Tampa award agreed to go on the Tampa bonds under the second award provided more working capital was made available, arrangements for which, including a segregation of funds, were made with the Reconstruction Finance Corporation. As a commentary on this award, it should be pointed out that the Commission felt that the new contracts should yield the company a profit, although on the basis of information then available, the company might not do better than break even or might sustain a small loss on the first group of vessels. There was no indication at that time that there would be a substantial loss, although the company was obviously working on narrow margins. However, the working funds which had been made available for the second contract were segregated with a view to safeguarding operations under that award.

Some months after the award of the second contract, it became evident that the company was experiencing higher costs due in part to labor difficulties and to difficulties in management, which became more evident as the volume of their operations increased. The company had based its bid upon labor rates then prevailing at its yard and in the vicinity, but before starting work found it necessary to enter into a labor agreement at much higher rates and a substantial increase in cost resulted. As its contract did not contain the usual provision for adjustment of the contract price on account of increased labor rates, this unfavorable cost situation directly affected profit. The labor problem was seriously aggravated by unfortunate controversies that arose and that accompanied the further adjustment of the company's labor relation. The Commission did what it could in the hope of correcting both the labor and the management situation, but found it difficult to obtain the necessary cooperation.

Nevertheless, the company completed and delivered the first of its vessels, the Sea Witch, which proved an exceptionally able ship. Shortly before the second vessel was completed, however, it became apparent that working funds available for the first group of vessels were not going to be sufficient to permit continued operation for any great period of time. Unpaid bills were piling up, creditors were threatening action, and keymen in the company's working organization were on the point of accepting employment elsewhere.

At this stage of the matter, and quite independent of difficulties of the company, the Navy Department asked the Commission to furnish three of the first group of four Tampa C-2 vessels. They originally suggesed that this include the Sea Witch, but as this vessel already had been turned over to the United States Lines and was on an extended voyage to the Orient, the Navy Department consented to take the three under construction. Obviously, these vessels could not be obtained on any condition unless the arrangements made, in addition to reimbursing to the Commission its payments to the shipyard, included taking care of the unpaid bills, some or all of which would be liens on the vessel, or otherwise lead to reclamation suits by the creditors.

The company was not, at that time, technically in default under its contracts with the Commission, although such default was, of course, imminent, and while it was without sufficient working funds to complete the remaining three vessels of the first group, it still had working funds for the second group of vessels because of the segregation thereof. The Commission had the right in event of default to enter the shipyard and complete the vessels for its own account. Had the Commission done so, it would probably have found it necessary to satisfy all or a large part of the creditors whose claims related to these vessels. Such action would, in any event, have been exceedingly expensive and would have also involved difficult questions relating to the rights of various parties, since the Ro construction Finance Corporation, the Commission, the sureties on the first group of vessels and the sureties under the second group all had rights in this connection, not to mention the possible rights of a trustee or receiver who might be appointed in the interest of the general creditors. Another alternative which was considered was to remove the vessels from the yard in their uncompleted condition and contract for their completion elsewhere. This also would have been very costly and would have been wholly impractical with respect to the fourth of the vessels of this group which had not advanced sufficiently to permit of launching, and the completion of which, therefore, would have probably had to be abandoned.

Any drastic action under default clauses of the first contract would in any event have automatically brought about a default under the second contract and would also have resulted in the immediate loss of the Company's supervisory organization, which would have rendered further operation impracticable until such time as a new organization could be recruited, the possibility of which, in

view of the temporary character of the resulting operation, would have been remote.

In order, therefore, (1) to preserve the shipyard as a going concern, and (2) to complete the remaining seven vessels, the only feasible plan was that which was actually adopted; namely, to get a new general management and a new corporate entity to take over the situation.

The Commission and the Reconstruction Finance Corporation having come to this conclusion, Mr. George B. Howell, vice president of the Exchange National Bank of Tampa, was approached and agreed to give up his vice presidency of the bank and to form a new company and management and himself to become the active head thereof. Mr. Kreher, the president and principal stockholder of the old company and other stockholders, representing nearly all of the capital stock of the old company, agreed to an arrangement whereby the new company, which was organized with nominal capital, would take over the assets of the old company in consideration of assuming its liabilities. The arrangement included the voluntary surrender by the old company to the Commission of the three uncompleted hulls of the first group of vessels; the sale of these hulls in their then condition to the new company for an amount equal to what the Commission had expended upon them by way of payments to the old company; the making of an agreement with the Navy Department whereby these hulls were taken over from the company under contracts for their completion with the Navy Department at values which would permit the unpaid bills relating to these vessels to be discharged without exceeding what these vessels would have cost had they been built under contemporaneous contracts with other shipyards, and the assumption by the new company of the second group of contracts.

