Sunday, with the sale of trustee certificates, if they can be sold without guarantees, and I am not in a position to say if they can be or not, we are not in a position to say how much would be required. Until we receive an application, from the Penn Central, under the reorganization, we could not determine the amount needed. I intend to look at it with the careful scrutiny I am sure you would want me to do.

Senator HARTKE. In relationship to this estimate which varies in your statement from $200 million to $450 million, what would that money be used for, do you know?

Would it be to buy more hotels?

Secretary VOLPE. No, the bill we have, as a matter of fact, specifies it could be used only for railroad operations. It could not be used to buy hotels or anything else of a non-railroad nature.

Senator HARTKE. All right. I will come back to that. As I understand it-I think I might as well proceed at this point now-as I read the bill, it is to aid them to meet temporary and urgent financial requirements. What does that mean? I understood you to say that means operating expenses. What does the word "temporary" mean?

Secretary VOLPE. The word "temporary" can be interpreted to mean a month or two, a year or two. I think if you read the rest of the sentence, it sheds light on what we think the word temporary

means.

Senator HARTKE. You read it to me, tell me what you mean. I have read it all. In other words, I don't see any qualification of temporary

there.

Secretary VOLPE (reading).

Provide emergency financial assistance to rail cariers to aid them to meet temporary and urgent financial requirements which, if not met, might seriously impair their ability to perform those transportation services necessary to the maintenance of a national transportation system adequate to meet the needs of the commerce of the United States, the postal service and the national defense.

Senator HARTKE. How long in advance could the requirements be foreseen.

Secretary VOLPE. In advance of the date of the issuance of the loan or

Senator HARTKE. Does a temporary loan mean a short term, 5 years, or does it mean 15 years?

Secretary VOLPE. The bill provides for loans of up to 15 years. We could well decide that a loan to a particular railroad, although it was temporarily in a severe cash squeeze, could be paid off within a 5-year period. We would have to exercise our judgment, after reviewing their complete financial prospectus and everything else we could procure, as to the length of the loan.

Senator HARTKE. What would the Government get in exchange for the loan?

Secretary VOLPE. Wherever possible, we would try to get a pledge of any assets that might be available.

Senator HARTKE. Is that a requirement? In other words here we have the Penn Central allegedly with what-$7 billion worth of assets-do you know how much assets they have?

50-934-71-pt. 1---5

Secretary VOLPE. Seven billion dollars in assets. That is the figure which is, shall I say, thrown around.

Senator HARTKE. But you don't know.

Secretary VOLPE. Yes, we do know. We have their statements, but we have tried to go behind those statements. Mr. Beggs has gone into that in some detail. I would be very happy to have him indicate to you at least a partial breakdown of the assets of the three layers of the Penn Central Co.

Senator HARTKE. Was this information submitted by Penn Central? What is the source?

Mr. BEGGS. This is public information-information submitted to the ICC and financial information used in public statements of the corporation.

Senator HARTKE. All right. Let me ask you, what is the total of those assets, according to your best judgment?

Mr. BEGGS. The book value of the assets is about $6.8 billion. O that $6.8 billion, the railroad itself, the Transportation Company has assets close to $5 billion. The rest of the assets are held by the Pennsylvania Company, and is mostly real estate and other operating properties, such as pipelines. That amounts to about $2 billion.

The remainder feeds indirectly to the holding company at the top of the corporation.

Senator HARTKE. What you are giving to us is reports from th ICC, the same situation I had with them. We want to find ou if we are going to be in the business of loaning out the taxpayers money? Don't you think we are entitled to know the whole histor of this operation?

Mr. BEGGS. Yes, sir.

Senator HARTKE. Not just a sort of surface operation as we hav had before. Who owns it, who do they owe the money to, what ar their assets, what are their investments, how much is being use for nontransportation purposes.

Mr. BEGGS. We can supply every bit of that information.
Senator HARTKE. You can now?

Mr. BEGGS. Yes, sir.

