UNITED STATES v. THIRD NAT. BANK
Legal provision: 12 U.S.C. 1828
Argument of Daniel M. Friedman
Mr. Daniel M. Friedman: That is the individual employees did not have a vested interest in the plan and apparently this was considered a serious problem to the bank and finally, this bank, unlike the larger banks, did not have any automated equipment or even semi-automated equipment.
It did not have a computer.
Despite these problems, the Weaver and his group decided to go ahead and to buy controlling interest of the bank which they did for a price at about $3,780,000.
They paid $350 a share for this stock and apparently, the price they paid reflected some of the problems of the bank because a financial study that was prepared for the bank at the time of this acquisition, start to pay it for Mr. Hill, indicated that this stock was being purchased at 15 ½ times earnings whereas, stocks of other banks in the South Eastern United States were being sold at 18 ½ times earnings.
And at the trial Weaver explained that the stocks of the banks that were priced at a substantially higher earnings multiple were not comparable and the reason he explained that, it's set forth at the bottom of page 502 of the record was he said, speaking to Mr. Weinbaum, our trial counsel, these banks that are being compared, Mr. Weinbaum, most of them are fully automated.
They have funded pension plans.
They have an adequate branching system.
Their headquarters and their branches are modernized, you simply can't compare on that basis.
Now, Mr. Weaver testified that his group originally bought the stock as an investment and that that no intention of selling the bank or merging it.
But he said that after they had looked into the problems of the bank a little more, they decided they were even worst than they had anticipated.
He said they smoked to a lot of people they knew in the banking field for advice, how to solve the problems of this bank, but they would tell that the problems were very, very difficult and that would be almost impossible they were told to find a replacement for Mr. Hackworth, the president of the bank.
They also said they discovered it would cost more than they had anticipated to fund the pension plan, the locations for branches were very difficult to find and they were very expensive and so the result of these discoveries, they started serious discussion with a Mr. Fleming, the president of Third National Bank who made the purchase.
At the bottom of page 515 of the record, Mr. Weaver explained the role Mr. Fleming played in persuading him to make the sale and this is what he said.
He said Mr. Fleming is a great salesman and he sold beyond the idea and my associates that the problems, the great problems of this bank could best be solved through a merger with the Third National Bank and that the best interest of a stockholders, the employees, the officers, and the national community would be best served through a merger.
And the same thought was repeated page 535 when he was asked, “Would you say that Mr. Fleming more than any other single person illuminated the problems of the trust company for you” and Mr. Weaver replied, “Yes, I would say that he did.
He certainly very forcefully brought to our attention the problems” and then he added of course, you must remember that we have already discovered many of these problems when we started our study in depth.
Two months, after that Mr. Weaver Group purchased the bank for $350 of share, it sold it to the Third National in exchange for stock of the Third National which then had a value of between $405 or to $420 a share or roughly a profit of between $600 and $760,000 on the investment of three and three quarter million dollars.
Now interestingly enough, this was not the first time since he had purchased the stock that Mr. Weaver had discussed the possibility of a merger.
About two weeks after he purchased the stock, he had the discussions with the president of the Commerce Union Bank which was the third largest bank in Nashville that was also interested in buying the stock.
Now Weaver testified that he was at that point not particularly interested in selling because he had purchased the stock for investment that they had discussed the possible exchange of Commerce Union and Nashville Bank stock and the Commerce Union had offered them only 10 shares for one which was worth just about $360 a share and he wasn’t interested.
The president of Commerce Union on the other hand testified that negotiations terminated because they couldn’t' get together on price that they were talking about 10 to one, and Mr. Weaver is talking about 13 to one and roughly $100 more.
After the approval of the merger by the boards of directors of the two banks, it was submitted as the same required under the Bank Merger Act of 1960 to the controller of the currency for his approval, his approval was necessary before a merger could be consummated.
And as the statute required the controller sought of use of the two other banking agencies and of the Department of Justice.
That is the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Company.
All three of these agencies advised the control of that in their view the merger would have significant anticompetitive consequences.
The controller nevertheless approved the merger and the government within a week filed a suit and sought a preliminary injunction to stay the merger, pending the completion of the trial.
After hearing the district court denied the injunction on the 18th of August 1964, the merger took place the same day.
Before the case came to trial, however, the Congress passed the Bank Merger Act of 1966 which in terms applied to this case because it was a case that was pending at that time and under that statute as it permits the control of the currency intervened in the district court in opposition to the government's case and he is appearing before this Court today, supporting the position of the appellee banks.
After a lengthy trial, the district court held for the defendants and dismissed the complaint.
The court ruled that under the 1966 Bank Merger Act, the standards for determining the anticompetitive effect of a merger, are not those that traditionally have been applied in Section 7 of merger cases, but rather that the standards were those that this Court had applied in 1948 in the Columbia Steel decision, a Section 1 case involving a corporate acquisition.
And that case by the way significantly we think in this Court's Lexington Bank decision about three years ago, this Court stated the case was to be confined to its own special facts.
The district court also indicated that in deciding the competitive impact, it was appropriately considered not only competitive factors but also the so-called banking factors which are a matter to be taken into account in determining the convenience and needs defense.
And the Court concluded at pages 7 -- 97 and 98 in its opinion, that he said although the plaintiff has established an arguable case for condemnation of the merger under the pre 1966 standards of the Lexington Philadelphia and other cases.
Treating Davidson County is the relevant geographic market and commercial banking as the services or products market, the merger is not violated of the new antitrust standards of the 1966 amendment.
And then as I've indicated, the court went on and made findings of its own that at any event, the anticompetitive effects of this merger clearly will clearly outweighed by the convenience and needs of the community.
Now, we think that the district court was clearly wrong in its view that in the 1966 Bank Merger Act, Congress intended to change the substantive standards for determining the anticompetitive effect of a bank merger?
In its Houston Bank opinion last term, although in a somewhat different context, this Court stated that Congress intended that a defense or justification be available.
Once that it had been determined, that a transaction would have anticompetitive effects as judged by the standards and normally applied in antitrust cases.
The language which Congress used in this section with the one exception that I will come to in a minute that it does not contain the words in any line of commerce, is identical to the language of Section 7 of the Clayton Act that that is --
Justice John M. Harlan: That decision was before the district court's decision, before this Court's decision in Huston Bank?
Mr. Daniel M. Friedman: Yes, it was Mr. Justice.
The language is that the effect of which is effective in any section of the country maybe substantially to lessen competition.
And it seemed that when you're dealing with a statute involving mergers, like this one is specialized type of merger, and where Congress has inserted a special defense, it requires a very clear showing that with Congress use the identical language in the Clayton Act, it really intended a different standard.
Not only is there no such evidence in the legislative history, but as we developed in the reply brief we have filed, the sponsors of this legislation indicated that they did intend the standards to be applied in determining competitive effect to be those traditionally applied under the Sherman and Clayton Act.
For example the Congressman Patman who was responsible of the bill that was finally enacted and whose statement is in this Court, “relied on heavily on the Houston Bank Case stated that the competitive standard to be applied is clearly that of the Sherman and the Clayton Act.
Because we think it's very clear that what Congress did in this statute was to provide that you determine the anticompetitive effects of a bank merger the same as you'd always determined anticompetitive effects, but then provided a limited exception, there were certain situations where the anticompetitive effects if clearly outweighed by the convenience in need of the community to be served would suffice to validate an otherwise anticompetitive merger.
And that is it seems to me in this all setting a part of the balancing factor that consideration of special factors applicable to banking play their part, but only there.
They do not play their part in determining competitive injury in the sense that a different standard is to be used where a determining competitive injury for banks.
Now the controller makes another argument.
The controller argues that because in this statute the words in any line of commerce do not appear whereas they do appear in the Clayton Act, this indicates that Congress intended that in bank merger cases henceforth the relevant product line was to be something broader than commercial banking which the district court in this case found was irrelevant product market, it was intended to encompass all financial institutions that is savings and loan associations, insurance companies, credit unions, any groups that make financing available to the community.
The district court rejected these arguments, saying that he couldn't be assumed that Congress would have made such a significant change by mere omission and he also said there was no really significant legislative history to support the contention.
We fully agree with that.
We again have discussed in our reply brief that there's nothing in the legislative history that establishes that by not using the words in this case, Congress intended to change the standard for determining the appropriate product market, a standard which this Court has twice upheld is properly permits the treatment of commercial banking as the relevant line of commerce.
In addition, the point I previously made that there is no showing of any intend on the part of Congress to change the substantive standards also applies here because the determination of the relevant product market we think is an integral element of determining competitive effect.
