> ## Content Index > Fetch the complete content index at: https://core-sector.ghost.io/llms.txt > Use this file to discover other available public pages before exploring further. # The Board Paid $56 Million a Year in Borrowed Dividends. - URL: https://core-sector.ghost.io/the-board-paid-56-million-a-year-in-borrowed-dividends/ - Published: 2026-09-21T19:00:54.000Z - Updated: 2026-09-21T19:00:53.000Z - Author: Susan Price | ![Susan Price](https://storage.ghost.io/c/8c/09/8c09bf02-2863-4e2f-9427-328b96b722da/content/images/2026/09/My-copy-8.png) | ![Marcus Grant](https://storage.ghost.io/c/8c/09/8c09bf02-2863-4e2f-9427-328b96b722da/content/images/2026/09/My-2-copy-9.png) | Susan Price & Marcus GrantSeptember 21, 2026 | | -------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | | | | | | THE SHORT VERSION | | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | • Two great American railroads merged into one company • Half a billion dollars drained in twenty-eight months • Group earnings rose while the railroad itself sank • Holders of its short-term paper were left waiting | | THE SETUP | | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | One-month paper issued by American non-financial companies was priced at [3.94 percent on September 17](https://www.federalreserve.gov/releases/h15/), against 3.77 percent six days earlier. That is the market a company uses when it needs money this week rather than this year. On February 1, 1968 the Pennsylvania Railroad and the New York Central became Penn Central, the largest railroad in the United States. The share had run from about 20 in the early 1960s, when the merger was first proposed, to 84 by the summer after it happened. What made it look safe was the spread of it. A pipeline company, three property developers, terminals and land in every city on the north-east corridor. The group accounts showed earnings. The dividend, at an annual rate of $56 million, kept being paid. Twenty-eight months after the merger the company filed for reorganization, and the short-term market found out what it had been funding. | | THE TIMELINE | | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | In August 1972 the Securities and Exchange Commission handed a staff report on the [financial collapse of Penn Central](https://fraser.stlouisfed.org/files/docs/historical/house/1972house%5Ffincolpenncentral.pdf?ref=core-sector.ghost.io) to a special subcommittee of the House. Every row below is taken from that one report, which sets the company out quarter by quarter from the merger to the filing, naming the officers, the banks and the dealer at each step. Look at the last quarter of 1969\. On November 29 the board voted to omit the dividend, after paying at $56 million a year on borrowed money. Within weeks the dealer that sold the company's paper was putting its concern in writing. CASE FILEPenn Central, 1968-1970SEC staff report, August 1972Special Subcommittee on Investigations QUARTERWHAT WAS ANNOUNCEDTHE RAILROAD 1968 yearGroup earnings of $90.3 million, up on 1967\-$2.8 million Q1 1969Group earnings down to a third of last year\-$12.8 million Q2 1969Group earnings slipped seven and a half percent\-$8.2 million Q3 1969The first group quarterly deficit since the merger\-$19.2 million Q4 1969The board voted to omit the quarterly dividend$56 million a year 1969 yearGroup earnings of $4.4 million against $86.9 million\-$56.3 million Q1 1970The quarter the dealer had been warned about\-$62.7 million June 21, 1970Reorganization was filed under Section 77$500 million drained | | THE BREAK | | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | Four things gave way, and the trains were only one of them. • **The group figure was not the railroad.** For 1968 the group reported earnings of $90.3 million while the railroad itself came in $2.8 million under water. Shareholders, and the people buying its paper, read the first number. • **The diversified side never sent money up.** From 1963 about $144 million went into a pipeline and three property companies. Over five years $19.9 million came back, and a House committee put the net drain at [$175 million in all](https://fraser.stlouisfed.org/files/docs/historical/house/penncentral/1970house%5Fpenncentralpt1.pdf?ref=core-sector.ghost.io). • **The dividend was borrowed.** Payments ran at $56 million a year until November 1969 and came out of borrowings, not operations. About $100 million left the company that way after the merger. • **Short paper was doing a long job.** At the peak $200 million of the company's paper was outstanding, rolled over in full every time because nothing longer could be raised, and one dealer sold all of it to buyers who were told very little. | ![The sheared drawbar](https://storage.ghost.io/c/8c/09/8c09bf02-2863-4e2f-9427-328b96b722da/content/images/2026/09/The-sheared-drawbar.jpg) | WHO PAID | | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | The holders of the paper. Some were institutions that could read a balance sheet and some were not, and the report found that buyers were given only limited information. When the dealer began receiving warnings it passed none of them on. A rating had helped sell it. The only national service rating this kind of paper carried the company at its top grade, and the [staff report of August 1972](https://fraser.stlouisfed.org/title/financial-collapse-penn-central-company-734?ref=core-sector.ghost.io) found that grade was given without an adequate look at the finances. Washington was asked for a $200 million loan guarantee in June 1970, weeks before the filing, and it never arrived. Shareholders who had watched the share reach 84 in 1968 were left holding a reorganization. | | THE PATTERN | | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | • **The group figure hides the operating company.** Find out which entity earns the money and which one owes it, because they are rarely the same one. • **A payout funded by borrowing is a signal.** Match what goes out to shareholders against what operations bring in, never against reported earnings. • **Diversification is judged by what comes back.** Money that goes down into a subsidiary and does not come up is a transfer, whatever the annual report calls it. • **Short funding for a long need has a date on it.** Paper that must be renewed every month is a promise that strangers agree to repeat. I worked a desk in 1987 where a name went from quoted to unquotable between lunch and the close, and not one person who owned it had been told a thing. Ask of anything you own how often somebody has to agree to renew it, and what happens on the day they decline. An ounce of gold has never had that date in its diary. |