The Warburgs

by Ron Chernow

  The European

  Siegmund Warburg had joined Kuhn, Loeb in a junior status, then his stature had risen in an almost vertical line in London. Nonetheless, his celebrated triumph with British Aluminium drew yawns from many self-satisfied Kuhn, Loeb partners. Relaxing at his Virginia horse farm, Freddy Warburg heard grousing from London friends and said Siegmund should have compromised. John Schiff, who avoided controversy, said the financial world hadn’t seen such bitterness since Jacob Schiff and Pierpont Morgan vied for the Northern Pacific Railroad in 1901.1

  In the early 1950s, Kuhn, Loeb had seemed a wondrous asset to Siegmund. After British Aluminium, he didn’t need it so desperately. With his firm soaring into the stratosphere in London, he couldn’t afford to spend so much time on Wall Street. His new London eminence also persuaded the paranoid camp at Kuhn, Loeb that he intended to dominate them. Constant friction frayed relations between S. G. Warburg and Kuhn, Loeb as the two firms couldn’t decide whether to compete or cooperate. Since they were only engaged, not married, the temptation to cheat was always strong. Each side claimed to bring more business to the party than the other and wished to be rewarded accordingly.

  To arbitrate disputes, the two firms agreed to hold twice-yearly summit meetings. In 1961 Siegmund also proposed that they exchange small holdings in each other—before he was the sole link—to bridge the differences between them.2 This arrangement didn’t quiet the churning waters and in 1962 Siegmund suggested an end to it.3 It was an artificial, jerry-built structure and destined to collapse.

  The rickety structure took a mortal drubbing during the summer of 1962 when the U.S. Treasury secretary, Douglas Dillon, told an international banking conference in Rome that America wanted to staunch the flow of its gold reserves abroad. To this end President John F. Kennedy enacted an Interest Equalization Tax (IET) in 1963. By making it prohibitively expensive for foreigners to raise money on Wall Street, the tax pushed business to London and other European capitals—in other words, to Siegmund’s home turf. Many Kuhn, Loeb partners feared that Siegmund would exploit the situation. Their fears seemed to be confirmed; reports filtered back to Wall Street that bright young S. G. Warburg executives were telling Kuhn, Loeb clients that S. G. Warburg & Co. would serve them and save them. Even some Kuhn, Loeb partners sympathetic to Siegmund became disillusioned, for they believed they were quite capable of placing issues abroad.4

  Even before the IET, there had been personality clashes between Kuhn, Loeb and S. G. Warburg people. One irritant was Ronnie Grierson, a young protégé of Siegmund’s and probably the first of his surrogate sons. Born as Griessmann to a Jewish family in Nuremberg, he had been educated in France and Britain. After joining the British Army during the war, he changed his Germanic name and served with distinction. At the start of the war he was interned by the British then imprisoned by the Germans at the end. This very Warburgian character became a British citizen in 1946 while keeping his German passport. “I happen to be a German who is loyal to Britain,” he would say.5

  Bright, witty, fluent in several languages, Grierson was Siegmund’s court jester and a foil to the dour uncles. A social butterfly, he knew all the lords and ladies and made the social rounds shunned by Siegmund. Siegmund loved Grierson’s hilarious accounts of his nocturnal escapades. If you wanted to know the gossip, he would say, just ask Ronnie Grierson. Grierson treated Siegmund with just the right blend of flattery and respect.

  Touched by Grierson’s devotion to his refugee German mother, Siegmund defended him against critics. For Siegmund, his adopted son could do no wrong. Yet Grierson’s swaggering flamboyance rubbed many people the wrong way. To critics, he seemed too loud and self-promoting, too quick to flaunt his connections or drop names. A strong, rather theatrical personality, he could be whimsical one moment and explosive the next and he tended to make friends and enemies very quickly. When Grierson lost his temper with the Kuhn, Loeb partners, generating tension, Siegmund stuck by him, telling one Kuhn, Loeb partner, “I will destroy anybody who criticizes Ronnie Grierson.”

  ——

  Siegmund and Eva Warburg with their son-in-law Dov Biegun, and granddaughter, Batya, in Roccamare, Italy.

