Of course, our East Coast case will go next to the court, and I suppose we will still be in controversy.

Senator REED. It is a matter of record, I suppose, but how much did you have to pay for the Florida East Coast?

Mr. DAVIS. $40,500,000. I refer to that on page 5, and it is on sheet 81 of the Commission's report.

Senator REED. Evidently you think it is a good buy.

Mr. DAVIS. Well, yes; we expect to pay the price.

Senator HAWKES. Is it not true, Mr. Chairman, that nobody ever buys anything unless they think it is a good buy?

Senator REED. Well, I think so. Where the buyer has some option.

Senator HAWKES. In other words, it has got to have some hope of profit to get a man to put $40,500,000 in it.

Mr. DAVIS. I think so, sir. I shall continue.

So far as I know, no one interested in the Florida East Coast Railway favors the proposed amendment to S. 249.

I think it is self-evident that the effect of those amendments, if enacted into law, would be to delay further, for an unforeseen number of years, a reorganization on which more than 15 years of receivership and trusteeship have already been spent, and even then a satisfactory reorganization would be highly problematical.

The section 77 proceeding has recently progressed to approval of a plan of reorganization by the Interstate Commerce Commission which provides for merger of Florida East Coast Railway into Atlantic Coast Line Railroad, in line with expressed congressional policy of consolidating short, weak railroads into strong trunk line systems. The case is practically ready for presentation to the court for confirmation of the plan approved by the Commission in accordance with the procedure provided by the statute, and there is no reason to believe that it will not now proceed expeditiously to conclusion.

I repeat that the sole stockholder of the Florida East Coast Railway Co. has voiced no objection to the elimination of that stock and no desire, through negotiations with creditors or otherwise, to attempt to restore value to that stock.

Senator REED. Now, Mr. Davis, for the benefit of the committee and its consideration, will you have your counsel prepare an amendment to part 2 of the bill, the so-called Reed-Myers amendment we are considering. This is not a promise to do anything. I have told you how I feel about it. I do not want to hold any railroad in bankruptcy where it could be relieved without serious objection.

Mr. DAVIS. I will do that.

Senator REED. I think it is easy to frame an amendment in this connection. That is, where the entire stock is in the hands of one party.

Mr. DAVIS. I will do that, but I remind you that a like exception on this matter was considered causing the President to veto it.

Senator REED. We consulted with the President, and he turned us over to his assistants, and we consulted with them. We are hopeful this year that conditions will be different.

Mr. DAVIS. Senator Reed, I have with me two copies of the Commission's third supplemental order, and since I have referred to it and since Senator Hawkes, particularly, has asked some questions about what it contains, and I have made reference to the sheet numbers, if desired I can submit it.

Senator REED. Suppose that you file that. We do not want to encumber the record with official data which already is available to us. Mr. DAVIS. Just one copy? Will that be sufficient?

Senator REED. Yes. We can retain it here as a part of the files. Mr. DAVIS. All right, sir. I have made reference to it and for convenient reference, you will probably want it along with the record.

Senator REED. Yes.

(The document was filed for the information of the committee.)

Senator MYERS. Mr. Davis, you indicated on page 4 that the senior security holders have a claim for principal and interest aggregating nearly $84 million. Who are those security holders?

Mr. DAVIS. The St. Joe Paper Co. owns approximately 56 percent of the $45,000,000 bond issue.

Now, the accrued interest which has not been paid on the entire amount of $45 million has, as the Commission found, built that total debt up to about $84 million, on a property that the Commission finds is worth $40,500,000.

Senator MYERS. You say the St. Joe Paper Co. owns what percentage?

Mr. DAVIS. Owns about 56 percent of the $45 million bond issue, and of course, therefore, owns 56 percent of the accrued interest. Senator MYERS. Was the othe 44 percent widely distributed? Mr. DAVIS. Rather widely distributed, yes. The Coast Line has none, but I think it is rather widely distributed. Mr. Lynch of Miami, S. A. Lynch Corp., I think, is the second largest holder of those bonds.

Senator MYERS. Thank you.

Senator HAWKES. Mr. Davis, what would they get for that $84,000,000 under the plan, do you remember?

Mr. DAVIS. Yes, I do. A news release which appeared in practically all of the Florida papers on last Sunday, dealt with that feature, and with the indulgence of the committee. I would like to read from that because it answers your question.

Senator HAWKES. I would like to know about it.

Mr. DAVIS. All right, sir.

