Black Art

Haled before the Securities & Exchange Commission in Washington last week was President Walter Clark Teagle of Standard Oil of New Jersey. Not afoul of SEC was the country's biggest oil company. The Commission merely wanted Mr. Teagle to answer a question which he himself had asked in a letter to Frederick H. Bedford Jr., a working Standard director: Why did Standard "happen to be so directly interested" in a protective committee for defaulted bonds of the Republic of Colombia?

Three of the six committee members certainly owed allegiance to Standard, which happens to be the biggest single taxpayer in oil-rich Colombia--Director Bedford, Standard's attorney James Henry Hayes and Adman Harrison K. McCann of McCann-Erickson, some 15% of whose business is in Standard Oil accounts. Furthermore, the committee had occupied rent-free quarters in the Standard Oil building at No. 26 Broadway, Manhattan. On the face of it, grumbled Mr. Teagle to Director Bedford, he was forced to agree with a friend of his who remarked that the committee was "pretty well plastered with 26 Broadway."

On the double-alert for conflicts of interests in fiduciary or quasi-fiduciary positions is SEC, and before approving the committee's registration statement for deposit certificates (to be exchanged for Colombian bonds), it wanted to know what would happen if the protection of bondholders required action detrimental to Standard, such as pressing for higher taxes in Colombia. Committeemen Hayes and McCann admitted they would resign before doing anything prejudicial to the big oil company. The fact that the committee was "plastered with 26 Broadway'' seemed largely coincidence, but SEC took the case under advisement.

Another case of conflicting interests over another and bigger foreign defaulter was before SEC last week. After more than two years of futile effort to get Germany to amplify registration statements covering $69,000,000 worth of 3% scrip to be issued to present holders of German bonds in settlement of past-due interest, SEC finally gave up. It allowed the registration to become effective but not without a bold attempt to supply on its own hook some of the missing information it deemed vital to investors, particularly a hint as to the Reich's "secret debt."

With magnificent effrontery, Germany maintains that it has no secret debt at all. It rationalizes this claim by the simple expedient of ignoring the incalculable amounts of short-term tax-anticipation certificates, "labor creation bills," and similar inflationary paper it has pumped into the credit system. According to the Reich, this paper is not debt until it becomes due, a contention which would have a counterpart in the U. S. if WPA workers were paid in baby Government Bonds which were excluded from the national debt until they matured. SEC pointed out that by the middle of 1935 this odd accounting conception had swollen the total Reich debt by at least $2,000,000,000 above the admitted figure.

Cabling from Berlin last week, the New York Times's Otto D. Tolischus estimated the present secret debt at between $8,000,000,000 and $10,000,000,000. Moreover, said Mr. Tolischus, "That debt is being increased through so many varied channels that the [German] Government itself is losing track of them, and is able to give only estimates, which make German finance a blacker art than ever."

While SEC was giving luckless U. S. investors a lesson in Nazi finance, it also called their attention to the anomalous position of the big U. S. banks which are involuntary German creditors by virtue of the famed "standstill agreements," the seventh of which was concluded last month. Under these agreements German credits extended by U. S. banks and frozen since 1931 have been cut in six years from $600,000,000 to $114,000,000. Interest has been paid regularly at rates varying from 2% to 4 1/4%. Moreover, these banks hold a considerable amount of Reich Treasury notes on which 3 1/2% interest not only is paid but paid monthly in advance. Meantime, with a few conspicuous exceptions, the owners of $800,000,000 worth of German bonds have not received a penny in nearly three years.

Exceptions are $150,000,000 of Dawes and Young Plan bonds, on which interest has been paid in part, and the obligations of a few German corporations, notably Hamburg-American and North German Lloyd issues. The only reason these corporate debts have been honored in full is that spunky U. S. bondholders methodically set out to attach the debtors' property in the U. S., including their ships when they docked. How much money could be squeezed out of Germany if the rest of the bondholders got tough is problematical. Britain's simple threat of appropriating German trade balances for the benefit of its citizens holding German bonds brought quick results in the form of a 4% scrip offer, as against the 3% offered U. S. bondholders in the issue registered last week. German trade with Britain yields a favorable balance, which the Reich desperately needs, whereas its balance with the U. S. has been unfavorable to Germany, which could retaliate against bondholders who attached German balances in U. S. banks by buying goods in other countries. Many an observer feels that more toughness earlier on the part of bondholders would have mitigated the U. S. investor's sorry lot. The logical people to get tough are the bankers who floated the issues originally and now act as fiscal agents for the bonds. It so happens that many of these fiscal agents are also short-term Reich creditors, either under the standstill agreements or as holders of Reich Treasury dollar notes. Seizure of German bank balances in the U. S. for the benefit of U. S. bondholders would mean, in effect, seizure of the funds from which payments are made on the banks' short-term paper.

Acidly observed SEC last week: "The Commission of course . . . does not attempt to evaluate the significance of these interests ... or the fact that although many of such special agents . . . were the issuing bankers for the bonds in question, and despite their professed recognition of a moral obligation to attempt to obtain for the bondholders the best that was possible under the circumstances, they nevertheless sought and obtained better treatment of their claims than those of bondholders who may have looked to such issue houses for protection."

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