Mr. MAHAFFIE. That is what I am telling you, there have not been. Senator TOBEY. There have not been?

Mr. MAHAFFIE. There have not.

Senator TOBEY. All right.

Mr. MAHAFFIE. I have a list of the prices brought by the securities in a bunch of the important cases, and I have brought that up, if you would like it. In some of them the bondholders that received securities and had a position senior to common stock, or perhaps to other claims, cannot get 15 cents on the dollar for what they got.

Senator TOBEY. At our previous hearings, your testimony on the subject of amending section 77 to expedite reorganization proceedings gave me the impression that you want to make the Commission's power even greater than it now is. If your forfeiture plans are to be speeded to execution in the way you suggest, it would destroy the securities more swiftly, and would allow little time for any record of subsequent earnings to demonstrate the shortcomings of your estimates. In effect, the destruction of private property would be quicker and less subject to correction. Very candidly, that is the idea your suggestion conveyed to me.

It is better to get justice in the end than injustice in a hurry, don't you think?

Mr. MAHAFFIE. The premise of your question is entirely wrong. I said a little while ago I had no objection to a complete review by the court of any action we take on a plan. That would remove the thing that you have stressed, on the finality as to various features, Senator. While you are right that if the matter were speeded up it would be determined sooner, I think it is wholly in the public interest that these matters not be dragged out too long.

Senator TOBEY. This is a very important subject. I would appreciate it if you would prepare a memorandum for our record on this subject, so that your thoughts can be carefully prepared. I would appreciate it if you would give me your views on this.

Mr. MAHAFFIE. I don't know what I could add to it.

Senator TOBEY. After reading the record over tomorrow, if you want to amplify it, please do so.

Back in 1943, when the House Judiciary Committee was trying to get legislation that would stop or reduce the power of your Commission to effect forfeitures based on guesses about the future, you were against those attempts of the House committee, were you not?

Mr. MAHAFFIE. I testified before the House committee, but I probably testified against some bills that were proposed, yes, sir. I think the Hobbs bill is, perhaps, what you have in mind.

As you know, Senator, I originated and testified in support of legislation that is perhaps the most revolutionary we have had in this country in the history of such legislation, to permit voluntary reorganizations which can be carried out with the consent of the parties. That is now in effect, and is operating.

Senator TOBEY. During the years I stated, did you not oppose the bills and proposals submitted by Senator Reed, of Kansas, and Senator Wheeler, of Montana, which attempted to stop these forfeitures on the basis of your guesses about the future?

Mr. MAHAFFIE. Well, the chief bill that those gentlemen proposed I think perhaps is the Railroad Reorganization Act of 1939. Is that the one which you have in mind?

Senator TOBEY. Yes, and later ones.

Mr. MAHAFFIE. I have the report on that before me. I think that the Commission reported that if the Congress thought that was the way to handle it, we would have no objection, but I am not too sure about that.

Senator TOBEY. I think that refers to the amendment to your bill, to take care of pending cases, the amendment to the Mahaffie bill, the Wheeler and Reed amendments.

Mr. MAHAFFIE. You mean that I opposed them?

Senator TOBEY. Yes.

Mr. MAHAFFIE. I think not, Senator.

Senator TOBEY. I would be glad to have you correct me if I am wrong.

Mr. MAHAFFIE. We probably opposed some drafts that were not the thing that the Senate and the committee finally agreed on. I recall being in conference with Senator Reed and Senator Hawkes, and various members of their group about that quite a lot.

I think the act as it stands now, which is Code 11, section 208, was worked out among us.

Senator TOBEY. Well, I am glad to have you make it right. At our last hearing, when we started discussing the forfeitures in the Western Pacific case, you said you "never heard of any wailing and gnashing of teeth" over those forfeitures.30 Do you have much information on the effect of your forfeitures on individual security holders? Do you get hundreds of complaints about them, as we do in the Congress? Mr. MAHAFFIE. Well, you were talking about the Western Pacific at that time.

Senator TOBEY. Yes.

Mr. MAHAFFIE. We get some quite a lot of them. Occasionally we get some literature from people who do not think it is done right. I do not recall any Western Pacific complaints at all, yet.

Senator TOBEY. Whether a man is wiped out for one share or a thousand shares, it means something to him, does it not?