  (Private collection)

  After the IET, Siegmund’s foes at Kuhn, Loeb argued that the two firms had an inescapable conflict of interest since Kuhn, Loeb’s American clients would now seek financing in Siegmund’s backyard. They predicted that Siegmund would steer business to his London firm ahead of Kuhn, Loeb. Pretty soon the arrangement began to unravel. Seeing an end to his dream of restoring Kuhn, Loeb’s glory, Siegmund was heartbroken. He had devoted years to the firm of Paul and Felix Warburg, introducing many foreign clients, and hiring many young associates. Siegmund grew so despondent about the divorce that Henry Grunfeld flew secretly to New York to confer with John Schiff at his huge Oyster Bay estate. They talked from five one afternoon until three in the morning, trying to salvage something. While sympathetic to Siegmund, Schiff explained that he couldn’t flout his own people. The situation could only be saved, he said, if Siegmund moved to New York and worked full time at Kuhn, Loeb. That was as impossible as it had been in the early 1950s when Schiff first proposed it.

  Trying to strike a brave note, Siegmund said that Kuhn, Loeb and S. G. Warburg could now go their separate ways with greater freedom. As Freddy said to Eric, “Between you and me and the lamp-post, I agree with him.”6 By the end of 1964, the two firms had formally parted. The following July Siegmund opened a subsidiary office in New York and hired David Mitchell, son of a former J. P. Morgan & Co. partner, to run it. Siegmund knew the Morgan bank’s anti-Semitic history and it must have tickled him to hire the offspring of a partner.

  The lesson of the Kuhn, Loeb debacle seemed to be that Siegmund could serve as a king but not as a prince. In London, he worked with German and Austrian refugees who implicitly shared his values, were schooled in his ways, and deferred to his leadership. His challenging ideas didn’t please rich American partners, who preferred the status quo to the intense team effort sought by Siegmund.

  Far from cooling his ambition, Siegmund’s failure at Kuhn, Loeb heightened his need for success in America. He had some nagging sense of inferiority beside such Wall Street barons as André Meyer and Robert Lehman. New York was a formidable place to penetrate, and Siegmund overestimated the mystique of the Warburg name. Through shrewd legerdemain, he tried to project an aura of great power, and David Mitchell would talk of peddling “bottled mystique.”7 Siegmund lacked the enormous capital needed to make headway in New York. Once again, he wanted to harness other fortunes and manage them under his own name and leadership.

  In November 1963, Siegmund had lunch in New York with J. Richardson Dilworth, who now managed the Rockefeller family money, and George Love, the chairman of Chrysler and Consolidation Coal. In a prophetic vein, he conjured up a potential business union of American and European talent. He dreamed of taking pools of transatlantic money, leveraging them, and taking stakes in companies. The corporate executives would contribute “financial engineering”—a phrase Siegmund relished—to revamp the laggard companies.

  The three men agreed on an action plan. Dilworth would approach David Rockefeller, Love would pursue the Mellon and Hanna families, and Siegmund would scour Europe for investors. The lunch became grimly memorable when the ma&ître d’ came over to announce, “Gentlemen, you should know the President has been shot.”8

  Five years later, Siegmund’s inspiration was realized in a venture called American European Associates (AEA). It was run by a genial young man named Carl Hess, who liked the way Siegmund blended imagination and down-to-earth practicality. However, he disliked Siegmund’s German sense of hierarchy and the air of grandeur he sometimes wore.

  After taking five million dollars from Kommerzbank and five million from the Rockefellers, then adding Du Pont and Harriman money, Siegmund established AEA in the same building at 640 Fifth Avenue that housed his New York office. The two operating partners were S.
G. Warburg and Laird & Co., each contributing one million dollars. As if Siegmund suffered from some jinx in New York, AEA at once ran into serious trouble. Laird went bankrupt, tying up money in court proceedings. And when AEA made its first investment in a Los Angeles recreational equipment maker, The Leisure Group, the company promptly reported an embarrassing loss.9

  With so much pride and frustrated ambition invested in his Wall Street comeback, Siegmund couldn’t bear another setback and he took out his anger on Hess, whom he saw as ruining his splendid concept. Hess hadn’t exactly covered himself in glory with AEA, yet he felt that Siegmund’s punishment was excessive. Though Siegmund wanted to fire him, Hess had an ironclad employment contract, which Siegmund took home nightly and scrutinized for loopholes.10 When that approach failed, Siegmund turned up the heat. One day, Hess was shocked to learn that the London headquarters had ordered a stairway built between the AEA offices on the 15th floor and the S. G. Warburg office on the 16th. When Hess wouldn’t accept this back-door maneuver, Siegmund ordered him to London with another executive, insisting they take separate planes.

