Hearings

6. Incontestability: The problem of contesting a guarantee after the loan has been made has been touched upon above in connection with the limited purposes for which the proceeds of a guaranteed loan may be used. Generally, under legal principles governing the relationships between a surety, a borrower, and a lender, the surety may only avoid his obligation when the obligation was induced by fraud and misrepresentation to which the lender was a party. Whether such principles govern such relationships when one of the parties is a sovereign power is hardly free from doubt. If the guarantee program for railroads is to be attractive, a lender must be assured that having made a loan on the strength of a guarantee by the U.S. Government, the scope of that guarantee will not be subject to erosion after the loan is made. Incontestability clauses of this nature appear in other Federal legislation including the Federal housing and ship mortgage insurance programs. Therefore, any new legislation should contain a provision to the effect that the guarantee will be incontestable after the loan is made except for fraud or misrepresentation on the part of the lender.

7. Maximum term of loans: The maximum term of loans which may be guaranteed under the act is 15 years. Any new legislation should permit guarantees of loans repayable within 25 years. The 25-year period, which is now employed in the ship mortgage insurance program, would attract more long-term investors such as insurance companies and pension funds.

Senator SCHOEPPEL. Might I ask at that juncture, Would it be in your judgment at a cheaper rate of interest?

Mr. SHOEMAKER. It is not my judgment that it would be a cheaper rate of interest, Senator.

Senator SCHOEPPEL. I see.

Mr. SHOEMAKER. I do not think the difference between 15 and 25 years would affect the interest rate in the kind of a money market we have today, sir.

Senator SCHOEPPEL. Thank you.

Mr. SHOEMAKER. It is my hope that these comments will be interpreted by the committee as being constructive in intent and not in the slightest to the derogation of my broad endorsement of S. 1146.

I wish, again, Mr. Chairman, to thank the committee for giving me the opportunity of appearing before you.

Senator SMATHERS. Mr. Shoemaker, we thank you for your appearance and your statement. You have been very helpful in clarifying our thinking about this matter. Thank you for being with us. Any questions?

Senator SCHOEPPEL. I have no questions. I think it's an excellent viewpoint for us to have before us and it does present some very serious aspects as you bring it out here for us to consider.

Senator SMATHERS. All right, sir. Thank you very much.

Mr. SHOEMAKER. Thank you.

Senator SMATHERS. Our next witness is William B. Johnson, president of REA Express.

All right, Mr. Johnson.

STATEMENT OF WILLIAM B. JOHNSON, PRESIDENT, REA EXPRESS, NEW YORK, N.Y.

Mr. JOHNSON. Mr. Chairman, members of the subcommittee, I have a prepared statement which I assume you have. I think it might perbe easier for me to just talk a few minutes and summarize it. My name is William B. Johnson. I am the president of Railway Expr Agency, Inc. We now call it REA Express because we hope toy symbolize in the minds of the shippers and the general public that company is offering services and a way of life different and better .. it has in the past. That's why there may be some confusion about ; what REA Express is.

Senator SCHOFPPEL. I might say this off the record.
Dussion off the record.)

Mr. JOHNSON. My purpose here this morning, gentlemen, is to sugtore amendment. As they say in Washington, I'm finding this is - a little amendment. It's an amendment that would simply make act, if extended, applicable to express companies subject to part I. I a''s all.

I do find myself in agreement with a number of other amendments e22ested but we will just be happy to get under the law--whatever

Senator SMATHERS. To further demonstrate that this is just a little endment, how many express companies are there under this act? Mr. JOHNSON. There is only one.

Senator SMATHERS. So, it's just one little old amendment?
Mr. JOHNSON. Yes, sir; that's all. [Laughter.]

Te language that would be necessary to do that is set forth in the

statement.

ik perhaps you know what the Railway Express Agency, KEA Express, is. I would like to say a word about that.

Our company is wholly owned by the railroad industry. Sixtyfr railroads own our stock. The corporation was actually formed

at the suggestion, I believe, of the Interstate Commerce Comon, when the old American Railway Express Co. was divided to two parts, the transportation end of the business being the Railav Express Agency. The railroads of the country acquired those and set up this corporation. The other part of it has since American Express, and you all know what their business Or company today serves all 50 States and has a direct serv℗ to 41 foreign countries. Indirectly we serve practically the whole fre world. We use all forms of transportation. I think we have Pt 420 contracts with motor common carriers. We run some *. as ourselves over the highways, we use practically all railroads have passenger train service. We use some railroads piggyback We have contracts with all the airlines. Our air express --- is about a $50 million business now. We also use the steam..and foreign freight forwarding, and try to tie together in one taoral and international network all forms of transport to give a. coordinated system.

However, most of our tonnage is still handled-the ton-miles* passenger train service.

statement would have to be this filed document which is a public dow a ment as any other party to the case would be privileged to tile.

Senator SMATHERS. Have you people given any cons deration to making any recommendation as to liberdizing the part V joan pro Visions so that a railroad might be able to pledge mortgages and equipment trusts obligations and things of that rature? Has that been given any consideration at all

Mr. BAKER. Under the present law, of course, the Comm's call empowered to take security, to require that security be given for these loans that are guaranteed.

