STUDY OF MONOPOLY POWER TUESDAY, APRIL 25, 1950 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON THE STUDY OF MONOPOLY POWER, Washington, D. C. The special subcommittee met, pursuant to adjournment, at 10 a. m., in room 346, Old House Office Building, Washington, D. C., Hon. Emanuel Celler (chairman) presiding. Present: Representatives Celler, Lane, Denton, Wilson, Willis, Michener, Keating, and McCulloch. Also present: Edward H. Levi, counsel to the subcommittee. The CHAIRMAN. The meeting will come to order. Mr. Levi wants to make a statement. Mr. LEVI. I would like to offer for the record a few documents. First, a document dated November 18, 1927, signed by Jerome J. Hanauer of Kuhn, Loeb & Co. This is a document in which Mr. Hanauer describes a visit of Mr. Seward Prosser, of the Bankers Trust Co., urging Kuhn, Loeb not to do the financing for Youngstown Sheet & Tube, and in which it is reported that Mr. Schiff of Kuhn, Loeb stated to Mr. Prosser that they had made every effort to be surethat is, that Kuhn, Loeb had made every effort to be sure they were not competing with Mr. Prosser's company. Second, a memorandum prepared by Mr. Denton of the Mellon Securities Corp., describing an agreement reached by the houses of Kuhn, Loeb & Co., Edward B. Smith & Co. and Mellon Securities Corp., the document being dated September 4, 1936.2 The agreement is that in all future business the three houses shall participate equally in respect of any purchase and/or underwriting or banking groups and in any management fees to be charged other banking or securities houses, and the agreement indicates that this agreement was reached in connection with the financing of Bethlehem Steel Corp. Third, a memorandum to the same effect signed by Burnett Walker.3 Next is a letter dated July 2, 1935, and signed by Mr. E. B. Greene of the Cleveland Cliffs Iron Co. and sent to Mr. B. Tompkins of the Bankers Trust Co., in which the following appears. This is a quo tation. I appreciate, as stated in your letter, that an arrangement with this group gives us the benefit of a connection with banking houses that have important affiliations with the steel industry and that this would be useful and valuable to our company * 1This document appears in exhibits S-183, S-183A, and S-183B in Steel Exhibits, pp. 344-346. This document appears as exhibit S-184 in Steel Exhibits, pp. 346–347. This document appears as exhibit S-185 in Steel Exhibits, p. 347. This document appears as exhibit S-186 in Steel Exhibits, p. 348. Next is a letter dated December 6, 1935, signed by Mr. E. B. Greene of the Cleveland Cliffs Iron Co., sent to and received by Lehman Bros., Field, Glore & Co., Hayden, Stone & Co., and Kuhn, Loeb & Co., to the effect that this banker group will be consulted with respect to the selection of any successors to the chairman of the board of directors or the president of the company.5 Mr. MICHENER. Are these documents those that were identified by the witness, Mr. Martin, yesterday? Mr. LEVI. No. Mr. MICHENER. It might be interesting to know where these letters come from and how we get them before they become a part of the record as substantive facts. For instance, you just stated, I think, that the last letter was sent to and received by two different firms. Well, is that a conclusion that it was sent to and received by them or do you have knowledge that that happened? Mr. LEVI. These are public documents which have been made public as a part of the Government's action in the investment banking case, and the authenticity of three of these documents, as I understand it, has been admitted in that case. One of the documents is a TNEC document." Mr. MICHENER. That is what I am getting at. The authenticity of these documents has been established in some public or legal forum. Mr. LEVI. That is my understanding. Mr. MICHENER. That is all. The CHAIRMAN. They shall be received in the record." Now we will hear from Mr. Donald Cook, one of the Commissioners of the Securities and Exchange Commission. STATEMENT OF DONALD C. COOK, COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION Mr. Cook. My name is Donald C. Cook. I am a Commissioner of the Securities and Exchange Commission. The subcommittee requested the Commission to prepare for it a brief study of the financial aspects of the steel industry, showing particularly the public financing which has been done by the industry, earnings retained by the companies, amounts and sources of funds generated internally, and the affiliations of officers and directors of the steel companies. I am here to testify with respect to the studies we have made. I should say at the outset, Mr. Chairman, that the first statute passed, which is now administered by the Commission, is the Securities Act of 1933. Under that statute, generally speaking, if public offerings of securities were made, it was necessary that a registration statement containing