Untold Story of the Survival of the Penn Central by Donald Prell - HTML preview

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Merge then Collapse

 

Even on Wall Street one’s memory can be short-lived.  ENRON and WorldCom have been described as America’s  largest bankruptcies. But few can name another, which in  current dollars, was almost as large as the ENRON and  WorldCom debacles.

 

Players of MONOPOLY will recall the value of controlling  the railroads, with The Pennsylvania Railroad one of the  historic four. (An interesting footnote is: in depression- ridden 1935, the firm of Parker Brothers was itself near  bankruptcy, when it reluctantly acquired then marketed  MONOPOLY. The board game became an instant bestseller,  both in America and abroad.)

 

Almost four decades ago, in 1968, the management of  the New York Central Railroad Company were playing real  life MONOPOLY with their repeated and ultimately success-  ful attempt to merge with The Pennsylvania Company. In  1971 two top-notch reporters on the editorial staff of the  Philadelphia Bulletin, Joseph R. Daughen and Peter Binzen,  wrote a best-seller called The Wreck of the Penn Central.

 

The book jacket describes it thus:

 

 “One cold winter's day, after more than ten   years of fighting, bargaining, and negotiating,   the New York Central and Pennsylvania   railroads merged to form the most   monumental single railroad in the history of   the United States: the Penn Central, a railroad   worth $4.5 billion with over 20,000 miles of   track, 95,000 employees, and an annual   payroll of over $1 billion. The date of this   merger: February 1,1968.

 

 On June 21, 1970, only 867 days later, with a   sickening crash that jarred not only Wall   Street but the government and the whole   national economy, the Penn Central went   broke. The largest single railroad became the   largest single bankruptcy in the history of the   United States

 

The directors of Penn Central Company, after being  informed there was insufficient cash to operate the railroad,  chose to file a petition for reorganization under Section 77 of  the Bankruptcy Act, and thereby put its wholly owned subsidiary, the Penn Central Transportation Company, into  bankruptcy. Section 77 of the Bankruptcy Act permitted a  railroad to suspend most of its debts. The Section, adopted  by Congress in 1933, was drawn specifically to cover  railroads that found themselves in bankruptcy situations.  Unlike ordinary bankruptcies, Section 77 did not provide for  liquidation. It was a means for railroads to reorganize while  the trains kept running.

 

  The share price of the Penn Central Company – just as in  the case of ENRON - had been in free-fall, dropping from a  high of $86.50 to a low of $6.50, on the day the bankruptcy  was announced. The next day the stock closed at $4.50.  Authors Daughen and Binzen concluded their story with the  bankruptcy of the Transportation Company. Yet the holding  company continued operating.

 

Putting its major subsidiary into bankruptcy preserved the  major asset of the Penn Central, but now, working capital  was needed to pay expenses in order to maintain the value of  the parent company’s publicly traded shares.  Through the Swiss based investment-banking firm of  Pressprich & Co. the Penn Central Company sold  $24,000,000 of short-term notes (12% rate) to a number of  banks and individuals in Switzerland and the United States. 

 

At the time, it looked to be a “low-risk” investment, as the  holding company had a number of valuable assets, apart  from the railroads, which would eventually provide more  than enough cash to retire the notes.

 

If everything had proceeded as planned there would be  little more of interest to relate. Because it didn’t evolve that  way, there is another story, which begins on a Wednesday  afternoon in December of 1971.