Court Opinion

ID: 7849506
Source: CourtListenerOpinion
Date Created: 2022-09-08 17:19:02.275723+00
Date Added: 2024-06-11T16:28:53.625572
License: Public Domain

ROBB, Senior Circuit Judge,
dissenting:
I dissent. In my opinion the majority’s holding contravenes the fundamental policy of the Glass-Steagall Act. That Act seeks to insulate commercial banking from the hazards inherent in investment banking by mandating a complete separation of those two functions. The majority decision violates this separation of functions by finding no difference under the Act between a lender in a commercial loan transaction and a seller in the sale of third-party commercial paper.
Although offering various justifications, the majority ultimately rests its holding on a “functional analysis” of Bankers Trust’s third-party commercial paper sales. In its functional analysis, the majority dismisses the difference between the bank’s role as “purchaser” in a commercial loan transaction and its role as “seller” in a third-party commercial paper transaction as a case of the bank “simply [being] on the other side of the transaction.” Ante at 150. This distinction, however, is determinative under the Act. Through the Act Congress sought a complete separation of commercial banking from investment banking. See Investment Co. Institute v. Camp, 401 U.S. 617, 629, 632, 91 S.Ct. 1091, 1098, 1099, 28 L.Ed.2d 367 (1971). See also Board of Governors of Federal Reserve System v. Investment Co. Institute, 450 U.S. 46, 62, 101 S.Ct. 973, 984, 67 L.Ed.2d 36 (1981). The critical distinction between commercial banking and investment banking is the bank’s role in the transaction.
When a bank lends money it is the investor. Following a thorough credit analysis of the potential borrower, the bank decides whether to approve the loan. A loan that the bank has approved and funded constitutes an asset of the bank for which the bank has placed its funds at risk. The bank’s generation of income and collection of principal are dependent on the wisdom of the bank’s credit decision, the adequacy of the loan provisions, and the bank’s perseverance in collecting the loan.
In contrast, when a bank markets third-party commercial paper, it is the seller, not the investor. As seller, the bank has less incentive to conduct a thorough credit analysis of the commercial paper issuer because the bank, unlike an investor, does not place its funds at risk. The bank earns its fee upon closing the sale of the commercial paper. Once the sale is complete, the bank has no direct financial interest in the issuer’s ability to meet its commercial paper obligations.
Ignoring the differences in the bank’s roles as lender and as seller, the majority characterizes commercial loans as “short-term” transactions and then avers that selling commercial paper is no different than making a commercial loan because both transactions have short maturities. Ante at 148-49. This analysis fails for two reasons. First, any interpretation of the Act must focus on the bank’s role in the transaction with a view to maintaining the Act’s separation of banking functions. The majority’s focus on maturities provides no help in determining whether the bank’s role in the transaction violates the Act. Second, the basic premise of the majority’s analysis is incorrect. Commercial lending is not limited to short-term loans. Longer maturity loans for the acquisition of fixed assets and for permanent increases in working capital are important commercial lending services which the majority conveniently ignores. See D. Hayes, Bank Lending Policies 89, 107,109 (2d ed. 1977); G. Munn, Encyclopedia of Banking and Finance 892 (7th ed. 1973). See generally Business Loans of American Commercial Banks chs. 7, 9 (B. Beckhart ed. 1959).
*38Similarly, an analogy between commercial paper sales and commercial loans, based on low default rates and the sophistication of the investors, ante at 149, is not helpful. Relying on these factors, a bank could transform “transactions unquestionably at the heart of the securities industry into permissible activity for commercial depository banks.” A.G. Becker, Inc. v. Board of Governors of the Federal Reserve System, 519 F.Supp. 602, 615 (D.D.C.1981).
The majority says that analysis of the hazards of mixing commercial and investment banking “confirms” the result reached through its functional analysis. I reach the opposite conclusion. In Investment Co. Institute v. Camp, 401 U.S. 617, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971), the Supreme Court lists several hazards that arise when commercial banks become peddlers of securities. First, commercial banks may suffer losses from imprudent security investments. Id. at 630, 91 S.Ct. at 1098. Second, “the bank’s salesman’s interest might impair its ability to function as an impartial source of credit.” Id. at 631, 91 S.Ct. at 1099. Third, commercial banks may lose customer good will if their depositors suffer losses on investments made in reliance on the bank’s involvement in the transaction. Id. Fourth, commercial banks may use their reputation for prudence to further their securities sales and subject that reputation to the risks necessarily incident to the investment banking business. Id. at 632, 91 S.Ct. at 1099. Finally, the bank’s promotional interests could conflict with its commercial banker obligation to render disinterested investment advice. Id. at 633, 91 S.Ct. at 1100.
