show that he represented a group in favor of the bill. That is my point. Mr. MECARTNEY. I know the counsel, Senator Myers, if I may just add this, the general counsel for the Rock Island Road, Mr. John Gerdes, communicated to either the members of the committee or the entire committee that the corporation he represented was in favor of S. 1253. I am aware of the fact that he did not testify, but I do not recall whether his letter was made a part of the record. Senator HAWKES. Mr. Colnon has probably told all of this, but how long have you been trustee? Mr. COLNON. Four years, Senator. Senator HAWKES. What was your business prior to that? Mr. COLNON. I have been in the banking business principally in the real estate field. Senator HAWKES. In Chicago? Mr. COLNON. That is right. Senator REED. You succeeded Governor Lowden wher he died, did you not? Mr. COLNON. That is right. Senator HAWKES. How do you feel about this plan, how did you feel when it was originally proposed? Mr. COLNON. When this plan was originally proposed? Senator HAWKES. Were you against it at that time? Mr. COLNON. When it was originally proposed, I was not a trustee. Senator HAWKES. How did you feel about it when you came in as a trustee? What was your reaction to it then? Mr. COLNON. Well, at the outset, Senator, I wanted to feel that I was acquainted with the situation, and I took a number of months to get acquainted with the situation before expressing any feeling of that sort, to have an informed judgment on it; but my reaction later on, on it, and then all along was that first the convertibles should be considered and then, as our cash and strength gathered force, the preferred and common stockholders ought to have a better deal. Senator HAWKES. How soon after you went in there did you reach that conclusion? Mr. COLNON. Well, I would say as respects the convertibles, that would be along about in 1944; and as respects the stock, later on. Senator HAWKES. It was a year after you went in there? Mr. COLNON. About 2 years after that. Senator REED. May I supplement that question, Senator Hawkes, by asking this: Until this committee began to hold its hearings last year and developed the facts and the equities and the amount of money available to help these junior securities, there was a general feeling in the country that there was no hope. Mr. COLNON. That is well put. Now, the Senator answered for me better than I do for myself. There was a feeling of hopelessness that we could not do anything with these things. Senator REED. It was the work of this committee that changed the sentiment of the country. Mr. COLNON. In trying to harden it up, Senator, I had attempted in 1944 to pay off the RFC loan, figuring that if I could take $18,000,000 and pay them out principal and interest, that I would release to the creditors $30,000,000 of securities. That was so obviously the thing to be done; and yet I did not have a supporting party for other than the junior securities, like Mr. Mecartney's group and the convertible bonds. The first mortgage bondholders committee, Mr. Bourne, fought it with all of the vigor that they could command; and mind you, that in the light of the fact that that $14,000,000 had been borrowed from the RFC in order to keep their current interest on their bonds paid back in the depression. So, Senator Reed well expresses the thought not only of myself, but I know it was in the minds of other trustees trying to do anything, that it was a hopeless situation. Senator HAWKES. So that you will understand my position, I want to say this: Reorganizations where somebody has to be mistreated, according to their viewpoint, are always unhappy and always unpleasant. I just want to be sure that we are right. We have a great job to do, and we want to try to do the thing right, because the future of the railroads is paramount to the interests of any security holder. Mr. COLNON. That is right. Senator HAWKES. We have had a lot of injustices in the war. Some boys are buried over in foreign soil because of injustices, and I speak knowingly. Now, I want to be sure that in our desire to be kind and considerate, we do not turn out to be unkind; and I am just as much interested in doing the fair and right and just thing as anybody on this committee. I want to be sure that in our efforts we do not turn out to be unkind and unsound. I want to be sure that we are not fooled by a fantastic earning power of the war period, because I make a prediction that the railroads of this country are going to have tough sledding. Everything indicates it. The meeting that I have just been in indicates it. You and I both know of the airplanes, and they are going to take a lot of business away from the railroads, and the railroads are going to have tough sledding. I just want to be sure that what we do does not turn out to be unkind and unsound, because of our heart's desire to do the right thing by certain people that think they are being mistreated, and may be, as far as I know. Mr. COLNON. May I say this to you, if it will bolster your spirits in doing something like that, that in the late nineties, there was no section 77, and consequently stocks could not be washed out that easily. You and I, Senator, are apt to think today of the three outstanding railroads, probably, creditwise, of the country, The Union Pacific, Norfolk & Western and Atchison; and yet they all went through the wringer in the late 90's. As I told your colleagues here before you appeared, I am proposing the common stockholders of the Rock Island to date be only given the right to subscribe for $10 per share for a new share of common. I said to them in illustration of how that might, and I thought would, harden into something, that that was exactly what was done with the common stockholders of Atchison, Topeka & Santa Fe in 1895. The people then that paid $10 for that thing, undoubtedly, thought like you, "I wonder if it is going to be anything." Yet, it is that same identical stock that sold this year at $100 a share and sold last year for much more money and has paid good dividends through the years, that same stock. Now, I say if we give these common stockholders the right to pay in $10 a share, why not give them a run for their money, Senator? We all know this: Railroads are going to have tough times, but we have also a strange condition in money, with our huge debt and all. You and I know your suit of clothes and my suit of clothes and our shoes and our meals, our ties and our houses are costing double. Do you stop to reflect what this Rock Island would cost to build today? It would be an untold amount, untold billions. Now, if you give a man a share of common stock, you are not putting any charge on the railroad, not a bit. Maybe it is only wallpaper, Senator, but maybe if the future of the country goes ahead as we expect it