O. P. & M. J. Railroad

O.P. & M. J. Railroad

Having learned how the greatest private banking house in the U. S. operates, the members of the Senate Banking & Currency Committee learned last week how a great railroad system may be put together.

Because one of J. P. Morgan & Co.'s deals was the financing of Alleghany Corp., Mr. Pecora sent to Cleveland and brought the bachelor brothers Oris Paxton and Mantis James Van Sweringen posting to the Capital, put "O. P." upon the stand and kept him there four solid days.

No wholly tractable witness was "O. P." His memory of figures and dates was defective, he refused consistently to "guess." Time and again he answered, "I don't know. We will get that figure for you." or "You can get that from the records." Caustic comments about the quality of his memory did not move him. Yet at the end of four days' testimony the committeemen could get a good idea of how the Van Sweringens had acquired their railroad system, step by step from a "shoestring" of $1,000,000.

Step I was taken in 1916, when the brothers--two farm boys who went to the city and spent their savings buying empty lots--were already successful real estate operators in Cleveland. They had a suburban development called Shaker Heights which needed a rapid transit line to the heart of the city. For a rapid transit line they needed a right of way. They thought of hiring one from the nearby Nickel Plate Road. They went to the New York Central (which owned more than 50% of the stock of the Nickel Plate) and came away not only with a right of way but with a majority interest in the Nickel Plate--the famed New York, Chicago & St. Louis Railroad, built in the 1880's at so great a cost per mile that financial wags of the period said that its rails were nickel plated. In 1916, the Nickel Plate (with 523 mi. of track connecting Buffalo with Chicago) was not in the forefront of railroads. It was a second-grade property, far from profitable. The New York Central was glad to sell its majority interest for $8,500,000.

The Brothers Van Sweringen did not have $8,500,000 but they had a vision of the Nickel Plate as a profitable road. With two chief associates, Charles L. Bradley, who owned the Cleveland baseball team, and Joseph R. Nutt, chairman of Union Trust Co., and with several lesser associates, they gave the New York Central ten notes for $650,000 payable one a year for ten years, and they also paid down $2,000,000 in cash obtained as a loan from Cleveland's Guardian Savings & Trust Co. by putting up the Nickel Plate stock as collateral. So the original deal was financed entirely on credit and borrowed capital. They presently formed Nickel Plate Securities Corp., which assumed liability for the notes and the loan. It issued $2,000,000 worth of preferred stock to which the Van Sweringens subscribed about $500,000 in cash. They also got most of the Securities Corp.'s common stock. With the $2,000,000 the Security Corp. paid off the bank loan and settled down to improve the railroad so that it could pay out of earnings the $6,500,000 in notes still owed. (The notes were all paid off by 1923, three years ahead of time.) This was the first profitable deal.

Step 2. In 1920 came the National Transportation Act, proposing railroad consolidations. Straightway the Van Sweringens sat down to figure out their own consolidation. The Nickel Plate was making money and in 1922 they had it buy and absorb two smaller roads: the Toledo, St. Louis & Western ("Clover Leaf") and the Lake Erie & Western. But the brothers had a more ambitious project; they wanted the Chesapeake & Ohio. A block of 73,000 shares, a minority but practically a controlling interest in the C. & O., was held by the Huntington family of Los Angeles. In 1923 they bought this at $100 a share (although the market price was only $70-$80 the value of such a large block made it worth while). Most of the cash was put up by the Nickel Plate; the rest was obtained by having the Vaness Co. (then the Van Sweringens' private holding company) borrow the money on its securities. From then on this was the system they followed: they borrowed to buy control of a railroad, then with its profits and money borrowed on the growing value of their security holdings bought another, again and again.

Thus the year after stepping into C. & O., they joined with bushy-whiskered old George F. Baker, chairman of Manhattan's First National Bank, to buy control of the Erie. Wanting outlets for the coal shipped over the C. & O. they bought into Pere Marquette (which served the industrial part of Michigan).

Step 3. With these major holdings assembled, the Van Sweringens went to the Interstate Commerce Commission in 1925 for permission to merge them with the Nickel Plate. The Commission said No. It objected to tying all these roads into the Nickel Plate which was so absolutely controlled by a small group of men, and it objected to certain physical aspects of the consolidation (which would have made the Nickel Plate instead of the C. & O. the backbone of a new system). So the Van Sweringens reversed their plans. The C. & O. became the centre of their schemes. In 1927 they set up Chesapeake Corp. and Morgan & Co. floated a $48,000,000 bond issue so that Chesapeake Corp. could buy the C. & O. stock held by the Nickel Plate and the Van Sweringen holding companies. But when the C. & O. asked permission to get control of the Erie and the Pere Marquette, the I. C. C. refused as regarded the Erie. Seeing they were getting nowhere, the Van Sweringens decided to set up a master holding company that would bring together all their railroad interests till such time as the roads could be consolidated. Hence, Alleghany Corp. Into this pot they poured in 1929 all their rail stocks. They took in exchange 2,500,000 common shares and a 15-year option to buy 1,750,000 shares at $30. To pay off the loans which had been pyramided in making their acquisitions they sold 1,250,000 shares of common at $20 to Morgan & Co., $54,000,000 of preferred stock and $53,000,000 of bonds to the public. Thus was their vast structure reduced to a corporate common denominator.

And now they added one more element: they bought into the Missouri Pacific. This road took them into new territory across the Mississippi, suggested the idea of a transcontinental system. This idea they vigorously deny, saying that their object was to obtain diversification in their investment, to obtain a road whose traffic, unlike that of the eastern roads, is not largely dependent upon coal. Today the MOP, in receivership, is the cat & dog of their holdings, while the C. & O., a coal road, which continues to pay dividends, is their paragon.

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