I think. You had a real serious problem on your hands financially, at least in May, there is no question about it, when the bond issue didn't go through. But before that you certainly must have been alerted by someone in the operation that things were not going very well and you had serious problems, you were faced with a big loss in the first quarter.

Mr. GORMAN. Well, we had a big loss in the last quarter of last

year.

Senator HARTKE. Yes. That is when you first came aboard.
Mr. GORMAN. I came aboard December 1.

Senator HARTKE. The first thing you were faced with was a tremendous loss as compared to an estimate to the contrary. Mr. GORMAN. That is right.

Senator HARTKE. And this gave you no warning whatsoever?
Mr. GORMAN. Oh, certainly. I was aware we had a loss.
Senator HARTKE. What did you do about it? Anything?

Mr. GORMAN. I set about to try to develop a program to improve the situation. We got our budgets set for the first time in the railroad, and had them approved by the board in January.

Senator HARTKE. Did you see the budget proposals of Mr. Perlman which he submitted?

Mr. GORMAN. No.

Senator HARTKE. Mr. Saunders didn't show those to you?

Mr. GORMAN. At what time did Mr. Perlman submit the budgets? Senator HARTKE. As I recall, some time in June of 1969. He said they stayed on the desk.

Mr. GORMAN. I don't know where they were. But I came on the property December 1, and the first order of business was to get the budget going for 1970.

Senator HARTKE. But you didn't have the opportunity to review the budget proposals of Mr. Perlman, who had been operating the company before.

Mr. GORMAN. That is right.

Senator HARTKE. Any reason you can give us why they would not have been given to you, the benefit of the previous operating chief executive?

Mr. GORMAN. It may have been there. I am not saying I was denied it, understand.

Senator HARTKE. But you didn't see it?

Mr. GORMAN. No.

Senator HARTKE. When did you first fear you would have to go into reorganization?

Mr. GORMAN. I beg your pardon?

Senator HARTKE. When did you first have the fear you would have to go into reorganization? When did that occur?

Mr. GORMAN. It occurred when the Government guarantee of loans was denied the railroad.

Senator HARTKE. Did you suggest at that time any other methods of raising cash?

Mr. GORMAN. I think all other methods had been exhausted.

Senator HARTKE. Can you explain for the record who is involved in the reorganization, that is, what power do the trustees in bank

ruptcy really have over the assets of the Pennsylvania Co., that is the holding company itself?

Mr. GORMAN. The Pennsylvania Co. is not really the holding company. The Pennsylvania Co. is an investment company that is 100 percent subsidiary of the Transportation Co. and they have full

power over that.

Senator HARTKE. What power do the trustees have over the assets of the Pennsylvania Co. They are not involved in reorganizationMr. GORMAN. No, they are not in reorganization and they have full power, if they would exercise it.

Senator HARTKE. What about the assets? Are there any assets there of the Pennsylvania Co. which could be touched in order to help the Transportation Co.?

Mr. GORMAN. The assets are there, but the stock is pledged, as I understand it, for loans that have been made and the money found its way into the Transportation Co.

Senator HARTKE. Do you have any idea what assets are encumbered, and which are not, either you or Mr. O'Herron?

Mr. O'HERRON. Yes. Let's go back to the Pennsylvania Co. I believe you know the assets that are essentially in Pennsylvania Co. They are Norfolk & Western stock, which is encumbered, the Arvida stock which is not encumbered, Great Southwest which is not encumbered and Buckeye Pipe Line Co. Those are the principal assets. Buckeye Pipe Line is encumbered. The stock of Pennsylvania Co. is held as collateral against a $300 million bank loan in the Transportation Co. There are also other debts in Pennsylvania Co., which I feel, based on certain legal opinions that have been rendered to me, has priority over any of the assets in Pennsylvania Co. before the Transportation Co.

Senator HARTKE. Mr. Gorman, on June 10 did you make a speech concerning the prospects for the Penn Central Railroad?

