FAILING RAILROADS

WEDNESDAY, JULY 22, 1970

U.S. SENATE

COMMITTEE ON COMMERCE

Washington, D.C.

The committee met, pursuant to notice, at 10 a.m., in room 5110 New Senate Office Building, Hon. Vance Hartke, presiding.

Present: Senators Hartke, Pastore, Hart, Scott, Pearson, and Baker.

Senator HARTKE. The hearing will come to order.

These hearings are a continuation of the committee's inquiry into the financial collapse of the Penn Central.

The first witness we will hear this morning will be Senator Javits. Following him, Stuart T. Saunders, the former chairman of the board of the Penn Central Co. is here to present his views on how this gigantic corporation reached its present state of affairs.

At 2 p.m. tomorrow the committee will hear testimony of the present management represented by Mr. Paul A. Gorman, who is chariman of the board, and Jonothan O'Herron, the executive director of finance. We will hear from Alfred Perlman, former president, next Wednesday, and those arrangements are to be finalized sometime today.

Senator Javits.

STATEMENT OF HON. JACOB JAVITS, U.S. SENATOR

FROM NEW YORK

Senator JAVITS. Thank you very much, Mr. Chairman. I wish to thank my colleagues for their cooperation with the time stringencies that all of us are under.

Mr. Chairman, I testify as one of the authors of 4014 which is a bill referred to the committee introduced by Congressman Reid in the House of Representatives, and by me here. It seeks $750 million in guarantee authority with respect to the operations of rail carriers.

My bill, as introduced in the Senate, differs materially from that introduced by the administration, Mr. Chairman, in the following respects: (1) The loan guarantee authority in my bill is specifically made available to a railroad in reorganization; (2) The money which is raised as a result of the guarantee must be used "soley for railroad transportation purposes"; (3) There is an opportunity for the guaranteeing authority to insure in a continuing way that the purposes for which the guarantee was made are being carried out.

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Finally, and very importantly, Mr. Chairman, the bill provides for a joint congressional committee to be known as the Joint Congressional Committee on Railroads, with Members from the House and Senate. The function of the committee would be to chart a course for the railroad industry of the country, and in making its proposals, Mr. Chairman, I have in mind that the committee would be able to act with a completely free hand.

As a matter of fact, we have a rather unique system of private ownership in the United States. Whereas in previous days you heard the greatest expressions of alarm and concern if anybody talked about nationalizing the railroads indeed, governments in other countries have come and gone on that issue-I think today, the complex of our society is so enormous, the amount in the private sector is so great, notwithstanding the concerns of many that the government is in too much, that it may be the railroads can no longer be owned privately.

The fact is that government employment at every conceivable level, State, Federal, municipal, is only 10 percent or less of the aggregate employed population, and even if the 5 percent in the Armed Forces are included in government employ, one still must find that 85 percent of our society is still in private hands.

Now, this is very appreciable. If that 85 percent were reduced 1 percentage point because we simply could not run efficient and effective railroads any other way, I do not think that would change the character of the American society.

I am not making a plea for it, but I am making a plea for an untrammeled joint committee in Congress which will really chart an honest course for the people.

Mr. Chairman, I am looking at Senators who, like myself, know that the people want to be told the truth and that the days of Pablum are over. If the railroads cannot be run except with Government help or even Government direction, we must have the courage to explain it. The people would still prefer the railroads to run than to have some illusory private interest in them preserved and grass grow on the tracks.

Senator PASTORE. This commission that you are suggesting, would that be an investigatory commission or would it be a commission to actually run the railroads?

Senator JAVITS. No. It would be a joint committee of the Congress to chart a plan as to what we ought to do about the railroad situation in a permanent way.

Senator PASTORE. Do you not think this committee is competent enough to do it? The point I am making, I am not trying to reflect on your suggestion at all, but it seems to me that every time we have a problem we either have to appoint a joint committee of Congress or we have to appoint a commission, and we know the problem. The problem today is that the railroads are rather archaic because of the outworn equipment that they have, and much of this is as a result of the fact that they have not been sufficiently patronized and they do need federal help. There is no question about it at all.

Now, you have given two alternatives and I am inclined to go along with you on the question. You are either going to have some

kind of Government help or you have got to nationalize this thing because it is not a paying thing, and eventually, it could be done.

I am wondering if we are not belaboring the fact about finding out what is wrong rather than to devote more of our time in remedying what we know is wrong.

Senators JAVITS. I do not think there is a member of the Senate I respect more than my colleague from Rhode Island, and I would like to make a considered reply, if I may.

In the first place, the joint committee that we have in mind in this bill would, and I quote page 8, line 24, "make recommendations for the solutions of such problems, wit: the financial and other problems of the Nation's carriers. I have no design for a joint invesigaing committee, only for a committee which will

Senator PASTORE. Would it be an ad hoc committee?

Senator JAVITS. It would be strictly an ad hoc committee. Now, the reason for a committee or a commission is this: nobody has ever invented a substitute for human brains or concentration. Hence, when you want to zero in on a problem you must either do it self or have an expert group such as this Commerce Committee, both the Senate and the House Committees, or some high-level blue ribbon group do it.

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I suggest the last. The reason is the following: (1) There is an emergency (2) Both committees are fabulously busy; (3) You can get into hassles between the Houses when you are dealing with some massive plan as this would be, and the thing could thus dribble away in some kind of political argument. In view of the emergency, we must take this "blue-ribbon approach.

Emergencies are not bad; they are good. The fact that Penn Central is going through the wringer I think is great because it is going to squeeze a lot of the water out of its securities.

It is going to wake the Nation up to the fact that there is no automaticity about private operation, and it will bring some solutions from the Congress because the people will take no less.

