that is not earning its operating expenses. There is no use to issue new securities and bring it out when it is at a deficit in operations. You can perhaps bring it out sometime when it would not earn its charges but costs of operations have to be met somehow.

Senator MAGNUSON. Why don't you put it on the block?

Senator O'CONOR. While it is going on terrific charges are being incurred-lawyers' fees, and so forth. I am not arguing against the lawyers or the trustees, but these charges are further working against its interests.

Mr. MAHAFFIE. That is correct, but the property cannot be shut down; these are public utilities. You have the problem, if you try to scrap it, of depriving the public of that service.

One road that you did not enumerate, I think, but which illustrates that very nicely at the moment is the New York, Ontario & Western which has been in trusteeship since 1937. The court currently is holding hearings or started to hold hearings on applications by the bondholders who have had no interest, of course, in that time, and have had built up against them about $7,000,000 of administrative claims that presumably have priority over their bonds. They applied to scrap the road. It is quite a sizable road and serves quite a few communities who have no other railroad service. The opposition was such that the court declined to permit the bondholders to foreclose and scrap the road and the court is currently holding hearings on proposals to dismember it somewhat and to sell parts of it to different purchasers, part I think to be abandoned, and the principal parts to be sold to purchasers who will undertake to continue operations. That is the trouble with foreclosure.

One other road you did not enumerate, I think, is the Florida-East Coast, where, on a finding of undue delay, in reorganizing under section 77 the court has now dismissed the proceeding as he may do under section 77 in case of undue delay, and has appointed receivers with a view to foreclosure and sale of the road.

But in that case there is no question of abandonment. So the thing we had in the Georgia and Florida Railroad case that I was discussing is not the situation in that instance.

Senator O'CONOR. The reason I did not take those other roads, I just took the extreme instances which averaged some 20-odd years. Without going into details about each one, is there anything at all that could be suggested whereby further expedition might be accomplished-any amendment to the Mahaffie Act, perhaps?

Mr. MAHAFFIE. I think the Mahaffie Act would not help in these cases that are in trusteeship. The Mahaffie Act permits a property with the acquiescence of enough security holders to propose a voluntary adjustment, but properties such as we are talking about, I doubt if there would be that chance.

Personally I think that one of the grave causes of delay in cases that are capable of being reorganized is in the intricacy of section 77. I am perhaps somewhat at fault in that. I have testified a good deal about it and was before the committees when it was originally formulated in 1933 and amended in 1935. At that time I think none of us would have been audacious enough to suggest that one proceeding only instead of these two before the court and the Commission would meet the legal requirements. As it is, when the Commission approves,

after extensive hearings, a plan, it goes to the district court who then must hold hearings and approve or disapprove it. Immediately the court acts, the way is open to appeal the decision all the way to the Supreme Court which means, if it takes the normal course, a period of perhaps a couple of years before it gets through the courts. Two is usually a minimum before you know whether that approval stands, then if it stands the Commission takes a vote of the security holders and when that vote is certified to the court the court again holds a hearing on whether to confirm the plan as originally approved by him and as voted on by the security holders.

Again if he confirms, that order is subject to appeal and it may take a couple of years before it is final.

It seems to me that while at the time we were working on section 77, the law had not developed to the extent that it has now as to the finality of either administrative or court findings-administrative under the interstate commerce power and by the court under the bankruptcy section and that now it would greatly simplify section 77 proceedings if there were only one proceeding. If the Commission held the hearing and if it approved a plan that plan would be the basis of the only hearing the court would have to hold, that the court would then either approve or disapprove, and if he approved then there would be only one appeal through the Court of Appeals and possibly to the Supreme Court. I think that would greatly shorten the process.

Senator O'CONOR. To the average person it does seem such an interminable delay that it runs several decades when the affairs of the world have been changed around many times in that period.

The only other criticism I have heard on so many sides is the delay within the Commission in regard to the fixation of rates and tariffs, and so forth. The Senator from Ohio, Senator Bricker, and Senator Capehart and I have joined in the so-called time-lag bill. From the time that has been given it does seem as though there have been very lengthy delays in the fixation of those rates where by the time the change is made another round of increases have served to put out of adjustment the rates already determined upon.