This procedure would not have been practicable had the result been a price for the vessels in excess of their value as determined by other current construction, but careful analysis of the situation indicated that even under these arrangements, these three vessels were the cheapest which the Navy could obtain. The plan had the additional advantage of avoiding a default on the second four vessels, which, in view of the working capital available for them and the management being provided by the new corporation could thus be kept alive. The amount of the unpaid bills on the first group of contracts was approximately $900,000; the guarantor, Mr. Spadaro, was liable for $500,000 of this amount; the other surety, Mr. Kreher, after the wiping out of the value of his stock holding in the company as a result of the losses on the first group of ships, had no substantial assets which could be availed of to meet his obligation. Analysis of the situation indicated that it was possible that the Government claims against the surety had already been weakened by the arrangements which it had been necessary to make previously in order to keep the company going, and that, in any event, we could not change this contract from a contract for merchant vessels to a contract for naval auxiliaries, without, in effect, releasing it. Furthermore, had recourse been had to Mr. Spadaro as surety, the first claim, as a practical matter, would have been on behalf of the suppliers of machinery, materials and services under the payment bond, so that there would have been no salvage to the Government out of his bond.

The reorganization plan, however, included arrangements with Mr. Spadaro whereby, in effect, he underwrote part of the working capital for the new company, and the new company undertook to pay out of any profits of this or future construction for the Government the amount of the $500,000 liability which Mr. Spadaro had formerly had.

This undertaking was implemented by an arrangement with the new company as to recapture of profits, in addition to those prescribed by law, such that it could make no profit on the first group of vessels, and that it was to give the Government half of all the profits on the second group and on any subse quent Government contracts until all of the $500,000 representing the Spadaro liability was thus recovered. It is our understanding that the company through work subsequently placed with it by the Navy Department is in process of liquidating this obligation and that its entire liquidation in the very near future is indicated. The Government will therefore have recovered without litigation all that it could have recovered from Mr. Spadaro even disregarding the probability that a suit under this bond would at best have led to a partial recovery by creditors only, with no net recovery by the Government.

It will, therefore, be seen that the maximum possible book loss to the Government is $400,000; all of which went to pay claims which were payable in

any event and which were recompensated for by (1) the fact that this was fully offset by the value of the uncompleted hulls acquired by the Navy as determined from contemporaneous contracts with the builders, (2) the avoidance of losses due to disruption of the yard, and (3) the economies involved when the Navy started its conversion work in advance of completion of vessels.

Subsequently, the Navy asked us to turn over all of the four ships in the second group of contracts for conversion to naval auxiliaries. It was not desirable in the interest of the Government that these vessels be first completed as merchant vessels and then taken by the Navy, since most of the value of the work done in the latter stages of construction would have been a complete loss to the Government, and the cost of conversion would have been unnecessarily high. Accordingly, the company was requested by the Commission to consent to the cancelation of these contracts against payment for work actually done and for materials on hand and in progress.

Again careful comparison was made with the cost of these vessels to the Navy Department in their then stages of completion as compared with other vessels of the same type under construction, and it was found that the Navy would be acquiring these vessels on favorable terms. The transaction involved no profit to anyone. The Navy then made its own contractual arrangements with the company for the changes and additional work involved in completing them as naval auxiliaries.

As a result of this last transaction, the Maritime Commission's interest in the Tampa yards and its commitments to the Reconstruction Finance Corporation with respect to their advances which had been given in connection with their advances of working capital is terminated, and a collapse that would have been a serious economic blow to the city of Tampa and the State of Florida was averted. In connection with this and other Navy construction, the Reconstruction Finance Corporation investment is in healthy condition, and the Navy has available for war needs a shipyard with which it is well pleased and which it has subsequently caused to be considerably expanded. Sincerely yours,

(Signed) E. S. LAND, Chairman.

