mission. This report shows that after allowing for all the wartime earnings, cash, and all recorded assets, that there is a deficit in corporate surplus as of December 31, 1946, of $146,258,607.

To the recorded deficit there must be added various secured and unsecured claims which have already been adjudicated and allowed by the Connecticut District Court. These claims, caused in large part by disaffirmance or rejection of leases and guaranties, and default on bonds, together with interest thereon, which would be payable before the preferred or common stock can be recognized, amount to $99,849,311.

Adding the amount of $99,849,311 to the deficit of $146,258,607, makes a total of $246,107,918, which more than wipes out the stockholders' equity of $206,155,300.

In addition there is interest of $58,583,954 on common claims which would be payable before any stock equity can be recognized. These figures clearly indicate that there is no equity for the stockholders of the New Haven Railroad and I do not see how anything can be done to pump any value into the property either by anticipated earnings or increase in the value of the assets. It is regrettable that this is the situation. It is hard fact, however, for which neither the present management nor the Interstate Commerce Commission can be held responsible, but which must be taken into account on any plan of reorganization, whether voluntary or involuntary.

To more graphically illustrate the situation on the New Haven, I have had an exhibit prepared in chart form which I am now presenting.

(The chart is inserted facing the preceding page.)

Mr. CARMICHAEL. As noted by the caption, all figures exclude equipment obligations and of course the present common and preferred stock. This chart shows that the total claims as of December 31, 1946, before preferred and common stocks, amount to $422,800,000. It shows the par value of the proposed capital structure in the ICC plan to be $342,100,000.

Mr. Wells informed you that $365,000,000 is the figure, which includes equipment trust notes, and some collateral bonds that are excluded in this chart.

It shows that there is over $80,000,000 of creditors' claims that will not be taken care of by the proposed new capital structure. It also shows the market value from 1941 to April 30, 1947, of the present capitalization dealt with in the plan including unsecured claims but excluding preferred and common stock. It will be noted that the total market value of the creditors' claims has always during this period been far below the par value of the capital structure which is proposed as the maximum amount allowed for settlement of their claims.

At the hearings before the House committee and again at the hearings before this committee, statements have been made as to the large accumulation of cash on hand with the various railroads under reorganization due to the large wartime earnings. Statement has been made that the New Haven Railroad "has enough cash on hand to pay all its accumulated interest in full and still leave some working capital."

Senator REED. Who made that statement?

Mr. CARMICHAEL. That statement was made by Mr. Forbes yesterday.

Senator REED. It did not impress itself on my mind if he did. Mr. CARMICHAEL. I have a copy of his statement here if you would like to have it.

Senator REED. It is in the record.

Mr. CARMICHAEL. This statement is not in accordance with the facts.

The total current assets of every description as of March 31, 1947, the latest date for which balance sheet has been prepared were $76,899,423.

As of the same date, current and all other liabilities already incurred and for which cash would have to be paid, amount to $56,102,718, leaving net working capital, including materials and supplies, of $20,796,705.

Deducting materials and supplies, not available as cash, of $10,400,000, leaves a balance of liquid assets available as working capital of $10,396,705.

As of March 31, 1947, the amount of accumulated interest is $33,399,030.

The foregoing figures clearly indicate that the net working capital of the New Haven Co. is hardly sufficient for the requirements of the trustees for administration and operation of the property; and certainly no cash is available for payment of accumulated interest.

Some of those favoring the proposed legislation have stated that the roads not in reorganization have been more aggressive in refinancing or buying in their outstanding bonds with the result that they have reduced fixed charges to a minimum. During the reorganization proceedings it has been impossible for the New Haven trustees to buy in the outstanding bonds, as the district court has insisted that all cash not required for the administration of the property be used to pay interest in default, as the cash available was earned on the property covered by the mortgage.

However, the approved reorganization plan will result in substantial reduction in the bonded indebtedness and total capital structure as well as the fixed charges, as shown by the following:

The reduction in funded debt carrying fixed interest charges is 53.6 percent.

The reduction in funded debt after allowing for new income bonds is 23.4 percent.