Now we think that under the proper standard for determining anticompetitive effect that the effect of this merger clearly was substantially to lessen competition.
As I've indicated, the National Banking Market in Davidson County was highly concentrated.
Three of the banks had 93% of the market.
The merger increased concentration to 98% and none of the remaining banks had more than 1% of the market.
Now this Court's decision in the Philadelphia Bank case recognized that a merger would result within a combination controlling 30% of the market threatens undue concentration.
And the Court's opinion also pointed out that if concentration is already great, the importance of preventing even slight increases in concentration and so preserving the possibility or eventual decontrol is correspondingly great and we think that is precisely this case, highly concentrated a further substantial indicate increase in control.
And moreover this merger eliminated the only middle-sized bank in the community.
What you have after this merger is three very large banks and four very small banks.
The middle-sized bank, the one that seem to us is the most powerful source of some possible ability of deconcentration has been eliminated.
Now the district court found in this case, and the appellee has vigorously argued, that National Bank was not a meaningful or substantial competitor in the national community.
The argument was that because it wasn't as modern, and as efficient, and as effective as some of the other banks, there was not a meaningful competitive.
This argument, we think rests on a mistaken notion, of kind of competition, Section 7 is designed to protect.
And if you have a bank like this that was have been growing, that has a substantial share of the market, we think it is definitely a significant competitor whose elimination poses the kind of competitive threat that Section 7 was designed to reach even though it may not have used the most modern merchandising methods, the most up to date business techniques.
Admittedly this fact may not have been the most efficient competitor in the market, it didn't have any significant number of branches, it was not aggressive -- as aggressive as some of the others in competing from the business, but nevertheless we think it was and the record shows a significant competitor in this market.
The presidents of the two other largest banks that is other than Third National, who presumably are in as good a position as anyone to know what kind of a competitive this bank is testified that National Bank was a vigorous and effective competitor.
Now because of its much smaller size, and National Bank was only perhaps seven third, eight is large as these big banks, because of its smaller size, it naturally tended to the medium size and smaller accounts, and to the medium-sized and smaller businesses in the community.
The president of the third largest bank, Commerce Union testified that they had encountered Nashville Bank in soliciting these smaller and medium-sized accounts, and that will indeed meet them, we found that the competition was very aggressive and we knew that they were there.
They said that they have Hackworth joined the bank in 1956 as they said; they became quite aggressive in direct consumer loan business.
The president of the largest bank, First America, also gave similar testimony.
He said that in late 1963 and 1964, his chief rivals in Nashville were the two other large banks and Nashville Trust, that in recent years, competition between his bank and National Trust for demand deposits was very keen, and that National Bank was a major competitive therefore and he said that in 1963 and 1964 just before the merger, National Bank was that he described it a major competitor for the smaller industrial and commercial loan.
Another indication as to the role National Bank played in this market and as to the competitive injury that resulted from its elimination was that this bank provided its customers with certain advantages not furnished by the other banks.
For example, National Bank had lower service charges on its checking accounts than did -- the other large banks.
That's shown by an exhibit at page 1180 of the record in Volume 3, The district court said this was insignificant because it said the amount of deposits to which these lower service charges applied were only 4% of National Bank's demand deposits.
Well that's true and the reason that it's true is because these lowered charges on checking accounts are only significant on small accounts when you have a huge account with thousands of checks, they don't charge you so much for check.
They work something t it, is precisely in dealing with the smaller depositor who had $300 or $500 in deposit that the lower service charge on the checks was significant.
The record also shows that there were at least two small businessmen who were able to get loans from the Nashville Bank after they had been turned down by one of the large banks.
And one of these witnesses, a man named Dole, when it was asked the effect of a merger on small borrower such as himself, explained very cautiously why he thought a merger like this had a bad effect.
He said, I think the page 862, top of the page, I think the more outlets you have, the more opportunities to seek or search for a loan, the better opportunities you have got.
So to sum up on this aspect of the case, we think Nashville Bank was a significant factor in the market and that its elimination by a merger, which significantly increased concentration in the market, the effect of this maybe substantial to lessen competition as this phrase has been defined in the cases under Section 7.
Now, we also think that the district court's error in determining competitive effect, necessarily in fact that its other determination that any anticompetitive effects were clearly outweighed by the convenience and needs of the community.
The statute permits an anticompetitive merger to be approved only if these community benefits clearly outweigh, not outweighed, clearly outweigh the anticompetitive effect and we don't see how that determination can possibly be made in a vacuum without first determining precisely how significant the anticompetitive effects are.
Now the banks attempt to justify the lower court's decision on the theory that whether or not, the district court was correct in its assessment of anticompetitive consequences in any event it was clearly correct in concluding that the anticompetitive effects outweighed, I am sorry, that the convenience and needs of the community outweighed the anticompetitive effect.
But this it seems to us, this is not the kind of statute under which the all setting community benefits is an alternative ground for upholding the decision of the district court.
This is a different kind of a statute.
There is basically three elements under this statute.
First you determine anticompetitive effects; if there are no anticompetitive effects, that's the end of the inquiry, the merger is permissible.
Second if you determine there are anticompetitive effects, you then ascertain what the effect of the merger is and the public and meaning, the public interest of the community in convenience in necessity term.
And then after you made that assessment, then you must balance the two to see whether the community benefits are clearly outweighed in the public interest, clearly outweighed in the public interest, the anticompetitive effects that have been found and it seems to us you can't possibly make a reasoned and careful judgment on the later question where it does clearly outweigh unless you have given fair weight to the anticompetitive effects.
Now we think however that over and beyond this, the district court's determination on convenience of the needs of the community as subject to a further flow, the failure of the district court to recognize that the problems of the Nashville Bank could be solved by some step short of an anticompetitive merger.
The banks argue that that is not a relevant inquiry under this statute.
They suggest that it's a very simple inquiry.
Justice Byron R. White: [Inaudible]
Mr. Daniel M. Friedman: Yes, we did, Mr. Justice.
We have again in our reply brief set forth in a footnote precisely what we said on that.
Justice Byron R. White: The district court has addressed himself on that?
Mr. Daniel M. Friedman: The district court addressed itself only in one footnote.
It didn't discuss it in its opinion because in its opinion, the Court did not reach these things.
The Court did make one finding saying that because of the age of various of these individuals and some other problems, it was virtually impossible that the problems of the bank could be solved by anything other than a merger and we of course, do challenge that finding.
Now the banks argue that there is no occasion to reach this issue because they say, all you have to do is all that statute says is, is you look to see the anticompetitive effects.
You look in the all say community benefits, and then you make a determination whether the community benefits outweigh the anticompetitive effect and if you found that it does, that's the end of it.
But of course, what the statute says is that the statute says that these community benefits must clearly outweigh in the public interest the anticompetitive effect.
Reverting for a moment again to this Court's decision in the Houston Bank Case, this Court recognized that under this statute antitrust standards would have been the norm and anticompetitive bank mergers the exception and we don't think that in the light of this Congress ever intended to permit a bank merger that was anticompetitive to be approved if there was some other way of solving the bank's problems, that is another way of accomplishing the needs and convenience of the community that would not pose this anticompetitive effects.
So this it seems does brings us to the question of whether the bank's problems were exceptional, that only a merger could solve them and that requires consideration of two things; first the problems, and secondly, the steps that the Weaver group he took an attempt to solve them.
Everyone agrees that the primary problem of this bank was management that Mr. Hackworth was getting old.
There was necessary to find a replacement for him as well as some others.
Mr. Weaver testified that their solution to this problem was they went around and talked to a number of people they knew in the banking business.
They had a lot of contacts and they said they spoke to a lot of people in the banking business, and they spoke to them at length, and these people told them, the problem was inside of it.
They did not attempt to hire a management recruiting firm to see if they could find at president because as he explained it, all they relied primarily, as he described it, all of the connections they had.
The government introduced as a rebuttal witness, a man named Mills who is from specialized in bank personnel recruitment.
He testified that he had at that time between a 150 and 200 existing bank presidents who were interested in making a change.
He also had a 150 to 180 top executive officers who were interested in making the change that he had placed over the past five years, an average of better than five bank presidents and 12 vice presidents that he had a large number of increase every year from banks seeking top executive officers.
And now these men that were available, he testified about 20% where either southerners or would be willing to work in the set.
And at page 909 of the record, he made it this very significant statement in the middle of the page.
He said, “It's been my experience over these 30 years and 10 years from the employer's side that any bank which sincerely wants and needs executive management, and is wiling to pay adequate compensation for it, will have no trouble in finding it.
