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Therefore, unsuspecting investors were entitled to feel and think that they were putting their savings into legitimate investments. Now, the very body which sanctioned these security issues proposes to wipe out many of them as utterly worthless.

I do not presume to regard myself as an expert on reorganization. It may be that some of the plans which were drawn up when acute depression conditions were plaguing the country in the early thirties were more or less justified. Be that as it may, there is no justification whatsoever for persisting in inflicting such plans in this year of 1947. Circumstances alter cases.

Circumstances have very greatly altered railroadwise in recent

years.

Some of the railway stocks then pronounced worthless by the ICC have since shown enormous earnings per share and have since paid enormous taxes to the Government.

My league associate, N. J. Paulson, our assistant general counsel here in Washington, has furnished me, among many other facts and figures, this:

Today the Rock Island could almost pay off its first-mortgage bonds with cash on hand (accumulated out of earnings); yet the Commission and higher courts insist on consummating the forfeiture plan based on 1936-37 "normalcy," under which all the stock is wiped out and many bondholders are harshly treated. And this cash on hand remains after the Rock Island paid the Federal Government almost $100,000,000 in income and excess-profits taxes in recent years.

Another example: The St. Louis Southwestern earned and paid to the Federal. Government in recent years more in hard cash than the entire par value of its capital stock. In 1946, a year of extreme labor troubles, traffic difficulties and increasing costs of every kind, this road earned its old fixed charges three times

over.

Senator REED. Mr. Forbes, you are aware, are you not, that the district court in St. Louis made an order releasing the St. Louis Southwestern from trusteeship, subject, of course, to the approval of the Interstate Commerce Commission of its new financial arrangements? That was last week.

Mr. FORBES. Yes. This was what the plan called for before. I think the Commission and the courts have continued to insist on that. Senator REED. That is right.

The St. Louis Southwestern case would be a reflection upon any system of courts and commissions that permits such a situation to continue.

Mr. FORBES (reading):

Yet the Commission and the courts continue to insist that this stock is worthless, and are proceeding to wipe it out, along with millions of dollars in claims of

creditors.

Take the New Haven: Here the railroad has enough cash on hand to pay all its accumulated interest in full and still leave some working capital.

Eleven railroads undergoing reorganization gained more in traffic and earnings during the war than their "solvent" competitors, and are relatively more prosperous today than they were before the war, and have held more of their wartime gains than 10 "solvent" roads in the same territories. Yet the Commission insists that the guillotine must be applied to investors in the reorganization roads. That ends Mr. Paulson's statement.

Born and raised in Scotland, naturally I believe in thrift, I believe in saving, I believe in self-reliance rather than in Government doles in any form.

Senator REED. You and Senator Moore, both.

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Mr. FORBES. Furthermore, I believe that those who put their savings into first-mortgage and other bonds should receive preferential treatment over investors in stocks. I am just old-fashioned enough to cling to the principle that those who accept a relatively small return on their investments in order to obtain safety are entitled to first consideration. I do not regard as Shylocks owners of bonds who demand their "pound of flesh."

But the problem covered by the bill now before you is not whether bondholders should be penalized at the expense of stockholders. If that were the sole question, I would be all for bondholders.

To refrain from wiping out common and preferred stockholders in railway reorganizations would not add one dollar of fixed charges to any company.

If any road cannot earn anything for its stockholders, no dividend would or should or could be paid.

Bondholders first.

But what harm can befall any railroad by allowing stockholders to retain ownership of their certificates?

I am not a lawyer; I am only a mere layman. But, to me, the United States Supreme Court recently issued an extraordinary and, I would even venture to say, indefensible, absurd decision. The decision, in effect, was.

We, the Justices of the Supreme Court, exercise the right to pass upon the acts of Congress. But when Congress, as parents, create offsprings, such as the Interstate Commerce Commission, we, the Justices of the Supreme Court, have no right to pass upon the acts of their offspring.

Without flattery, Senators, may I say, as a common or garden citizen, that we have more faith in the judgment of Congress than in the judgment of the infinite variety of agencies, commissioners, and other bureaus and bureaucrats you have so freely spawned during the last decade. Why should the Supreme Court, or anyone else, regard you as not being infallible and regard every member of today's thousand and one bureaucratic bodies as infallible.

