A Dec. 24 Business article about Treasury nominee John W. Snow incorrectly reported the category in which his former professor, John Nash, was awarded a Nobel Prize. It was in economics. (Published 12/27/02)
In 1996 and 1997, CSX Transportation experienced a series of costly and embarrassing train wrecks, including one in Arlington that disrupted Virginia commuter service for a month. The Federal Railroad Administration concluded that some managers were more concerned about keeping trains running than safety.
CSX chairman and chief executive John W. Snow had no idea things were that bad. But he acted immediately to make things right: The day after the FRA's scathing report was released, he hired its safety chief as a vice president, telling him to spend and do whatever was necessary to fix the problems he'd uncovered.
Three years later, when CSX service deteriorated following its acquisition of part of Conrail, and another regulatory report criticized its track maintenance and inspection, Snow fired his top three railroad officials -- whom he had handpicked just nine months earlier.
The episodes illustrate a recurring theme in the stewardship of President Bush's choice to become Treasury secretary -- trust others to run day-to-day operations, get blindsided by disaster, then take charge and recover quickly.
A lawyer and economist who studied the theories of Nobel mathematics laureate John Nash as a graduate student, Snow has spent much of his 25-year CSX career focused on the kind of big-picture issues of economics, public policy and government he would face as Treasury secretary, taking prominent roles in such groups as the Business Roundtable and the Conference Board. But that management model, current and former associates say, sometimes placed too much trust in people at CSX who, resentful of Snow's tight budgets and lack of attention to the nitty-gritty of railroading, sometimes left him out of the information loop.
"John doesn't plan ahead," said one official, "He reacts to the moment. But he's brilliant, he's smart and personable. He's used to getting himself out of the things he gets into."
The White House has yet to formally nominate Snow for Treasury secretary, much less forward to the Senate the detailed background information necessary before confirmation hearings can be scheduled. Republican and Democratic investigators on the Senate Finance Committee say they plan a vigorous inquiry not just into Snow's personal background and tax returns but also into CSX's.
"Given the atmosphere, post-Enron and all, where we would have gone into just A and B of his background, now we'll also look at C and D," a Republican finance aide said.
Under Snow's tenure, CSX has paid no federal income taxes in two of the past four years -- and in fact, obtained $150 million in rebates largely through equipment depreciation credits -- despite reporting pretax profits of more than $1 billion during that period. Over that same period, Snow took in more than $36 million in compensation, not including a $24 million loan taken out to buy stock that was later forgiven after the stock price dropped.
Usually, the committee demands a nominee's personal tax returns for the previous three years. This time, investigators say they will also look at CSX's tax records over that time. They have already requested information on the loan that was forgiven.
Incoming Senate Finance Committee Chairman Charles E. Grassley (R-Iowa) had hoped to hold confirmation hearings the week of Jan. 13, a committee aide said. But they are likely to be pushed back to the week of Jan. 27.
A New Track
Snow never planned on going into corporate management, according to friends. He was a college professor and a private attorney before he joined the Transportation Department under President Gerald Ford. As a deputy undersecretary of transportation, he became the administration's point man on transportation deregulation, helping push through Congress the first of a series of railroad deregulation bills in 1976.
When he left government in 1977, after the Carter administration took office, he planned on joining a law firm. But Hays Watkins, then president of Chessie System, the predecessor to CSX, persuaded Snow to join the company as vice president for government relations in Washington. Watkins believed that economic deregulation was the answer to railroading's problems, and he wanted a true-believer ally inside an industry whose own officials were skeptical of the concept.
Watkins became Snow's enthusiastic mentor, promoting him through a series of positions until Snow became president of CSX in 1988 and succeeded Watkins as chairman in 1991. Watkins was smitten with Snow's intellect, but one former CSX official said Watkins had one fear about Snow: "that he had too many fish to fry" and would not manage the railroad.
Snow, who has refused interview requests since his nomination, "viewed the world from 44,000 feet," as one associate put it.
