The History of Equipment Finance, Volume 3, 1841-1849

The Philadelphia & Reading railroad began operating in 1842-1843, although its infrastructure was incomplete and it had minimal rolling stock. It urgently needed coal cars and locomotives. Its debt was in default. It struggled to borrow. Sheriffs seized essential assets to enforce contractor judgments. Bridges suffered arson. Trains were derailed.After the 1837 Panic, the Locks & Canals machine shop had little work; it was to be sold. Its treasurer, Patrick Tracy Jackson, strove to keep the shop busy pending sale. Despite the risks, Jackson committed L&C to building the Philadelphia & Reading's first cars and engines and developed a financing and collateral security structure whose core element remains in equipment finance structures of today.It went badly. Neither Jackson nor the P&R anticipated the new heavy iron coal cars or Baldwin's flexible beam truck: they rendered small L&C engines inadequate. The P&R needed larger engines. Builders of large engines were paid; L&C received little. Payment defaults were continuous (for years) diminishing L&C's ability to sell the machine shop.This is a story of debt, desperation, and default: of balancing on the brink of bankruptcy. To induce payment (suasion and threats having failed), L&C bought P&R stock and bonds, aligned with English bondholders concerned about P&R finances, especially floating debt, and initiated one of the first audits of managerial custodianship in U.S. history. Bondholders obtained voting rights with stockholders. All to no avail.Many were the P&R machinations to obtain more debt, including secret purchases of P&R stock from the Bank of the United States to diminish Schuylkill Navigation influence, securities arbitrage across the pond, a preferred stock issuance, and relocation of a county seat. Equipment builders were required to provide credit and financing. Financial intermediation was invoked. A shadow banking system was used. Still L&C was not paid.Exasperated, Jackson took independent action in 1845. He and the lawyer Horace Binney devised a plan. Within months, L&C took all control of the P&R debt and related remedies from the trustees, neutralized the P&R, and forced a P&R financial restructuring. Its value enhanced, L&C rid itself of the P&R debt. But more was needed.