Prelude to Scandal?

The ink was barely dry on the 1934 Corporate Bankruptcy Act when depression-sunk U.S. railroads rushed into Federal Court to be bailed out. Most of them, representing investments of $4 billion and more than 40,000 miles of track, are still in court. Why?

Montana's Burton Kendall Wheeler, rambunctious chairman of the Senate Interstate Commerce Committee, recently proposed a Senate investigation to find out. Last week, the Wheeler committee put a burr under the Senate in the form of a 94-page report on railroad reorganizations. The report painted an ugly picture.

Quick, Cheap, Painless. Section 77 of the Bankruptcy Act was designed to make bankruptcy a quick, cheap, financially painless procedure for the debtor. It turned out to be none of these for the original security holders. As a basis for a railroad's reorganization, the Interstate Commerce Commission has had to make long-range forecasts of the road's earnings. ICC had warned that it could not do this, proved it by guessing wrong on at least nine roads.*

The result, according to the report: some $2.5 billion in railroad stocks, had been written off the books as worthless, some just before the war boom began. If this had not been done--and earnings had been pro rated--these stocks would have earned an estimated $750 million from 1939-44.

Furthermore, court-appointed receivers held on to war-brought cash "in far larger amounts than were needed or could be justified. . . ." They should have used it, said the report tartly, to reduce funded debt and thus reduce interest charges. Actually, fixed interest charges of bankrupt roads increased 4.1% between 1940 and 1944, while charges for other roads, free to use wartime earnings to decrease fixed charges, declined 12.5%. In effect, said the report, the road in trouble is "gouged."

Prosperous Bankrupts. Despite all this, roads in reorganization have made so much money during the war that they are actually solvent. Some examples: in four and a half years, the Cotton Belt (St.Louis-Southwestern) earned its annual interest charges 42 times and made about $150 a common share to boot; in 1944, the Missouri Pacific had excess profits of $46,380,000--larger than any other railroad system in the U.S. except the Santa Fe. Yet the Cotton Belt, Mopac and other roads with good wartime profit records continue in reorganization.

As to who was keeping the roads in bankruptcy, Wheeler named no names, but concluded suspiciously: "The only reason I can see is that some receivers and lawyers want them to stay in bankruptcy so they can continue to draw down fees. Frankly, I think it is getting to be a scandal."

Two days after the report appeared, the Wheeler committee sat down and revised the Wheeler bill, S 1253, which would permit railroads to reorganize themselves voluntarily under the ICC. In this way, the committee hoped that roads would save reorganization fees, and maybe common stockholders would get a better break. This week, while awaiting action from the Senate on its investigation resolution, the Wheeler committee opened hearings on the new bill.

* Chicago & North Western; Chicago, Milwaukee, St. Paul & Pacific; Chicago, Rock Island & Pacific; Denver & Rio Grande Western; Missouri Pacific; New York, New Haven & Hartford; St. Louis-San Francisco; St. Louis-Southwestern; Western Pacific.

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