. Whitney. Mr. Hall tells me that Drexel did.
Mr. Nehemkis. The answer is that Drexel handled the last three
pieces ?
Mr. Hall,. Which three pieces?
Mr. Nehemkis. Look at the chart ^ and refer to United Gas Im-
provement Co., Public Service Corporation of New Jersey, .nd
Indianapolis Water Co. — did Drexel handle all those three accomits?
Mr. Hall. They did.
Mr. Nehemkis. Mr. Whitney, to return to a former answer of
yours, you said U. G. I. and Public Service Corporation of New
Jersey appear in the J. P. Morgan scheme of things rather remotely
in the past. Don't they appear latterly somewhat more contem-
poraneously than perhaps you intimated?
Mr. Whitney. J. P. Morgan & Co.?
Mr. Nehemkis. Yes.
Mr. Whitney. No, sir; we have never done any broad transac-
tion, I don't think, in New York. In the New York part of our show
I don't think we have ever done anything for U. G. I., and I say
we did once 40 years ago for Public Service.
Wait a minute, I apologize because I always think in terms of the
New York end. Mr. Hall reminds me that some of these Common-
wealth & Southern Corporation issues^ subheaded that way, Drexel
did do business with. He had better identif}' it because I wouldn't
know.
Mr. Nehemkis. I think Mr. Hall had better be sworn.
Mr. Whitney. I wouldn't know of my own knowledge at all. I
have forgotten.
Mr. Nehemkis (to Mr, Hall). Suppose you take the sheet.^ And
will you be good enough to swear this person ?
The Chairman. Do you solemnly swear the testmiony you are
about to give in this proceeding shall be the truth, the whole truth,
and nothing but the truth, so help you God?
Mr. Hall. I do.
TESTIMONY OF PERRY E. HALL, VICE PRESIDENT, MORGAN
STANLEY & CO., INCORPORATED, NEW YORK, N. Y.
Mr. Hall. There is only one, and that would be the Ohio Edison
under Commonwealth & Southern.
Mr. Nehemkis. And you previously indicated, and Mr. Whitney
accepted your statement, that U. G. I., Public Service of New Jersey
and Indianapolis Water Co. had been formerly financed by DrexeH
Mr. Hall. That is correct.
Mr. Nehemkis. Mr. Whitney, do you recall when the United Cor-
poration was organized?
Mr. AVhitney. United Corporation — 1929.
Mr. Nehemkis. Was not the United Corporation organized by J. P.
Morgan & Co. and Bonbright & Co. ?
Mr. Whitney. It was.
1 "Exhibit No. 1764-1."
12070 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. Mr. Whitney, I show you a letter which purports
to be on the stationery of J. P. Morgan & Co., addressed to Lansing
P. Reed, Esq. Will you look at it and tell me if you recognize this
as being your stationery and the kind of file paper that normally
appears in your shop?
Mr. Whitnet. Yes.
Mr. Nehemkis. This is a letter, may it please the committee, from
Mr. Thomas S. Lamont, to Mr. Lansing P. Reed. Can you tell me
who Mr. Lansing P. Reed is or was?
Mr. Whitney. He was a member of the firm of Davis, Polk, Ward-
well, Gardiner & Reed, who are our counsel.
Mr. Nehemkis. I read to you this letter [reading from "Exhibit
No. 1765"] :
At Harold Stanley's suggestion —
I presume he referred to you, sir?
Senator King. What is the date of that?
Mr. Nehemkis. January 2, 1929 [reading] :
At Harold Stanley's suggestion, I am enclosing a batch of advertising circu-
lars regarding various investment trusts. He —
Referring again, I presume, to you, Mr. Stanley
suggested that I call to your particular attention the Utility Equities Corpora-
tion and especially the first paragraph thereof which I have marked. In this
connection the names of two other investment trusts occurred to me, the
purposes of which are in a way similar to the one proposed — -
Bear this in mind, if you will, Mr. Chairman —
in that they make little if any pretense of diversitication, and their purpose
is obviously to insure continued control by the bankers (Lee, Higginson & Co.),
and their clients. These are the Swedish American Investment Corporation
and the Solvay American Investment Corporation. In the circular advertising
the sale of their fixed obligations to the public, no mention is made of
diversification.
Now, I am oflfering this at this time because of this significant
fact. This document was filed under United Corporation, and when
I paused in my reading, the reference was to United Corporation.
I offer it, sir.
The Chairman. It may be received.
(The letter referred to was marked "Exhibit No. 1765" and is
included in the appendix on p. 12296.)
Mr. Nehemkis. Mr. Whitney, were you not once a director of the
United Corporation?
Mr. Whitney. Yes, sir.
Mr. Nehemkis. Would you be able to identify for me the report
to the stockholders for the year ending 1934, and while you were
not a director in 1938, I ask j'ou to tell me if the report I show you
for the year 1938 looks familiar to you, and is the report.
My. Whitney. Well, I can certainly identify the '34 one. I sup-
pose it is fair to believe that that is the report that was issued in
1938.
Mr. Nehemkis. Before relinquishing these, since I don't have oc-
casion to refer to them later, I would like to read into the record from
the consolidated balance sheet sent to the stockholders in the year
1938, the investments of the United Corporation in a mmiber of
corporations which we shall have occasion to deal with later, and
CONCENTRATION OF ECONOMIC POWER
12071
which we have in fact ah-eady discussed with you [reading from
"Exliibit No. 1766-2'n :
Companies
Shares held
Percent of
total voting
stock out-
standing
2, 424, 356
2, 351, 007
988, 271
6, 066, 223
1, 798, 270
203, 900
19.6
Niagara Hudson Power Corporation, common stock
23.4
13.9
The United Gas Improvement Co., common stock
26.1
The Commonwealth & Southern Corporation, common stock
5.1
1.5
May I at this time, sir, offer these documents in evidence, as identi-
fied by the witness?
The CHz^rRMAi-f. Do you want them printed in the record?
Mr. Nehemkis. I think it is rather important, sir, that they should
be printed.
Perhaps we can file them; we can always get access to them.
Tlie Chairman. That will be better.
Mr. Nehemkis. I think I have given the vital information.
The Chairman. They may be accepted and filed.
(The documents referred to were marked "Exhibits Nos. 1766-1
and 1766-2" and are on file with the committee.)
Mr. Nehemkis. Mr. Stanley, is it a pure coincidence that Morgan
Stanley should do all the underwriting for companies whose stocks
have been the principal investment of United Ccrporation?
Mr, Stanley. Well, I don't know what you mean by a pure coinci-
dence, but I would say that the reason the t we have done business for
the companies, for the subsidiaries of the companies you mentioned,
is because those companies asked us to.
Mr. Nehemkis. Is it a coincidence, Mr. Stanley, that Morgan
Stanley has done no underwriting for other utility companies?
Mr. Stanley. I am not sure that Ave haven't.
Mr. Nehemkis. Check me if you will. If I am in error, I am al-
ways very happy to be so told.
Just a moment before you do that; to the best of your knowledge at
this moment, subject always to your privilege to check, can you give
me an answer to those two questions, yes or no ?
Mr. Stanley. May I have it read, please?
Mr. Nehemkis. Read the second question.
(The reporter read the question : "Is it a coincidence, Mr. Stanley,
that Morgan Stanley has done no underwriting for other utility
companies?")
Mr. Nehemkis. Give me the answer to that. You have the privi-
lege of checking that later.
Mr. Stanley. May I have the question again?
(The reporter read the question again.)
Mr, Stanley. We have done other.
Mr. Nehemkis. What is the answer to the question, is it a coinci-
dence or not a coincidence?
Mr. Stanley. Coincidence to what ? I don't get your meaning.
Senator Kjng. It seems to me that is a dual question. Is it a coinci-
dence—that is a question; and was there any underwriting of other
organizations.
12072 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. They were two questions, sir, quite.
Senator King. It seems to me a man would have to be dexterous to
know how to answer it.
Mr. Nehemkis. I will repeat the first question : Mr. Stanley, is it
a pure coincidence that Morgan Stanley should do all of the under-
writing for companies whose stocks have been the principal invest-
ment of United Corporation? Now may I have your answer?
Mr. Stanley. I would say it has nothing to do with the ownership
of United Corporation by these companies.
Mr. Nehemkis. You can't answer that yes or no ?
The Chairman. May I suggest, Mr. Nehemkis, that the question
cannot possibly be clear to the witness, because he doesn't know
what is in your mind as the alternative to a coincidence.
Mr. Nehemkis. May I ask the witness if he will pass that ; I have
his general answer, and see if he can answer my second question,
which I believe was as follows : Mr. Stanley, is it a coincidence that
Morgan Stanley has done no underwriting for other utility com-
panies ?
Mr. Stanley. But we have done other underwriting.
Mr. Nehemkis. Than in that group formerly mentioned?
Mr. Stanley. Yes; we have. They are on the group you have,
some of them — all of them.
"morgan STANLEY & CO., INC0RP0R.\TED, HA\T3 BEEN DOING BUSINESS "WITH
THE CLIENTS WHICH FORMERLY HAD PATRONIZED J. P. MORGAN & CO."
The Chairman. Doesn't this all boil down to this state of facts, Mr.
Nehemkis, that the Morgan Stanley firm was incorporated after the
banking law of 1933 had been passed, divorcing underwriting from
banks, and that the Morgan Stanley firm took over the underwriting
function of the old firm of J. P. Morgan & Co., and that it was
established principally by old stockholders or old partners of J. P.
Morgan or Drexel ; in other words, that the new investment companv
was organized by the owners of the J. P. Morgan partnership for the
purpose of carrying on the business which the banking house could
no longer carry on, and that most of the investment underwriting
business of J. P. Morgan went on over to Morgan Stanley? Now,
that is the situation, is it not, and there is no dispute about that, is
there?
Mr. Nehemkis. I think the answers are all in the record.
The Chairman. There is no dispute about that.
Mr. Stanley. Only this, sir; we didn't take over anything. We
formed a company to do business of the type of security business,
investment business, that J. P. Morgan & Co. used to do, and I think
it might tell the whole story of the formation of Morgi;n Stanley &
Co. if you would permit me to put in the record two very short
announcements made at the time of formation, one by Morgan Stan-
ley & Co. and one by J. P. Morgan & Co.
The Chairman. I think they have already been mentioned, but we
will be very glad to have them.
Mr. Stanley:
CONCENTRATION OF EC0N0:MIC POWER 12073
For release morning newspapers September 6, 1935
Announcement of Morgan Stanley & Co.. Inc.
A group of partners and staff members of J. P. Morgan & Co. of New York
and Drexel & Co. of Philadelphia, formerly active in the securities business of
the firms, have withdrawn and are forming a new organization for the under-
writing and wholesaling of investment securities, to be known as Morgan
Stanley & Co., Inc., Messrs. Harold Stanley. William Evving, and Henry S.
Morgan, of J. P. Morgan & Co., Messrs. Perry E. Hall and Edward H. York, Jr.,
of Drexel & Co., and Messrs. John M. Young and A. N. Jones, heretofore mana-
gers of the Bond and Statistical Departments of J. P. Morgan & Co., are to be
the executive officers of the new corporation. Mr. Stanley will be the President
of the new corporation.
The new securities corporation will have a paid-in capital of $7,500,000,
divided into common and preferred stock. The common shares, which have sole
voting rights in the election of the directorate, are to be held exclusively by
the officers and staff of the corporation. The preferred shares will be held by
members of this group and by certain individual partners of J. P. Morgan &
Co. The corporation will open its offices for business at No. 2 Wall Street,
New York City, on September 16th next.
For release morning newspapers September 6, 1935
Statement of J. P. Moegan & Co.
We have to announce with regret the resignation of the following members
of J. P. Morgan & Co. and of Drexel & Co. who, with other valued members of
our staffs, have, under the name of Morgan Stanley & Co. Inc., undertaken to
organize and carry on a securities business of the character formerly handled
by our firms: Harold Stanley, William Ewing, Henry S. Morgan, Perry E. Hall,
Edward H. York, Jr.
The withdrawal of these partners and associates, and theii* formation of a
separate and independent securities company, is, we consider, a logical step
following upon our firm's decision a year ago, to carry on our banking business
rather than the securities business; thus acting in accordance with the banking
and securities provisions of the Banking Act of 1933, recently confirmed by
the Banking Act of 1935, just enacted. We believe that the members of the
new organization will be able, with the ample experience which they have
heretofore had, to serve usefully the investment interest of the community.
The firms of J. P. Morgan & Co. and Drexel & Co. will continue as heretofore
to carry on their business as private bankers.
The Chairman. Now you said in answer to my question that J. P.
Morgan & Co. did not transfer this business, or words to that effect?
Mr. Stanley. Right.
The Chairman. But as a matter of actuality, though there was no
legal transfer of this business, the new firm of Morgan Stanley &
Co., composed of former partners and associates of J. P. Morgan
& Co., did, as a matter of fact, carry on most of the old J. P. Morgan
investment-banking business ?
Mr, Stanley. It did, as a matter of fact, if I may say, do a very
considerable amount of business with people who had formerly done
business with J. P. Morgan & Co. and with people who Mr. Ewing,
Mr. Hall, and myself had individually done business with.
The Chairman. And you were not, of course, confined to that busi-
ness which had formerly been transacted by J. P. Morgan ? You did
other business ?
Mr. Stanley. We did.
The Chairman. And would do other business that would come
across the thresh6ld ?
Mr. Stanley. We would be very glad to.
124491 — 40— pt. 23 18
12074 CONCENTRATION OF ECONOMIC POWER
The Chairman. But it is a fact, nevertheless, that the great ma-
jority of the old business and the old clients followed the Morgan
partners into the new firm.
Mr. Stanley. A great many of the old clients of J. P. Morgan &
Co. did business with us after we were formed, yes, sir; people we
had known for years.
The Chairman. Would it be proper to say most of them did?
Mr. Stanley. Yes ; I think so.
The Chairman. In other words, with very few exceptions, the
new firm of Morgan Stanley & Co. have been doing the business with
the clients which formerly had patronized J. P. Morgan & Co.
I say just as a plain matter of fact ; it has no implications of any
kind to iliy mind at all. It is just a plain matter of fact. That is
what happened.
Mr. Stanley. Quite right, sir; excepting with very few exceptions
I am not quite sure of the figures. I think there was quite a substan-
tial amount of business done with people who had never done business
with J. P. Morgan & Co. before.
The Chairman. And it would be a simple matter for you and Mr.
Nehemkis to get together and outline what business has been taken
over, what percentage — I shouldn't use the words "taken over," what
business is now carried on by Morgan Stanley that formerly had
been carried on by J. P. Morgan. Is that the situation as you under-
stand it? [to Mr. Nehemkis].
Mr. Nehemkis. No, sir. Mr. Whitney has identified the three
industrial accounts that were new accounts not handled by his firm ;
Mr. Stanley has given testimony that the only old accounts that
his firm did not handle were four accounts, three of which his nrm
lost through competitive bidding; Mr. Whitney Jias testified that all
of the utility business that Morgan Stanley has done today was with
companies in which United Corporation, which had been organized
by Mr. Whitney's firm, had heavy investments in ; and Mr. Stanley,
if I understand correctly, is a little bit confused by my second ques-
tion that had the word "coincidence" in it, but which simply means
that I find no record of new financing of utility business by Morgan
Stanley & Co. other than accounts that belonged to the United Cor-
poration group.
Mr. Stanley. I testified that United had nothing to do with it.
Mr. Whitney. Mr. Chairman, may I make a comment then? I
didn't testify to that. I testified as to the first part of what Mr.
Nehemkis stated but I never had an opportunity, I never was asked
the question about confining this to United Corporation. Mr. Stan-
ley's statement and your statement, rather, is absolutely correct -of any
understanding of what has happened. United Corporation I can say
unequivocally hasn't been a factor in this in any possible, conceivable
way.
The Chairman. I don't see much difference between what Mr.
Nehemkis has said and what the chairman said, nor what the wit-
ness said. I don't see any dispute here.
M'-. Nehemkis. I think they are now all in agreement.
The Chairman. Then what is it all about?
Senator King. Was the Stanley company that yom aided in organ-
izing required, compelled, legally' or morally, to take over any clients
that formerly had patronized J. P. Morgan & Co. ?
CONCENTRATION OF ECONOMIC POWER 12075
Mr. Stanley. No, sir.
Senator King. You had the rijjht to select clients as and when and
where you pleased?
Mr. Stanlet. Absolutely, sir.
Senator Kii^G. And to take over any or all of the former clients
of J. P. Morgan & Co. if they came to you ?
Mr. Stanley. If they were willing to do business with us.
Senator King. And you went out, as I understood the testimony,
and did obtain other clients in addition to those who had been the
clients of J. P. Morgan & Co. ?
Mr, Stanley. We did.
Senator King. You were an independent corporation?
Mr. Stanley. Absolutely, sir.
Senator King. No strings upon you, so you were not compelled to
take only J. P. ]\Iorgan clients but you could take clients from any
source you pleased?
Mr. Stanley. Absolutely.
Senator &ng. And have done so?
Mr. Stanley. We have.
The Chairman. Of course, there is perfectly clear from all of the
testimony throughout this hearing a fact which we all knew before,
that J. P. Morgan & Co. were probably the leading bankers in the
United States, if not the world, and that most of the strong corpora-
tions in the United States at some time or another passed through
its portals. J. P. Morgan & Co. did a lot of the financing business.
Now that the Banking Act has separated two functions that were
formerly merged, JNIorgan Stanley in the investment field has suc-
ceeded to a similar dominant position that J. P. Morgan formerly
held.
Mr. Stanley. Senator, I am \evy glad to say that some of the for-
mer clients have been willing to select us to be their bankers in the
investment field.
Senj^tor King. I see no impropriety in 'hat.
Mr. Stanley. I don't, sir. I am prouc of it.
The Chairman. It isn't a question of impropriety so far as the
question takes note. It is a question of the actual concentration of
the bulk of this business. Now, that carries no implication of wrong-
doing or violation of the law, or anything of that kind, but it is a
physical fact that is of tremendous importance in the economic his-
torj^ of the United States.
Mr. Stanley. Lots of good business we don't get, Senator, that we
would like to have.
The Chairman. You are not satisfied with the large proportion
that you now have?
Mr. Stanley. Well, I would like to do more.
The Chairman. It was ever thus.
Mr. Stanley. We haven't had much since July, Senator. We are
running in the red.
Mr. Nehemkis. Mr. Chairman, may I proceed?
The Chairman. It is now 12 1'SO.
Mr. Nehemkis. I don't know what to do. I promised some of our
witnesses that we would get them back to their - families before
Christmas. I am kind of worried.
12076 CONCENTRATION OF ECONOMIC POWER
The Chairman. One reason I interrupted was in the hope that it
might clarify the matter and make it unnecessary to go into so much
detail. I really don't think there is any dispute about this.
Mr. Nehemkis. You have done it magnificently and I am not
going to cross-examine. If I may have the committee's indulgence
for 15 minutes more, then I think we can come to a good stopping
point.
Mr. Whitney, I want to read to you testimony of your senior
partner, Mr. Thomas Lament, given in connection with the hearings
before the Wheeler Railroad Committee.^ I think you recall them,
don't you?
Mr. AVhitnet. Yes, sir.
PROPORTIONS IN WHICH PREFERRED STOCK OF MORGAN STANLEY & CO.,
INCORPORATED, IS HELD BY PARTNERS OF J. P. MORGAN & CO.
Mr. Nehemkis. Will you follow me as I read?
This is Mr. Lamont [reading] :
We have no interest in the profits of Morgan Stanley & Co.
Question. You get dividends upon preferred stock, do you not?
Answer. —
By Mr. Lamont, who always is the answerer here.
We get interest on our preferred stocl£.
Question. You get dividends upon the preferred stock, do you not?
ilr. Lamont. Those are limited dividends, simply a return on capital.
Question. If they make any profits — -
Referring to Morgan Stanley —
you get a profit out of the business, do you not?
Mr. Lamont. No, we do not get a profit out of it.
Question. Through dividends?
Mr. Lamont. I do not call that a profit out of the business, I call that interest
on capital.
Question. It comes from earnings, does it not?
Mr. Lamont. It derives of course from the profit of the earnings of the
business.
Question. It comes from interest upon the earnings?
Mr. Lamont. Certainly.
Question. The other way, you had it as a partner, and now you have it from
interest.
Mr. Lamont. Oh, by no means now. The way you put the question, Senator,
would indicate that we had an interest in the profits of Morgan Stanley & Co.,
whereas we do not. We get interest on capital. The dividend on the pre-
ferred stock is limited to a certain amount, and we have no interest in the
equity.
At this moment Mr. Whitney interposed.
Mr. Whitney. The preferred stock is owned by individuals, not by the firm.
Mr. Whitney, in what proportions is it owned?
Mr. Whitney. You mean the total amount?
Mr. Nehemkis. In what proportions is the preferred stock owned
by individuals?
Senator King. Of what?
Mr. Nehemkis. Morgan Stanley, sir.
' See "Investigation of Railroads, Holding Companies and Affiliated Companies" pur-
suant to S. Res. 71 (74th Congress), Part G, pp. 2026-7.
CONCENTRATION OF ECONOMIC POWER 12077
Mr. Whitney. Mr. Chairman, I agree that this matter has been
summed up by you completely. The answer to that question is this,
that when these gentlemen we have been talking about this morning
decided to split off from us completely into an independent
Mr. Henderson (interposing). May I ask that Mr. Wliitney give
us an answer in accordance with our custom, and if be has an ex-
planation he may make it.
Mr. Whitney. Very well. At the time of the organization there
were, I think, 8 partners of the 16' at that time who contributed in
varying degrees purely for their own accounts, personal accounts,
outside of the firm, the' amount of preferred stock that Mr. Nehemkis
mtroduced this morning.
The Chairman. Did you say 8 out of 16 ?
Mr. WnrrNEY. Eight out of the sixteen partners.
Mr. Stanley. There were 17 partners at that time.
The Chairman. Seventeen persons were partners at that time of
J. P. Morgan & Co., is that right?
Mr. Whitney. Yes.
The Chairman. And of that 17, 8
Mr. Whitney (interposing). I find it is nine — nine contributed
in varying amounts for their own personal accounts.
The Chairman. Nine of them contributed part of the preferred
stock of Morgan Stanley & Co. ?
Mr. Whitney. Yes, sir; at the time. There are 8 of the living
partners out of 14 who have no interest whatever in Morgan Stapley,
leaving 6 living partners of J. P. Morgan & Co. who have an interest
of about 44 percent of this nonvoting stock.
The Chairman. Six out of how many ? _ _
Mr. Whitney. Out of 14. The remaining 8 are obviously —
or rather, to put it more accurately, those 6 are obviously the re-
maining partners who are the more well-to-do older partners. The
8 of the younger partners, who are more directly charged with
day-t0;day operation of the firm have no interest.
From the inception, Mr. Henderson — perhaps I was putting this
back end to, but from the inception this has been completely sepa-
rated. It is not lumped in any way. It is an individual investment
by those individuals. As death and various things come to oper-
ate, the preferred stock finds its way into trusts. I, myself, for
instance, transferred it to two trusts of which my family are bene-
ficiaries, and I have absolutely no interest in it. In other words,
there has never been anything but a totally individual investment
in the matter, and nothing to do with J. P. Morgan & Co., from the
inception to this day, and as unfortunately death takes its toll, that
percentage is going to further decrease.
The Chairman. Legally the two are separate entities?
Mr. Whitney. Absolutely.
The Chairman. There can be no question, of course, of that. That
is the legal status of any corporation. But the fact remains, of course,
that those who controlled Morgan Stanley were formerly part:i^rs
of J. P. Morgan & Co.
Mr. Whitney. Yes, sir, who elected, however, to split off entirely
from us to form a completely independent organization, and what
12078 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis refers to in the testimony before Senator Wheeler
back 2 or 3 years ago, is, of course, the fact that the older partners,
the more well-to-do partners in 1935, did grubstake these partners
and associates, and they got a limited return that has already been
testified to.
While the conversation at that time with Senator Wheeler was a
question of dividends and interest, it is true that it was a grubstake
they put up as an investment to enable the new company to hava
adequate capital. But in the nature of the thing, from its inception,
it was fully acknowledged by the partners who went in that it was
going to be their private investment. That was the theory of it. We
wanted to comply absolutely in every respect with the law. This
money was put up and we were entitled, as capital is, to primary
return, and it took the form obviously of preferred stock rather
than a note, so that "interest" and "dividends" did not get mixed
up in that way. But it was capital, a grubstake given by the old
Morgan partners to the other men who elected to go off in the other
venture, to enable them to do business.
The Chairman. And while you say the two are distinctly legal
entitles, it nevertheless is true, as Mr. Stanley has testified in answer
to my question, that the great bulk of the investment banking busi-
ness of the J. P. Morgan company did find its way to Morgan
Stanley.
Mr. Whitnet. Because, as has been testified, it flows with indi-
viduals rather than with the name.
The Chairiman. Of course, J. P. Morgan & Co. has never made
any effort to keep business away from Morgan Stanley & Co.
Mr. Whitney. Certainly not.
Mr. Nehemkis. Mr. Chairmxan, I regret, and I think you know how
deeply I regret to say it, but Mr. Whitney's answer to my question
is completely unresponsive.
The Chairman. He probably w^as led away from the question by
the interruptions. Perhaps you may restate the question.
Mr. Whitney. I didn't mean to be. May I have it agahi?
Mr. Henderson. Mr. Nehemkis will state it.
Mr. Nehemkis. I read to you from your previous testimony :
Mr. Whitney. The preferred stock is owned by individuals, not by the firm.
My question: In what proportion is it owned, Mr. Whitney? You
testified a moment ago that there were 8 partners who subscribed
originally to preferred stock. Now tell me very simply, did these
8 partners subscribe for preferred stock of Morgan Stanley in the
same interest as their capital interest in the firm of J. P. Morgan
& Co.?
Mr. Whitney. No ; certainly not.
Mr. Nehemkis. Then tell me how they did it.
Mr. Whitney. I am/ really not meaning to be unresponsive but I
don't know what you mean ; in proportion to what ? To their means,
I should say.
Mr. Nehemkis. Ah ! Mr. Whitney, I think you do see
The Chairman (interposing). Now, now —
Mr. Nehemkis (interposing). 1 withdraw that, I apologize.
CONCENTRATION OF ECONOMIC POWER 12079
PARTNERS INTERESTS IN J. P. MORGAN & CO. IN RELATION TO THEIR
PREFERRED STOCK TNTERESTS IN MORGAN STANLEY & CO., INCORPORATED
Mr. Nehemkis. Did the eight partners of J. P. Morgan & Co., who
subscribed for preferred stock in Morgan Stanley & Co., subscribe in
the same proportion as their capital interest in the firm of J. P. Mor-
gan & Co. ?
Mr. Whitney. No.
Mr. Nehemkis. In what interest did they subscribe?
Mr. Whitney. In accordance with their personal inclinations and
means.
Mr. Nehemkis. Mr. Chairman, in view of the answer I am con-
strained to offer you-" —
Mr. Whitney (interposing) . Do you still think it is unresponsive,
because I am trying to do the best I can. You say in proportion to
something. It c/ertainly wasn't in proportion to their interest.
Mr. Nehemkis. I think Mr, Whitney is trying to do his best. I
tried to frame the question several ways and he doesn't understand,
so I think the appropriate thing for me now is to offer you a table
which contains the answer and I offer you the answer and if Mr.
Whitney desires
The Chairman (interposing). By whom prepared?
Mr. Nehemkis. It was prepared by the staff of the Investment
Banking Section.
The Chahjman. S. E. C. ?
Mr. Nehemkis. Correct.
The Chairman. From what records?
