Matters now went on in much the same old way. The seven reorganization trustees, representing the principal interests concerned, held meeting after meeting with no apparent result. The courts became impatient; bondholders clamored for their interest; but after the failure of the earlier plan the way out seemed harder and harder to find. In September, 1885, Mr. E. Dunbar Lockwood addressed an open letter to Mr. John B. Garrett, one of the trustees, in which the following points were made:
(1) “The trustees should recognize promptly and unequivocally that the Reading Railroad is bankrupt, and has not sufficient available assets to meet its obligations.
(2) “Two dollars of obligations cannot be paid with one dollar and a half of assets, and the sooner all persons interested ... recognize this fact, and agree to scale both principal and interest sufficient to meet the obligations of the company and put it upon a strong financial basis, with sufficient working capital to enable it to conduct its future business economically, the better it will be for all concerned.
(3) “The trustees should look only at the facts as they exist ... and while endeavoring to rehabilitate the road, also bring it into harmonious relations with its adversaries.
(4) “The trustees should consider the problem ... precisely as business men consider the matter of the settlement of a bankrupt firm. The question at once presents itself, is it best that the company should continue in business, or should it be wound up?”[217]
In his reply Mr. Garrett pointed out the difficulties to be overcome, and concluded by saying that in his judgment no reorganization would be final that did not ensure the establishment of credit, the entrusting of the management to an interest having an actual equity in the property, and just expectation of pecuniary return from it, and harmony with competing lines, coupled with due regard for the rights of the public.[218]
The reorganization trustees by this time appeared discouraged, and the following month called a conference of creditors at which a resolution was passed looking toward foreclosure. In November a suit was actually begun, supplementary to a similar suit instituted a year before. It was during the pendency of these proceedings that the plan of reorganization devised by the reorganization trustees themselves came out, and marked a third effort to rehabilitate the road. The first plan proposed, it will be remembered, had suggested the conversion of all of the junior securities into income bonds, plus a funding of one-half the general mortgage coupons for three years; and the second had introduced an assessment on the junior bonds and stock. This third plan, while preserving the assessment, and making it more severe, added a provision for the conversion of general mortgage liens into 3 per cent bonds, and of junior liens into preferred stock. For the ultimate retirement of the prior liens a new fifty-year 5 per cent mortgage was to be created; for both the prior and general mortgage liens the difference between the return from the old bonds and that from the new was to be adjusted by the use of 5 per cent preferred stock, so that bondholders in prosperous times would not find their incomes diminished. Preferred stock was to be of two kinds, of which the first was to go to satisfy the general mortgage bondholders and for assessments, while the second was to exchange at varying rates for the junior securities above the second series 5s. Everything below the second series 5s was to receive common stock instead. Under the scheme the company’s obligations would have been reduced to $60,731,000, of which $33,400,000 prior liens and $24,686,000 new 3 per cents; while its stock would have been increased to the very considerable figure of $96,516,282. The total cash assessments, if all paid, would have amounted to $13,506,620; and, joined with the balance of stock, were expected to be sufficient to cover the floating debt. The new fixed charges were to be $7,064,830.[219]
Various points in the plan deserve mention. For the first time since the failure of 1880 it was proposed to use two kinds of securities, of which interest on one should be fixed, and interest on the other optional. For the retirement of senior bonds President Bond had suggested a bond on which half the interest should be fixed and the other half variable, but his plan had been inferior in flexibility to the one now proposed. The junior securities received less favorable treatment than before; but the general mortgage itself did not escape, and was required to accept 3 per cent plus preferred stock instead of a mere funding of its coupons. The increase in the amount of stock was very great, and naturally so, in view of the new uses to which it was put.[220] Assessments were made heavier, and for the first time the management frankly excluded from their calculations the Central of New Jersey, foreshadowing the abandonment of the lease. To repeat, the first two plans described had developed the idea of an assessment and the conversion of the junior bonds into income obligations. To this the reorganization trustees added the use of preferred stock, and, more important still, the combination of two securities, respectively with obligatory and optional liens, which were to be given for the general mortgage bonds. In principle the result was excellent, in practice the degree of reduction was somewhat too slight from the point of view of the company, although it seemed more than the creditors were willing to accept. The general mortgage bondholders in particular were loud in their protest. “The truth of the matter is this,” said one of them, “while the plan of the trustees has much to commend it, and is based on an excellent theory, it fails to cover the whole ground, and falls terribly short of meeting our reasonable demands.” Thus, although the Bartol and Whelen committees accepted the plan, matters again stood still for a while, while the financial powers talked and wrote and threshed the question out.
In February, 1886, the reorganization trustees received a letter signed by J. Pierpont Morgan and John Lowber Welsh, which is important enough to be quoted in full.
“A syndicate has been formed,” said these gentlemen, “composed of leading bankers and capitalists here and in Europe, together with corporations or their representatives controlling large transportation and coal producing interests, who have agreed to subscribe in the aggregate $15,000,000 for the purpose of aiding in the reorganization of the Philadelphia & Reading Railroad Company and its affiliated lines. The syndicate has no commitment of any kind with any other railroads or corporations upon this subject beyond securing a management in harmony with the principle that capital invested in internal improvements should be so managed as to result in a fair return in the way of interest and dividends. Their object and purpose is to secure the reorganization on business principles for the Philadelphia & Reading bondholders, stockholders, and creditors without prejudice to the relative position of either, and in their interest only.