We can supply bankers to any section of the country.
” And then a few lines down and does the question – and does the opinion you have just expressed still apply having considered the facts of this case,” the answer, yes sir.
Chief Justice Earl Warren: Who is that witness for the state?
Mr. Daniel M. Friedman: That is a witness a man named Mr. Mills.
Unfortunately Mr. Chief Justice, we did not cite his testimony in our brief.
He was a rebuttal witness who testified, he specializes in bank personnel recruitment.
He also of course, testified that he had not been approached to find any officers for the Nashville Bank nor did to any people in the Weaver group approached non-bankers in the community to see whether they might be interested, other business people, whether they might be interested in joining the bank although, the man whom everyone thinks was responsible for the growth of the bank, Mr. Hackworth, prior to joining the bank had been the president of the railroad.
Now we think this is similar.
There is nothing in this record to indicate that the other problems of this bank was so insurmountable that only a merger would solve them.
Concededly the bank had problems and undoubtedly would have cost some money to solve it.
They may have to increase some of the salaries that they were paying and they may have had to reinvest in the business, some of the substantial earnings of this bank although I might mention in passing of course, that to whatever extent, additional capital was reinvested in the bank and improvements presumably, it will be subsequently reflected in greater earnings.
Chief Justice Earl Warren: What have been the earnings of the bank and your reason –-
Mr. Daniel M. Friedman: Well that they're going up Mr. Chief Justice -- this is after taxes, they've gone up from $99,000 in 1959 to $368,000 after taxes the year before the merger.
The before tax earnings I think was something like $480,000 to $500,000 -- $565,000 in the last year before the merger.
The net operating income of the bank had increased in every year from 1959 to 1963.
The district court and its findings, findings 55 to 64, pages 118 to 121 of the records, details in great minutia, the increase the bank had enjoyed in the various indicia of banking operations.
They've found that in respect of many of these functions, Nashville Bank had a greater rate of growth than any other bank in the country.
And even after 1959, when the bank allegedly had reached the plateau, it was still increasing at a significant rate although not spectacularly as before.
For example, between June 1959 and June 1963, four years before the merger, the banks total assets and the bank's total deposits increased to total of 40%, roughly 10% a year.
And its total loans in the same period increased about 26% a year roughly 6 1/2 % a year.
And we think that this is not the kind of stagnant, this is not a stagnating or floundering bank.
This is not the kind of institution that Congress intended under the Bank Merger Act that an anticompetitive merger could be –-
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Well we rely on two things, Mr. Justice, I would say.
First, we rely on the language, the use of the words clearly outweigh in the public interest.
We think these are broad phrases which do require it and secondly, we rely on the basic theme of the Act.
The basic theme of the Act that anticompetitive mergers are to be permitted only in a limited exception where it's clearly outweighed by the community needs an interest, convenience and interest.
And we think that under that kind of statute, that it is not clearly outweighed in the public interest where there is another method of solving the bank's problems does not pose the anticompetitive difference that a merger does.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Well I would put it this way if I may, Mr. Justice.
We do think that this Court should lay down the rule that a merger that has anticompetitive effects cannot be justified if in fact it appears from the record that there are alternative methods for solving its problems.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: I would think so, Mr. Justice, the extent to which they –
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Yes, I would think, Mr. Justice.
Justice William J. Brennan: Otherwise, you will find it [Inaudible].
Mr. Daniel M. Friedman: That's right because the statute says that the anticompetitive merger is bad unless it is clearly outweighed by the convenience and needs of the public.
Now, whenever people buy a new business, they expect a period of uncertainties and changes.
The Weaver group was well aware that this bank had problems when it ported in this.
I've indicated the price they paid apparently reflected these problems.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Well I think -- let me put it if I may approach the question a little differently.
I think that there are two ways the problems of the bank like this might be solved.
One way is to make the bank itself to make various internal changes.
Another way would be to sell the bank out in a situation where there was no anticompetitive effect.
That is for example, the sale of the bank by the Hill and Hackworth interest to the Weaver group on its face had no anticompetitive.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Well I would think they should be some showing on the applied that they at least have attempted, at least have attempted to see if there was anyone else who was interested in it.
Let me – if I may put the case a little differently, if all we show is anticompetative effects and there was an offer, there was an offer and immediately it was accepted an attractive offer, I doubt, I think that's enough for us to prevail.
They have to show something more than that.
And in this case, what we have --
Justice William J. Brennan: No matter they prove may be otherwise, directed to convenience [Inaudible]
Mr. Daniel M. Friedman: They have to, Mr. Justice, I mean they have to make reasonable efforts to see if there are not some ways show of a merger that could solve this bank's problems.
Justice Byron R. White: Do you think – you think that the public convenience and needs cannot outweigh the anticompetitive effects as long as there is a way of solving the problems sort of like this?
Mr. Daniel M. Friedman: Precisely, Mr. Justice, precisely.
Justice Byron R. White: And so this is really a refinement of the public convenience and needs of the test?
Mr. Daniel M. Friedman: That is correct.
We think this is implicit in the standard of the statute.
Justice William J. Brennan: The rested on clearly outweighed?
Mr. Daniel M. Friedman: Clearly outweighed in the public interest.
There's two phrases; clearly outweighed and in the public interest.
Justice Byron R. White: Now what is the statutory test?
Mr. Daniel M. Friedman: The statutory test is set forth at page 37 of our brief that a proposed anticompetitive merger is illegal unless it finds and that's either the court or an agency that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
Justice Byron R. White: And what do you think the convenience and needs -- do you think part of the needs should be measured by the anticompetitive effect?
Mr. Daniel M. Friedman: No, we think the convenience and need of the so-called banking factors, but we think that even though after you evaluate what the benefits to the community are in determining whether these benefits clearly outweigh in the public interest, the anticompetitive effect, you have to look and see whether there's some other method of accomplishing the same result that would not have these anticompetitive effects.
In other words, you start with the anticompetitive effects, then they come in and show that this particular merger may have certain significance in helping community needs.
Then you look at these community needs and you say, “Well now, do these benefits to the community clearly outweigh the injury and maybe if this was the -- if the problems were serious and this was the only way you could solve the problems, and they had attempted to solve them else where you couldn't you have said yes, yes we do think that in this situation, the benefits to the community do clearly outweigh.
Justice Byron R. White: The way you put it I would think the convenience and needs of the community could easily outweigh the anticompetitive effects even if, even if there were some ways shorter during the next problems and if that's true, then why you're asking for another statutory standard?
Mr. Daniel M. Friedman: With all due respect, Mr. Justice, we do think that if you have community needs even though there is community convenience and needs, if in fact, there was no need to resort a merger, to accomplish this community needs --
Justice Byron R. White: But you say it's part of the judgment of needs.
Mr. Daniel M. Friedman: Well I'm reluctant to say so because it seems to me that --
Justice Byron R. White: Well so you got to do one way or the other I would say?
Mr. Daniel M. Friedman: I don't think it's part of the community need, Mr. Justice.
I think it's involved in balancing the one against the other because the legislative history does reflect that in community need and convenience, Congress intended these banking considerations.
Justice Byron R. White: Well but the statute says that convenience and need outweigh the anticompetitive effect, then the merger should be approved.
Mr. Daniel M. Friedman: It says that they clearly outweigh.
Justice Byron R. White: Alright, clearly outweigh and that I wouldn't think that the debate is clearly outweigh even if the bank problems could be solve in other way.
Mr. Daniel M. Friedman: I would suggest, Mr. Justice that --
Justice Byron R. White: I know that you suggest it.
Mr. Daniel M. Friedman: If I may, come to one last thing about this whole transaction, which is that the sale that was made by the Weaver group to the Fleming people was made at a substantial profit.
They tested -- Mr. Weaver testified that Mr. Fleming sold them on the idea that the best way to solve the problems of this bank was by a sale and Mr. Fleming made him a written offer that as far as the Weaver group is concerned, whatever its ultimate validity might be, seem to him to be a proposition on which he couldn't lose because the written offer which is plaintiff's Exhibit 478 at page 951 of the record provided after the exchange of stock that in the event the controller were to turn down this merger, or in the event that justice department ultimately prevailed in a lawsuit attacking the merger, a firm named Third National Company, there was an affiliate of the Third National Bank that handled its real estate mortgage business would purchase this stock from the Weaver group for $420 a share.
So as far as they were concerned, they had the perfect deal.
They would get their $420 in cash if the merger terminated otherwise they get the stock of First National and under these circumstances it seems just it's no wonder that the Weaver group at that point didn't make any further efforts to try to solve the bank's problems.