All I suggest is a technique for utilizing the emergency for our benefit in order to bring about some high-level plan of a comprehensive character.

I am not without experience in this, Mr. Chairman. I am the ranking member of the Labor Committee, and on more than one occasion and one of those occasions cost one Senator his seat-we have had the very unpleasant task of keeping the wheels rolling rather than stop because of the strike.

For many, many years the railroads, being the central regulated industry, were the whipping boy for every new idea and every new concept and every regulatory trend everybody could think of. It is one of the things which has resulted in the by no means incidental -and I hasten to point out without proper complaint by the railroads eucrustation of barnacles on the whole operation of railroads which has built up over the years.

This is the reason I am making this suggestion most respectfully to the Committee. The time has come, in my judgment, when you simply must rationalize the rail system of the United States, utilizing this emergency as the railroad system is not used up, by any

means.

As the Senator knows, to take a very homely example, I am probably the best customer of the New York-Washington airplane run. I would more than gladly ride the trains. I have tried the new train. on a number of occasions, but instead of speeding it up they slowed it down. And we all know that there is no lack of patronage for railroads, even passenger patronage, as Ben Heineman has certainly shown in the area around Chicago. But we are strangling in big cities like New York and Philadelphia and others such as Indianopolis, the place of the Chairman, where I was the other day. All of us are strangling because we are on rubber instead of iron.

Senator PASTORE. I am not questioning the Senator's interest in this matter. As a matter of fact, he knows how I feel about him as well. What I am saying is this: That this committee has been very much involved and very much concerned about this problem. I think we understand the problem and we are holding hearings on these bills.

I am afraid if we get into creating a new joint committee you are going to get into jurisdictional problems. Naturally, ordinarily, committees are jealous about their jurisdiction. You are going to get this argument about whether you need it anyway, but if you do need it it is going to take some time.

This emergency is so immediate we ought to begin doing something about it. We have had the Secretary of Transportation here and we have had messages from the White House. We have had Senator Hartke, who is Chairman of this subcommittee, who has gone into this problem in some detail. I think we know the problem. I think the committee is ready and willing and able and capable of doing something about it. We are not so overtaxed with work that we cannot take care of this emergency. That is the point I wanted to make.

Senator JAVITS. The bill we have submitted contemplates exactly what the Senator states because it is in two parts. (1) We are seeking action, to wit, by the loan guarantee route; and (2) We are seeking a permanent or a broad national plan into which the railroad business may fit.

The time may have come for the railroad business to be a joint enterprise of government and private enterprise. This is not impossible. We are doing it in Comsat. We have got another corporation waiting to be staffed called the Overseas Private Investment Corporation. We may do more and more of it. Indeed, I think Comsat came out of this very same committee.

Senator PASTORE. And I managed the bill on the floor and it was the first time we broke a filibuster in 27 years.

Senator JAVITS. I believe in that concept, I might say to Senator Pastore, and I said so at the time. I have been responsible for a number of the initiatives on this joint-enterprise front.

The only thing I am pleading for is the twofold approach, to wit, immediate action, which you must have to deal with the emergency; and greater rationalization with respect to the railroads, and I have suggested a technique for getting it.

In answer to the jurisdictional question, Mr. Chairman, may I say that like the Joint Economic Committee or the Committee on Nutri

tion and Human Needs, of which I am a ranking member, or the Committee on Equal Educational Opportunity, these are all ad hoc committees. They make their recommendations to the legislative committees but they are backed by testimony and a great deal of public notice.

There is an urgency about implementing what they have recommended which is greater than if we rely upon the normal legislative

process.

Mr. Chairman, there is no need to emphasize before this committee the critical importance of the rails, and I believe I have testified to the particular areas in which I have any expertise or ideas and I thank the Chairman very much.

I ask unanimous consent, Mr. Chairman, that my statement as issued may be made part of the record.

Senator HARTKE. Senator Pastore, do you have any more questions?

Senator PASTORE. NO.

Senator Hartke. Senator Pearson.

Senator PEARSON. Senator Javits, I recognize your proposal as being directed toward service and the problems of the employees rather than concentrating on the financial problems involved in this, but at the risk of this being a simple question, tell me, Senator, as an expert in banking-he has to be if he comes from New Yorkwhy are not the banks, the usual institutions, capable or willing to lend money to a corporation such as the Penn Central today? Why is the loan guarantee necessary?

Senator JAVITS. The banks were unwilling to lend to Penn Central before it went into 77(b), I believe, because Penn Central had too much water in it, and the transportation assets were not adequate security for a loan. Nor could they see a cash flow which would get their money back in any reasonable period of time. Therefore, they refused the loan and they would rather see the railroad go into bankruptcy. Not that they are callous to the public importance of such a large enterprise going into bankruptcy in this country; if the decision had been more marginal I believe they would have made it affirmatively.

I do not subscribe to the view that they are unknowing about the consequences to the general economy of a Penn Central failure, but any case, that was a banking decision.

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As to the reason for a guarantee now that they are in reorganization. Creditors of Penn Central are in the hands of the court. To be sure, the certification made by the trustees gives the loan made to the trustees priority over all other indebtedness. (There is still some argument as to whether it has some priority over taxes, but even then, it is very likely that the court has the power constitutionally to give priority over taxes for so-called trustee certificates.)

But this is a very sterile loan for the banks in terms of the fact that they are in the hands of the court. Nobody knows what claims may occur on the part of people who have dealt with the railroad. The court giveth and taketh away. At a time when money is very scarce and when there are lots of other good customers who would be continuing customers, not trustees in bankruptcy, waiting to lend. money to, it is likely that when you add some risks to the unattrac