Mr. Nehemkis. From the income tax reports of J. P. Morgan & Co.
I offer it, sir.
Senator King. Does that show the interest which each of the in-
corporators of the Morgan Stanley company — would that show the
interest each incorporator had in that company ?
Mr. Nehemkis. That will show, sir, the proportionate interest of
the eight partners, I think Mr. Whitney said, who subscribed to stock
of Morgan Stanley in relation to their proportionate interest in the
capital of J. P. Morgan & Co. The purpose of that table is very rele-
vant, as you will see upon scrutiny.
Mr. Whitney. Mr. Chairman, I finally tumbled to what Mr. Ne-
hemkis is getting at, but, of course, a man's individual income taxes
are on his own income, and my answer is even more certain than it
was before that there was no proportion to our capital, because a man
has other funds outside of the firm. If he has income — of course that
goes in the income taxes.
The Chairman. Let me hand you the exhibit ^ which has been
tendered by Mr. Nehemkis and ask you to look at that and see
whether or not it refreshes your recollection or enables you to answer
the question.
Mr. Whitney. I couldn't dare do this, because it is put in such
a different way. Of course we haven't had access to Revenue De-
partment figures. I would have to check it. If it would serve
to expedite this, Mr. Steele and Mr. Lamont and Mr. Morgan were
the three — Mr. Steele is now dead — ^they are the oldest and have
1 "Exhibit No. 1766-3."
12080 CONCENTRATION OF ECONOMIC POWER
the three largest interests in our firm. You see, our income, our
capital contributions to our office, and our percentage of earnings
in the profits, if any, and losses, if any, have no relation whatever
to capital.
Mr. Henderson. Mr. Wliitney, in that connection, as I understand
it (you will correct me if I am wrong) , you have two sets of arrange-
ments so far as payments out of income are concerned. In the first
case, the capital contribution receives a stated return in proportion
to
Mr. Whitney, (interposing). You are talking about us now?
Mr. Henderson. Yes, J. P. Morgan '& Co. In proportion to the
amount held by the individual partners. Then the balance, if any,
is distributed on an entirely different basis? •
Mr. Whitney. That is right.
Mr. Henderson. It is distributed in accordance with some pre-
determination by the partners and does not correspond to the cap-
ital contribution. That is one of the ways in which the younger
members are enabled to share in the results of the business that is
created, isn't that correct?
Mr. Whitney. Yes, subject to certain immaterial data, I mean
differentials, but that is substantially correct. If we have a profit
at all, there is a distribution made on quite different arbitrary
grounds as between ourselves, one of which of them is obviously his
return on capital, the other is division of profits, but no relation of
capital among the rest of it. There is another predivision on still
more arbitrary terms but that is a detail.
Mr. Henderson. Mr. Stanley, in Morgan Stanley, preferred stock
is entitled to a fixed return, is it not?
Mr. Stanley. It is.
Mr. Henderson. And this year you indicated you couldn't get
it because ygu didn't earn it?
Mr. Stanley. Right.
Mr. Henderson. And the balance remaining, if any, is distributed
according to basis other than the contribution of capital ?
Mr. Stanley. Well, the balance remaining over
Mr. Henderson (interposing). Will the reporter read back the
question I addressed to Mr. Stanley?
(The reporter read back the immediately preceding question of
Mr. Henderson.)
Mr. Stanley. I don't think the contribution of capital is involved,
Mr. Henderson. Everyone knows what preferred stock is. A pre-
ferred stock has dividends out of earnings and after they get their
full amount they are entitled to, the common stock gets dividends.
Mr. Henderson. I think that is the answer, except you have made
it a usual thing. I asked you about your company.
Mr. Stanley. In our company Avhat l have said is the case.
Mr. Hendi.^son. That is, the Ijalance, if any, is distributed accord-
ing to the owi ?rship of common stock?
Mr. Stanley. Quite right, after the distribution of preferred
dividends.
Senator King. If I understood your answer, Mr. AVliitney, there
are the two catogoi^ies into which the earnings or the profits of J. P.
Morgan & Co. are placed, and the disti'ibution of those profits are
CONCENTRATION OF ECONOMIC POWER 12081
not with respect to the number of partners, but some of them have
larger interests than others?
Mr. Whitney. In both categories.
Senator King. In both categories the younger partners perhaps
have less capital, perhaps less of the profits than the older ones who
have for years been interested in the business and furnished the
capital ?
Mr. WinxNET. Or the other way around in many instances; the
larger capital people have less interest in the residual profits than
the younger ones because we are less active in the business. But it is
a perfectly arbitrary thing.
But the point in this connection, if I may say so, was whether any
of these presentations of Mr. Nehemkis may tie up mathematically
and that I just don't know.
The fact is that when it came to grubstake, as I said before, these
gentlemen who were breaking off from our firm, it was done with
no relation to anything except their personal inclination and their
personal means, and if the record will show that clearly, I don't
know how you can make mathematical calculations about anything,
but that was the fact.
Senator King. And the income-tax returns of individuals, partners,
and those who are in the Morgan Stanley Co., would not reflect the
amount of their interest in the Stanley company?
Mr. Whitney, it wouldn't necessarily. It would have nothing to
do with it because it was purely a voluntary contribution of in-
dividuals.
Mr. Henderson. May 1 ask a question there, Mr. Chairman?
But the record of the capital contribution of each of the partners
of J. P. Morgan & Co. would be shov/n in the return of J. P. Morgan
& Co., would it not?
Mr. Whitney. Not necessarily, because a man might have very
substantial outside assets.
Mr. Henderson. No, I think I said the capital contribution to
J. P. Morgan & Co. by partners would be shown in the return
rendered by J. P. Morgan.
Mr. Whitney. For income-tax purposes?
Mr. Henderson. Yes.
Mr. Whitney. Oh, no. You are getting me out of my depth on
income-tax returns, but that isn't shown.
]\Ir. Henderson. I am not trying to trap you, Mr, Whitney, on thi?
thing.
Mr. Whitney. The return would be on our income.
Mr. Henderson. Just a minute.
(Off the record discussion between Senator O'Mahoney, Mr. Hen-
derson, and Mr. Nehemkis.)
Mr. Nehemkis. Mr. Whitney, you had an ojjportunity to examine
somewhat casually the sheet shown you by the chairman, I believe.
If the proportions in which the preferred stock is owned by the part-
ners of J. P. Morgan & Co. is the same as their proportionate interest
in the capital of the firm, it follows, does it not, Mr. Whitney, that
the effect is the same as if the firm of J. P. Morgan & Co. owned the
stock of Morgan Stanley & Co. Inc.?
Mr. Whitney. Absolutely not.
Mr. Nehemkis. I have no further questions.
12082 CONCENTRATION OF EX30N0MIC POWER
Mr. Whitney. May I explain that, Mr. Chairman, because it seems
to me there is an inference in there. We have already testified to
Mr. Senator Wheeler we didn't have it as a firm. The facts are
exactly as I stated this morning, that certain individuals did it. It
is well known that Mr. Steele and Mr. Lamont and Mr. Morgan are
the three richest of our partners, probably, and they made the contri-
butions in the largest amounts as a matter of public record, but the
inference that Mr. Nehemkis attempts to draw there (because they
contributed the largest amounts in both offices, in ours and in Mor-
gan Stanley) is absolutely incorrect because it just isn't so. It was
a voluntary contribution by individual people, subject to deaths, as
has a,lready happened when Mr. Steele died last summer, in which
case stock is already in the hands of his executors and it has been
nothing, never has been anything, but an individual investment by
the individual partners, at their own election, because they happened
to have means to do it.
Mr. Henderson. Now, Mr. Chairman, Mr. Whitney's statement was
not directed to the supposition which counsel presented. In view of
the delay, I suggest the statement presented by counsel, properly
identified by those who prepared it, be introduced into the record.
Sentaor King. Without further proof of the material, I don't see
that it has any proper value.
The Chairman. Now,^of course, it has not been identified by any
person on the staflF.
Mr. Henderson. We can identify it, just as we have identified
other documents prepared by the staff. Responding to Senator
King, it is my considered opinion that it does have a real bearing
on the questions and the supposition addressed to Mr. Whitney by
counsel. I ask for its introduction.
Senator King. If there be no objection, it seems to me, after offer-
ing proof as to the amount of capital which any of the partners of
J. Pierpont Morgan had in this new concern
Mr. Henderson (interposing). That is exactly what we want to
present.
Senator King. But to identify that with the income-tax return
would not prove it, because any of them might have income fron>
various sources, other sources ; so it seems to me that the only thing
that is necessary for you, if that is material, is to ascertain — let me
complete my statement — to ascertain the amount of capital of the
Morgan Stanley Co. and by whom subscribed, and if some of the
stockholders are members of J.' Pierpont Morgan then you are
entitled to such inference as that wpuld
The Chairman (interposing). May I say that the utmost latitude
is allowed in hearings of this Idnd. We have not pretended at any
time to enforce the rules of evidence. Many objections could have
been made at any time during the whole proceedings of th+s com-
mittee to testimony — I am not now referring to testimony or evidence
offered by the S. E. C, but on the part of everybody who has come
before the committee. This committee is sitting, not as a jury would
sit, to pass upon a strict legal question, but in an effort to learn the
fundamental facts about our economic system.
Now, personally, I have no objection to the admi'ssion of this
particular instrument. My questions to counsel and to Commis-
sioner Henderson with respect to it, off the record, were all intended
CONCENTRATION OF ECONOMIC POWER 12083
to point out what I deemed to be its legal weakness as a legal offer of
evidence.
Now, this exhibit, as Mr. Nehemkis has stated, has been prepared
by the staff of the S. E. C Obviously, that is not binding upon any
of the witnesses before the committee because they had no part in it
and they know nothing about it. It is prepared by your experts
from your examination of income-tax returns. Now, it probably is
accurate, but obviously it has no binding effect.
This exhibit contains first a list of names of individuals presumably
former members or present members of J. P. Morgan & Co. It con-
tains a column which is labeled [reading from "Exhibit No. 1766-3"] :
Approximate percentage of capital in J. P. Morgan <& Co. ♦ * *. As shown
by the 1938 partnership income tax returns. 2% was paid to partners who died
in that year.
Now, those calculations were worked out by the staff of the
S. E. C.
Mr, Nehemkis (interposing) . On the basis of the partnership return
of the firm.
The Chairman. Now, the next column shows the [reading further] :
Approximate percentage of Morgan Stanley & Co., Incorporated, preferred stock
in comparison with total held by Morgan partners and their assignees, i. e.,
70,000 shares less 12,500 held by officers of Morgan Stanley & Co., Inc., as of
8/31/39. 8.8% is held by assignees of partners.
The exhibit shows that Charles W. Steele, deceased, held 36.6
percent, approximately, of the capital of J. P. Morgan, and that he
held approximately 34.8 percent of the new firm of Morgan Stanley
& Co. Now, there is a diversion immediately. Thomas W. Lamont
held 34.2 of the approximate percentage of capital in J. P. Morgan
& Co.,' and he held 34 percent in Morgan Stanley; J. P. Morgan held
9.1 percent of the first, he holds 5.2 percent of the second ; R. C. Lef -
fingwell, 6.1 percent in the first, 5.9 in the second ; F. D. Bartow, 2.9
percent in the first, 1.7 in the second; J. S. Morgan, 2.2 percent in
the first, 4.9 percent in the second ; A. M. Anderson, 1.9 in the first,
1.7 in the second ; George Whitney, 1.9 in the first, none in the second;
H. P. Davison, 1.2 in the first, none in the second; Charles D. Dickey,
0.9 in the first, none in the second ; Thomas S. Lamont, 0.6 of 1 percent
in the first, none in the second ; Edward Hopkinson, Jr., a debit in-
terest in the first and none in the second; Arthur E. Newbold, less
than one-tenth of one percent in the first and none in the second.
Mr. Whitnet. He is not a partner of ours, Mr. Chairman.
The Chairman. Edward fetarr, Jr., less than one-tenth of 1 per-
cent in the first and none in the second.
Senator Kjng. You say he is not a partner ?
Mr. Whitney. Neither of those two gentlemen are.
The Chairman. H. Gates Lloyd, Jr., less than one-tenth of 1 per-
cent in the first, 2.9 in the second, this percentage having been ac-
quired under the will of Horatio G. Lloyd who had subscribed for
approximately 4.8 % of the original issue, and at the time received
approximately 4.9% of the income of J. P. Morgan & Co.
Now, that is the exhibit.
12084 CONCENTRATION OF ECONOMIC POWER
Mr. Henderson. May I suggest, just so the record may be clear,
that we did not contend that heading which you read — that heading
is not partners.
Tlie Chairman. Yes; there is no title over the column.
Mr. Stanli':y. May I say just one word? I couldn't follow the
things you read then but I understood you to say that Mr. Steele and
Mr. Lamont had thirty-odd percent of the preferred stock of Morgan
Stanley & Co. Yes; the figures you read were, Mr. Steele. 3G percent
of it — I suppose it is preferred stock; it says capital. Oh, wait a
minute — the preferred stock — may I begin again? Memoranda
which you read show Mr. Steele a holder of 34.8 percent of the pre-
ferred stock of Morgan Stanley & Co., and Mr. Lamont as a holder of
34 percent of preferred stock of Morgan Stanley & Co., whereas the
fact is that at the end of August 1939 Mr. Stoele held 28.5 percent
of the prefen-ed stock of Morgan Stanley and ]Mr. Lamont held 27.8
percent of the preferred stock of Morgan Stanley & Co. I know
nothing about the figures in J, P. Morgan & Co.
Mr. NEHEMias. You will notice, however, that you are reading
from different dates, don't you, Mr. Stanley?
Mr. Whitney. Mr. Chairman, may I just say this, that we haven't
any objection to that going in as long as the" record shows that income-
tax returns of the individual partners have absolutely no relation to
the capital that they may have in the firm except that obviously the
fellows with the bigger capital in the firm probably get more interest
in it than the fellows who have less.
The Chairman. Well, of course, I read it into the record. It is in
the record.
Senator King. Mr. Chairman, may I say that the objection which
I suggested a few moments ago was not to the introduction of evi-
dence tending to show the interest which any of the partners of the
J. Pierpont Morgan firm had in the Morgan Stanley company, but
the point that I made was that if you attempted to show the income
of the various individuals, that would not reflect anything as to the
interest which they might have in J. P. Morgan & Co. or this com-
pany, because the income might have been derived from a hundred
other different sources.
The Chairman. This column purports to show the general income.
Senator King. So I have no objection at all to showing whatever
interest of any of the partners of J. P. Morgan have in the Morgan
Stanley company.
Mr. Nehemkis. Thank you.
Senator King. And I think that counsel himself would admit that
to tie it up to an income would not be any basis in determining the
interest they might have in any company.
Mr. Whitney. May I say one more word, Mr. ChaiiTiian, literally
that the calculations are wrong anyway? [Laughter.]
Dr. LuBiN. I don't understand what the basis of the table is, what
the table is based upon. The income received by these partners as
revealed by their income tax statements, then computed m terms of
holdings — or is it a statement based upon returns from J, P.
Morgan & Co. and stock of the partners — stockholders of the Morgan
Stanley company — in which they specify their holdings of securities
in either or both of these companies ?
CONCENTRATION OF ECONOMIC POWER 12085
Mr. Nehemkis. I'm sorry, I missed the crucial part of the last part
of your question, but I would say from the jreneral import that I got
from it, if it is the pleasure of the committee, perhaps the orderly
way to do this job woidd be to put the technical man of the staff,
who was charged with the responsibility of preparing this, on the
stand and have him tell
The Chairman (interposing). Excuse me, Mr. Nehemkis, but to
answer Mr. Lubin's question, will you please read, as I did, the
lieading 021 the first column?
Mr. Nehemkis. I think the Senator is correct. If I just give you
the headings — the first column which the Chairman read is entitled
as follows: "Approximate percentage of capital in J. P. Morgan &
Co.," and that is predicated upon the 1938 partnership income tax
returns. The second column, Mr. Commissioner, reads as follows:
"Approximate percentage" — approximate percentage, that is where
Mr. Stanley was confused — "of Morgan Stanley & Co., Incorporated,
preferred stock in comparison with total held by Morgan partners
and their assignees," with appropriate deductions indicated in a
footnote.
Dr. LuBiN. I still don't feel tliat you have answered my question,
namely, do these figures taken from the partnership income-tax re-
turns, figures showing the incomes of the partners, and using those
figures as the basis, do you compute their holdings of stock or
Mr. Nehemkis (interposing). No, sir.
Dr. LuBiN. Or did this income tax return reveal the actual
holdings ?
Mr. Nehemkis. The income tax material upon which this is predi-
cated shows — and the figures we use — interest on capital.
The Chairman. But you computed it from the interest?
Mr. Nehemkis. That is correct, sir.
The Chairman. That is the question which he is asking, the income
tax return which you examinetl did not show the capital stock?
Mr. Nehemkis. No, sir.
The Chairman. It is a computation ?
Mr. Nehemkis. Correct, sir.
The Chairman. In other words, it is a conclusion of the person
who prepared the table ?
Mr. NEHEMias. That is correct.
Senator King. And shows the income which is derived from other
sources ?
Mr. Nehemkis. No, sir.
Senator King. That was the point that was not clear when I made
my first objection. If you attempt to link this with the income
which I^.lr. Morgan or anybody else had in other investments, it would
wholly be irrelevant.
Mr. Nehemkis. Right. But we don't do that.
Mr. Whitney. May I point out, Mr. Chairman, that I didn't get
until this minute that those income tax returns were of 1938; what
has that got to do with contributions made to the capital stock of
Morgan Stanley in 1935?
The Chairman. Well, now, the witness is arguing; but, of course,
there has been an awful lot of argument here.
I think it is perfectly clear now.
12086 CONCENTRATION OF ECONOMIC POWER
(The table referred to was marked "Exhibit No. 1766-3" and is
included in the appendix on p. 12296.)
The committee will stand in recess until 2 o'clock, and we hope
to finish at that time.
(Thereupon, at 1:01 p. m., the committee recessed until 2 p. m. of
the same day.)
AFTERNOON SESSION
The hearing was resumed after recess at 2 : 25 p. m.
Acting Chairman King. Proceed.
Mr. Nehemkis. Mr. Sidney A. Mitchell, take the witness stand,
please.
Acting Chairman King. Have you been sworn? Do you solemly
swear that the testimony you are about to give in this proceeding
shall be the truth, the whole truth, and nothing but the truth, so help
you God ?
Mr. Mitchell. I do.
TESTIMONY OF SIDNEY A. MITCHELL, PRESIDENT, BONBRIGHT
& CO., NEW YORK, N. Y.
Mr. Nehemkis. Mr. Mitchell, will you state your full name and
address, please ?
Mr. Mitchell. Sidney A. Mitchell, Oyster Bay, N. Y.
Mr. Nehemkis. Are you associated with the investment banking
firmof Bonbright&Co.?
Mr, Mitchell. I am.
Mr. Nehemkis. Are you a partner of that firm ?
Mr. Mltchell. It is a corporation that I am president of.
Mr. Nehemkis. President of the corporation. How long have you
been president of Bonbright & Co. ?
Mr. Mitchell. The present Bonbright since it was organized in
December 1938. I was president of a previous Bonbright from the
time it was organized in 1933 until December 1938.
organization of bonbright & CO., INC.
Mr. Nehemkis. Is it not a fact, Mr. Mitchell, that Bonbright Sc
Co., a predecessor of the present Bonbright, was instrumental with
J. P. INIorgan & Co. in organizing the United Corporation ?
Mr. Mitchell. It is not a fact, Mr. Nehemkis.
Mr. Nehemkis. Do you care to make any additional comment
or enlarge upon that?
Mr. Mitchell. Yes; the Bonbright, which was organized in 1933,
had no connection with any previous Bonbright company.
Mr. Nehemkis. I merely had in mind Mr. Whitney's testimony
this morning, which was a little bit different from wliat you said,
but I accept what you say, sir. Has Bonbright & Co. ever been in-
strumental in the financing of Niagara Hudson Power Corporation ?
Mr. Mitchell. The Bonbright Co., which existed from '33 to '38
was one of the underwriters of three issues of subsidiaries of the
Niagara Hudson Power Co.
CONCENTRATION OF ECONOMIC POWER 12087
Acting Chairman King, May I ask a question? Did that first
corporation, that Bonbright company, did it incorporate in 1938
or was it merged into the present?
Mr. MiTCHELX,. No; the present Bonbright — may I start in 1933?
In 1933 the company which up to that time had been loiown as
Bonbright went out of the investment banking business entirely.
A new corporation was organized at that time, entirely separate and
distinct, and in no way a successor to the one that went out of the
investment banking business in 1933. It is that corporation. Sen-
ator, the one that was organized in 1933, which was one of the
underwriters of several bond issues of subsidiaries of Niagara Hud-
son Power.
Acting Chairman King. But the present company, of which you
are the president, was that organized in '33 ?
Mr. Mitchell. No; that was organized in 1938, December 1938.
Acting Chairman King. Wliat became of the corporation in 1933?
Mr. Mitchell. The corporation that was organized in 1933 was
liquidated in 1938.
Mr. Nehemkis. While we are on this historical development of
the various Bonbright companies, were you associated with the old
Bonbright company of 1933?
Mr. Mitchell. I was the vice president of that company from 1926
until 1933.
Mr. Nehemkis. Have you always been associated with the various
Bonbright companies?
Mr. Mitchell. No; Mr. Nehemkis, because there have been some
since 1890 sometime. My first connection with any Bonbright com-
pany was in 1923.
Mr. Nehemkis. 1923. I think I have those dates fixed now. Was
there any other banking house associated in the financing of Niagara
Hudson Power securities?
Mr. Mitchell. Do you mean subsequent to 1933 ?
Mr. Nehemkis. Correct.
Mr. Mitchell. There were a great many.
Mr. Nehemkis. Can you tell me whether Schoellkopf , Hutton • &
Pomeroy were associated in that financing ?
Mr. Mitchell. I remember they were.
Mr. Nehemkis. And can you tell me any other house?
Mr. Mitchell. Morgan Stanley.
Mr. Nehemkis. Now, Mr. Mitchell, did you ever have occasion to
discuss with any of the officials of Morgan Stanley & Co., Incor-
porated, the problem of the respective participations in the under-
writings of the Niagara Hudson Power Corporation ?
Mr. Mitchell. I did.
Mr. Nehemkis. With whom did you have such discussion.
Mr. Mitchell. I had those discussions when the first issue
Mr. Nehemkis (interposing). I said with whom?
Mr. Mitchell. With Mr. Stanley and I believe Mr. Hall.
Mr. Nehemkis. Mr. Perry Hall?
Mr. Mitchell Mr. Perry Hall.
Mr. Nehemkis. Can you identify the period of time about when
you had these discussions ?
12088 CONCENTRATION OF ECONOMIC POWER
Mr. Mitchell. Very definitely, because they arose wlien the first
public issue was made of any subsidiary of the Niagara Hudson
Power Co., subsequent to 1933 when our firm — the Bonbright of
1933 — when that firm did business, and when we heard that this
financing was about to be done I had a discussion at that time with
Morgan Stanley & Co. as to the position which Bonbright & Co.
might obtain in that financing.
Mr. Nehemkis. Mr. Mitchell, did you not also in connection with
this discussion which you have referred to, enter into an informal
agreement or understanding with the two officials of Morgan Stanley
that you have mentioned a moment ago as to the underwriting of
securities of Niagara Hudson system, or as to the proportion of the
amount 6f underwriting that your company would obtain in such
underwriting?
Mr. MiTCiiEix. You are referring, I presume, to testimony I gave
in the i)rivate hearing of the Niagara Hudson case?
Mr. Nehemkis. I am, sir.
INFORMAL UNDERSTANDING RELATIVE TO FUTURE ITNANCTXG OF NIAGARA
HUDSON POWER CO. SYSTEM BETWEEN BONBRIGHT & CO. AND MORGAN
STANLEY & CO., INCORPORATED
Mr. Mitchell. As I remember, in the autumn of 1938. In order to
have that testimony have the meaning which it should have, it must
be considered against the chronological context — if I may i^ut it
that way — of events. The first discussions I have said which I had
with anyone of Morgan Stanley relating to a subsidiary of the
Niagara Hudson Povver Co. was, I believe, in the year 1936, and the
first issue was discussed, the refunding of some bonds of the Niagara
Falls Power Co. My discussion at that time was in connection with
the interest which Bonbright might have in that particular issue.
As a result of those discussions Bonbright received a certain in-
terest in that particular issue.
Mr. Nehemkis. Do you recall — forgive me for interrupting you —
do you recall what the interest \yas at this time?
Mr. Mitchell. I think it was around 10 percent, Mr, Nehemkis.
1 don't remember exactly, but I can get it for you if you want it.
That issue was done. We think we did our job successfully as an
underwriter in those bonds. The next issue that came along was
sometime in 1937. I believe the spring of 1937, but I am not sure,
and it was the Buffalo Niagara Electric Service Co., some such name.
In that issue we also had an interest which I think was not exactly
the same percentage of the total issue, but somewhere nearl}- the
same. When that issue came on we again discussed the matter with
Morgan Stanley & Co. We pointed out that in the last issue we
had had a certain interest that we had performed in a certain way
in the last issue; we hoped our interest in that particular company,
which was then under consideration, would be at least as good as it
liad been in the preceding one. Fortunately it was.
If I may just finish.
Mr. Nehp:mkis. Yes, sir.
Mr. Mitchell. I just want to give you the background of this
particular thing. Then the third issue came along; it was in, I
believe, the autumn of 1937, and in that issue — that Mas the Central
CONCENTRATION OF ECONOMIC POWER 12089
New York Power Co. — in that issue v.e ajrain discussed with Mor^^an
Stanley what position we miji^lit hope to obtain for ourselves, and I
believe that our position a<]jain was slif^htly different fi'om what it
had been before, but nevertheless in the same o;eneral neifjhborhood.
Actino- Chairman King. AVere those separate issues?
Mr. Mitchell. Three entirely separate issues, Senator.
Actino^ Chairman King. Of different corporations^
Mr. Mitchell. Of different subsidiary companies of the Niagara
Hudson Power Co. Now the reason I am sayin<>- that, IMr. Nehemkis,
is this. Over a period there from '36 to the end of '37 there were
three different issues of subsidiaries of this company. It so hap]Dened
that the discussions about our participation in any one of those issues
was apropos of that particular issue. It so happened that in the
issue we did a certain job and had a certain interest and did a certain
job. As in the second issue, presumably because of our performance
in the first, we were given a comparable interest; we did also a fairly
good job in that. When the third one came the same thing hapi)ened,
you see? Now in the autumn of 1938, I believe it was at that time,
I think this is a fact, but you know more about this than I do,
the Niagara Hudson Power Co. applied to be declared not to be a
subsidiary of the United Corporation. We were suddenly told by
somebody that the S. E. C. wanted to hold hearings at 120 IBroadway
and would I appear at sudi a time. I did.
The question then that was asked me was, "Did you ever have any
arrangement with Morgan Stanle}' or understanding or sometliing
with Morgan Stanley regarding your financing of Niagara Hudson
Power Co."? I said at that time, "Based upon the history as it had
developed in those three preceding issues done in '36 to the time
of this hearing, that we had" — I believe I used the word — "an in-
formal arrangement."
Mr. Nehemkis. Tliat is correct.
Mr. Mitchell. Subsequently that was in your questionings and so
on; you kept referring to an agreement or an understanding or some-
thing of that sort. We discussed — you asked a lot of questions, and
so on, and we discussed this. At the end of the period I think I
stated, or Mr. Lesser, I believe, stated — and I have it here, because
perhaps it is the best explanation of this thing. Mr. Lesser stated
Acting Chairman IQng (interposing). Who is Mr. Lesser?