Senator HARTKE. For the Penn Central. Can you tell us who own the Penn Central. I thought the Secretary said you couldn't. Mr. BEGGS. Can I supply a stockholders' list?

Senator HARTKE. Can you give us even major control.

Mr. BEGGS. I think that would be obtainable, yes, sir.

Senator HARTKE. I am not talking about the list of those 30 th: comes down through the ICC hearings. I am talking about the actu beneficial behind-the-scenes owners.

Mr. BEGGS. I would doubt that it could be obtained.

110

Senator HARTKE. I think that is the important point. Let's ne leave the impression we can, because I think that is wrong at th moment, isn't it?

Mr. BEGGS. At the present time, there is very little equity left this company. Therefore, I am not sure that this is particular pertinent to the problem we are addressing here, which is wheth there is security for a loan.

Senator HARTKE. How much is left?

Mr. BEGGS. The market values it at about $150 million out of the so-called asset value of $6.8 billion.

Senator HARTKE. But you don't even know who holds that, do you?

Mr. BEGGS. No, sir.

Senator HARTKE. And can you find out?

Mr. BEGGS. I would doubt that you could get a complete list of the beneficial owners of the stock.

Senator HARTKE. You couldn't even come up with beneficial owners of the stock in relation to control?

Mr. BEGGS. I think that would be obtainable. I think you could get the control.

Senator HARTKE. Don't you think we should know that?

Mr. BEGGS. I think it would be pertinent to know if one were making a loan to this company, yes, sir.

Senator HARTKE. Do you think that in exchange for a loan to this railroad or any other that we ought to have certain requirements as to service which is going to be rendered?

Mr. BEGGS. Certainly, as indicated in the testimony, the reason for granting a guarantee on a loan would not be for any purpose but to maintain service on the railroad for the public and for the shippers.

Senator HARTKE. Do you think that you ought to require, as a condition to such loans, divestiture of assets which have no relationship to the transportation industry?

Secretary VOLPE. Not necessarily, Senator, if those assets are providing substantial revenues that are keeping the railroad going. In this case, based on the information we have, if the Penn Central Co. had not held nonrailroad properties from which to draw assets and dividends last year, the loss instead of being 40-odd million dollars would have been on the order of $185 million.

In other words, there was some $140 million or more that went from nonrailroad properties to pay off the deficit of the railroad. Senator HARTKE. Yes, but as Chairman Magnuson indicated, at the same time you are talking about all of their difficulties, they continue to pay out dividends of $43 million?

Secretary VOLPE. They did, sir, that is correct.
Senator HARTKE. Didn't you say $43 million.

Secretary VOLPE. Yes, sir. I am not trying to justify it, Senator. That is not my purpose here this morning, as you know.

Senator HARTKE. I understand that you think it is not. But there is no question that if the Penn Central hadn't gotten into this situation, I don't think you would have been here with legislation today, do you?

Secretary VOLPE. Well, there are some other railroads, Senator, that are not at the very point that the Penn Central was last week, but who are not very far away.

Senator HARTKE. Can you identify what other railroad needs we are going to have? The dollars?

Secretary VOLPE. The best estimate we could come up with was that $750 million in guarantees would be sufficient to meet the demands that we could foresee for the 5-year period during which these

loans could be made. Your guess might be a little less, or might be a little more. This is our best estimate. We would hope that we would not need the entire $750 million, as was the case in 1958. They only used just under half of the $500 million that was made available.

I would hope we wouldn't have to use more than $300 million of this money. We have no way of determining that.

Senator HARTKE. I think we ought to make the record clear at this moment, too, that there were defaults under the 1958 act, Mr. Chairman.

The CHAIRMAN. What were they? Small amounts?

Senator HARTKE. A total of $31 million, the Central Railroad of New Jersey and New Haven.

Secretary VOLPE. Yes, the two of them have defaulted. One has paid some money, however, and there is still a chance of collecting some money from the other.

