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The Men Who Loved Trains: The Story of Men Who Battled Greed to Save an Ailing Industry

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A saga about one of the oldest and most romantic enterprises in the land—America’s railroads—The Men Who Loved Trains introduces some of the most dynamic businessmen in America. Here are the chieftains who have run the railroads, including those who set about grabbing power and big salaries for themselves, and others who truly loved the industry.

As a journalist and associate editor of Fortune magazine who covered the demise of Penn Central and the creation of Conrail, Rush Loving often had a front row seat to the foibles and follies of this group of men. He uncovers intrigue, greed, lust for power, boardroom battles, and takeover wars and turns them into a page-turning story for readers.

Included is the story of how the chairman of CSX Corporation, who later became George W. Bush’s Treasury secretary, was inept as a manager but managed to make millions for himself while his company drifted in chaos. Men such as he were shy of scruples, yet there were also those who loved trains and railroading, and who played key roles in reshaping transportation in the northeastern United States. This book will delight not only the rail fan, but anyone interested in American business and history.

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1 The Forrest Gump of Railroading

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Dawn was creeping up over Lynnhaven Bay as Jim McClellan walked briskly out of his kitchen, down a hallway, and out the back door. It was a perfect October morning. The air was brisk, barely 50 degrees. McClellan drove to his office in downtown Norfolk. He was going early to clear his desk of any unfinished work because he was leaving later in the week for four days of vacation in southern California.

James W. McClellan was vice president for corporate planning at Norfolk Southern Corp., one of the nation’s five largest railroads. His job was to advise NS’s chairman, David R. Goode, on a wide range of key questions that the railroad faced, issues as subtle as changes in the corporate culture or as visual as deciding which tracks to shut down or which railroads to acquire in order to keep the company viable.

It was 1996, and for nearly 20 years he had been watching the moves of NS’s archrival, CSX Corp., and its chairman, John W. Snow, who later was to become George W. Bush’s treasury secretary. The two railroads served almost the entire eastern half of the country save for a highly contested block of states in the Northeast, and both needed to get into those states for access to the rich port of New York and the chemical plants of New Jersey. The only way to do that was to acquire Conrail, a railroad that held a monopoly of the rail markets in New York, New Jersey, and most of Pennsylvania. The railroad that won Conrail would then be able to negotiate a merger with one of the western roads at favorable terms and form a system that spanned the continent. McClellan was worried because he knew that if NS lost this race, it would remain a regional line that would be at the mercy of one of those western roads. Moreover, NS had another reason for wanting Conrail, a need so crucial to the future of the company’s most critical source of revenues, McClellan and others at the top of the company kept it a closely held secret.

 

2 Meeting the Blue-eyed jew from Minnesota

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Life on the Southern Railway in the mid-1960s was interesting for McClellan because this was one of the most progressive railroads in the United States. It was automating its maintenance operations, both in the shops and on the tracks themselves. McClellan’s boss, Bob Hamilton, had outraged his competitors at all the other railroads by developing a new jumbo hopper car that enabled the railroad to cut the price it charged for hauling feed grain from the Midwest to the chicken farmers of the Southeast. The marketing department was building the first computer system for tracking the movement of freight cars, three giant IBM computers in a massive operations room atop an old freight warehouse in downtown Atlanta. Overseen by a former air force colonel, the computer system was based on the one used by the Strategic Air Command to track its bombers. The computer center was tracking thousands of freight cars so that any shipper could call the Southern and find out where his carload of merchandise was, right down to the train it was on and the station it had just left.

 

3 A Cabal at the Greenbrier

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Jim McClellan was about to participate in his first merger. It was now 1966, and he had been a student back at Wharton when the marriage talks had begun in September 1957. James M. Symes (pronounced “Sims”), president of the Pennsylvania Railroad, had met with Robert R. Young, chairman of the New York Central, at his Waldorf apartment, proposing a merger.

Besides dominating the New York–Washington Corridor, the Pennsylvania ran from Philadelphia west through Pittsburgh to Chicago and St. Louis, crisscrossing the Northeast and Midwest and dominating some of the region’s most important freight markets. The Central stretched from Montreal, New York City, and Boston to Chicago and St. Louis. They were the country’s two biggest railroads, and in Symes’s view their combined strengths and the savings from cutting duplicate jobs, shops, and terminals would liberate them from their problems. Added to that, they would have access to the seemingly endless flow of cash from a Pennsylvania-controlled line that served the rich Pocahontas coal fields, the Norfolk and Western Railway.