Mr. MiToiiELL. He is on the staff of the S. E. C, Senator, and
conducted this private hearing I am speaking of. Mr. Lesser stated,
"Am I correct when I say that your understanding with Morgan
Stanley about Bonbright participation in the future business of
Niagara Hudson, is it an informal understanding based on hope and
expectation and desirability of the continuance of the relationshij),
rather than any formally legally enforceable contract?"
The answer was, "You are correct."
"It is an understanding, isn't it?'* Mr. Lesser said. "It is not only
your feeling but it is their feeling."
And my answer to that was, "That is what we hope. If tliey don't
share that feeling there is nothing w^e can do about it. My under-
standing with our friends at Morgan Stanley is that if any piece of
Niagara's business comes up that they have anything to say about that
insofar as they have anything to say, and consider it for the best
interests of the business to so state, that they would suggest to the
124491 — 40 — pt. 23 19
12090 CONCENTRATION OF ECONOMIC POWER
company that Bonbright and Schoellkopf have substantial interest
hi the business, which interest would be identical, but there is nothing
we could do about it if Morgan Stanley won't do it, and there is
nothing Morgan Stanley can do about it if the company won't agree."
Now, that is based on the previous relationships that accrued.
Mr. Nehemkis. Thank you very much, Mr. Mitchell, for that very
good explanation of your conversations and the results therefrom.
Now, may I ask you this question : Is it your impression that what
you refer to as "expectation and hope" has materialized insofar as
your house is concerned?
Mr. Mitchell. No; I was extremely disappointed in the arrange-
ment that we nmde, Mr. Nehemkis.
Mr. Nehemkis. Just how were you disappointed?
Mr. Mitchell. Well, I had hoped very much that we might have
a larger interest in this first issue of subsidiaries than we have.
Mr. Nehemkis. So that your hope and expectation was shattered
only insofar as degree was concerned ?
Mr. Mitchell. Yes; I suppose that is right.
Mr. Nehemkis. Now, Mr. Mitchell, I am going to show you a table ^
which shows the relative participations in utility issues managed or
co-managed by Morgan Stanley & Co., Incorporated, and it will con-
tain the amount of the participation of your firm — I should say your
company, excuse me — and the other company that you spoke of,
Schoellkopf, Hutton & Pomeroy, in a number of issues of Niagara
Hudson Power Corporation. Would you glance at this for me,
please, Mr. Mitchell?
''Senator King. Does that relate to the issue of 1938?
Mr. Nehemkis. Yes, sir. Do you see the percentage participa-
tions there, Mr. Mitchell?
Mr. Mitchell. I see you have under Bonbright 50 percent. Fifty
percent of what?
Mr. Nehemkis. Of what Morgan Stanley received.
Mr. Mitchell. Oh, is that the percentage?
Mr. Nehemkis. Yes. Will you run down the various issues and
tell me the amount that your firm received in relation to the amount
Morgan Stanley received? '
Mr. Mitchell. Niagara Falls Power Co. — wait a minute. I had
better start at the beginning of your list. Central Hudson Gas &
Electric Corporation, 4^^ percent preferred, 340,400 — what is that,
dollars or shares?
Mr. Nehemkis. Dollars — I think there is a dollar sign there.
Mr. Mitchell. It must be shares. Morgan Stanley
Mr. Nehemkis (interposing). Just give me the percentage
amounts.
Mr. Mitchell. Moi'gan Stanley 100 percent, Bonbright nothing.
Niagara Falls Power Co. 31/0 's of 1966, Morgan Stanley 100 percent,
Bonoright & Co., 50 percent. Buffalo Niagara Electric Corporation
31/^'s of 1967, Morgan Stanley 100 percent, Bonbright 50.8 jpercent.
Buffalo Niagara Electric Corporation Serial Debentures of '38-52
(that was done at the same time), Morgan Stanley 100 percent, Bon-
bright 50.8 percent. I think tliose were underwritten pro rata with
the bonds. Central New York Power Corporation, 3%'s of '62, Mor-
1 "Exhibit No. 1767-1."
CONCENTRATION OF L1.0NOMIC POWER 12091
gan Stanley 100 percent, Bonbright 49.5 percent. I don't know
anything about these figures ; I assume they are correct. i
Mr. Nehemkis. And you may always have the privilege of correct-
ing them if you so desire. While you have that before you, Mr.
Mitchell, will you also give us the percentage participation in rela-
tion to the Morgan Stanley amount and Schoellkopf, Hutton &
Pomeroy ?
Mr. Mitchell. They are just the same.
Mr. Nehemkis. As yours?
Mr. Mitchell. As ours.
Senator King. Who is that?
Mr. Mitchell. Schoellkopf, Hutton & Pomeroy.
Mr. Nehemkis. Would it not appear, Mr. Mitchell, that the hope
or expectation which you spoke of earlier has been realized?
Mr. Mitchell. Well, no ; because I thought you said that I satis-
fied you as to the amounts we had in this participation and I told
you I wasn't
Mr. Nehemkis (interposing). You thought you should have more?
Mr. Mitchell. We hoped to receive more.
Senator ICeng. May I ask a question? I understood that in the
first issue you referred to, you got 10 percent, and now you got 45?
Mr. Mitchell. No, Senator; we had about 10 percent of the total
securities issued, underwritten. In Mr. Nehemkis' tabulation is what
our percentage is in relation to Morgan Stanley's, the amount of
bonds underwritten by Morgan Stanley & Co.
Senator King. And you got 45 percent?
Mr. Mitchell. And we had about half as much. We underwrote
about half as much as Morgan Stanley underwrote but I believe
Morgan Stanley underwrote only about 20 percent of the total issue.
Senator King. So that Morgan Stanley didn't underwrite the entire
amount ?
Mr. Mitchell. No, no, sir; there were a great many underwriters.
Senator King. And vou had the same amount that Morgran Stanle.v
had? ' '
Mr. Mitchell. That — no, we had approximately one-half.
The Chairman. That is, Morgan Stanley had 20 percent, you had
10, and, that was the total of 30 percent of the entire issue ?
,Mr. Mitchell. That is correct, sir.
Mr.' Nehemkis. So that I find, Mr. Mitchell, that in four issues,
the Niagara Power Co. 31/^'s, the Buffalo Niagara Electric Corpora-
tion 31/2's, the Buffalo Niagara Electric Corporation series of deben-
tures, and the Central New York Power Corporation S%\ Bon-
bright had substantially half of what Morgan Stanley did, and I
also find that exactly the same percentages apply to Schoellkopf,
Hutton & Pomeroy. Now, do you happen to know, Mr. Mitchell,
whether a similar informal understanding, hope, or expectation ex-
ists between Bonbright; Morgan Stanley; Schoellkopf, Hutton &
Pomeroy; and the following houses: Brown Harriman; The First
Boston; Smith, Barney; E. W._ Clark & Co., with reference to
Niagara Hudson Power Corporation's financing?
Mr. Mitchell. Well, Mr. Nehemkis, first, may I say I have no
idea of what there is with these other companies, nor do I think
it is quite right or correct to say a similar understanding and so on,
because what I am trying to make clear to you and that is the only
12092 CONCENTRATION OF ECONOMIC POWER
reason I mention this chronological — development of our interests —
is to point out to you that our discussion arose in connection with
the Niagara Power Co. That is the first issue Ave knew anything
about. In that issue, we had an amount in relation to Morgan
Stanley's, which as I say, is approximately 50 percent. All right;
another issue comes along, we want to have at least as good a posi-
tion as Ave have had in the previous one, but there was no future —
when the interests in the first issue were settled, there was no com-
mitment as to any future issue nor is there today any.
Mr. Nehemkis. Yes; I think I understand, Mr. Mitchell.
Mr. Mitchell. I wanted to make that perfectly clear.
Mr. Nehemkis. I think I follow you, quite.
Now, Mr. Chairman, may it please the committee, the reason I
asked the witness Avhether he had any personal knowledge of a
similar — you embarrass me, Mr. Mitchell — "hope"; I don't know quite
the word to describe it.
►Senator King. "Expectation."
Mr. Nehemkis. "Expectation," as between Brown Harriman; First
Boston; Smith, Barney; and E. W. Clark, is that I find that in the
same issues that we have been discussing with this witness, these
houses all always received the same amount; 22.9 percent or 22.8
percent ; but it never varies. So I just inquired.
Mr. Mitchell. Mr. Nehemkis, apropos of that, do you mind if
I interject, as it may perhaps help your question ?
Mr. Nehemkis. Oh, please do so !
Mr. Mitchell. Commonwealth Edison Co., with which Mr. Stuart
is very familiar, has been engaged in quite a large refunding pro-
gram. I don't know, it amounts to two or three hundred million.
It was recently completed. The interest that Bonbright, I believe,
had in the first of five or six different individual issues, to carry out:
this program, was "X," say; the interest that Bonbright had in
the second issue was again, '^" percent; the interest that Halsey,
Stuart had in the first was so much. Presumably the underwriters
in the first issue acquitted themselves to the satisfaction of the com-
pany and therefore, when it came to having another issue, they
naturally turned to the same underwriters; that is the normal pro-
cedure, it seems to me, in any professional relationship, and this is
distinctly a professional relationship.
Mr. Nehemkis. Quite. Mr. Mitchell, may I ask you one other
ouestion? Have you always conferred with Mr. Stanley and Mr.
Hall and possibly other officials of Morgan Stanley & Co. each time
a new piece of financing of Niagara Hudson Power arose?
Mr. Mitchell. We have always discussed it with them ; yes. Now,
whether we have had to go and fight hard to have the same position
or not in one issue, as against having to do it in another, I can't
say. I don't think so. I think we have discussed the matter each
time it came up.
Mr. Nehemkis. Yes. Well, as you recall in your mind at this
time, do you have any recollection as to whether you had to discuss
each time exactly what the percentage participation would be?
Mr. Mitchell. I don't think so. I am sure, for instance, in Com-
monwealth Edison, we never did. I think we were merely notified
by Halsey, Stuart what it was and they said this is being "done just
like the last issue, and every interest was about the same.
CONCICNTRA.TION OF ECONOMIC POWER 12093
Senator King. Did Halsej', Stuart have the entire issue under-
written ?
Mr. Mitchell. Commonw^aUh Edison, Senator, tliey managed, yes.
Mr. Nehemkis. Well, now, in the Niagara Falls Power 3i/i>'s of
'66, do you recall at this time whether you discussed the percentage
participation, what it would be, or was it just taken for granted?
Mr. Mitchell. Oli, very much, because that was the first issue,
Mr. Nehemkis, and therefore it was very important for us.
Mr. Nehemivis. Now, in the next one, the IBuffalo Niagara Electric
Corporation o^/jS, was there any discussion about the percentage
participation?
Mr. Mitchell. There may have been. I am not sure about that,
although I r(>nicmber ver}' distinctly in connection with the fii'st piece
of business of that holding company subsidiary.
Mr. Nehemkis. But ^-ou are not clear about the subsequent ones?
Mr. Mitchell. I am not ; no, I don't remember.
Mr. Nehemkis. Mr. Chairman, I should like to offer in evidence
this table which we have been discussing. The source is based on
the registration statements relating to the respective issues on fi!e
with the Securities and Exchange Commission.
The Chairman. It may be received.
(The table referred to was marked "Exhibit No. 1767-1" and is
included in the appendix on p. 12297.)
Mr. Nehemkis. I have no further questions, sir, unless the com-
mittee desires to examine Mr. Mitchell.
The Chairman. Do the members of the committee desire to ad-
dress any qutestions to Mr. Mitchell? If not
Senator King. Any issues to which you have referred, did any
one company underwrite the entire amount and then confer with
others with respect to the allocation of the issue to various invest-
ment companies?
Mr. Mitchell. No, Senator. I believe the — I don't — I assume
that tlje arrangement was that the company picked out someone with
whom it wished to deal, as the managing underwriter, so to speak,
and after discussion with the company what — I mean after discus-
sion with the underv^'riter, told the underwriter what other under-
writers should be included, and there were 5 or 10 or 15, I don't
remember how many there were, and each of them bought the bonds
directly from the company itself rather than having one of the
underwriters buy them all and sell them to the others.
Senator King. Was that the plan which is usually adopted, or
has been adopted for years, in connection with the disposition of
securities ?
Mr. Mitchet.l. Ever since the Securities Act was passed.
Senator King. But anterior to that time?
Mr. Mitchell. No ; not before that time because then we were able
to have banking groups, and it very frequently happened that one
house would buy the entire issue and then would sell it to a banking
group, of which it was a member.
Senator King. Was it the custom then for the companies to select
a person, or the banking company, which would be their representa-
tive, and underwrite' or dispose of the entire issue?
Mr. Mitchell. Very definitely, Senator.
12094 CONCENTRATION OF ECONOMIC POWER
Senator King. That has been the custom for many years?
Mr. Mitchell. Yes, sir.
Senator King. There was rivalry between the various banking in-
stitutions, was there?
Mr. MiTCHFXL. Most acute, sir.
Senator King. For the acquisition, if I may use that term, of the
various issues?
Mr. Mitchell. Very much so.
Senator King. And the company, the investment company, that
offered the best terras, was it the custom to have the issuing company
select that organization, that investment company as its represen-
tative?
Mr. Mitchell. I don't think it was so much a question of the invest-
ment company that offered the best terms. I think it was more a
gradual development of a relationship over a period of years. I
think I can explain that perhaps by
Senator King (interposing). Kather professional, as you used that
expression ?
continuity of banker relationship
Mr. Mitchell. It seems so exactly to me. For instance, under —
well, we have done business — the individuals who are now in Bon-
bright & Company, have done business — have been the people who
have negotiated contracts, written prospectuses, studied financial
plans and so on, for certain companies over a long period of years.
Now, when those companies have some problem, some financial prob-
lem, to do, they come and consult those same individuals. That
happens all the time.
I was rather astounded this morning, for instance, in this hearing,
to see that so much time was being spent in trying to find out
whether or not corporations who had done business with J. P. Morgan
in the past were doing business today with Morgan Stanley & Co.
Senator, I can think of nothing iriore natural than that ; I mean,
if, for instance, I should have to employ a counsel and had employed
a certain counsel for 15 years, whose advice on various legal matters
we have had and he has always done it satisfactorilj^ and knows
the whole background and history, what is more natural than I
should go back to him again? Now, if he happens to be a partner
in the firm of Davis Polk or something, in the beginning of my
relationship, and then subsequently goes out on business for himself,
under another name, with no connection with Davis Polk, that doesn't
mean he isn't the same man that he was before. He is the same
friend of mine who lias given me this satisfactory advice. Naturally,
I therefore go to him again.
Senator King. In that sense, then, it is professional, that is a pro-
fessional relation which ensues, much the same as between a client
and his lawyer?
Mr. Mitchell. Quite right. Senator, and may I add just one
more thing to that point, because it is something I think does concern
the staff of the Securities and Exchange Commission, and that is
this, that it seems to me that the very fundamental principle of the
Securities Act tends to emphasize this continuity of relationship.
For instance, in your A-2, your registration statement under the
Securities Act, responsibility for which we must take as investment
CONCENTRATION OF ECONOMIC POWER 12095
bankers, as well as the company, there are various questions. Among
them, for instance, is this: Financial changes and so on since the
year 1922. That all has to go in
Then yoi: have one whole section of the Securities Act where it
says, '"Important developments of the last five years." Well, now,
we are all liable for misstatements and the company is liable for mis-
statements. If the company has had a relationship with a certain
banking house, say, or certain individuals, who are now engaged
in the investment banking business, since 1922, an intin.ate rela-
tionship with them, when it comes to prepare this statement — and
the liability for a mistake in this statement is very great, sir —
when it comes to prepare this statement, I should think it would
do it with a great deal less worry if it had the assistance in the
preparation of that statement of people who had been intimately
associated with it since the date to which these questions refer.
So, it seems to me there is, first, a professional character, and
always has been, to this business, and it seems to me, second, that
under the present way the business is done, the importance of that
continuity of relationship is emphasized even more than it was prior
to tne passage of the Act.
Mr. Henderson. My. Mitchell, have you read all the testimony
that has been given at these investment banking hearings ?
Mr. MrrcHELL. I have not, Mr, Henderson.
Mr. Henderson. Well, I suggest that you do, because it will, I
think, serve to care you of any wonder why we have gone into detail
as to continuing relationships. If you will note, as you go through
that record, some of the stubborn resistance to the intimation that
there was a continuity or a continuing group, you will perhaps
realize why the S. E. C. put on the kind of hearing that it did.
I suggest that, and strongly recommend it to you.
Mr. Mitchell. Thank you.
Mr. Nehemkis. Thank you very much, Mr. Mitchell, for having
come down here.
Mr. Chairman, I ask Mr. Alexander to step forward to help me
identify some documents.
TESTIMONY OF HENRY C. .ALEXANDER, J. P. MORGAN & CO., NEW
YORK, N. Y.— Resumed
Mr. Nehemkis. Mr. Alexander, will you glance at this batch of
material which was prepared by your firm and tell me whether you
recognize it to have been so prepared?
Mr. Alexander. I do.
Mr. Nehemkis. What does <:hat material represent? What are
the various subject matters referred to in that material?
Mr. Alexander. The deposits of various corporations at certain
month ends. I think that is over a 5 -year period, sir. Also, the
amount of loans made by J. P. Morgan & Co. to the various corpo-
rations outstanding as of the end of each of the last 5 years. It
also covers the securities owned by J. P. Morgan & Co. in these com-
panies as of the end of each of the last 5 years.
Mr. Nehemkis. Thank you very much, Mr. Alexander.
May the documents identified by the witness be filed with the
committee.
12096 CONCENTRATION OF ECONOMIC POWER
The Chairman. They may be 30 filod.
Mr. Nehemkis. Mr, Alexander
Mr. Henderson (interposiriii). Just a minute, Mr. Nehemkis.
(Off-the-record discussion.)
Mr. Nehemkis. ]\Ir. Chain 11:111. I withdraw my request and I ask
leave of the committee that this material be kept in the files of the
Securities and Exchanoe Conunission.
The Chairman. Very Avell.
(The documents referred (o wore marked "Exhibit Xo. 17(37-2"
and are on file with the Securities and Exchange Commission.)
Mr. Nehemkis. IVfr. Alexander, T sliow you a letter addressed to
your firm dated March 0, 1939, requesting:- certain data from your
firm, and your reply thereto.' Will you examine it and tell me
whether or not it is a true and correct copy?
Mr. Alexander. It is.
Mr. Nehemkis. I offer it in evidence.
The Chairman. It may be received.
(The letters referred to were marked "Exhibits Nms. 1768-1 and
1768-2"- and are included in the appendix on p. 12298.)
Mr. Nehemkis. ISIr. Alexander, I show you a table \^'hich your firm
has prepared in response to our request, ^jiving the financing by
J. P. Morgan & Co. of Consolidated Gas Co. and subsidiary issues,
together with the profits of your firm. Will you examine this and
tell me whether you caused this slieet to be pi-eparecl in response to
our request?
Mr. Alexander. I did. Mr. Nehemkis. These are partioipaticms
by J. P. Morgan & Co. in financing headed by other houses.
Mr. Nehemkis. I offer it in evidence, Mr. Chairman.
The Chairman. Without objecti(m it is so ordered.
(The table referred to was marked "Ex1\ibit No. 1769" and is in-
cluded in the appendix on p. 12310.)
Mr. Nehemkis. I want to oifer one other table which relates to
the subject matter heretofore discussed. This table, Mr. Chairman,
shows the participations of Blyth & Co. in Morgan Stanley issues
relating to Consolidated Edison Co. and certain other issues, together
with the profits of Blyth & Co. in that financing. The data has been
supplied to us by Blyth & Co., and has been identified by Mr. Charles
E. Mitchell at the time he appeared before tliis conunittee.
The Chairman. It may be admitted.
(The table referred to was marked ""Exliibit No. 1770" and is in-
cluded in the appendix on p. 12312.)
Mr. Nehemkis. Mr. Chairman, ISIr. Arthur Pean, who represents
Mr. Mitchell's firm, has asked that I correct my statement. I said
the "profits" of Blvth & Co. Mv. Dean requests that the record show
"gross profits" of Blyth & Co.
I now offer a table showing relative participations in utility issues
managed arid co-managed by Morgan Stanley & Co., Incorporated,
during the period 1935 to 1939, with reference to Consolidated Edison
and subsidiary financing. The source of this data, may it please the
' For additional Information pertinent to tlie above tostinionj', see letter of October 10,
U»."!>, Irvins S. Olds to I'etor R. Nehemkis, .Jr., appendix, p. 12S:;o. and lettttr of Novem-
ber 15, 1030, Peter R. Ncheml<is, .Ir., to llenrj ('. Alexander and re' ly of December 7,
lli:'.'.i. tlioretn, aii-pendix, p. I'l.'.H.
'J. P. Morgan & Co., under date of October 20. lOr.O. submitted a partial revision o£
"Exliibit No. 1708-2." It is included in tbe appendix on p. IL'itL'o.
CONCENTRATION OF ECONOMIC POWER 12097
committee, is based on registration statements relating to the re-
spective issues on file with the Commission.
The Chairman. Without objection the table may be admitted.
(The table referred to was marked "Exhibit No, 1771" and is
included in the appendix on p. 12314.)
Mr. Nehemkis. I now offer in evidence, may it please the com-
mittee, a table relating to the financing of Consolidated Edison Co.
of N. y., Inc., andt its subsidiaries by Morgan Stanley & Co., Incor-
porated, for the period September 16, 1935, to June 30, 1939. This
is predicated upon data supplied by Morgan Stanley & Co,,
Incorporated.
(The table referred to was marked "Exhibit No. 1772" and is in-
cluded in the appendix on p. 12315.)
Mr. Nehemkis. Mr. Chairman, I had hoped to have the pleasure
of discussing with the committee and with Mr. Leffingwell this after-
noo]i certain data on deposit accounts, and their significance, and so on.
The people at J. P. Morgan & Co., have worked very hard to make this
material available. Mr. Alexander tells me there has been a force of
17 people working night and day for some time. Unfortunately, the
material was made available to us only this morning. While I have
no doubt that it is accurate in all respects, I don't feel under the
circumstances that I want to ask the committee to discuss it with me
when the staff has not had sufficient time to examine it. So with
the committee's indulgence, may I ask that we defer that phase of
our presentation which we hoped to give you this afternoon until a
later time when we shall have analyzed it.
The Chairman. Very well.
Mr. Nehemkis. Will Mr. George Whitney and Mr. Harold Stanley
return to the witness stand, please ?
TESTIMONY OF GEORGE WHITNEY, J. P. MORGAN & CO., NEW
YORK, N. Y.; AND HAROLD STANLEY, PRESIDENT, MORGAN
STANLEY & CO. INCORPORATED, NEW YORK, N. Y.— Resumed
QUESTION OF AVHETHER PROCEEDS OF ISSUES UNDERWRITTEN BY MORGAN
STANLEY & CO. INCORPORATED, WERE PLACED ON , DEPOSIT WITH J. P.
MORGAN & CO.
Mr. Nehemkis. Mr. Stanley, do you know whether or not several
companies for which Morgan Stanley & Co. has underwritten securi-
ties have placed all or part of the proceeds of their issues on deposit
with J. P. Morgan & Co. ?
Mr. Stanley. I don't know as a matter of fact, but I assume some
of them have.
Mr. Nehemkis. Did you not, Mr. Stanley, have occasion to under-
write an offering in 1938 which for the purposes of the record will
be knowni as corporation No. 1 ?
Mr. Stanley. I assume that is the correct date. We underwrote
securities of that corporation, but I don't know the date.
Mr. Nehemkis. Mr. Whitney, wall you look at the sheet which Mr.
Alexander has and tell me the amount of the credit entered to corpo-
ration No. 1?
Mr. Whitney. Credits?
Mr. Nehemkis. Yes,
12098 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney. You mean from the top of this list?
Mr. Nehemkis. Yes.
Mr. Whitney. In March '37, $750,000; September 7, same year,
$750,000 ; another $750,000, March '38 ; a million dollars in August
'38; $500,750 in September; a million dollars in November; and
$21,084,865.78 in December '38.
Mr. Nehemkis. It was that last figure that I was interested in.
Do you know whether that happens to be the p'boceeds in part or
in whole of the underwriting by Morgan Stanley ?
Mr. Whitney. Yes ; paid to their account.
Mr. Nehemkis. Mr. Stanley, did not corporation 2 have occasion
to underwrite with you a substantial offering in 1937 ?
Mr. Stanley. They did.
Mr. Nehemkis. Now, Mr. Whitney, if you will glance at the sheet
before you and tell me the amount of the credit entered to cor-
poration No. 2?
Mr. Whitney. Well, it was $17,000,000 June '37.
Mr. Nehemkis. Is that the amount of the proceeds in whole or in
part of the underwriting that Mr. Stanley referred to ?
Mr. Whitney. I assume so.
Mr. Nehemkis. Could you find out if you are uncertain at this
time ?
Mr. Whitney. This company had an account with us and they
credited it, I presume that it is. There may have been some other
credits, incidentally.
Mr. Nehemkis. Mr. Stanley, in connection with corporation No. 3,
did you not have occasion to do a substantial amount of underwriting
for corporation No. 3 in 1937?
Mr. Stanley. We did.
Mr. Nehemkis. Mr. Whitney, if you will glance at the correspond-
ing sheets and tell me whether or not the proceeds in whole or in
part of that underwriting were credited to the account of cor-
poration No. 3?
Mr. Whitney. I find here a credit to that corporation of $48,-
750,000; withdrawal, $44,500,000.
Mr. Nehemkis. Mr. Stanley, did you not have occasion (when I
say "you," you understand I mean the corporation) to underwrite
a substantial amount in 1937 for corporation No. 4?
Mr. Stanley. Yes.
Mr. Nehemkis. Mr. Whitney, will you look at your sheet and tell
me the amount of the credit entered to corporation No. 4?
Mr. Whitney. There are several large credits.
Mr. Nehemkis. The first one.
Mr. Whitney. $9,951,000 in one month. That is a rather active
account.
Mr. Nehemkis. As far as you know, would that represent in whole
or in part the proceeds of that underwriting?
Mr. Whitney. I should assume so.
Mr. Nehemkis. Mr. Stanley, did your organization have occasion
to do some underwriting in 1937 for corporation 5 ?
Mr. Stanley. We did.
Mr. Nehemkis. Mr. Whitney, will you look at your sheet and tell
me whether the amount of the credit entered to corporation No. 5 is
the result in whole or part of the proceeds of that underwriting?
CONCENTRATION OF ECONOMIC POWER 12099
Mr, Whitney. Which year?
Mr. Nehemkis. '37.
Mr. Whitney. I find an entry or credit of $21,700,000; the follow-
ing month a withdrawal of $18,000,000.
Mr. Nehemkis. Mr. Stanley, did not your firm have occasion to
underwrite in 1937 for corporation No. 6?
Mr. Stanley. Correct.
Mr. Nehemkis. Mr. Whitney, will you tell me the amount of the
credit to corporation 6?
Mr. Whitney. '37 one month a credit of $21,578,000, but that again
is a very active account. I don't know if all of that is the result of
that credit.
Mr. Nehemkis. I am sorry ; I didn't hear your answer.
Mr. Whitney. I say I find in one month a credit for that corpo-
ration of $21,578,000, but that is a very active account, and I there-
fore don't know whether that is the amount of the credit as the
result of this operation.
Mr. Nehemkis. Will you get that information for me ? ^
Mr. Whitney. Yes; but there is $53,000,000 deposits and $49,000,-
000 taken out during the year in that corporation. I don't know
what the amount of the
Mr. Stanley (interposing). The issue was $20,000,000.