The plan now prescribed by the Commission means over-all price

and that is the aggregate of Coast Line securities and Coast Line cash

of $49,500,000, which compares with Coast Line's offer of Coast Line securities and Coast Line cash aggregating $38,250,000. The plan now approved by the Commission increases by $2,250,000 the amount of new Atlantic Coast Line divisional first mortgage fixed interest 31⁄2 percent 25-year bonds, reduces by $1,125,000 the amount of new Atlantic Coast Line divisional income mortgage 4% 75-year bonds, and increases the Coast Line's cash contribution by $1,125,000 o" from $3,000,000 to $4,125,000. Under the plan prescribed by the Commission "excess cash" in the hands of the trustees will also be distributed to FEC bondholders.

As also stated further

The record has been in conclusive as to prices paid by St. Joe Paper Co. for latter's holdings, 56 percent of total issue, of Florida East Coast first and refunding. mortgage bonds, because St. Joe Paper Co. refused to have the record show those prices. However, it is known that a large part of such holdings was acquired in 1942, at depressed prices, and after taking into account the return represented by payment of defaulted interest coupons, it is hardly likely that St. Joe Paper Co.'s present investment in those bonds now stands at much in excess of $2,500,000.

Senator HAWKES. You mean that is all they paid, $2,500,000, for 56 percent of the holdings?

Mr. DAVIS. That is correct.

Senator HAWKES. Of the first and refunding bonds?

Mr. DAVIS. That is right. Taking into account the payment of some of the defaulted interest coupons.

Now, answering specifically Senator Myers' question:

St. Joe Paper Co. will receive approximately 56 percent of the $4,125,000 cash required to be paid by Coast Line, or approximately $2,310,000, and will therefore probably recover in Coast Line cash alone nearly the entire amount of St. Joe's net cash investment. In addition, St. Joe Paper Co. will receive approximately 56 percent of the new Atlantic Coast Line securities to be issued in the merger which, in par or stated value, aggregate $36,375,000. Therefore, it may be said that St. Joe Paper Co. will thus receive slightly more than $20,000,000 par, or stated value, of such Coast Line securities at little or no expense to St. Joe, to say nothing of the presently undetermined amount of cash to be also distributed from FEC treasury to the bond holders.

Senator MYERS. We heard much about speculation this morning. It would occur to me that here is something about speculation among bondholders as well as stockholders.

Mr. DAVIS. Not stockholders.

Senator MYERS. There is no question of stockholders here.

Senator HAWKES. In other words, Senator, the thing Mr. Davis is touching on now is the thing that, as far as I am concerned, I want to be sure I know as much about as possible before I cast my vote.

We have heard all this testimony about the poor stockholders who have been squeezed out. I have contended from the beginning that the poor stockholders who are squeezed out are gone. They are over the dam and washed down the river. We have got to be careful that we do not do an unsound thing in the reorganization of these railroads in an effort to be kind to somebody who is a speculator, and came in and bought securities at about half a dollar or a dollar.

Senator REED. Here is a speculator who is going to come out all right.

Senator HAWKES. That is all right if he is coming out all right with a sound plan. I am in favor of it.

Senator MYERS. Before you came in, Mr. Bushby was here on the Rock Island case. There was considerable testimony on that.

Senator HAWKES. I am sorry I missed it.

Senator MYERS. He indicated that much of the common stock or preferred stock was in the hands of speculators. I asked if that also included the bonds, and he said, not as far as the claim of Metropoli

tan.

Senator HAWKES. I think that is true.

Senator MYERS. I think that is accurate, but here is a situation in another company in which there has been considerable speculation in the bonds. A windfall is certainly coming to them in this particular instance. There is probably speculation in all types of securities and among the holders in these various roads.

Senator HAWKES. Senator, you have not forgotten the gentleman we had before this committee a year ago by the name of Simpson, as I recall it, who bought the control of some little railroad down South, and paid $5,000 for it, and on cross-examination in answers to questions I put to him, he admitted that he had back already $98,000 but he wanted about $400,000 or $500,000 more. So do you and I.

Senator MYERS. I would take the $98,000, would you not?
Senator HAWKES. I would think I was pretty lucky.

Senator MYERS. And, too, Senator, that was a bond situation.
Senator HAWKES. I am not sure that bonds were involved.

Senator REED. There has been testimony here, and I think it covered an undeniable situation in the Rock Island, where there has been extensive speculation in the "when issued" stocks and bonds, but that does not touch you, Mr. Davis?

Mr. DAVIS. Not at all. In view of what you Senators have said between yourselves in the record and off the record here, I would like to finish one part of the press release which, as I say, appeared in the Florida papers on Sunday, June 1, because it deals partly with that. In that press release, I had

expressed the opinion that with probably few exceptions most of the present holders of the remaining bonds had likewise acquired their holdings at depression prices and that the great majority of the original holders of the bonds who purchased same at par, or close thereto, when first issued had probably long since closed out their investment and taken their loss. For the holder of the majority of the bonds and for many other bondholders the plan prescribed by the Interstate Commerce Commission in the Third Supplemental Report and Order, which will mean a total of $900 par, or stated value, per $1,000 first and refunding mortgage bond in aggregate of par or stated value of Coast Line securities and Coast Line cash, will likely yield to most of the fairly recent investors in first and refunding mortgage bonds a return equal to several times their net investment.