Senator SMATH. And under the present law is there any lin. ta tion as to what the Commission can recommend that could be cut. sidered as security!

Mr. BAKER. One of the basic findings required by the law, of course, is that the Commission shall find that there is reasonable prospes condering the earnings of the carner and any collveral fat ris be offered, that there is reasonable prospect that the loan will be pai Senator SMATHERS. All right. Thank you very much.

I don't have any further questions,

Mr. HUTCHINSON. May I ask, Mr. Charman, whether it wollḥ useful to include the rev ommer dat otson Commissioner Webb's rep." in the record without reada gt.em? I understand -

Senator SMATHERS. I don't bel eve, Mr. Chairman, we ong d encumber this particular hearing with Webb's recommendat spectat g the New Haven. I am just asking that for my own at mation because tỉ is mater oby.ously will come up for d and I think we would be well advosed if I knew something a but there is no sense putting it in there at this time, I don't to, i Thank you very mù h, Mr Churman.

Senator ScHOEPri... No further questiotos,

Senator SMATHERS. All right.

Our next witress is Mr. Shoemaker, the vice cha rman of the best ! of the Fre Lackawanna Rylrond Co.

Mr. Shoemaker, you just have a seat. We are glad to have you Will you pleve proceed!

STATEMENT OF PERRY M SHOEMAKER. VICE CHAIRMAN OF THE BOARD, ERIE LACKAWANNA RAILROAD CO

M- SHOPMAKER Tark you.

Le opport I have in appest.tg before you gent'ener, tala

My name is Perry M. Shoemaker. At flet me of merger of ber 17, 1960, I had been president of the Delaware La AIN Western Rilroad Co för × years, after previously hold postors from division siper 1 ter dert to operating V. e pre

From 14 to 14! I was wit'e New Haven, Rand, s t`e position of super verdert of fregit træt portat 1929 I was employed by the Frie Ratoid as fre foren an, yarimaster, and general ward ter MA econds of a degne in

Iversity of Man and a transportat one green ng degree !Yale.

In Government work, I was Chairman of the Transportation ComLittee of the second Hoover Commission and served on several other task forces of that Commission.

Section 510 of the Interstate Commerce Act, as created by the Transportation Act of 1958, made available to the railroad industry a source of funds through the Government guarantee provisions, parcularly for capital purposes involving circumstances under which an individual railroad otherwise had limited credit.

Understandably, and in spite of the precarious financial position of many of the eastern railroads in particular, there has been but 1.mited utilization of this credit device.

The industry has been involved in conflicting economic pressures during a time of rapid change in distribution practices; during a time of rapid expansion of Government-provided competition in transportation facilities and a general business recession came into the picture not long after the Transportation Act of 1958 became a statute.

No businessman desires to increase the indebtedness of his company necessarily. No businessman invests in new equipment and facilites if there is uncertainty in his mind as to the payoff of such investment in the light of changing conditions, and certainly the railroad dustry has been impressed with its responsibility for self-help. Among the steps taken for self-help has been the merger of the Erie and Lackawanna Railroads.

The current hard goods recession has had a seriously adverse effect upon the Erie and Lackawanna Railroads, both before and since erger. We had a net income deficit in 1960 of almost $20 million. Our cash position deteriorated approximately $10 million. Storm and strike situations since the middle of December have caused us other $2.5 million in lost revenue and extraordinary expenses. In te meantime, labor injunctions against furloughing or transferring people have impaired the consolidation of merger and the developBit of savings therefrom.

In Erie-Lackawanna's case, with $13.5 million in merger savings aicipated, we find ourselves in a cash and credit position under wwe would be unable to carry out the necessary physical changes st facility improvements necessary for successful merger without the usage of the guarantee provisions of this act. We therefore filed with the Commission on February 28 application for a $15 million Government guarantee on loans which could not otherwise be secured. There will be other mergers. Every student of transportation Arows that there is a surplus of transportation facilities in the East, and certainly we in the railroad business have the economically imTied obligation to press the elimination of unnecessary trackage, tiplicate lines, duplicate facilities and duplicate service. The field of opportunity for this is tremendous. Aside from all other problems lating thereto, accomplishment will take cash and credit.

Were this act to expire in the light of the present financial positon of the eastern railroads, a body blow would be struck at the in

try and its potential for merger. I have no hesitancy in making te prediction that first-quarter earnings will be shocking to the country as a whole. In some cases help is obviously necessary to sustan life pending merger, coordination, or other rehabilitation.

I strongly support S. 1146, which would extend section 510 for 2 year, thus establishing an expiration date of March 31, 1963, for the

loan guarantee ahority of the Interstate Commerce Commission. My erts of S. 1146 is that it does not go far enough. It is my opinion that a 2 year extension is an adequate. I would strongly en dore the principle of this act becoming permirent leglat oli at the guarantee provisions th becoming a revolving fund for t broad purposes envisor ed by the original act,

Now, out of my peroral expe** ce in tegol yng the Ere Luk loan in der 1'e pryant get, I have come to cert in cor box or W* Types to døra 1⁄4 of the net which I am placing before the ne, hope that t'erwyst se for tæeded elarification in the