Mr. Whitney. It probably is that plus normal credits.
Mr. Nehemkis. Your answer to my question is, "Yes?"
Mr. Whitney. I assume that is correct.
Mr. Nehemkis. Mr. Stanley, did you have occasion to underwrite
for corporation 7 in 1938?
Mr. Stanley. Yes.
Mr. Nehemkis. Mr. Wliitney, what is the amount of the credit to
corporation 7 resulting in whole or in part from the proceeds of that
underwriting?
Mr. Whitney. There is nothing in these figures of mine
Mr. Nehemkis (interposing). What is the amount of the credit?
Mr. Whitney. The largest single month of credit was $9,900,000;
31 months.
Mr. Nehemkis. Mr. Stanley, without having me ask the question,
tell me if that isn't the month in which the underwriting occurred?
Mr. Stanley. The underwriting occurred in July of that year.
The issue was $81,000,000.
Mr. Nehemkis. Mr. Stanley, did you have occasion in 1938 to un-
derwrite for corporation 8?
Mr. Stanley. Yes; we did.
Mr. Nehemkis. WiU you give me the corresponding information,
Mr. Whitney?
Mr. Whitney. Well, there are some very big credits, but I think
here is one of $49,876,000.
Mr. Nehemkis. Is that the credit resulting in whole or part from
the proceeds of" the underwriting ?
Mr. Stanley. I don't know. The size of the issue was much
larger than that. The issue was twice the size.
^ Mr. Whitney, under date of January 26, 1940, submitted the information requested.
It is included in the appendix on p. 12321.
12100 CONCENTRATION OF ECONOMIC POWER
Mr. Whitney. A withdrawal of $44,000,000.
Mr. Nehemkis. Do you know, Mr. Whitney, whether the figure
you gave represents in whole or part the proceeds of the underwrit-
ing?
Mr. WnrpNET. Certainly not the whole, and while it is a very
active account I should think it is very probable it is a portion of
it; i.t is a very active account and in that year there were over $80,-
000,000 of credits and $93,000,000 of withdrawals.
Mr. Nehemkis. Mr. Stanley, did Morgan Stanley & Co. do any
underwriting in the year 1938 for Corporation 9?
Mr. Stanley. Th^ did.
Mr. Nehemkis. Will you examine your sheets, Mr. Wliitney, and
tell me the same information that you have been giving me hereto-
fore? What is the credit to the account for Corporation 9?
Mr. Whitney. No credit around that time at all.
Mr. Nehemkis. Check with Mr. Stanley on that again.
Mr. Whttney. I can tell you for '38 the only credit was $8,000,000.
Mr. Nehemkis. I will ask Mr. Stanley to look at his material
and find out when the underwriting took place.
Mr. Whitney. We have a credit for January of $8,000,000 and
nothing in April.
Mr. Nehemkis. As to the credit account of $8,000,000, does that
represent in part the proceeds of the underwriting ?
Mr. Whitney. I haven't the remotest idea.
Mr. Nehemkis. Can you find out ?
Mr. Whitney. Yes. I will ask the company.
Mr. Nehemkis. And you will advise the committee?
Mr. Whitney. I will ask the company if they will advise the
committee, or if they will authorize me to advise the committee; I
will do so.^
Mr. Nehemkis. All right. You don't have that information?
Mr. Whitney. I wouldn't know. It is just an ordinary credit.
Mr. Nehemkis. That is all. Thank you very much.
Senator King. I would like to ask if the questions are for the pur-
l)ose of indicating that the Morgan Stanley company did consider-
able banking with J. P. Morgan & Co. and obtained credits when
they made certain underwritings ?
Mr. Nehemkis. Not quite, Senator. It simply indicates that a
portion of the proceeds of the underwriting done by Morgan Stanley
& Co. found their way to J. P. Morgan & Co., the bank, and we
merely have been talking about numbers that represent corporations.
Senator King. I understand, but for the purpose of indicating,
as I understand it, that they did their banking with the Morgan
company ?
Mr. Nehemki-s. That is right.
Senator King. And when they would underwrite obligations and
incur obligations they would obtain loans or credits from J. Pierpont
Morgan and then would repay the credits which they obtained?
The Chairman. With respect to these certain companies, Morgan
Stanley & Co. handled certain underwriting and J. P. Morgan & Co.
were bankers.
Mr. Nehemkis. That- is right.
1 See footnote on p. 12099.
CONCENTRATION OF ECONOMIC POWER 12101
Mr. Stanl,ey. May I say that as far as Morgan Stanley is con-
cerned we provided certain companies with a certain amount of funds.
They did with those funds what they wanted after they got them.
Mr. Whitney. The only comment I would like to make is that
these were all accounts we had had deposit relations with for varying
lengths of time, sometimes a long time, sometimes not a long time,
and we cleared the transactions. Payment by Morgan Stanley was
made to them in our books and then it was entirely at their disposi-
tion. It was purely a bank clearing transaction.
Mr. Stanley. Paid by check.
Mr. Whitney. Paid by check, certainly.
Mr. Nehemkis. Mr. Whitney, I'm sorry, I had hoped I was
through, but I want to ask one question wliich might clarify the issue
a bit. Can you tell me in general whether or not J. P. Morgan & Co.
performs fiscal services of various kinds for corporations who have
occasion to underwrite securities thnmgli Morgan Stanley & Co.,
Incorporated ?
Mr. Whitney. Fiscal? I don't know what you mean.
Mr. Nehemkis. Registrarships. coupons
Mr. Whitney (interposing). Oh, certainly, but we do it for a lot
of people.
Mr. Nehemkis. That is right, but it just happens that you do it for
corporations that do their underwriting through Morgan Stanley?
Mr. Whitney. I would assume we must.
Mr. Nehemkis. And you have sup])lied us with that information?
Mr. Whitney. Yes; among others.
Mr. Nehemkis. No further questions.
The Chairman. Are these gentlemen excused?
Mr. Nehemkis. They are.
The Chairman. Are they excused for Christmas?
Mr. Nehemkis. For Christmas.
The Chairman. Merry Christmas, gentlemen, and thank you so
much.
Mr. Nehemkis. Mr. Russell Leffiingwell, please.
The Chairman. Do you solemnly swear that the testimony you are
about to give in this proceeding shall be the truth, the whole truth,
and nothing but the truth, so help you God ?
Mr. Leffingwell. I do.
TESTIMONY OF RUSSELL C. LEFFINGWELL, J. P. MORGAN & CO.,
NEW YORK, N. Y.
Mr. Nehemkis. Mr. Leffiingwell, will you state your full name and
address for the record, please?
Mr, LErriNGWELL. Russell C, Leffingwell, Oyster Bay, N. Y.
Mr. Nehemkis. And you are a partner of J. P. Morgan & Co. ?
Mr. Leffingweix. I am.
Mr. Nehemkis. Were you not former Under Secretary of the
Treasury Department of the United States?
Mr. Leffingwell. I don't want to be too exact about the words
Mr. Nehemkis (interposing). Assistant Secretary.
Mr. Leffingwell. The office of Under Secretary had not been
created. I was Assistant Secretary,
12102 CONCENTRATION OF ECONOMIC POWER
The Chaikman, That was during the administration of "Woodrow
Wilson?
Mr. Leffingwell. During the administration of Woodrow Wilson
and under the three secretaries of the Treasury who served him, Mr.
McAdoo, Mr. Glass, and Mr. Houston.
Mr. Nehemkis. Mr. Leffingwell, will you tell me in what year you
became a partner of J, P. Morgan & Co. ?
Mr. Leffingwell. In 1923, July 1. May I just add further identi-
fication? I am a New York lawyer, and practiced law from 1902, in
general practice, until 1917 when I went to the Treasury, and from
1920 to 1923 when I returned to the practice of law.
Mr. Nehemkis. Thank you very much, sir.
Mr. Leffingwell, glancing at the sheet which I have made available
to you for your convenience, because I note j^ou have no papers with
you, is it not true that as of September 30, 1939, the total assets of
J. P. Morgan & Co. were $640,000,000-odd ?
Mr. Leffingwell. It is.
increases in holdings or government obligations by j. p. morgan &
CO. BETWEEN 1934 AND 1939
Mr. Nehemkis. A comparison of the first statement published by
J. P. Morgan & Co. on December 31, 1934, with that published on
September 30, 1939, shows that total assets have increased, that total
deposits have increased.
Senator King. Assets or deposits?
Mr. Nehemkis. Well, deposits make up the former ; they both have
increased. Cash likewise has increased. The holdings in United
States Government securities has increased. State and municipal
bonds have increased, and loans and advances have not increased;
capital has not increased; surplus in partners' balances has not in-
creased. Total capital in surplus has not increased. However, in
this period, Mr. Leffingwell, deposits did increase over 60 percent?
Mr. Leffingwell. I accept your figure.
Mr. Nehemkis. Subject to your correction, sir. Similarly, Govern-
ment securities increased over 33i/^ percent, and I note that State
and municipal bond holdings increased over 350 percent.
Mr. Leffingwell. I accept it.
Mr. Nehemkis. Capital decreased by one-fifth?
Mr. Leffingwell. I accept that.
Mr. Nehemkis. The increase in deposits, I take it, permitted the
large increase in Government securities, would you say?
Mr. Leffingwell. Excuse me.
Mr. Nehemkis. The question was, did the increase in deposits over
this period of time permit the large increase in holdings of Govern-
ment securities?
Mr. Leffingwell. Yes, sir; I should think so.
Senator King. You utilize your profits for the acquisition of Gov-
ernment securities so you can get some little interest?
Mr, Leffingwell. Of course, it all goes into one total; it is not
earmarked, but the increase in deposits is reflected in part.
Mr. Nehemkis. Now, most of these Government securities are
wholly tax exempt, are they not, sir?
CONCENTRATION OF ECONOMIC POWER 12103
Mr. LEFTiNGWELii. Well, I would have to get an analysis of that.
I wouldn't be able to say, because, as you know, the Government
issues a variety of issues, some of which are wholly tax exempt and
some of which are not wholly tax exempt, and I am not at all sure
how that stands in relation to the portfolio.
Mr. Nehemkis. Would you make it available at some later date, at
your convenience?
Mr. Leffingwell. Yes.^
Senator King. For my information, is it not a fact that the greater
part of the Government securities have been taken up often at the
itnvitation of the Government by various banks throughout the
United States, so they can get some little interest upon the deposits,
and the greater part of the forty-odd billion dollars of bonds,' the
greater pari; of those issues, have been taken up by the banks?
Mr. Leffingwell. I think that is probably true. Of course, during
the war. Senator, we made a very great effort to get wide distribu-
tion of the Government's obligations through the Liberty Loan or-
ganization, and that waSj I think, a most important achievement of
the U. S. Treasury during that period. Under these conditions, dif-
ferent policies are necessarily followed, and the Government securi-
ties tend to be held by the banks.
Senator King. And insurance companies?
Mr. Leffingwell. And insurance companies and I suppose other
great companies.
Senator King. But most of the
Mr. Leffingwell (interposing). But I have no statistical infor-
mation on it. I have no doubt that the Treasury would have
Mr. Nehemkis (interposing). Mr. Leffingwell, I have before me
some calculations which appear on the large sheet that has been made
available to me, and I observe that the total of Government securities.
State and municipal securities, held by J. P. Morgan & Co., for the
year 1934, was, roughly, $257,000,000; that its deposits during the
same period were $338,000,000; and for the year 1935, the total of
Government obligations. State and local, were $342,000,000, as com-
pared with $473,000,000 of deposits ; and for the year
Mr. Leffingwell (interposing). These figures are not on here, so
I am accepting them as you run along.
Mr. Nehemkis. I had expected my assistant to give you one so
you might follow me. Here is a copy.
Mr. Leffingwell. Thank you.
Mr. Nehemkis. I think I was about to come to the year 193(3 ,
that is the third one down, Mr. Leffingwell. The total of Govern-
ment, State, and municipal securities was $360,000,000 and the de-
posits for the same year $479,000,000. In 1937 the total of State
and local securities was $280,000,000, and deposits $395,000,000. In
1938 I find that the holdings of Government, State, and local securi-
ties was $352,000,000 and the deposits with your firm w^ere $521,000,-
000 ; and as of September 30, 1939, the total of your holdings in Gov-
ernment securities, State and local, were $386,000,000 and your total
deposits, $590,000,000.
* Mr. Leffingwell, under date of February 2, 1940, submitted the Information requested.
It Is included in the appendix on p. 12337.
12104 CONCENTRATION OF ECONOMIC POWER
Mr. Leffin<TweIl, has it not been contended that the great propor-
tion of bank deposits are not being put to use in private industry?
Mr. LeffIngwell. I have heard a great deal about that ; yes.
]\Ir. Nehemkis. Has there not been an increasing proportion of
bank deposits invested in tax-exempt securities?
Mr. Leffingwell. Well, of course, that broad question involves
the practice of a great many people and I haven't followed it statis-
ticall3% but there is a j^lain tendency in your figures Avhich I accept
to an increase in government securities, so far as our bank is con-
cerned. I would have to look this subject up in a broader field, but
I wasn't thinking you were going to ask me about that.
Mr. Nehemkis. I'm sorry, but my question is sufficiently general.
Mr. Leffingwell. I don't doubt that what you say is so.
Mr. Nehemkis. Now, tax exemption makes this kind of invest-
ment that we have been speaking of especially attractive to banks,
does it not?
Islv Leffingwell. Well, I should think it made it very attracti^•e
to banks. I should tliink it made it very attractive to piivate per-
sons.
Mr. Nehemkis. In fact, over 80 percent oi the earning assets of
J. 1'. Morgan & Co. as of Septernbei* 30, 1931), Avere invested in such
t;ix-exempt securities ?
Mr. Whitney. Oh, no; nothing like that.
Senator Kino. Can you give a percentage figure?
PROPOSAL BY MR. LEFFINGWELL TO ABANDON POLICY OF TAX EXEMPTION
ON CERTAIN G0VERN3IENT OBLIGATIONS
Mr. Whitney. No ; but that is assuming that all our govenunents
are tax exempt and, of course, they are not.
]\Ir. Leffingwell. You are speaking of a subject that has interested
me very much. If I seem to ramble too much, bring me back to
earth.
Mr. Nehemkis. No, sir; you are doing verj^ well; it is a pleasure.
Mr. Leffingwell. You remind me of what happened to me 22
years ago. Twenty-two years ago I proposed on behalf of Secretary
McAcloo the abandonment of the policy of exemption, exem})ting
government securities from taxation, and in the second Liberty bond
bill, authority was given by Congress to issue bonds without exemp-
tion from supertax. That is a rough statement.
Under Secretary McAdoo's authority — I was very green in the
Treasury then; I expounded this question for the Treasury — and I
have always been a firm believei' in the policy which I understand
Secretary Morgenthau advocates, of withdrawing tax exemption from
Government securities of future issues. Necessarily, the Treasury
never for a moment contemplated the possibility of removing tax
exemption from outstanding issues which contain a different sort of
obligation. But I have always felt withdrawal of exemption de-
sirable — I have always favored it — for future issues of Government
securities.
Now, so far as a bank portfolio is concerned, I say this because I
want you to understand that as to the matter of public policy, I have
never ceased to advocate, either in public life or in private life, the
adoption of a policy of taxing government securities, never.
CONCENTRATION OP ECONOMIC POWER 12105
Senator King. Now, you know, Mr. Leffingwell, do you not, that
that is a subject on whicli there have been sharp differences of
opinion?
Mr. Leffingw^ell. I do ; I do indeed, Senator.
Senator King. Many believe it is to the advantage of the govern-
ment itself to issue securities, bonds, of the character which it now
issues, that is, bearing interest, because they will be more salable, they
will bring a higher price in the market, and in the long run, it's ad-
vantageous to the government. Isn't that one view ?
Mr. LErriNGWELL. Absolutely, absolutely. And
Senator King (interposing). So you are not the last word?
Mr. Leffingwell. I am not the last word.
Senator King. You are not the last word in that question.
Mr. Leffingavell. No, but I was afraid I wasn't going to get in
my first word, Senator. [Laughter.]
Senator Kjng. Well, I am not deciding whether the last word or
the first word is the better.
Mr. Leffingwell. I don't ask anybody to agree with me, but
Senator King (interposing). However, while you are on the sub-
ject, Mr. Wilson and his Secretaries of the Treasury, Mr. McAdoo,
Mr. Houston, Mr. Glass, did not agree with you ?
Mr. Leffingvitell. Oh, I beg your pardon ! Mr. Wilson, Mr. Mc-
Adoo, Mr. Glass, and Mr. Houston all supported that policy.
Senator King. Well, then they didn't carry it out.
Mr. Leffingwell. That was carried out in the second, third, and
fourtji Liberty Bond issues.
S'^natoi King. With respect to surtaxes?
Mr. Leffingwell. A¥ith respect to surtaxes. And the only reason
why we didn't put it into effect in respect to normal taxes was that
we were of the opinion in the Treasury, when we were selling bonds
in the denominations of $50 and $100 and $200, that the attempt to
collect normal taxes on them would cost more money than it would
come to.
Mr. Miller. May I ask a question of Mr. Leffingwell?
Mr. Nehemkis. Certainly, sir.
Mr. Miller. In making such large investments of bank portfolios
in U. S. Government obligations, aside from the high-credit standing
of theee obligations, would you say that the tax exemption or the
tax benefits contained in these various issues was as important as the
marketability, the ready marketability, in large amounts? Was that
the .guiding or the most important thing?
Mr. Leffingwell. Well, frankly, Mr. Miller, I think plainly the
problem of the banker is to invest monies deposited with him safely
and in such a way that he can meet the demands made upon him by
its depositors; in other words, that his first obligation or charge is
the care and safety of the money entrusted to him, and that the safest
thing he can buy, or could buy, is a short-time obligation of the Gov-
ernment of the United States; and I should say, speaking only for
my own opinion, that in answer to your question specifically, a liquid
investment of a first quality is a consideration that impels bankers to
invest their portfolio in U. S. Government securities.
You promised to stop me if I rambled on to a point where I bored
you, Mr. Nehemkis. You know, for 4 days I have sat here and
listened to other people talk. [Laughter.]
124491 — 40— pt. 23 20
12106 CONCENTRATION OF ECONOMIC POWER
Mr. Nehemkis. It is too much of a privilege, Mr. Leffingwell, to
take advantage of your kind offer.
Mr. Leffingwell. I haA^e given a great deal of thought to the ques-
tion which you asked, Mr. Miller, and which you began, Mr. Nehem-
kis, asking. About the question of public policy in relation to tax-
exempt securities, %vhich is no business of mine as a banker — I just
wanted you to know of my philosophy with regard to the subject. I
hcve the greatest deference for the opinion of others who have a
difffci-ent view, and I don't for a minute mean to suggest that I know
all about it. But, unquestionably, our object in buymg securities or
in making loans is to see that the money's that are deposited with us
are safe and liquid. Now, I have an extraordinarily interesting com-
ment on 'that subject that I found in the Federal Reserve Bulletin as
long ago as September 1933. It interested me so much that I thought
I might read you just a sentence.
The growth of large-deposit balances to the credit of individuals and financial
concerns refects the accumulation of idle funds, awaiting investment, and also
explains, in part, the active demand for securities.
Now, there is just one other thought — one more quotation — and
that is taken from the* then Assistant Director of the Division of Ee-
search and Statistics of the Federal Reserve System, Mr. Lauchlin
Currie. He attributed that growth of deposits "to the Government's
borrowing and spending program," and "to the addition to our gold
stock," which has resulted from the flight of money from Europe.
In addition to those two factors which have led to this expan-
sion of deposits, I should add, I think, the devaluation of the dollar
which makes gold worth $35 an ounce instead of $20.67 an ounce.
Obviously, when the gold comes in, more dollars aie printed against
it than were under the old arrangement.
This expansion of deposits which is reflected in our statement,
as you correctly said — well, I have a notion that in the 5 years
since we were put out of the investment banking business, our de-
posits have about doubled. That is not surprising. I don't know
how it runs through the country, but there is nothing unusual about
it. Bank deposits have increased enormously, and they have in-
creased because of these two factore which Mr, Lauchlin Currie,
with authority, mentions, plus the one I mentioned, which is only a
footnote to his. But those things are not in the very nature of the
case things which lead to the revival of confidence and activity in
business if you stop to think about them. We had to go along those
lines. I was in complete agreement with the decision of the Govern-
ment to suspend payment or "go off" gold. I knew of no other solu-
tion for the problem than going off gold in 1933. But while there
was the basis for deposit inflation in this high price of gold in terms
of the dollar, it was in the very nature of the case a thing that did
not give confidence. So the very set of circumstances which created
deposits, that same thing tended to sterilize them. It was both a
necessary thing and a sort of "scaring" thing for business, that we
had to go off gold.
Well, similarly, the Government's borrowing and spending pro-
gram carried with it, of necessity, a sense of apprehension, and in
many phases it of necessity involved competition Avith business; so
that the Government's borrowing and spending, which expanded de-
CONCENTRATION OF ECONOMIC POWER 12107
posits, at the same time carried with it this somewhat deflationary
or sterilizing antidote. You had stimulus and depressant at the
same time operating on the economic system.
Now, those things were two. Third, the incoming gold came over
for fear of the war ; came over for fear of revolution in Europe ; came
over because of Hitler and because of Stalin and because of the dis-
tressed condition of the world. That gold that came in created
dibposits. But at the same time the thing that brought it here
created fear.
So you have both an inflation of deposits and an inflation of the
I)ublic debt. The three major factors that operated to bring those
about, brought with them a brake, a slow-down. So you have the
extraordinary phenomenon of an immense inflation of deposits, im-
mense inflation of public debt, and no inflation at all of prices, and
no recovery of business.
Mr. Nehemkis. We were speaking earlier, Mr, Leffingwell, of the
fact
Mr. Leffingwell (interposing). Must you stop my speech? If I
could have one more sentence or perhaps 2 more minutes.
Mr. Nehemkis. I am sorry, sir; I hadn't intended to be rude.
ADVOCACY BY MR LEFFINGWELL OF POLICY PEKMITTING PRICE INCREASE ^
Mr. Leffingwell. Mr. Chairman, am I keeping you too long?
You weren't a bit rude, Mr. Nehemkis; you have been very generous.
I just wanted to complete that thought. Now, we have on the
whole — and this, Mr. Chairman, I know, from what you said in pub-
lic and from what I have read in the newspapers of the view of the
committee, you will reject, but I know you will permit me a hearing.
We have had many things pressing toward a higher level of costs for
business. We have had a pressure, one with which I sympathize, for
better wages, a pressure for better working conditions, absolutely
necessary and inescapable pressure for relief and a great burden of
taxation, and yet taxation is wholly inadequate to meet the expendi-
tures of the Government.
All these things reflect themselves in the costs of business and, on
the other hand, we have had policies of the Government, well thought
out, intended to prevent inflation, which are directly and effectively
directed toward preventing prices from rising. Now, if business
must meet rising costs, and an extraordinarily heavy burden of taxa-
tion and pay higher wage rates, and provide much better working
conditions, and pay the bills for relief, and at the same time you are
going to keep prices down, then I guarantee to you that business will
go bankrupt, because business cannot forever pay higher taxes, meet
higher costs, and stand the same level of prices.
The Chairjuan, What is the conclusion that you say you know that
the chairman would reject?
Mr. Leffingwell, The conclusion is that we must accept the view
that you must either curtail relief, which you cannot do, and must
reduce the tax burden, which you cannot do, or you must consent to
permit prices to rise — or else you must admit that the profit system
' In this connection see also memorandum subsequently submitted by Mr, LeflBnewell
and entered in the record as "Exhibit No. 2163," appendix, p. 12338.
12108 CONCENTRATION OF ECONOMIC POWER
is dead, the capital system is dead, and we are going to have a man-
aged economy.
We have had a very much managed economy for 22 years. 1 was
guilty of trying to manage it somewhat when I was in the Treasury.
We had a managed deflation in 1937 and '38, intended to prevent
inflation, but the effect was drastic deflation.
The Chairman. Of cour3e, Mr. Leffingwell, some Members of
Congress, particularly those who come from agricultural States,
have been vei-y anxious to bring about a certain rise in prices because
they felt that would be the only w^ay in which the farmer and the
rancher could operate at anything like a profit. I think that the
criticism of price rises recently has not been directed toward an
adequate compensation for products, whatever they may be, but
toward an undue manipulation of prices to make them— to raise
them out of proportion to what the costs justified.
Mr. Leffingwell. Well, Senator
The Chairman (interposing). I didn't Avant you, Mr. Leffing^vell,
to place any rejection of any policy in my mouth, because I am not
conscious of having rejected anything like that.
Mr. Leffingwell. I am perfectly delighted to hear it; it is music
to my ears. I was so fearful that you had espoused the cause of
price controls.
The Chairman. I find a lot of people around the country, and
particularly in some of the financial journals, have assumed my con-
clusions for me. I don't recognize myself frequently in what I
read about the chairman of the committee.
Mr. Leffingwell. Then if I have performed no other service
I have performed a great one in getting you to make that state-
ment, Senator. I am delighted.
Dr. LuBix. Mr. Chairman, may I ask a question?
The Chairman. Certainly.
Dr. LuBiN. It doesn't have a definite bearing upon what Mr.
Nehemkis asked, but bearing upon what Mr. Leffingwell said in
regard to cost. Is it your general opinion that actual labor costs
in terms of unit costs of production are higher today than they
were, let us say, oh, in 1936 or 1928 or 1929 ?
Mr. Leffingwell. I am afraid I couldn't answer that in terms
of unit costs of production. As I look at the experience of busi-
ness in the country, it appears to me that the ratio, that the ratio
of profit is steadily being squeezed in between those two forces. Is
that not so, sir?
Dr. LuBiN. The reason I asked it was that I think pretty gener-
ally most of us don't distinguish between changing wage rates and
changing labor costs. Such evidence as this committee has had
from various people who are in the operating end of industry gives
pretty definite — leads' to the belief pretty definitely that modern
technology, greater efficiency and operation, better distribution
methods, and so forth, have really cut costs rather markedly, and
that the increased wages have more than been ofi'set by the in-
creased productivity of labor during the last decade or two.
Mr. Leffingwell. I should undoubtedly accept that. I think
that the really distressing problem is that while Ave haA'e been get-
ting better wages for those fortunate people who are employed, the
CONCENTBATION OF ECONOMIC POWER 12109
management of our economy has been failing conspicuously for ten
years to get a better pay roll in the pockets of all possible employees.
That is the most distressing phenomenon of our managed money
and our planned economy, and I think that it is due to th« fact that
the wage bill in terms per man is very high and the tax bill is very
high and the burden of indebtedness is very, very high.
The Chairman. But is the wage bill high in terms of output?
Now, for example, take the automobile industry, a modern auto-
mobile is produced at a much lower wage cost in terms of the actual
product than it was 15 or 20 years ago, and that is what has enabled
the motor industry to reduce prices to advantage.
Mr. Leffingwell. Of course, that would be an absolutely con-
trolling factor if one were to assume that tliis was a moribund or
obsolete or senescent economy. To my mind it is a juvenile economy.
I realize that there are those who think that the frontiers have met
and that we are aged and exhausted, and that we have no future.
To my mind, this is just an infant sort of a country and I don't
know who is going to iiiAent the next thing, but I know that the
energies, the imagination, of the American people have risen to every
opportunity that has been presented them, and I believe that the
oportunities of the future are far greater that the oportunities of
the present.
The Chairman. You are expressing a point of view that the chair-
man has frequently expi'essed.
Mr. Henderson. Mr. Leffingwell, in the first days of the hearings
of this committee, my distinguished colleague here, Senator King,
asked me whether I thought that we had stopped growing, and 1
responded, in the vernacular, bv saying, "There's life in the old gal
yet."