Snow believed there were two kinds of chief executive: the micromanager who dampens creativity in his managers, and the leader who allows his managers to manage even though there might be slip-ups from time to time, said Tom Hoppin, a retired CSX vice president.
Rather than immerse himself in the nitty-gritty of CSX's many businesses running trains, sailing ships, navigating rivers and operating ports, Snow believed in exercising power over the CSX interests from corporate headquarters in Richmond through their budgets, limiting the main office's roles to "policy, planning and policing," Hoppin said. All of CSX's business units, which included ocean-shipping giant Sea-Land Services and resorts as well as the railroad, were based elsewhere.
The CEOs of all these units met with Snow at least once a month. Then, at least quarterly, Snow and his team would visit the headquarters of the various units and spend a day or more going over operating and financial information in detail.
Otherwise, Snow spent much of his time on outside activities, such as working the political and regulatory corridors of Washington and state and foreign capitals. A scratch golfer, he gained membership in the exclusive Augusta National Golf Club, and often schmoozed politicians and other important guests on the fairways of the Greenbrier, the CSX-owned resort in West Virginia. "John was probably out of Richmond 41/2 days a week," Hoppin said.
Snow was excited by big new ideas, and new ways of using old-line industries like railroads. International trade, and how it could be built by linking ocean shipping, rail, truck and air, was a continuing interest.
At the Business Roundtable, his first major committee assignment was to lead a study on the importance of a balanced budget. Oddly, one of Snow's first assignments for Bush will be to sell an economic policy that does not contemplate a balanced budget.
Snow never hid his desire to return to government someday; in fact, his employment contract specified that he could leave to return to public service, and it was recently amended to give him a big payout if he did so. After his intended nomination became public and attention was focused on the payout, Snow announced he would forgo some of it. According to a CSX source, Snow will not take pay and benefits worth $15 million that could have been awarded by the company's board. Snow will still receive $5 million to $7 million toward the purchase of a life insurance policy because that "was previously earned," the source said.
"John was more interested in the role of a statesman, preparing himself for a Cabinet post," said Rush Loving, a Baltimore transportation consultant who worked with Snow off and on for many years.
But even as he cultivated friends in government, politics and industry, Snow often seemed oblivious to a growing resentment among the old-line managers at the railroad's headquarters in Jacksonville, Fla. To them, Snow was intent on milking the railroad for cash to prop up CSX's other businesses -- even though Snow in fact later sold many of those other units.
The relationships with labor were no better. CSX unions had grown weary of a militaristic style of railroad discipline that fostered bitterness and unrest, and that the unions believed was jeopardizing safety as well.
The safety problems of 1996 and 1997 ranged from the serious -- the collision of a Maryland commuter train with Amtrak's Capitol Limited at Silver Spring that killed 11 on Feb. 16, 1996 -- to the borderline comical.
On July 8, 1997, a northbound CSX freight train derailed in Arlington, just south of the Long Bridge over the Potomac River, and sideswiped an Amtrak passenger train. No one was hurt seriously, but the cleanup and replacement of a destroyed signal system caused serious delays at Amtrak and Virginia Railway Express for a month.
This was a preventable accident, officials said. Other train crews had noticed a truck trailer out of alignment on a CSX flatcar as far away as Rocky Mount, N.C. At Richmond, CSX's yardmaster examined the trailer and decided it was sufficiently secured to keep moving.
Between Richmond and Arlington, the trailer began to lean more severely. When two other CSX train crews issued warnings, the crew on the northbound train merely replied that management had checked it out. As the train went through switches at the south end of the Long Bridge, the trailer toppled over into the side of the passing Amtrak train.
At Garden City, Ga., on Oct. 9, 1997, an Amtrak train traveling on CSX tracks rammed into a truck that was stuck on a crossing. Police had advised CSX dispatchers responsible for monitoring the tracks 20 minutes earlier of the stalled truck, but a dispatcher ordered trains stopped on the wrong line.
