The House of Morgan

by Ron Chernow

  In his time, Harry Morgan tried to set the tone and uphold standards at Morgan Stanley. Following family tradition, he gave everyone in the firm a bonus on his twenty-fifth anniversary there, in 1960. “Harry stood for the gentlemanly, principled way of doing business that we felt in those days Morgan Stanley and J. P. Morgan epitomized,” said a former Morgan Stanley partner, Sheppard Poor. At the annual partners’ dinner at the Union Club, he would say, “Gentlemen, the hardest ship to sail is a partnership.”33 In an often greedy business, he presented himself as “brakeman on the Morgan Stanley express train.” Harry prevented the place from degenerating into a haven of the Social Register and perpetuated the Morgan tradition of taking smart, ambitious people from modest backgrounds and turning them into aristocrats. He would say, “We recruit and hire in accord with Morgan tradition—which is to hire people who are brighter than the partners.” Each year, he visited the Harvard Business School and spoke with finance professors about their most promising pupils; he would often conduct initial job interviews himself. Because Harry Morgan also lent money to young people to become partners, he had more than his nominal $2 million in the firm, giving him veto power.

  Though the world’s prestige investment bank, Morgan Stanley seldom appeared in the press. It didn’t promote itself and conscientiously avoided publicity. “It was like a doctor not advertising,” said Perry Hall. To advertise would be “kind of cheap.”34 Investment bankers subordinated themselves to clients and tried to keep their profiles low. There was a huge internal row about whether to put the partners’ pictures into a promotional booklet—an agony resolved in the affirmative after GM chairman Fred Donner said they were all so ugly they would probably scare clients off anyhow. This aversion to publicity was related to the restrained style of competition: if you couldn’t raid other firms’ clients, why bother to advertise? Morgan Stanley’s goal was to freeze the status quo.

  Morgan Stanley did have one form of advertising, however—the tombstone ads listing the members of underwriting syndicates. All Morgan-sponsored issues were printed in Ronaldson Slope typeface. Sometimes, when traveling, Morgan people stuffed Ronaldson Slope type into their pockets, in case local printers lacked the numerical fractions. Prospectuses were always done in royal-blue type. The great Morgan Stanley hobbyhorse was that its name stand alone atop tomb stone ads and that the firm single-handedly manage issues. This enabled it to price issues and allocate shares among participating firms; it also didn’t have to split lucrative management fees with a co-manager. On the rare occasions when Morgan Stanley deigned to join somebody else’s syndicate, it asked that its name be omitted. By managing the huge industrial syndicates, Morgan Stanley shaped the Wall Street pyramid and decreed the relative standing of firms. This produced a self-assurance that partners would describe as pride but competitors would see as arrogance.

  As the Justice Department noted in the Medina suit, syndicate rankings seldom changed for a particular company. If Morgan Stanley expelled a firm from a syndicate, the firm might not regain admittance for a long time. Risks were widely distributed in the 1950s, so firms didn’t need much capital. On big industrial issues, Morgan Stanley might enlist three hundred underwriters and eight hundred dealers, endowing itself with godlike powers. The firm had virtually nothing to do with selling securities and was strictly a wholesale outfit. It had a clerk on hand to sell unsold syndicate shares around the Street, usually at a loss. This was as close as it ventured into the world of trading.

  Nobody could afford to alienate Morgan Stanley, which presided over most of the decade’s record issues, such as the General Motors $300-million debt issue of 1953 and its $328-million stock issue of 1957, the $231-million IBM stock offering of 1957, and the $300-million U.S. Steel debt issue of 1958. These securities didn’t finance speculation or line the pockets of a self-serving management. They went for new V-8 auto engines or a steel plant on the Delaware River or IBM’s expansion into the computer business. At this point, investment banking still functioned according to a textbook model in which capital was tapped for investment, not financial manipulation. Investment bankers were still intermediaries between providers and users of capital, and they considered it unprofessional to function as the “principal” in a transaction. The age of financial engineering hadn’t yet dawned.

  Morgan Stanley’s monopoly of so much of America’s industry made the firm far less adventurous than J. P. Morgan and Company in exploring foreign markets. In the early postwar years, its few foreign financings had a distinctly Anglo-Saxon or European bias. It sponsored large issues for Australia and Canada, smaller ones for France and Italy. During the 1950s, Morgan Stanley made only one exception to its sole-manager policy, and that was for the World Bank, where it co-managed issues with First Boston. The names of the two firms alternated in the top-left corner of the prospectuses. Through the World Bank, Morgan Stanley partners believed that they made their contribution to European reconstruction and the Atlantic alliance.

