Creature From Jekyll Island by G. Edward

employees and a payroll of $20 million a week. In 1970, it also became the nation's biggest bankruptcy. It was deeply in debt to just about every bank that was willing to lend it money, and that list included Chase Manhattan, Morgan Guaranty, Manufacturers Hanover, First National City, Chemical Bank, and Continental Illinois. Officers of the largest of those banks had been appointed to Penn Central's board of directors as a condition for obtaining funds, and they gradually had acquired control over the railroad's management. The banks also held large blocks of Penn Central stock in their trust departments.

The arrangement was convenient in many ways, not the least of which was that the bankers sitting on the board of directors were 42 THE CREATURE FROM JEKYLL ISLAND

privy to information, long before the public received it, which would affect the market price of Penn Central's stock. Chris Welles, in The Last Days of the Club, describes what happened: On May 21, a month before the railroad went under, David Bevan, Penn Central's chief financial officer, p r i v a t e l y i n f o r m e d representatives of the company's banking creditors that its financial condition was so weak it would have to postpone an attempt to raise $100 million in desperately needed operating funds through a bond issue. Instead, said Bevan, the railroad would seek some kind of government loan guarantee. In other words, unless the railroad could manage a federal bailout, it would have to close down. The following day, Chase Manhattan's trust department sold 134,300 shares of its Penn Central holdings. Before May 28, when the public was informed of the postponement of the bond issue, Chase sold another 128,000

shares. David Rockefeller, the bank's chairman, vigorously deniedChase had acted on the basis of inside information.1

More to the point of this study is the fact that virtually all of the major management decisions which led to Penn Central's demise were made by or with the concurrence of its board of directors, which is to say, by the banks that provided the loans. In other words, the bankers were not in trouble because of Penn Central's poor management, they were Penn Central's poor management. An investigation conducted in 1972 by Congressman Wright Patman, Chairman of the House Banking and Currency Committee,

revealed the following: The banks provided large loans for disastrous expansion and diversification projects. They loaned additional millions to the railroad so it could pay dividends to its stockholders. This created the false appearance of prosperity and artificially inflated the market price of its stock long enough to dump it on the unsuspecting public. Thus, the banker-managers were able to engineer a three-way bonanza for themselves. They (1) received dividends on essentially worthless stock, (2) earned interest on the loans which provided the money to pay those dividends, and (3) were able to unload 1.8 million shares of stock— after the dividends, of course—at unrealistically high prices.2 Reports from the Securities and Exchange Commission 1. Chris Welles, The Last Days of the Club (New York: E.P. Dutton, 1975), pp. 398-99.

2. "Penn Central," 1977 Congressional Quarterly Almanac (Washington, D.C.: Congressional Quarterly, 1971), p. 838.

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showed that the company's top executives had disposed of their stock in this fashion at a personal savings of more than $1 million.

Had the railroad been allowed to go into bankruptcy at that point and been forced to sell off its assets, the bankers still would have been protected. In any liquidation, debtors are paid off first, stockholders last; so the manipulators had dumped most of their stock while prices were relatively high. That is a common practice among corporate raiders who use borrowed funds to seize control of a company, bleed off its assets to other enterprises which they afco control, and then toss the debt-ridden, dying carcass upon the remaining stockholders or, in this case, the taxpayers.