The reduction in annual net fixed charges and guaranties before allowing for contingent interest on new income bonds is 65.6 percent. The reduction in annual net fixed charges and guaranties after allowing for contingent interest on new income bonds is 42.2 percent. During the course of the committee hearings in connection with the proposed legislation, statements have been made that the ICC reorganization plans have been based on the poor earnings of the depression period in the 1930's. In the case of the New Haven this is not the fact.

The ICC report shows, Court Record, page 7938, that based solely on earnings, a capitalization of only $267,773,480 would be produced by capitalizing the estimated income of $13,388,674 available for fixed charges in a prospective year, at a rate of 5 percent. If the aver age income available for interest in the period 1927-38, inclusive, were capitalized at the same rate, the result would be $337,990,940.

Based on the cost of reproduction of the property less depreciation, and including the present value of lands and rights, plus the value of the outside investments, the Commission found the total capitalization would not exceed $368,764,809. The Commission allowed a maxi

mum capitalization of $365,000,000.

During the wartime period, from 1941 to 1945, inclusive, the New Haven had net earnings available for fixed charges very much in excess of the $13,388,000 used by the Commission as the prospective average. However, it must be borne in mind that these were wartime earnings and although the real increase in passenger traffic did not come until 1942, it was this class of traffic that showed the largest increase during the war years, 1942 to 1945.

During these years, 1942 to 1945, the New Haven showed an annual average net railway operating profit of $12,132,000 from its passenger service operations. For the 7 years preceding 1942, the New Haven had an average net railway operating loss of $2,182,000 from its passenger operations.

In 1946, before Federal income tax carry-back credits, the net railway operating loss from passenger operations was $3,495,000. On the same basis, the net railway operating loss for 1947 is estimated at $5,386,000. This is important as far as the New Haven is concerned, as almost 47 percent of its total gross revenue came from passenger service operations during 1946, and for 1947 it is estimated to be aboue 43 percent.

In my opinion it is going to be difficult to reach the $13,388,000 figure used by the Commission as earnings available for fixed charges in the future. This is because of the decline in volume of traffic, particularly in passenger, with increased labor costs; increased pay-roll taxes and also increased charges caused by the Crosser Act, effective January 1, 1947; and increased fuel and material costs.

Since the Commission's plan was issued in 1940, labor rates have increased 54 percent and material prices 61 percent. Included in the labor increase is the 20 percent wage increase granted in 1946, and it is reasonable to assume that wages will again be increased this year. Material prices have increased at least 25 percent since January 1, 1946.

In view of these facts and the outlook for the future earnings it is my opinion that the proposed capital structure and the fixed and contingent charges are on a maximum basis for the future.

If any equity is to be given to the stockholders, it must be taken from the securities which the secured and unsecured creditors are receiving in the reorganization. In view of the fact that these creditors, particularly the unsecured creditors, coming ahead of the stockholders are not being paid in full for their claims, I do not see how any equity can be artificially created for the stockholders.

Senator REED. Do you know of anybody who proposed to create any such equity artificially?

Mr. CARMICHAEL. That is the only way under these facts it could be created Senator. It is regrettable that this is the situation, but these are the facts as I found from my study.

Now, yesterday when ex-Governor Ely of Massachusetts was here, he talked about the Old Colony situation, and the method in which it had been handled by the New Haven trustees, and gave some facts with regard to that.

I think I would like to give the committee some additional facts with regard to the Old Colony situation.

Senator REED. I think you are entitled to do that.

Mr. CARMICHAEL. Thank you.

The plight of the Old Colony Railroad is the result of changed business conditions in the territory which it serves, and the competition of private automobiles, motorbusses, and motortrucks.

As stated by the Governor, the Old Colony Railroad is comprised of the lines extending from Fitchburg and Lowell to Framingham, to Mansfield, to Taunton, from Taunton to Fall River and Newport, from Taunton to New Bedford, and the network of lines extending south from Boston that serve the South Shore and Cape Cod.

In 1893, when the Old Colony Railroad was leased by the New Haven, its principal freight traffic was provided by the cotton textile mills located in Lowell, Fitchburg, Taunton, Fall River, and New Bedford.

We all know what has happened to the cotton textile industry In 1920, there were more than 100 large cotton textile mills located in Fall River alone. Today there are but 12.

