Penn Central: Rotten Ties, Lost Trains and a Toilet Paper Jet Deal

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The Pennsylvania Railroad and the New York Central, bitter rivals on the New York to Chicago routes, proposed merging in 1957 as trucks and the 1956 interstate highway program drained their freight and the Interstate Commerce Commission barred them from raising rates or dropping money-losing routes. The ICC took nearly a decade to approve the deal. By the time Penn Central formed in 1968, many young managers had left, the cultures of Stuart Saunders' traditional Pennsylvania and Alfred Perlman's modern New York Central had never meshed, and regulators required the new company to absorb the bankrupt New Haven railroad.

Incompatible computers lost trains, union contracts kept crews from handling each other's equipment, and rotten cross ties caused standing derailments; the Cleveland yard averaged six derailments a day. Losing about $1 million a day, management diverted cash into real estate and pipelines, borrowed to keep paying dividends, and reported a 1969 railroad loss of $56 million to the public and $67.8 million to the ICC while internal figures showed $190.8 million. Washington refused aid without new leadership, the board fired Saunders and CFO David Bevan, and after requests for a $750 million loan guarantee and a $200 million defense loan failed, Penn Central filed for bankruptcy on June 21, 1970, then the largest in U.S. history. Amtrak followed in 1971 and Conrail in 1976.

• In 1969 a Maine potato shipment rotted at New York's Selkirk yard, and Bangor and Aroostook shippers vowed never to ship by rail again.
• Bankruptcy-era president William Moore fired a superintendent for failing to clear a derailed coal train from a Baltimore tunnel within one hour.
• Moore was ousted after using railroad staff to renovate his home and having Scott Paper bill Penn Central for toilet paper to cover a borrowed corporate jet.
• Investor Max Heine bought bonds at pennies on the dollar, betting the assets were worth more than the debt, and profited in the 1978 reorganization.
• The 1978 Supreme Court case Penn Central Transportation Co. v. New York City upheld the city's block on a tower over Grand Central, which the MTA bought in 2020.