Evening star., 1938-01-27
RAIL BONDS HURT
BY FEAR COMPLEX
Distrust in Secondary Is.
sues, Largely Ground|ess,
Began With Erie.

SucS, IdIytIy OIUuIIuleSSs
Began With Erie.
BY CHARLES r. sPEARE.
Special Dispatch TO The Star.
NEW YORK, Jan. 27.-Needlessly,
as it seems to those who have care
fully studied the railroad situation,
a fear complex has been built up In
the last few weeks, or since the Erie
defaults, among institutional and in
dividual investors In railroad bonds.
Nothing like the decline that has
taken place in mortgage and deben-
ture issues from the first of the year
has occurred since 1923.
In is bonds OF solvent roads the
average drop has been eight points.
while from the high prices Of year
ago slump Of over 40 points on
the average has occurred. This
means that from January, 1897, to
date individual carrier securities have
lost from 40 per cent to as much as
so per cent Of their market value.
Reduced to dollars, the depreciation
Is such As to change materially the
status Of investment portfolios long
Of railroad bonds.
Who owns these bonds? The an
swer is given in the elaborate state
ment presented by the Railroad Sc
curities Owners Association as an
exhibit in the Is per cent freight
rate case now being argued before
the Interstate Commerce Commits
sion. This shows that the largest
investors in railroad bonds are the
life insurance companies, which have
securities of q book value of s3,los,-
o0o,000; the commercial banks, with
sl,l2l 100000, and the mutual saw
ings banks. with SLOTS, 100000. In
addition fire, marine casualty and
surety insurance companies hold
1852 ,000,0 ,000 So the total ownership
OF this group amounts to over $6.00o,-
100000 par value.
Other Important Investors.
However. there are other important
investors In the same type Of securi-
ties. Among them are educational
institutions. notably the large COL
leges and universities Of the country,
which own a par value Of $275,000,- =
900. Then there are foundations. 4"
such as that directed by the Rookie
feller family, in which the railroad
investment amounts to $2S0,000, 900.
In all, these five lists of investors
owned nearly 56 per cent OF the total
railroad funded debt, which at the
end of 1886 was approximately $l2.-
900. 100000.
1t has been the policy Of the life
insurance companies. gradually to re-
duce their ownership in railroad Sc
curities. The same may be said Of
the commercial and savings banks.
All three groups have looked with
growing apprehension at the change
in the railroad position with respect
to competition and the rising cost Of
operation on what has been a sta
tionary rate base. Accordingly. since
1881 these institutional investors had
cut down their railroad bond ac-
counts from s5,166, 900 to s4,604.-
100000 at the end Of 1896. The
sharpest decline has occurred since
1888, or after the bank moratorium.
In the 1933-l938 era more railroad
systems have gone into the courts
than since the reorganizations of the
1905. The effect Of their defaults
has been to rob the investors Of
about $3.50, 100000 in interest in the
last i've years. The sum Of 1t is
mounting rapidly each IL months.
Confined to Secondaries.
The reaction from the Erie Rail-
road failure has been to intimidate
holders Of bonds in railroad systems
that until this episode were gener-
ally regarded as able to weather
any depression. Naturally the ex-
treme declines in the bonds of such
roads have been confined to their
secondary issues. It is in them that
the greater part of the 15-point av-
erage fall this month and the 40
point drop in the last year has oc-
CURED. AS result extraordinary
yields are now available on bonds
which until recently had possessed
a rating sufficiently high to permit
their purchase by banks operating
under the F. D. I. c. These returns
range from 7 per cent to nearly 10
per cent, irrespective of maturity.
It Is . fair guess that, with IN IN
crease in freight rates likely to be
authorized by tho Interstats Com
merce Commission within the next
30 days, the investment status and
the market level Of bonds Of this
type will be. materially improved.
It Is known that the railroad credit
situation, as represented in current
prices for secondary bonds, Il deeply
disturbing to the Roosevelt admins
tration. and that the President and
Jesse H. Jones. head Of the r. F. c.,
are giving 1t close attention. It is
also believed that the Senate Com
mittee on Interstate Commerce, of
which Senator Wheeler is chairman,
is considering early legislation that
will accommodate carriers in finan-
cial distress. One clear fact is that
with such disturbed railroad bond
market any progress In the reor-
ganization Of insolvent roads must
be deferred. It Is not unlikely that
when negotiations are resumed there
may be . different approach to those
bondholders who have been asked
to give up much Of their seniority
rights without being sufficiently COM
pensated In "equity' securities for
their sacrifice Of position and Of
principal.
ECopyriaht 1889