Senator REED. Thank you very much, Mr. Davis.

Are there any further questions, Senator Hawkes?

Senator HAWKES. No.

Senator REED. Senator Myers?
Senator MYERS. No questions.

Senator HAWKES. Except that I would like to say, Mr. Davis, that my philosophy up to date is that we want to do the sound thing, whatever that is, and not in trying to be kind to one group, do damage to others. In trying to be kind, you have got to be careful that the heart does not destroy the value of the mind. In trying to be kind, we want to be sure we are not ultimately unkind to a great many more people than we are kind to.

Mr. DAVIS. I am sure of that, Senator. I merely wanted to indicate why amendments to S. 249 would be harmful to the proposal to merge the Florida East Coast with the Atlantic Coast Line.

Senator HAWKES. Your testimony was very interesting.
Mr. DAVIS. Thank you.

Senator REED. Mr. Oliver, we will hear from you next.

STATEMENT OF FRED N. OLIVER, RAILROAD SECURITY OWNERS ASSOCIATION, INC., AND RAILROAD COMMITTEE OF THE NATIONAL ASSOCIATION OF MUTUAL SAVINGS BANKS, NEW YORK, N. Y.

Mr. OLIVER. My name is Fred N. Oliver and my business address is 110 East 42d Street, New York City. I am appearing here on behalf of the Railroad Security Owners Association, Inc., which is an organization maintained largely by institutional holders of railroad securities. The members of this association hold a par amount of railroad securities of about $2,500,000,000. This amount represents. approximately 25 percent of the railroad bonds of the country.

The members of this association are mostly mutual institutions: life insurance companies and mutual savings banks; which are nonstock organizations, operated by boards of trustees for the benefit of their depositors and policyholders. They have no interest in this bill except a fiduciary responsibility to protect as best they can the investments made on behalf of their depositors and policyholders. They are interested not only in preserving the integrity of their present holdings of railroad securities but also in stabilizing railroad obligations so that they will provide a safe and sound outlet for the future investment of the fiduciary funds of these institutions. Any legislation which tends to impair the integrity of these investments discourages future purchases of railroad obligations.

The affairs of the association are under the general supervision of an executive committee, composed of the following: Henry Bruere, president, the Bowery Savings Bank, New York, N. Y.; J. Hamilton Cheston, vice president, the Philadelphia Saving Fund Society, Philadelphia, Pa.; Harry C. Hagerty, vice president and treasurer, the Metropolitan Life Insurance Co., New York, N. Y.; August Ihlefeld, president, the Savings Banks Trust Co., New York, N. Y.; Richard K. Paynter, Jr., vice president and treasurer, the New York Life Insurance Co., New York, N. Y.; F. W. Walker, vice president, the Northwestern Mutual Life Insurance Co., Milwaukee, Wis.

I am also appearing on behalf of the railroad committee of the National Association of Mutual Savings Banks. The mutual savings banks are located in 17 States and have about 16,000,000 depositors with aggregate deposits of around $18,000,000,000, or an average deposit account of somewhat in excess of $1,000 per deposit.

Most of these banks are members of the Railroad Security Owners Association. Mutual savings banks in the past have been purchasers of those railroad obligations which their trustees believed to be sound for fiduciary investment, but of recent years these institutions have become discouraged in this field and have reduced their holdings drastically. They have, however, funds available for safe and sound investments and if they can be assured that these banks will be interested in reentering the field of railroad investment.

I have been instructed by the executive committee of the Railroad Security Owners Association and by the railroad committee of the National Association of Mutual Savings Banks to appear and present the views of these groups on S. 249 and the amendments proposed by Senators Reed and Myers.

They favor wholeheartedly S. 249. There can be no serious objection by anyone to the enactment of S. 249 as a separate measure and without the proposed amendments. It will tend to improve railroad credit. They are strongly opposed to the amendments suggeste! by Senators Reed and Myers. They believe that these proposed amendments are unsound, would be damaging to railroad credit, and should not in their opinion be enacted.

S. 249 is, in our judgment, an improvement over the old Railroad Readjustment Act because it provides simpler machinery and also because it enables a more comprehensive readjustment of a capital structure. It enables a railroad company, which foresees difficulty in meeting its obligations, to work out an equitable readjustment either on a temporary or permanent basis with its creditors before the railroad gets into trouble and thus avoids the long and expensive proceedings in equity or under section 77.