Goliath by Matt Stoller

Author:Matt Stoller
Language: eng
Format: epub
Publisher: Simon & Schuster
Published: 2019-10-14T16:00:00+00:00

CHAPTER TWELVE Penn Central

“Rumor has it that a red carpet was chosen for the House Banking Committee’s hearing chamber to hide the blood spilled during chairman Wright Patman’s frequent jousts with the nation’s money lords.”

—Lester Salamon, The Money Committees1

On June 20, 1970, Paul Volcker, a tall man with a low voice, headed to Capitol Hill on a mission. It was a Saturday, and he was going to an office where people worked on weekends, that of Banking Committee chairman Wright Patman. Volcker, an undersecretary of the treasury for Nixon, wasn’t there to talk about the heated debate over bank holding companies. He was overseeing a $200 million emergency loan to the nation’s biggest transportation network and seventh-largest company, the Penn Central railroad.

Penn Central was one of the oldest and grandest companies in America, with roots going back to the 1840s. Banks considered it an honor to lend to the company. Nevertheless, five Penn Central executives were on their way to the same office for the same reason. The Penn Central executives were gathering to beg for their company’s life. Volcker, and the Penn Central executives, knew Patman was unlikely to approve a transfer of government money. But they had nowhere else to turn.2 If Penn Central went down, the whole banking system, and a number of weak large corporations, might go down as well.

The collapse had taken years, decades even. First, the economy had changed; trains now competed with trucks and airplanes, in addition to the fact that industry—as well as the need to ship industrial goods—had moved away from the Northeast. Second, regulators hadn’t kept pace, forcing railroad companies to run empty passenger trains on certain routes when commuters were taking cars. Third, union contracts often forced the railroads to pay workers who didn’t work.3 Most importantly, railroad managers themselves began stripping their companies of value, trading stocks on inside information, rewarding themselves with lavish pay, and engaging in empire building through unworkable mergers. Finally, the CEO of Penn Central tried to turn the train company into a conglomerate, to gamble his way out of insolvency. The Penn Central collapse involved deception by accountants, lies to regulators, customers, and passengers, and the sell-off and demolition of one of the most beautiful train stations in the world, all to keep the fraud going for as long as possible. And Wall Street had been knee-deep every step of the way. Walter Wriston at National City was Penn Central’s banker.

The corporation had fouled up its giant train system by engaging in a classic railroad robber baron technique: paying dividends instead of maintaining the track and rolling stock. Its executives had also rediscovered old ways to ruin a balance sheet. Penn Central had borrowed at high interest rates to buy land, buildings, pipelines, and even that longtime signal of American financial greed and idiocy, Florida real estate. Everything the corporation owned was mortgaged, and no one would lend Penn Central another dime. Now, bleeding cash, the company went begging for a bailout from the government.

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