 

4 The Portly Virginia Gentleman

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When they met, Alfred Perlman and James Symes agreed once again that New York Central shareholders would get 40 percent of the new company and that the Pennsylvania’s owners would hold 60 percent. The “new” company actually would be the Pennsylvania Railroad, but it would assume a new name, Penn Central Corp.

The shareholders approved the merger, and the Interstate Commerce Commission began more than a year of hearings in 1962. As the sessions were getting under way, McClellan was starting his job at the Southern Railway. Although he paid scant attention to rail mergers, his bosses cared, and from their vantage point just nine blocks from the ICC’s ornate quarters on Independence Avenue, they watched with concern as the Penn Central argued its case. Symes and Perlman both defended the size of the proposed railroad, Symes reminding the commission that the combined system would be moving fewer cars than the Pennsylvania carried without any disruptions in its heyday, a reassurance that would help shake the Penn Central’s credibility later.

 

5 An Eleventh Hour Surprise

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As McClellan—now at the Central—watched the merger’s inevitable approach, he and the other junior officers of the two railroads grew increasingly apprehensive. Although they could not imagine its impact, they were about to be caught in the middle of the biggest debacle the transportation industry had ever experienced. For McClellan it would be a watershed that would determine everything he was to experience or do for the rest of his life.

If the Central had joined with the C&O–B&O and the Pennsy with the N&W, it would have created two competitive lines. Instead, they were being amalgamated out of fear, not from some grand dream of creating a better transport system. “I didn’t think it was a particularly good merger, but we were trapped into some kind of merger,” Perlman said later. They had too many tracks, too many yards, too much railroad, and they needed to cut back by consolidating. It did not seem normal for two such fierce competitors to join up. “Those of us inside the New York Central or Pennsy said, ‘This is an unnatural act! Not the way to go. This is crazy. It’s going to be a monopoly,’” said McClellan. In his view, railroads got lazy and unimaginative when they held monopolies.

 

6 “Where the Hell Is Harrisburg?”

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The merger started at 12:01 a.m. Thursday, February 1, 1968, a cold, rainy night in Philadelphia. The system that the marriage brought together was larger than anything American railroaders had ever seen. Penn Central was the longest investor-owned railroad in the world. If coupled end to end, its fleet of cars and locomotives would stretch from New York to Laramie, and its tracks could stretch all the way around the world and then some. In one day all its trains combined traveled the equivalent of halfway to the moon. Even if their cultures had not clashed and even if their computers had blended, they were not prepared, and combining everything the first day made Penn Central almost impossible to manage.

No sooner had they merged than they were plunged into chaos. “It was just a goddamned operating mess,” said one veteran railroader. Routes were changed immediately for some types of shipments, but none of the classification clerks had been taught the 5,000 new combinations of routings. By the thousands, cars began flowing into the wrong yards. As the yardmaster at Selkirk described it: “They’d get a car for Harrisburg, which wasn’t on the old Central, and they’d say, “Where the hell is Harrisburg? I know where Pittsburgh is. Shit! I’ll send it to Pittsburgh.’”

 

7 Cooking the Books

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In the late fall of 1968, Jim McClellan and a friend from the Central rode the train together to Washington for interviews at the Federal Railroad Administration. The FRA administrator, who had been a protégé of Alfred Perlman at the Central and the Rio Grande, wanted one of them to come to FRA on a new exchange program that he was setting up. He selected McClellan, who left behind at Penn Central a memo to Perlman. Even if he hadn’t paid much attention to the financials, McClellan was beginning to see with ominous clarity that the chaos and fighting were putting the railroad on a track to disaster. Accordingly, he sent the warning that Penn Central would not make it if nothing were done to change things. Perlman could be surprisingly tolerant of such ideas, but others in the top ranks of Penn Central could not, and immediately it became clear that McClellan’s appointment at FRA was not temporary, because Penn Central was not going to let him come back. It didn’t seem that way at the time, but nothing could have been more to McClellan’s advantage.