various information including financial statements be filed with the Commission. Obviously, not all companies were currently financing, so that the information which we have as far back as 1933 is necessarily somewhat scattered. However, in 1934 a second statute was passed called the Securities Exchange Act of 1934. That statute created the Securities and Ex This document appears as exhibit S-187 in Steel Exhibits, p. 349. The authenticity of the documents marked 1189 (exhibit S-186) and 1208 (exhibit S-187) does not appear to be admitted, although they are public and 1189 (exhibit S-186) is a TNEC document. The documents referred to are exhibits S-183 through S-187 in Steel Exhibits, pp. 344-349. change Commission, transferred to it jurisdication over the administration of the previous statute-namely, the Securities Act of 1933and provided, among other things, that all corporations having securities listed on a so-called national securities exchange, which would include, of course, the New York Stock Exchange, the Curb Exchange, and the other smaller exchanges throughout the country, would file with the Commission basic registration statements and annual reports. These registration statements and annual reports contained rather extensive financial information about the respective companies, including balance sheets, income statements, analyses of surplus, and various supporting schedules. Consequently, the information the Commission has, commencing with the year 1934, is extensive. It has been filed by the various companies themselves. The financial statements, pursuant to the requirements of the Commission, are certified by public accountants. We have drawn for our information upon that material, which has been furnished to the Commission by the companies involved. Of course, by 1934 the steel industry had reached a highly developed stage, its history, as we all know, going back to the early origins of our country. Since our detailed information commenced only in 1934, in order to piece out a reasonably intelligible story, we referred to, in addition to the Commission's records, the various standard financial serv-. ices, such as Moody's, Standard and Poor's, and others. We also, referred to some of the financial periodicals-the Wall Street Journal, the Commercial and Financial Chronicle. Generally speaking, those are the sources of the information which we gathered and summarized for the committee. 1. Companies studied: For many years the Commission engaged in a continuing survey of the financial characteristics of those American, corporations having listed securities, and thereby, as I stated preliminarily, under the provisions of the Securities Exchange Act of 1934required to file periodically certain financial information with the Commission. For purposes of that survey, corporations are grouped on an industry basis, and each industry grouping is further divided, for purposes of statistical study, into several subgroups of related businesses. There are almost 200 listed companies in the iron and steel group. In view of the rather brief time at our disposal and in light of the purposes of the present investigation, we deemed it desirable to restrict the scope of our study to the principal iron and steel subgroup, identified as "steel producers with blast-furnace facilities." We believe that the companies in this group come closest to what is frequently referred to as "integrated" steel companies, although in a strict sense. several are not fully integrated, lacking either ore supplies, transpor tation facilities, or some other component essential to full vertical integration. There are 16 steel producers with blast-furnace facilities which are registrants with the Securities and Exchange Commission. They are as follows, presented alphabetically rather than by size: Steel producers with blast-furnace facilities: Alan Wood Steel Co. Armco Steel Corp. 9C347-50-ser. 14, pt. 4a- -28 Colorado Fuel & Iron Corp., the Jones & Laughlin Steel Corp. Portsmouth Steel Corp. With respect to Portsmouth, I should say parenthetically it has recently sold all of its steel-making facilities to the Detroit Steel Co., and Portsmouth today is no longer a steel company, but instead is a company having primarily cash, marketable securities and approximately 25 percent of the stock of the Detroit Steel Co. which it received in exchange for the steel-making facilities. Republic Steel Corp. United States Steel Corp. Youngstown Sheet & Tube Co., the According to the American Iron & Steel Institute, there are 19 steel producers in the United States having both steel and pig-iron capacities. Our study omits Ford Motor Co. and Kaiser Co., Inc., both of which have done no public financing and as to which the Commission has no official information, and International Harvester Co., which is primarily a farm-equipment manufacturer and whose steel operations are not separately reported to the Commission. 