Treasury Nominee Skilled in the Art of Deal-Making
In 1976, an ambitious young economist in the Transportation Department helped launch a revolution that changed the ground rules of American commerce, creating enormous opportunities for some to prosper, and others to fall behind. John W. Snow has done a little of both.
Snow, nominated last week to be President Bush’s new Treasury chief, was one of the architects of deregulation, the political movement that transformed one heavily regulated industry after another, from trucking to telephones. Like deregulation’s mixed record, Snow and the railroad company he has run for more than a decade have at times prospered and expanded. Yet they have also disappointed backers and disrupted the economy.
Described by friends and critics as a consummate consensus-builder, Snow used his mastery of detail and abundance of charm at the Transportation Department to assemble the fragile political alliances needed in the 1970s to reverse decades of government oversight. He then flagged a ride with what would become CSX Corp., one of the few surviving major railroads, where he used his industry expertise and political connections to help the company benefit from the policies he helped put in place, and enriched himself in the process.
But Snow, 63, has taken himself, his company, and to some extent the country on a bumpy ride that has left many better off, but some battered and bruised.
Economists say deregulation has generated big economic gains for the country by reducing costs, improving efficiency, encouraging innovation and, in many cases, lowering prices. But it has not bestowed its benefits equally. Thousands of people lost their jobs. Many companies fell by the wayside. In some areas, service was curtailed and costs increased. The laws still force many shippers to do business with a single railroad, leaving them unable to shop around for lower prices.
“The chemical industry, coal-fired steam plants, the electric utility industry, all of them are very unhappy with deregulation,” said Robert Banks, president of R.L. Banks & Associates, a railroad consulting firm.
For CSX’s stockholders, deregulation has yet to fully deliver on its promise. At several key points, experts and associates say, miscalculations by Snow and other CSX executives cost the company dearly, and CSX stock has been a market laggard. Snow, however, has profited handsomely from his efforts, taking home more than $50 million in compensation since becoming chairman 11 years ago.
“John Snow is a CEO with a mediocre operating record at best, who has had an extraordinary amount of personal compensation,” said Bob Monks, a shareholder activist who once ran a railroad that did business with CSX’s predecessor. “The pattern of his career is that of a professional schmoozer.”
Snow’s defenders are quick to differ. “No, no, that’s wrong,” said former Transportation Secretary William T. Coleman Jr., who was Snow’s boss there. “He’s not a glad-hand fellow. He knows the details. If you called him today, he could probably tell you where every ... freight train is on his rail line.”
Snow, who will soon get a chance to present his case when the Senate takes up his nomination, was unavailable for comment. But a CSX spokesman said the company is confident Snow’s key decisions will eventually pay off.
A product of Toledo, Ohio, Snow earned a doctorate in economics and a degree in law. He worked as a college professor and a private attorney before joining the Transportation Department in the latter days of the Nixon administration. During the Ford administration, he became a member of an influential club of high-ranking officials who believed most regulated industries would be far better off if the government got off their backs.
In 1976, Snow, as a deputy undersecretary of Transportation, was instrumental in securing passage of the Railroad Reorganization and Regulatory Reform Act, the first in a series of major deregulation initiatives. It was followed by the Airline Deregulation Act of 1978, the Motor Carrier Reform Act of 1980 and the more sweeping Staggers Rail Act of 1980.
If any industry needed restructuring, it was railroads. The industry had been hobbled by 89 years of ever-increasing government control of shipping routes, freight rates and passenger service. Half a dozen major rail carriers had gone belly-up. Some people thought that the entire industry should be nationalized.
The “4-R Act” did two things: It gave railroads limited ability to negotiate the terms of their contracts with shippers, and it shoveled the remains of several bankrupt carriers into Conrail, a new, government-owned freight line serving the Northeast U.S.
Snow shaped the contents of the bill, mediated differences between industry and labor, and sold the package to the Republican White House and Democratic Congress.
“John Snow was the main intellectual force and energy source behind the 4-R Act,” said Robert E. Gallamore, a former federal railroad regulator who now heads Northwestern University’s Transportation Center. “He was the go-to guy.... He put it into a legislative vehicle and lobbied it through Congress.”
Richard Klem, who worked with Snow at the Transportation Department and later at CSX, said Snow’s people skills are so impressive that others consistently underestimate his analytical and consensus-building abilities. As a graduate student, Snow studied the “Nash equilibrium” concept used by economists to predict outcomes, and he sometimes used advanced game theory to analyze how to proceed on an issue.
“People don’t expect someone who’s that smooth to be deep,” Klem said. “They don’t realize that he masters the details. He uses that to good advantage.”