Mr. Leffingwell. Tliat's splendid, only I don't even think she is
an old gal. [Laughter.]
Senator King. Anybody that w.-mld despair for this Government
in vie^y of the conditions and confusion in all parts of the Avorld, it
seems to me, is a pessimist of the first water. This Nation has got
to lead other nations by its example and I agree entirely with Mr.
Leffingwell, the future of this country is better than it has been in
the past.
Mr. Leffingwell. I really think you ought to give 130,000,000
people a little more ro])e. t think, going back to the time when I
had official burdens, however insignificant, we got into a phase
of trying to manage all of us. It was necessary, we had a great big
war on our hands, and I can be forgi\'en for thinking we did a
sweP job. But then we sort of relaxed, and I think we relaxed most
exaggeratedly, as you all do. That Avent on for 10 years 'and we
had another major crisis, and we had to manage things again, we had
to do "most drastic things. I have said we had to do that. I cannot
agree with those wliom I greatly respect, who criticize that decision:
I think it was inevitable.
But I don't think we ought to go too far. I think we want a
system of free enterprise, and I believe in those old-fashioned Ameri-
cans being let loose on the plains and the rivers and the harbors, and
the hilltops, and I think they will work out their destiny. I think
they will do a superb job all over again, and I really believe the
12110 CONCEKXRATTON OF ECONOMIC POWER
relief of the world abroad, the future of mankind, depends on their
havin": oportunity to do that.
Senator Kino. Less regimentation, less discouragement of invest-
ment so many of these deposits in the banks drawing only small rates
of interest, such as banks can pay, would be beneficial so it could be
utilized in the expansion of business and in the creation of new
business activities.
Mr. Henderson. Mr. Chairman, this committee is contemplating
what we have termed a free-for-all public discussion. I think we have
found candidate No. 1 for that.
Mr. Leffingwell. Thank you very much; I would be grateful for
the opportunity.
The Chairman. Of course, I think Mr. Leffingwell's comments
should not be permitted to pass without just another little addition.
There is the implication in what you say that the Government has
undertaken an undue degree of management. You say, of course,
that government has done this in the past. It did it when you were
a part of Government because it had to do so, and there is a tendency
now to say that the Government has done too much of this particular
thing, but it should never be overlooked that during the past 6 years
there has been practically no alternative proposal offered, except iipon
the part of certain unreconstructed Democrats like Senator King
here.
Now, Senator King from the outset was opposed to the N. R. A.
Take that as an example.
Senator King. The Supreme Court said I was right — unanimously.
The Chairman. I was not a member of the Senate at the time, so
I can speak as an observer.
Senator King, And I think you agreed with me.
The Chairman. I am speaking now as an observer. The signifi-
cant point is that before any inferences may be drawn out of any
policy it must be remembered that that bill was adopted by a prac-
tically unanimous vote, and that there was no division, no political
division, with respect to it. So today when I hear people talking
about Government regimentation, and too much spending, for ex-
ample, as in the case of the W. P. A., I can't forget that when the last
appropriation bill, for example, for W. P. A. was passed there wasn't
a single vote cast against it in the Senate of the United States, for
all the criticisms, and there were only 23 votes cast against it in the
House. So it was a program that was adopted because there was no
alternative program.
In measuring our conclusions we must bear facts like that in mind,
it seems to me.
Senator King. May I make one addendum ? When Mr. Leffingwell
was in the Government we had a great war on. We called for more
than 2,000,000 men, we had to send ships abroad, we called for large
expenditures, we contracted a debt up to twenty-six billions of dol-
lars in the prosecution of that very great war. So in the prosecu-
tion of war, as a rule, economic as well as political laws are silent.
We bow to the necessity and the preservation and protection of our
country, and if we get into another war undoubtedly there will be
a system of regimentation which will be very obnoxious, but will be
essential to properly prosecute the war.
CONCENTRATION OF ECONOMIC POWER 12111
TAX-EXEMPT INCOME TO J. P. MORGAN & CO. AND ITS PARTNERS
Mr. Nehemkis. Mr. Chairman, I hate to return to such mundane
matters as Government securities and their attractiveness to banks,
but I suppose one must.
You say, Mr. Leffingwell, that tax exemption makes the kind of
investment you have been describing to us especially attractive to
banks, and I think I commented at the time that about, well, over
85 percent of the earning assets of J. P. Morgan & Co., as of Septem-
ber 30, 1939, were invested in such Government securities, and I
think you have already indicated that the same thing is true to a
greater or less degree on the part of banks throughout the country?
Senator King. That is true, is it not, you indicated that you
thought that?
Mr. Leftingwell. I accept the figures as to J. P. Morgan & Co.,
but
Mr. Whitney. Eighty percent of our assets would be $520,000,000,
and our total tax exempts are $385,000,000, because unfortunately
at that time we had $200,000,000 of cash which we were not able to
invest in anything.
Senator King. The point I was making related to the question of
Mr. Nehemkis, that the banks, generally, throughout the United
States have a very large amount of their deposits held in Government
securities.
Mr. Leftingwell. I think what I was trying to say (before I
forgot myself and entered into this larger field) in answer to Mr.
Miller, is, that after all, the object of the banks is to get a safe
investment for their money and, of course, the safest investment for
this money is Government obligations. And the pertinence of my
general remarks is that there aren't other good loans being offered
to the banks in sufficient volume, and I was attempting to show why
there were not other good loans being offered to the banks in suffi-
cient volume.
As far as tax exemption is concerned, under the same conditions
which exist today if the Government were to be selling other taxable
securities, I should not expect to see the banks' portfolios change.
Mr. Nehemkis. This income that is tax exempt to incorporated
banks is not exempt to the stockholders of such bands, is that correct ?
Mr. Leftingwell. The dividends are not exempt, but of course the
income
Mr. Nehemkis (interposing). I meant dividends. However, Mr.
Leffingwell, whatever is tax-exempt income to the firm of J. P. Mor-
gan & Co. is tax-exempt income to the partners personally, is that
not true?
Mr. Leffingwell. That is correct.
Mr. Nehemkis. Are not all of the expenses of J. P. Morgan & Co,
charged against taxable income, pursuant to section 25 (a) (5) of
the Revenue Act ?
Mr. Leffingwell. I suppose expenses are a deduction from total
income.
Mr. Nehemkis. So there is in most years, Mr. Leffingwell, little if
any income taxable to the partners of J. P. Morgan & Co. ?
12112 (X)NCKNTRATIOX OF KCOXO.MIC POWEli
Mr. Leffingwkll. Not most years. When years are as bad as some
have been tliere isn't any taxable income, but in many years our
taxable income has been very great and our taxes liave been very
great.
Mr. Nehemkis. Mr. Leffingwell, is not substantially the entire in-
come of the part]iers of the firm exempt from Federal income tax?
Mr. Lefi'ingwell. It depends entirely upon the year, I think.
Mr. Nehemkis. In 1938 it was entirely exempt, was it not, sir?
Mr. Leffingwell. I don't remember.
Mr. Nehemkis. Would you accept my statement, subject to cor-
rection ?
Mr. Leffingwell. Yes.
Mr. Nehemkis. So in 1938 the partners f)f J. P. Morgan & Co.
paid no income taxes on their earnings of nearly $4,000,000 from
the firm?
Mr. Leffingwell. 1 don't know Avhclher that is (rue or not. I
don't know whether the earnings were $4,000,000. 1 kn(nv that if
they paid no taxes it was because there was no taxable income.
Mr. Nehemkis. Do you have any comment on that, Mr. Whitne}'?
Mr. Whitney. On this last?
Mr. Nehemkis. Yes; do you want to correct it?
Wr. Whi'inet. No. I have a lot on your earlier things. You
must remember we have tO' make earnings before taxes are due, and,
of course, our holdings of governments are not wliolly tax-exempt.
In running a bank, as Mr. Leffingwell indicated, you have to run
your portfolio on what the market has to ofter. The figures you
gave of 85 percent was after the deduction of cash. You could
have made that percentage higher if you had taken out real estate
and Oilier things, like cash, that have no income. Our total assets
tell a different story. On that I can't sj)eak. I would have to look
it up. I don't like to guess, but I am sure all our holdings of gov-
ernments arc far from being tax-exempt, except insofar as they are
all tax-exempt on noi-mal income. As to the nuuiicipals, yes, that
would be true — $05,000,000. But I am not compete] it to talk about
taxes, I only know we have to pay them.
Mr. Nehemkis. As I said earlier, 1 deeply regret we can't have
the pleasure of having Mr. Lelfingwell's discussion on that very vital
problem of the role and function of bank deposits, and I hope that
Mr. Leffingwell wilh^be able to do that with us at some later date.
I have 110' further questions, sir.
The (-HAIRMAN. Are there any more ([uestions to be addressed to
Mr. Leffingwell?
Thank you very much, sir.
Any other witness this afternoon?
Mr. Nehemkis. No, sir.
The Chatkman. What is your program now?
Mr. Nehemkis. As I understand, we meet again with the com-
mittee some time after the new year, the date to be fixed by the
committee, is that correct?
Senator Kin(!. I suggest we leave 4t to be fixed by the committee
and Mr. Henderson, and then we can give ample -notice to all
witnesses. - -
CONCENTRATION OF ECONOMIC POWER 12113
The Chairman. Thank you very much, Mr. Whitney.
Mr. Whitney. We are discharged?
The Chairman. You are dismissed for the present. I will wish
you a Merry Christmas now.
The committee will stand in recess then, so far as the investment
banking hearing is concerned, until the call of the Chair.
Tomorrow, in this room, the hearing upon certain phases of the
insurance problem, whicli has been going on in Room 357, will be
i-esumed. The Chair wishes to urge all members of the committee
who may possibly do so to attend this insurance study.
The committee will now stand in recess.
(Whereupon, at 4:05 p. m., an adjourmnent was taken subject to
call of the chairman.)
APPENDIX
Exhibit No. 165&-1
[From files of Federal Communications Commission]
In view of any possible attempt of the opposition to the National Bell
Telephone Company or others to buy up a majority interest in said Company,
and of the danger to the interests of the minority if this should be accomplished
the undersigned hereby agree in respect to the stock in said National Bell
Telephone Co. owned by them and to the amount placed opposite their names
as follows : —
They will not sell any part of said stock except to the subscribers of this
paper unless all of said subscribers agree to sell all of said subscribed stock
and have the opportunity to do so, at a price satisfactory to each : they will
not agree to give proxies to vote upon said stock to any other than some of
the said subscribers.
This agreement is to remain in force until April 1st, 1880, but it may be
terminated at any time with the unanimous consent of the subscribers, but not
without. It is not to be binding unless at least 3,700 shares are subscribed
Boston, April 2nd.
W. H. Forbes, 300 shares; J. Malcolm Forbes, 100 shares; H. L.
Higginson, 635 shares; Y. S. Gardner, Jr., 75 shares; C. E.
Perkins, per W. H. F., 150 shares ; Thomas Sanders, 500 shares ;
Thomas A. Watson, 300 shares; George L. Bradley, 525 shares;
W. G. Saltonstall, 25 shares; Arthur W. Slake, 100 shares; C. S.
Bradley, 218 shares; Francis Blake, Jr., 325 shares; R. S. Fay,
100 shares; A. Lochranets, 100 shares; J. N. A. Griswold, by
W. H. Forbes, 100 shares; H. S. Russell, by W. H. Forbes,
150 shares ; C. C. Jackson, 50 shares ; C. Williams, Jr., 50 shares.
Boston, Dec. 15th, 1879.
We the undersigned, mutually agree to release each other from all the obli-
gations of the above written agreement.
W. H. Forbes, H. S. Russell, by W. H. Forbes, J. N. A. Griswold,
by W. H. Forbes. C. E. Perkins, by W. H. Forbes, Geo. L
Bradley, T. A. Watson, C. Williams, Jr., Thomas Sanders,
W. G. Saltonstall, H. L. Higginson, R. S. Fay, A. Lochranets,
Francis Blake, Jr., Arthur W. Slake. J. Malcolm Forbes, C. C.
Jackson, John L. Gardner, Jr., C. S. Bradley.
[Presidents File No. 1879 Apl 2 Agreement Not to sell. Release Room 1124 — 195 Bwy.
N Y C. A T & T. Co. Inv. C. anyst.j
12115
12116
CONCRNTRATTON OF KCONOMK' POWKR
Exhibit No. 1659-2
[From files of Fedprnl Communications Commission]
Amickfcan Ti'XEphone and Tfxecrai'h Company and Tekdecessors
ScHEiJULE la. — List of Directors of Predecessors Prior to 1900 With Tlcejr Terms
of Office Including Directorships Held hy 'I'hem in American Telephone and
Telegraph Company
Name of Director
(a)
Bell, A. O
Hubbard, C. E
Hubbard, O. G
Sanders, T
Watson, T. A '.
Bradley, C. S-
Cochrane, A
Silsbee, G. Z _
Saltonstall, W. a...
Goodspeed, J. II ..-
Sturgis, J
Bradley, G. L
Bailey. T. B..
Forbes, W.H
Blake, F., Jr
Fay, R. S
Emerson, C
Driver, W. R
Whitcomb, C. M, .
Devonshire, R. W.
Bowditch, C.P
Minturn, R. B
Hudson, J. E
Clapp, C.
Phillips, G. L
Madden, O. E
Vail, T.N...
1-28-89
5-20-(J3
Stone. P. S
Perkins, C. R
French, C. J
Stockton, H
Blake, S
Howe, H. S.
(A) Jodirates director was in and out during periodl
Bell Tel-
ephone
Company
(Associa-
tion)
(b)
New Eng-
land Tel-
ephone
Company
(0
8-1-77
7-2-8.'-.
8-1-77
7-2-85
8-1-77
7-2-85
8-1-77
7-2-S5
8-1-77
7-2-85
Bell Tel-
ephone
Company
(Corpo-
ration)
(d)
2-2-78
5-20-03
2-2-78
1-30-82
2-2-78
5-26-03
2-2-78
1-30-82
2-2-78
1-30-82
2-2-78
l-2»-89
2-2-78
1-30-82
2-2-78
2-2-85
f 1-2.5-97
\ 5-26-03
f 1-30-82
t 9-19-87
f 1-30-82
\ l-25;-8'l
1-30-82
5-26-03
1-16-91
1-28-95
1-27-90
5-26-03
1-30-82
10-1-00
1-28-84
26-91
{1:
/ 9-19-87
1 1-27-90
7-20-78
.'i-26-03
7-20-78
6-21-80
7-20-78
5-26-03
7-20-78
1-30-82
12-31-78
6-21-80
1-30-82
5-26-03
1-30-82
10-8-84
7-20-78
12-31-78
f 7-20-78
\12-31-78
7-20-78
1-30-82
7-20-78
12-31-78
12-31-78
9-19-87
(12-31-78
I 1-30-82 I
National
Bell Tel-
ephone
Company
(e)
3-10-79
5-26-03
3-10-79
4-12-82
3-10-79
5-26-03
3-10-79
4-12-82
3-10-79
3-8-86
3-10-79
4-12-82
4-7-79
3-10-90
6-21-80
9-13-S2
6-21-80
5-26-03
9-10-,S9
5-20-03
f 10-8-84
t 5-26-03
1-30-82
9-2-00
9-13-82
9-10-89
9-9-91
.'V-26-03
9-19-87
V»-10-90
3-10-79
4-12-82
3-10-79
4-7-79
3-10-79
9-19-87
3-10-79
4-12-82
.3-10-79
3-12-82
4-12-82
5-26-03
3-10-90
3-11-95
4-12-82
5-26-03
.5-12-82
10-1-00
4-12-82
3-10-84
4-12-82
3-8-86
4-12-82
3-9-91
3-10-84
5-9-91
3-8-86
.5-20-03
9-19-87
3-10-90
American
Bell
Telephone
Company
(0
9-9-U
12-10-21
3-31-80
12-16-21
5-14-80
12-10-97
5-14-80
8-7-11
5-14-80
3-11-85
.5-14-80
3-28-1 1
3-31-80
.5-1 4-80
3-31-80
11-29-86
3-31-80
3-26-06
3-31-SO
3-2'.)-21 (A)
3-31-80
10-11-97
3-31-80
3-28-11
3-31 -SO
3-28-82
3-31-SO
,5- 14-80
3-31-80
.5-14-80
3-31-80
12 16-21 (A)
5-14-80
3-20-07 (A)
3-29-81
7-13-87
1 1-29-86
lO-l-OO
3-28-82
C>-20-88
3-2,5-02
4-16-20
3-11-85
5-14-07
7-13-87
5-14-90
3-26-89
5-8-89
5-iS-89
12-16-21
American
Telephone
and Tele-
graph
Company
(g)
5-9-00
8-24-28
5-9-00
8-7-1 1
1-6-93
4-10-19
5-9-00
3-26-06
.5-9-00
3-30-15 (A>
9-2-85
9-23-97 (A)
5-9-00
1-19-13
5-8-90
5-7-92
11-30-85
3-20-07 (A)
3-<>-86
lO-I-OO
3-9-86
5-24-88
»-14-S5
5-7-92
3-2.5-02
4-16-20
5-9-00
5-14-07
9-19-87
5-8-90
12-24-96
3-2-31
CONCENTRATION OF ECONOMIC POWER 12117
Schedule la. — Li^f of Directors of rrcdcccssorfi Prior lo lUOO With Their Terms
of Office. IncludirKj Directorships Held by Thon in American Telephone and
'J'elcyraph Compavy — Continued
Name of l^ircclor
(a)
Bell Tel-
ephone
Company
(A«socia-
tion)
(b)
New Eng-
land Tel-
ephone
Company
(c)
Bell Tel-
ephone
Company
(Corpo-
ration)
(d)
National
Bell Tel-
ephone
Companp
(e)
American
Bell
Telephone
Company
(f)
American
Telephone
and Tele-
graph
Company
(g)
/ 3-10-90
\ 5-26-03
/ 3-9-91
1 5-26-03
3-1) -95
,5-26-03
Ware, C. P..
f t-28-95
1 5-2G-03
9-2-on
5-26-03
Hutchinson, W. S :
Amory, C. W
f 3-26-95
1 3-28-11
/ 3-26-95
1 8-21-19
9-23-97
Williams, M .
.5-9-00
Milne, 0, P .-
f 3-8-97
1 5-26-03
3-26-18
/ 3^30-97'
\ 3-28-11
f 1-19-98
1 2-19-04
Coolidge, T. .r., Tr
3-25-19
,5-9-00
Forhos, J. M
4-14-12
5-9-00
Exhibit No. 1659-3
[From files of Federal Communieafions Commission]
American Bell Telephone Company
ScHEPUi.E lb. — Officers and Members of E-reeutive Committee Years TS85 to 1900,
Inclusive
Name
(a)
E.xecu-
tive
Com-
mittee
(b)
Presi-
dent
(c)
Vice
Presi-
dent
(U)
Tre?5-
urer
(e)
Clerk
(f;
Auditing
Com-
mittee'
(g)
Hubbard, C. E
/ 3-31-85
\2G-28-21
Driver, W. 11
f 3-3 I -85
I 3-31-14
f 4-3-85
1 3-29-98
/ 4-3-85
1 3-30-87
1 3-29-92
3-30-97
4-3-85
1 3-31-86
3-28-93
3-27-94
3-20-95
I 4-9-07
4-3-85
3-29-88
Forbes. W. H
Bowditch, C. P
/ 4-3-85
\ 3-30-87
/ 3-30-87
\ 3-29-88
Cochrane, A
Saltonstall, W. O
f 4-3-85
1 3-30-87
Clapp, C ..
f 3-31-86
) 3-29-88
/ 3-30-87
I 10-1-00
/ 3-29-88
1 4-1-89
Hudsdn, J. E.
4-1-89
3-28-01
3-29-88
4-1-89
3-30-87
4-1-89
Stockton, H
Blake, F.. , _..
r 3-29-88
) 3-28-01
Howe, n. S
f 3-30-97
I 4-3-11
f 3-29-98
1 4-9-07
::::::::.
Amoiy, C. W._
' From April 3, 1885 to March 30, 1887, known as the Standing Committee for Auditing the Accounts,
and from March 28, 1899 to March 28, 1901, the Committee on Treasurer's Accounts.
' Pen.Moned between 1914 and 1917.
12118
CONCENTRATION OF ECONOMIC POWER
Exhibit No. 1659-4
[From flies of Federal Communications Commission]
Amebican Telephone and Telegeaph Company and Peedecessoe Companies
Schedule 2. — Per Cent of Equity Ownership hy Directors, Other Officers and
Their Family Relations as of Selected Dates From July 9, 1877 to Septemher
16, 1935 ^
BELL TELEPHONE COMPANY (ASSOCIATION)
Date
(a)
July 9, 1877..
July 20, 1878.
Total out-
standing
shares
(b)
} 5, 000
Per Cent of Outstanding Shares Held By
Directors '
(c)
Other
Officers
(d)
FamilyRe-
lations >
(e)
Directors,
Other
Officers
and Family
Relations
(0
100.00
NEW ENGLAND TELEPHONE COMPANY
February 12, 1878 -
2,000
2,000
100. 00
28.20
100 00
March 10, 1879
8.05
5.40
41.65
BELL TELEPHONE COMPANY (CORPORATION)
July 20, 1878 -
March 10, 1879
4,600
4,500
75.24
54.25
1.76
1.11
19.82
19.66
9e.82
75.02
NATIONAL BELL TELEPHONE COMPANY
March 10, 1879
7,250
55.04
0.10
21.26
76.40
AMERICAN BELL TELEPHONE COMPANY
December 8, 1880
March 28, 1885...
March 31, 1890...
March 30, 1895...
March 31, 1900...
73,500
96,021
112, 971
205,000
'258,863
40.13
12.91
5.13
3.95
1.37
3.83
.02
12.44
8.53
6.31
6.45
3.67
56.40
21.46
11.44
10.40
5.04
AMERICAN TELEPHONE AND TELEGRAPH COMPANY
March 17, 1905
March 31, 1910
March 31, 1915
March 19, 19^0
March 17, 1925
March 14, 1930
September 16, 1935.
1,315,514
1.88
2, 592, 894
2.31
3, 579, 779
1.30
4,420,615
.80
8, 915, 329
.57
13,909,697
.73
18, 662, 276
.06
' Information as of March 31, 1900 and prior dates was compiled from the stock records of the companies.
Data on per cent of outstanding shares held by directors of American Telephone and Telegraph Company,
were obtained from compilations made by the company.
> From July 9, 1877 to March 31, 1900, Includes percentage of shares held by directors as trustees or agents.
From March 17, 1905 to September 16, 1985, the percentages are for shares owned by directors. However,
if 271,104 shares Of->American Telephone and Telegraph Company common stock, held by American Bell
Telephone Company and voted by Frederick P. Fish, Piesident, were Included, the percentage for March
17, 1905 would be 18.65.
* The per cent of outstanding shares held by family relations of directors and otter officers of the com
panies prior to 19C0 is computed on the basis of holdings of individuals with the same surname.
CONCENTRATION OF ECONOMIC POWER
12119
Exhibit No. 1659-5
No. S-26-E
Inv. CA
Dept. Treasury
File 012.11
Table No. 1. — Stock Outstanding and Numier of Stockholders
Shares Out-
standing '
Number of
Stock-
holders
Averaee Shares Per
Stockholder i
Nearest Available Record Date to Annual
Meeting
Including
A. & P. Co.,
B. T. S. Co.,
and Trus-
tees for
Employees
Excluding
A. & P. Co.,
B. T. S. Co.,
and Trus-
tees for
Employees
1926 - -
9, 234, 772
8, 915, 329
7, 472, 728
7, 088, 913
5,601,252
4, 435, 246
4, 420, 615
4,419,495
4, 358, 965
3, 958, 633
3, 848, 239
3, 579, 779
3, 446, 377
3, 440, 960
3, 243, 617
2, 682, 422
2, 592, 894
1, 909, 205
1, 525, 280
1,315,514
1,315,514
1,315.514
1, 270, 689
1,097,164
877, 480
621, 271
258, 863
258,863
258,863
236,500
215,000
205,000
200,000
174, 995
150,000
125,000
112, 971
100, 000
98, 521
98, 021
98,021
96, 021
96,021
.59.500
59,500
59,500
356, 525
349, 191
299. 498
256, 041
197, 825
146, 490
124, 172
113,860
88, 851
73, 600
66, 938
61,512
56, 946
52, 080
49, 064
40,686
37, 594
28,545
24,189
18.549
17,542
17,055
16, 121
11, 887
9,609
7,858
6,961
6,863
6,886
6,474
5.778
5,572
5,247
4,542
3,945
3,501
2,734
2,066
1.770
1,818
1,826
1,607
1,532
973
724
540
25.2
25.5
24.9
27.7
28.3
30.2
35.5
38.8
49.1
53.8
57.5
58.2
60.5
66.2
66.2
66.2
68.8
66.9
63.1
70.9
75.0
77.1
78.8
92.3
91.3
79.1
37.2
37.7
37.6
36.5
37.2
36.8
38.1
38.5
38.0
35.7
41.3
48.4
55.7
53.9
63.7
59.8
62.7
61.2
82.2
110.2
2.5.1
1925 .. -- -. -- -- --
25.5
1924
24.8
1923
27.6
1922
27.9
1921 .
29.7
1920 -
34.4
1919 -
38.5
1918 . -
47.9
1917
52.1
1916
55.6
1915 -.
66.2
1914
60.2
1913
63.5
1912
66.1
19U
62.0
1910
66.8
1909 .. - .. --
66.9
1908
63.1
1907
70.9
1906
75.0
1905 . ..
77.1
1904
78.8
1903..
92.3
1902.
91.3
1901...
79.1
1900. .. ..
37.2
1899
37.7
1898
37.' 6
1897
36.5
1896 ..
37.2
1895
36.8
38.1
1893
38.5
38.0
1891
35.7
41.3
1889
48.4
1888
55.7
1887..
53.9
83.7
1885
59.8
62.7
1883
61.2
82.2
iS^l
110.2
' Excluding shares held in name of A. B. T. Co. and treasury stock.
12120
('f)\('p:NTRA'ri()X OF !•:'•( )X()Mir rowi:i{
No. S-26-F
Inv. CA
D«pt. Treasury
File 012.11
Table No. 2. — Finmuidl Interest of T,arije Stockholder r,'^
IToUlors of !000 Shares and Over 20 Lartrcst Stockholders
Nearest Available lU'cord Date 1" ADiiiial
Moctinj;
Nunihor
.Shares
Held
% of Stock
Outstand-
ing
Shares
Held
% Of Stock
Outstand-
ing
1926 . --
425
43'.»
367
3K5
342
203
327
385
416
391
389
373
368
371
377
296
304
198
163
155
165
180
176
166
108
82
25
10
23
19
18
14
16
11
10
7
11
10
n
12
11
13
9
8
8
11
1,113.920
1,136.816
902, 206
980, 423
769. (iOl
617.419
749, 738
906, 407
978, 161
877, 48.S
906, 730
877, 036
904. 223
958, 757
981,522
698, .llil
740, 102
577. 056
4.58, 9r.8
403, 465
398, 580
411,610
402, 793
37,5,312
284, 624
167, 649
40, 100
28,313
39. 62S
36,516
45. 360
2,j. 87 1
28.916
22, 857
19,277
11,930
17,655
18,503
23. 579
22. 660
19,918
23, 371
23, 650
14.824
16.837
27, 383
12.1
12.8
12.1
J 3. 8
13.7
1.3.9
17.0
20.5
22.4
22.2
23.6
24.5
26.2
27.9
.30.3
26.