 

8 “That Telephone Man”

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Stuart Saunders’s lobbying of the board was paying off, and he soon had the votes he needed to oust Alfred Perlman. Unwittingly Perlman had helped by insisting that the road’s Hollidaysburg, Pennsylvania, shops build more new cars, and with dollars growing increasingly scarce, this and the constant rise in costs were making the directors additionally skeptical of Perlman’s judgment. So Saunders stepped up his still highly secret search for a new president.

After several months, Saunders heard of a possible candidate through one of David Bevan’s friends. Although Bevan was not directly involved in the search, he obviously knew—probably through an ally of Mellon—what was going on. For Bevan, Saunders’s quiet quest was an opportunity to gain more power for himself and possibly unseat Saunders, too, so he slipped his own chess piece onto the board.

Saunders was about to set off on one of his periodic trips to Europe in late June 1969 when Bevan told him he was quitting and presented him with the letter of resignation. Saunders realized this could perturb Mellon and create a boardroom confrontation. He also knew the timing was awful, because he needed Bevan’s banking connections to keep Penn Central supplied with capital. He therefore tried to placate Bevan with a salary increase, urging him to hold off and telling him of his plan to get rid of Perlman. At one point Bevan said he couldn’t take the pressure anymore and had to get out, that he needed a good night’s sleep for a change, and Saunders quickly quipped back, suggesting he take sleeping pills. Saunders’s humor annoyed Bevan, but finally he did agree to hold off quitting, and to make Bevan feel involved in the overthrow of Perlman, Saunders asked him to give advice on presidential candidates. And he promised that, once Perlman was kicked upstairs, Bevan would regain his old seat on the board.

 

9 The Granddaddy of Enron

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Penn Central was about to trigger a scandal that, by the standards of 1970, equaled the disaster of Enron. The company’s consolidated assets totaled nearly $7 billion, which in 2002 money equaled between $30 and $35 billion. That was a huge compilation of assets for its day. Only seven U.S. industrial companies were larger. Government antitrust policy in 1970 made it impossible for companies to create the behemoths that exist today. In the next 30 years, for example, the assets of the banking industry would be consolidated from 50 large national and statewide institutions to a handful. For oil giants like Mobil and Exxon ever to combine was unthinkable. The railroad industry, which is dominated today by seven large Canadian and American systems, was divided among nearly 30 major railroads. So Penn Central represented a major combination and held a dominant place in the economy and on Wall Street, and its collapse could bring about a major crisis. As was the case with Enron, Penn Central’s questionable accounting practices had the potential to undermine investor confidence and set off a bear market.

 

10 Some High Society Sex

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As the snowdrifts melted and the flowers started blooming on Philadelphia’s Main Line, Stuart Saunders was still demanding savings, but no one could find anything else to cut—except for workers, but that would have cost millions because of the labor agreement. More urgently than ever, Saunders and David Bevan went on searching for new capital, but now no source seemed left but Washington.

Bevan and Saunders were walking a high-wire, because one was trying to keep the financiers thinking all was relatively well while the other was trying to convince Washington that Penn Central’s straits were so dire that help was imperative. This, plus the constant search for more savings and more paper profits, would tax the time and imagination of the most formidable chief executive officer, and although a man of whirlwind energy, Saunders’s days were being stretched to the limit. In the middle of all that, the chairman’s attention and even valuable working hours were captured and diverted by a much more personal concern that was so well guarded that only three or four of his closest aides ever knew of it.

 

11 “They Are Going to Run Out of Cash”

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When he arrived at the Treasury, Stuart Saunders confided to Secretary David Kennedy that commercial paper was being redeemed faster than it was being sold, and he described the tightening bind on Penn Central’s cash supply. The debenture offering appeared doomed, he said, and if he could not obtain government guarantees for further loans, the railroad subsidiary, Penn Central Transportation Co., would have to consider filing for bankruptcy within the next few days.

Kennedy was stunned, all the more so because he was former chairman of Continental Illinois Bank & Trust Co., which held $15 million of Penn Central’s debt. He also was alarmed because the stock market already was in a serious slump and news of the bankruptcy of a company as large and venerable as Penn Central could trigger a chain reaction, if not an outright panic. Most of the nation’s largest banks were its creditors. Penn Central’s collapse would bring heavy losses as well to many of the country’s large mutual funds.

