Monday, Jan. 17, 1938

"Funny Thing"

Few U. S. railroads are as prosperous as the Chesapeake & Ohio, whose tracks from Norfolk to Chicago brought it a net income of $43,700,000 in 1936, of $31.000,000 in the first eleven months of 1937. Few U. S. railroads have been closer to insolvency without actually being in that parlous state than the Erie, whose tracks from Chicago to New York have been kept in operation in recent years only by loans totaling $16.582.000 from Reconstruction Finance Corp. Both lines are part of the old Van Sweringen system and ! last month they b came even more closely related when the Interstate Commerce Commission permitted C. & O. to take direct control of the Erie by acquiring the 50% of Erie stock held by C. & 0. owned Virginia Transportation Corp. and Alleghany Corp. But, as was proved last week, formal adoption by a rich uncle did not put a silver spoon into Erie's mouth.

Harassed by the same swelling costs and shrinking revenues which face most U. S. roads, the Erie last month petitioned RFC for a loan of $6,006,000. Last week-- though RFC was on record as willing to lend money on any "reasonable" railroad request and though it agreed to lend $8.000,000 to the Baltimore & Ohio after only a week's thought (TIME, Jan. 10)-- it refused to aid the Erie. While some Erie bonds broke as much as 16 points and its common stock fell from $6.25 to $3.25, the Erie thereupon defaulted on $1,849.000 interest due on six bond issues. Unless some drastic remedy could be found in the six-month period of grace provided for in the bonds, * the Erie seemed headed for reorganization under section 77 of the Bankruptcy Act.

Chairman Jesse Jones explained RFC's hardheartedness as simply that "a matter of principle is involved." The ICC approved an RFC loan to the Erie on the I condition that C. & 0. guarantee it or put j up part collateral. C. & O. flatly refused, explaining that its first duty was to protect its own stockholders. Snapped Jesse Jones, after new C. & 0. President George D. Brooke refused to discuss the matter: "If C. & 0. is unwilling to nurture its own child. I do not see why the Government should. It seems a funny thing to me that a railroad that paid $44,000.000 in dividends in 1937 cannot lend its subsidiary $2.500.000 that would be adequately secured. It looks like they want to milk the cow and turn it out when it stops giving milk."

On the face of it. C. & O's explanation for refusing to aid the Erie meant either that the road did not care to throw any more money after the $45.000.000 it already has tied up in Erie securities, or dreaded stockholders' suits if it did. President Roosevelt in press conference took occasion to criticize the C. & O. stand. Jesse Jones, eying C. & O. and its holding company, Alleghany Corp.. with the suspicion that Van Sweringen holding companies have often merited in the past, had two other explanations to offer. Said he first: "The only thing I can assume is that they want to see the Erie go into receivership and come out of it with C. &

0. still in control and the Erie with much less fixed charges." This would seem a singularly hazardous C. & O. gamble, for only last month an ICC examiner reported on an insolvent line (Chicago & Eastern Illinois) in which C. & O. has an $8.000.000 interest. He held that C. & E. I. stock was worthless; the ICC might do the same for Erie in like circumstances.

So Jesse Jones guessed again: "Probably if the directors of the C. & 0. were as interested in protecting the Erie as they are the Alleghany Corp.. which receives a large part of C. & 0. dividends, their course might be different.'' Admitting that he would "not punish" the Erie if it were "independent," and questioning the right of C. & O. to control the Erie without helping it financially, he wound up: "It is a matter for the court--the juvenile court!"*

-This week Erie managed to pay the interest due on the only one of the six bond issues which had but a 30-day period of grace. Also aroused over Erie's situation last week was Senator Burton Wheeler whose investigation of railroads was proceeding busily (see p. 53). While Jesse Jones wants to save all major railroads, Senator Wheeler favors letting weak roads, however important, "go through the wringer." Irked at the ICC's allowing RFC to aid H. & O. and its willingness to aid Erie, Senator Wheeler last week demanded that the ICC be reorganized because in creating RFC Congress "never in-tended to pour public funds into the bottomless pit of badly financed railroads."

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