$787,000,000 OF SUPPOSED FORFEITURES SATISFIED IN COMMON STOCK Column 17 shows, for securities having book value the amounts which represented only part of an issue, the rest of which received new common stock for part of its claim. This is a very important classification, complete appreciation of which involves an understanding of one of the basic principles of corporate finance. Railroad capital structures in general consist of various classes of indebtedness' mostly bonds which are usually secured by much, if not all, of the physical property of the railroad company, together with one or more classes of stock. The most junior class of stock is usually called common stock and it represents an interest in all of the equity in the property which remains after the prior claims, such as bonds and preferred stock. have been settled. In other words, anyone who holds the common stock of a company holds all the value in the enterprise after satisfaction of creditors. Therefore, when any class of securities receives common stock for its claim, it receives a proportion of all the remaining value which there is, and it does not matter whether the amount of the common stock which it receives is reduced in number of shares or in stated amount by some technical finding that a portion of the claim is valueless. The fact that any issue receives a proportion of common stock means that it receives all of the equity. You will note that $787,000,000 of the securities held to be valueless actually represented portions of securities which received new common stock for the rest of their claim. These securities therefore cannot in any sense be declared to have been held valueless since they received in any event all of the equity which there was to give them.

Column 18 covers two cases where the securities held valueless received the collateral behind their notes for whatever they might be worth, which was, of course, all they were ever entitled to; and column 19 covers four minor cases where the amounts held valueless represented unpaid interest. These two columns do not require further comment.

Column 20 shows the amount of securities held valuless after deducting those which were without book value, those which received new common stock in part, and the minor items in columns 18 and 19. It will be noted that actually only $724,000,000 of securities were held valueless for reasons other than those already explained. Of this amount only $320,000,000 is in the companies remaining to be reorganized.

LARGE AMOUNT OF SUPPOSED FORFEITURES HELD BY OTHER RAILROADS

However, many of these $724,000,000 of securities were not held by the small investors with whom the reports evidence concern. They were held instead by large corporations or estates, which should have understood fully what they were buying and the risk they were running when they acquired these securities, and which were financially able to protect their interests. Columns 21 and 22 show the amounts of such securities known to be held by corporations or estates and the names of the holders. Most of them are other railroads or companies affiliated with railroads, such as Alleghany Corp., Pennsylvania Rail

road, Pennroad Corp., Erie Railroad, Southern Pacific, Union Pacific, Louisville & Nashville, Southern, Missouri Pacific, Western Pacific, and Canadian Pacific. Here are no helpless investors, but corporations well able to look out for themselves and present the best possible case to the Interstate Commerce Commission and the courts.

There remains in column 23 the amount of securities not previously eliminated which represents the maximum amount of securities really forfeited or subject to forfeiture which could have been owned by small investors. It will be noted that of this amount only $195,000,000 or less than 8 percent of the original $2,500,000,000, is in the securities of companies still to be reorganized. However, this again is not the entire story.

AFTER ELIMINATING SECURITIES HAVING NO BOOK VALUE AND SECURITIES RECEIVING COMMON STOCK, $16,841,000 IS THE MAXIMUM POSSIBLE FORFEITURE BY SMALL INVESTORS IN PENDING CASES

Actually, the hard realities of the market place had long since declared practically all of these securities to be without value before the reorganization proceedings were started. Column 24 shows the appraisal of the market place in the case of these securities. It shows the market value based upon the average prices during the last full month preceding the institution of proceedings in each case, before investors or speculators knew that bankruptcy was upon them. They represent the free appraisal of these securities in open markets. viewed in this light the $462,000,000 of securities which possibly might have been in the hands of small investors assume a value of only $23,859,260, or less than 1 percent of the original $2,500,000,000. Of this amount, only $16,841,267 represents market value of securities of companies whose reorganization is still pending.

When

Of course there are many securities included in columns 23 and 24 held by large corporations whose holdings in most instances are not a matter of official record, but these amounts have not been analyzed further.