 

12 The Scandals Unfold

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In the days just before the board took the company into receivership, 4 of the 16 directors bailed out. Immediately after the board passed the bankruptcy petition, William L. Day, chairman of a Philadelphia bank that was a substantial Penn Central creditor, resigned, too, saying his attorneys advised him that he now had a conflict of interest. Some critics charged that Day was not alone, that there had been numerous conflicts of interest on the board. Three other directors headed financial institutions, and 10 additional directors, including Stuart Saunders and David Bevan, had been directors of banks, many of them Penn Central creditors. The question of directors’ conflicts of interest never was resolved satisfactorily in the months that followed, and it still haunted boardrooms when Enron collapsed.

All the top players were embarrassed by the obvious fact they had been caught unawares, and many felt tainted, Paul Gorman foremost among them. Summoning Bill Lashley, the public relations vice president, he said, “Bill, I want you to keep my name out of the press.” Lashley replied in his Southside Virginia drawl, “Paul, that’s gonna be hard to do because people want to talk to the head person, either the president or the chairman of the board, and you’re both!” Gorman wanted nothing to do with a failing company, and within a few months he would find another job, running International Paper Co.

 

13 Booted Off the Property

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As he had watched Penn Central unravel from his post at the Federal Railway Administration, Jim McClellan had continued exploring ways to relieve Penn Central of its passenger losses. He and the staff of the ICC had found that while the railroads were overstating the losses, the railroad labor unions and politicians who advocated continuing passenger trains were understating them by a significant margin. Moreover, not only Penn Central but all the nation’s railroads were losing more and more cash every month on passenger services.

Their report had been sent to Congress in July 1969, sparking a Senate hearing two months later when Stuart Saunders had traveled down to urge immediate government action. Some senators had responded with open skepticism. “This house is on fire now, and it has been on fire for some time!” Saunders had retorted.

The problem was lack of revenue and high costs. The railroads had a market share of only 7.5 percent, and train after train was leaving the station nearly empty. For example, two Penn Central trains between Harrisburg and Buffalo were carrying an average of only 17 passengers apiece. Just after its merger, Penn Central was allowed to discontinue two trains that ran between St. Louis and the Indiana/Ohio border that carried an average of only seven passengers a day at a loss of more than a half-million dollars a year. The passenger business had once been as profitable as it was glamorous. Twenty-six percent of the Pennsylvania Railroad’s operating revenues in 1900 had come from passenger service. Except for those people who journeyed by river or coastal steamer, the railroad industry’s market share of intercity travelers had been essentially 100 percent. Forty years later, private automobiles had accounted for nearly 90 percent of the mileage traveled by intercity passengers, and railroads had provided only 7.5 percent. Cars would retain pretty much that share of the market for the decades to come.

 

14 A School Band on the Railroad Tracks

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While McClellan and the others had been creating Amtrak, Judge John P. Fullam, who was presiding over the Penn Central bankruptcy, had named four trustees, three to serve part-time as the equivalent of directors. The fourth was Jervis Langdon Jr., who became the chief trustee and served full-time. A former president of the Baltimore and Ohio, Langdon, 65, had flown the Hump with the Flying Tigers during World War II and continued to pilot his own airplane. He was a tall man with a rocklike face that was softening with age. His looks and demeanor seemed soft, but that was misleading, for his cold, alert eyes told the real story about Langdon, who was well versed in the subtleties of corporate politics.

Langdon was a great-nephew of Mark Twain, who wrote Tom Sawyer in an outbuilding at the family farm—where Langdon himself still lived—outside Elmira, New York. Langdon was the ideal choice because—although no operating man—he knew how to scrutinize operations, and he understood the art of diplomacy and compromise. The latter skills would be mandatory, since working with Washington and the labor unions would be key to Penn Central’s survival. He knew the railroad business from the viewpoint of a strategist.

 

15 The Unsinkable Chief Wawatam

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Bill Moore and everyone else had believed Penn Central could be saved simply by raising its revenue base and cutting costs. But by the fall of 1972, Jervis Langdon, his general counsel, Bob Blanchette, and one or two other people had begun to realize that the railroad would never be fixed without an unprecedented amount of help from the courts or from Washington. Certainly its operations needed to be made more efficient, but that could never happen in the environment in which Penn Central and the other northeastern railroads existed.

