Memorandum of Disapproval of Bill Relating to the Bank of America National Trust and Savings Association.

I HAVE withheld my approval from H.R. 1672, "An Act For the Relief of Bank of America National Trust and Savings Association."

The purpose of this bill is to pay to the Bank of America National Trust and Savings Association the sum of $20,403.65, representing the net loss sustained by that bank in connection with loans it granted under regulation V to finance the operations of San Jose Manufacturers, Incorporated, under a certain contract which that company had with the War Department during World War II.

It appears that early in 1941 the San Jose Manufacturers, Incorporated, was organized by certain citizens of San Jose, California, in order to effect a consolidation of the machinery and equipment of a number of small machine shops in that city so as to be able to assist the United States in the defense work program during World War II. The operations of San Jose were financed entirely by the claimant. The United States, in turn, through a regulation V loan, assumed 80 percent of any losses which might be sustained by the bank.

In January 1942, the San Francisco Ordnance District placed a letter order, later superseded by a formal contract, with San Jose for 98 105-mm howitzer carriages at a unit price of not to exceed $6,000. Delivery of the 98 gun carriages was required to be completed in November 1942. But up to February 1943, when San Jose was completely reorganized, none of the gun carriages had been delivered to the Government, although an amount equal to the entire contract price for the carriages had been expended. However, all of the gun carriages ordered from San Jose were completed and delivered to the Government in January 1944.

It appears that upon the liquidation of San Jose, and after applying to its indebtedness to the bank all of the funds received from the sale of the assets of the corporation, as well as all of the funds received from the War Department in payment for said 98 gun carriages, there remained a balance due the bank of $348,676.98. Since 80 percent of this amount was covered by the V loan guarantee, the net loss to the bank, after certain other minor adjustments had been made, amounted to $69,735.40. The award contained in the present bill was computed by diminishing this latter figure by $55,000, the amount of interest paid by San Jose to the bank, and then adding to the resulting figure the sum of $5,668.65, representing the cost to the bank of maintaining one of its. officials in the San Jose office for the purpose of observing the manner in which the loaned funds were expended.

Ordinary business prudence requires that a financial institution, before making a large loan to a manufacturer to finance its production of goods under a contract, ascertain full details concerning the purpose of the loan, the manner in which the money is to be applied, the ability of the borrower not only to fulfill its obligations under its production contract but also to make repayment of the loan. In the present case it appears that the bank fully informed itself concerning all such matters, and that it, in fact, had one of its officers spend a large portion of his time in supervising the operations of San Jose.

On May 22, 1945, Under Secretary of War Robert P. Patterson, in a statement concerning the refusal of the War Department to grant relief to the bank under the broad authority contained in the First War Powers Act, said:

"Almost from the outset the company [San Jose] had difficulty in organizing properly for the performance of the contract, and over a considerable period the Ordnance Department found it necessary to give it assistance of various types.

"When the concern had not been able to make delivery of any of the carriages contracted for even after the original completion date, the Ordnance Department felt that it would be impossible for it to fulfill its obligation. However, a change of management was effectuated, and thereafter the Bank of America advanced additional funds to finance the completion of the contract.

"It is the Bank's representation that because the Ordnance Department knew of its furnishing these additional funds., it tacitly agreed to increase the price under the contract. So far as I can ascertain no responsible Ordnance Department officer or employee who had knowledge of the facts at any time stated or implied that such was the case. The willingness of the Ordnance Department to see the Bank advance additional funds was based on a hope that with the additional funds and under the new management, San lose Manufacturers would be able to complete the contract, deliver the gun carriages, and reduce the amount of the loss both to the Bank of America and to the War Department which, as you know, guaranteed the V-Loan to the degree of 80%. The carriages were completed and the net loss to the Bank was thereby very substantially decreased.

"The initial mistake in the entire transaction appears to have been a belief on the part of San lose Manufacturers that it could manufacture these carriages for $6,000, the maximum that Ordnance felt warranted in allocating to the project.

"The War Department was purchasing the same carriage from other manufacturers even then for less than $6,000. It is doubtful if it would have been justified in contracting originally at a higher price. There appears no basis on which it would now be proper for the War Department to increase the amount paid for these carriages over that originally contracted for. In reaching this conclusion, consideration has been given to the fact that the entire operation was carried out in an attempt to implement the desires generally expressed by Congress that small plants should be used as much as possible in the war effort."

The above-indicated facts make it clear that there is no equitable basis for payment of the proposed award, the effect of which would be to make the United States an insurer of all the losses which the bank sustained on its loans to San Jose.

If this bill were to be approved it could establish a precedent which would be extremely undesirable from the standpoint of the Government. Even though the War Department losses on V-loans during World War II were relatively small, the fact remains that the success of essential loan guarantee programs would be seriously jeopardized if, after meeting its obligation on the guaranteed portion of a loan, the Government were later compelled to pay a claim for the unguaranteed portion. I believe it would be most unwise to do anything which might tend to lessen the effectiveness of the guaranteed loan programs which have contributed so much to past and present mobilization efforts.

In my opinion, the instant bill is illustrative of a growing trend toward a philosophy which I find most disturbing. This is the disposition on the part of many individuals and organizations to assume in dealings with the Government that, no matter what contractual or other arrangements have been entered into, the United States should bear all the risk arising out of such dealings while they should receive all the profits. Such an attitude is manifestly inimical to the vitality of our free enterprise system, the maintenance of which becomes a matter of increasing concern in view of its importance to the continued strength of the free nations.

For the foregoing reasons, I feel obliged to withhold my approval from H.R. 1672.

HARRY S. TRUMAN