One federal regulator said the incompetence exhibited by the wreck persuaded him that something was fundamentally flawed.
The confirmation of that came just a week later. In a report, the Federal Railroad Administration said it found overworked employees, track and signal defects and deteriorated communications lines, adding that it was "imperative" for senior management to address the shortfalls.
The next day, Snow hired James Schultz, the railroad administration's safety chief, as CSX's safety vice president, after what Schultz now remembers as a "whirlwind" day of negotiations. Schultz said the offer actually came shortly before the report was presented, but that Snow knew how bad the report was going to be.
Snow gave Schultz two charges: Change the company's safety culture and change its labor-management culture. In truth, the two were so intertwined that one could not be done without the other.
"John changed the culture of the company as a result," said Loving, the Baltimore transportation consultant. "He gave him [Schultz] a blank check."
There was some initial suspicion that CSX hired Schultz to get him off the railroad's back, but Schultz quickly dispelled that notion. Among other things, Schultz instituted a new discipline policy that emphasized learning from mistakes rather than punishment.
Snow and CSX President Pete Carpenter, a railroad man, made it clear to the railroad managers that Schultz was speaking for them, and that anyone who resisted might end an otherwise promising career. With union officials, Schultz said, there was no resistance: They were eager for a change.
"We built a relationship with CSX that rivals anything else we've ever had in our history," said James Brunkenhoefer, legislative director for the United Transportation Union.
Tested by Conrail
Snow's greatest challenge at CSX has been the aftermath of the bitter and costly battle with rival Norfolk Southern Corp. for Conrail, the northeastern railroad formed and financed by the federal government in 1976 from the lines of the Penn Central and other bankrupt railroads.
Over time, Conrail became so profitable that Norfolk Southern made several efforts to acquire it. Snow had consistently downplayed Wall Street speculation about merging with Conrail.
But one day, Conrail Chairman David LeVan visited Snow. Weary of fighting off advances from Norfolk Southern, LeVan offered to place Conrail in CSX's hands, saying he felt the cultures of their two railroads would fit better. Snow saw the opportunity to expand into the Northeast, the largest consumer market on Earth, and turn CSX into the country's largest railroad. He also saw the public-policy potential in using the massive rail system to get trucks off the region's clogged highways.
Snow worked with a secrecy that would do a spy novel proud. On Oct. 11, 1996, an e-mail went to all occupants of the CSX headquarters building in Richmond. On Sunday, Oct. 13, it said, no one could enter the building because tests would be conducted "that will include the use of X-rays and other equipment."
There were no X-rays. Instead, members of the board sneaked into the building through back entrances to vote on making a bid for Conrail. Snow even hired an out-of-town caterer for lunch on the theory that its employees would know no one in Richmond and would therefore not start rumors.
CSX made its bid, but Snow miscalculated the ferocity with which Norfolk Southern would fight back. "John thought we'd be a bunch of timid southern gentlemen," said a high-ranking Norfolk Southern official who did not want to be named.
In the end, following a long and bitter battle, the two railroads split Conrail's assets almost equally, but both were saddled with debt by the inflated $10.5 billion price for a property valued a few years before at about $2 billion.
Following the complicated Conrail split in the spring of 1999, service at both railroads deteriorated. Shipments fell behind schedule and yards became backed up. But at CSX the deterioration was so slow -- and the reports to him by railroad managers so rosy -- that Snow apparently did not know how bad it had become. On Dec. 1, Snow got a rude awakening.
Linda Morgan, then chairman of the Surface Transportation Board, the regulatory body that had approved the merger, called Snow after CSX officials in Jacksonville failed to react to her warnings of deteriorating operations.
"I said, 'John, your railroad is going in the wrong direction, and if you don't do something about it, I will have to,' " said Morgan, a Democrat who was replaced last week as chairman but remains on the board.
Morgan said she remembers Snow saying, "You know, we aren't doing as well as we should have. You're right."