“When I went to Penn Central, I was terribly concerned about two things,” Langdon said. One was the crushing passenger deficit, which he and Judge John P. Fullam immediately attacked. While they did succeed in passing the intercity passenger trains on to Amtrak, they still were saddled with expensive commuter services. Next Langdon attacked the ICC’s misregulation of the freight business and the erosion of the market. “Penn Central dominated the freight business in the Northeast. But freight was down. The policies of the ICC and competition from trucks were lethal,” he said. “The railroads were bound to lose. The ICC would go out of its way to protect the motor carrier industry. The railroad was the cheaper mode. The truck was faster, particularly on shorter hauls. It was more efficient. That’s why I was worried.” Those questions led to even broader issues, and Langdon began to realize they were the key to the survival of not just Penn Central but all rail transportation in the Northeast.

 

16 Donning the Mantle of Moses

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On January 2, 1973, Jervis Langdon and the other trustees sent John Fullam a report declaring the railroad could not be turned around without government help. The report caught the attention of Washington and the railroad industry, but it did not precipitate any immediate reaction. Nevertheless, it was the warning shot for a series of events that would shake the leaders of government, labor, and the U.S. business community out of their complacency. On January 10, the trustees’ counsel, Bob Blanchette, warned Fullam that the company would have to stop its trains at the end of February if he did not grant permission to sell $10 million of securities from the railroad’s contingent compensation fund.

In Washington, the directors of the Association of American Railroads continued discussing the problem, but since the board was composed of the chief executives of 21 major railroads, there was little hope for a consensus. The N&W’s Jack Fishwick had been the most vocal advocate for a plan to save the region’s lines, but he had trouble persuading the other members. Like Jim McClellan, Fishwick frequently found that his intellectual honesty and his ability to neatly dissect the industry’s problems and destroy the absurd with simple facts irritated other railroad executives. At one government-sponsored meeting, for instance, one of the nation’s top economists, a professor from Yale, was arguing against large consolidated railroads and declared that no system should be so large that the president could not visit all the employees at least once a year. The man’s entire argument was wiped out when Fishwick immediately spoke up, declaring: “Professor, if that were true, there never would have been a British empire.”

 

17 Merging Railroads over Bourbon

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Claude Brinegar had been wasting no time. Just a few months after the 45-Day Report, knowing that the new bill would require an even more detailed study of the problem by DOT, he had put to work a team of analysts, Jim McClellan among them. Viewing his brief March report to Congress as merely the forerunner of more advice and counsel, Brinegar wanted a document that would outline the kind of rail system that the region between the Mississippi and the Mid-Atlantic and New England needed. The secretary intended that it become a blueprint for resolving the crisis, and that is what the new law was to require of him. “Brinegar had us solving a problem,” said the Federal Railway Administration’s Bill Loftus. “We were searching for the solution, but Brinegar wanted a nongovernment solution.”

The network that would result had to be solvent and strong enough to provide dependable service to the region’s shippers. Early in their study the FRA staff agreed that they must look at all the railroads in the region, healthy as well as sick. Unquestionably, a lot of blood would flow. For instance, a line that wound past the estates of northern Baltimore and through the Amish farms of southern Pennsylvania had carried for decades the Pennsy’s sleepers and express trains bound from Washington to Harrisburg, Buffalo, Pittsburgh, and points west. Now it bore not one passenger train and barely any freight. Just to the west lay the tracks of the Western Maryland Railway, which paralleled the Pennsylvania almost all the way to York and carried at least five times the tonnage that moved over the Pennsy line.

 

18 Selling the Shiny Silver Sphere

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Still pushing his scheme, William T. Coleman approached the chairmen of the Norfolk and Western and the Chessie System. The N&W’s John Fishwick already had some idea of what was to be proposed. Some time earlier at a Washington dinner he had sat next to one of Jim McClellan’s old friends from the New York Central, David DeBoer, now one of the Federal Railway Administration’s top planners and analysts. DeBoer had mentioned the idea of Controlled Transfer, of which he was an avid proponent, and later he had met one Saturday in an Alexandria, Virginia, hotel room with Fishwick’s top lobbyist and outlined the idea in further detail. The lobbyist had expressed interest.

When Coleman met with Fishwick and the Chessie’s Hays Watkins, he did most of the talking while the two railroad chief executive officers listened. Coleman offered each railroad half of all the bankrupt properties and a gift of $500 million to cover the cost of refurbishing the lines. In addition, each would get $2 billion in low-interest federal loans. The two executives told the transportation secretary they would consider his offer and have their answers in a couple of weeks.

 

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