Bankers like Kidder, Peabody played an important role in reorganizing railroads in financial trouble. The fees and commissions earned in these transactions often were "very large," as Frank Webster, then a partner, wrote to the elder Peabody who was on his way to Europe. Webster believed the firm should cultivate this business, and he urged Peabody to impress upon the Barings the profits and safety in these operations. It was imperative, he said, that Barings understand "that for the making of large profits," Kidder, Peabody should be permitted to use the funds the two firms held in joint account "without any feeling of restraint or misunderstanding." Peabody illustrated the point by referring to Drexel, Morgan & Co/s reorganization of the Philadelphia & Reading Railroad, in which Kidder, Peabody had been given an opportunity to participate by Franklin B. Gowen, the president of the carrier. "I was satisfied that the property could be safely reorganized," Webster wrote, and on a basis "upon which the new securities would be perfectly good." Webster refused the business, he said, because of Thomas Baring's "apprehension and uneasiness" concerning reorganizations. Such fears were baseless, he reported. Had Baring shown more "confidence in our conservatism and judgment in the matter", Webster concluded, he would have accepted a share of the business and Kidder, Peabody, the Barings, and Drexel, Morgan would have divided "a commission of over $1,000,000 without a particle of risk to anyone". There were far fewer dangers and much greater profit in reorganizing railroad properties than in the letter of credit business. Peabody should stress to the Barings that "there is no basis of a security so sound or so capable of intelligent understanding, as the basis of the reorganization of a large property; as you have all the history, the condition of the property, and what it can safely be depended upon to do under the worst circumstances before you upon which to form your judgment." He concluded that the two firms should concentrate more of their attention on serving the financial needs of large corporations.
The close relationship that developed between Kidder, Peabody and the Atchison, Topeka & Santa Fe Railroad during the late 1800s illustrates both the kind of business Webster wanted the firm to emphasize and the range of services private bankers came to provide their issuer clients. Kidder, Peabody's association with the Santa Fe began in September 1870, when the road was in financial difficulties and in desperate need of capital to build from Atchison, Kansas, to the Colorado border in order to satisfy the terms of its congressional land grant. The president of the railroad and several of the directors as well as most of its investors were Bostonians. It was only natural that the Santa Fe should turn to a Boston house for the funds it required. From 1870 until 1888 Kidder, Peabody, usually in collaboration with the Barings and occasionally with one or two American houses, financed much of the construction and acquisition of new properties that turned the Santa Fe from a sectional railroad, with most of its mileage in Kansas, into a major transcontinental system.
Financing the Santa Fe's expansion was only one of Kidder, Peabody's services to this company. The firm also acted as the carrier's transfer agent, bank of deposit, and financial consultants. It was in this latter capacity that Kidder, Peabody exercised its greatest influence over policy. In 1871 Francis Peabody joined the Santa Fe's directorate, rising to become chairman of the finance committee and vice president. But even after he relinquished these posts and the firm no longer was represented in an official capacity, Kidder, Peabody continued to be actively concerned with company affairs. In part this stemmed from the fact that for a time Kidder, Peabody and the Barings were among the Santa Fe's largest stockholders, having secured most of their shares in payment for originating and marketing the carrier's securities. In addition to these holdings the two banking houses sometimes also found themselves with a large volume of the road's unsold securities. In October 1887, for instance, the amount of unsold Santa Fe securities held in joint account by Kidder, Peabody and Baring Brothers stood at nearly $5.9 million.
Protection of its own investment was not the only reason Kidder, Peabody sought to maintain its ties with the Santa Fe. Nor was it due chiefly to Kidder, Peabody's sense of responsibility toward the investors who had bought the railroad's securities, important as this consideration was to everyone concerned. Kidder, Peabody's continuing interest in the property derived in no small part from the pride and satisfaction of having played a vital role in launching a major transcontinental railroad. "The property is increasing rapidly and largely in value and influence", Webster wrote Francis Peabody, "and has, on the whole, I think, the most honest and able management that I know of, of any railroad property here.
Kidder, Peabody's hopes for the continued success and integrity of the Santa Fe were to be seriously shaken. Rapid construction westward and expansion of its facilities brought a sharp increase in the road's bonded debt, from $52 million in 1883 to $154 million in 1888. Interest payments strained the company's resources, while an appreciable drop in earnings added to its financial troubles.
Pressed by problems, the railroad called on Kidder, Peabody for advice and assistance. The bankers responded at once, recommending measures to cut costs and improve the company's credit. When these proved inadequate, Kidder, Peabody prepared to institute more drastic reforms. The first step was to seek and win Baring Brothers' approval. Once this had been accomplished, Kidder, Peabody then arranged to have a partner placed on the road's finance committee and to have its authority over disbursements greatly extended. These measures, together with a $7 million loan floated by Kidder, Peabody, proved immediately useful but did not solve the Santa Fe's long-term problems.
A comprehensive program designed to restore the Santa Fe's credit and assure the road's successful operation in the future was initiated in the spring of 1889. Kidder, Peabody, with the support of the Barings, instituted a series of changes in the carrier's management and financial structure that gave the bankers a commanding voice in making policy. They achieved this position at the Santa Fe's annual meeting on May 9, 1889. On that day Thomas Baring, the American representative of the London banking house and a Kidder, Peabody partner since January 1, 1886, voted his huge block of shares (some 71 percent of those represented) in favor of the "Kidder, Peabody ticket," giving the Boston bankers an easy victory. The newly elected board was composed of six directors, two of whom (Thomas Baring and Oliver Peabody) were Kidder, Peabody partners. A few months later a third partner, Francis Peabody, who previously had served a term as a Santa Fe director, returned to his old place on the board. A fourth Kidder, Peabody partner, George C. Magoun, the firm's expert on corporate reorganizations, was named chairman of the board. By the end of August 1889, four of the Santa Fe's six directors were Kidder, Peabody partners and the bankers also held majorities on the road's executive and finance committees.
Once Kidder, Peabody and the Barings were in control of the Santa Fe's top management, the bankers then proceeded to reorganize the carrier's finances. The plan, involving some $250 million of new securities, was designed to achieve several objectives: reduce fixed charges, simplify the capital structure, retire some $1.7 million of floating debt, and provide the company with about $5 million of new capital. To achieve these objectives, Kidder, Peabody proposed converting a great variety of outstanding bond issues into two types: general first mortgage bonds and income bonds, the former paying 4 percent and the latter 5 percent. The plan, which Kidder, Peabody persuaded the bondholders to accept, caused them no loss of income. The major concession they were asked to accept was "to have part of their interest payments depend upon current earnings, if available, rather than on a legal obligation". For the Santa Fe the exchange of securities involved a saving of $3.8 million. Contemporary observers hailed Kidder, Peabody's reorganization. The Commercial & Financial Chronicle, crediting Magoun for his skill and ingenuity in planning and executing the project, called the reorganization "a brilliant conception".
The bankers sought to perpetuate their reforms by having the Santa Fe's stock put into a voting trust "for the protection of the property." The original plan, set forth by Francis Peabody, called for a three or five-year arrangement. But shortly thereafter, when it appeared Jay Gould might try to win control of the road, Peabody suggested a ten-year trust. "If he should do so," Peabody wrote Magoun, "it would not only be a great disaster to the property, but a terrible mortification for K.P. & Co., who would practically have cooked the goose for him to eat". No such device was affected and Kidder, Peabody's influence over the Santa Fe lasted until 1893, when the panic of that year and the long depression that followed it forced the road into bankruptcy, along with one-fourth of the country's carriers.