Mr. MAHAFFIE. Surely.

Senator TOBEY. When a man works hard for his money, and buys some securities, it is pretty rough on him when some Government official says to him, "We guess that the future will be such that your shares will be found worthless, and so we now declare them worthless, and they will be wiped out."

That is a pretty rough story for any man, is it not?

Mr. MAHAFFIE. It is, but I don't think the Senate committee, when you adopted unanimously the report that I referred to, and also when you adopted the report on the Railroad Reorganization Act of 1939, which was also unanimous, felt that they ought to deter anybody from recognizing the fact that securities had become worthless.

In the report on the Railroad Reorganization Act of 1939, which was the unanimous report of this committee, that is presented very strongly and the statement is made, "The bill calls for realism in the reorganization process."

Senator TOBEY. Stark naked realism.

Mr. MAHAFFIE. I am quoting from this committee.
Senator TOBEY. I am saying what it consisted of.

Mr. MAHAFFIE. The committee at that time said this:

Reorganizations cannot succeed if they are based on claimed values that have long since disappeared in a realistic sense and on business that has long since been lost to the railroads never to return.

Senator TOBEY. But there have been resurrection days in railroad finance, haven't there? The dead have come to life.

Mr. MAHAFFIE. That is right. The committee goes on:

A reorganization based on a sound judgment of earning power destroys no values and creates no losses.

Senator TOBEY. But it kills a lot of hopes.

Mr. MAHAFFIE. That is not what the committee says.
Senator TOBEY. I am adding to it.

Mr. MAHAFFIE. It says:

It merely realistically recognizes the facts, including the unpleasant but nevertheless inescapable fact that values based on original cost or even reproduction cost simply do not exist without earning power to support them.

Senator TOBEY. At our last hearing on March 31, you did not recall that you wiped out any class of creditors in the Western Pacific case. Has the Commission become so callous about these forfeitures that you don't even remember what classes of claims you have wiped out?

In the Western Pacific case, did not the Supreme Court specifically quote from your own Commission ruling that:

the claims of the unsecured creditors

*

have no value, and hence no securities or cash should be distributed under the plan in respect to those claims. You remember that, don't you?

Mr. MAHAFFIE. Yes, but I don't remember my saying what you attributed to me, that no creditor had been found to have securities of no value in that case. Did I say that?

Senator TOBEY. Yes, on page 82 of the transcript.31

Mr. MAHAFFIE. If I said that, then that statement was, of course, too broad, because there were unsecured claims, mainly of the Arthur Curtis James Foundation.

case.

Senator TOBEY. Commissioner Miller disagreed with you in that He said you were unjustly destroying at least 30 million dollars of securities and capitalization. I am referring to your decisions on October 10, 1938, and June 21, 1939. You remember Commissioner Miller saying that, don't you?

Mr. MAHAFFIE. I remember he did not agree. I forget what he said exactly.

Senator TOBEY. He dressed up his disagreement by saying you were unjustly destroying at least 30 million dollars of securities and capitalization.

Mr. MAHAFFIE. Did not he say they probably had no value but might some other time?

Senator TOBEY. That statement pleases me very much indeed. It is a very strong statement, I thought.

Mr. MAHAFFIE. Commissioner Miller wanted to issue additional securities. He said they probably had no present value, no value to

Above, p. 38.

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support them, but they might have value in the future. That brings us back to the line of decisions which have to be recognized as binding

on us.

Mr. Jarrett calls my attention to the statement on page 82.
Senator TOBEY. Will you read it, please?

Mr. MAHAFFIE (reading):

I do not recall that any class of creditors was wiped out, sir.

I apparently overlooked the unsecured creditors' claims. Senator TOBEY. In addition to wiping out the unsecured creditors in the Western Pacific, you forced the other creditors to give up their bonds and to accept securities of lesser rank. Do you remember that?

Mr. MAHAFFIE. Some of them. We authorized a first mortgage and an income mortgage, Senator, and to some extent the old senior creditors got first mortgage obligations that were of an equal rank to those that had been in existence.

Senator TOBEY. Your reorganization plan eliminated certain valuable contract rights of those Western Pacific bondholders, did it not? Mr. MAHAFFIE. Valuable contract rights?