"I think he had some sense of the problem, but he didn't know the extent or what to do about it," Morgan said.
Morgan said she learned over the next few months that Snow is a good listener and that when he knows there is a problem, he acts. "I really credit John for responding to my call," Morgan said.
On April 11, 2000, Snow fired the top three officials at CSX, starting with President Ronald J. Conway.
Snow was swayed by Morgan, by the clogged yards he discovered, and by a depressed stock price. But the final straw might have been yet another negative safety report, this time on track conditions.
The railroad administration report said many areas of the company's 22,700-mile rail system had rails spread too wide, marginal crosstie conditions, rail failures, worn rails and switches, and water-saturated subgrades.
Several officials say the preoccupation with integrating the Conrail operations meant that no one at the top was paying attention to how CSX track had deteriorated. It was a classic industrial problem -- defer maintenance for a while to squeeze costs with the idea of catching up later, only to discover that deterioration has gone too far.
CSX safety vice president Schultz said he had watched the deterioration in frustration. "He was not always served well by some of his employees, and he may have waited too long to step in," Schultz said of Snow. In fact, Schultz said, Snow trusted his railroad officials so long that "they almost cratered the doggone railroad."
Conway had not been in charge long enough to be blamed for the track conditions. But Snow was said to be furious that Conway kept several railroad administration officials waiting on March 14 to see him, then dismissed their concerns. Federal Railroad Administrator Jolene Molitoris called Snow a few days later.
Snow had picked Conway specifically because he came from Conrail. He'd wanted to show this was not a CSX takeover but a blending of two railroads. Firing Conway was difficult, one of Snow's friends said. "He doesn't like to do bad things to people," the friend said. "He's not a chainsaw kind of guy." Conway declined to comment.
When he did move, Snow proved he could immerse himself in the daily details of railroading, even if it was not his preference. He took charge personally, spending most of his time in Jacksonville and running day-to-day operations as he had done for several years earlier in his career.
One source said the railroad immediately exhibited "a 180-degree change of attitude" and Snow "was very responsive to us. He was not defensive. He got it fixed."
Federal sources said the railroad seems to be on the way to recovery physically, although recovering from deferred maintenance is neither easy nor fast. The Conrail debt has complicated the effort.
CSX's stock price -- it closed at $28.53 yesterday on the New York Stock Exchange -- is about 50 percent below where it was at the time the merger was completed. And as CSX's struggles have persisted, Snow has come under criticism for his compensation, which is among the highest in transportation industries.
Some of the old problems with poor information flow remain, and, say some CSX officials, they contributed to another embarrassment for Snow after he was nominated for Treasury secretary. Snow had sold 120,000 shares of CSX stock on Aug. 8, shortly after a positive earnings report. Just one month later, the stock fell when CSX announced that slow coal shipments would depress earnings.
CSX sources said no one in Jacksonville had told Snow about the decline in coal shipments over the summer. "John had to go down to Jacksonville and essentially discover it himself," said a CSX official who did not want to be quoted by name.
The timing of Snow's stock sale is now one of several items being examined by Congress.
Loving, the transportation consultant, and many other Snow friends and acquaintances said that despite any management shortcomings, Snow has done a good job of preparing himself for his new role.
United Transportation Union President Byron A. Boyd Jr. has gone so far as to offer to help push Snow's nomination through the Senate. He sent a letter to President Bush calling Snow "a man of high integrity and principle." Michael Sacco, president of the Seafarers International Union, wrote Bush praising Snow for "unwavering fairness and honesty."
And Morgan, who has had plenty of chances to see Snow's weaknesses, nonetheless supports him for the Cabinet post.
"He's not being asked to be a manager," said Morgan. "He is a good salesperson. He puts an intellect at the table. Without a doubt, he is the man for the job at hand."
Staff writer Jonathan Weisman contributed to this report.
CSX Chairman John W. Snow will face Senate Finance Committee scrutiny next month.