Business & Finance: Double Blue Eagle

“Be smart for once.” cried Jesse Jones to U. S. bankers when they convened in Chicago last September, advising them to sell preferred stock to the R. F. C. and earn a ”double blue eagle.” Ever since then the R. F. C. has been trying in vain to persuade some big bank to issue preferred stock. Last week James Reader Leavell, successor to the Brothers George and Arthur Reynolds as head of Chicago’s Continental Illinois National Bank & Trust Co., decided to accept Mr. Jones’s offer to have his bank sell $50,000,000 worth of preferred stock. “Other big banks of New York and Chicago are expected soon to fall patriotically in line,” chanted the U. S. Press naively. If the issue of preferred stock was planned by Mr. Leavell merely to accommodate Jesse Jones, it was attended by unusual circumstances. Continental Illinois, with $630,000,000 in deposits, is the fifth biggest bank in the U. S., largest west of Manhattan. The price of its shares fell from $98 in June to $24 the week before the announcement (rallied to $31 after the news was out). Mr. Leavell wrote a letter to his stock holders explaining that it was planned to write down the value of their common stock from $75,000,000 to $25,000,000, the difference being credited to surplus and reserves from which proper provision would be made for “unsatisfactory as sets.” The stockholders’ equity according to the bank’s last statement consisted of $75,000,000 in capital, $25,000,000 in sur plus and $6,600,000 in undivided profits and reserves — a total of $106,600,000. The anticipated equity after the reorganization is $25,000,000 in common stock capital and $25,000,000 in surplus, undivided profits and reserves — a total of $50.000,000, indicating a write-off of $56,600,000. Thus, adding $40,000,000 written off a year ago when Continental Illinois be came a national bank and some $10,000,000 written off earlier, the bank’s total write-offs will exceed $100,000,000.

The stockholders must still go through the form of meeting to approve the terms of the reorganization. They will be allowed to subscribe to the new preferred stock and what they do not subscribe will be taken by the R. F. C. The dividends on preferred stock taken by the R. F. C. are required to be 5% (4% if the stock is retired within three years). Since in these days few banks can earn 5% or even 4% on money, the deficiency will have to be made up out of profits that would otherwise be available for common stock dividends. However, stockholders and depositors have the satisfaction of knowing that their bank, which had about 50% in cash & U. S. governments alone last June, will be in a very sound condition.

If the case of the Continental Illinois is a criterion few bank stockholders will be eager to win a double blue eagle for their bank. But Mr. Jones now rejoices in his first big double eagle bank and Continental Illinois is fortified with 50,000,000 extra dollars of liquidity. With such an example many a small banker and some big bankers who may need to sell preferred stock to the R. F. C. in order to qualify for the government’s deposit guarantee scheme, can do so and still save their faces. Three Manhattan banks were reported ready to fall in line and Mr. Jones still hoped to make the movement general so that no stigma would be attached to banks that followed the example of Continental Illinois.