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42 THE CREATURE FROM JEKYLL ISLAND PROTECTORS OF THE PUBLIC 43
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.
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. 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/' 1971 Congressional Quarterly Almanac (Washington, D.C.: Congressional
Quarterly, 1971), p. 838.
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
abo 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 bankruptcy
on Monday morning, Burns called the homes of the heads of
the Federal Reserve banks around the country and told them to get
1- "Penn 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.