18. Reducing Liabilities

It may be asked what is gained by a reorganization? Suppose it be a railroad. In one sense its failure is due to an excessive capitalization; in other words, the receipts are insufficient, either because of bad management or miscalculation with respect to anticipated profits, losses from storms or other calamities, excessive competition, greater cost of construction than was first estimated, to pay interest on its bonds and other indebtedness. The object of a reorganization is to lighten in some way the burden of obligations so that the company can live and pay its debts. The mode of effecting this end greatly varies. Sometimes some of the stock is retired, or some of the bonds, and thus the capitalization is reduced Another and very frequent way is to reduce the rate of interest on many or all of the obligations. The first time the Philadelphia and Reading Railroad was reorganized, the reorganisers accomplished a radical relief by inducing certain classes of bondholders whenever the recieipts were insufficient to pay the interest on their bonds when it fell due, to give it up; in other words, that it should not continue as an unpaid debt of the company, but be regarded as discharged. These bonds are now known as non-cumulative income bonds, and the owners get interest on them if the company is fortunate enough to earn the amount required, otherwise they receive nothing. The gain to the company is apparent, for the former fixed obligation to pay interest has been turned into a conditional one, the performance of which depends on the profits earned by the company.

19. Profits

Some of the older and larger trust companies have undertaken reorganization schemes. They are very profitable, involve but little risk on the part of the organizers, but great wisdom and tact are required to execute them successfully. One banking house in New York especially has been a successful reorganizer of several great railroad companies. Not infrequently years are required to bring a reorganization scheme to a close; but not having been undertaken until the company was in a hopeless condition, this condition of things continues to favor the reorganizer until he brings his difficult undertaking to a successful close.

20. Trusts

The last kind of undertakings financed by banks and bankers are industrial trust enterprises. Of these not much need be said here, for the mode of creating and financing them is familiar knowledge. Though the details of every trust differ from those of every other, the general features are the same. The property of two or more similar enterprises is bought and recapitalized at a sum greatly exceeding their former valuation. Sometimes the properties of several are bought and united, as in the case of the United States Steel Corporation. One or more of them usually have been prosperous, but it is not an uncommon thing when uniting several to add some which have not had a profitable history.