reasons for enactment of the proposed bill. It has been demonstrated to this committee that the existing plan of reorganization for the Rock Island makes altogether too drastic cuts in capitalization and is thoroughly obsolete in the light of the present condition of the property, its net current assets and its traffic potential. Yet that plan may become effective because the Supreme Court will consider itself bound by findings of fact which the ICC made several years ago-findings which the Commission would review if given an opportunity. Because I believe that this plan is unfair to bondholders of the Rock Island, I believe that the delay which might be caused in final reorganization by the enactment of this bill would be well justified if in the end more equitable treatment could be provided for the security holders.

Recent experience in the Rock Island, Missouri Pacific, and Cotton Belt reorganizations leads to the conclusion that negotiations under the proposed bill will move forward expeditiously.

Thus in the Rock Island case, Trustee Colnon prepared a voluntary plan which had the support of large numbers of substantial bondholders. Under existing antiquated law eastern financial interests, who are anxious that their nominees for reorganization managers and voting trustees be appointed, were able to prevent the trustee from submitting the plan to security holders for a vote. It is my opinion, however, that had the plan been submitted it would have received overwhelming support from bondholders and might well have been the basis for the preparation and submission of a general voluntary adjustment plan.

In Missouri Pacific, a voluntary plan of readjustment has been substantially agreed to (see exhibit A) and the problem is to get it before the Commission.

In the Cotton Belt, the stockholders are resuming control and creditors have made voluntary adjustments by way of extension of claims, reduction of interest and in some instances reduction in total amount of claim.

Objection No. 5.—It is asserted that the bill would be prejudicial to creditors and the public interest-the theory being that under the bill new plans might be adopted which would benefit the junior creditors and stockholders for the benefit of senior creditors. Alleghany Corp. has far greater financial interest in the senior bonds of the reorganization roads than it has in junior bonds or common stock. It has junior bonds and common stock only in the Missouri Pacific and even there it also holds senior bonds which are greater in value than are the junior securities.

It is our view that the present plans provide unnecessarily drastic treatment for the senior bonds. Senior creditors in roads which are in excellent financial condition and handling record peacetime traffic, like the Missouri Pacific and Rock Island, ought not to be asked to accept diluted stock for large portions of their claim. The only senior creditors who are urging the consummation of the Rock Island plan, for example, are those who are interested in controlling the property either through reorganization managers, voting trustees, or by virtue of distributions of common stock which will eventually be made after the voting trust has been dissolved.

We do not suggest-and certainly the bill gives the Commission power to prevent-plans so burdensome that excessive fixed charges would place a property back in bankruptcy. But on the other hand it is entirely possible for plans to be negotiated which place charges on a contingent basis and which give the stockholders at least an opportunity to reinvest in the property. Such plans do not adversely affect the ability of the property to serve the public as they can leave room for the issuance of additional senior securities if further financing becomes necessary. Actually it would be more healthy if railroad credit could be reestablished to the point where financing may be done through the sale of stock in lieu of additional debt. Investors, however, will not purchase stock if under the law that stock is to be wiped out through bankruptcy even though improved conditions have restored health to the bankrupt company.

Objection No. 6.-It is urged that the bill would damage, rather than restore, credit of the railroads; and in support of this objection it is said that securities having a prior lien on earnings must be given fair treatment. We, likewise, urge fair treatment for securities having prior lien on earnings. However, under the existing Rock Island plan the general mortgage bonds of 1988 receive most of their distribution in common and preferred stock. I do not see how future lenders will be encouraged by this kind of treatment.

Objection No. 7.-It is contended that the bill is unworkable. of opinion, and one on which we disagree with the Commission.

This is a matter

Certainly one would expect some confusion in the administration of a new law of this character. However, the law makes it incumbent upon the various parties in interest to negotiate together for the formulation of an equitable plan all under the supervision of the ICC. To say that the bill is unworkable is to presume

that interested parties will not act in good faith in the reconciliation of their divergent interests to the end of a financial reorganization. Furthermore, the bill permits the Commission to enter an order approving a plan even without the approval of the requisite majority of the affected class of creditors if it finds that rejection of the plan is not reasonably justified. The Commission suggests that the standards for reorganization under the new law would be those stated by the Supreme Court in Insurance Group Committee v. Denver & RGW R Co. (67 Supreme Court 583), decided February 3, 1947, wherein the Court reiterated the doctrine of the case of Northern Pacific Railway Company v. Boyd (228 U. S. 482). Without going into an extended discussion of the subject, it is my view that the doctrine of the Boyd case would have no application to proceedings under the new bill as entirely new standards are set forth in the statute.

