In 1937, the insolvent Chicago & Eastern Illinois almost became the first Class I railroad to leave court jurisdiction under Section 77 of the Bankruptcy Act and return to private control. Security holders all agreed informally on a plan; yet the plan fell through. Last week, under a different plan, Trustee Benjamin Wham turned the title over to President Charles O’Neal, and C. & E. I. left the courts at last. Although nearly four years had elapsed, it was still the first Class I railroad to do so.
But C. & E. I. did not really return to private control. Probably 1937 was its last chance to do that. When it left court jurisdiction last week, it entered that of Emperor Jesse Jones’s RFC.
Fiefdom is nothing new to C. & E. I. In 1930, Thomas Fortune Ryan’s estate sold its control to the Van Sweringens, who wanted it as a feeder for their rich Chesapeake & Ohio. Although C. & E. I. had paid no dividends for 17 years, the Vans caused the C. & O. to pay $8.000,000 for just over 50% of its common ($2,000,000 above the market price). Fearing ICC disapproval, they used a dummy, kept their own and C. & O.’s name out of the deal. The dummy: brokerage house Paine, Webber & Co., whose partner Kenneth Steere soon after became chairman of the C. & E. I. board.
Two years later, to repay $700,000 it owed to the C. & O. System, C. & E. I. got a loan from RFC. To keep the loan’s purpose from ICC eyes, the Van Sweringens had to resort to further camouflage. At length, in 1933, C. & O. let its secret ward drift into the courts.
Getting to work on a reorganization plan, Mr. Steere (representing the stock holders) finally made a pact with Prudential Insurance Co.’s Carrol Shanks (representing the bondholders) in March 1937. Their plan would have given C. & O. a 14% interest in the new common for its old.
There were two reasons why that plan did not go through. One was Senator Wheeler’s muckraking railroad finance investigation, which had meanwhile brought the Vans’ C. & E. I. shenanigans to light. Although the Vans were by then out (dead, in fact), the revelations left ICC in no friendly mood toward Mr. Steere. The other reason was Jesse Jones, who did not share Mr. Steere’s optimism about the plan. By then RFC had become a big creditor of C. & E. I.
The second effort to reorganize was a bondholders’ plan — and there was no doubt as to who the No. 1 bondholder would be. Just to make sure, Jesse Jones put his own man on the three-man reorganization committee — RFC’s John Bar-riger, who went in to keep watch over Stockholder Steere and Bondholder Shanks. Their plan, under which C. & E. I. last week left court, wiped out the common, left RFC on top. Capital structure was deflated from $85,000,000 to $61,-000,000, fixed charges were cut from $1,772,800 to $485,000. For its loans, which totaled $6,262,000, RFC got $6,-262,000 of new first-mortgage bonds. RFC also advanced the new company $4,933,000 in new cash, and got as many more bonds for that. Jesse Jones’s total secured holdings in the new C. & E. I.—over $11,-000,000—are enough to assure him the right to run its next reorganization by himself.
The Emperor Jones is no tyrant. Mr. Shanks’s principals got a fair shake too: for each old $1,000 bond, a $500 general mortgage bond, $500 in new Class A stock, four shares of common and $35 in cash (as back interest on each new $1,000 bond). Mr. Steere’s stockholders of course got nothing, but since C. & O. owned other C. & E. I. securities, it will wind up with 12% of the new voting stock (16% if its bonds are converted)—the largest single voting block. For continuity’s sake the reorganizers also left Charles Thomas O’Neal, the Van Sweringens’ operating head of the old C. & E. I., as president of the new.
If these are signs of Jesse Jones’s tact, they do not obscure the facts of who is in control. The banking patronage, for example, is split several ways: some to Manhattan’s Chase, Chemical and City Banks, some to Trust Co. of Chicago, but the cream to Chicago’s Continental Illinois, which gets the trusteeship for the first-mortgage bonds. Chairman of Continental Illinois is Jesse Jones’s appointee Walter Joseph Cummings.
Three RFC representatives were named to C. & E. I.’s new board. One of them, John Barriger, also becomes a member of the executive committee. Young (41), baby-faced John Barriger is a railroad fan who learned to wear cufflinks and stiff collars at Kuhn. Loeb. A bright young man to old Wall Streeters, an outsider to New Dealers, he has two pet railroad theories: 1) their maintenance of way badly needs modernization, 2) they sorely need consolidation. Wall Street, he feels, was on the way toward consolidating them until Teddy Roosevelt’s trustbusting put a stop to it. Since 1933, ex-Wall Streeter Barriger has been working for RFC.
Wage and Hour Administrator Fleming, acting on the recommendation of an industry committee, ordered railroads to give $7,000,000 worth of raises to 70,000 track workers, redcaps, waiters, other employes.
Of the 20 roads that will foot two-thirds of the bill, ten were in the red through last October.
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