  In London, Siegmund said flatly that he wanted to merge his New York office and AEA. Referring to the stairway, Hess said he had no desire to be subordinated to S. G. Warburg’s New York office. Siegmund couldn’t brook such defiance, got extremely upset, and started wagging his finger in Hess’s face. “We have the power to compel this,” he said. “We have the power to make you do this. We have the power to destroy Carl Hess in the financial community.” Hess shrugged and said coolly, “Everybody has to die someday, Siegmund.”11

  Withdrawing the Rockefeller and Kommerzbank money from AEA, Siegmund sent Eric Roll to New York to announce that the experiment was being wound up. Hess had lined up a powerful ally in Chrysler chairman George Love, who said to Roll, “Tell Siegmund that he owes one to this bald-headed man.”12 Because Chrysler was a major client, Siegmund couldn’t afford to antagonize Love. So AEA bought out the S. G. Warburg stake at ten cents a share. Having badly bungled his maiden venture, Hess soon hit his stride. By the late 1980s the AEA shares had zoomed to $150, as it evolved into a billion-dollar club for retired Fortune 500 CEOs who invested their money to restructure companies. With his usual flair for innovation, Siegmund had devised a marvelous idea. Had he stuck with it, he might have gratified his Wall Street aspirations. Instead, he let a vision of transatlantic cooperation fall victim to a power struggle.

  —

  Starting with his early days at M. M. Warburg & Co., Siegmund had specialized in international securities issues. In postwar London he had been hampered by capital controls. Now, in the early 1960s, Siegmund would help to rejuvenate London as a world financial center, lavishly repaying Britain for its hospitality. In creating the Euromarkets, Siegmund would again inject tremendous dynamism into a lethargic London scene.

  The Euromarkets would give Siegmund a chance to reverse many earlier disappointments. After the war, he had vainly urged Britain to join the Common Market, lobbying Jean Monnet and Konrad Adenauer for a central British role. “They would have gone down on their hands and knees and would have thanked the British in the first five postwar years if they would have agreed to lead a united Europe and to make London its capital city,” Siegmund recalled.13

  Now, through the private markets, he was about to accomplish something that would bring closer his vision of an integrated Europe. With the pending imposition of the Interest Equalization Tax in America, Siegmund consulted both the Bank of England and the Bundesbank about creating a new global market in London to supplant New York. This new market would issue Eurobonds, using three billion surplus dollars that had circulated in Europe since the war. While British investors would supply a small portion of the money, this new, extraterritorial market would float, like a small, foreign island, in a sea of domestic business. When the British and German central banks expressed support for such a move, Siegmund quickly formed an in-house team to explore ways to accomplish it.

  The new business played to S. G. Warburg strengths. As Sir David Scholey recalled, “The development of the Eurobond market was fascinating because there were people in our firm, such as Siegmund and Gert Whitman and Eric Korner and Henry Grunfeld, who had been active participants in the international bond market of the ’20s and ’30s.”14 While other firms saw the new market as transient and experimental, the S. G. Warburg people correctly guessed that it represented an enduring revolution. Siegmund lacked the capital or distribution networks for these securities, but he knew how to offset his weakness by forming strong syndicates. He would sit day and night at the phone, dialing the world over until an issue was fully placed. Having done foreign issues at Kuhn, Loeb in the 1950s, he knew that as much as 90 percent of those issues had been placed with European banks and so when he made his telephone calls, he had the best black book in the world.

  In January 1963, S. G. Warburg and Deutsche Bank were ready to launch the inaugural Eurobond issue for the European Coal and Steel Community. When the ECSC decided to postpone the issue, Siegmund launched the market instead with a fifteen-million-dollar, six-year loan for the Autostrade Italiane, which built and maintained the Italian highways. The historic deal was signed on July 1, 1963. (The real recipient of the money was the steel-making company Finsider, a sister subsidiary of the Autostrade in the state-owned IRI conglomerate.) It was the first foreign industrial loan issued in London in a generation and in several ways was a landmark. To eliminate a 4 percent stamp tax on the transaction, Siegmund had the bonds listed in Luxembourg. This imaginative issue was therefore signed in Holland, under English law, for an Italian borrower, with the loan quoted in Luxembourg, and paid in American dollars.15 It didn’t sell particularly well—Italy wasn’t a special favorite of investors—but for a self-styled world citizen who had inveighed against nationalism since Hitler, this new borderless world of finance was a refreshing tonic to the spirit.

