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so that the holders of bonds secured by that mortgage would be entitled to cash on a theoretical dissolution of the holding company, the Court could break that mortgage into parcels and equitably apportion it between properties so that instead of having one set of bonds and one mortgage the Court substituted two mortgages, one on the coal properties and one on the railroad properties.

Now, you can do the same thing

Senator BONE. How did they do that, under an appraisal of those two properties?

Mr. CORCORAN. The Court worked it out on that basis.
Senator BONE. On an allocation?

Mr. CORCORAN. An allocation. The same result might have been worked out anyway through equitable contribution, but the Reading case provided a more concrete way to do it. The holding company

into court under this trust agreement and have that general lien, the general lien of the preferred stock, for instance, allocated to each parcel separately. Then the trustees would issue separate beneficial certificates for each parcel entitling the holders of the common stock of the holding company to vote as common stockholders, in effect, of each of those parcels; i. e., they would vote for the board of directors of each of these new five entities created under the trust agreement.

Each one of the five entities, pursuant to the trust agreement, could act through the trustee without disturbing in any way the lien of the debenture holders and the bondholders, even if the trust represented an intermediate company unable to qualify as a regional company entitled to survive under the bill.

Several regional companies could thus be cut out of one big holding company without forcing a liquidation of a nickel's worth of property. That can be done. There is a Supreme Court case, right on the nail, which says that that lien can be equitably reapportioned in that way. If you don't mind I would like to read from that case.

This is Continental Co. v. United States (259 U. S. Rept., p. 171) : The power of the court under the Sherman antitrust law to disregard the letter and legal effect of the bonds and general mortgage under the circumstances of this case, in order to achieve the purpose of the law, we cannot question. The principles laid down and followed in the case of United States 5. Southern Pacific Co., decided today, post, 214, leave no doubt upon this point. Indeed, the case which we there cite, Philadelphia, Baltimore & Washington R. R. Co. v. Schubert, 224 U. S. 603, 613, 614, is a stronger instance of the power of Congress in regulating interstate commerce to disregard contracts than is needed in this case, because there it was enforced as to a contract made before the regulation.

It may be conceded, as averred, that the bondholders in this case were innocent of any actual sense of wrongdoing, that they relied on the advice of eminent counsel in assuming that the union of the railroad and the coal companies under the control of the holding company was not a violation of the Sherman law, and that some of them surrendered bonds secured by underlying liens of unquestioned validity created before the enactment of the Sherman law. Nevertheless, spread all over the face of the general mortgage, was the information and notice of the union of the railway and coal properties for the very purpose which is the head and front of the offending under the antitrust law and which requires this court to dissolve the illegal combination. The general mortgage was the indispensable instrument of the unlawful conspiracy to restrain interstate commerce. It was the advantage of the legally improper relation between the railway and coal interests which made the security so attractive. In one of the phases of a case, reported as United States v. Lake Shore & M. S. Ry. Co., 203 Fed. 295, the Court of Appeals of the Sixth Circuit was obliged to consider on an intervening petition, the question of the power of the court under the Sherman Act to deal with a mortgage whose lien if held to be inviolable interfered with the effective dissolution of the offending combination of a railway company and a coal company. The opinion is not reported, but we have been furnished a certified copy of the memorandum opinion and its language is so pertinent that we quote it as expressing our views :

“One who takes a mortgage upon several items of property of such character that their common ownership or operation may offend against the Antitrust Law or the commodities clause, and such that the mortgage serves practically to aid in tying them together, must be deemed to hold his mortgage subject to the contingency that if the complete and final separation of one item of the mortgaged property from the remainder becomes essential to the due enforcement of either named law, the court charged with such enforcement may take control of that item, free it from the consolidating tendency of the mortgage, and substitute therefor its judicially ascertained equivalent. Otherwise the mortgage will stand as the ready means of restoring—or at least tending to restore—those conditions which the court is endeavoring to destroy. It may well be true" I am reading this in regard to a later point

that a railroad and a coal company under common ownership and management are worth more as security under a mortgage than when independent, and that their effective separation does impair the mortgage security, but this cannot make the law helpless.”

