The House of Morgan

by Ron Chernow

  Preparing for a large metropolis of Tokyo issue, the Japanese went first to First Boston and were so impressed that they accepted them as co-managers. Expecting equally considerate treatment at Morgan Stanley—wasn’t the House of Morgan Japan’s honored friend?—they were coldly and uncivilly rebuffed. “The old-timers in the Ministry of Finance were really horrified,” said Morgan Guaranty’s Loughran, who had to deal with the unpleasant consequences for 23 Wall.50

  Why did Morgan Stanley spurn Japan? The decision contained elements of both business calculation and xenophobia. Morgan Stanley still held to an unswerving policy of managing securities issues alone or not at all, a lucrative form of snobbery that allowed the firm to pocket all management fees. Barging in blindly, the Japanese didn’t realize that their casual decision to accept First Boston first made it impossible for Morgan Stanley to participate without violating its cardinal rule. The sole exception it had made was for the World Bank itself, which doubtless misled the Japanese.

  Why didn’t it make another exception? “The prestige of being banker to the World Bank was regarded as greater than being banker to a defeated country,” explained former Morgan Stanley partner Alexander Tomlinson. “The Japanese didn’t realize what a sensitive subject it was for us. The partners involved in the war weren’t enthusiastic about doing business in Japan anyway. And the older partners had deeply resented the attack on Pearl Harbor. They had a personal relationship with Japan that they felt had been offended.”51 Also, in Western eyes, Japan seemed less of a full-fledged industrial power than a superior version of a developing country. In the early 1960s, it was still the second most heavily indebted country in the world, after India.

  Whatever the business rationale, the Morgan Stanley decision was laced with a subtle racism, for similar objections never stopped the firm from doing business with Italy or Germany. “The Germans somehow converted themselves into nice guys,” an ex-partner said cynically. “All the Nazis seemed to have been purged.” At the time, a single Morgan Stanley partner could blackball a major decision. One partner who was a former fighter pilot made rabble-rousing patriotic speeches invoking Hirohito, Pearl Harbor, the sale of war bonds, and so on. To this day, Perry Hall is unrepentant about the decision: “I wouldn’t do business with the Japanese even now.”52 Although younger partners thought the older ones a bunch of stubborn fools, the latter wouldn’t budge.

  This intransigence was a big problem for J. P. Morgan and Company, which was then trying to wrest big balances from Japan’s Ministry of Finance. Fearing fallout from Morgan Stanley’s insult, international chief John Meyer had long, angry talks with his close friend John Young, who was Morgan Stanley’s senior partner for foreign business. The problem acquired new urgency for Morgan Guaranty after a September 1964 meeting in Tokyo. Morgan Guaranty director, Steve Bechtel, Sr., and his friend General Lucius Clay, former military governor of Germany, prevailed on Meyer to try to open a Japanese branch. Bechtel said Tokyo was becoming a world information capital. More to the point, his own firm planned to open an office there—always strong inducement for Morgans to follow. A decision was made to open a Japanese branch as part of Morgan’s strategic blueprint to establish branches in major world markets and end its Eurocentric bias.

  Japan was then far more closed than it is today, and no bureaucrat cared to accept the political stigma of admitting Morgans. The government felt there were enough foreign banks; approving more was extremely sensitive business. In 1965, Tom Gates, who had fought at Iwo Jima and Okinawa, made an initial presentation for a branch license to Michio Mizuta, Japan’s foreign minister. Even with the Japanese, Gates had a straightforward style; skipping ceremony, he bluntly asked for a branch. Far from settling anything, this meeting was the opening round of a long, dreary battle. For all the bowing and deference to the Morgan name, the Japanese made the bank grovel for twenty-nine months. The Finance Ministry laid down two rules: Morgans couldn’t discuss the negotiations with the U.S. embassy (honored) or with a lawyer (flouted). The talks sometimes seemed to be endurance contests, conducted by the Japanese in an elaborate language of shrugs, sighs, and veiled allusions to nameless difficulties.

  The bank deployed many emissaries and sent international head John Meyer, Jr., for early talks. Meyer, who would follow Gates as Morgan Guaranty chairman in 1969, was the most austere and humorless of the postwar bank chairmen. Tall and granite-hard, he had a bald domed head and huge bushy eyebrows, which the Japanese interpreted as the sign of a great samurai spirit. He seldom smiled as he puffed watchfully, enigmatically, on his pipe. With his elephantine memory and vast experience, he always seemed several steps ahead of everybody else, and his thoroughness at the House of Morgan was legendary. Having started at the Guaranty Company in 1927, he could remember obscure details of railroad bonds from forty years before.

  Unlike the charming Henry Alexander and Tom Gates, Meyer made subordinates feel uneasy. Borrowing an old trick from FDR, he would assign more than one person to the same task, although he often knew the answer in advance. He would pretend to defer to the judgment of some young banker on a giant loan, then watch the young person squirm. He had an incomparable mastery of detail that some colleagues found counterproductive. “He would read every last word of a credit report on a tiny $9-million loan to Ireland,” said a former colleague.

  Meyer carried Morgan secrecy and discretion to new lengths. Despite a vast awareness of political developments, he had the lowest public profile of any Morgan chairman. Constantly absorbing financial intelligence from around the world, he was thick as thieves with Arthur Burns, Fed chairman after William McChesney Martin, and they had long phone talks each Sunday. “Meyer should have been in the CIA,” remarked an admiring former associate; “he was a real inside man, with a style of quiet influence.” With Meyer, the Morgan bank would no longer exercise the visible Wall Street leadership that had come so naturally to his predecessors.