  In the early days, the World Bank was a highly conservative institution. The International Monetary Fund, however—and contrary to its later image—was then feared as a hotbed of left-wing activism. Russell Leffngwell derided it as a “dream child” that would prop up overvalued currencies, and the American Bankers Association lobbied vigorously against its creation. But the World Bank seemed a pillar of sound finance and was congenial to Morgan Stanley. Because the bank depended on U.S. capital markets for money, early World Bank presidents were chosen from Wall Street. In 1949, Eugene Black, formerly a senior vice-president at Chase, replaced John J. McCloy as president. After a brief experiment with competitive bidding, Black (whose son Bill was later a Morgan Stanley executive) chose Morgan Stanley and First Boston as a permanent team to market the Bank’s triple-A-rated issues in 1952. Black later explained his choice: “Morgan Stanley has a close connection with Morgan Grenfell in London, and with the old firm of Morgan in Paris. They had a very fine reputation in Europe.”35

  In selling the World Bank to investors, Morgan Stanley and First Boston faced a formidable job. Its very name—the International Bank for Reconstruction and Development—was a mouthful. There were fears—noted earlier—that it might repeat the foreign lending disasters of the 1920s. To promote the bank, Morgan Stanley and First Boston organized huge syndicates of up to 175 underwriters, put on road shows, published booklets, and even seconded people for brief stints at the bank. Morgan Stanley got a critical guarantee that World Bank bonds were backed by America’s capital contribution and were therefore as good as obligations of the U.S. Treasury itself. Morgan Stanley partners always took immense pride in the World Bank account, which marked the summit of the firm’s success: they were banker to the world’s bank, a big enough honor to satisfy even the most swollen Morgan ego.

  IN the 1950s, the City of London hadn’t yet awakened from its Depression slumber. It was stuffy, inbred, and unimaginative, feeding off past glory. England had lost a quarter of its national wealth in defeating Germany and couldn’t function as a world banker. It had lost Italy to the Marshall Plan and China and Eastern Europe to the Communists. Its old foreign clients were fair game to be picked off by Wall Street firms: in 1946, Dudley Schoales of Morgan Stanley snared the first postwar loan to Australia—already a J. P. Morgan client in the 1920s—and the firm sponsored Qantas Airlines two years later.

  The City was hobbled by exchange controls and a weak pound. Under the postwar Anglo-American Loan Agreement, the United States lent Britain $3.75 billion to cover its payments deficit. In exchange, Britain was supposed to make sterling convertible to other currencies by July 15, 1947. The attempt failed abysmally as investors rushed to dump pounds for dollars. Speaking at the Lord Mayor’s Dinner in October 1947, Lord Catto, governor of the Bank of England, ruefully reviewed this blow to British pride: “Confidence was returning; sterling balances were being more and more freely held in London as in the days before the war. . . . At any rate, we were obliged to try.”36 The sterling mark
et was largely shut to foreigners until Margaret Thatcher dismantled exchange controls in 1979. In its century-long contest with the City, Wall Street had won hands down.

  Like most places of obsolete splendor, the City was full of charming eccentricities. At one merchant bank, incoming mail was laid on a table each morning so partners could scan each other’s correspondence. At N. M. Rothschild’s townhouse, partners shook little bells marked “butler” when they sought refreshment. At the manorial Hambros, senior people were called Mr. Olaf or Mr. Charles. Self-respecting merchant bankers still wore bowler hats and carried furled umbrellas; their reading glasses were always crescent-shaped. Junior men wore stiff collars and were considered dangerously uppity if they let them soften. In this conformist world, when a Lloyds Bank chairman appeared in black suede shoes, people buzzed for days about the frightful lapse in taste.