2. Scope of study: The first part of our study is concerned with the financing of the steel industry. In general a business can obtain cash to purchase plant and otherwise finance its business in three ways: From the sale of securities (including bank borrowing and Government loans), from the retention of profits, and from certain noncash charges to income, such as charges for depreciation and depletion, which have the effect of retaining cash in the business. Our study has accordingly been prepared along these lines. In the course of discussing financing through the sale of securities, we have briefly commented upon the historical origin of each of the companies, and from the rather meager records available, endeavored to reconstruct, in a general way, their initial and early financial histories. The second part of our study is devoted to ascertaining the various interlocking relationships which exist between the steel companies themselves as well as with other companies. I shall deal first with the financial history, including the sources and uses of cash, and then turn to the question of affiliations. FINANCIAL HISTORY We have prepared a short report on each of the steel companies, setting forth the various financings, public and private, in which each has engaged, showing principal underwriters, and concluding with a summary presentation of presently outstanding securities. Where information was readily available, these reports also describe the initial organization of the company and the securities issued at 1 These summary reports are printed as exhibit S-188 in Steel Exhibits, pp. 349-363. that time. For purposes of ready reference we have summarized, in tabular form, the available information as to underwriting.1 We either have or will have distributed to the committee copies of each of the individual reports on the steel companies, together with copies of the tabulation showing the significant information with respect to the underwriting of steel securities. Now, of course, the presently existing 16 companies did not spring into existence full blown. They are, instead, the product of a great many mergers, consolidation and property acquisitions. It would be difficult to estimate the number of smaller companies which have gone into the 16 larger ones, but I think it is fair to say that the number is enormous. Indeed, I suppose one of the characteristics of the development of the steel industry has been not so much the construction of facilities by full-blown, large companies as it has been the organization, the creation and the development of the large existing companies by the process of merger, consolidation, and property acquisition. Generally speaking, we have not gone into the financial history of the hundreds of separate companies which were combined in times past into the 16 steel companies, to which we will advert this morning. Most of these companies, some of which can trace their origins to the founding of the Republic, are not now in existence and their history was not available to us. Further, we have confined our study to the top, or parent company in each of the steel holding-company systems. There are, of course, many subsidiary companies, but only a few finance publicly and, in any event, time would not permit individual studies of each. I should state, however, that in connection with the analyses of the surplus accounts of the steel companies in our determination of their sources and disposition of funds, we have proceeded on a consolidated basis. Now, what I mean by a consolidated basis is that it is an accepted and widely spread technique used in the field of accounting to prepare financial statements resulting in a single balance sheet, a single profitand-loss statement, a single surplus account covering both the parent company and all of the controlled subsidiary companies. Consequently, the data which we have on sources and dispositions of funds having been prepared on a consolidated basis, does, as a fact, take into consideration all of the business operations of the various controlled subsidiary companies. Some idea of how these separate companies were created and financed may be obtained from the report on Newport Steel, whose recent organization made it possible to obtain more detailed information than is now available in the case of the other companies. It may be observed that 14 of the 16 companies have this in common: The 14 are the product of combinations of existing businesses. All of the 16 companies except 2 (i. e., except Portsmouth Steel Corp. and Newport Steel Corp.) came into being through the merger or consolidation of many separate companies engaged in one or more operations connected with some stage of steel production. Not 1 of the 16 existing companies, moreover, so far as we have been able to ascer The tabulations appear in exhibit S-189 in Steel Exhibits, pp. 364–369. |