28.5
30.2
30.0
30 7
30.3
31.3
31.7
34.2
32.4
27.0
15.5
10.9
l,'-..3
15.4
2i.l
12.6
14.5
13.1
12.9
9.5
15.6
IS. 5
23.9
23.1
20.3
24.3
24.6
24.9
28.3
46. a
400,819
398, 770
306, 779
325. 176
231.640
173,6.35
193,021
202, 039
216,884
221,421
2:«,631
224. 765
234, 393
233.2:il
258, 000
209,846
221,663
258, 720
216, 209
192, 479
149.5.55
146,367
143,398
140, 420
149, 766
86, .541
35.023
31,810
38. 628
37, 462
47, 120
31,123
32 476
2<».511
26.853
21,730
23,610
26. 380
31.365
28, 651
27, 263
27, 9.53
31.841
21.648
24. 114
33, 190
4.3
1925 -. - -
■1924
1923 . -
4.5
4.1
4.6
1922 . .- -- -
4.1
1921 _ ---
1920 -- --
1919___. .---
1918 _- - --
1917
1916 -- - -
3.9
4.4
4.6
5.0
5.6
0.1
1915 - .- --
6.3
1514 ... _
0.8
1913
1912 --
6.8
8.0
1911
1910 --
7.8
8.e
1909 . — -.
13.6
1908.. ._
14.2
1907
1906 -. --- -
14.6
11.4
1905 .— - -- -. -
11.1
1904
11.3
1903
1902 ---
12.8
17.1
1901 -. I.
13.9
13. 5
1899 . - -.
12.3
14.9
1897
15.8
21.9
1895
1.5.2
16.2
1893 --
16.9
1892
1891
1890... - ._- :
1889 .. .
17.9
17.4
20.9
26.4
31.8
1887 . .
20.2
27.8
1885
?0, 1
33. 2
1883 -
,36. 4
40. 5
1881
55.8
■ Excludinp A. &. P. Co., H. T. S. Co., and trustees for employees. Stock outstaudins includes shares
carried 'n these names hut excludes holding's of A. B. T. Co. and treasury stock.
CONCENTRATION OF ECONOMIC TOWER
12121
No. S-2G-II
Iiiv. CA
Dept. Tie;i.sury
File 012.11
Tabll No. 4. — Financial Interest of the Directors
Nearest Available Record Tiatc to
Annual .Mci'tiiii);
1926
1925
1924
1923
1972
1921.
1920
1919
1918
1917.
1916.
1915
1914
1913.
1912.
1911.
1910
1909.
1908.
1907.
1906.
1905.
1904
1903.
1902.
1901
1900
1899.
1898
1897.
1896.
1895.
1894.
1893.
1892.
1891
1890
1889.
1888.
1887.
1886.
1885.
1884
1883.
1882.
1881.
1880.
Board of Directors
Shares
Held
50, 892
50, 894
77, 205
(17, 132
43, 409
27, 749
38, 036
43,471
50, 507
47,575
46, 713
46,451
45, 912
55, 677
58,571
55, 829
59, 7S3
25,511
31,796
24, o97
29, 193
^4, 809
24,553
32, 456
12,866
6,025
2, 198
2,445
2,978
4, 542
0, 007
5,955
6,818
6,073
5,530
5,110
5,615
7,398
7, 376
7,556
8,168
8,089
8! 158
7,104
8,041
13,181
9,144
%of
Stock
Outstand-
ing!
0.6
.6
1.0
.9
.8
.0
.9
1.0
1.2
1.2
1.2
1.3
1.3
1.6
1.8
2.1
2.3
1.3
2.1
1.9
2 2
l!9
1.9
3.0
1.5
1.0
.9
.9
1.2
1.9
2.8
2.9
3.4
3.5
3.7
4.1
5.0
7.4
7.5
7.7
8.3
8.4
8.5
11.9
13.5
22.2
Present Board of Directors
Nuniber
Holding
Stock
1926-1912
Shares Helil
Number
50, 892
50, 894
77, 157
65, 992
42, 32;i
2V,980
27, ,580
26, 761
27,031
26, 654
26, 968
26, 505
25, 286
26, 147
23,617
%of
Holdings
in 1926
100.0
100.0
150.6
128.7
82.2
54.0
53.2
51.6
52.1
51.4
52.0
61.2
48.7
50.4
45.4
' Excluding shares held in name of A. B. T. Co. and treasury stock.
124101 — 40 — pt. 2."? 21
12122
CON(;KNTltATION (JF ECONOMIC I'OWEII
No. S-2C>-J
Inv. CA
Dept. Q'roasury
File 012.11
Table No.
6. — Degree of Control by Large Stockholders'^
Nearest Availal)!e
Estimated Mini-
mum Num'-jcrof
Stockholders
Owning Majori-
ty of:
Shares Held By
Holders of 1000
Shares and Over
Shares Held By
20 Largest Stock-
holders
Shares Held By
Board of Direc-
tors
Record Date to
Auuual Meeting
Shares
Out-
standing '
Shares
Voted at
Annual
Meet-
ings '
%of
Majority
Out-
itanding '
%of
Majority
Voted at
Annual
Meet-
ings'
%of
Majority
Out-
standing 2
%of
Majority
Voted at
Annual
Meet-
ings •
%of
Majority
Out-
standing I
Majority
Voted at
Annual
Meet-
ings'
1926
23,000
21,000
12,000
13,000
11,000
8,000
6,800
5,700
4,500
3,600
3,400
3,300
2, 750
2,750
1,150
1,100
1,500
775
775
775
675
675
025
500
400
400
400
400
400
400
225
225
225
225
200
200
200
200
110
110
110
110
110
75
50
19
8,500
7,500
3,000
3,250
1, 5(10
2,000
1,750
1,750
1,700
1,500
1,500
900
900
8o0
375
350
325
225
240
250
300
220
225
230
110
108
24.1
25,5
24.1
27.6
27.4
27.9
33.9
41.0
44.8
44.3
47. 1
40.0
52. 5
55.7
60.5
52.1
57. 1
00.4
00.2
G1.4
60.6
62.6
6.3.2
08. 4
64.8
54.0
31.0
21.9
30.6
30.9
42.2
2.S. 2
28.9
26.1
i.5.7
19.
30.3
37.0
47.9
46.2
40.6
48.7
49.3
49.8
56.6
92.0
37.1
39.0
37.9
43.6
43.3
45.2
52.6
67.5
70.3
68. ,2
72.9
79.8
86.1
«7.9
101.7
86.9
94.8
83.7
78.0
78.5
72.4
77.2
75.2
77.4
97.0
91.9
8.7
9.0
8.2
9.2
8.3
7.8
8.7
0.1
9.9
11.2
12.1
12.5
13.6
13.5
15.9
15.6
17.1
27.2
28.4
29.2
22.8
22.2
22.6
25.6
34.2
27.8
27.0
24.6
29.8
31.8
43.8
30.4
32.5
33.8
35.8
34.6
41.8
52.8
63.8
53. 6
55.8
58.4
66.2
72.6
81.0
111.6
13.4
13.7
12.9
14.5
13.0
12.7
13.5
15.0
15.6
16.7
18.8
20.4
22.3
21.4
26.7
26.1
28.4
37.5
36.7
37.4
27.2
27.4
26.8
28.9
51.0
47.5
1.2
1.2
2.0
1.8
1.6
1.2
1.8
2.0
2.4
2.4
2.4
2.6
2.6
3.2
3.6
4.2
4.6
1.6
4.2
3.8
4.4
3.8
3 8
6.0
3.0
2.0
1.8
1.8
2.4
3.8
5.6
5.8
6.8
7.0
7.4
8.2
10.0
14.8
15.0
15.4
10.6
16.8
17.0
23.8
27.0
44.4
1.7
1925
1.7
1924
3.2
1923
3.0
1922
2.4
1921
2.0
1920
2.7
1919 .
3.2
1918
3.6
1917
3.6
1916
3.8
1915 .
4.2
1914
4.4
1913
5.1
1912 . .. .-
6.1
1911
6.9
1910
7.7
1909
3.7
1908
5.4
1907
4.8
1906
5.3
1905 --
4.7
1904
4.6
1903
1902
6.7
4.4
1901 ----
1900
3.3
1899
1898
1897 .
1896 -
1895
1894
1893
1892 -
1891
1890
1889
1888
18f7
li 6 - .-
ISpS
1884 .
1883
1882
1881
« Excluding A. B. T. Co., A. & P. Co., B. T. S. Co., and trustees for employees.
> Excluding shares held In name of A. B. T. Co. and treasury stock.
• Including unvoted shares in the name of A. <St P. Co., B. T. S. Co., and trustees for employees.
CONCIOMTKATION OK lOrOiNO.MIC I'OWKlt
J 21 23
N(.. S 26 'J'K
Tnv. CA
Dopf. Trcnsnry
F'lo 012.11
'J'Aiti.i'. No. 7. - I'oitnlinl Cnntrnl hy IHivciors
Shares Hold B
y:
% of Total
to Stock
Outstand-
ing!
Nearest Available Record Date to Annual
Meeting
Board of
Directors
A.&P.Co.,
B. T. S. Co.,
and Trust-
ees for Em-
ployees
Total
% of Total
to Shares
Voted >
192.'. .
50, 892
50,894
77, 205
67, 132
43, 409
27, 749
38.036
43, 471
50.507
47, 575
46, 713
46, 451
45, 912
55, 677
58,571
55,829
59, 788
25, 511
31, 796
24, 597
29,193
24, 809
24,553
32,456
12, 866
6,025
2,198
2,445
2,978
4,542
6,007
5, 955
6,818
6,073
5,530
5,110
5, 615
7,398
7,376
7,556
8,1.58
8,089
8.153
7,104
8,041
13, 181
9,144
51. 538
20. 253
35, 858
23,251
86, 1S7
85,288
152, 392
39, 448
104,911
126, 926
127,523
122, 336
19, 359
134, 528
.531
159,832
82, 906
102, 430
71, 147
113,063
90.383
129, 596
113,037
190. 428
82, 919
155,418
174, 501
174. 236
168, 787
65, 271
190, 205
59, 102
215, 661
142. 694
25,511
31, 790
24, .597
29, 193
24, 809
24, 553
32, 456
12, 866
6,025
2,198
2,445
2,978
4,542
6,007
5,955
6,818
6, 073
5,530
5,110
5,615
7,398
7.376
7,556
8,158
8,089
8,158
7,104
8,041
13, 181
9,144
l.I
.8
1.5
1.3
2.3
2.6
4.3
1.9
3.6
4.4
4.5
4.7
1.9
5.5
1.8
8.0
5.5
1.3
2.1
1.9
2.2
1.9
1.9
3.0
1.5
1.0
.8
.9
1.2
1.9
2.8
2.9
3.4
3.5
3.7
4.1
5.0
7.4
7.5
7.7
8.3
8.4
8.5
11.9
13.5
22.2
1 7
1925
1 2
1924
2.4
1923
2
1922
3 6
1921
4.1
1920 .
6 7
1919 - _
3.1
1918
5 6
1917
6.6
1916 ^
7.0
1915 - .-
7.7
1914
3.1
1913
8 7
1912 . .
3 1
1911
13.4
1910
9 1
1909
1 8
1908
2.7
1907
2 4
1906
2.7
1905
2.3
1904 .
2 3
1903
3.3
1902
2 2
1901
1.7
1900
1899 . .
1898
1897 -
1896
1895
1894
1893
1892
1891
1890 .
1889
1888 . - .
1887
1886.
1885 .
1884
1883
-
1882
1881
1880
' Excludes holdings of A. B. T. Co. and treasury stock.
' Includes unvoted shares of A. & P. Co., B. T. S. Co., and trustees for employees.
F. H. B.
H. C. H.
12124
CUNCENTltA'J'ION OF lOCONO.MlC I'OWEli
Tai{I,e No. H.- Esllmated Number of Stocic holders in Addition to Lnrr/c Jloldcrs
and in Addition to Directors Necessary To Control Annual Meeting — Based
Upon Residual Average Shareholdings^
Estimated Number of Holders Necessary to Control
Annual Meetini,' in Addition to:
Nearest Available Hocoril Date to Auuual
MeetiuR
Holders of
1000 Shares
and Over '
20 Largest
Stockholders'
Hoard of Di-
rectors
Board of Di-
rectors Plus
A. & P. Co..
B. T. S. Co.,
and Trustees
for Employ-
ees
1926 - -
8.'>, 7un
80, 194
67, 928
53, 282
41,905
29,407
23, 796
14, 273
11,187
11,098
7,954
5,271
3,286
2,905
108, 277
103, 036
87, 238
73, 132
57, 816
41 883
37, 577
31,094
25, 885
22, 493
19, 377
16,629
14, 552
14, 537
11,605
10,441
9,174
7,446
6,874
5,309
6,029
5,640
5,605
4,277
1,894
1,405
118,416
113,290
93, 733
79, 905
62. 524
45, 408
46.090
34,113
28.363
24,869
21, 794
IS, 973
16,917
16,590
13, 963
12, 3-25
11,052
10,065
9,012
7,025
7, 102
6,708
6, 605
5,047
3,115
2,249
116,346
112 4.'(S
1925 -.
1924 -
92, 275
1923
78, 705
59, 413
1922
1921 -
42,517
1920 . ... -
36 221
1919 ...
33, 077
26,200
1918 -- .
1917
22 400
1910 -
19, 471
1915
16,769
19H . . - ... -
16, 592
1913 ---
14, 434
1912
13, 955
19U
2,331
848
2, 399
2, 923
2, 233
2,877
2,270
2,445
1,783
142
252
9,691
1910
9,781
1909
10, 065
1908 . - .
9,012
1907
1906
1905 .
7,025
7,102
6, 708
1904
6,605
1903
5,047
1902
3,115
1901 ---
2,249
' In the computations for this table, unvoted shares of the A. & P. Co., B. T. S. Co., and trustees for
employees have been included in shares voted at annual meetinRS, and these holdings as well as those of the
.\. B. T. Co. have been excluded in determining average holdings outside of the groups of large holders
indicated.
2 Excluding A. B. T. Co., A. & P. Co., B. T. S. Co., and trustees for employees.
No. S-2G-L
Inv. CA.
DepL Treasury
File 012.11
COXCENTKATION OF ErONOMK^ POWER
Exhibit No. ICIO-G
12125
American Tclvyhonc and TvU't/rajih Comimnij and Predecessor, American Bell
Telephone Company — Long Term, Debt Issues — 1880 to li)05, Inclusive
[From files of Securities and Exchange Commission]
Selling
Com-
Name of Issue
Year
Issued
Principal
Amount
Price
Per $100
Principal
Amount
Net
Proceeds
peti-
tive
Bid-
ding
To Whom Sold
American Bell Telephone
Company:
Coupon Convertible 6%
18S0-1881
$470, 000
$100
$476, 000
No....
Pro Rata to Stock
Notes.
hoUlers.
1S81
l.-i, 000
136. 33
20, 450
(')
m
1881
9,000
140
12, 600
(')
' (')
Convertible G% Coupon
1882-1883
045,000
100
045, 0(X)
No....
Pro Rata to Stock-
Notes.
holders.
Seven Per Cent Deben-
18&8
1,987,500
100
1,987,500
No....
Pro Rata to Stock-
ture Bonds.
holders. -
1888
12,500
Various
14,002
0)
Lee, Higginson & Co.
Ten-Year Debenture 4%
1898
5, 000, 000
100. 771
5, 038, 550
Yes.._
Do.
Coupon Bonds.
1899
3,000,000
102. 327
3,069,810
Yes...
R. L. Day & Co.
1899
2,000,000
101.71
2, 034, 2(X)
Yes...
Estabrook & Co., R.
L. Day & Co. and
Verrailyne & Co.
American Telephone and
Telegraph Company:
Four Per Cent Collateral
1900
7,000,000
95
6, 650, 000
No....
Kidder, Peabody& Co.
Trust Bonds.
1900
3, CH)0, 000
90-97
2, 895, 000
No___.
Do.
1901
5,000,000
95
4, 750, 000
No.,..
Do.
1902
313,000,000
No
Do.
1905
20, 000, 000
'"""94.I9'
i8,"838,'666
Yes...
Do. and Baring Bros.
& Co., Ltd.
Three-Year 5% Oold
1904
'20, 000, 000
97.77
19, 554, 000
Yes...
Speyer & Co. and Lee,
Coupon Notes.
Higginson & Co.
' Sold at auction.
2 Data not available.
3 Delivered to Kidder, Peabody & Co. in exchange for $12,000,000 par value of preferred stock and
$8,000,100 par value of common stock of Western Telephone and Telegraph Company, successor to Erie
Telephone and Telegraph Company. Alternative s'lle price on the first $7,000,000 of these bonds delivered
to Kidder, Peabody & Co., in case the Erie Company reorganization did not materialize, was 95.
* $25,000,000 principal amount of Pour Per Cent Collateral Trust Bonds pledged as collateral to this
note issue.
ExHiDiT No. 1659-7
[From files of Fcdoral Communications Commis.sion]
(Handwritten:) I*. F. Filo. P./.l/OS. A. A. M.
Lee, PIiggin.son & Company,
//// State Street, Boston, April S, I'JOJ,.
Personal.
H.
Frederick P. Fish, Esq.,
President, Anicriean Telephone <£ Telc(jraph Co.,
Boston, Massachusetts.
]My Dear Mr. Fish : I was with Jim Storrow in New York yesterday and
came back last night, in case there should be anything for me to do here about
this bond business.
Of course, we agree with your views entirely that you need a new market,
and we think this can be accomplished by dealing with Speyer. We know as
_[2126 COXClOXTUA'llOX OF I'lC.uNo.MIC I'OWKli
well an anybody can that the To'-eylioiKi securities are as good as can be, but
th(!y bave imt iiitere.sled liic pubiie yet, oulside of New Kn^hiud, very luueb.
aiKi (be ectmiiaiiy lias mil liol ilie slaudiiii; wbieh it deserves aiul wbieli iL wili
liHve by and by. The JS'ew Yorkers aie always shy of new things from this
part of the country. We tluuk Speyer can help lo distribute the securities
elsewhere.
As regards figures, may I call your attention to the fact that there are
plenty of railroad notes of companies well known to be strong and in good
hands, and these notes sell at 5% and thereabouts. The 4i^% notes of the
IVnnsylvania road have hung lire terribly. More than that, there are plenty
of luilroad note.-j to come, as everybody knows. If the Telephone company
wants money and wants a new markec, it will probably have to pay for it,
just as everybody does who is not well kuown.
It seems to me, if I were on your board, that I should vote to lake money,
if it were offered, in quantities enough to make the company easy and pay the
])rire needed. It is, after all, a very small matter on short securities. Most
of the.se railroad notes are two years, and that seems to bo a good kniglh of
note; and perhaps they can be made a little longer. If tJie time could be left
to the bankers, it W(mld bo not less than two years; it would be made longer,
if it could be managed, and might give good results.
If you v-/ant me today, or if I can offer any advice of \alne, I am at yoiu-
service.
I am speaking to you with perfeci, frankness, just as I have for the last
thirty years lo the directors of tlie Chicago, Burlington & Quincy Railroad
Co., with whom I have had intiuiatc relations. They were very apt to ask
about the times and about what I thought with regard to this or t'other point,
whether I bought a loan or not; and I always found that by treating them
with entire openness and considering tiieii problems, I got on much better. I
think they recoguized that fact, and I think it did them g-^^-^n At any rate: 't
was much easier for me to procet_Ti in chat way, and I can fairly sa^ that we
have dealt with no railroad in the counn-y, in wbifb deijlinu.'^ v^e have made
less money than with the Chicago, Ijurliugton & Quin'-. We always paid
them every penny we could afford for loans and not iiuruQuently jaid thevi
too much.
I do not believe it is wise for a coiporation to get the last penny on it3 bom is
or notes. Notes cannot fall much in price ; bonds can fall very heavily. If
the dealers or the investors or bot^h ;-:ee l>onds very heavy on the market, the
next time the company w^ants money it is remembered and costs more than it
should.
Forgive me for offering my wisdom ( V) nua.sluMl, and believe nie.
Yours truly,
II. I.. llmrnNsoN
FxiiiiaT No. lO-T.^-S
[From fili'^s of KciIi'imI ('(iniiiiitiiic.-il ions < 'onuiiis.^ion 1
MAKcm 7, 1902.
Personal.
Francis L. Hink, Esq.,
Vice-President, First Naiional Hank.
2 Wall Street, Neic York.
My Deak Mk. IIine:
I am now in a position to as.sent definitely to the proposition which I dis-
cus.=:ed the other day with Mr. Baker and yourself.
We will sell to Mr. Baker and his associates 1.^,000 shares of the stock of the
American Telei)hone and Telegraph Company, at loS^, with the understanding
that Mr. Baker is to have the oi)<ion to take 25,t>00 additional shares of the
stock within a few days after his return from the south, and at the same price,
if he desires to do so. If he coiicludes that he would like to have 35,000 addi-
tional shares, rather than 25,000, I have no doubt that we shall be able to meet
his views on that point.
It is our expectation to elect I\Ir. Baker and Mr. Waterbury to the Board of
Directors of the American Telephone and Telegraph Company at the annual
meeting, which will be held on March 25, 1902.
CONCENTRATION OF ECONOMIC POWER .12127
I need not repeat that we understand that it ia the purchaser's intention that
this stoclj is to be held as an investment, although, of course, no binding agree-
ment to that effect is to be expected.
I think that I have now stated our entire understanding, and should be glad
to have you confirm my statement and indicate to me when you would like to
have the certificates for the 15,000 shares delivered and the names in which
these shares are to be placed.
Very truly yours,
F. P. Fish, President.
[Source: Private Letter Book I.]
No. 29.
Geo. F. Baker, President.
II. C. Fahnestock, V. Pres.
Francis L. Hinb, v. Pres.
Charles H. Stout. V. Pres.
C. D. Backcs, Cashier.
W. G. Snow, lAsst. Cashier.
H. Fahnestock Ass(. Cashier.
Geo. F. Bakidr, Jr., Asst. Cashier.
First National P>ank,
AVw York, March 8, 1002.
F. P. Fish, Esq.
Prcst., Am. Tel. & Telegraph Co.,
Boston, i/(/.s.s'.
Deab Mb. Fish : Replying to your favor of the 7th instant, I beg to hereby
confirm the agreement entered into by you with Geo. F. Baker, Esq., namely,
that he and his associates shall accept upon presentation by you at the First
National Bank of New York, 15,000 shares of the stock of the Amecican Tele-
phone and Telegraph Company at 153%, and that they shall have the privilege
of accepting 25,000 @ 35,000 shares additional at the same price within a few
days after Mr. Baker's return from the South. Also that Mr. Baker and
Mr. Waterbury shall be elected as members of the Board of Directors of the
American Telephone and Telegraph Company at their meeting to be held on
March 25, 1902.
As indicated over the telephone, we should be glad to have a certificate of
100 shs in name of Geo. F. Baker, 100 shs in name of John I. Waterbury, 14,800
shs in name of W. J. Nevius.
(300 shares of the latter to be in six certificates of 50 shares each).
Yours, very truly, '
' F. L. HiNE, V. P.
[Source: President's file 12373.]
Source : President's file 12373.
Geo. F. Baker, President.
H. C. Fahnkstock, V. Pres.
Francis L. Hine, V. Pres.
Charles H. Stout, V. Pres.
C. D. Backus, Cashier.
W. G. Snow, As-it. Cachier.
H. Fahnestock, Asst. Cashier.
Geo. F. Baker, Jr., Asst. Cashier.
First National Bank,
New York, Mch 25', 1902.
F. P. Fish, Esq.
Prest., Am. Telephone d Telegraph Co.,
Boston, Mass.
Dear Sib: Referring to your letter of March 7th, I hereby accept for myself
and associates the option to purchase 35,000 shares of your stock at 153%, the
same to take effect this date. The arrangement for the delivery of the certifi-
cates and payment of dividends as arranged by you with Mr. Waterbury will
be entirely satisfactory. Yours, truly,
Geo. F. Baker.
12128 CONCENTRATION OF ECONOMIC POWER
Exhibit No. 1059-9
[From flies of Federal Communications Commission]
Pkoposed Plan of Financing
Report of Messrs. Leverett, Sherwin aud Driver. February 16, 1905
Frederick P. Fish, President
Edward J. Hall,
Thomas Sherwin,
C. Jay French.
Vice Presidents
Charles Eu.Sfi'is Hubrard, Secretary
William R. Driver, Treasurer
AmbkiCAn Telephone and Telehraph Company
Boston, February 16th, 1905.
plan of financing proposed by MR. WATERBURY AND ASSOCIATES
Frederick P. Fish, Esq.,
Dear Sir: In order that there may be no question as to the exact points
which are discussed in this letter we will briefly summarize the p'an under
consideration.
A syndicate to buy —
(a) $15,000,000 of our bonds expiring in ten years instead of 1929.
(b) $35,000,000 four per cent bonds analogous to our present bonds con-
vertible into stock at $130 at any time, say, after three years and before
eight years, and to run, say, twenty to twenty-live years.
(c) $50,000,000 of the same type of convertible bonds, if we have the power
to offer them, with an option on the part of the syndicate to take $50,000,000
more of the same kind.
The $100,000,000 which the syndicate are bound to take are to be paid
in installments on fixed dates, the series of installments of the first $50,000,000
being completed in August 1906 and of the installments of the second $50,000,-
000 in December 1907, with the right to anticipate at any time payment of
any part or all of the first $50,000,000 and at any time after August 1906
payment of any part or all of the second $50,000,000. If payments are antici-
pated, the syndicate, at our request, will hold the money until we want it and
allow 3% interest.
Omitting the price to be paid for the bonds, this is the whole of the plan.
The distinctive and controlling feature of this plan is the issue of converttt)le
bonds, and at the threshold of our inquiry we are met with the question of
the power of this company to issue such bonds, as the indenture of July 1,
1899, under which our present collateral trust four percent bonds are issued,
makes no provision for the issue of convertible bonds.
It has long been laid down by text writers, supported by numerous decisions,
that in the absence of special enabling statutes authorizing a different dis-
position of its stock, a corporation, upon the issue of new stock, must dis-
tribute that stock pro-rata to its then existing stockholders. In other words,
each stockholder, upon the issue of new stock, has the right to take a pro-
portionate part thereof. Some cases have gone so far as to hold that the stock-
holders are entitled to have this new stock at par. Such is not the rule in
New York, according to the recent case of Stokes vs. Continental Trust Co.,
91 N. Y. Sup., 239. But it would seem to be the law in that state that a
stockholder is entitled to take his pro-rata share of now stock at the same
price it may be offered to other stockholders or to others.
This is a general rule of law and subject to exception. For example, it
would not apply in case of the purchase of specific property for stock, where
the corporation is authorized to issue stock for other consideration than
money; nor would it apply in the case of the conversion of bonds into stock,
if the corporation is authorized to issue convertible 'bonds. Other cases may
be imagined in which the rule would not apply.
But the rule would make strongly against the right of a corporation to Issue
convertible bonds unless' specifically authorized, except in cases like the one
mentioned below (this company having in the treasury of The American Bell
CONCENTBATION OF ECONOMIC POWER 12lr2^
Telephone Company $27,000,000 of its old stock which can be disposed of by our
directors as they see fit).
The Stock Corporation Law, section 2, in empowering stock coriwrations
(among them telephone companies) to issue bonds and secure the same by
mortgage, requires the consent of the holders of not less than two-thirds of the
capital stock of the corporation, and provides that the directorsTTinder such
regulations as they may adopt and when authorized by such consent (i. e. of the
holders of two-thirds of the capital stock), may confer on the holder of any
debt or obligation secured by such mortgage the right to convert the principal
thereof, after two and not more than twelve years from the date of the
morgage, into stock of the corporation. This is the only New York statute unon
this svbject affecting this company.