Senator HARTKE. Congress appropriated the money through a supplemental appropriation and now it is in the hands of the Department of Justice to try to recover it.

The CHAIRMAN. This is the Jersey Central?

Secretary VOLPE. Yes, sir.

Senator HARTKE. Can you tell us what other railroads will be applying for money?

Secretary VOLPE. No, I cannot. Senator, I think you would consider me to be-well, I better be careful about what you would consider me to be. Let me say I think if I were to indicate to you and this committee in public those railroads which I think might be on the verge of financial problems, I could be very seriously injuring the employees of those railroads, the stock of those railroads. and the service on those railroads.

I don't believe that it would be fair for me to publicly indicate those railroads that we believe may apply for such loans.

All we have to do is look at the financial returns of some of these railroads to determine that they are not in the best of financial shape. Senator HARTKE. As far as the employees are concerned, if they would go into bankruptcy, wouldn't they still be employed? Secretary VOLPE. Not necessarily.

Senator HARTKE. Not necessarily, but probably. That has been the history of bankruptcy with railroads.

Secretary VOLPE. That is correct, provided the trustees could sell trustee certificates.

Senator HARTKE. Do the directors of these railroads to whom you refer, do they know about the financial condition, do they know how soon they are going to have to apply for loans?

Secretary VOLPE. I presume they know they are not in good financial shape, but they have not notified me. We have had no request from any other railroad at this time.

Senator HARTKE. Have any of them notified you they are con sidering making a request of that type in the event this law passes! Secretary VOLPE. NO.

Senator HARTKE. Have you tried to make a determination of thos corporations and those railroads which would be requiring suc funds?

Secretary VOLPE. Yes, we have analyzed the cash position of various railroads. It would appear to us that there could be three or four-not necessarily tomorrow or next month, but in the not too far distant future that might ask for this kind of a guarantee. What we are asking for is standby authority to enable us to fulfill their needs without having to wait until they go into bankruptcy.

Senator HARTKE. You mentioned the question of cash, the shortage of cash for Penn Central. Did you indicate they might not be able to meet their payroll?

Secretary VOLPE. We indicated that they may not be able to meet a payroll. I will not say that they won't meet their payroll. We can only surmise. Yesterday it was touch and go, and they did finally meet their payroll, although we have evidence that at the close of business yesterday there were at least two cities where employees were unable to cash their checks because the banks refused to honor them.

I can only say to you that it is our judgment that there may be, on the next pay day, insufficient capital unless the present management, with the assistance of the court, can get themselves turned around and possibly sell some of their assets. If they can, without giving them away, they will be able to find enough money to meet the payrolls. I can't, however, make that as a positive judgment. Senator HARTKE. Have you asked the railroads for their cash position, Penn Central?

Secretary VOLPE. Yes, we have.

Senator HARTKE. Have they given it to you?

Secretary VOLPE. Yes, we have it. They told us as of Friday they had $7 million in the bank.

Senator HARTKE. I think before we can make some of these determinations we ought to have a lot more information. For example, on the question here you cite the low margin and of net operating income to gross, the low rate of return on investment, decrease in working capital, insufficient cash flow to supply capital expenditures, and for payroll. In my opinion this doesn't give us enough information to really demonstrate why they are in their present position. That is we need a statement of the sources and uses of the funds, we need this for a specified period, we need to know the revenues, the loans, the bond sales, the stock sales, the repayment of receivables, the sale of assets, whether they are making collection of their accounts receivable, and who is in default in that regard.

We also need to know how that cash was used, in other words, for operating expenses or whether it was put into investment in equipment, other investments, payment on debt-now we know part of it was used for dividends in a time of extreme difficulty. This is what I am asking you about, you mentioned the money that came in from the subsidiary corporations to the transportation company, but what about in prior years, how much of the money from the transportation company went the other way? Do you know?

Secretary VOLPE. There is only 2 years that this company has been in business

Senator HARTKE. I understand that. But they made some acquisitions and paid high interest rates, did they not, in order to obtain some of those acquisitions?