I'd like to reserve the balance in my time.
Chief Justice Earl Warren: You may Mr. Friedman.
Argument of E. William Henry
Mr. E. William Henry: Mr. Chief Justice, may it please the Court.
I would like the time that I'm going to use for the appellees is to cover what I think are the two most important factors in this case.
First a very brief review of the facts because what the government is essentially saying is that this Court should conduct still another de novo review of those facts to go behind the findings of the district court and secondly in perhaps more importantly those facts were at the heart of the district court's opinion that trust company had indeed reached a point of eminent deterioration and that it was a stagnant and declining institution, and that its elimination as a statistical competitive unit under these circumstances was entirely lost.
Chief Justice Earl Warren: What issues will your colleague argue about?
Mr. E. William Henry: Well, I would take one more and that will be the what we think is what I think is the government's principle contention and that is, that the Bank Merger Act of 1966 in effect simply codified the failing company doctrine which was already the state of the law and nothing more.
My colleague, Mr. O'Malley will discuss some of the legislative history on the line of commerce.
He will discuss the meaning of convenience and needs and some I think of some of the also some of the factual elements of the case.
The Trust Company was in 1956, changed its name to National Bank and Trust Company to reflect its banking activities that it was just embarking on at that time.
Through the efforts of three men, with Mr. Hill Hackworth, and Kirby Primm who was in charge of their new business at that time, they did indeed make considerable strides and show considerable profits for the first four years of their operation from 1956 to 1960.
At this time and in the four years preceding the merger, they began to go down hill.
Their share of the market in the national area, declined over 15%.
And in 1964, they had only 4.8% of the market, which of course was in sharp contrast not only to the growth of the community but to the performance of the other banks in the area.
So their relative position in the market, the client considerably.
The IPC deposits mentioned by Mr. Friedman, which are generally regarded to be as the most effective statistical index of a bank's performance, the client absolutely and it was the only bank in the county to show an actual dollar decrease in these four years.
It was the only bank in the county who can do that.
In 1962, some two years prior to the merger, Trust Company's loan portfolio had deteriorated seriously.
It's ratio of classified loans to capital structure exceeded 20%.
20% is normally the benchmark and only used by the regulatory authorities to indicate that corrective action is required.
Trust Company's ratio is 27%.
The ratio of its classified loans to all loans was five times the Tennessee average and this had nearly tripled in the two years preceding the merger.
Justice Potter Stewart: Plus five loans means, loans about at least there is some doubt?
Mr. E. William Henry: Loans, it's about which is some doubt and generally are uncollectible and therefore frozen, and not able to be reinvested in the community to businesses that needed --
Justice Potter Stewart: Who does the classifying?
Mr. E. William Henry: The bank examiners.
It's loan loss ratio that is the loans on which they actually showed a loss was three times, it was 6.9% which was considerably high, I beg your pardon 5.6% which was considerably high was three times, for example, Third National's, the acquiring bank here which was an active, aggressive, successful bank.
It had – Trust Company had more classified loans by dollar volume than did Third National, although Third National's total loans was more than eight times Trust Company's.
The classified loans at Trust Company were 145% of its reserve for bad debts in spite of the fact of Trust the Company's history over the years of having a rather bad debt history and in therefore it had a rather high reserve for bad debts.
Now the evidence in this case showed and the district court found that commercial lending is the heart of the commercial banking business.
It also shows the Trust Company did very little of this.
In spite of the fact that it had between $40 to $50 million in assets, it had roughly only $12 million actively engaged in commercial lending in the community.
The Trust Company kept no credit files.
It had no credit specialists.
The testimony indicated that if a man came in for a loan, and the particular officer that had handled that loan was out to lunch or on vacation, the man cannot be served because the information with respect to his loan was carried around in the officer's head.
The Trust Company had the lowest loan to asset ratio in the county, the lowest asset ratio loan to asset ratio in the county, it was lower even than the smaller banks to which Mr. Friedman referred to that were only 1/4 or 1/5 Trust Company's size.
I think the clearest stack in the record was Trust Company's serious problems with respect to its management.
The evidence indicated that four of the directors were over 75, nine were over 65.
Of its department head, two-thirds were 65 or older and I hasten to add these were not the mature men who had risen to the top of a profession but these were men who had in fact been passed over and were not contributing.
In the department heads, there had not been a single change in the bank for over 18 years.
New departments were created when it became engaged in banking, but those department heads had never been changed and the other had not been changed for 18 years.
The average salary level of all employees in the bank was the lowest of the banks in the county.
The average salary of all employees was lower even than the smaller banks in the county.
I assume these are the salaries that the government's expert referred to as what he considered to be adequate.
80% of the officers in Trust Company's banking department were not college graduates.
Our side of the Trust Department, there was only one man, one officer under 40, who was a college graduate.
And in the entire banking department of the Trust Company, they had not hired a college graduate in the five years preceding the merger.
They had only one branch in the county that had over 50 banking officers.
Again, the smaller banks in the county had passed it by in this respect.
There was one bank, the record showed, that was much smaller than Trust Company and had more branch offices.
Trust Company had no corresponding banking system.
And thus was unable to provide any correspondent banking services for the rural banks in the area, nor provide the contacts to its own customers that a correspondent banking system involves.
Its bookkeeping and its accounting procedures were obsolete and inadequate.
Its mortgage ledgers representing over 40% of Trust Company's loans were kept with pen and ink.
It had no computer.
It used no computer service company and thus it was unable to handle any payroll account that involved IBM or other computer cards.
It did not have a continuous audit program.
It lacked any continuous system of auditing the various receipts and disbursements and not unexpectedly this led to a discovery after the merger of a major defalcation, over $50,000 that had taken place prior to the merger.
The controls over its Trust Department were breaking down.
The FTIC examiner found that the improvements that they had previously recommended had not been carried out.
Little control had been exercised over the trust officers and that certain of the members of the trust department had acquiesced in violations of law in the use of trust funds.
And the FTIC's rating of the bank for the two years preceding the merger, had been reduced below satisfactory to fair.
The Trust Department, of which it was so found, had never had a rating above fair.
Now these problems that I have just enumerated occurred prior to Mr. Weaver's purchase.
What happened after Mr. Weaver's purchase?
Well Mr. Hackworth on whom Mr. Weaver was counting to run the bank, indicated an expression – to a desire to retire because of ill health and that ill health subsequently caused his death.
Mr. Primm, who had been in-charge of the new business, was taken away by the largest bank in the county First American and took a considerable amount of business with him.
The control of the currency noted, in which – and his findings are part of the record in approving the merger, that within 60 days after the sale, that is between the time the bank -- the Trust Company was sold to Mr. Weaver's group and the time in which they turned around and sold it, the assets of Trust Company had gone down from $45.4 million to $39.6 million or a decrease in that short period of almost 13%.
And finally, though Trust Company was showing a profit as it's been pointed out, I think it is fair to say that that even that profit picture was distorted and it was unhealthy and the testimony showed that these profits had been squeezed out of badly needed revenues for operating expenses.
And there was a list of expenses that was not only needed but which the acquiring bank, Third National put into effect, actually extended to indicate that almost the entire pre-tax profits were necessary to put Trust Company on its feet as annually recurring expenses, in addition to whatever capital expenditure would be necessary.
The largest capital expenditure for example, was the one that was actually put into effect and to create the funded pension plan that was almost half a million dollars, it was $400,000 plus.
Now I would like to get to what we consider is the government's position in this case.
And that is, that in spite of the fact that the new law had its primary emphasis placed upon creating one uniform standards for use by courts and banking authority agencies alike in judging bank mergers and in spite of the fact that Congress was primarily emphasizing the needs for courts to examine the so-called banking factors, nevertheless insofar as its substantive provision are concerned, the Bank Merger Act of 1966 simply did no more than codify the already existing failing company doctrine that was in antitrust law with perhaps slightly expended contours.
But again, their position indicates that in spite of the enormous study and effort that went into this new law, in spite of the fact that it's considered by some to be a major piece of legislation for the 89th Congress, it did no more than it was simply codify the failing company doctrine on the point.
Justice William J. Brennan: [Inaudible]
Mr. E. William Henry: Well I agree, Mr. Justice Brennan.
The position that they take however is more clearly pointed out in the briefs and I think perhaps they stayed away from it in oral argument.
But I think they – for example, in Attorney General's Katzenbach's letter of January 1966, objecting to the provisions of the Ashley-Ottinger Proposal which was in effect, and active into the bank merger law.
The Attorney General took the position that convenience and needs should be considered only in the context of the effect on competition, and the likelihood of insolvency.