to do, if the dollar is permanently on a lesser basis of value, instead of that being wallpaper that you and I have given the man, he has got something that means real money. That is the optimistic side. The pessimistic side is: Suppose that the railroads all go down the drain. You have not made them go down the drain, because the common stock carries no charge. It is only that it has the right to surplus earnings over and above charges, and I could not, or do not see where an injustice can be done. Senator MYERS. I agree with much that Senator Hawkes said. However, the philosophy of this bill is not based on kindness but on justice. Mr. COLNON. Which, I hope, Senator, has been the basis of my argument here. Senator MYERS. And considering the present condition of the Rock Island and its present earnings and its present surplus, that, too, is a consideration. Senator HAWKES. I might say, if the Congress would always look at justice, I would be very happy. I might say that the Congress of the United States, for political reasons, has people frozen on rents where they cannot get a dollar back, and they are paying $9 a day for a janitor, against $3 when they rented the place originally, and there is no justice in what we are doing down here. There is little, if any. I think justice is a great thing, but if it is going to be administered, it ought to be administered evenly over all, without any regard to political consequences. Senator MYERS. As we referred to this bill, it is not a hand-out that we are giving the stockholders to which they are not entitled. Senator HAWKES. No, but you are changing your plan. In other words, let me say, Senator, why I am concerned about this thing. I have been a businessman all of my life. When a group of men work for 10 or 12 or 14 years to reorganize and get a plan up which is apparently acceptable to the courts, and this is not the only plan involved, then the Congress comes along and says, "Well, all of that is thrown in the junk pile; we did not mean what we said before; we have a new idea now and we are going to do the whole thing over again," I think you discourage the initiative of the average American citizen tremendously. Mr. COLNON. How do you discourage him? If you take his investment made in good faith and with reliance upon the Interstate Commerce Commission, and you put that down the drain, you discourage him? Do not forget, Senator, that these convertible bonds to the extent of $32,000,000, without a vestige of security behind them and not even a set of pencils, in 1930 were approved by the Commission as sound and in the public interest, and in 3 years the road was in bankruptcy. Now, I mean, there is the other side of the picture, too. Senator MYERS. I think Senator Hawkes' suggestion is a good one, that we should have some information as to when these stocks were purchased and at what prices, to see whether it is a windfall that we are giving someone or whether they were really investors. Mr. COLNON. We can give you the dates. We cannot give you the prices. Senator HAWKES. We have got to consider the effect of what we do in turning the management over to a certain group that would have had management under the plan that had been worked on all of these years. All of those things have to be taken into consideration. I have no fixed view on this, yet; I want to hear the information. Senator REED. Since you have concluded your testimony, Mr. Colnon, we will insert in the record at this point a copy of your prepared statement. (The statement is as follows:) STATEMENT OF AARON COLNON, TRUSTEE, THE CHICAGO, ROCK ISLAND & PACIFIC RAILWAY CO., DEBTOR In the matter of S. 249, a bill to amend the Interstate Commerce Act, as amended, and for other purposes I wish to appear before this committee and urge with all the emphasis at my command the prompt enactment of legislation affecting railroads presently being reorganized under section 77 of the Bankruptcy Act. Only by such means can there be avoided the gravest injustices to thousands upon thousands of investors throughout the country who purchased in good faith and with reliance upon the Interstate Commerce Commission the junior bonds and stocks of our major railroads. Unless legislation comes to the rescue, in all probability the pending plans of reorganization will be consummated. I have followed the progress of most railroad reorganizations, but my intimate and daily study through the last 4 years of the Rock Island, of which I am a trustee, permits me to speak with full knowledge of this particular reorganization. 1. Since June 8, 1933, The Chicago, Rock Island & Pacific Railway Co. has been in the process of reorganization under section 77 of the Bankruptcy Act. A plan of reorganization for this company, which was approved by the Interstate Commerce Commission on May 1, 1944, in Finance Docket 10028, is now pending before the United States District Court in Chicago. In reality the said plan is a modification of several previous plans which bore the stamp of approval of the Interstate Commerce Commission but, in fact, is basically the handiwork of certain senior bondholders groups representing mainly the interests of large insurance companies and financial houses. The plan is antiquated for many reasons which are brought to light later and principal among which is the fact that its very foundation, upon which new securities are allotted to old bondholders, is based upon earnings of the railroad for the calendar years of 1936 and 1937, and the further fact that the plan specifically states there is no equity in the property for $128,892,512 par value of preferred and common stocks. Some of the glaring absurdities of the plan are outlined herewith. The plan as finally approved by the Interstate Commerce Commission authorized the following capitalization: RFC note (22 percent fixed interest, 111⁄2 percent contingent interest).. $11,909, 000 $200,000 294,830 30,917, 060 140, 960 62,500 1,236,682 General mortgage income sinking fund (one-half of 1 percent; noncumu 37,500 lative) Total debt and charges. Preferred stock 5 percent ($100 par value). Common stock (no par value, stated at $100 a share). Total capitalization, charges and dividends.. Because of debt retirement, this already drastically reduced capitalization is now as follows: Proposed capital structure and charges (adjusted for payment of RFC loan and excluding capital fund) General mortgage income sinking fund (one-half of 1 percent; noncumu lative).. Total debt and charges. Preferred stock 5 percent ($100 par value) Common stock (no par value, stated at $100 a share). Total capitalization, charges and dividends. The foregoing capitalization is considerably under the capitalization the Interstate Commerce Commission authorized at the time it approved the plan, as shown in the following table: |