The majority makes short work of the hazards discussed in the Camp decision. Those hazards, in the majority’s view, are irrelevant here because commercial paper is a “prime quality”, “very low-risk” investment, issued by “financially sound” issuers, and sold to “sophisticated” investors. Ante at 150-51. The majority’s self-fulfilling analysis misses the point. “Prime quality” and “very low-risk” are characterizations that are justified only after an investment has been terminated without any investor loss. The drafters of the Act were certainly more wary of such characterizations in 1933 than the majority is today. The Act has no provision permitting bank sales of securities which are “prime quality” or “very low-risk”.
To determine whether the bank’s sale of third-party commercial paper involves the hazards that the Act seeks to prevent, we mus,t take the perspective of the Act’s drafters. The recent' Penn Central experience provides such a perspective. See generally Staff of Securities & Exchange Commission, 92d Cong., 2d Sess., Report to Special Subcomm. on Investigations of the House Comm, on Interstate and Foreign Commerce, The Financial Collapse of the Penn Central Company (Subcomm. Print 1972) [hereinafter cited as Penn Central Report ]. As a consequence of its bankruptcy oh June 21,1970 the Penn Central Transportation Company defaulted on $82.5 million in commercial paper. Id. at 1. Goldman, Sachs & Co., the nation’s largest commercial paper dealer, had sold the commercial paper during the seven months preceding the bankruptcy. Id. at 290. The National Credit Office, a wholly owned subsidiary of Dun & Bradstreet, Inc., had given Penn Central’s commercial paper its highest rating, “prime”, until June 1, 1970. Id. at 283. The investors, whom Goldman, Sachs & Co. described as “sophisticated” and “capable of making their own investment decisions,” had purchased Penn Central commercial paper in $100,000 denominations. Id. at 290.
A review of the Camp warnings in light of the Penn Central experience presents a picture very different from that which the majority draws. First, although Bankers Trust makes no commitment to purchase unsold commercial paper, it makes clear in its promotional letter to commercial paper issuers that such purchases are within the ambit of its investment services.
*39However, in those rare occasions in which we would be unable to satisfy all of [the issuer’s] requirements through the placement of paper with investors, we may, from time-to-time and without prior commitment, lend [the issuer] money at the commercial paper rate and take back a commercial paper note.
(J.A. at 61). See also J.A. at 27, 50. The majority states that bank purchases of commercial paper would not present a problem because commercial paper is “prime quality, [is] sold only by corporations with well-established credit ratings,” and is a short-term investment. Ante at 150. Yet a bank’s purchase of Penn Central’s commercial paper, which fit the majority’s criteria just three weeks before it became worthless, would have been a perfect example of the hazard of “imprudent investment” that the Act seeks to prevent.
Second, the majority states that commercial paper issuers are “financially sound” companies and, therefore, have no need for commercial loans to strengthen their financial position. Ante at 150. However, as the Penn Central case demonstrates, commercial paper issuers are not exempt from financial difficulties. A bank’s interests in handling the issuer’s commercial paper sales and in protecting the bank’s reputation for sound financial decisionmaking could “distort its credit decisions or lead to unsound loans” to issuers for whom the, bank regularly sells commercial paper. Investment Co. Institute v. Camp, 401 U.S. at 637, 91 S.Ct. at 1102.
The third hazard discussed in the Camp decision arises when a bank sells third-party commercial paper under any circumstances less idealistic than those which the majority envisions. Bank depositors who are financially able to purchase commercial paper in large denominations are likely to be among the bank’s most important and influential clientele. Loss of their good will as a result of losses on investments which the bank recommended and sold could be detrimental to the bank’s commercial operations.
Finally, the majority makes the indisputable statement that when a bank sells “very low-risk” commercial paper of “very solvent” corporations to “large, sophisticated” investors the bank is not in a position to abuse its reputation for prudence or to give unreliable financial advice. Ante at 150-51. However, commercial paper sales that initially fit the majority’s criteria may, before the investors are repaid, create hazards that the Act seeks to prevent. .