These were the two factors that the Attorney General said should be considered and that convenience and needs should be considered only in that context.
Now in the reply of brief of the government at page 16, this is their essential position at the bottom of page 16, and they say that there is no indication that the bank, Trust Company, was inherently unsound that it was facing imminent or insoluble financial difficulties or dangers, or that its solvency was in any way threatened.
In short, National Bank was not a floundering bank.
That's the essence of their position it seems to me to equate a --
Justice William J. Brennan: What about the [Inaudible]
Mr. E. William Henry: Well I don't think that changed their basic problem.
Even if it does, I think, Mr. Friedman's colloquy with you indicates that if a bank does have alternative methods of solving its very serious problems, one cannot – it's not even necessary to inquire into the service to convenience and needs.
Now it seems to me that their position is based on not only on equating the floundering or stagnant bank with the failing bank, but in equating the banking industry with every other industry.
And considering that the problems associated with the elimination of the competitive unit in the banking field is similar to the elimination of a company in any other field.
And I think this simply misunderstands the responsibility of a bank not only to serve the community, but to get its assets employed in a fashion that may not produce the greatest profits.
I think they misunderstand that even if the bank has been demonstrated to meet the convenience and needs test then somehow, the fact that Mr. Weaver showed the profit on it, or the fact that he listened to the truth as explained to him by Mr. Fleming, that somehow his profits outweigh the public interest in the elimination of this stagnant institution.
Justice Byron R. White: Mr. Henry, I think that you're talk about this bank and how about a shape and things like that really goes to this county beyond a competitive of this?
Mr. E. William Henry: Not necessarily, Your Honor.
I think it reflects on that certainly, but --
Justice Byron R. White: What would you say if somebody had come along here and offered the owners of this bank a cash price equal to the market value of the stock that they – I guess to merge they got a stock –-
Mr. E. William Henry: Yes.
Justice Byron R. White: -- equal to that market value the stock that I'm going to give to this merger.
Some owners come along with this -- says, I'm a banker, anybody who could start out with $50 million worth of asset, is going to have and it should be a successful banker.
Plenty of money has been loaned.
I can make a profit.
I want to buy it, cash price.
What would you --
Mr. E. William Henry: If the record had shown that this had been offered to Mr. Weaver's group?
Justice Byron R. White: Well the owners of the 5% bank.
Mr. E. William Henry: Originally.
Justice Byron R. White: At any time.
Mr. E. William Henry: Well I don't get thrust of your question.
Justice Byron R. White: I just want to (Voice Overlap)
Mr. E. William Henry: That's what happened in effect, is it not that the Weaver group came along which was not in the banking business and bought the bank from Mr. Hill.
There was no – at $350 of share.
You see there was no exchange of --
Justice Byron R. White: -- merger?
Mr. E. William Henry: No, that was the first purchase.
Mr. Weaver came along and purchased the bank from Mr. Hill in effect, the man who owned the grocery channel and because Mr. Hill needed money for his grocery, and he paid $350 of share cash for it.
Justice Byron R. White: Well you got a --
Mr. E. William Henry: Then he subsequently sold out to the Third National Bank.
Justice Byron R. White: Well and here's a fellow who wants to merge.
He's the owner and certainly there was a merger took place.
Mr. E. William Henry: After the original process, correct.
Justice Byron R. White: Well say at that point another person came and come along and say, “I want to buy this bank.
I want to stay in the bank with this business.
I can fix this bank up and I got the management, here it is.”
And there was no question then that what the bank would be preserved, as the bank and the institution.
It wouldn't go broke.
It wouldn't go out of business.
It would stay as a competitive bank.
What would you say then under the statutory test in this case?
Mr. E. William Henry: Well the first thing I would point out of course, that it is not the case here and there was no evidence of any other offer, other than from a competitive bank in the county.
The only offers that Mr. Weaver received were from two competitive banks.
Justice Byron R. White: Well, in that case --
Chief Justice Earl Warren: (Voice Overlap) offers, was he looking for offers?
Mr. E. William Henry: He testified that he although the problems of the bank had been indicated to him originally, he did not understand their depth and their scope and the expense of a corrective measure.
The record is not clear as to whether he actively sought offers or whether the Commerce Union Bank and the Third National first approached him.
I think the later, that he was approached originally by others interested in it, two competitive banks in the county approached him.
Chief Justice Earl Warren: For merger?
Mr. E. William Henry: For merger.
Justice Byron R. White: But not for any independent operation?
Mr. E. William Henry: That's right.
That's right, they wanted --
Chief Justice Earl Warren: How long after he bought this property to this discussion about merger start?
Mr. E. William Henry: He was approached and the competitive banks approached him, I think as early as one month after his acquisition.
The merger occurred two months after his acquisition.
So getting back to your question, the --
Justice Byron R. White: [Inaudible]
Mr. E. William Henry: Even if it what --
Justice Byron R. White: [Inaudible]
Mr. E. William Henry: That's certainly a large part of our contention, yes.
Because we think that the question of the stagnant or declining institution as conceived by Congress was aimed primarily at increasing this -- the banking service to the community, in spite of the fact that it was eliminated as a competitive unit and that therefore might have had the by statistical analysis and the competitive effects.
Justice Byron R. White: [Inaudible]
Mr. E. William Henry: I think there is other clear evidence in the record to sustain the proposition that it met the needs service, that it brought to community convenience and needs clearly outweighed any competitive effects.
Mr. O'Malley is going to discuss what those banking factors are.
I would like to add though in response to your question this thought.
One has to look at the banking business as it operates and as it serves the public.
Again, in looking around for ultimate purchasers, how far does the owner of the bank have to go?
Does he have to advertise in the paper?
Does he in effect, have to put it on the auction block and sell it to the highest bidder other than a competitive bank?
To what extent is confidentiality required in discussing the sale of the bank particularly if a bank has problems?
How far and how long should Mr. Weaver have looked around?
The record shows that he had talked to some 13 prominent people both inside and outside of National to see if he could -- to see if they had any suggestions as to the solution to this bank's problems.
He found none.
Chief Justice Earl Warren: Do you think he want to know if anyone would buy it from him?
Mr. E. William Henry: No sir, he was asking them what in effect how he could dissolve the problems of this bank?
Were they insoluble?
How long would it take to solve them?
What was going to happen to the bank while he took his time in looking around for new management?
There was a meeting personnel recruiter who testified in the case that if Mr. Weaver had come to him and asked him to find a management team for him, he would not have undertaken the job because he did not feel that it could be accomplished, or that if it could be accomplished, it would have taken years and the doing.
So what we are saying essentially is that the Weaver group nor indeed any purchaser is not required to -- or certainly it is a matter of judgment as to how long he is required to conduct this inquiry.
How far he is to go in revealing the problems of the bank, and the degree to which he must look around for other purchasers.
Justice William J. Brennan: [Inaudible]
Mr. E. William Henry: That's correct.
Justice William J. Brennan: [Inaudible]
Mr. E. William Henry: No, I did not say declining earnings.
I say the declining relative position in the market.
Justice William J. Brennan: [Inaudible]
Mr. E. William Henry: It had never -- yes.
It had shown a continuing increase in profits.
The evidence indicated however had it made the necessary expenditures to overcome the problems that I outlined.
For example it cost $51,000 annually recurring in addition to an $80,000 initial investment to establish one branch.
They had only one, if they had built three branches or four branches, they would have shown no profit or whatsoever, nor have they had any money leftover for capital expenditures, nor if they need to pay capital dividends.
Now the government made -- the government after the time of the trial in its brief indicated that the Court was required to consider the effect on the competition of -- and on the public interest of an acquisition by competitive bank in Davidson County.
They indicated that the law requires that alternate purchasers be considered and that this record showed that there was an alternate purchaser namely the Commerce Union Bank, that was a smaller bank, and that therefore, the district court erred because it did not consider this as an alternative less anticompetitive solution to the merger.
Now I think again, this indicates the deficiencies of the rationale of the government.
They found that the State, that this merger itself would have been anticompetitive, would have combine 26% of the banking assets in the community, would have combined 35% of the banking offices in the community, and would have resulted in exactly the same degree of concentration in the market, in the top three banks that resulted from this merger.
And yet they say, that's a less anticompetitive solution and vitiates the judgment of the trial court that this merger was lawful.
To windup my part, I would like to comment just briefly on the trial judge's opinion in that respect.
The government for much of its brief, indicates that the trial judge's reference to the Columbia Steel Case in effect fatally undermined his judgment here.
I think he had two problems with that.