  In developing the new market, Siegmund wanted to avoid dogma or conventional thinking. After his Autostrade coup, he followed with issues for the ECSC and the city of Oslo. (Oslo—a Kuhn, Loeb client—gave the business to Warburgs on the mistaken assumption that it was still tied to Kuhn, Loeb.)16 Then Siegmund asked: Why must payment be made in dollars or any single currency? Why couldn’t investors have the option of choosing among different payment methods? After getting the go-ahead from the Bank of England and the Bundesbank, Siegmund issued a bond for the Communist city of Turin in which payment could be taken in sterling or deutsche marks. He followed with option loans for Mobil Oil and the governments of New Zealand and Ireland. Though the Euromarkets didn’t account for more than 10 to 15 percent of S. G. Warburg revenues, Siegmund used them to feed clients to his merger team, giving his firm irresistible momentum. The Euromarkets also brought great renown to Siegmund who had transported the City back to its Edwardian days, when London served as banker to the world.

  Siegmund kept trying to broaden the insular world of London finance. In 1962, he and other bankers visited Japan under the aegis of the Bank of England, and their hosts included the chairman of Nomura Securities. The bustling Japanese captivated Siegmund who praised their “unique mixture of utter discipline and infinite self-criticism.”17 The Japanese, in turn, liked Siegmund’s exquisite manners. By urging German friends to invest 10 percent of their money in Japan, Siegmund recaptured the goodwill that Max Warburg and Jacob Schiff had enjoyed in Tokyo when they financed Japan in the Russo-Japanese War.

  In launching the Euromarkets, Siegmund suffered from one critical deficiency: He lacked a fingertip feel for markets. He therefore relied upon Eric Korner and, even more, upon a man named Gert Whitman. Many people believe that Siegmund never gave adequate credit to Gert in the development of the Euromarkets. Like Siegmund, Gert came from a prominent German family, and the two men had been friends in Germany. Gert’s father, Robert Weismann, was a distinguished state secretary for Prussia, while his heiress mother was a baptized Jew. The Weismanns lived on the Wilhelmst
rasse in Berlin in a massive stone mansion adorned with Chinese art later stolen by the Nazis. In the early 1930s, Siegmund and Eva attended balls at the Weismann home. Through his father, Gert had become a private secretary to Dr. Schacht in 1924, attending the Young Conference with him in Paris.

  In the 1930s, Gert had emigrated to America. After his gilded upbringing in Berlin, exile came as a rude shock, and he grew very depressed. He worked for Lee, Higginson and Harris, Upham and, hoping to improve his prospects, changed his name from Weismann to Whitman. After the war, he worked on the American High Commission in Germany under John McCloy and collaborated with Monnet, Schuman, and Adenauer in creating the European Coal and Steel Community.

  Siegmund often showed flashes of ambivalence toward people from privileged background and Gert was destined to bring out both his admiration and scorn. In the 1950s, Gert helped Kuhn, Loeb with its European work and married a gentile woman from Hamburg named Gretchen. Siegmund coaxed him into coming to London to perform Kuhn, Loeb work from the S. G. Warburg office. After a time, Gert shifted to the Warburg payroll. Unlike Siegmund, Gert was thrilled by fast-moving markets. Endowed with a visionary streak, he frequently expounded his forward-looking plan for a single European currency called the “Eurodukat.”

  A short, witty man with a pink, bald head and blue eyes, Gert was genial and sophisticated. Always well groomed and natty, he traveled first-class, drove a fancy car, and lived opposite Siegmund on Eaton Square. He could also be cynical in his comments and played office politics. For a time, Siegmund was enamored of Gert. Every Sunday morning, they strolled together through the Eaton Square gardens. The Whitmans and the Warburgs often met for dinner and bridge and Gretchen and Eva attended exhibitions and fashion shows together.

  Siegmund had many gripes about Gert: He went to too many parties, was vain and self-important, and wasn’t dedicated enough to the firm. Siegmund disapproved of Gert’s smoking and Gert of Siegmund’s pedantic paperwork. When the uncles flicked on a light outside their office to indicate meetings in progress, Gert used his to steal cat naps. So the potential for trouble always existed, but was offset by Gert’s evident utility.