The application of the above to the plan in question is not difficult. So far
as the firbt $35,000,000 of the bonds is concerned it would not be necessary to
issue new stock in order to enable this company to perform its covenant of
conversion. The $27,000,000 of stock now held by The American Bell Telephone
Company wold be ample and available for the purpose. But inasmuch as further
new stock would be needed to carry out the remaining features of the plan, it
would hardly seem necessary to draw upon the stock held by The American Bell
Telephone Company ; for all the stock required could be authorized by one vote of
our stockholders.
Is action by tiie sto'^'kholders necessary? Not for the first $35,000,000, because
the $27,000,000 of stock neetled for the purpose of conversion are within the
control of the board of directors. But we are of the opinion that it would be
required for the remaining issues for the reasons above given and for the further
reason that such is the express requirement of the enabling sThtute. The very
fact that it was thought necessary to make such an enabling statute would create
a presumption that such power did no otherwise exist.
We are concerned with the question of power to issue convertible bonds and
not with that of policy, although it might be worth while to consider whether,
if the power exists, it is expedient to issue, without consulting the stockholders,
so great an amount of convertil)le bonds as is contemplated by the plan as a
whole, with the possible attendant issue of so large a block of stock.
THE PLAN IN DETAIL
Examining the plan in detail, we find that at first an issue of $15,000,000 of
our bonds is contemplated, to run ten years instead of until 1929, the date of
payment of our collateral trust four per cent bonds. Can these short term
bonds be issued under the indenture of trust dated July 1, 1899? That indenture
provides for the issue of bonds, all to be substantially of the tenor therein set
forth, except that bonds bearing a less rate of interest than that specified in the
form given in the indenture may be issued thereunder. The exception of the
rate of interest would of itself indicate that all other provisions of the bond are
to remain unchanged and that the time of payment can nqt be changed. It is at
least doubtful if bonds of a shorter period can be included thereunder by agree-
ment with the trustee, as all the bonds already issued would have an interest
in the terms under which the later bonds are to be issued. If short term bonds
are issued a failure to pay these bonds at maturity would be a default under
which all the securities of the trust might be sold and must be sold at the
request of one-fourth in interest of the bondholders. This is a radical change in
the plan of the trust established by that indenture.
We take it that the $35,000,000 of bonds required by section (b) of the plan
could be our regular collateral trust four per cent bonds if desired. As stated
above the directors have within their control the required amount of stock —
that now^ in the treasury of The American Bell Telephone Company. Bonds
in the regular form provided by the indenture could be issued, and appended
to each bond a separate covenant on the part of the American Telephone and
Telegraph Company to make the conversion. If the conversion were made, the
bonds when surrendered under the terms of the conversion would come back
into the possession of the American Telephone and Telegraph Company. If
the instrument containing the covenant for conversion was not stamped on the
bonds but made in a separate instrument appended to the bonds, it might be
removed from the bonds and the bonds reissued. But it is to be noted that
the amount of collateral once placed in the hands of the Old Colony Trust
Company, Trustee, to secure these $35,000,000 bonds, must always remain in
its hands and cannot be withdrawn even if it be thought desirable to cancel
12130 CONCENTRATION OF liJCONOMIC POWER
them. Indeed the bonds themselves must, if they are to be used, remain out-
standing. New bonds cannot be substituted for them, except under the provision
for mutilated bonds, in the first paragraph of the indenture.
As stated above, it would probably be found more desirable, if convertible
bonds in greater amount than $35,000,000 are to be issued, to issue them all
under a new indenture instead of issuing $3r),O0O,0OO under the indenture of
July 1, 1890, and the balance under a new indenture. The indenture of
July 1, 3899, as stated above, makes no provision for an issue of convertible
l)onds.
BUSINESS C0N8ID1':BATI0NS
There is one serious business objection to the adoption of the convertible
bond feature of this plan. The bonds, when placed upon the market, being of a
greater value, would to a large extent lessen the demand for our collateral
trust bonds, as the market would undoubtedly give preference to the convertible
bonds. This would be an important fact for those of our present bondholders
who may wish to dispose of their bonds.
Undoubtedly we need not, in our policy of financing, limit ourselves to our
own serious detriment in order to protect those who have heretofore purchased
our previous issues of bonds, but we should bear in mind, in deciding upon a
policy, that we must ourselves necessarily be in the market to sell further
issues of our collateial trust bonds; because in May 1007 $25,000,000 of these
bonds will be released by the payment of the $20,000,000 of notes for which
they are now held as collateral. In July 1908 the bonds of The American Bell
Telephone Company will be payable, thereby making the collateral theretofore
held for such bonds available for the issue of $10,000,000 of our collateral trust
bonds. As stated above, this collateral having once been deposited with the
trustee under the indenture cannot be withdrawn ; and consequently this com-
pany will have $35,000,000 of bonds which it must sell in order to avail itself
of the assets deposited under that indenture.
It would, therefore, seem to be highly desirable, as a business proposition, not
to issue convertible bonds if it can be avoided, as these $35,000,000 bonds would
be available in any scheme which did not require the is.sue of convertible bonds.
AVAILABLE ASSETS
Are we in a position to make a contract according to this plan?
The stocks and bonds which this company possesses, including
what we are to receive within i. short time, stand on our books
at $143, 000, 000
Of these there have already been deposited with the Old Colony
Trust Company under the indenture of July 1, 1899, (the value
here stated being that at which they stand on our books) 60,000,000
Balance 77, 000, 000
Of this the following are not available for deposit under that
indenture :
Western T. & T. Co. (because the indenture of
trust does not permit the deposit of the stock
of this company, as it is not a licensee) $13,000,000
Certain stocks of struggling companies, like the
Cent. N. Y., Cent. Union, N. Y. & Penn., and
Ches. & Pot., which should l>e kept in hand for
the future financing of these companies 7, 500, 000
20, 500, 000
Leaving a balance of 5(3, 500. (XK)
If a n(»w indenture is to be prepared, there may be added to this
the following:
Western T. & T. Co. preferred $12, 000, (KK)
Real Estate 2. 250, 0(K)
Long Line Construction 31,000,000
So. Bell Indebtedness, say 10, (MK), 000
OlluT notes, say 4,000,000
59, 250, (X)0
115,750,000
CONCEN'J'RATION OF ECONOMIC POWER 12131
TIhtc is, in arMltion to tli(> ;ii)ove notes, thf notos of tlie abo,ve monlionod
struggling: companies amonntins? to about $10,000,000 but these notes, for the
reason al)Ove stated, should, if possible, be kept within the control of this
company.
In order to issue the $100,000,000 of bonds above called for, if a margin
equivalent to the margin provided for in the present indenture of trust be called
for, $133,333,3^,3 of assets would be required therefor. The assets in hand would
hardly be .suflBf^ient to furnish this amount of security, not to speak of security
for the $50,000,000 of further bonds on which the syndicate is by the plan to
have an option. For this latter $50,000,000 provision must be made with
securities that will be obtained in the future. Consequently the option on this
further $50,000,000 should not be available before the expiration of several
years from date.
It is to be noted in this connection that the company has cash in hand suf-
ficient to pay all its obligations until the current Summer ; that for the two years
succeeding, including the payment of the $20,000,000 of notes maturing in
May 1907, the probable requirements of the company will not be much, if
any in excess, of $70,000,000; and that upon the payment of the above notes
$25,000,000 in bonds will be in hand for the future financing of the company.
RESULT OF PLAN
If, under the above plan, the bonds net this company 89 (90 with, say, 1%
for expenses) and the option to take the stock is exercised at the expiration
of three years from date, the transaction would be equi,\alent to the sale of
the stock in three years at $ll5.70 (that is, 89% of 130) with a payment mean-
while by this company of about 4%% per annum for the money; or, to state
the transaction in another way. it would be equivalent to a sale of the stock
at 130 and a payment meanwhile by us of 8% per annum on the money. If
the option was exercised at the end of eight years, it would be equivalent to
about 5%% for the money, and the rate would increase as if the option were
exercised earlier. The purchaser is free to take the stock or not according to
the state of the market.
CONCLUSIONS
Our conclusions are, that
(l)It would be undesirable, from a business point of view, to issue con-
vertible bonds.
(2) In order to Issue convertible bonds above $35,000,000, consent of two-
thirds of the stockholders would be required, and this would be difficult to
obtain.
(3) It is much more desirable to issue bonds under the present indenture
of trust, for the present needs of the company, up to, say, a total of $100,000,000.
If more than $100,0(X),000 of bonds are to be issued, it might be well to con-
sider whether it is not advisable to make an issue of bonds under another
indenture of trust which would fall due at some other date, as the amount
falling due in 1929 would otherwise be excessive and probably burdensome
for the company to finance at one time.
(4) Short time bonds (that is to say, payable in ten years) cannot be issued
under the present indenture.
(5) We doubt the expediency of financing the company for so long a period
of time as the proposed plan contemplates, especially as it would have the
effect of tying up our assets and of rendering more diflBcult the use of them
in the financing, consolidation, and development of our sub-companies.
(6) In preference to the plan under consideration, we should recommend
the issue this year of a limited amount of stock and bonds, say, one in ten
of stock to present stockholders and $15,000,000 in bonds to be sold to bankers.
Of course it would be preferable to finance for a year or two more if a satis-
factory arrangement can be made through a syndicate. A plan for marketing
abroad stock or stock and bonds would be very desirable.
To our minds there is another risk in the proposed plan which should be
had in mind. If a bankers syndicate should be formed under the proposed
plan, who should pool their bonds or place them in trust, the trust so formed,
by exercising the option given for the conversion of bonds, would have the
power to acquire so near an absolute controlling interest in this company as
practically to control the whole assets of the company, which they could use
12132 CONCENTRATION OP ECONOMIC POWER
for any schemes of financing that they saw fit. In short, having nearly one-
half of the entire issued, capital stock of the company, they could consolidate
this company with other companies, or make any other arrangment in regard
to its future financing that they saw fit. This is a great and extremely A'aluable
option and is equivalent, until the bonds are distributed or sold to the public,
to a surrender of the powers of management by the present officers and stock-
holders to a body of bankers who may work to the disadvantage of the present
stockholders in the promotion of other schemes of consolidation.
We cannot see in the present condition of the company any urgency which
calls for a method of financing so drastic as this plan.
Respectfully,
Geo. V. Leverett,
Thomas Sherwin,
Wm. R. Driver.
The foregoing plan assumes that the convertible bonds to be issued there-
under will not be offered to our stockholders. We understand that it is now
proposed to modify this plan by making an offer of these bonds to our stock-
holders. This would remove one of the serious legal objections to the plan.
It would not, however, give authority to the directors to offer the Fifty Mil-
lions, on which it is proposed to give the syndicate an option, that is to say,
the third Fifty Millions of the plan, because there is not sufficient stock at
the disposal of the directors to make such a contract. All of the other ob-
jections to the plan as stated in the foregoing opinion slill subsist. In addi-
tion, if say. One Hundred Millions were to be offered to our stockholders at
one time the question of the good faith of the offer would be at once raised,
inasmuch as it couldn't be fairly expected that our stockholders would be in a
position to take so large a block at once.
Respectfully,
Geo. V. LEVERErT,
Thomas Sherwin,
Wm. R. Driver.
[Source: President's file 17614.]
Exhibit No. 1659-10
[From flies of Federal Comiuunicatious Coiuinission]
Febbuaey 15, 1905.
Messrs. J. P. Morgan & Co.,
^ Broad and Wall Streets, New York City.
DEijfR Sirs : We find so many practical and technical difficulties In the scheme
suggested in our conference last Friday, that it will be some time before wv5 shall
"be in aiposition to take the matter up on its merits. Absolutely no time will be
lost iji making such investigations as are necessary to a proper consideration
of the plan.
I shall hope to call on Mr. Steele some time Friday, to talk with him a few
minutes about .some of the legal difficulties.
Very truly yours,
F. P. Fish, President.
[Source: Private Letter Book IV.]
Exhibit No. 165i>-ll
[From tiles of Federal Comniuiiications Commission]
(Handwritten:) P. F. File. 6/3/08. A. M.
United States Senate,
Washingtmi, Feb. 15, 1905.
Private
Dear Mb. Fish : I am beginning to think that we ought to raise the neces.«;ary
money by the sale of four per cent collateral bonds witlu)ut the conversion clause.
We surely can find some one who will buy tliem at a reasonable price. The other
proposition is intricate and uncertain, and might lead to a great deal of trouble.
I write you about it now, thinking that you might want to intimate to the people
CONCENTRATION OF ECONOMIC POWER 12133
in New York that some of your people do not look with favor on their plan, but
of course do us you think best about this.
If you wish to talk with me on the telephone you can call me up at the Senate
any time after 11 o'clock tomorrow or Friday, and at the Arlington Hotel previous
to that or in the evening.
Very sincerely yours,
W. M. Crane.
Mr. F. P. Fish,
15 Dcy Street, Nciv York, N. Y.
Exhibit No. 1059-12
[From files of Federal Comiiiunieations Commission]
February 20, 1905.
John I. Waterbury, Esq.,
Manhattan Trust Company, Wall d Nassau Streets, New York City.
My Dear Mr. Waterbury : Knowing the deep interest you have in securing an
arrangement by which our financial matters may be adjusted for a long time,
I regret to say that the Executive Connnittee has determined that it is not wise
for us to consider at present the comprehensive scheme of financing submitted to
us by Messrs. J. P. Morgan & Company and Messrs. Kidder, Peabody & Company
at our recent interview. I have so notified those two firms.
There are certain practical and legal difficulties in the way of dealing with
the matter on broad lines at the present time which may ultimately be elinjinated
but which now seem to us controlling.
We are submitting to a number of banking houses which have expressed an
interest in our securities a memorandum copy of which I enclose.
Very truly yours,
F. P. Fish, President.
(Enclosure)
[Source: Private Letter Book IV.]
February 20, 1905.
Messrs. J. P. Morgan & Co.,
Broad and Wall Streets, New York City.
Dear Sirs: Our Executive Committee has given careful consideration to the
proposition which you and your associates made to us a week ago last Saturday
for the purchase from our Company of certain securities to be issued by it.
The Committee has decided that at the present time it is not expedient for the
Company to enter into such a comprehensive -scheme of financing as that sug-
gested, on the lines proposed.
Thanking you for the pains you have taken in this matter, I remain.
Very truly yours,
F. P. Fish, President.
[Source: Private Letter Book IV.]
February 20, 1905.
George F. Baker, Esq.,
First National Bank,
4 Wall Street, New York City.
My dear Mr. Baker: After most careful consideration our Executive Com-
mittee has determined that we can not take up at present negotiations on the
lines suggested by Messrs. J. P. Morgan & Company and Messrs. Kidder, Pea-
body & Company at our recent interview. There are practical. and legal difli-
culties in the way which seem to us, for a time at least, to be controlling.
I enclose a copy of a memorandum that we are submitting to a number of
banking houses wliich have intimated a desire to consider any issue of secu-
rities that we might make about this time.
I shall hope to see you in New York at an early date.
Very truly yours,
F. P. Fish.
Presideyif.
(Enclosure)
[Source: Private Letter Book IV.]
12134 CONCENTltATlON OF ECONOMIC: I'OWKK
ExHiDiT No. 1059-13
[From files oi' Federal Comuiunicatiou.s Commission]
Aug. 14, 1905.
Deae RIb. Winsob: In view of my understanding with my Executive Com-
mittee that the entire financial question should go over until fall, I am not
sure that I am at Liberty to go so far into the facts and figures with you as
you would like, as per your suggestion at the Exchange Club today. At any
rate, I shall have to bring the question before my Committee.
You will remember that I said, after my return from California, that I saw
no reason why you and I should not talk over your general plan or thought on
the subject (provided we could do so without prejudice or any danger of incur-
ring the slightest obligation) for such preliminary consideration would make the
work in the fall, if we take it up, more easy. Dealing with the "facts and fig-
ures" as you suggest would go far towards instituting negotiations and a possible
approach to a committal. This, of course, must be avoided.
If you feel that you can not tell me the general nature of your plan, without
going into the figures, it seems to me most probable that everything will have
to go over till fall, as I doubt if my Committee would support me in taking
action now, which might be inconsistent with our conclusion to do nothuig at
present. I should have said all this to you this noon but my ihind did not work
quickly enough.
Sincerely yours,
(Signed) F. P. Fish.
Robert Winsoe, Esq.
[Source: Private Letter Book IV.]
ExHiiiiT No. 10.09-14
[From flies of Federal Communications Commission]
Wall Steickt, Corneb Nassau, New York,
November 21st, 1905.
Deai Mb. Fish : If you will pardon a running comment which occurs to Mr.
Baker and myself after reading over tlio proposed circular to the stockholders,
you will, I think, have a better notion as to how we are impressed in our efforts
to judge of the draft from the point of view of the stockholder, who, after all, is
the person we desire to reach.
The statement as to the business and operations of the Company might, we
think, be followed by the further statement that the companies are gaining in
those portions of the country in which they have continuously prospered etc. etc.,
omitting any reference to conditions which are generally known to exist.
This followed by a description of the company's investments and advances,
and by the statement that in order to meet the continual increasing demands
for a comprehensive and national service such as only this company can give,
requires constant development of facilities and further outlay.
A statement of the present amount of the issued capital upon which divulends
are paid, and a short table which will show at a glance the outstanding bonds
and debenture notes of all kinds, including The American Bell Telephone Com-
pany's bonds.
The increased requirements of the company have heretofore been met by
issues of stock or of debentures, or by the issue of debenture notes.
The development of the company has now reached a stage when the Directors
believe that the Interests of the stockholders will be best conserved by author-
izing another form of security that will enable the company to negotiate advan-
tageously for addiional moneys that are required to meet the enormously in-
creasing business of the company, so that it may be prepared to meet market
conditions as they occur, and provide for financing the Company for an ex-
tended period should It be found practicable to do so.
The Directors believe that in addition to the right to secure money by the
further issue of stock and of its four per cent, collateral bonds, they should be
authorized to negotiate for the issue and sale of convertible bonds as the money
for the necessary development of the business could probably be obtained at a
better rate than if the Company was confined to the forms of financing to which
It has heretofore been limited.
CONCENTRATION OF ECONOMIC POWER 12135
While the present financial condition of the Company is sufficient for all it3
purposes until well into 1906, the Directors nevertheless are of the opinion that
action should be taken upon the recommendation in order that the stockholders
may derive every advantage in securing money for the future purposes of the
Company.
I trust we have met your request as desired, and tha*^ if we can be of further
service you will not hesitate to command us.
Yours faithfully,
John I. Wateubtibt.
F. P. Fish, Esq.,
Preset. Amer. Tel. & Tel. Co., Boston, Masn.
(Enclosure.)
[Source: President's file 15941.]
Exhibit No. 1659-15
[From files of Federal Communications Commission 1
Kt>ow Aix MEN BY THESE PRESENTS, that the undersigucd, stockholder in the
American Telephone and Telegraph Company, does hereby coastitute and appoint
Alexander Cochrane, Nathaniel Thayer, John I. Waterbury and William R.
Driver, attorneys of the undersigned, with power of substitution to each, for
and in the name of the undersigned to vote upon all stock of the uudersigned
in the American Telephone and Telegraph Company at the special meeting of
the stockholders of said Company to be held on Thursday, the twenty-first day
of December, 1905, for the purpose of acting upon the question of authorizing
the issue of convertible bonds, and at any adjournment of said meeting, with
all the powers the undersigned would possess if personally present. A majority
of such of said attorneys as shall be present and shall act at the meeting (or
if only one shall be present and act, then that one) shall have and may exer-
cise all of the powers of all of said attorneys hereunder.
Decembee 1905.
[From files of Federal Communications Commission]
American Telephone and Telegraph Compant,
No. 15 Dey Street, New York, March 12, 1901.
Enclosdd please find notice of the Annual ]VIeeting of the Stockholders of this
Company. _
It is important that your stock be represented at this meeting, in order that
the presence of a quorum may be ensured.
A blank form of proxy is enclosed, which, if you cannot be present in person,
you are requested to sign and send to some one in your confidence for use, or
to William R. Driver, 125 Milk Street, Boston, if that be more convenient. If
sent to Mr. Driver, the proper United States Internal Revenue stamp will be
aflixed and duly cancelled by him.
A. stamped envelope Is enclosed for use, if you choose to send the proxy here.
Chaeles Eitstis Hubbabd, Secretary.
[Subject File No. 012.11. Treas. Dept. A. T. & T. Co., Inv. C. Augat.]
[Subject File No. 012, Treasury Dept. A. T. & T. Co., Inv. C. Augat.]
Know all men by these presents, That I, the undersigned Stockholder in
the American Texephone and Telegraph Company, do hereby appoint
true and lawful Attorney, with power of substitution, for me and
in my name to vote at the Annual Meeting of the stockholders in said Company,
to be held in New York, March 26, 1901, or at any adjournment thereof with
all the powers I should possess if personally present.
March , 1901.
12136 OONCENTUATION OP ECONU.MKJ I'OWEK
Exhibit No. 1059-16
tFiom tilcu of American Telephone and Telcgrapli Company]
Dkcembek G, 1905.
P. F. 15923
Pcrsoual
Charles H. Davis, Esq.,
25 Broad Utrcct, New York City.
My DiiVK Mu. Davis: Your letter of DecQiiiber 5 comes to hand today. I am
very glad to hear from you and if you care to call on mo in New YurV. next
Tuesday at my office 15 Dey Street, I should like to talk the situation over
with you.
It does not seem to me w'se at the present time that we should commit
ourselves to olfering to the stockholders any convertible bonds that may be
issued, for the market conditions might be sucli that the most desirable trade
possible for the Company and the stockholders would be o)ie that could not give
the stockholders the opportunity to subscribe for the bonds.
My own belief however is that if we ever issue such bonds, the conditions
are likely to be such that an offer to the stockholders would be wise and
proper.
Of course you understand that we have no plans for financing at the present
time and there are no negotiations whatever looking to the sale or issue of
such bonds. We simply concluded that it would help the Company very much
to have this form of financing open to it and therefore the DirectoLs ask for
tl'.e requisite authority.
Very truly yours,
F. P. Fish, President.
American Teiei'Hone and Tei-EuRAph Company, Special Meeting op
Stockholuers, December 21, 1905
Dec. 21, 1905.
"RrmliKd, That the Directors be and they are hereby antliorized to issue
from time to time, when and as it may be necessary, for the transaction of
the business of the Company, or for the exercise of its corporate rights, privi-
leges, or franchises, or for any other lawful purpose of its incorporation, con-
vertible bonds of the Company, not exceeding, in the aggregate, one hundred
and fifty million dollars ( $150,000, (XK)) in such denominations, at yuch rate of
interest and for such periods of time as they may determine, and tJjoy are
hereby authorized to confer upon the holders of such bonds the right <^o convert
the principal thereof, after two and not more than twelve years from the date
of such bonds, into stock of the corporation at such raie, not- less than par,
as the Directors may fix, and under such regulations as they may adopt."
Exhibit No. 1G59-17
[ Krom tiles of Federal Coininunieations C"oniiiiis.sion]
December 15, 1905.
Personal.
W. L. Putnam, Esq.,
HO State Street, Boston.
My Dear Mu. Putnam: I trust that we are to have the support of the Lowell
stock at the special stockholders' meeting in New York. I write this because I
observe that the proxy has not yet come in.
The proxies generally are coming in, and the more I think the matter over,
and the more I hear of the views of those whose opinion is of value, the more
thoroughly satisfied I am that the Directors should have the power for which
they ask.
Very tndy yours,
F. p. Fish, President.
[Source: Tresident's Letter Book 41. >
CONCENTRATION OF ECONOMIC I'OWEK 12137
December 15, 1905.
P. F. 15,961
" 15,988
George Babciay Moffat, Esq.,
5 Nassau Street, New York City
My Dear Mr. Mofiat: I regret extremely that I was unable to see you iu
New York this week, as I intended. I had so much to do that was unexpected
that I did not have the opportunity to communicate with you.
I sincerely hope that we are to have your support in getting, at our meeting
next Thursday, the power to issue convertible bonds.
The matter has received most careful consideration, and we are all satisfied
that if this additional authority is given to the Directors it will be to the advan-
tage of the stockholders and the Company.
I am not able at this moment to put my hand on the letter from you which
I received a few days ago, and I should thank you very much if you would
write me again upon receipt of this, telling me exactly what is your attitude and
giving me the opportunity of writing you at greater length if you are not
entirely satisfied to advise those with whoui you come in contact to act affirma-
tively with reference to the proposition that will come before the meeting.
Very truly yours,
F. P. Fish, President.
(Handwritten.) Gov. Crane is trying to see you this afternoon or tomorrow
morning to talk the matter over with you.
[Source: President's Letter Book 41.]
Mr. Fish: Mr. Driver telephoned from New York just now (11:55 A. M.) to
say that Marsden J. Perry had not sent in his proxy (8,750 •shares), and that
Francis A. Cranston, Providence, had withdrawn liis (l,2fK) shares). As this
last seems to indicate a change of mind you may want to take notice of it.
G. D. M.
December 15, 1905.
[Source: President's file 15947.]
December 15, 1905.
P F. 15.947
Marsuen J. Pi3{RY, Esq.,
Providence, R. I.
My Dear Mr. Perry: i trust that you are in favor of giving the Directors of
the Company the power to issue convertible bonds, and that you will either be
present at the meeting or send us your proxy.
If you have any doubt as to the advisability of having the Directors in a
position where they can negotiate for the issue of convertible bonds, I shall be
glad if you will do me the favor to give me a chance to talk the matter over
with you.
Mr. Francis A. Cranston, of Providence, who sent in his proxy, has withdrawn
it. I should be very sorry if this meant that he disapproved of the plan.
Perhaps you will take the trouble to call me on the telephone at your
convenience.
The proxies are coming in well, and, as far as I can judge, those whose
opinion I most value believe with me that the Directors should have the power
to negotiate for the issue of convertible bonds if conditions are favorable to that
sort of security.
Very truly yours,
F. P. Fish, President.
[Source: President's Letter Book 41.]
(Stamped:) Received Dec. 19, 1905 A. B. T. Co.
American Tetji'Hone and Telegraph Company,
No. 15 Dey Street, New York, N. Y., Dec. 16, 1905.
Mr. Joseph S. Fay," Jr.,
31 State St., Rm. J,06, Boston, Mass.
Dear Sir: For the purpose of the special meeting of stockholders called for
Tlinrsday, December 21st, it is necessary that two thirds of the capital stock
should act.
Your proxy has not been received.
124491— 40— pt. 23 22
12138 CONCENTRATION OF ECONOMIC POWER
If the proposition meets your approval, and if you do not expect to be present
at the meeting, will you kindly execute and return the accompanying proxy?
As the time is short, I shall be glad if you can find it convenient to give this
your early attention. (Handwritten:) 5440 Shrs.
Respectfully yours,
F. P. Fish, President.
(Handwritten :)
Dear Sir: I do not approve of Ihe proposed issue because in the ResolutioL
of the Directors they fail to state that the bonds shall first be offered to the
stockholders. I consider this very important so shall not send proxy.
Yours truly,
J. S. Fay, Jr.
(Handwritten:) 15947 Dec. 18, 1005. L. B. 41/372. See L. B. 41/338.
Marsden J. Perry
UNION TRUST COMPANY BUIIJ)ING
PRO^^DBNCE, R. I., Dec^mier 16, 1905.
Dkar Mk. Fisn: I most heartily endor.se your plan for the issue of convertible
bonds, and supposed I had executed and .sent my proxy long ago, but on my
return from New York I find your letter, and the only inference is that I have
neglected my "plain duty". I, unfortunately, have no influence with Mr. Cran-
ston, or I would volunteer to see him and attempt to secure his proxy, but there
are, you know, some men to whom success, even in a moderate degree is an
offence.