I am just trying to bring out the point that it is perfectly possible, therefore, to redistribute prior liens in such a way that, under a trust agreement, carefully worked out, with approval of the Securities and Exchange Commission, a court can enable holding companies to split up to become eligible for exemption as regional holding companies and operate as such, without in any way having to liquidate their assets to take care of claims of debentures and of preferred stock.

In Mr. Gadsden's brief, several objections are made to that process: The first is, “ Think how long that process will take.” Until that brief was presented, the cry of the utilities was that holding companies would not have a long enough time to realize the value of their assets under the bill, that everything was going to have to be thrown on the market and disposed of immediately at a sacrifice.

Now, they are turning around and saying, “ You will preserve these situations too long.” That is not a good argument. From their own previous argument it would seem that the longer you preserve the structures intact, the better the chance to work out value for the common-stock equity of which they talk so much.

Remember in connection with the talk about common-stock equities in holding-company securities, that that common stock represents a very small proportion of the present market value of $2,000,000,000 for aïl holding securities now outstanding, as contrasted with $10,000,000,000 market value of the public's direct investment in operating companies' securities, and most of that holding-company common stock is held by people who are perfectly able to take care of themselves. Nevertheless, that interest in holding-company common stock, if it is worth anything, does not need to be hurt because the operating properties giving value to that stock can go on operating, so long as the control now in the holding company is distributed among the holders of common stock of that holding company, and the certificates issued under the trust agreement entitle those individual common-stock holders to vote directly for the directorate of the new regional holding company or the new operating companies created through the imposition of the trust agreement on one of these parcels.

A great point is made that the Reading case took a great deal of litigation and was very expensive. But that was a first case. The machinery is now worked out. It is absolutely established now as a matter of law that when as a matter of public policy it becomes necessary to dissolve a corporation, a court can make such an equitable reapportionment of liens. And remember that under this bill the court dealing as a court with difficult economic problems will have at its side the Securities and Exchange Commission to advise the court as well as advise the public-utilities holding companies how they can work out such situations.

The old cry of the utility interests that this regulation cutting all holding companies down to workable size couldn't be done without a sacrifice of the investors' interests has therefore come down to a legal question whether the Supreme Court was right when it said in the Reading case that a situation such as that I have been describing could be worked out.

The utilities lawyers are trying to say the decisions don't go that far, because they do not want them to go that far. Instead of trying to help work out a way in which the investors can be taken care of they are trying to throw difficulties in the way which has been worked out in perfectly analogous cases, where other businesses operating throughout the United States have been cut down to a reasonable size in order that we might go on and preserve private enterprise.

Senator BONE. To what extent, if any, would the operation of this act affect me adversely or otherwise if I were, say, the holder of $100,000 worth of common or preferred stock in an operating power company?

Mr. CORCORAN. It wouldn't hurt you at all, Senator.

Senator BONE. Is there any charge or any assertion by power companies in this country in their propaganda that those people would be adversely affected ?

Mr. CORCORAN. No; there nothing in that charge.

Senator BONE. The point of view has been expressed that there has been a deliberate and studied effort to have all the holders of securities of operating companies write to Members of the Senate and the House, saying that they will be injured.

Mr. CORCORAN. They claim that.

Senator BONE. That is why I asked you that. Do the utility companies claim in any of their literature that the holders of the securities of operating companies will be injured by this legislation?

Mr. CORCORAN. Oh, yes.
Senator BONE. How?

Mr. CORCORAN. Why, they say that there is no way of preserving their holdings and that they will have to be dumped on the market.

Senator Bons. If an operating company is showing steady and continuous earnings, it is a well-established and well-organized company, and I am an owner or holder of common stock or preferred stock in that company, how would I be hurt if the owner of a block of stock in that company is compelled to sell his stock unless it would affect the price or market value of the stock?

Mr. CORCORAN. Stock in an operating company, is it?
Senator BONE. Yes.

to you.

Mr. CORCORAN. Let me put the argument the utility people will put Senator BOWEN. That is what I want to know.

