Rattling the Bones

Now that RFC has a new and vigorous boss, a lot of skeletons are coming out of the closet. Last week, Administrator W. Stuart Symington opened the door on what looked like the biggest, ugliest skeleton of all: RFC's $87 million loan to the Baltimore & Ohio Railroad, largest ever given to any U.S. railroad, during the regime of Jesse Jones. In the last eight years, the B. & 0. has paid back only $6,800,000, although the road is fat with profits. (Other roads have paid back 80% of their RFC loans.)

The skeleton was first glimpsed by New Hampshire's Republican Senator Charles W. Tobey four years ago. As chairman of a Senate subcommittee probing RFC, he wrote a blistering report accusing RFC and B. & O. officials of evading payment of the loans by "collusive" bankruptcy. But Tobey failed to get the committee to agree and the report was never released. Last week the report came out after an ex-Tobey aide, Randolph Phillips, a Washington financial consultant, reportedly leaked key sections to Herald Tribune Reporter Jack Steele and Columnist Drew Pearson.

Like many another depression-haunted road, the B. & 0. started borrowing in 1932, owed RFC $87 million by 1939, when it was supposed to start paying back. Since it was unable to do so, Congress passed a special law (the Chandler Act), which permitted the B. & O. to go into bankruptcy without its management's losing control. With that, a steady stream of officials left RFC and took B. & 0. jobs with the blessing of RFC Boss Jones.

The B. & O. went into bankruptcy again in 1944, at a time when its net profits for the four previous years were $117 million, highest in the B. & O.'s 120-year history. The railroad claimed it was forced into bankruptcy because it couldn't afford to pay its RFC loan. Senator Tobey charged that the bankruptcy was "collusive and irregular" because the road, with RFC's knowledge, had put on a poor mouth by juggling its cash. It had siphoned off $31.5 million to pay off bonds long before they were due, had underestimated its earnings for the following year by $49.5 million. It kept $60 million in working capital, rather than pay back RFC, even though one of its directors admitted it needed only about $6,000,000.

The RFC and the B. & O., said Senator Tobey, had conspired to put through the second bankruptcy so that the B. & O. could put off paying its RFC debt until 1965. Tobey charged that B. & O. officials had feared that the Democrats might lose the 1944 election and new RFC officials might not be as cooperative as Jones and his men, so they wanted to get everything set ahead of time.

After the second bankruptcy, B. & O. General Solicitor Cassius Clay (an ex-RFC lawyer), resigned in disgust, was joined by another B. & O. lawyer. Said 'lay after he quit: the loans were a "gigantic steal," a "frame-up" and a "fraud." The bankruptcy, said the Tobey report, did more than postpone payment of the loan. It enabled the railroad to convert the notes held by RFC into non-salable bonds, hence left RFC with a frozen loan rather than a live claim on the B. & O.'s assets. Once converted, RFC's collateral Dehind its loans to the railroad dropped in value by about 30%, or $21 million.

RFC Boss Symington wasted no time last week in getting to the bottom of Tobey's charges. He ordered a special investigation by former Federal Trade Commission Counsel Joseph J. Smith Jr., gave him full rein to dig into the mess. The Senate Banking & Currency Committee also went into action. It sent the Tobey report to the Justice Department to see if there was any ground for legal action against B. & O. and former RFC officials.

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