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and under the Attorney General's responsibilities here, to make it easier to dispose of these properties.

I only pass this on as a suggestion, because I think the question is in a state of flux and if we are toying with an item in bankruptcyby the way, the Penn Railroad is not in bankruptcy, it is not bankrupt yet. It has filed and it will be adjusted at a time in the future. I think the record ought to make that very clear.

But I think we also, in dealing with setting up a three-quarter of a million dollar fund should make sure all of these things are available to bail ourselves out.

Sitting here thinking about some of the questions, I might say that no one is going to subordinate their debt to the Federal Government. Obviously if we try by legislation to ask that other creditors be subordinated, we might as well nationalize the railroads tomorrow. These creditors are not going to lend the railroads any money if they know they have to give up their position in receivership or a bankruptcy proceedings.

Secretary VOLPE. I am glad you mentioned that word, because I think someone asked a question about alternatives. Perhaps it was in the other hearings, but one of the alternatives to our bill is nationalization of the railroads.

I, for one, would not like to see the Federal Government get involved in operating the railroads of this Nation at this stage in our history.

Senator Cook. The other thing I would ask you-I am not at all. sure I agree with you at all-and that is you only ask authority to hold up stock dividends, and you feel that somehow or other cash. dividends should be continued. I refer you to page 6, a rail carrier receiving a guarantee load should not declare a stock dividend without the consent of the Secretary.

This flexibility in the payment of dividends is necessary to cover the situation where dividends are paid to the parent railroad company by a subsidiary. The only point I am trying to make is I would hope if the Federal Government is going to be low man on the totem pole in regard to obligations, that it would also ask for the authority to determine that cash dividends need not be paid, along with stock dividends.

I only pass that on because I think with a railroad that knew it was in serious trouble, that paid a $43 million dividend last year, did not use good management logic. I will close with this, in regard to this management logic, I am delighted that a major corporation in the country, whose chairman of the board last year was paid $326,972, and whose president was paid $250,000, now has to subject itself to asking a bunch of $42,500 fellows if they can help them out. Senator COTTON. Mr. Chairman, I have just one question. Senator HARTKE. Yes, Senator Cotton.

Senator COTTON. If you, under this authority, are making loans to a railroad that is not in bankruptcy, you would probably say to that railroad that their management must be approved. They would have to submit the name of the man or men who are going to conduct the railroad's business and have them approved, or they would not get the loan. You probably would take that step, would you not? Secretary VOLPE. Yes, sir.

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Senator COTTON. Now if a railroad goes into bankruptcy-if the Penn Central's petition is granted and they go into the hands of receivers, you will not be able to exact that because the court would have something to say. The court might designate somebody you did not approve.

Doesn't that present something of a different problem in dealing with a railroad in bankruptcy?

Senator Cook. If I may interject, first, under section 77 the majority of the outstanding creditors have to agree. That is my understanding.

Senator COTTON. Yes; and that is a further restriction.

Secretary VOLPE. There would be a restriction on the trustees as well, because the Department of Transportation would be the one who would determine whether or not they would guarantee the loan. If the trustees wanted the loan guaranteed, I think they might listen. Senator COTTON. But after the loan was guaranteed, and 2 or 3 years went on, couldn't that problem occur?

Secretary VOLPE. If the railroad, while it was in receiver's hands, made a change in management, I suppose it would be quite difficult. at that stage of the game to take any action. On the other hand, I don't think a railroad, knowing that it is a pretty heavily regulated industry, would thumb its nose at Uncle Sam.

Senator COTTON. Well, I have seen it done.

Thank you, Mr. Chairman.

Senator HARTKE. Mr. Secretary, you are going to come back tomorrow, but I want to clear up one thing which I hope you didn't mean, or at least I understood you to say the principal cause of the difficulty, one of the principal causes was the loss on passenger service alone, that the freight service carried its own load. According to the statements, they were also losing money in the freight business. Secretary VOLPE. That is correct.

Senator HARTKE. In regard to the Penn Central, why should they be treated differently really? Why should they get specialized treatment? LTV was required to liquidate some of its assets. A few years ago in my State of Indiana Studebaker Corp. liquidated the whole automobile business and the Government didn't come in and rescue them and step in.

Now that the bankruptcy has been filed by the Penn Central, the sale wouldn't be a distress sale, would it? I mean it is a different situation.

Secretary VOLPE. Let me say, just, that the other industries you are talking about are not regulated industries.

Senator HARTKE. Does that give them any special treatment? Are they entitled to special attention from the taxpayers? Isn't the same money you are using-just because they are regulated-they are in the public interest, I grant you that. But do they receive any special financial consideration from the Government because they are regulated?

Secretary VOLPE. They shouldn't receive any special consideration whatsoever under any circumstances. I am not interested in whether or not the Penn Central Co. per se is a healthy organization. I am interested in a healthy railroad that can provide services to the

people. That is all I am concerned about. And if there has been-I don't know that there has been-but if there has been hanky-panky then you and I ought to know about it.

