Business & Finance: Wabash Blues

Of the Wabash Railway it has been said that “it begins nowhere and ends nowhere.” That is not very complimentary to Buffalo and Omaha, its terminals, or to the mining districts of northern Michigan, which it reaches from Toledo with its Ann Arbor Railway (99% owned). But “somewhere” to a railroad is either a great seaport or the gateway of a populous, raw-producing hinterland. The Wabash developed a system 2,500 mi. long, with 4,500 mi. of track, 701 locomotives, 26,000 freight and 411 passenger cars. Last week this whole property, $358,000,000 in assets, passed out of stockholders’ hands into receivership. The railroad industry saw its first major bankruptcy since Depression, looked on glumly as the stockmarket absorbed the news like a draft of poison.

Wabash 5½% bonds of 1975 broke 19 points, the 53 of 1939 17 points. Average price of 20 listed rail bonds made a new bear market low at 72.7 against 102.2 a year ago. The receivership surprised rail investors more than it should have. Bankers & brokers had known for months that Wabash must have help or failure was inevitable. The public, shocked at the news, had supposed aid would come from one of three sources: the Government, the road’s bankers (Kuhn, Loeb & Co.) or Pennsylvania Railroad Co.. largest stockholder. The Wabash management tried all three sources before they gave up. The Government has a revolving fund supposedly to aid ailing roads but no adequate machinery has ever been devised to arrange the loans.† Kuhn, Loeb shied off. Last resort, the Pennsylvania, decided it had invested enough in a venture which now stands it a loss of $60,000,000. Pennsylvania’s interest in Wabash began in 1927 when it anticipated that the Interstate Commerce Commission would allocate the Wabash to it under the Eastern railroads’ four-party consolidation plan. Pennsylvania’s wholly-owned subsidiary, Pennsylvania Co., was busy for the next two years buying up Wabash securities. By 1929 48.9% of all Wabash stock outstanding had been acquired. Pennsylvania Co. paid $63,041,000 for $67,580,000 par value of preferred and common stocks purchased. On the day of the receivership this investment had a market value of $2,744,000.

In 1930 the I. C. C., still pushing its own consolidation plan, ordered Pennsylvania to get rid of its Wabash stock. I. C. C.’s plan was to consolidate Wabash and Seaboard Air Line (put in receivership December 1930) into a fifth eastern trunk line to be known as System No. 7. This scheme has pretty well collapsed but the I. C. C. order has not been withdrawn.

Immediate cause of the receivership was a petition of T. J. Moss Tie Co. which said that the road was “completely insolvent,” could not pay a tie bill of $49,651.95. There was no question of mismanagement in the petition. Federal Judge Charles B. Davis heard the petition in St. Louis, appointed as receivers Walter S. Franklin of St. Louis, Wabash’s newly-elected president,* and Assistant General Counsel Frank Nicodemus Jr. of New York.

Embarrassing as it is, a railroad receivership does not affect the routine of the company in striking fashion, especially where there is no question of bad management. Employes go to work as usual, trains run on schedule, salaries and wages are paid promptly. But all of this will be done in the name of Receivers Franklin and Nicodemus, not in the name of Wabash Railway Co. Instead of “President,” Mr. Franklin’s office door will be labeled ”Receiver.” Many rubber stamps, much red ink scores of reprinted forms will be required for the new regime, but routine will not change much. Chief sufferers under the receivership are the bond holders. If they did not hear the news last week they will when they send in their next coupons and get them back instead of checks for interest.

A clue to the big bond holders’ identity came when the protective committee was announced a few days after the receivership. Chairman of the committee is John W. Stedman, vice president of Prudential Insurance Co. Other members: George W. Bovenizer of Kuhn, Loeb & Co.; James H. Brewster Jr., vice president and treasurer of Aetna Life Insurance Co., Treasurer Henry W. George of Metropolitan Life Insurance Co.