  With slightly over one hundred employees, Morgan Grenfell emerged from the war in relatively strong shape. In U.S. banking terminology, it was a cross between a commercial and an investment bank, underwriting bond issues but also managing pension funds and making loans. Like Morgan Stanley, it seemed to have a monopoly on major industrial accounts. In 1945, it sponsored the first postwar share issue and floated debt for virtually every British electric company, including Associated Electrical Industries and British General Electric. It also handled denationalization of steel companies—the legacy of Teddy Grenfell’s work with Monty Norman to rationalize the industry in the 1930s—and participated in World Bank issues. But the firm was softened by prewar success. The partners (technically directors) had a lazy, custodial attitude toward accounts and wouldn’t dig up new business or stir from their chairs. When they disappeared to Boodle’s or Brooks’s for lunch, they might return—or they might call it a day. Rod Lindsay, a later Morgan Guaranty president who apprenticed at Morgan Grenfell, recalled the somnolent mood: “By Thursday afternoon at four, one of the senior partners would come across to the juniors and say, ’Why are we all still here? It’s almost the weekend.’ ”37

  J. P. Morgan and Company still held a passive, one-third share in Morgan Grenfell. It was the only foreign bank with a sizable stake in a merchant bank on the elite Accepting Houses Committee. Lacking a London office, J. P. Morgan and Company used the firm as its U.K. branch equivalent, and the two houses traded apprentices and clients. When Esso mapped out big postwar expansion plans for refineries in Western Europe, 23 Wall Street steered the company to Morgan Grenfell. Ditto for Procter and Gamble, Monsanto, Inco, Alcan, and General Foods. After stepping down as Bank of England governor in 1949, Tom Catto took a desk back at Morgan Grenfell (though he didn’t resume his partnership) and extended the special access of both J. P. Morgan and Morgan Grenfell to the Bank of England.

  Morgan Grenfell was so heavy with peers that it was derided as the House of Lords (in sometimes sniggering tones) by its J. P. Morgan counterparts. In a caste system common in the City, partners were drawn largely from family members, with only Sir George Erskine, a brilliant, driving Scots banker, rising from the managerial ranks to become a partner. (By no coincidence, he was the best banker.) The aging Lord Bicester—Vivian Hugh Smith—reigned, somewhat terrifyingly, as senior partner, and his authority was unquestioned until his death, in 1956. He treated other partners like errand boys as they rushed in and out to get his approval. Everybody called him the Old Man. He was a sphinx who kept his own counsel and never tipped his hand. During eighteen years in the House of Lords, he never delivered a speech. Once, on a deadlocked charity board, he was asked whether he favored a proposed measure. “No,” he said, then added, “Or have I said too much?”38 To be interviewed for a job by Bicester was to endure an array of skeptical snorts, grunts, and harrumphs.

  Even when he was in his late seventies, Vivian Smith wouldn’t pass the reins to his son, Rufus, who had patrolled on the roof of 23 Great Winchester Street during the wartime buzz-bomb raids. Rufie was relegated to a sad Prince of Wales role. A portly man with a jolly well-fed look, round-faced and mustachioed, he acted the grandee: he was the sort of large, stately man who would rap on doors with the knob of his cane. He loved steeplechase horses and hunting and tossed off whiskey by the tumblerful. Like his father, he had connections everywhere. He served as a director of Shell, Vickers, and AEI and also sat on the Court of the Bank of England. His wife, Lady Helen, was a daughter of the earl of Rosebery.

  Rufie was cowed by the thunderous presence of the Old Man and patiently suffered a marathon apprenticeship lasting well into late middle age. In the late 1940s, Sir Edward Peacock, the senior partner of Barings, told Russell Leffngwell how the Old Man was pleased that Rufie had taken the lead in a Shell financing and proven himself as a good, sound fellow.39 Yet Rufie had already been through two world wars! In 1949, Lord Bicester relented and let his son take part in a major steel business. “Oh well, the boy’s got to learn sometime,” he sighed.40 The boy was then fifty-one and had been a partner for almost twenty years.

  In the City of the 1950s, with most business revolving around relationships, Morgan Grenfell was hard to match. It was the City’s major portfolio manager for the Vatican, thanks partly to the flamboyant, multilingual Francis Rodd (the second Baron Rennell), son of a former ambassador to Italy. A portly, snuff-taking man who blew his nose into a big red handkerchief, Rodd was a protege of Monty Norman’s and a former British manager of the Bank for International Settlements in Basel. As a close friend of T. E. Lawrence (Lawrence of Arabia), he was once asked by Monty Norman to recruit Lawrence as secretary of the Bank of England. (Lawrence declined.) Rodd himself was spirited away to Morgan Grenfell by his father-in-law, Vivian Smith, in 1933.