I may add that America has been so good to me that, at my age, my concern over the legislation you are now considering is not narrowly selfish. I think, by lifelong exercise of thriftiness, I have been able to save enough to obtain three meals a day and to maintain my modest home for my few remaining days or years. But I have four sons. I am eager and anxious to do anything and everything I can, within my very limited ability, to try to preserve and perpetuate the American form of government, which I regard, and most of us do, as the best mankind has ever devised.

If you gentlemen of Congress enact this measure, I am profoundly convinced you will be taking a step in that direction. That is in the right direction.

Senator REED. Thank you, Mr. Forbes. We will next hear from Governor Ely. Governor I would like to hear now your full analysis of your New Haven situation, especially with reference to the Old Colony and the Boston & Providence.

STATEMENT OF JOSEPH B. ELY, PROTECTIVE COMMITTEE FOR BONDS OF THE OLD COLONY RAILROAD CO., WESTFIELD, MASS.

Mr. ELY. I have not covered that too much in detail on my prepared statement, and that is what I would like to say to you this morning.

Senator REED. The New Haven case involving the Old Colony is one of the most important in the country, and involves, more factors than have appeared in some of the other cases. There is a question of senior and junior securities.

Mr. ELY. That is right. We are in the position of a leased line. Senator REED. Proceed now.

Mr. ELY. May I start out by asking this: You are conducting hearings on a Senate resolution, which briefly is an investigation?

Senator REED. We are holding hearings on S. 249 and the amendments proposed thereto. The resolution, of course, is also before the subcommittee.

Mr. ELY. Yes.

Senator REED. The committee has the resolution.

Mr. ELY. Yes.

Senator REED. But immediately we are discussing S. 249 and the proposed amendments. We will welcome anything you have to offer. Mr. ELY. I will ask myself this question, although you know the answer: "Why is Senate 249 before this committee?"

I take it that it is a bill actually sponsored by the Interstate Commerce Commission.

"Why is the Interstate Commerce Commission sponsoring a new method of railroad reorganization?"

When I answer that question to myself, I say, "Because the results. of reorganization under section 77 have been so entirely unsatisfactory."

I realize that Senate 249 is substantially along the lines of the McLaughlin bill, but when the Interstate Commerce Commission, which has had the responsibility of reorganizing railroads, proposes to the Congress a different method of reorganization, it would seem to me self-evident that the regulatory body itself appreciates how ineffectual and how disastrous and how inequitable the results have been in the administration of section 77.

Senator REED. Governor, if I may break in on you there, I would like to say that I have not heard of a single person-whether with the railroads, with the investors, with the institutional groups, or anyone who has contended that section 77 has been a success so far as reorganization of railroads is concerned.

Mr. ELY. I think there is unanimous opinion on that score.
Senator REED. That is right.

Mr. ELY. But I notice that Senate 249 expressly excepts from the provisions of what I am now going to call a better method of reorganization the rails that are already under section 77.

And the point I wish to make to you-and the reasons I will try to give later is this: If the new method is the better method and if it is a better method because of the inequities that have grown out of the administration under section 77, why, in the name of all con

science, should not those people who have been so adversely affected by the administration under section 77 be given the benefit of the new equities which Senate 249 seeks to establish?

Therefore, Senate 249 should be amended to make it available to those whose rights have been taken away from them, whose properties have been taken away from them by the inequitable administration of section 77.

They should be given a chance also for these equities under the new method of procedure. It seems to me self-evident.

Senator REED. Senator Wheeler and myself have been pounding away at that, Governor, for some time.

Mr. ELY. Yes. Of course they will say, "Well, we have worked on this reorganization of the New Haven for a long, long time. We have been through the courts. We have been to the circuit court of appeals four or five times. We have been to the Supreme Court a couple of times on different phases of reorganization, and now if we can only trim up the Old Colony and clean those protestants out, why, we will go ahead with this inequitable plan."

