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4 The Texas Observer There will be a three-week lag between this Observer and the next one. Happy summer, everyone. Co., Panhandle Eastern, International Telephone & Telegraph, Ethyl Corp., Weingarten’s. Clearly, at the center of power in the First City structure are the energy-related businesses, some of them in obvious competition with each other. While the Federal Trade Commission considers it illegal for a director to serve on the ,boards of two competing companies even if they are selling different products there is nothing preventing directors from competing companies from sitting on the same board of banks they mutually control. The 24 directors of First. City National hold more than 100 other commercial directorships in major companies and corporations and numerous non-commercial trusteeships, many on the boards of wealthy foundations. Ironically, the prosperity of the bank holding companies in Houston and the state has come while the financial world itself has been in a cloudy condition. Still, apparent trends in profitability determine the price of a bank’s stock, and the price of the stock has become the name of the game. Like any conglomerate, an expanding bank holding company seeks to acquire new properties, although not by , cash but by an exchange of stock. The higher the market price of bank stocks, the smaller the number of shares that must be offered to pay for any given acquisition and the greater the future profits per share that the bank can buy. In January, for instance, Texas Commerce Bancshares completed a merger with Pan American Bank of Brownsville in a transaction that had a value of nearly $7.5 million. But no money changed hands. Instead, the merger agreement provided for the exchange of 227,000 shares of TCB common stock for all 200,000 outstanding common shares of Pan American Bank. Thus the acquisition of banks, much like the merger of companies in the Sixties, has rested on the exchange of a bank or company for “funny money” combinations of convertible preferreds, debentures, and warrants, as well as highly leveraged common stock. That in itself has made for an accounting technique among conglomerates and holding companies that has worried the Federal Trade Commission. Many subtle devices enable merger-active companies to report substantial increases in earnings per share without improving operating efficiency. Among the most notable is the pooling of interests method of accounting for business combinations. Despite two accounting studies recommending its abolition, pooling remains the most common method of accounting for mergers effected by an exchange of voting stock. Under a pooling of interests, the book values of both banks or businesses are simply added together. In this circumstance, the values prevailing at the time of acquisition need have no relation to the actual market value of the transaction. Through acquisition then, an acquiring company can do what it cannot do through internal growth that is, list the value of assets at less than real cost. HOUSTON’S three super bank holding companies all use pooling of assets with their newly-acquired member banks and interests. Assets carried on the books of the acquired company at an unrealistically low value often yield a windfall. Actually, it makes little difference whether the gain in earnings is real or illusory because the key is in the price-earnings ratio. The price-earnings ratio denotes the range between the price of a bank’s stock and its earnings. Thus a stock earning $1 per share and selling for $20 has a price-earnings ratio of 20 to 1. The glamour stocks of Wall Street have always been those of companies with high price-earnings ratios the wider the spread, the more attractive the bait. Any time a conglomerate or holding company acquires another company with a lower price-earnings ratio, it automatically improves its own ratio. The greater the differential in their ratios, the fewer shares it takes to swing the deal, and the greater is the increase in its earnings per share. It is no wonder then, that next to oil, banking is the most lucrative business in Texas. And, with the uncertainties of the American energy market today, banking is getting more lucrative all the time. Once, banking gave a somewhat old-fashioned image as a fortress of conservatism and stability. But bankers and banking have changed considerably in the Post-World War II years. Some have called it a revolution. Undoubtedly, a major factor has been the banks’ discovery of the one-bank holding company. Originally intended as a convenience for small-town bankers who wanted to put their bank in the same corporate shell with an insurance agency or a real estate business, the holding company has become a convenience for large banks, too. FIRST CITY Bancorporation of Texas is a $4 billion bank holding company providing a full line of domestic and international banking, investment,, leasing and other financial services. There seems little doubt that the current director representation on First City’s board presents precisely the anticompetitive potential for possible abuse expressed by Lewis A. Engman, chairman of the Federal Trade Commission, in congressional hearings last year: “There is concern that representation of competitors on the same bank boards may lead to exchanges of information between competitors, collusive activity, and possible communities of interest strong enough to provide a substantial handicap to non-represented companies dependent THE TEXAS OBSERVER “A tradition of honesty, accuracy, fairness, and tireless investigation has enabled the Texas Observer to occupy a unique place in Texas journalism.” The Adversaries: Politics and The Press, Bill Rivers, ed. “The always impious Texas Observer . . . We recommend it.” I. F. Stone’s Bi-Weekly, May 31,1971 … the Progressive and the Texas Observer, both of them knowledgeable, superbly written, and leavened by a wit of which conservatives seem incapable.” George Frazier, The Boston Globe, Dec. 15, 1973. “Oddly, the impact of some of its biggest stories comes on the rebound: They are picked up and commented on nationally before the state’s daily press recognizes them.” Lew Powell, Chicago Journalism Review, April, 1974 “One of the best publications in the country remains the Texas Observer.” Pete Hamill, The New York Post, Dec. 18, 1969 “The Observer is the conscience of the political community in Texas.” Andrew Kopkind, The New Republic, Nov. 20,1965 “I think the Observer ranks with The Progressive as one of the two most useful papers in the United States.” John Kenneth Galbraith, Sep. 16, 1970 “The Observer keeps coming out with serious and thorough news of this critically important state which people inside and out can’t get elsewhere.” Nicholas von Hoffman, The Washington Post, Sep. 10, 1971 [ ] One Year $10.00 [ ] Two Years $18.00 [ ] Three Years $25.00 \(Non-Texas addresses exempt from 5% sales tax Name Street City & State Zip [ ] Check end.; [ ] Bill me 600 WEST 7 AUSTIN, TEXAS 78701