Goldman, Sachs & Co. sold $5 million of the commercial paper of Penn Central, the nation’s fourth largest corporation, to American Express Company, a sophisticated investor, on May 1, 1970. Penn Central Report at 286, 291. That sale, following several indications of major problems at Penn Central, id. at 279-86, and preceding the Company’s collapse by just seven weeks, demonstrates the hazards present when there is a financial incentive to give unreliable advice. Had Bankers Trust been Penn Central’s securities peddler, the association with Penn Central’s collapse together with the resulting lawsuits which the bank would have had to defend would have severely damaged the bank’s reputation for financial prudence. See Comment, The Commercial Paper Market and the Securities Acts, 39 U.Chi.L.Rev. 362, 378-79 nn. 112-13 (1972).
We must analyze the Act with the intent of its drafters as our guide. The Act was a “drastic step”, Investment Co. Institute v. Camp, 401 U.S. at 629, 91 S.Ct. at 1098, taken during a bleak period in our country’s banking history. Its drafters intended a complete separation of commercial banking from investment banking without regard to the likely “soundness” of the securities which a bank might sell. Senator Bulkley stated this uncompromising position at the time of the Act’s passage: “If we want banking service to be strictly banking service, without the expectation of additional profits in selling something to customers, we must keep the banks out of the investment security business.” Investment Co. Institute v. Camp, 401 U.S. at 634, 91 S.Ct. *40at 1100 (quoting 75 Cong.Rec. 9912 (1932) (remarks of Sen. Bulkley)). Permitting a bank to sell third-party commercial paper presents the same hazards that “Congress determined ... made it necessary to prohibit ... [investment banking] activity to commercial banks.” Investment Co. Institute v. Camp, 401 U.S. at 636, 91 S.Ct. at 1101. As a result, we must look closely to determine whether the Act prohibits banks from selling third-party commercial paper.
Unlike the majority, I find the Act’s language helpful in determining whether commercial paper is a “note” or “security”. For our purposes the Act raises two issues. The first issue is whether commercial paper is an instrument with which the Act is concerned — “stocks, bonds, debentures, notes, or other securities,” 12- U.S.C. § 378(a)(1) (1976). The second issue is whether Bankers Trust is engaged in the “issuing, underwriting, selling, or distributing,” id., activities which the Act prohibits.
The majority characterizes the terms “stocks”, “bonds”, “debentures”, and “notes” as “specific type[s] of long-term investment securitpes].” Ante at 143-44. The majority concludes that a broader definition of the term “notes” would be inappropriate because it would include instruments such as commercial paper “which have little in common with these long-term investment securities.” Ante at 144. The majority’s reliance on maturities to force a narrow meaning onto the terms of the Act is misplaced. The Supreme Court has interpreted the Act’s terms broadly.
[N]othing in the phrasing of either § 16 or § 21 . . . suggests a narrow reading of the word “securities.” To the contrary, the breadth of the term is implicit in the fact that the antecedent statutory language encompasses not only equity securities but also securities representing debt.
Investment Co. Institute v. Camp, 401 U.S. at 635, 91 S.Ct. at 1101. See also Board of Governors of Federal Reserve System v. Investment Co. Institute, 450 U.S. at 65, 101 S.Ct. 986. The terms “stocks”, “bonds”, “debentures”, and “notes” have broad meanings which encompass a multitude of different instruments. The term “other securities” further indicates the breadth of the Act’s coverage; it catches any instruments which are not otherwise defined by the prior four terms. Taken as a group these five terms cover the spectrum of instruments which a corporation might seek to market. Relying “squarely on the language ... of the Glass-Steagall Act,” Board of Governors of Federal Reserve System v. Investment Co. Institute, 450 U.S. at 65, 101 S.Ct. at 986, I would find that commercial paper is a type of instrument with which the Act is concerned.
Although analysis of the Act’s terms and of the hazards with which the Act is concerned requires a finding that commercial paper is a “note or other security” under the Act, our inquiry is not complete. There remains the second issue of whether Bankers Trust’s commercial paper sales is an activity which the Act prohibits. However, neither the Federal Reserve Board nor the District Court reached this second issue. A.G. Becker Inc. v. Board of Governors of Federal Reserve System, 519 F.Supp. 602, 616 n.10 (D.D.C.1981). Therefore the second issue is not before us on this appeal.
I would affirm the District Court’s finding that commercial paper is a “note or other security” under the Act, and would remand this case for the further determinations suggested in this dissent.