First of all, he simply indicated that he felt that the Bank Merger Act of 1966 was analogous to the rule of reason.
That in weighing, convenience and needs against anticompetitive effects, this required a balancing of other than the usual Section 7 considerations although he realized that Section 7 considerations were also involved.
Secondly, he considered and weighed every factual matter that this Court has thought under its Section 7 considerations pertained to mergers.
And he stated in his opinion, that under those, what he called pre-1966 standards, the government had established an arguable case.
We think this indicates that his reference was left to the statute as a whole and not simply that the methods by which anticompetitive effects would be considered under Section 7 had been changed and as indicated, Mr. Justice Harlan, the case was decided prior to this Court's decision of Houston.
Chief Justice Earl Warren: Mr. Henry, you may continue.
Mr. E. William Henry: Thank you, Your Honor.
Just one or two points before I close.
I would like to make clear that in the opinion of the appellee banks, the floundering bank question in its elimination as a competitive unit, can have considerations that pertain both to the anticompetitive effects question and the convenience and needs question.
But I do think it is important to note that while the problems with respect to the anticompetitive effects are rather apparent when we are dealing with this stagnant institution because in many respects it will not be competing effectively, the Court should not overlook the very important thrust of the legislative debated of the law itself.
It seemed to emphasize in addition to the competitive questions that surround the elimination or the operation of a stagnant institution.
The manner, the fact that such an institution also very often fails to provide certain banking services to the community even though it maybe rendering some competition which would be eliminated by the merger.
So one has to look at both sides of that question, both sides of what the government refers to as the equation when we're talking about a stagnant institution.
Also, I want to emphasize that we do feel that this record indicates quite clearly that there are -- that the convenience and needs of the community was met by this merger in increasing and bringing better service to the community totally apart from the anticompetitive considerations involved.
Now the reason I said that I thought that the government's equation or analysis of this law, in effect was limited pretty much to the failing company doctrine is because, as emphasized rather heavily in their original brief, they seem to say that community needs and services are some new and important kind of service not being rendered by any bank in the community.
And I don't know what they are talking about on air pollution, or traffic safety, or what, but it seems to me you have to consider banking services when you are considering convenience and needs.
But if you read out of it almost as they do, the convenience and needs question, then you get over to the anticompetitive side, and then you limit yourself to that.
And then they say, “We're back to the failing company doctrine in the look for alternative purchases, etcetera.”
So I think in this case, we had the elimination of a bank as a competitive unit.
That not only was failing to render the kind of services that it should and therefore was failing to compete as effectively as it should, but also from a convenience and needs point of view, was failing to render to the public apart from competitive considerations, the kind of service that the public in Nashville was entitled to receive from each banking unit and the customers of that banking unit some 10,000 strong were not receiving those services.
Justice John M. Harlan: I'd like to put a question to you, Mr. Henry and perhaps Mr. Friedman will answer the same thing under rebuttal.
Whether one that comes to the conclusion that in treating this matter as one bottle of wax in 1966 Act, as distinguished from separating out as I understand the government's position namely the Section 7 question deciding that first and then passing to the escape clause as I recall it, what should the Court do in those circumstances, decide the whole case up here or send it back?
Mr. E. William Henry: Well, I think it is a -- first of all, I don't believe that what the government urges should be done, can be done.
They are urging some sort of a conceptual pigeonholing of the various factors.
Justice John M. Harlan: Well, that 's my –-
Mr. E. William Henry: And I think what the Court -- what this Court should look at is -- what it looked at in the Seaboard Air Line Railroad Company versus United States Court when they were under evaluation, the ICC's approval of a merger.
And there they found that the failure of the ICC to find the Section 7 violation was not necessary as long as all the factual matters involved in the anticompetitive effects question were examined, and the impact on competition was examined.
I think that is the question that this Court should look at and not simply a reference to a case that stands for the rule of reason.
So my answer to your question would be to -- that this Court should examine whether the district court looked at all of those factors.
If it did, its opinion should be affirmed.
If it found that it didn't, that it failed to look at all those factors, I assume that he should be required to reexamine those factors under the appropriate standard.
Chief Justice Earl Warren: Mr. O'Malley.
Argument of Joseph J. O'malley
Mr. Joseph J. O'malley: Mr. Chief Justice, and may it please the Court.
I want to address myself to the convenience and needs feature of the Bank Merger Act of 1966, but first, I would like to note that a new element has been introduced into that Act by the argument of the Department of Justice, the question of the alternative purchaser.
There is first of all, a recognition in the Bank Merger Act by its very terms that two sound banks in substantial competition with each other can be merged out of exists -- merged into one, if the convenience and needs of a community clearly outweigh the anticompetitive effects of that merger.
I believe that the legislative history of the Act clearly demonstrates that Congress felt that a floundering bank or a stagnant bank such as we had in the National Bank and Trust Company was covered by the Act, without question.
Certainly the failing bank was not the intend of Congress because Section 6 of the Act provides that the agency may merge out the failing bank without the approval of the Attorney General, without an advisory report, and as far as prosecution for violation of the antitrust laws upon the consummation of such merger which can be immediate.
So that the convenience --
Justice Hugo L. Black: [Inaudible]
Mr. Joseph J. O'malley: It's on page 38 of the appellant's brief.
Justice Hugo L. Black: [Inaudible]
Mr. Joseph J. O'malley: Starting with the last sentence on page 37, I'm sorry, Mr. Justice.
Now the conclusion of that sentence in regard to 7 (a), the next paragraph, and it states that the action brought under the antitrust laws arising out of a merger transaction, shall be commenced prior to the earliest time under paragraph 6, at which a merger transaction approved under paragraph 5 might be consummated.
So that there is no time between the approval and the time it might be consummated.
So this -- the failing bank, the statement carried in Section 6 and Section 7, it's not applicable, Section 5 is not applicable in any sense of the word for the failing bank so two sound can banks can merge.
Now the banking agencies have considered convenience and needs in three different areas in the chartering of new banks and the approval of branches to existing banks, and then the mergers or consolidations of the existing banks.
The convenience and needs has never been defined by statute and to my knowledge never by a case settled by this Court.
So we have to look to those statutes that a bank regulatory agency considers preferably in this case in the charter with the new bank because they are similar to those used in the approval of the merger.
First, is the new bank needed by the community.
Will it be a sound bank?
Do the proposers of this bank have a good management team?
Will they be able to serve the community in the primary function of a bank particularly a commercial bank or it would be able to lend money in a way that it's going to benefit the economy of the community, without money by supporting marketing capital to industries, create jobs, expand plans, and in otherwise contribute to the betterment of the people whom that bank serves.
This is the one fact and now another factor in convenience and needs is competition.
Is there enough competition in a town or in area among banks, or among other financial institution if that maybe the case?
Would the addition of a new competitive entity injure the existing competition?
And in a merger, where the removal of a competitive entity help competition which can be done and the record in this case is uncontradicted.
The competition among banks and financial institutions in Nashville has been greater since this merger than before the merger.
Even the appellant's own witness, an economist, testified that this was a probable consequence of this particular merger.
I think we might best apply the convenience and needs test to this particular merger by asking ourselves some questions.
First, the sole of the Trust Company was exposed during the course of this trial by the introduction of examiner reports, it's our confidential, unfortunately, the bank was out of existence at the time the trial took place or it probably would have destroyed the public confidence in the bank anyway.
By the introduction of these examiner's reports, the internal weaknesses of the bank, the poor condition of its own portfolio, the deficiencies in its management, the default and its service to the community, and its acquiescence, indeed of violations of the law in the administration of Trust, things that were formally only known to the bank law officers and to the examining agency, which is not a contour of the currency of the FTIC were brought to the attention of the public and this is known in National Tennessee, because it received great covers in that city.
So I consider the bank in that condition where everyone knowing what it is, if the status quo were returned, as an employee now who worked for Third National Bank, would you want to go to the National Bank and Trust Company, at a salary which is lowest in the city and below the poverty level which is cut if government recognizes in its economic opportunity programs.
Every employee of National Bank and Trust receives an increase in salary subsequent to the merger with Third National Bank.
There are long-term division heads.
There's no promotional opportunity, no assurance of a pension.
There is no funded pension plan and this is a regulatory problem for 40% of our nation's banks have no fund of pension plans.
As an officer, you have not given any responsibilities by this bank.
While Officer Kirby Primm, who was acknowledge by both, I should say the three sides in this particular case, who was acknowledge as being the outstanding business development officer had its salary increase only 45% in 10 years.