Mr. GORMAN. I didn't make any speech. I have not made any public speeches. There may have been a press conference on that date.

Senator HARTKE. Didn't you talk to some investment executives at that time?

Mr. GORMAN. No, sir. I have never talked to any investment executives.

Senator HARTKE. You didn't talk to the Federal Reserve people, members of the Federal Reserve Board?

Mr. GORMAN. No, I haven't talked to the members of the Federal Reserve Board at all.

Senator HARTKE. On June 10, you made a statement someplace: The management of the company has recently been changed by the replacement of the executive officer.

This is a statement from the Federal Reserve Bank of New York that I am reading from.

In a recent statement, the new chief executive described his plans to recruit a new management team with particular references to improving the chief operations officer and improving the chief financial officer.

Isn't it true you gave a rather glowing account at that time of some of the things that could be accomplished to improve the company's position.

Mr. GORMAN. I don't consider it a glowing account at all. This date is not June 10. I didn't ever meet with the members of the Federal Reserve bank. I met a group of representatives of other banks. I can't tell you the exact date, but it can be determined.

Senator HARTKE. All right. Was that at the Federal Reserve bank? Mr. GORMAN. Yes.

Senator HARTKE. What in substance did you say at that time? Did you give an indication at that time of the impending financial collapse of the railroad?

Mr. GORMAN. I said about what I said here today, that we have a good management group there, we have 90-odd thousand people that are interested in making this railroad go, that we needed financial assistance, and that I felt that with that assistance, we could make it go.

Senator HARTKE. Let me ask you this: There have been some allegations about Penn Central's management problems. In your opinion how good are the controls over inventory and scrap, scrap sales?

Mr. GORMAN. Well, I think

Senator HARTKE. Let me be specific. It has been brought to the attention of the committee that in Selkirk, N.Y., the Penn Central storage depot inventory indicates there is between $15 to $18 million shortage of materials in stock.

Mr. GORMAN. I would say that that couldn't possibly be true.
Senator HARTKE. That is not possibly true?

Mr. GORMAN. No.

Senator HARTKE. About how much shortage is there?

Mr. GORMAN. I don't know how much shortage there is. But I can tell you the total inventory on the railroad, the whole railroad, probably is not more than about $90 million. Certainly that much in Selkirk would be unusual at any one time.

Mr. O'HERRON. We are running that rumor down, Senator Hartke. I got a call from the ICC on it.

Senator HARTKE. Yes. We will have the ICC look into it. What about the alleged shortage in Indianapolis?

Mr. GORMAN. I don't have any knowledge of it. The auditors are checking, because there is a rumor and we always check those things out.

Senator HARTKE. And a shortage of funds, right?

Mr. GORMAN. Anything that doesn't look right.
Senator HARTKE. But you are aware of that rumor?
Mr. GORMAN. Yes, sir; as of yesterday.

Mr. O'HERRON. The third one was dismantling some freight cars.
Senator HARTKE. That is right.

Mr. O'HERRON. One was a facility at Omaha, Nebr., and we don't have any facilities there.

Senator HARTKE. How about Kankakee, Ill.

Mr. O'HERRON. We are looking into that one.

Senator HARTKE. All right. Would you submit that information to the committee when you find out about it? 1

Mr. O'HERRON. Yes, sir.

Senator HARTKE. You are checking into those?

1 See letter of Dec. 22, 1970 from the Penn Central Co. in part 3 of these hearings.

Mr. O'HERRON. Absolutely sure.

Senator HARTKE. And ICC has alerted you to that.

Mr. O'HERRON. Yes, sir, with a phone call. We said thank you very much and got right on it and informed Mr. Gorman.

Senator HARTKE. Just a few questions on your statement, Mr. O'Herron.

You refer to an item which was included in your statement, which you passed over, low utilization of freight car equipment. Whose fault is that, really? Isn't that the railroad's fault?