Objection No. 8.-It is said that the bill is unnecessary, and it is suggested that a simple modification of section 77 would be adequate. In my opinion such modification would not correct the inequities which present plans will bring about. It is true that in all probability there would be some liberalization if the plans were reviewed under section 77. However, it would still be incumbent on the Commission to find a value for the property (a task which I submit is absolutely impossible) and upon the Court to eliminate all securities which do not come within the value so found.

RECENT EARNINGS OF RAILROADS IN REORGANIZATION CONTRASTED WITH THOSE NOT IN REORGANIZATION

Railroads in reorganization have generally rehabilitated their properties, purchased substantial amounts of equipment, and have thus placed themselves in a position to improve substantially their ability to produce income for their security holders. The following tabulation showing 1946 earnings of four representative railroads presently in section 77 reorganization proceedings and four representative railroads which are not undergoing reorganization under section 77, shows the result of the rehabilitation programs of the reorganization roads.

Because tax credits during 1946 were so important the above tabulation shows the earnings available for fixed charges, both before and after Federal income taxes. It will be noted that in each of the four solvent roads income available for fixed charges before tax credits was substantially less than fixed and contingent interest charges. In the case of the Baltimore & Ohio a tax credit of over $20,000,000 resulted in net income of approximately $4,500,000. A tax credit of $9,000,000 in the Pennsylvania was not quite enough to overcome the deficit, and in the New York Central a tax credit of $23,000,000 was insufficient by over $10,000,000 to erase the deficit. In the Southern Pacific a tax credit of $45,000,000 produced $25,000,000 of net income.

On the other hand, in each of the reorganization roads, except the Florida East Coast, there were no tax credits and yet fixed and contingent charges on the old capitalization were earned by comfortable margins, and on the Rock Island and Cotton Belt substantial income taxes were paid to boot.

This showing by these roads in the troubled year 1946 when they paid a retroactive wage increase but received no rate relief demonstrates the enormous earning power of the properties whose present reorganization plans would drastically eliminate legitimate security holders.

DECLINE IN INSURANCE COMPANY HOLDINGS OF REORGANIZATION RAILROAD SECURITIES

One of the shocking features of insurance-company opposition to this legislation is the fact that there has been a substantial reduction in the insurancecompany holdings of reorganization rail bonds. Yet, because the voting-trust provisions of the present plans are threatened by this bill, they are opposed to it even though it means drastic forfeiture of the values of the very bonds which they have sold to public investors.

The following tabulation shows reported holdings by certain insurance companies of various bonds (now defaulted) in 1932 compared with 1946.

The foregoing tabulation does not include the holdings of all insurance companies. Furthermore, it is limited to the holdings by the insurance companies named of bonds in the Rock Island and Missouri Pacific systems. It does indicate, however, the substantial reduction in the holdings by these institutions of the bonds which would be most importantly affected by the proposed legislation. The reduction in holdings is most noticeable in the case of the Rock Island. It is not mere coincidence, therefore, that it is in the Rock Island reorganization proceedings where the greatest struggle is taking place to put through the existing plan over all opposition in advance of this legislation. Because of the reduced holdings the only way that the insurance companies can retain control of the railroad is through the medium of the voting trust set up under the existing plan. If the voting trust were eliminated through the passage of this bill the insurance companies' holdings would be so small that all hope of control would be lost. In my opinion that is the real basis for insurance company opposition to this bill.

STATEMENT BY ROBERT R. YOUNG, CHAIRMAN OF THE FEDERATION FOR RAILWAY PROGRESS ON S. 249 AND AMENDMENTS

It is essential that railroad security holders and life insurance policyholders actively support the Reed bill because this bill will save their investments by ending the confiscation of railroad security holders' property by the ICC. Its importance rests in these simple facts:

1. Already one and a half billion dollars of securities in 23 bankrupt carriers have been unnecessarily and unjustifiably wiped out, though every dollar was honestly invested in a property presently utilized to capacity, and virtually irreplaceable.

