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

9. The Granddaddy of Enron

9 The Granddaddy of Enron 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. 82 The Men Who Loved Trains Well before the accountants totaled up the books for 1969, it was obvious the year-end returns would be worse than ever. Although it had reported only a fraction of the true figure, the company’s railroad subsidiary, Penn Central Transportation Co., had lost over $300 million since the merger. That was the equivalent of $1.5 billion in 2002 dollars when the Enron bubble burst. Although a few people like McClellan knew there were problems, he and everyone else outside Penn Central’s executive suite remained unaware of how big the loss really was. To hide the damage, Saunders continued pushing for the rosiest numbers that creative accounting could conceive. He was not disappointed. David Bevan cooperated because he, too, needed to put as good a face on things as possible so he could keep lenders and stockholders in line. If the real numbers were ever published, the money market would shut itself off and Bevan would be left empty-handed. While they knew operating problems were forcing Penn Central to borrow more and the company’s stock price had plunged in the previous year all the way from the 70s to the 20s, the lenders and analysts still had no idea that Penn Central’s position was so precipitous. Nor did the investors from Philadelphia’s Main Line know. Saunders, too, faced a problem, but it was closer to home. Even though they felt they had done something to fix things by kicking Perlman upstairs and they remained ignorant of how bad the real numbers were, the directors were growing more restless. The board now knew the losses were large and mounting, and Saunders was trying to keep the members docile by continuing to leave them uninformed. As long as the red ink was presented as a pastel, the directors seemed willing to avoid the unpleasant reality of it all, giving Saunders more time to fix the problem without their interference. The Standard Railroad of the World must stay afloat; that was Saunders’s charge as chief executive, and given the old Virginia culture in which he was imbued and the optimism that guided his life, he carried no doubts about his ability to fulfill it. As he had declared a few months earlier, “I did not come to the Penn Central to liquidate it.” One thing that helped make the railroad’s losses seem less grue- 83 The Granddaddy of Enron some was a new corporate structure that Saunders had created in the fall of 1969. He had turned Penn Central Co. into a holding company with no operating functions. It had only one subsidiary, the Penn Central Transportation Co., which was the railroad. All the other holdings were under Penn Central Transportation. Most notable among those subsidiaries was the Pennsylvania Co., which held the investments in the N&W and the Wabash, and nonrail ventures like Buckeye Pipeline and Great Southwest. The railroad also owned directly or controlled around 150 other subsidiaries, such as trucking companies, New York hotels like the Barkley and the Biltmore, and various smaller railroads, most notably the Pittsburgh & Lake Erie and the Lehigh Valley. The new parent company provided the perfect structure for an accountant’s shell game, offering Saunders and Bevan even...