How did RRs survive so long being broke?

econandon wrote:MichaelK -

I agree with what you wrote, but I want to expand on two points.

michaelk wrote:Key things is "expense" <> money you pay out. And "income" <> money you receive. Only certain things are expenses and only certain other things are income.

Here you are using "<>" to signify "not equal to". I mention this to clarify for those who may not have seen this symbol combination before, though they may be more familiar with the symbol ≠.
.....

yep <> for "not equal to"- i dont know how to get the ≠ symbol (short of cutting and pasting from your post above- lol)

Passaic River Rat wrote:The original question is a politically interesting one in the era of the so-called "Occupy Wall Street" movement. I am not asserting anything or ascribing motives to anyone. Just realizing that the subject could be politicized by someone who wanted to say the old railroad claims of financial loss were not genuine because they continued to operate as long as they did.

Sure is interesting.

One can manipulate "profit" and "loss" to a certain degree from year to year without significant changes to the overall business. For example my office rent is due on the 1st of the month with a 10 day grace period. I like to be on time so most times i mail the check around the 27,28. But if I have no money in checking on 12/28 and a "loss" showing for the year I wont sent the check on 12/28 but rather wait till 1/2, 1/3, (whenever some customers pays me so I have the cash to pay)- it will get there before the 10th anyway and the landlord wont get too annoyed. The following year I'll have 13 rent payments in the year and therefore more expenses to offset any "profit" i might have. No rocket science, nothing illegal- but small simple things like that happen- and I dont have an army of accountants working for me telling me how to manipulate things. I'm sure there's plenty going on.

Other times seemingly minor things make a huge difference. Leasing vs buying is a big one. Payments might be around the same each month but vastly different outcomes each year you have the item in possession.

Also- I am not a big enough business so I dont fuss but I've heard of people that have "management companies" for their business in order to manipulate things. Say I owned "Mike's plumbing company". I could also own "Mikes plumbing management company". My plumbing company would pay my management company every year for "management services" or some crap like that (as I said not my thing so not sure exactly what they call it). My plumbing company might have a "profit" of 100k on Dec 29th. But for whatever reason on Dec 30th the plumbing company pays the management company 101k in fees on 12/31. "oh gosh- the plumbing company lost money last year". With publicly held companies I think that all has to be out in the open- but if it's a private business like say a professional sports team or a brokerage firm- then what they say about having a loss or a profit means NOTHING in my mind. Do the Brewers really lose money each year or do they pay their owners 50 million bucks to "manage" the team's assets? Since typically owners never want to show their books to players, it's hard not to assume it's all BS in the professional sports relm.

Another mess we have in American Business is "the market" isn't generally content with the same profit each year. I think this explains some of the confusion above with profit and loss. With the exception of utilities and maybe a few others investors seem to DEMAND increases year over year. If Walmart makes 200 billion profit this year and 200 billion profit next year, that seems pretty good to me. But wall street would "punish" the company becasue profits didn't RISE. There was no increase in year over year profits. Because of this businesses do some pretty disgusting things in my mind. Say walmart was making 200billion for a few years in a row. Wall Street and investors wouldn't be happy. To make them happy, the head of walmart would go out and fire thousands of people just so that he could tell the analysts that this coming year they will make a few more billions compared to last year. They the head guy will get a a billion dollar bonus for making more money- even though all he did was fired a bunch or people and told the people left to suck it up and do more with less.

I think it's pretty clear from the fact that they all wound up in conrail at the end that the northeast railroads all did really have fundamental financial issues at the end. But when railroads went belly up ever 5 years from 1870 on, maybe some of it was because the 'robber barons' were paying themselves huge "management fees" all the time? I really wouldn't know. Does anyone?

michaelk wrote:But when railroads went belly up ever 5 years from 1870 on, maybe some of it was because the 'robber barons' were paying themselves huge "management fees" all the time? I really wouldn't know. Does anyone?

I have knowledge of some areas of business and economic history, but I am not an expert. So please take my answer with an appropriate grain of salt.

I think that the "management company" structure is a relatively new development, so my short answer is "no". There were similar shenanigans occurring in the 19th and early 20th centuries, however.

The most famous is perhaps the Credit Mobilier of America scandal of the 1860s/1870s. Credit Mobilier was a construction company that charged large sums to the Union Pacific to build the transcontinental railroad. The UP received their cash from the US Government, so it is unsurprising that several Congressmen were later found to have been involved in the scheme.

I would argue also that the nested railroad legal structure is analogous to the "management company" idea you referenced. For example, the Port Reading Railroad was a subsidiary of the Reading Company, a conglomerate that also had properties in coal mining and canals. If the parent company wanted to show a loss, the Port Reading RR could have increased the amount it charged to the Reading Company for each train that ran from Bound Brook to Pt Reading.

The above example is an illustration - please do not take at face value. I know that such corporate structures existed during the 19th century, but I do not know for certain that this is how the Reading operated. If anyone has direct knowledge of Reading Company accounting, please confirm or refute.

As for the point about "railroads went belly up ever 5 years from 1870 on" - I realize that you are using hyperbole, because no single company went bankrupt 22 times between 1870 and 1976. I don't even think that all the CR predecessors had 22 bankruptcies between them. It is not in any company's interest to declare bankruptcy, much less to establish a pattern of doing so.

I also object to the term "robber baron" but that is a discussion for another day.

I'm not an accountant either, so some of these details may be off base, but one of the complicating factors was the requirement of the Interstate Commerce Commission (ICC) that trackwork had to be treated as an expense. If a railroad spent big bucks to renew track with a life expectancy of 30 years, the ICC would not allow the project to be amortized over the anticipated 30 years; if the work was done in the 3rd quarter of 19xx, the whole amount was an expense in the 3rd quarter of 19xx. Imagine how you could juice up a weak 3rd quarter simply by not doing the trackwork. The nature of track is such that you can get away with that for a period of time, and the hope springing eternal (and it did) that next year will be better and we can do the work then is a big temptation to fudge things as the track starts to deteriorate, requiring speed restrictions, resulting in poorer utilization of locomotives and cars, and worsening service, until finally the track begins to collapse under standing trains.

In the case of the LV, it got financial assistance from majority owner PRR (PC) after 1962. Not a lot, as they were going broke themselves, but enough to get by - their bankruptcy took place only days after PC's.

The Reading and CNJ were both helped by the C&O/Chessie at various points, with the CNJ nearly merged with Chessie in 1972 or so.

And the EL, while not in great shape, was only killed by Hurricane Agnes.