Fulcrum of the I. C. C.’s five-party plan, Wabash has had a strenuous career in its 94 years of operation. In 1877 it was reorganized after its original 12-mi. line from Meredosia to Morgan, Ill. had grown to 678 miles. Twelve years later it was again reorganized but escaped receivership. Twenty-six years of financial peace followed, ended abruptly in 1915. The company went into receivership, was sold under foreclosure for $18,000,000 cash and assumption of underlying mortgages.

In the seven years that followed 1915 the Wabash was far from the only major railroad in trouble. This period included government operation under William Gibbs McAdoo. In these years the following carriers went into receivership: Chicago, Rock Island & Pacific; Western Pacific; International & Great Northern; Missouri, Kansas & Texas; Missouri Pacific ; St. Louis, Iron Mountain & Southern; Baltimore & Maine; Texas & Pacific; Denver & Rio Grande.

From 1922 to 1929 the rails fared better but besides Wabash the following Class I railroads are now bankrupt: Minneapolis & St. Louis, Seaboard Air Line, Florida East Coast.

The railroad world echoed with much other news last week:

An Aristocrat of the carriers, New York Central Railroad Co., found itself in urgent need of cash, applied to I. C. C. for permission to sell $100,000,000 of 5% bonds to mature in the distant year of 2013 and to be callable 5% above par in 1951. Never in receivership or reorganized in its 100 years of operation. New York Central faced a grave difficulty. Next month matures a large part of its $51,500,000 short-term loans and bank debts which it cannot meet with cash on hand. The road did not ask for permission to sell bonds now, just asked for them to be authorized so it could pledge them as collateral against loans. Every $100 of the loans would be secured by $125 of bonds, an arrangement apparently acceptable to Central’s traditional bankers, J. P. Morgan & Co. and First National Bank of New York. It was estimated that the deal would not only take care of maturing loans but provide the road with fresh working capital.

Chicago, Rock Island & Pacific, another major carrier, changed its policy last week, omitted dividends due on both classes of preferred stock. It was the first interruption of these dividends since the stocks were issued in 1917. Said Banker Charles Hayden, chairman: “It is the belief of the board that the best dividend that could be paid to preferred stockholders at this time is to keep the company in strong financial position.”

New Rates. After long investigation, contests and disputes the new freight rates authorized by I. C. C. last year went into effect at midnight Dec. 2. According to I. C. C. the new rates will increase revenues of eastern roads $25,000,000, western roads $12,000.000. The carriers dispute these figures, say it will amount to much less and in any case, much less than they really need.

These rates are not to be confused with the new schedules offered the roads by I. C. C. in October in answer to the carriers’ plea for a 15% all-around freight rate increase (TIME, Nov. 2). This plan offered to increase the December rates if all roads would pool their income from the increase for the benefit of weak-sisters. Thinking this too much like a dole, strong roads balked, counter-proposed to loan the money where needed at a fair rate of interest. Last week the I. C. C. agreed to this by a seven-to-four majority, said individual roads could keep the increased revenues for themselves, without contributing to a common pool. Caustic dissenting opinion, written by Commissioner Joseph Eastman, said there was “no occasion for beating such a retreat. It is impossible to prove such a plan as in the public interest.”

With I. C. C. approval roads were free to put increased rates into effect one day after revising their tariff schedules.

In Canada and Chicago. Last week the Canadian Board of Conciliation recommended a 10% wage cut for Canada’s 27,000 railroad employes. Closely allied with U. S. unions, Canadian labor leaders were bitterly disappointed, declared they would submit the matter to arbitration. In Chicago this week the U. S. Railroad Brotherhoods meet to consider the same question of wages. Unmoved so far by pleas of rail executives, their leaders must ponder the Canadian decision, the Wabash failure.

†During government control of the railroads (1917-20) War Finance Corp. had power to aid the carriers financially. Recently there has been talk of similar aid. Last week major roads were reported sounding out Congress on a $500,000,000 relief fund.

* James Edward Taussig, Wabash president since March 1921, resigned suddenly last September, “to attend to personal affairs.” His office was then filled by William Henry Williams, chairman since 1915. A month later Mr. Williams died suddenly of heart disease in St. Louis.