Senator HARTKE. Yes.

Would you agree or disagree with the statement made by Shef Lang, who was formerly the railroad administrator under President Johnson's administration, when he said at that time, that using the Defense Production Act as justification was a lot of nonsense. He said much as some current officials grumble, he maintained the Government role only protects the security holders and since they allowed the property to be misused, they deserved to be wiped out.

These are his words. He said the Government should not step in unless the company can't generate enough cash to keep the trains moving even after bankruptcy proceedings might have freed it of its debts.

Would you agree or disagree with that?

Secretary VOLPE. I couldn't agree or disagree with the entire statement, Senator. I can agree with him wholeheartedly that the reason we are suggesting this legislation is to keep that railroad running, to keep its employees working, and to provide for the commerce of these United States. That is what I am interested in.

Senator HARTKE. I think we are all interested in that. But as I have expressed my concern with the ICC, I think that someplace along the road we have not had that type of anticipation which we should have had.

Mr. Secretary, if you can't come back tomorrow-can you? Secretary VOLPE. Yes, I shall rearrange my program so I can be here at 11 o'clock.

Senator Cook. Mr. Chairman, may I ask a question?
Senator HARTKE. Yes, sir.

Senator Cook. During the course of this, has the Department looked into the present legal status of the acquisition of the New York, New Haven, and Hartford by the Penn Railroad; the fact that it is in the Supreme Court; the fact that there is a dispute as to the New Haven bondholders who say they are due $178 million, and Penn Central says they are willing to pay them $150 million. Because I think knowing Penn Central may well be the first applicant if this bill is passed, that it is incumbent on the Department to look into other liabilities of the company in the amount of $178 million, which would also go into this reorganization, if in fact the Supreme Court rules the Penn Central can buy out the New YorkNew Haven bondholders.

Secretary VOLPE. Having been the Governor of Massachusetts during this period

Senator Cook. I rode it many, many years. I am only suggesting this to you, because it is in the Supreme Court-there is a dispute of $28 million. The railroad contends they want to pay $150 million, and the bondholders want more, and I think one better determine whether it is going to see another $178 million liability go on the books.

Secretary VOLPE. We will look into it, but we believe that the difference is being held in trust. We will check and have it available for you at the hearing tomorrow morning.

Senator HARTKE. I think we will have to call some other witnesses; probably call the ICC back; probably the Treasury.

Senator Magnuson suggested we call Secretary Packard. I think in view of some of the conversations, we will have to have some private witnesses, certainly some from Penn Central. Some airlines have indicated they would like to testify and there has been a request from former administration officials. However, we will recess at this time until 11 o'clock tomorrow morning. As far as I know, the only witness scheduled at that time will be the Secretary.

(Whereupon, at 1:15 p.m., the hearing was adjourned, to reconvene at 11 a.m., Friday, June 26, 1970.)

FAILING RAILROADS

FRIDAY, JUNE 26, 1970

U.S. SENATE,

COMMITTEE ON COMMERCE,

Washington, D.C.

The committee met at 11:30 a.m. in room 5110, New Senate Office Building, Hon. Vance Hartke presiding.

Present: Senators Magnuson (chairman of the committee) Hartke, Moss, Cotton, Scott, Baker, and Cook.

Senator HARTKE. Good morning, Mr. Secretary. I am sorry we have delayed you here. We just had a vote and we understand you have had your experience this morning, too.

Secretary VOLPE. Quite.

Senator HARTKE. I think one thing should be made clear concerning the bankruptcy law and that is basically that the law is designed in specific relation to railroads for the very purpose of keeping them operating; that some of the expressions we have had here have indicated the fear that, unless this law was passed, the railroads would

not open.

Second, I believe that it is common knowledge-one can almost take judicial notice of the fact that even though we frequently have said we are talking about railroads generally, the fact still remains that if the Penn Central had not gone into this serious financial crisis, probably you would not have this legislation before us today. So I think those two pertinent facts should be matters which we should recognize here.

Mr. Secretary, one problem that faces the committee, and I would imagine that you might have some information on this: If the Defense Department considered the loan under the provisions as not desirable, would there be any reason to expect it would be any more desirable if some other legislation were passed in the same fashion to guarantee it just because it came through the Department of Transportation, rather than through the Department of Defense?

STATEMENT OF HON. JOHN A. VOLPE, SECRETARY OF TRANSPORTATION; ACCOMPANIED BY JAMES M. BEGGS, UNDER SECRETARY; CHARLES D. BAKER, ASSISTANT SECRETARY; AND CARL LYON, DEPUTY ADMINISTRATOR OF THE FEDERAL RAILROAD ADMINISTRATION-Resumed

Secretary VOLPE. Mr. Chairman, I certainly don't feel that the rationale for the Defense Department's decision would also apply to a loan that might be requested of the Department of Transportation if this legislation is passed.

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