And upon leaving this bank to go to the largest bank in town, had an increase immediately 60%, showing how far out of scale, the officer's salary of this bank were.
As Mr. Henry stated, it had been 18 years since the department head have been changed and no college graduates were hired.
There was just no opportunity for advancement at all, and the officer salaries again where the law is entailed.
Moreover they did not have the tools to go out and get business.
Their new business development officer testified that they did because of their lack of automation, their lack of a computer, things of that sort, lack of branches.
They were not able to go out and service the industries in the national area.
And that includes a lot of comings around National, and there was no leadership in the bank.
As a depositor, knowing the condition of this bank, would you entrust the sum of money of your own over and above the amount ensured by the FTIC to the management of this type of individual who had this bank?
As a businessman, needing the financial expertise of a bank, would you entrust your business and financial requirements to a bank that had no loan officer competent to handle the -- or supervise either the making or the employment of funds or the collection of funds?
They're unable to service a $500,000 credit from an admittedly credit worthy mortgage broker in Nashville, and had to go out to the larger bank in town to get the assistance to do it.
This bank was just not competing in the commercial field at all and there's no evidence to show that it was.
As a community leader, the recreation of this bank would result in the removal, assuming that law policies to be the same as they were at the time of the merger, would result in the removal of $30 million of commercial funds available to the industries of that area.
And these days of tight money that is a substantial sum because in seasonal 90-day loan that comes out the $52 million a year available to meet the needs, recurring needs of other industry.
But as a regulatory agency, that this Court receiving as a regulatory agency ask yourself all these questions, would you charter a bank under your obligation to consider the convenience and needs of the community if upon the day that bank was created, $1 of an every $8 that it had let out, over above those real estate mortgages that it had, was classified as a loss or a potential loss item by the bank examiners?
Would -- as I mentioned before, you charter a bank which was going to pay his employees such low salaries, now we'd have to consider the danger of the calcations because low bank salaries are admittedly one of the causes of embezzlement?
Would you charter a bank when the proposers had nobody capable of commercial lending or supervising a loan?
Would you charter a bank that had no credit files or whatsoever and had no plans for any?
Would you charter a bank that had $8 million or was going to have $8 million in loans and keep all of the ledgers and entities?
Would you charter a bank which would have on the day of its inception, a Trust Department which was permitting the deception of the public, by allowing principles of an association to speculate the perpetual care funds on which maintained other non-conforming trust?
Or if you are chartering a bank, would you charter one that plan to maintain its records which were needed currently?
In cigar boxes, packing boxes, and the like, the pictures of these are in the record of page 1205 and several pages thereafter.
That is what we would have if we chartered this bank today and if the convenience and needs of the community could certainly not be served by chartering such an institution --
Chief Justice Earl Warren: When was that report made?
Mr. Joseph J. O'malley: These reports Mr. Chief Justice were made in 1960, 1961, 1962, and 1963.
They showed a constantly or continuously deteriorating position of the bank.
They classified loans doubled between 1961 and 1962.
And although, it improved very slightly in 1963, the examiner did note that many of the classified loans have been replaced with other classified loans.
And the Trust Department was criticized the violations that I referred to, was criticized for a period of at least those four years and for years before that according to the reports although I don't honestly know how long the situation did exist.
I might point out that in serving the convenience and needs of the community, Third National Bank subsequent to the merger, has replaced all the speculative assets in the Trust Department with solid assets more prudent adherence to prudence manual.
Third National Bank has gotten rid of all of the classified loans, you know, by putting their expertise to work on them, getting collateralized and repaid or by charging off immediately upon the assumption of this bank of $121,000 as lawsuits.
Third National Bank also has introduced a continuous trust audit because the National Bank and Trust Company despite its reputation as a good trust company, had absolutely no audit of trust assets and whatsoever.
It did not have a continuous audit of its commercial department despite the fact that every National Bank in that region, with the same amount of deposits is subject to continuous audit.
That's uncontradicted testimony again to the record.
So we submit that if you wouldn't charter a bank like that to meet the convenience and needs of the community, it is not reasonable that the rule of reason is to prevail in bank merger cases.
It's not reasonable to state that it was a violation of the law to remove all of these problems and to have a good sound, aggressive, and progressive bank take over the human resources and the material resources, and to employ them in the central side.
The Third National Bank -- the National Bank and Trust Company was the only mortgage lending bank in Nashville.
They had about 40% of its portfolio in long-term mortgage.
Upon taking it over, the Third National Bank, put that mortgage paper, sold that mortgage paper, and that money is available for commercial lending.
And if the record is replete on one thing, it's the need and the central-south for commercial lending.
It is a capital deficit of area, experienced in one of the most rapid industrial growths in the country.
It sorely needs investment capital and working capital.
And the Third National Bank has utilized the National Bank and Trust Company resources, and this has to be one of the primary factors in assessing convenience and needs certainly by regulatory agency.
The convenience and needs could narrow us down to whether a bank is going to do a good job or to deposit his money with which it has been entrusted.
Chief Justice Earl Warren: So now you're going to address yourself to the -- your differences with Mr. Friedman on the standard of the Court assumed to --
Mr. Joseph J. O'malley: Yes, I do that right now Mr. Chief Justice.
Chief Justice Earl Warren: Alright, in your own time.
Mr. Joseph J. O'malley: We believe that the legislative record in this case at least insofar as it was made by the supporters of this legislation, rather than its opponents.
And the opponents of this legislation are clearly led by the chairman of the committee, Mr. Patman.
The supporters of this legislation and the Court incidentally the three-judge court in the US v. Crocker-Anglo Case, another Bank Merger case, after an extensive study of the legislative history, arrived at this conclusion in its opinion which is cited in our brief.
The supporters of this legislation indicated that there was another antitrust standard.
Now the question is, how does the Court arrive at this?
There's one difference between the language of the Clayton Act and the language of the Bank Merger Act and that's the absence of the phrase “line of commerce”.
Now obviously there has to be some kind of a product market, but the legislative history has explained in our brief at more length, between pages 40 and 52, show that the Ashley-Ottinger Proposal intended that competition the banks received from all institutions be considered in assessing the competitive effect of a merger.
This Court, incidentally the House report on the Bill which finally became law, also used the phrase “competition among financial institutions” and Senator Robertson in floor debate, and in extension of remarks, indicated that the meaning of this was that competition from all financial institutions was to be considered.
Now we can get the statistics and they are contained in this record to show that it cuts the percentages down to about half if we introduced all the dollars deposited or lent by other commercial institutions or financial institutions of Nashville.
But it's almost impossible to get a -- in an accurate statistical measure if we consider the competition from all various financial institutions.
If no defense was entered, and I think the Houston Case would hold this, it should be my interpretation of it, if no defense were entered, and obviously the standard of Section 7 and the standard set down by this Court in Philadelphia, that the line of commerce was commercial banking would be a valid one, but once the affirmative defense of the Bank Merger Act, the entire defense of the Bank Merger Act comes into play, and other financial institutions might be considered.
I believe it's a Congress trying to say, “Let's consider not merely a pure statistical concept of competition, but let's consider the realities of competition in any given market.
This bank, under that, you can blend really as Mr. Henry suggested, rather than try to get part of a scale over here and part of a scale over here, and put so much weight here and balance it off, I think you can blend the two.
The realities of competition in the marketplace where it occurs and the convenience and needs of the public which to a certain degree have to be under related.
A bank cannot be a competitor if it has no competitive ability no matter what the statistics might be.
So we would suggest that the Court can balance both sides of the equation without the necessity of making a formal balance.
So it can just consider the overall picture and ask itself a question is competition really hurt here?
I submit that except for statistics Your Honor, there has been nothing in the record of this case to show that competition was adversely affected in any sense of the word.
The two major bank presidents who testified as to the elimination of competition or the aggressiveness of competition, both had sizable corresponding balances from the Trust Company sitting in their banks.
The largest bank in town had $2.5 million of Trust Company funds at its disposable at all times.
And it was made clear by other witnesses that what they are talking about meeting them in competition, is that they would go around and talk to these accounts in case their relationship between the largest bank in town and the Trust Company ever broke up, the largest bank would still be friendly with the account.
But the record is quite clear that in Nashville, a correspondent, large correspondent does not compete with the smaller bank.
Both bank presidents testified that they're helpful.
They send accounts to the National Bank and Trust Company just to give it a hand.
So this was not a commercial area.
National area as I said, is highly industrialized and growing.
The Acme Boot Company, the world's largest maker of boots started in that community or the communities around it, it has grown over the years and its needs have met by Third National Bank.