In 1977, the Carter administration began replacing Republican appointees with Democrats, and Snow needed a new job. He was snapped up by Chessie System, which later became CSX. As the railroad’s chief Washington lobbyist, he played a role in the policymaking process that led to passage of the more comprehensive Staggers Act, which essentially freed the railroads to compete on their own terms.
Snow leapfrogged through the ranks of CSX executives, becoming president and chief executive in 1989 and chairman in 1991. He scuttled the diversification strategy pursued by his predecessors, selling off non-rail subsidiaries and focusing on CSX’s core freight-hauling operations.
In 1996, Snow made an offer to buy Conrail, which the government had spun off to private shareholders. He portrayed the proposed merger as “a terrific marriage” that would cut shipping costs and appeal to regulators, because the two companies had little overlap. But it was widely criticized for seeking to create a giant that would dominate its only major rival in the East, Norfolk Southern Corp.
Snow and CSX “misjudged the reaction of Norfolk Southern, their customers and the regulatory bodies,” said Martin Bercovici, a Washington lawyer who frequently represents shippers.
Soon CSX and Norfolk Southern were engaged in an all-out bidding war. They ultimately agreed to pay $10.5 billion in cash and assume $10 billion in debt to acquire Conrail, dividing the spoils between them.
To consummate the deal, Snow had to go back to work in Washington to persuade federal regulators and members of Congress that Conrail’s demise would not harm freight shippers, union members or what was left of the industry. It took more than a year, but he finally made the sale.
“Snow and his team were working the Hill and asking members to either support the deal or be neutral,” said Rep. James L. Oberstar (D-Minn.), who tried to block the acquisition. “He was quite persuasive.”
Rail experts say the acquisition was a good deal for Conrail shareholders, the rail industry and probably the nation. For CSX, it was another story.
Snow’s company was saddled with a huge debt load, and integrating CSX and Conrail operations proved more difficult than expected. Costs escalated, shipments backed up, and customers took their business elsewhere. Five years later, it is still struggling to digest the deal, and the company’s stock price has fallen by half, closing Friday at $27.83.
Even within the slow-growing railroad industry, CSX’s financial record is unimpressive, analysts say. “CSX under Snow has been a sluggish operation,” said Mark Reutter, a rail historian and author. When Snow was bidding for Conrail, CSX predicted the acquisition would take heavy truck traffic off congested East Coast roads, Reutter said, “and that has not occurred.”
CSX acknowledges that the combination has taken longer and has created more problems than expected, but it sees light at the end of the trestle.
“Clearly the company paid a premium price for Conrail,” CSX spokesman Adam Hollingsworth said. “However, we’re confident that over time it’s going to prove to be the best investment CSX ever made.”
Regardless, the company has benefited from deft tax filings. Taking full advantage of laws on the books, CSX paid no federal income taxes in 1998, 2000 and 2001. Instead, it received federal rebates of more than $150 million by claiming a number of tax breaks, including accelerated depreciation of equipment purchases. Critics say such practices only reinforce perceptions that big business is granted benefits that ordinary taxpayers are denied.
Meanwhile, Snow has nurtured the details of business and politics.
Just ask Rep. Nick J. Rahall II (D-W.Va.), whose district includes the famed Greenbrier Resort, a mountain getaway owned by CSX and frequented by Washington power brokers. Greenbrier holds an annual retreat for members of Congress, who are ferried to and from the site aboard CSX trains. Snow, a first-rate golfer, is frequently seen on the course with key lawmakers and CSX customers.
Last spring, Rahall called CSX a “robber baron” for trying to charge local county commissioners a princely sum to place a water pipe along the company’s right of way. But that didn’t stop Snow from inviting Rahall to Greenbrier to play in a foursome that included professional golfer Tom Watson. Snow reduced the right-of-way fee from $180,000 to $6,000, and impressed his guest by landing a ball close to the pin from about 200 yards away.
“He’s unusual,” said Rahall, a member of the House railroad subcommittee. “He has served in the bureaucracy. He has served in the business world. He is well connected. He knows the concerns of the members of Congress with whom he deals.”
Klem, Snow’s former colleague in the Ford administration and at CSX, said he thinks his friend would be a better Treasury secretary than he is a corporate CEO.
“He’s good at the inside game,” Klem said. “When he goes to a meeting with high-level players, he understands what they’re after. He marshals the relevant facts. He does it in such a low-key way, people think they invented it themselves.
“It’s the perfect job for him.”
*
Vieth reported from Washington and Peltz from Los Angeles.