Now, I want to tell you how the New Haven was reorganized. As you know, the New Haven in the 1890's leased the Old Colony Railroad. The Old Colony had about 1,000 miles of track operating in southeastern Massachusetts. The Old Colony was the lessee of the Boston & Providence Railroad.

The Boston & Providence Railroad is the main line now as it is now operated. That is the main line of the New Haven from Providence to Boston, some 44 miles. All double tracks. Some of it is four track and some of it three.

It is a strategic piece of railroad. Without it, the New Haven would not get into Boston at all by any satisfactory line. It is absolutely an essential part of the New Haven if it is going to operate through service from New York to Boston.

The Old Colony with the Boston & Providence therefore supplied the New Haven with service into Boston. It also supplied New Haven with the best freight charge they got.

By that I mean it is the best originating area, probably, considering its size, that the New Haven possesses.

The Old Colony connects at New Haven, connects the New Haven trunk line, if you can call it a trunk line, with Brockton, Fall River, New Bedford, Taunton, Plymouth, and all the cape.

At no time, even in the worst part of the depression, did the freight business on the Old Colony ever show a deficit.

It has always been a profitable operation, no matter how you handled it.

The passenger business, being short-haul commuter service, and bringing a tremendous passenger list into Boston and out of Boston daily, according to the Interstate Commerce Commission and the accountants of the railroads, was a losing proposition.

During all the course of the reorganization proceedings, the New Haven people have always said that the Old Colony was a tremendous loss, that the Boston & Providence was a tremendous loss to the New Haven.

I think any sane person looking at it impartially would say that if, in the method of bookkeeping, they showed a loss, it was due to the method of bookkeeping and due to the way in which the roads were

operated, because without the Boston & Providence the New Haven would never get into Boston. It was a strategic 44 miles.

Senator REED. Well, they do have an entrance into Boston over the old New England?

Mr. ELY. Over the old New England; yes; but that would have to be completely rebuilt. They would have to spend millions on it to make it at all comparable in usefulness to the Boston & Providence line, which is the direct, well-built entrance of the New Haven into Boston.

Senator REED. This is correct.

Mr. ELY. They talk about the New England line, but it would cost them more to build up the New England line so that it was competitive to the B. & P. than it would cost them to pay par for the bonds and stock of the Boston & Providence.

The Boston & Providence has debentures of two million plus. Two million, one or two. It has some 35,000 shares of stock.

Now, when the New Haven, due to manipulation some years ago, had got itself in a very unfavorable position financially, trying to buy up all street railways and all the steamship lines and to buy up the Boston & Maine, when it was in bad shape by reason of the way in which it had been managed rather than from anything due t o traffic, it filed its petition under section 77 in the court of Connecticut in 1935, and the trustees were appointed.

Three estimable gentlement were appointed. They were Mr. Palmer, Mr. Loomis, and Mr. Sawyer.

Mr. Palmer is the president of the New Haven road, a fine gentleman, but rather on the accounting side, however.

The other two gentlemen are not railroad men at all, but those three men were appointed trustees.

They continued to operate the system for a few months. Then they disaffirmed the Old Colony lease which had some forty-odd years to run. The New Haven owned slightly more than a majority of the Old Colony stock, and a very small fraction of the Boston & Providence stock, stock that had been acquired since the leases were

executed.

By reason of their control of the stock of the Old Colony, they caused the Old Colony, although its business is all in Massachusetts, to file a petition as a subsidiary debtor in the courts in Connecticut, and so Old Colony became a debtor in the section 77 in the Connecticut courts, the Federal court.

So, having filed a petition to put the Old Colony under section 77 in the district court of Connecticut, when it really belonged in Massachusetts, the court appointed three trustees for the Old Colony.

This is the way what otherwise might have been a fairly decent clause, section 77, was badly worked. I do not think there is so much criticism to be made of the Congress in passing that act as there is in the way it has been administered.

The court appointed the same gentlemen trustees of the Old Colony, having disaffirmed the then lease, as trustees for the New Haven. Now, mind you, the Old Colony has connections with the Boston & Maine. The freight of the Old Colony lines, at least 50 percent and probably 60 or 70 percent, could just as well be taken over the Boston & Maine as the New Haven, and to much better advantage

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