Senator TOBEY. Yes.

Mr. MAHAFFIE. I do not recall what they were.

Senator TOBEY. We will pass that for a while.

On the basis of actual earnings, do you know whether those bondholders whose rights you cut down could not have received the full annual interest on their bonds in the past 13 years, and could have received payment of their back interest also if you had let those bonds stand unimpaired, without forfeiting any of their rights?

Mr. MAHAFFIE. The senior bonds, probably, yes, I would expect that is true. I haven't checked it.

Senator TOBEY. Find out and let me know. When you look at the whole Western Pacific case, your Commission wiped out some creditors completely and deprived most of the bondholders of valuable contract rights which the company was actually able to pay out of subsequent earnings, isn't that the plain fact of the matter?

Mr. MAHAFFIE. As I say, I haven't checked it.

Senator TOBEY. You recognize that they are contract rights? Mr. MAHAFFIE. So far as the senior bondholders are concerned, they probably could have been serviced.

Senator TOBEY. Did they take some income bonds as a part of the claim?

Mr. MAHAFFIE. Yes, sir, I think that is the situation.

Senator TOBEY. It seems to me that your pessimistic estimate of earnings in the Western Pacific case was unjust to the creditors, as well as to the stockholders. How does it seem to you in the light of past events?

Mr. MAHAFFIE. Could I have that question again?

Senator TOBEY. It seems to me that your pessimistic estimate of earnings in the Western Pacific case was unjust to the creditors, as well as to the stockholders. How does it seem to you?

Mr. MAHAFFIE. It does not seem so at all, sir.

Senator TOBEY. Now at the last hearing on March 31, when I expressed my concern for the "poor fellows" whose stock was wiped

the idea that "little fellows" were much affected. These were your words: 32

Do you know who the poor fellows were you are talking about suffering greatly for, the little fellow? That was one of the big holding companies of all time in this country, dominated by Mr. Arthur Curtis James.

Well, you got the wrong one this time, Senator, because that was no little fellow at all.

Now, Mr. Mahaffie, that testimony of yours conveyed the idea to me that a big, rich man had his stock wiped out, but very few little fellows were affected. Is that the idea you intended to convey?

Mr. MAHAFFIE. Arthur Curtis James, through his holding companies and otherwise, controlled the property and was far and away the largest security holder.

Senator TOBEY. You mean to say Authur Curtis James lost and not the little fellows?

Mr. MAHAFFIE. Arthur Curtis James lost more than the little fellows.

Senator TOBEY. Of course, he had more to lose.

Mr. MAHAFFIE. Yes.

Senator TOBEY. All the stock of the Western Pacific Railroad Co. which you put through the wringer was owned by the Western Pacific Railroad Corp., was it not?

Well, that is my recollection. Now I shall refer to the railroad as the "company," and I shall refer to the parent company as the "corporation."

Was Arthur Curtis James the sole owner of the corporation?

Mr. MAHAFFIE. I think not. I think he controlled it, however, Senator.

Senator TOBEY. As a matter of fact, the preferred and common shares of the corporation were listed on the New York Stock Exchange, were they not?

Mr. MAHAFFIE. That I don't know.

Senator TOBEY. Literally thousands of people owned those shares, the shares of the corporation, did they not?

Mr. MAHAFFIE. I don't know.

Senator TOBEY. Well, it is a fact. Did you know that in 1934, the year before the railroad company went into reorganization proceedings, more than half a million shares of the parent corporation were sold on the New York Stock Exchange?

Mr. MAHAFFIE. The holding company?

Senator TOBEY. Yes, sir.

Mr. MAHAFFIE. No, sir, I did not know that.

Senator TOBEY. That is right.

If the parent corporation were deprived of its holdings in the railroad company, that would damage not only the corporation, but all its stockholders, that is obvious, isn't it?

Mr. MAHAFFIE. Yes, I think so.

Senator TOBEY. Do you think all the shareholders in the parent corporation were big, rich fellows like Arthur Curtis James? Mr. MAHAFFIE. No, but he controlled it, as I understood it.

Senator TOBEY. I am speaking about the little fellows. They would lose as much as he in proportion to their holdings, wouldn't they?

"P. 40.