The president of that company although probably aware of the existence of National Bank and Trust Company did not know that it was a commercial bank.
It was just not considered a commercial bank in that community in any sense of the world.
Chief Justice Earl Warren: Mr. Friedman.
Rebuttal of Daniel M. Friedman
Mr. Daniel M. Friedman: Mr. Chief Justice, and may it please the Court.
I would first like to respond to the question of Mr. Justice Harlan put to Mr. Henry, and also asked for my comments.
As I understand the question is this, if this Court should disagree with us, that there's a balancing equation involved and that the basic determination is to be made in one step in effect, if the Court were to so view it, should this Court itself undertake to decide that issue or should it rather remand it to the district court to make that determination as an issue.
As I understand that, it is your question, Mr. Justice Harlan.
And our answer would be that the case is here and we would agree that the Court of course, could remand it to the district court but we think it would be appropriate for this Court, now that the case is here to dispose of that issue.
Of course, as I think I have attempted to make clear that we don't think this is just one ball of twine here.
We think that there are separate elements that it would be taken into --
Justice John M. Harlan: [Inaudible]
Mr. Daniel M. Friedman: But we would urge this Court to decide the merits of the case.
We hope that you would agree with us.
Now I'd like to refer briefly to the point that has been made about these classified loans.
Mr. Henry suggested that a loan that is classified, it is one that is generally uncollectable and somehow the fact that the bank has a substantial significant amount of classified loans is a very great danger zone.
The three different categories of classified loans.
There's one called substandard, there's another one called doubtful and as the third one, that is called loss and all of substandard means, is that it has more than the normal risk involved.
A substandard loan is not necessary alone that portends any serious doubt as to its ultimate collectibility and the substandard loans in the portfolio of the First -- of the Nashville Bank were primarily -- I'm sorry, the classified loans were primarily substandard.
It's nothing novel for a bank to have classified loans.
Indeed a man, a witness named Robson who was the regional administrator of the National Bank, testified at page 840 of the record that Third National itself had quite a volume of classified loans as did other banks.
Now, I'd next like to turn to question that's been repeatedly urged upon here that the government somehow is trying to equate the convenience and needs test of a failing company doctrine.
That's just not so we do not contend that this is limited to failing companies.
As Mr. O'Malley has pointed out under the statute if a bank is in serious difficulties, the bank is in serious difficulties under the statute itself, the controller may authorize a merger and commit a merger to be consummated without a waiting for the reports of the attorney general of the other banking agencies.
The standard we have suggested for the kind of situation which Congress did intend, this defense to be applicable is set down at the bottom of page 8 at the top of page 9 of our reply brief, we said, Congress intended principle concern of Congress was to permit mergers involving so-called floundering banks, that is those which although not yet in failing condition, had sufficiently serious problems to cause great concern as to their future unless the deficiencies were corrected.
Now what has to be done in dealing with the problems of a bank that is in difficulties?
How extensive the inquiry has to be?
What the people have to do depends necessarily on how serious the problems are.
There maybe situations where a relatively brief inquiry will make it clear to the people that there is no solution to the problems.
We don't think that's this case however.
In this case basically, what is shown by this record is a bank that admittedly had problems, problems however that flowed primarily from the management, the old management in fact.
Mr. O'Malley says, this bank wasn't really competing, what Mr. O'Malley means when he suggest that this bank isn't competing is, he means this bank was not competing as vigorously as effectively as the banking authorities would like to see a bank compete.
The standard of convenience and needs to the community, we suggest is not what Mr. O'Malley suggested whether the bank is making the best possible use of the depositor's money.
That's not the standard.
Justice John M. Harlan: [Inaudible]
Mr. Daniel M. Friedman: Well to start with it, means something less obviously than a failing bank.
We concede that.
We think it's a bank which because of --
Justice John M. Harlan: [Inaudible]
Mr. Daniel M. Friedman: Something more –-
Justice John M. Harlan: [Inaudible]
Mr. Daniel M. Friedman: Yes, something less serious let me put it that way.
I think what Congress meant was that a bank in the search where the situation was, that the bank's internal problems were such that unless something was done about it to direct these problems fairly soon, it would tend to go downhill and it will ultimately might even turn into a failing bank.
But it seems to us the mere fact that the bank is not operating most efficiently, the mere fact that the bank does not have the most modern methods, the fact that it may not have a computer, that it doesn't have branches, that in our view is not enough to turn it into a floundering bank.
We don't think that's the kind of thing that Congress --
Justice John M. Harlan: Perhaps it does [Inaudible]
Mr. Daniel M. Friedman: I will -- yes, Mr. Justice --
Justice John M. Harlan: Do not bring [Inaudible]
Mr. Daniel M. Friedman: That is correct Mr. Justice, and I'd like to refer you to the House Committee report on this bill which has a section at the top page 3 of the report about 40% of that page is dealing with the floundering bank and that indicates that that was – that was.
Justice John M. Harlan: [Inaudible]
Mr. Daniel M. Friedman: I would think so Mr. Justice.
I would think so.
Chief Justice Earl Warren: Is that in your brief?
Mr. Daniel M. Friedman: This discussion?
Chief Justice Earl Warren: That report --
Mr. Daniel M. Friedman: Pardon?
Chief Justice Earl Warren: That part of the reporting --
Mr. Daniel M. Friedman: That is -- I believe that's cited in our brief Mr. Justice
Chief Justice Earl Warren: [Inaudible]
Mr. Daniel M. Friedman: It's cited.
We have not quoted.
We have in our brief stated that the legislative history shows that the concern of the Congress was with the floundering banks.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Yes.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: Yes.
Justice William J. Brennan: It's not available [Inaudible]
Mr. Daniel M. Friedman: That's correct.
That's we think the purpose for legislation.
Justice William J. Brennan: I know that the [Inaudible]
Mr. Daniel M. Friedman: Well let me say that --
Justice William J. Brennan: At least I ask you for [Inaudible] the principle --
Mr. Daniel M. Friedman: I think perhaps I did overstated.
And I think it's the primary concern.
I'd be reluctant to say that there might be a situation perhaps, although I find it difficult to conceive where something other than a floundering bank would be permitted.
Justice William J. Brennan: I know [Inaudible]
Mr. Daniel M. Friedman: Yes.
Justice William J. Brennan: Then, [Inaudible] is unavailable [Inaudible]
Mr. Daniel M. Friedman: Well if I may change a little Mr. Justice, I mean I don't know that calling it a floundering bank necessarily is --
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: To the end -- it's the word I use because it's in the committee.
But I do suggest in the committee report, I do suggest this that, when you have anticompetitive effects and the attempt is now made to justify the merger, you cannot justify the merger unless it appears that the problems of this bank are sufficiently serious that unless something is done by way of merger, the bank is in for a rough time of it that it's going to have serious difficulty.
It's not it seems just it's not enough, it's not enough under this statute to say that because the bank is not the most effective competitor in the community, that is not enough to justify an anticompetitive merger.
And certainly, you cannot justify an anticompetitive merger if there's some alternative methods for solving the bank's problems that does not entail that reduction of competition.
Justice William J. Brennan: [Inaudible]
Mr. Daniel M. Friedman: We would disagree with that Mr. Justice.
If I may suggest that the evidence there rely on is in colloquy and debate in the Congress in which they talk about the problem of a little community with two banks and one of them being absorbed or a community with free banks and two of them being -- but these are all cases in the hypothetical.
It seems to us assumed that these are one of the banks, the bank that's being absorbed is not doing its job properly.
It's in trouble.
It's in trouble.
But it doesn't seem to us that this defense is intended to sanction a merger where all that you're saying is you have some banks and one bank in the community isn't competing as vigorously as it might.
It's not loaning out as much of its money to the commercial communities, got too much of its money tied up in real estate.
We don't think that is the kind of situation to which this defense was intended to be applicable.
Chief Justice Earl Warren: Is the language in the House report that you referred to lengthy or is it concise so you could --
Mr. Daniel M. Friedman: On the floundering bank?
You mean the language on the floundering bank?
Chief Justice Earl Warren: Right.
Mr. Daniel M. Friedman: Yes, it's about 15 lines.
I'd be happy to --
Chief Justice Earl Warren: Please read it.
Mr. Daniel M. Friedman: It says.
Unknown Speaker: [Inaudible]
Mr. Daniel M. Friedman: I think it's quoted.
I think it is --
Unknown Speaker: More than [Inaudible]
Mr. Daniel M. Friedman: Yes, that it includes the entire quotation --
Chief Justice Earl Warren: Very well, [Inaudible]
Mr. Daniel M. Friedman: Thank you.