Mr. O'HERRON. Certainly, it is a portion

Senator HARTKE. In other words, it is not the fault of the ICC or Congress that you cannot fully utilize the freight cars?

Mr. O'HERRON. No, as I say, these are the types of things we would like to start on, and trying to find out whose fault it is, what the problems are.

Senator HARTKE. It is not the Government's fault?

Mr. O'HERRON. Oh, no.

Senator HARTKE. It is management's fault? Is it unmanageable? Mr. O'HERRON. No, it is not unmanageable. I don't believe any problems in business are unmanageable.

Senator HARTKE. You disagree with Mr. Saunders who said it was unmanageable?

Mr. O'HERRON. I didn't see the context of what that phrase was used in.

Senator HARTKE. I saw the context. He said it couldn't be managed. He said it wasn't a question of bad management.

Mr. O'HERRON. I think I know what he had in mind, a lot of problems are beyond our control, that we need additional assistance from various other groups in order to solve the problem.

Certainly a lot of them we can solve ourselves, but we need a lot of help from other groups.

Senator HARTKE. On page 8 you refer again to what we have heard repeatedly in these hearings, what I call the doctrine of truth by assertion, rather than by facts, and that is a philosophy which has extended outside of the field of the Penn Central. I mean, there are certain places in Washington where also that seems to be the prevailing philosophy.

But anyway here is a situation, you say eight times the investment in plant and equipment as it made in its diversification, a substantial amount of these funds have been generated internally. But we have never been able to find out the shift of cash, the stock options, how they were pledged.

We went through one of the options yesterday to some extent, superficially in my opinion. But could you unravel how all of these things, 175 corporations move back and forth and who used what for what.

Mr. O'HERRON. I think we would be here for another week.

Senator HARTKE. Longer than a week.
Mr. O'HERRON. At least a week.

Senator HARTKE. In the short time you have been there, have you been able to unravel any of them.

Mr. O'HERRON. There has been considerable interest and discussion on this. I have appointed a group of my associates, including some outside auditors, and this was appointed over a month or 3 weeks ago, to put this down into the most infinite detail so that everybody who wants to look at it and get the response to any of your questions, it will be done.

Now, Pennsylvania Co.

Senator HARTKE. I wish we had other people as cooperative as

you are.

You are going to submit that to us, right?

Mr. O'HERRON. It is, yes, sir. We have so much to submit, but we want to try to solve the future problems and then if we have enough energy left, we will come back and do some of the spade work. But we will try to do both simultaneously. We have been going 7 days a week, 14 hours a day on this problem. I would like to submit for the record that all of us are very, very sorry to see Mr. Gorman leave.

Senator HARTKE. You refer to the questions of differences in operating conditions in the East and West and South and you refer to how you have been mired down with similar handicaps.

Why don't you proceed on an industrywide basis to make those applications in your rate cases on a regional basis?

Mr. O'HERRON. I think this is under consideration right now. There is a rate increase, I understand, that is being discussed within the industry and there might very well be a regional one.

Senator HARTKE. You refer to the ASTRO program, and not overly enthusiastically.

Mr. O'HERRON. I am very enthusiastic about anything where we can buy or lease equipment.

Senator HARTKE. Then you discuss your proposal for a task force. Mr. O'HERRON. Yes, and this is a very imaginative one, like Mr. Dennis' proposal, which I thought was very imaginative. We had some conversations this morning and I think I can say that he thinks our approach to establish a task force would be useful and constructive to think about.

Senator HARTKE. Are you leaving, too?

Mr. O'HERRON. No, sir.

Senator HARTKE. You are going to stay with the trustees?

Mr. O'HERRON. They have asked me to stay and I have responded that I would.

Senator HARTKE. I personally am glad. I am glad you are going to stay.

Mr. O'HERRON. It is public service, Senator, I assure you.

Senator HARTKE. Let me say to you, I haven't passed out many compliments in these hearings; I compliment you at least on your