MEMORANDUM-TAMPA SHIPBUILDING CO., INC.

The report of the Comptroller General to Congress with respect to Tampa Shipbuilding & Engineering Co. and its successor, Tampa Shipbuilding Co., Inc., has to do with the circumstances surrounding the award of two groups of contracts, each group involving four vessels, the reorganization of the Tampa Co., and the acquisition by the Navy Department of seven vessels which were originally contracted for by the Maritime Commission. Owing to the fact that the Comptroller General has disregarded certain major elements of the problems involved in these transactions, as well as certain of the important elements of the transactions themselves, the public has apparently been misled by newspaper versions of the report.

At the time the Maritime Commission undertook the beginnings of its construction program, it was faced with extreme reluctance on the part of the shipbuilding industry to make reasonable bids for the building of its ships. The awarding of a series of contracts to the Tampa Co. at prices consistent with the Commission's own estimates of cost served to break down this resistance, saved the Government many millions of dollars, and made possible the carrying out in its early stages of the shipbuilding program which has now in its tremendously expanded phase become a cornerstone of the country's war effort.

The Tampa Co., however, experienced financial difficulties during the period of its contract and was barely saved from bankruptcy by reorganization made possible partly through efforts of the Maritime Commission and the Reconstruction Finance Corporation, the cooperation of Mr. George B. Howell, and the fact that three of the seven vesesls were urgently needed by the Navy for conversion into naval auxiliaries (the remaining four vessels were subsequently taken over by the Navy for the same purpose).

At the time the company was reorganized in November 1940, the alternatives, because of the various complications, were either the consummation of the plan actually carried out involving the taking over of the vessels at prices which would

permit the bills of the bankrupt company to be paid, or the abandonment of the whole undertaking with large loss to the Government (including both the Maritime Commission and the Reconstruction Finance Corporation), the disintegration of a going shipbuilding organization that was rapidly taking its place as an important element in the defense program, and the effecting of a serious economic blow to the city of Tampa and the State of Florida. The prices paid by the Navy Department for the vessels were lower than it would have had to pay for comparable vessels under contemporaneous construction elsewhere. It is understood that their conversion into naval auxiliaries was accomplished on a favorable cost basis. The Maritime Commission and a host of creditors of the old company were saved from loss and the Reconstruction Finance Corporation mortgage loan which was in default is in a healthy condition.

Two important facts are, in effect, overlook by the Comptroller General:

1. That Mr. Howell's new company assumed all the debts of the defunct old company, including considerably over $1,000,000 of unpaid bills incurred in the building of the first group of vessels for the Commission, the inability to pay which was about to put the old company into bankruptcy.

2. That Mr. Howell's new company agreed that if it derived any profit from the two groups of vessels then under contract, after paying the bills, it would return without limitation all of such profit to the Maritime Commission, and furthermore, if such profits were less than $500,000, it would return one-half the profit it made on future Government contracts until an aggregate of $500,000 had been returned.

The Navy Department, when it took over the last four vessels from the Commission, acquired the Commission's right to the return of any such profit, and it is understood that this matter is in course of audit and payment as between the Navy Department and the company. It would appear obvious, therefore, that ample provision was made against loss to the Government through the acquisition of the vessels by the Navy Department.

There are other inaccuracies in the report of the Comptroller General, but in view of the agreements made by Mr. Howell on behalf of the new company to repay to the Government any profit, the position taken by the Comptroller General in his report to Congress would appear to be without adequate foundation.

REPORT OF MARITIME COMMISSION ON THE WATERMAN STEAMSHIP CORPORATION

Mr. DIRKSEN. Admiral, I want to insert also a letter addressed to Representative Bland, Chairman of the Committee on Merchant Marine and Fisheries, dated October 15, 1942, simply to get the record complete.

Admiral LAND. Is that about Waterman?

Mr. DIRKSEN. No; that is your letter to Mr. Bland. That is a rather extensive letter.

(The document referred to follows:)

REPORT FROM THE UNITED STATES MARITIME COMMISSION ON THE WATERMAN STEAMSHIP CORPORATION

UNITED STATES MARITIME COMMISSION,
Washington, October 15, 1942.