Faithfully yours,
Marsden J. Perry.
One enclosure.
( Handwritten : ) File
Office of S^h Low
30 East 64th Street, New York
December 18th, 1905.
Dear Sir: I have received a second copy of the circular of your Company,
dated November 29th, 1905, and a second request for my proxy, to be used at
the meeting of the Company to be held on the 21st inst. I am not sending my
proxy, for the reason that I do not believe in the plan proposed.
Yours, very truly,
Seth Low.
F. B. Fish, Esq.,
rresidcnt of the American Telephone <G Telegraph Co.,
1.5 Dey Street, New York City.
ExHiniT No. lf;59~18
[Krom flics of American Telcplione and T(>Io;,'rni)h Company]
JANUARY 27, 1906.
p. F. 16078
William Salomon, Esq.,
Messrs. William Salomon & Co., 25 Broad Street, 'New York.
My DEi\R Mr. Salomon: I was out of town when your telegram was received.
Nothing has been done as yet, but the conditions are such that I must be
very careful in all cases not to give any encouragement to any parties in the
matter referred to.
I very much appreciate your continued interest in our financial affairs, and it
would give me great pleasure to be in a position to utilize your very efficient
organization and capacity ; but there are innumerable considerations that must
be taken into account, and it is entirely impossible for me to say what can or
can not be done.
Thanking you for your telegram, I remain.
Very truly yours,
F. p. Fish, President.
[Source: President's Letter Book 42.]
COXOENTRATIOX (iF ]';('()NC)MT(' I'OWEU 12139
(Handwritten:) 16078. Jan. 30, 1906. LB 42/95. See LB 42/35, 38.
(Handwritten:) File 6/3/08 A. A. M.
^^'ILLIAM Salomon & Co.
BANKERS
25 Broad Street New York
Jan. 29, 1900.
Mr. F. P. Fish,
President, American Telephone & Telegrafih Co., Boston.
De.\r Sib: I beg to confirm telegrams exchanged between us and receipt
this morning of your land letter of January 27th, for which accept my best
thanks.
I shall be much obliged if you will let me know whether you are going to be
in New York within the next few days, so that I might have an interview with
you ; or if you are not going to be here, whether you would permit me to send
one of my partners to Boston to have a talk with you in respect to the matter
referred to.
I understand from your telegram and letter that the matter is still open,
and I would like to learn whether it may be possible to allow me to make for
myself, associated with a satisfactory group, a competitive offer. Your policy
has always been that of allowing competitive tenders to be made and I do
not understand from your letter that it is your intention to follow a different
policy in this instance.
I am
Yours truly,
W. SAT.0MON.
S. B.
January 30, 1900.
P. F. 16078
WirxiAM Salomon, Esq.,
Messrs. William Salomon & Co., 25 Broad Street, New York.
My Dear Mr. Salomon : Your letter of January 29 comes to hand this morning.
I shall be in New York early next week — probably Tuesday — and should
of course be glad to see you, or any representative of yours at any time.
As you assume, the matter is still open, but I am not at present in a position
to state whether or not we shall be in a position to allow competitive tenders,
as has been the case heretofore.
In former years I should have given the same answer up to the time when
our poli^-y was determined for the particular case, for I am satisfied that each
time you must deal with the existing situation on its merits.
While, therefore, I should be very glad to talk the matter over with your
representative, I should feel bound to refrain from committing myself in the
slightest degree to aiiy policy, until the time comes for action, when I shall be
forced to adopt and adhere to some definite position.
I greatly appreciate your willingness to participate in our financial arrange-
ments, and it would give me great pleasure to deal with your firm if matters
took such a turn as to make it possible so to do. You undoubtedly recognize
the complexities of my position, and I trust that you understand that all that I
am saying is said in the most friendly spirit, but in view of the necessities of our
business situation.
Very truly yours,
F. P. Fisn, Prcsideni
[Source: I'l-csidcnCs I^etter Book -12.]
Exhibit No. 1059-19
[From files of Amorioan Telephone .'ind Telogiapli Company]
December 10, 1905.
P. F. 15922
Edgab Speyeb, Esq.,
Lothhury, London, England.
My Dear Mb. Speyer : I was very glad to receive your cablegram and to
know that you are of the same mind as when I had the pleasure of talking
with you last September.
12140 CONCENTRATION OP ECONOMIC POWER
Nothing can be or will bo dono in the way of financing, at any rate for a few
weeks. I should l)e only too glad if, when the time came, it were possible to
take the matter up on exactly the lines referred to in your cablegram. You
will understand, however, that it may not be in our power to do this.
Meanwhile, nothing is being done, and the whole question is open for such
aetion as shall seem best and most expedient.
Thanking you for communicating with me on the subject, I remain,
Very truly yours,
F. P. Fish, President.
(Handwritten:) P. F. File. 0/3/08. A. A. M.
Washington, D. C,
January 27, JD06.
Personal.
Mr. F. P. Fish,
J25 Milk Street, Boston.
Dear Mr. Fish : — Mr. Storrow called on me at the hotel last evening. From
what he said I judged that he and his friends would be quite well satisfied
with a two-thirds interest in the proposed syndicate providing Mr. Morgan
would withdraw his objections to Mr. Speyer. I presume that he will \make
this known to you when he sees you. That being the case, Mr. Winsor ought to
be able to induce Mr. Morgan to withdraw his objections. I will call you on
the telephone Tuesday.
Sincerely yours,
W. M. Crane.
(Handwritten:) File. 6/3/08. A. A. M.
S-Mc
Lee, Higginson & Company,
J/J, State Street, Boston, Fehriiarij 1, 1906.
Fredbhiick p. Fish, Esq.,
President, American Telephone d Telegraph Co.,
119 Milk Street, Boston, Mass.
Deak Sir : In order that there may be no misunderstanding about our posi-
tion, I beg to say that, representing a syndicate formed by Messrs. Speyer & Co.
of New York and ourselves, we would be glad to have an opportunity to bid on
svich new securities as the Telephone Company may contemplate issuing.
At present, we do not know sufficient details as to the character of the securi-
ties and the amount to be issued, to formulate an offer.
If the Company should desire us to consider the characteristics to be given
the new securities, and to advise the Company as to our opinion, either with
or without a bid, we shall be glad to do this.
If we should purchase an issue of securities from you, we should make an
especial effort to interest European investors ; and perhaps it may be of inter
est to you to know that we should have directly associated with us, and pre-
pared to join with us in offering the s<>curities abroad, among others, the follow-
ing banking interests :
England (London) : Speyer Brothers.
Holland (Amsterdam) : Teixeira de Mattos Brothers.
North Germany (Berlin) : Deutsche Bank.
South Germany (Frankfort-on-Main) : Lazard Speyer-Ellissen.
We are ready to make an offer for these securities on short notice, if we
are put in a position by the Company to do so.
Very truly yours,
Lee. Higginson & Co.
Exhibit No. 1659-20
This agreement, made this 8th day of February, 1006, between the American
Telephone and Telegraph Company, a corporation of the State of New York
COXCENTIIATION OF ECONOMIC POWER 1214t
(hereiniifter calk-d the Cuinpuuy), party of the first part, and J. P. Morgan &
Company, Kuhn, Loeb & Company, Kidder, Peabody & Company and Baring
Brothers & Company, Limited, (hereinafter called the Bankers), of the second
part,
WITNESSETH :
The Company is about to make an issue of bonds amounting to one hundred
and fifty millions dollars, dated March 1, 1906, payable to bearer, or if rej:is-
tered to the registered holder at the office or agency of the Company in New
York, New York, or Boston, Massachusetts, in gold coin of the United States
of America, of the present standard of weight and fineness, on the first day
of March, 1936, with interest at the rate of four per centum per annum,
payable at either of the offices or agencies aforesaid in like gold coin, semi-
annually on the first days of March and September in each year, to the holders
of the coupons thereto annexed, on presentation and surrender thereof; which
bonds aie to be convertible at the option of the holder into common stock of
the Company at any time after three years and within twelve years from the
date thereof at the rate of one share of stock for $140 of the principal of
such bonds under suitable conditions. The bonds are to contain a provision
that in case the Company shall at any time before the expiration of the period
of convertibility issue, sell or permit to be sold, any stock in addition to the
present stock outstanding in the hands of the public (amounting to $131,r>.'51,400)
except in exchange for convertible bonds, the rate of conversion thereafter
shall be determined by adding to the sum representing the value of said
$131,551,400 of stock at $140. per share, the sums actually received in cash
for all such additional stock issued or sold, not including stock issued for
convertible bonds, and dividing the aggregate of such sums by the said 1,315,514
shares of present outstanding common stock, increased by the number of shares
of such additional stock issued or sold, exclusive of the stock issued for con-
vertible bonds. Both principal and interest of said bonds shall be payable
without deduction for any tax or taxes which may be imposed by the laws of
the United States of America, or of any State, county or municipality therein,
and which the Company may be required to pay or deduct therefi'om.
They are to contain a further provision that they may be redeemable by
the Company at any time after eight years from ^he date thereof at 105
per cent, and accrued interest, on giving notice of such intention to redeem
by publication thereof for twelve weeks in two newspapers of the City of New
York and the City of Boston, Massachu.setts, and also in London, and, if
requested by the Bankers, in two Continental centres. They shall be redeem-
able in whole, or from time to time in part, and if in part the bonds to be
redeemed shall be drawn by lot in the usual manner.
Whenever such right to redeem shall be exercised the holder of the bonds
to be redeemed shall have the privilege of converting the same in accordance
with the terms of the bonds at any time (not later than March 1, 1918) up to
thirty days before the day of redemption.
The bonds are to contain a provision for the registration of the principal
thereof, in New Y''ork City and Boston, Massachusetts, and for the certifi-
cation thereof, by some Trust Company ; and a provision relieving the officers,
directors and stockholders of the Company from any liability of any kind
with respect thereto.
It is therefore agreed by and between the parties hereto as follows:
First. The Company agrees to sell to the Bankers, and the Bankers agree
to purchase from the Company, One hundred million dollars of such issue at
the price of 95 and accrued interest ; less a commission of 2V2 per cent, on
the par value of said bonds, said bonds to be taken and paid for as follows :
Bonds of the par value of $10,000,000 on each of the following dates: April
15th, 1906, July 15th, 1906, October 15th. 1906. January 15th, 1907; bonds of
the par value of $30,000,000 on A'tII 15th, liX)7 ; and bonds of the par value
of $10,000,000 on the followinr dates; July 15th, 1907, October 15th, 1907. Janu-
ary 15th, 1908.
The Bankers are to have the right to demand the delivery of said $100,-
000,000 of bonds in any sums prior to the date or dates so specified, on paying
therefor the purchase price.
If the engraving and printing of said bonds shall not have been completed
before the day of delivery, receipts shall be issued therefor as a temporary
substitute.
Second. In consideration of said agreement of purchase, the Bankers shall
have the option to purchase the balance of said issue, amounting to $50,000,000,
12142 CONCENTltATlON OF ECONOMIC I'OWEll
until October 1st, 1908, at 98'/; and accrued interest, less a commission of 2Vj
per cent, upon the par value of the bonds, but in the event of the exercise of
such option prior to January 2nd, 1908, the said bonds shall not be delivered
until that day.
Thikd. The Company shall not issue any unsecured bonds or notes in addi-
tion to .said issue of convertible bonds (except obligations payable in less
than one year and to an aggregate amount not exceeding $10,000,000), unless
there be paid into the treasury of the Company additional money from the
sale of stock, in which case the Company may issue additional unsecured
bonds or notes to an amount equal to the money so paid into the treasury
of the Company. This provision shall be included iii the bonds if the Bankers
so elect.
FouETH. If the Company shall hereafter execute any mortgage on its prop-
erty and franchise, or any new collateral trust indenture covering collateral
now owned by the Company or acquired with the proceeds of said bonds, it shall
provide for the security of the convertible bonds herein provided for on equal
terms with any other obligations secured thereby; but this shall not prevent the
issue of collateral trust four per cent, bonds, under the present indenture secur-
ing them, to the amount now permitted thereby in view of the amount of
collateral already deposited.
Fifth. If at any time ninety-five per cent, of said bonds shall have been
redeemed or converted, the restrictions of the two preceding paragraphs of this
agreement shall cease to be operative.
Sixth. The liability hereunder of each of said four firms of bankers shall
be limited to one-third of the aggregate obligations of the Bankers.
Seventh. The said bonds and the trust indenture, as to their form and
legality, shall be subject to the approval of tlie counsel of the respective parties.
Dated, February 8th, 190G.
American Telephone & Telegraph Company,
By F. P. Fish, President.
J. P. Morgan <& Co.
KuHN, Loeb & Co.
Kidder Peabody &. Co.
Baring Brothers & Co., Ltd.
by Kidder Peabody & Co.
February 13, 1906.
Messrs : J. P. Morgan & Company,
KuHN, LoED & Company,
Kidder, Peabody & Company,
Baeing Brothers & Company, Limited.
Gentlemen: Referring to the agreement dated February 8, 190G, between
this Company and yourselves, touching the i.ssue by this Company of Thirty-
Year Convertible Four Per Cent Gold Bonds, dated March 1, 1906, and amounting
to $150,000,000, I understand that you have agreed that article Third of said
agreement shall be modified to read as follows :
"Third, During the term of said bonds the Company shall not have out-
standing at any one time unsecured bonds or notes in excess of $150,000,000
(except obligations payable in less thr.n one year and to an aggregate amount
not exceeding $10,000,000), unless there be paid into the treasury of the Com-
pany additional money from the sale of stock, in which case the Company may
is.sue additional unsecured bonds or notes to an amount equal to the money so
paid into the treasury of the Company. This provision shall be included in the
bonds, if the Bankers so elect."
Will you kindly write me a letter confirming your agreement.
Very truly yours,
F. p. Fish, President.
New York, Feb. 13, 1906.
The American Telephone & Telegraph Company.
Dear Sirs : Referring to your favor of even date herewith, we accept the
modification therein pioposed of our contract of February Sth, 1906, so that
Paragraph Third of said contract shall read as follows:
"During the term of said bonds the Company shall not have outstanding at
any time unsecured bonds or notes in excess of $150,000,000 (except obligations
CONCENTllATION OF K(X)NO]\IIC POWEIJ 12143
payable in less than one year and to an aggregate amount not exceeding
,$l(MltlO,()(l(l), miloss there I)e paid into tlie tieasury vf 1Iie ("(inipany additional
jiioncy ti(!ni the sale ol' stock, in wliich case (he Company may issue additional
unsecured houds or notes to an amount c<iual to the money so paid into the
treasury of the Company.
"This provision shall be included in the bonds if the Bankers so elect."
Yours truly,
J. I'. MoiiGAN & Co.,
KUIIN, IX)EI! & Co.,
Ivinnicii, Peabouy & Co.,
I'.AKING lIUOTHKliS & C(»., Ivi'l).,
P.y Kiunraj, Peabody & Co.
ExHiniT No. 1(m!)-21
AMEiiicAN Telephone & TexegRxVpu Company — Conveiitible I'.onus Syndicate
Referring to the Agreement between the undersigned and the American
Telephone &. Telegraph Company, dated February Sth, 1900, providing for the
purchase from that Company of $100,000,000 face value of Four per cent. Con-
vertible Gold Bonds and for an option upon $.50,000,000 additional of such
bonds, it is agreed between the undersigned that the business under said agree-
nient is divided in the following proportions:
J. P. Morgan & Co., Twenty-five (2.5) per cent.
J. S. Morgan & Co., Five (5) per cent.
Kuhn, Loeb & Co., Twenty-two and one-half (22'/;) pier cent.
Kidder, Peabody & Co., Twenty-five (2.5) per cent.
Baring Brothers & Co., Limited, Twenty-two and one-half (22i/.) per cent.
Dated, New York, February 14, 190G.
J. P. Morgan & Co.,
Kuhn, Loeb & Co.,
Kii)ni;K, Pkabouy & Co.,
Baking Bkotheks & Co., Tyr'n.,
By KiDDEit, Peabooy & Co., Ally's in fad.
(ITandwritten :) Accepted. J. S. Morgan iV: Co.
Exhibit No. lG.50-22
[From files of Federal Communications Commission]
Appendix 10
American Telephone & Telegraph Company Convertible Four Per Cent Gotj)
Bonds Syndicate Agreement February 15, 1906.
J. P. Morgan & Co., Kuhn, Loeb & Co., New York ; Kidder, Peabody & Co., Boston ;
Baring Brothers & Company (Limited), London.
Agbe3:ment, made the fifteenth day of February, 1906, by and between J. P.
Morgan & Company, Kuhn, Loeb & Company, Kidder, Peabody & Company and
BAraNG Brothers & Company, Limited (hereinafter collectively called the "Bank-
ers"), parties of the first part, and the subscribers hereto (hereinafter called,
severally, "Subscribers," and, collectively, the "Syndicate"), parties of the second
part :
Whereas, The American Telephone & Telegraph Company (hereinafter called
the "Company") has made with the Bankers an agreement, whereby, among
other things, the Company is to sell, and the Bankers are to purchase, upon the
terms, in said agreement provided, one hundred million dollars ($100,000,0001
face value of Convertible Four Per Cent. Gold Bonds of the Company of the issuB
described in the statement of the Company, dated February 12, 1906, of which ^
copy is annexed hereto ; and
Whereas, the Subscribers desire to form a syndicate to purchase said bonds
from the Bankers at 94^4 per cent, of their face value together with accrued
12144 CONCENTRATION OF ECONOMIC TOWER
interest, said bonds to be paid for on the following dates, with the right to antici-
pate any of the payments, viz. :
$10,000,000 bonds on April 5, 1906,
$10,000,000 " " July 5, 1906,
$10,000,000 " " October 5, 190G,
$10,000,000 " " January 5, 1907,
$30,000,000 " " April 5, 1907,
$10,000,000 " " July 5, 1907,
$10,000,000 " " October 5, 1907,
$10,000,000 " " January 5, 1908.
Now, THEREFORE, in Consideration of the premises and of their mutual promises,
the parties hereto agree and the Subscribers severally agree, each with the others,
and with the Bankers, as follows :
I. Each Subscriber shall indicate in his sub.^cription hereto the total amount
face value of convertible bonds for the purchase of which he is or shall be bound
on account of the maximum Syndicate obligation to purchase $100,000,000 face
value of convertible bonds at 94i/^ per cent, of their face value and accrued inter-
est ; and, to the extent of the purchase price of the bonds so indicated in his
subscription, each Subscriber will make to the Bankers cash payment for the
purposes herein indicated, when and as called for by the Bankers, without ref-
erence to the receipt or the possession by the Bankers or by the Subscribers of
any of the said convertible bond.s. The several Subscribers shall be called upon
to make payments of cash, in respect of their several subscriptions, only ratably
according to the several amounts thereof, but to the full extent of his own under-
taking each Subscriber shall be so responsible regardless of performance or non-
performance by any other Subscriber. In the same proportion each Subscriber
shall be entitled to share in the benefits, and shall bear any loss, resulting to the
Syndicate under this agreement, exceiJt as otherwise herein provided. Notliing
in this agreement contained shall constitute the parties hereto partners, or shall
render any of the Subscribers liable to contribute more than the amount of his
subscription. Originals hereof shall be signed by the Bankers and retained by
them, but counterparts may be signed by the Subscribers, and all shall be taken
and deemed one original instrument.
II. In the same manner as other Subscribers, the Bankers may severally
become Subscribers hereto ; and, as such Subscribers, they shall be liable for all
subscriptions by them made, and in all respects entitled to the same rights and
benefits as any other Subscriber. The Bankers may severally purchase or be
interested in the purchase of any of the convertible bonds herein mentionetl,
and may deal with the Syndicate in the same manner as other persons. Any
Subscriber hereto may, on his own account, make any agreement with any other
Subscriber or with any other person, syndicate or corporation. This agree-
ment shall bind and benefit ratably, not only the parties hereto, but their
respective successors, survivors, assigns, executors and administrators. All
rights and powers of J. P. Morgan & Co., of Kuhn, Loeb &. Co. and of Kidder,
Pealiody & Co. hereunder shall vest in the copartnership firms now bearing
those names, respectively, and in tlie successors thereof as from time to time
constituted, without further act or assignment. Any of said Bankers may
delegate any of their powers and authority under this agreement to any of the
other Bankers. Nothing herein contained shall be construed as creating any
trust or obligation whatsoever in favor of any person or corporation other
than the Subscribers, nor any obligation in favor of the Subscribers except
as herein expressly provided. The term "convertible bonds" whensoever herein
used shall be deemed to include receipts or certificates issued for payments on
account of the purchase price of such bonds.
III. Each Subscriber in his subscription hereto shall give an address, to which
notices, calls or other communications may be sent ; and any notice, call or other
communication addressed to any Subscriber at the address so given, and either
left at such address or mailed, shall be deemed actually given to such Sub-
scriber, and shall be sufficient for all the purposes hereof. If any Subscriber
shall fail so to furnish his address to the Bankers, he shall not be entitled to
any notice of calls, or any other notice hereunder, and he shall be deemeii to
assent to any action of the Bankers. The Bankers may issue to the several
Subscribers receipts in respect of payments made herciuider, of such tenor
and form as they may deem suitable. Such receipts, and all rights and obli-
CONCENTRATION OF ECONOMIC POWER 12145
gations hereunder of the respective Subscribers may be made transferable in
such manner and on such terms and conditions as tlie Banljers may prescribe;
but no transfer liereunder shall be valid unless assented to in writing by the
Bankers, and, unless otherwise expressly provided in such assent, tlie transferor
shall continue liable for the payment of the unpaid part of the transferred
subscription until the same shall be fully paid.
IV. The Banliers, in their discretion, may release any Subscriber. In case
any Subscriber shall fail to perform any of his undertakings hereunder, or
shall be released by the Bankers, other Subscribers may be received to take
the share of the Subscriber so failing to perform his undertakings or so released.
In case of the failure of any Subscriber or his transferee to perform any of
his undertakings hereunder as r.nd when called for by them, the Bankers, on
behalf of themselves and of the Syndicate shall have, and at their sole and
exclusive option may exercise, the right to exclude such Subscriber or his trans-
feree from all interest in or under the Syndicate ; and, in their discretion,
without any proceedings either at law or in equity, in such manner and on
such terms as they shall deem expedient, they may, for the benefit of the
Syndicate, dispose of such participation hereunder or of any interest or right
of such Subscriber or of his transferee hereunder, and thereupon all interest'
and right of such defaulting Subscriber or his transferee hereunder shall cease
and determine. At any public sale hereunder of any interest or right of any
Subscriber or his transferee, the Bankers, or any party hereto, may purchase
the same for their or his own benefit, without accountability; but notwith-
standing any sale, \Yhether public or private, the defaulting Subscriber shall
be responsible to the Bankers for the benefit of the Syndicate for all damages
resulting from any such failure on his part, not exceeding the amount unpaid
on his subscription hereto with lawful interest.
V. The Bankers shall have full power, in their discretion, from time to time,
to make with the Company any additional agreements, relating to the pur-
chase and sale of the convertible bonds herein mentioned, as, in the exercise of
their unlimited discretion, they may deem expedient, and also, from time to
time, to modify and perform said agreement with the Company and any other
agreements they may make with the Company hereunder, as they may deem
expedient. The Bankers shall be under no responsibility in respect of the form
or validity of the convertible bonds or of any receipts or certificates, nor for
the delivery of bonds by the Company in exchange for any receipts or certificates
which may be issued for payments on account of the purchase of bonds, nor
for the performance of any agreement contained in any such receipts or cer-
tificates.
VI. The Bankers shall have authority, from time to time and at any time, to
incur such expenses as they may deem proper in carrying out, or in endeavor-
ing to carry out, this agreement, or in connection with the preparation, execu-
tion or examination of the securities which may be the subject of this agree-
ment, or in doing any act or thing which they may deem to be in the interest
of the Syndicate, and all such expenses shall constitute and shall be a prior
charge in their favor upon any and all moneys and bonds, by them received
or held hereunder. Any and all moneys by them received hereunder shall be
held by them as Bankers in general account. They shall also have power and
authority finally to fix and to pay all compensations of depositaries, brokers,
agents and counsel, or others; and in the expense account may be included
brokers' commissions to the Bankers or any of them on sales or purchases of
bonds at the rate usually paid.
VII. The Backers shall have full power, as in the exerci.se of their unre-
stricted discretion they shall deem to be for the best interests of the S.vndicate,
from time to time, during the life of the Syndicate, in such manner, upon such
terms and for such prices as they shall deem expedient, to sell and dispose of
any and all bonds that may be subject to this agreement. In case of any such
sale the proceeds thereof shall become and be subject to this agreement ; and,
as managed, used and finally distributed by the Bankers under the provisions
of this agreement, the same shall be accepted by the Syndicate in full and final
discharge of any and all obligation and liability of the Bankers hereuiider.
During the life of the Syndicate the Bankers, in such manner, at such prices,
on such terms and in such amounts as they may deem expedient, shall have
power, for account of the Syndicate, to make purchases of the convertible bonds
or receipts or certificates representing bonds or rights which may be accorded
12146 CONCKNTRATION OP ECONOMIC POWER
to stockholders to subscribe for bonds, and they may resell any such bonds,
receipts, certificates or rights which they may have purchased; and, in their
discretion, they may make any further undertakings of any kind with any
persons concerning any such bonds, receipts, certificates or rights. They may
apply towards any such purchases any sums realized from any sales of con-
vertible bonds; of the Company under any provision of this agreement ; and they
may make adv^ances, or may procure loans, and may secure the same to such
amounts and in such manner as from time to time they may deem expedient
for any of the purposes of this agreement.
VIII. The Styndicate shall continue until July 1, 1907, unless sooner terminated
by" the Banke Fs, and it may be extended thereafter from time to time by the
Bankers, in t. eir discretion, but not beyond July 1, 1908. No Subscriber shall
be entitled to receive any of the convertible bonds or the proceeds thereof, which
may be subject to this agreement, imtil the termination of the Syndicate. In
the meantime in their discretion, the Bankers may retain all or any of such
convertible bonds or may deliver to any Subscriber his proportionate part
thereof. In the latter case such Subscriber shall hold the same subject to
p«le by the Bankers, and shall return the same upon the call oC the Bankers
at any time before the termination of the Syndicate. No Subscriber shall,
prior lO the termination of the Syndicate, sell or contract for the sale of any
of the convertible bonds subject hereto. Nothing herein shall '.o construed to
prevent any Subscriber or any of the Bankers from dealing in any manner with
bopds not subject to the provisions of this agreement. The L;.!nkers shall be
the only and final judges as to whether at any time it is to ihe interest of
tlie Syndicate to proceed further under this agreement; and, vrhenever tliey
may deem expedient, they may abandon the objects contemplated by this agree-
ment and all further proceedings hereunder. In such event all cash and con-
vertible bond.'5 by them received and then hold for account of the Syndicate,
and the proceeds of such bonds, shall remain charged with the payment of
all expenses ^nd liabilities by them incurred heretmder, and shall be applied,
first, to the payment of a«y and all expenses incurred by the Bankers under
any provision of this agreement, and, secondly, to the repayment to the Sub-
scribers, ratably, of all amounts of such convertible bonds or cash held by the
Bankers subject to this agreement (so far as the same may be sufficient for
that purpose). After the complete performance of the entire obligation of the
Syndicate hereunder, but not before the date set from time to time for the
terinination of the Syndicate as above provided, unless otherwise determined
by the Bankers in the exercise of their unrestricted discretion, and upon sur-
render of the! certificates and receipts issued hereunder by the Bank 
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