Not only was it conceived in fraud but it continues to operate at a loss paid for by the tax payer
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CREATURE FROM JEKYLL ISLAND wrote:Chapter Three
PROTECTORS OF THE
PUBLIC
The Game-Called-Bailout as it actually has been
applied to specific cases including Penn Central,
Lockheed, Nezv York City, Chrysler, Common-
wealth Bank of Detroit, First Pennsylvania Bank,
Continental Illinois, and others.
In the previous chapter, we offered the whimsical analogy of a
sporting event to clarify the maneuvers of monetary and political
scientists to bail out those commercial banks which comprise the
Federal-Reserve cartel. The danger in such an approach is that it
could leave the impression the topic is frivolous. So, let us abandon
the analogy and turn to reality. Now that we have studied the
hypothetical rules of the game, it is time to check the scorecard of
the actual play itself, and it will become obvious that this is no
trivial matter. A good place to start is with the rescue of a
consortium of banks which were holding the endangered loans of
Penn Central Railroad.
PENN CENTRAL
Penn Central was the nation's largest railroad with 96,000
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 Perm 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, privately informed
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 denied
Chase 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 disas-
trous expansion and diversification projects. They loaned addi-
tional 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.: Con-
gressional Quarterly, 1971), p. 838.
PROTECTORS OF THE PUBLIC 43
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.
THE PUBLIC BE DAMNED
In his letter of transmittal accompanying the staff report,
Congressman Patman provided this summary:
It was as though everyone was a part of a close knit club in which
Penn Central and its officers could obtain, with very few questions
asked, loans for almost everything they desired both for the company
and for their own personal interests, where the bankers sitting on the
Board asked practically no questions as to what was going on, simply
allowing management to destroy the company, to invest in
questionable activities, and to engage in some cases in illegal activities.
These banks in return obtained most of the company's lucrative
banking business. The attitude of everyone seemed to be, while the
game was going on, that all these dealings were of benefit to every
member of the club, and the railroad and the public be damned.
The banking cartel, commonly called the Federal Reserve
System, was created for exactly this kind of bailout. Arthur Burns,
who was the Fed's chairman, would have preferred to provide a
direct infusion of newly created money, but that was contrary to
the rules at that time. In his own words: "Everything fell through.
We couldn't lend it to them ourselves under the law.... I worked on
this thing in other ways.""
The company's cash crisis came to a head over a weekend and,
in order to avoid having the corporation forced to file for bank-
ruptcy on Monday morning, Burns called the homes of the heads of
the Federal Reserve banks around the country and told them to get
1 "Perm Central: Bankruptcy Filed After Loan Bill Fails," 1970 Congressional
Quarterly Almanac (Washington, D.C.: Congressional Quarterly, 1970), p. 811.
2 - Quoted by Welles, pp. 404-05.
3- Quoted by Welles, p. 407.
44 THE CREATURE FROM JEKYLL ISLAND
the word out immediately that the System was anxious to help. On
Sunday, William Treiber, who was the first vice-president of the
New York branch of the Fed, contacted the chief executives of the
ten largest banks in New York and told them that the Fed's
Discount Window would be wide open the next morning. Trans-
lated, that means the Federal Reserve System was prepared to
create money out of nothing and then immediately loan it to the
commercial banks so they, in turn, could multiply and re-lend it to
Perm Central and other corporations, such as Chrysler, which were
in similar straits. 1 Furthermore, the rates at which the Fed would
make these funds available would be low enough to compensate
for the risk, A peaking of what transpired on the following Monday,
Burns boasted: "I kept the Board in session practically all day to
change regulation Q so that money could flow into CDs at the
banks." Looking back at the event, Chris Welles approvingly
describes it as "what is by common consent the Fed's finest hour."
Finest hour or not, the banks were not that interested in the
proposition unless they could be assured the taxpayer would
co-sign the loans and guarantee payment. So the action inevitably
shifted back to Congress. Perm Central's executives, bankers, and
union representatives came in droves to explain how the railroad's
continued existence was in the best interest of the public, of the
working man, of the economic system itself. The Navy Department
spoke of protecting the nation's "defense resources." Congress, of
course, could not callously ignore these pressing needs of the
nation. It responded by ordering a retroactive, 13 A per cent pay
raise for all union employees. After having added that burden to
the railroad's cash drain and putting it even deeper into the hole, it
then passed the Emergency Rail Services Act of 1970 authorizing
$125 million in federal loan guarantees. 3
None of this, of course, solved the basic problem, nor was it
really intended to. Almost everyone knew that, eventually, the
railroad would be "nationalized," which is a euphemism for
becoming a black hole into which tax dollars disappear. This came
1. For an explanation of the multiplier effect, see chapter eight, The Mandrake
Mechanism.
2. Welles, pp. 407-08.
3. "Congress Clears Railroad Aid Bill, Acts on Strike," 1970 Congressional Almanac
(Washington, D.C.: 1970), pp. 810-16.
PROTECTORS OF THE PUBLIC 45
to pass with the creation of AMTRAK in 1971 and CONRAIL in
1973. AMTRAK took over the passenger services of Penn Central,
and CONRAIL assumed operation of its freight services, along
with five other Eastern railroads. CONRAIL technically is a private
corporation. When it was created, however, 85% of its stock was
held by the government. The remainder was held by employees.
Fortunately, the government's stock was sold in a public offering in
1987. AMTRAK continues under political control and operates at a
loss. It is sustained by government subsidies — which is to say by
taxpayers. In 1997, Congress dutifully gave it another $5.7 billion
and, by 1998, liabilities exceeded assets by an estimated $14 billion.
CONRAIL, on the other hand, since it was returned to the private
sector, has experienced an impressive turnaround and has been
running at a profit — paying taxes instead of consuming them.