Mr. MAHAFFIE. That is correct. There is a great deal of criticism of that time lag and it gets back to this: To the extent to which shippers and persons interested in rates have a right to be heard or ought to be heard before rates that might greatly affect them are increased. Of course we have the same delay problem and the shippers do not like that where there are proposals to reduce rates-and we have many more proposals to reduce rates than we have to increase them, in number that is. Sometimes we will have a proposal to reduce all the rates on a particular class of traffic, for instance, petroleum products in a large territory. We will have protests by other types of carriers and a terriffic amount of litigation about it. It works, as I say, in that instance, the other way.

I would like to see these things handled faster, but I think possibly some of the criticism is a little overdone as to delay because in these advance rate cases we have usually been asked to permit interim increases while the case was actually being tried and we have done so in a great many instances. We have one trouble that I think the committee is thoroughly familiar with and I would not attribute the de

We have now 1,810 people employed by the Interstate Commerce Commission. Ten years ago we had somewhere around 2,800. In the meantime our work has increased. It naturally slows up the accomplishment of the work and it necessarily makes the work turned out less well considered. I cite that and emphasize the fact that we are urged to cut out delays but we are confronted with a situation where, if it continues, they will get worse.

Senator TOBEY. Your illustration about the Ontario & Western tickled me because you are a pretty astute student of railroad affairs, and I do not believe anyone who watched them through the decade 1930 to 1940 knew the Ontario & Western Railroad was a dead duck, a living corpse, so to speak. Anybody can see it is doomed. Is that

so?

Mr. MAHAFFIE. I think that is entirely so, but I repeat it serves a lot of people and a lot of industries who would be gravely hurt if the service is stopped.

Senator TOBEY. I do not think that it serves the interests now, but certainly the crowd running it are in the hole.

Mr. MAHAFFIE. The trustee has incurred administrative expenses that run about $7,000,000.

Senator TOBEY. I will bet it has. It is the most lucrative job in the world, trusteeships of bankrupt railroads and lawyers' fees. Take the case of the Member of the House of Representatives who got a fee of $150,000; it was $150,000 or more. He was a Member of Congress at the time.

Mr. MAHAFFIE. I have heard of a larger fee.

Senator TOBEY. I want to be kind and charitable.

Mr. Chairman, I would like to make a brief statement for the record before I proceed to examine the witness.

In anticipation of a possible claim that a thorough examination of seasoned Government officials is unusual or unfair, it would be desirable at the very outset to make a brief statement for the record. Where the President submits a nomination to us, the Senate is asked to advise and confirm―or not confirm. We have to have the facts. In this instance the facts relate to the backbone industry of the country-the railroad industry which is vital in peace and war. And the facts relate to various matters, among them the investment of the public in the railroads, and the loss to the investing public of some $2 billion. This may be no one's fault, but as a member of this committee I consider it my duty to find out. The subject of course is not a new one. Nor is it a surprise subject. For at least 9 years, committee reports in both Chambers have been discussing more and more the tremendous losses imposed on the investing public and the need for preventing such losses in the future.

I might say my examination will be rather a long one. I will try to keep it sweet, and I am sure you will, and rather comprehensive. As you undoubtedly know, most of the Senators have received, over the past years, numerous complaints about railroad reorganization, and criticism that we are not discharging our duty to protect the public interest and the investing public. I should like to develop this subject in some detail, in view of your unusual experience with this subject, and the many years you have had in your work in this field. It will better enable all of us to discharge our duty on this and other nominations, if we can get a full picture of past activities of nomi

nees, and can see the extent to which their work has contributed to the doing of justice, or if not, in what way there was any failure and what can be done about it.

First, I should like to put questions about your own participation in railroad financial questions.

Your first position was Director of the Finance Bureau of the Interstate Commerce Commission; is that right?

Mr. MAHAFFIE. Yes.

Senator TOBEY. You served in this post from 1922 until you were. appointed a member of the Commission in 1930? What date in 1922 did you begin this work?

Mr. MAHAFFIE. May 1.

Senator TOBEY. In 1920 Congress imposed on the Commission the duty to supervise new issues of securities of the railroads, to grant or withhold authority for the creation of new security issues by those companies?

Mr. MAHAFFIE. That is correct.