  Assigned to Harold Macmillan’s wartime staff in 1943, Rodd was made chief civilian aide to Sir Harold Alexander, who administered occupied territory in Italy. Left-wing commentators criticized the choice, noting that Morgan loans had propped up Italian fascism and warning that Rodd might help to give former fascist finance officials a voice in postwar Italy. Nevertheless, Rodd acted ably to alleviate hunger and sickness in liberated Naples. Macmillan thought Rodd a prima donna and an intriguer but also praised him as “quick, intelligent and persistent.”41 So long as Rodd was around, the Vatican business stayed in Morgan Grenfell’s hands.

  The chief partner for portfolio management was Wilfred William Hill Hill-Wood, who provided Morgan Grenfell with entree to Buckingham Palace. A shrewd, entertaining fellow and a brilliant cricketer, Hill-Wood had served as intermediary between Morgan Grenfell and 23 Wall. Like Jack Morgan, he was a close friend of George VI. “Uncle Willy became friends with George VI at Trinity College, Cambridge, and the king asked him to look after some of his personal finances,” said his nephew Sir David Basil Hill-Wood.42 Hill-Wood reported regularly to the king on his finances, keeping details of the account to himself. His friendship with George VI guaranteed that when Elizabeth became queen in the early 1950s, Morgan Grenfell would manage a significant portion of her wealth as well. The queen was amused by Willy and apparently on easy terms with him. When she knighted him at Buckingham Palace, she took the sword from behind the curtain, tapped him, and then whispered slyly, “You can get up now, Willie.”43

  Rich in memorabilia, Morgan Grenfell’s atmosphere in the 1950s was antiquated. Partners sipped sherry by coal fires while young clerks on tall stools copied accounts into large bound books. These victims of the “fagging system” didn’t emerge into adulthood until about age forty, by which point many were thought brain dead. Sexual segregation at Morgan Grenfell was strict. To mask their sexuality “tea ladies” were required to wear linen dusters around the office and leave their jobs when they married. Nomenclature was highly revealing: the firm called itself a countinghouse and directors were partners; it was listed under “merchants” in the London telephone directory.

  The thunderclap that roused the City from this profound torpor was Siegmund Warburg’s first hostile raid in the famous aluminium war of 1958-59. To understand the furor, it is neces
sary to note the City’s cultural homogeneity. It was a hermetic world of men who had passed through Eton and Oxford, Cambridge, or the Guards and met at Lord’s or Wimbledon on weekends. Shot through with class barriers, the City made upward mobility all but impossible for foreigners. From an eminent Hamburg banking family, Siegmund Warburg had fled Hitler in the 1930s and started a merchant bank in 1946. As a Sephardic Jew with a German name and a German accent, bored by shooting and yachting, he seemed to grate on City bankers. One merchant banker admitted, “Siegmund’s Jewishness was a problem. He was a little too Jewish, as they say in the City.”

  Warburg was an unlikely revolutionary who followed all the old merchant-banking folkways. He posted no nameplate, opened no branch offices, and valued personal contacts. But he was always an activist, an innovator, and he would quote Dwight Morrow, whom he had met as a young man in the 1920s. “The world is divided into people who do things and people who get the credit. Try if you can to belong to the first class, there is far less competition.”44 In his Belgravia apartment were books in six languages, and he said he would rather hire someone steeped in George Eliot than someone steeped in banking. His use of handwriting analysis for recruiting employees added to his eccentric image.

  While Morgan Grenfell floated through long, pleasant lunches, Warburg ran a firm disciplined in Prussian punctuality. Some Warburg people sat through two lunches—one at 12:30, one at 1:30—to maximize the business they conducted. Young recruits arrived early, stayed late, and worked weekends, while young Morgan Grenfell men were out shooting blizzards of birds from the sky. Warburgs, significantly, was the first firm to scrap the bowler-hat-and-umbrella costume in favor of modern dress.

  With a cool outsider’s perspicacity, Siegmund Warburg saw that the City disliked unpleasantness and would tolerate mediocrity just to avoid a row. This wasn’t surprising, with so many family-run banks and such extensive intermarriage in the City. Warburg also saw that merchant banks no longer had the capital to finance industry or government on a large scale. In the advisory area, by contrast, small capital was no handicap. “In the sense that bankers provide money for industry, they’re becoming less important,” he said; “but in the sense of being consultants—what I call ’financial engineers’—they’re becoming much more important.”45 This was the critical insight of the Casino Age, the idea that would push merchant bankers from the staid world of securities issues into the piratical world of takeovers. The merchant bankers would no longer hand out free merger advice to preserve underwriting relationships. Before Siegmund Warburg was through, the “stuffy” City would be rife with marauders.