This still is not all the story. In the comparisons in schedule 2 the book values of these securities are those shown on the books of the carriers themselves and computed as shown on that statement. In nearly every instance, however, these book values are very substantially greater than the values found by the Commission for ratemaking purposes, which it has frequently described as the amount of money upon which a railroad should be entitled to earn a fair return. A comparison of book values of these carriers with their values for rate-making purposes as found by the Commission is shown in schedule 3. Only in the cases of the Central of Georgia, the Chicago & North Western, and the New York, New Haven & Hartford does the Commission's rate-making value exceed the carrier's book value. Judged by the rate-making value alone, and this of course is not the sole basis of judgment none of the other carriers was conservatively capitalized before it went into bankruptcy. In the case of one of the leading carriers remaining to be reorganized, the Chicago, Rock Island & Pacific, its book value exceeded its rate-making value by more than $60,000,000. From the preceding schedule it will be noted. that only about $40,000,000 of its securities reached columns 23 and 24 as representing the maximum amount of securities in the hands of

small investors which might have been said to have a real chance of survival and which did not survive. However, if the Commission had appraised these securities on the basis of its own value for ratemaking purposes, even this $40,000,000 of Rock Island stock would have been eliminated, so that here again the Commission had ample support in existing facts for declaring this stock to be without value. To declare otherwise would have been to set up a capitalization upon which the Rock Island might in the future have demanded the right to earn a fair return, but which would have been in excess of the rate-making value determined by the Commission itself on which the Rock Island was entitled to a fair return.

In the aggregate the book values of the carriers, some of whose securities have been declared valuless under plans of reorganization, was $1,238,105,028 in excess of the rate-making value of the properties of those carriers.

(Schedule III is as follows:)

SCHEDULE 3. Certain class I railroads reorganized since 1933 or still in process of reorganization-investment in property used for transportation purposes-comparison of book value with ICC value for rate-making purposes as of Jan. 1, 1940

1 Includes Chicago, Rock Island & Gulf.

227, 094, 500|

23, 736, 904 11,882, 149 142, 370, 884

Gulf Coast Lines includes New Orleans, Texas & Mexico, San Antonio, Uvalde & Gulf, Beaumont, Sour Lake & Western, and St. Louis, Brownsville & Mexico.

36, 536, 904 30,882, 144 369, 465, 398

12, 800, 000
19, 000, 000

SCHEDULE 3. Certain class I railroads reorganized since 1933 or still in process of reorganization-investment in property used for transportation purposes-comparison of book value with ICC value for rate-making purposes as of Jan. 1, 1940– Continued

Total 3

$123, 260, 185
310, 109, 142
5, 865, 498
295, 794, 664

9, 434, 344 136, 448, 820)

$8,693, 816 $114, 566, 369
26, 418, 082
320,056

283, 691,060

5, 545, 442 263, 675, 892

$63,349,000
189, 325, 000|
4, 700, 000
155,900,000

32, 118, 772

400, 196 11, 539, 210

9, 034, 148 124, 909, 610

96, 800, 000

$51, 217, 369 94, 366,060 845, 442 107,775,892

28, 109, 610

5,740,159,406 549, 720, 878 5,190,438,528 3,952,333,500 $39, 763, 479 1,277,868,507

3 Total excludes Waterloo, Cedar Falls & Northern, as ICC rate-making value not available. Sources: Column 1. ICC comparative statement of railway operating statistics-individual steam rail. ways in the United States having annual operating revenues over $5,000,000. Years 1941, 1940, and 1939 (statement No. 42200).

A. C. & Y., N. Y. S. & W., S. I.-Figures shown are for investment in road and equipment and general expenditures, from ICC Statistics of Railways in the United States, 1939 (Blue Book).

W. C. F. & N.-Moody's Railroads-figure shown is investment in road and equipment.
Column 2. ICC Statistics of Railways in the United States, 1938 (Blue Book).

W. C. F. & N.-From plan of reorganization. Figure shown is as of Apr. 30, 1943.

Column 4. "Rate of Return on Value of Property of All Operating Steam Railway Companies, 1940”— ICC Bureau of Statistics, statement No. 4142.

Investment less depreciation includes no allowance for working capital, an item which is included in the ICC value for rate-making purposes. If allowance had been made for this in column 4, the net total difference in columns 5 and 6 would have been greater.

ON RATE-MAKING BASIS MAXIMUM FORFEITURES OF SMALL INVESTORS IS ONLY $10,000,000

Schedule 4 restates columns 5 and 16-24 of schedule 2 to show what they would have been if the $2,500,000,000 of securities declared valueless had been analyzed from the point of view of rate-making value instead of book value. On this basis only $205,000,000 of securities in the hands of small investors might be considered to have had a chance to survive but failed, and when reduced to market values this figure becomes only $15,000,000. The figures for companies still remaining to be reorganized are $92,000,000 for nominal value and $10,000,000 for market value, practically all of which applies to the New Haven Railroad.

(Schedule 4 is as follows)

See footnotes at end of table, p. 435.