Ball & Chain

Armed with blanket authority and a $25,000 appropriation, Montana's Burton Kendall Wheeler set out a year ago last May to show the Senate Interstate Commerce Committee, of which he is chairman, precisely how the art of railroad finance had been practiced in the U. S. in late years. Hand-picked for the Senate by Railroad Coordinator Joseph B. Eastman was a list of likely subjects. Much of the preliminary field work in the investigation was done by the experienced staff of the Interstate Commerce Commission. Named as inquisitor was Max Lowenthal, lawyer-author of The Investor Pays. Fortnight ago Senator Wheeler sat down for the first hearings in Washington to harvest his publicity.

Opening his show with a public dissection of the Van Sweringen railroad pyramid, the Senator at first plugged the theme: how little the Cleveland bachelors owned, how much they controlled. His star witness was George Alexander Ball, whose name is a household word to millions of farmers' wives who put up their preserves in his "Ball Perfect Mason" jars. Mr. Ball, a pale, grey-mustached septuagenarian with a frosty fringe around his bald cranium, told how he and Cleveland's George Ashley Tomlinson, to whom the late O. P. Van Sweringen appealed for aid in 1935, formed Midamerica Corp., put up $3,121,000 to buy at auction from J. P. Morgan & Co. collateral that had once secured a $39,500,000 loan to the Van Sweringens (TIME, Dec. 14). He went on to tell a lot more: how $274,000 of their purchase price bought 47% control of Alleghany Corp.; how they promptly gave the Vans irrevocable proxy to vote this stock, how they also gave the Vans a ten-year option to buy 8,250 of the 15,000 shares of Midamerica Corp. for $8,250; how they gave the Vans a salary of $100,000 a year, how Mr. Ball bought out most of Mr. Tomlinson's stock in Midamerica so that he now owns over 90%; how finally when the Vans died, thus terminating the option and proxy, Mr. Ball found himself the master of the Van Sweringen empire.

"I don't think Houdini could have done anything more phenomenal than the Van Sweringens did," scoffed Senator Wheeler. "They regained control of their vast empire without putting up a five-cent piece." Mr. Ball, unexpected inheritor of the Van Sweringen empire, had to confess time & again that he did not even know what kind of business many of the 286 Van Sweringen corporations were engaged in. He had put its management in the hands of Herbert Fitzpatrick, Van Sweringen attorney.

In spite of Senator Wheeler's sneers, Mr. Ball was not wholly abashed. Senator Wheeler brought out that Mr. Ball was Republican National Committeeman from Indiana, Mr. Fitzpatrick former Democratic National Committeeman from West Virginia.

Said Senator Wheeler: "I suggest you get a member of the Socialist National Committee and then you will get them coming and going."

Said Mr. Ball gently: "I would be very glad to discuss that proposition with you." The audience guffawed and Senator Wheeler, whose bias is for government ownership, winced.

Spiciest bit was a memorandum found in the files of George F. Baker, Chairman of Manhattan's First National Bank, which Senator Wheeler read into the rec ord. It related a telephone conversation in March 1935 in which Harold Stanley, then a Morgan partner, told a vice president of the First National that "the Van Sweringens, heretofore having drawn no salaries from the enterprises and for some time having been living on their insurance, are up against it to provide for living expenses. They estimate their joint require ments to be $150,000 a year, the principal items being the following:

"Living expenses, $30,000.

"Dependent relatives, $25,000.

"Upkeep of farm, $20,000.

"Insurance, $25,000.

"Taxes, $20,000 to $25,000.

"It is proposed that they draw salaries aggregating $75,000 from their companies, presumably Chesapeake Corp., etc., and that the other $75,000 be provided in some way out of or by the participants in the [loans to the Vans]. . . . "

Other creditors were not enthusiastic about this proposition. By last week Senator Wheeler got down to pay dirt, assaying richly in publicity. Again he dug out a story, the broad outlines of which were already on record. But this time he had something which had been challenged on more than ethical or social grounds. The story:

Just before the 1929 stockmarket crash the Vans bought from the Armour and Swift packing interests certain terminal and belt line railroad properties in North Kansas City and St. Joseph, Mo. The price was about $19,000,000. In the next few months the Vans bought control of Missouri Pacific R.R. ("MOP").

In the opinion of the railroading Vans, MOP could well use the terminal properties they had purchased from the packers. So in December 1930 their Alleghany Corp. sold the properties to a subsidiary called Terminal Shares, Inc., and Terminal Shares in turn sold them to MOP--on the installment plan. In effect, it was a deal between the right hand and the left hand, because the Vans controlled both the buyer and the seller.

No profit inured to the Vans, for the price was the same in each transaction-- cost plus interest. But the Vans had paid the packers a boomtime price and values had melted considerably by the time MOP got the properties. The sale was subject to ICC approval, yet some $16,000,000 worth of the contracts were so drawn that the seller could not lose. If the ICC denied MOP permission to make the acquisition, that railroad had to make good any loss suffered by the seller, Terminal Shares, in disposing of the properties elsewhere.

Summoned by Senator Wheeler last week was RF Chairman Jesse Jones to give his views on the Terminal contract. Mr. Jones, it seemed, had lent MOP $17,000,000 before he had any inkling that the railroad was involved in commitments which were draining off $1,600,000 in much-needed cash annually. Neither to RFC nor to ICC, let alone its own stockholders, had the railroad disclosed the existence of the contracts. Belatedly Mr. Jones laid the facts before the U. S. Attorney General for possible fraud prosecution, but by then action was outlawed by a statute of limitation.

Another surprise witness last week was Joseph B. Eastman, now back as an active ICCommissioner after a turn as Railroad Coordinator. Mr. Eastman used the intricate chain of terminal transactions to make the point that public regulation was defeated in that the ICC could, if it saw fit, forbid MOP to buy the properties, but it could not save MOP from loss.

Also made by Commissioner Eastman was a grave, if well-considered, charge. By the time debt-ridden MOP flopped into the courts in 1933, it had paid $3,200,000 on account for the terminal properties. On the books this was first lumped in a peculiar railroad account called "unauthorized work." Later it was carried as a "special deposit," a current asset. The funds were indeed deposited in Guaranty Trust Co. but for the benefit of Terminal Shares, not MOP. Last week the railroad's officials tried to explain that they never intended to convey the impression that the $3,200,000 current asset was ready cash. Somewhere on the books the item had to be entered. "Sometimes accounts may disagree," said MOP Vice President Fred P. Johnson, "but I did the best I could."

According to Mr. Eastman, Mr. Johnson had not done very well. "The result of the incorrect accounting," said the Commissioner, "was that the Missouri Pacific presented a false record of its current assets, of its liabilities and of its income account. It was enabled to make this false showing at a time when it was in great financial peril."

Before adjourning the hearings until after the turn of the year, Senator Wheeler summoned Morgan Partner George Whitney to explain a loan made to MOP by the big banking house at No. 23 Wall Street. At the time RFC was being organized, MOP needed $1,500,000 to tide it over an interest date, and the House of Morgan, already a large MOP creditor, furnished the money on condition that it would be repaid promptly from the road's RFC borrowings.

Senator Wheeler: Surely, you wouldn't have let the railroad default at that time for $1,500,000?

Banker Whitney: We would have let the railroad bust unless we had assurance that the money would be paid.

Senator Wheeler: Why should you?

Banker Whitney: Why shouldn't we?

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