Re Comptroller General's report dated August 8, 1942, relating to certain transactions between Maritime Commission and Waterman Steamship Corporation, Hon. SCHUYLER O. BLAND,

Chairman, Committee on the Merchant Marine and Fisheries,

House of Representatives. DEAR JUDGE BLAND: This letter is in reply to your request that the Commission make a report to your committee upon the report of the Comptroller General of the United States dated August 8, 1942, and entitled as follows:

"Report of the sale by the United States Maritime Commission to Waterman Steamship Corporation of five obsolete vessels from the Commission's laid-up fleet, with option to repurchase said vessels, and the subsequent purchase from said corporation of five other similar and older vessels at greatly enhanced prices, instead of exercising said option."

The report submitted by the Comptroller General contains a number of statements as to matters of fact which are wholly or partially inaccurate, and the legal discussion therein involves important misconceptions with respect to the statutes under which the Commission operates. It is regrettable that the Comptroller General's representatives did not consult with me or the other Commissioners or with the responsible officials of the United States Maritime Commission with a view to ascertaining the factual situation or as to the Commission's legal powers and rights in connection with this matter, since, if this had been done, the preparation of this report would have been much simplified.

Soon after the Martime Commission was established, it began to dispose of its vessels in a manner directed by Congress in the Merchant Marine Act, 1936, as amended. As to the regular lines previously operated by the Government and the vessels employed thereon, such lines were sold to established operators or the vessels chartered to operators who agreed to maintain regular service. The vessels then in lay-up, so far as practicable, were handled in the same manner, that is to say, they were put in condition and then sold or chartered to operators who were maintaining or agreed to maintain regular service. There were certain other vessels in the laid-up fleet which were either unsuitable as to type and size or in poor condition. These vessels were disposed of for scrap or sold alien under suitable trading restrictions.

Thereafter, there remained another class of vessels in the laid-up fleet which could be put into condition but at a cost which the Commission felt would not justify the expenditure by the Government in view of uncertain shipping conditions. Early in 1940 it was decided that these vessels should be offered on an "as is" basis. As an essential part of the consideration for the sale, the purchaser was required (a) to recondition the vessels, (b) to specify a regular service which had already been considered by the Commission to be an essential foreign-trade route or which might, prior to award, qualify as such, (c) to maintain such service with the vessels, and (d) to replace the old vessels. Four of the vessels were offered on these terms to established lines under a proposal issued March 26, 1940. The Commission's proposal indicated that applications for an operating-differential subsidy and a construction-differential subsidy would be entertained, and a replacement program was made a condition of the bidding.

Upon the opening of the bids on April 17, 1940, bids were received from Ocean Dominion Steamship Co. and Waterman Steamship Corporation. The Ocean Dominion bid was considered inadequate, while Waterman did not in its bid offer to maintain regular service on an essential trade route. For this reason, the General Counsel of the Commission ruled that the Waterman bid was unresponsive to the proposal. Accordingly, both bids were rejected by the Commission. Since no operator would undertake to maintain regular services on an established trade route with the advertised vessels, the Commission decided that it was not warranted in reconditioning the vessels at the Government's expense. This left as the only alternative (a) abandoning all attempts to dispose of the vessels, or (b) inviting further bids upon terms which did not require an undertaking on the part of the operator to maintain regular service on an established foreign trade route. Alternative (a) was obviously undesirable in the public interest and the Commission thereupon worked out terms of a proposal which, while not requiring such regular service, would, nevertheless, put the vessels in operation as part of our merchant marine, and, at the same time, provide for their replacement with new vessels. The Commission considered it proper in this connection not to offer a construction differential subsidy for the construetion of new vessels, but it did agree to entertain applications for financial aid under section 509 of the Merchant Marine Act, 1936, which section provides for loans amounting, in the case of vessels of the type proposed, to not more than 871⁄2 percent of the full domestic construction cost. This was a fair and proper basis on which to dispose of these four old vessels and one other old vessel that was included in the new proposal. In effect, the operator wanted ships; we wanted the ships in service, but in accordance with the statute and with adequate protection to the Government.

Since Waterman had submitted a bid in connection, with the earlier proposal, it was thought likely that it would be a bidder in connection with a second offer, but there was a possibility that other American operators might be interested. Accordingly, a new proposal was issued on May 10, 1940, along the foregoing lines and containing two additional conditions for the protection of the Commission's interests. The first was that if any vessel was sold within 2 years