Mr. CORCORAN. The utility people's argument is made by Mr. Gadsden in his brief, in reply to the proposal for a trust arrangement I have been discussing. Bear in mind that the proposal for a trust arrangement I have discussed is very different from one made before the House committee by Mr. Harriman, of the chamber of commerce. He proposed simply turning over all the holding-company assets to three independent voting trustees. That's bad. If the three men selected by the court represent the old holding company management or ownership, the accusations of a continuance of holding-company control will create a very difficult situation and will always cause trouble. If the trustees are really independent, the people in the holding company will accuse them in turn of not playing ball” with their beneficiaries.

To come back to the point we were discussing, this is the holdingcompany argument about loss to the holder of operating company securities. They say: “All right; you can undoubtedly freeze our investment situation through your trustee device, and the holders of operating securities will not lose because the securities will be thrown on the market by holding companies forced to sell their securities. But our holding-company system gives operating companies the advantages of our supermanagement, our supercredit facilities, and our superservicing, and without those the operating companies will not be as good operating companies as heretofore, and they will not earn as much for payment of dividends on the securities held by the public as they would if you left us in control.”

Now, note that that is a completely different kind of argument from a charge that holders of operating securities would suffer because the securities would have to be thrown on the market and sacrificed to say that operating companies will pay better dividends under holdingcompany control than running themselves with local men and the backing of local capital.

Senator Wheeler answered that new argument in detail on the floor of the Senate the other day.

According to the holding companies, their management offers three advantages to operating companies. The first is the advantage of pooled engineering and other management and services through the service companies maintained by the holding company. That argument sounds best in the mouths of companies like Commonwealth & Southern, which don't render those services at an extortionate profit. But the bill makes an answer even to Commonwealth & Southern by expressly providing in section 13 for the setting up of mutual service companies which can serve a number of operating companies just as the holding company serves them now but on a mutual cost basis. Pooled engineering research and all other services can thus be obtained under this bill for the operating companies much cheaper than they could be obtained from the management of most holding companies today, and just as cheaply as they might be obtained under the management of the best holding companies today.

Argument no. 2 is this——that the operating companies can get adequate credit only through the interposition of the holding company as a borrower for them in the national money market. That argument reduces to a straight question of money market arithmetic. If the money market is straight-and the money market is straight—the operating companies, which are fundamentally sound in the aggregate, should be able to borrow on their own responsibility, in a local if not a national money market, as easily as the holding company. The banker has a regulated, protected industry to deal with; he knows what its earnings are; he has a pretty good idea of what the earnings are going to be. Why, then, does he have to be approached through a holding company as a second set of bankers, which is all the holding companies pretend to be? Why the holding companies can approach the money market and decentsized operating companies can't is something beyond people who stop with arithmetic and don't go on to mystery.

Now, argument no. 3.

The CHAIRMAN. You said the money market had been straight. Some people would dispute you on that, I am afraid.

Mr. CORCORAN. No; I mean that. I think you can go into the money market today and find there plenty of people who, on a good proposition, will lend money without requiring some second set of bankers to introduce the borrower.

The CHAIRMAN. Hasn't this been true—that some of the bankers, for instance in New York, who have been interested in these holding companies—they more or less forced the operating companies, if they wanted to borrow money, to go to these holding companies to get the money and in that way control them!

Mr. CORCORAN. I don't know, sir, how much truth there is in charges of that kind. I just simply don't know what the answer is. The charge has been made that the holding companies arrange with the banks through which they finance to see to it that their game wasn't killed by letting the operating companies finance directly. I know that charge is made. I don't know whether it is true or not.

Senator BONE. While you are on that subject, will you sketch for us the alleged service the holding company gives to the operating company?

Mr. CORCORAN. The chief argument is that holding companies supply credit to the operating companies—that if an operating company needs refinancing, for instance, and has to go into the money market itself to get the money it won't be able to get as good a rate as the holding company can get if it acts as an intermediary bank, takes up the refinancing, and, if necessary, waits a couple of months in order to get a better outside market. I don't see why that has to be, and even if that differential did exist it is offset by disadvantages which are really dangerous.

You will hear argument here from utility-holding companies that their subsidiaries cannot get along without the continual new money, and the holding company secures that money for them through the credit of the holding company. But when conditions reach a point where a local company cannot depend on its own credit standing not even in its local money market and must depend on holding company high finance to secure money to continue operating, that operating company has reached a point where its financing operations had better be changed.

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