2. Another $650,000,000 in nine bankrupt carriers will be wiped out in the same way, unless the Reed bill is passed promptly.

3. This sharp practice in contempt of the express wishes of Congress that a sound transportation system be maintained threatens every investment, every insurance policy, because if repeated for a depression or two, it would completely extinguish the capitalistic system.

Nearly every one of these 32 bankrupt carriers, some of them kept there now for 16 years, though their treasuries are overflowing with cash, represent in greater or lesser degree a counterpart of the notorious B. & C. bankruptcy.

The cash of these carriers should have been used years ago for the retirement of high-interest debt. Instead it has rested in favored banks whose officers are appearing in Washington to oppose the bill for that reason.

And the politicians of both parties are supposed to be representing the people and not the bankers.

LETTERS

A. W. BENKERT & Co., INC.,
New York 5, N. Y., June 2, 1947.

Subject: H. R. 3237, Railroad Reorganization Act of 1947.
Hon. WALLACE H. WHITE, Jr.,

United States Senator,

Senate Office Building, Washington, D. C.

SIR: Our clients own some $20,000,000 principal amount of the senior obligations of five (out of the six) major railroad enterprises now undergoing reorganization under section 77 of the Bankruptcy Act.

Our concern and our right to speak are, therefore, obvious. Naturally, we have given the bill very thoughtful study.

Enactment of H. R. 3237 by Congress would defeat every constructive purpose it is said to be designed to promote.

The introductory paragraph of the bill declares it to be "the policy of Congress.

* * *

1. "To promote the public interest in increased stability of values of railroad securities with resulting greater confidence therein of investors;"

There is not one single provision in this bill that would promote this end and there are several provisions in the bill that, by attempting to violate the foundational elements of the law of contract as interpreted in several instances by the United States Supreme Court, would result in the total destruction of railroad credit.

2. "To assure, railroads;"

insofar as possible, continuity of sound financial condition of

It would be impossible for the railroads robbed of their credit by such legislation as this to long maintain a sound financial condition.

3. "To preserve the investments of railroad security holders to the fullest possible extent;"

The bill expressly attempts to circumvent the contractual rights upon which the holders of the senior obligations have relied, thus destroying, not preserving, "the investments of railroad security holders."

4. "To enable said railroads * * * to avoid financial difficulties, inability to meet debts as they mature *

By undermining investors' confidence, by destroying their credit and, consequently, their ability to borrow for refunding purposes, the provisions of this bill would multiply the financial difficulties of the railroad industry and render it impossible for them to meet maturing debts. The railroad industry, which contributes more tax revenues than any other industry in the country to the support of our Government, would then have to look to the Government for financial assistance. The only way to "enable the railroads to avoid financial difficulties" is to respect the law and the court decisions which uphold the contractual rights of their creditors, and to restore public confidence by allowing them to operate under a rate structure supplemented by subsidies proportionate to what the air lines and waterways are receiving from the Federal and city governments, all of which, taken together, would permit a return of 6 percent.

** **

* * *

5. "And to assist the railroads now involved * * * under section 77 of the Bankruptcy Act, to emerge therefrom expeditiously and without the unnecessary sacrifice of forfeiture of securities of or investments in such railroads."

Far from expediting consummation of the reorganization of those roads, enactment of this bill would result in endless litigation. The provisions of this bill cannot become operative unless the Supreme Court can be induced to reverse its own repeatedly affirmed decisions that senior creditors must be "made whole" (i. e., satisfying his total claim in cash or new securities approximately equal to cash) before any junior creditor or stockholder may be recognized. To deny the constitutional protection of contractual rights to creditors, and to set aside the "priority rule" as between creditors and stockholders, is to destroy investors' confidence in such securities.

In fact it becomes very apparent that, not the credit of the railroad industry, but preservation of the interest of the stockholder (risk capital) is the real purpose of the measure. This purpose is poorly disguised in the debatable phrase (p. 2, lines 14, 15, 16) "because certain classes of obligation [sic] * * ** are in the usual case held by a very large number of holders."