Senator TOBEY. Was the Finance Bureau created thereafter?
Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. In any event, was it not in the decade when you joined the Commission that it exercised its first large power in the field of railroad finance?

Mr. MAHAFFIE. It started in 1920, and as you stated, I joined the Commission in 1922.

Senator TOBEY. And was it not under your directorship of the Finance Bureau that that power was in substance first exercised, built up, and made into one of the large fields of activity of the Commission?

Mr. MAHAFFIE. I did not quite get that question.

Senator TOBEY. Was it not under your directorship of the Finance Bureau that that power was in substance first exercised, built up, made into one of the large fields of activity of the Commission?

Mr. MAHAFFIE. The power had been exercised only about a year, something less than 2 years, before I became Director.

Senator TOBEY. The real growth came during your administration? Mr. MAHAFFIE. As to the growth, Senator, I forgot the exact figures, but when I became head of the Bureau they had about 130 employees in the Bureau. We now have slightly less than 40. It is not one of the numerically major divisions of the Commission's work.

Senator TOBEY. You should address a statement to the appropriate committee of the Senate.

Mr. MAHAFFIE. I expect to if I get a chance.

Senator TOBEY. The staff of the Finance Bureau were directly under you in the period from 1922 to 1930; is that correct?

Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. You reported, in much of the work, to the Finance Division of the Commission?

Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. That Division was usually made up of three members of the Commission, very occasionally of four; is that correct? Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. Sometimes finance cases were decided by the entire Commission but usually by the Finance Division, is that right?

Senator TOBEY. That is the so-called Division 4?

Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. In the period 1922 to 1930 the relation of the Commission and of your Finance Bureau to railroad reorganization was in connection with the issuance of new securities pursuant to reorganization, is that correct?

Mr. MAHAFFIE. If I understand the question, the answer is yes. Senator TOBEY. I will repeat it. In the period 1922 to 1930 the relation of the Commission and of your Finance Bureau to railroad reorganization was in connection with the issuance of new securities. pursuant to reorganization?

Mr. MAHAFFIE. That is correct.

Senator TOBEY. Sometimes, as in the Chicago-Milwaukee-St. Paul reorganization in 1928, the Commission and its staff considered not alone the quality of the new securities, but also the fairness of the reorganization plan itself, did it not?

Mr. MAHAFFIE. Yes, sir.

Senator TOBEY. But normally during your directorship of the Finance Bureau you were concerned with the new security issues primarily?

Mr. MAHAFFIE. That is correct.

Senator TOBEY. What is the language of the statute on that subject? Mr. MAHAFFIE. Section 20 (A), I cannot quote it.

Senator TOBEY. Will the clerk please get section 20 (A) of the Interstate Commerce Commission Act?

If securities were unsound, would the Commission take the view that they should not consent to their authorization?

Mr. MAHAFFIE. We did in numerous cases. Yes, sir.

I would like to qualify that in this way, however, if I may. When a public body is authorizing securities, you are sometimes confronted with this problem. The securities may not look too sound, but the carrier simply has to issue them or go under. That is particularly true of the extensions of existing maturing securities. You may find that they cannot be paid off, but they have a chance to extend them.

Senator TOBEY. You often get surprised.

Mr. MAHAFFIE. You conclude that rather than precipitate real trouble by refusing to allow an extension or renewal, that you had better do it. That is a problem you have in regulating securities. I have 20 (A).

Senator TOBEY. Would you read that, please? This is in response to my question: What is the language of the statute on that subject? Mr. MAHAFFIE. Here is, I think, what you have in mind, the pertinent provisions. It is paragraph 20 (A) (2):

From and after 120 days after the section takes effect it shall be unlawful for any carrier to issue any share of capital stock or any bond or other evidence of interest in or indebtedness of the carrier (hereinafter in this section collectively termed "securities") or to assume any obligation or liability as lessor, lessee, guarantor, endorser, surety, or otherwise, in respect of the securities of any other person, natural, or artificial, even though permitted by the authority creating the carrier corporation, unless and until, and then only to the extent that, upon application by the carrier, and after investigation by the Commission of the purposes and uses of the proposed issue and the proceeds thereof, or of the proposed assumption of obligation or liability in respect of the securities of any other person, natural or artificial, the Commission by order authorizes such issue or assumption.