The situation in New Bedford, Taunton, Lowell, and Fitchburg is quite similar.

Before the advent of motor vehicles there was also a large volume of local freight traffic, which moved between points on the Old Colony Railroad, particularly to and from Boston. Today that local shorthaul freight traffic is all handled by motortrucks operating on the public highways.

There are numerous motorbus lines which parallel the lines of the Old Colony Railroad. Almost every family in the territory served by the Old Colony Railroad has its own automobile and provides its own transportation, when formerly they traveled by railroad.

The unfortunate position of the Old Colony Railroad has been thoroughly investigated by the experts on the staff of the Interstate Commerce Commission and by outside experts employed by the Federal court as well as by experts hired by a legislative commission or committee of the Commonwealth of Massachusetts.

In the year 1946, the Old Colony Railroad had a deficit in net railway operations of almost $4,000,000.

The year before that, it had a deficit of $1,000,000.

Before the war, its deficits were running from $2,000,000 to $3,000,000.

Of course, during the war period from 1942 to 1945, it did show some profits, but the entire situation of the Old Colony is due to the change of the conditions in that territory, and as the Governor failed to state, it has been thoroughly investigated even by representatives of the Commonwealth of Massachusetts.

The primary reason for this showing are the large losses in the passenger operations. An expert former railroad president, as a matter of fact, hired by the legislative commission of the Commonwealth of Massachusetts, confirmed that and offered suggestions, such as the abatement of all taxes, increase in fares, and other matters, but did not have any criticism as to the application of the segregation formula which Governor Ely in his statement yesterday said would be difficult to attack or to find wrong.

We have been checked, and the segregation formula has been examined by all kinds of experts, and we have been before the court many times.

I think that briefly gives this situation so far as the Old Colony Railroad is concerned, Senator, and completes my statement.

Senator REED. Thank you.

Mr. Loomis, do you want to appear?

STATEMENT OF JAMES LEE LOOMIS, CHAIRMAN, BOARD OF DIRECTORS, THE CONNECTICUT MUTUAL LIFE INSURANCE CO. OF HARTFORD, AND A TRUSTEE, THE NEW YORK, NEW HAVEN & HARTFORD RAILROAD CO., NEW HAVEN, CONN.

Mr. LOOMIS. My statement is very brief. You may feel it is argumentative. I have a background as a lawyer, although I reformed years ago and went into other forms of business.

Senator REED. Very much of the testimony presented to committees of this character is argumentative.

Will you sit down, please, or you may stand if you desire.

Mr. LOOMIS. My comments are addressed primarily to section 2 and the following portions of the bill.

I am not unmindful of the hardships of railroad stockholders, not only in this decade, but in past decades; and not only in bankrupt railroads, but in solvent corporations as well. I am sympathetic to those who have risked and lost their money in the railroad industry. Concerning the lost equity of stockholders, the word generally used by those promoting this legislation is "forfeiture." This is not the word with which to define the losses that have befallen these stockholders in the past 15 or 20 years. In common with conditions constantly prevailing in a capitalistic economy, conditions bearing with greater or less hardship on various forms of enterprise, the equity estate has vanished.

The bill strikes me as unsound in principle with far-reaching implications that may cause more difficulty in the future than that which the bill is now calculated to remove. The judicial denial of equities alleged to exist may be no more unfortunate than to assume by statute the presence of equities that do not exist.

Senator REED. Where is there any such an assumption in this bill? Mr. LOOMIS. It seems to me, Mr. Chairman, inconsistent and impossible by law to turn a property over to stockholders unless it carries the assumption of a financial interest in the stockholders. I cannot see any other basis for it. That is an opinion.

Senator REED. They did have an equity at one time; did they not? Mr. LOOMIS. The fact that they had an equity one time does not, in my opinion, justify the turning over of any property, whether it is railroad or public property or bankrupt property or a steel company-turning it over to the stockholders who have no equity at the

time it is done.

Senator REED. Well, that is an opinion again; is it not?

Mr. LOOMIS. I state it as an opinion, sir, and it is argumentative. If a bankrupt road covers its fixed charges for the stated period, the bill assumes an equity as now possessed by the stockholders of such road whether an equity does or does not exist in fact. That is