Evening star., 1932-05-08
Uncertainty Over Tax Pro-
qram Is Also a Disturb
ing Influence.
CONSTRUCTIVE ACTION
DECLARED IMPERATIVE
Presidents Message Gives Ray of
Hope for Early Balancing
of Budget.
BY CHARLES F. SPEARE.

Special Dispatch to The Star.
NEW YORK, May THE railroad
situation today holds the same position
with respect to the markets for securi-
ties and as disturber of public conf
dence as did banking conditions in this
country from last October until the
middle Of February. Until evidence
can be produced that the difficulties of
the carriers are to be corrected or
modified, the influence of steadily de-
clining prices in their stocks and bonds
must have a depressing effect on the
general investment market and delay a
restoration of confidence in the entire
banking and industrial outlook.
Briefly, the position of the steam
transportation lines is this In the
March quarter of this year their gross
revenues decreased about % per cent.
Their car loadings from the first of
January to the end of April were off
nearly rs per cent from a similar
period in 1891 and nearly 80 per cent
compared with 1880. In the first two
months Of this year the net deficit of
the class roads was about $50, 1000, 900.
The rate OF return earned on property
investment for the three months to
March 81 was 128 per cent. This is
always the leanest period of the year,
but in 1881, in a corresponding in
terval, 2.10 per cent was earned.
Federal Aid Necessary.
Because Of the great decline in gross
revenues, inability to finance with new
securities and the payment of a Dor
ton Of dividends out of surplus. the
roads working capital was recently
under $95,000,000, whereas last year at
about this time it was S462 600, 600.
One OF the normally busiest seasons of
the year is passing with no gain in
either merchandise traffic or in heavy
tonnage
Obviously, the situation is critical for
at least half a dozen systems that have
eltner peen reorganized since 1917 in a
Tatner haphazard way or that, since
the emo OF Federal control, by stock
anu pono issues and legitimate ex-
penolture OF earnings, have develoned
a plant that today is only from rs IN
30 per cent in use. The consenuences
are apparent in the present embarrass-
nent OF having paid too high dividends
anc continued dividend policies too
long after the reduction in net oper-
asllg income had set in, but have no
place now in an argument for cor
rective measures
Inc junior bonds of the six or seven
railroaoS that can only stand I'm DIR
ing the year by the grace of the Inter
state Commerce Commission and the
reconstruction Finance Corporation
nave been selling this week at about o
10 IL cents en- the dollar. These are
issues hoated between 1927 and 1890 a
period OF the largest gross earnings and
one OF the highest returns on railroad
property investment ever made. Most Of
them were bonds legal for savings banks
ano trustfes. They were widely dis
trlbuted among commercial banks and
life insurance companies and held hU
educational institutions and bv diff
ferent foundations and individuals
The majority were initially sold at an
average price between 95 and 81.
Inc interstate Commerce Commits
sion has now established a precedent
toward loans to carriers with an ex-
hausted credit and bank loans for
which there is pressure from the in
side to liquidate or to reduce. The
commission is requesting. If not com
pelling, the st. Louis-San Francisco
road to present a plan of capital re-
organization before July 1. 1t intimates
that unless such plan is submitted
and found satisfactory, it will not
recommend further use of Reconstrlc-
tion Corporation funds to meet the
interest payments or maturities of this
Southwestern system. The challenge
has been presented. The form of ac-
ceptance of it by the Frisco directors
and their bankers and the degree to |
which bondholders may show a will |
ingness to go along with it will de-
termine what is to be done in the
event that similar proposals are made |
to such carriers as the Missouri Pacific
and the New York, Chicago g. st. |
Louis and two or three other lines
whose securities reflect the same
suspicion Of pending trouble as those
mentioned. /
Capital Structures Unbalanced.
Only as the realities of the present
economic situation are realized and ac-
cepted can there be any progress
toward correcting it. The Frisco is
greatly overcapitalized. It's ratios of
stock to bonds are about 80 per cent
and 10 per cent. This general average
applies to the other roads whose
finances are in the most critical stage
today
The Interstate Commerce Commission
had to pass on the bond issues which
threw the capital structures of these
roads out of balance. While it Is said
with considerable justice and bitter
ness today that it could have corrected
this condition earlier, this has nothing
to do with what must be done now to
change it so that temporarily, and in
the future, a great load of debt will not
be a constant drag on these properties.
In the emergency there are three
methods that may be adopted by the
Frisco or bv the other lines in similar
conditions, to meet the demands of the
Interstate Commerce Commission and
establish an improved credit rating.
First, the junior bonds may be ex-
changed for an income bond on which
interest is paid only as earned second,
the interest on existing bonds may be
scaled down over a period of years, say
from Az per cent to 2 per cent or
from per cent to per cent: third,
bondholders may agree to a three year
suspension of interest on their bonds,
or a shorter period of deferment in
the event that traffic and net operating
income revive quickly within this period.
Alternative for Bondholder.
Any one of these sacrificial plans
involves the consent Of a majority of
the bondholders affected by them. II
the bondholder understands the ex-
tremity of conditions in the railroad
world he will agree to some one of
them, for he must realize that the
alternative Is a receivership and a long
period of reorganization and wholly
suspended interest-and the only one
that viii profit by that situation is the
reorganization banker. A bondholder
with an issue selling today at 10 or II