  A man of legendary strength, Meyer’s idea of a happy weekend in Tokyo was climbing Fujisan. He was capable of outlasting even the Japanese. Each time that Meyer in New York would ask Loughran in Tokyo what he needed, Loughran would cable back, “Patience, patience, patience.”53 The patience would be rewarded: Morgan Guaranty became the first American bank since 1952 to win branch approval and penetrate the bamboo curtain.

  In breaking through Japan’s cordon sanitate, Morgan negotiators profited unexpectedly from history. Some Finance Ministry old-timers remembered Tom Lamont. Of even greater help was the memory of a beautiful, fated geisha. In 1904, Pierpont Morgan’s nephew George Morgan, living in Yokohama and collecting Japanese art, married Yuki Kato. Although George’s friends told reporters, “I understand that the young lady he has married comes of an excellent family,” George had actually bought out the contract of a young geisha.54 During their honeymoon in Newport and on Long Island, Yuki Morgan was ostracized by George’s family, and the couple ended up living in Paris. When George died, in Spain in 1915, his wife inherited his wealth.

  Yuki’s trust fund was administered by J. P. Morgan and Company, which was unable to send her payments during World War II. Afterward, Henry Alexander went to Cologne as vice chairman of the U.S. Strategic Bombing Survey Committee. He tracked her down and gave her not only the accumulated interest but interest on the interest as well. When Yuki later moved back to Kyoto, she told her neighbor, “You always must trust the Morgans.”55

  On March 24, 1969, the day the Morgan branch finally opened in Tokyo, one of Yuki’s Kyoto neighbors traveled in to deposit her life savings of Y 8 million (by this point, Yuki was dead); the neighbor was gently told that Morgans wasn’t that kind of bank. Adding to Yuki’s fame was a musical based on her life, which depicted her pining for a young student as she was signed over to George Morgan. When Morgan negotiators made the rounds in Tokyo, staid bureaucrats would stop to ask about Yuki Morgan. “The Japanese are very sentimental,” explained Morgan’s Loughran, “and everybody over forty knows the story.”56

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nbsp; Another arrow in the Morgan quiver was Aisuke Kabayama. As the prewar Count Kabayama, he had squired Tom and Florence Lamont around Tokyo and in the 1930s had helped Lamont set up an information bureau. After the occupation, he had to renounce his title; now he would be an elite Morgan adviser. Employed by the new Morgan branch, he could perform no prosaic mortal labors but only advise. Even without his title, his noble identity was well-known, and he could get an appointment with anybody from Emperor Hirohito on down.

  In its quest for a branch, the House of Morgan had had one last weapon, a man of indeterminate nationality known as both Satoshi Sugiyama and David Phillips. In the 1950s, John Phillips, an American professor working with the U.S. Air Force in Japan, befriended a Mr. Sugiyama of the Asahi newspapers, who wanted an American education for his son Satoshi. (An American education then inspired veneration in Japan.) Phillips adopted the boy; rechristened David Phillips, he lived for thirteen years with the Phillips family in Long Beach, California. He studied Japanese daily. After graduating from Berkeley, he worked in New York for Morgan Guaranty’s stock-transfer unit. Then the Immigration and Naturalization Service challenged his adoption and threatened to deport him; Davis, Polk lawyers contested in vain. So in 1964, David Phillips, né Sugiyama, was posted to Morgan’s representative office in Tokyo.

  The deportation had unexpected consequences within the Morgan empire. While Phillips started as office manager, he was soon caught up in the secret lobbying for the Morgan branch. As he said, “Because of my Japanese face, the Japanese press would never question why I was going into the Ministry of Finance all the time.”57 With no real bank training, he was good at scouting out new business and didn’t mind going out nightly on the Ginza, Tokyo’s main commercial district. He was a perfect Morgan hybrid—a fully bilingual, bicultural man who wore expensively tailored suits and cuff links and smoked Dunhills.

  44. Jack Morgan dandling circus midget Lya Graf during the 1933 Pecora hearings. The stunt humanized Jack’s image but deeply scarred him.

  45. Russell C. Leffingwell hunting on the Devonshire moors with his wife and daughter, 1927. Leffingwell was the lone Morgan partner to foresee a financial crisis in 1929.

  46. The 1929 crash at Broad and Wall streets. This photo reveals several flappers and a surprising number of young people.

  From the Grenfell family album

  47. The dapper Edward C. (“Teddy”) Grenfell with Jessie Morgan and her two daughters, Jane and Frances

  48. Jack Morgan and Captain Porter aboard the Corsair off Nassau in the Bahamas

  49. Jack and Jessie Morgan (at Jack’s right) and Teddy Grenfell aboard the Corsair with a Mr. Gardiner and a Miss Williams. The House of Morgan was known as a white-shoe bank.

  The central bankers

  50. The bearded Montagu Norman of the Bank of England greeting Dr. Hjalmar Schacht of the Reichsbank at Liverpool Street Station, December 1938. Hitler fired Schacht a month later.

  51. Junnosuke Inouye, governor of the Bank of Japan and finance minister. Inouye was murdered by a nationalist fanatic in February 1932.

  52. Teddy Grenfell, who became a Bank of England director a year after he became a Morgan partner The Depression hearings

  The Depression hearings

  53. Counsel Ferdinand p’ecora (left) eyeing his quarry, Jack Morgan. Senator Carter Glass, in hat, scoots between them.

  54. Tom Lamont, George Whitney (center), and Jack Morgan huddling during the Nye “merchant-of-death” hearings on morgan involvement in world war I, January 1936

  55. S. Parker Gilbert returning from Berlin in 1930 after retiring as agent general for Germany, with his wife, Louise, who later married Harold Stanley. Their son, S. Parker, Jr., chaired Morgan Stanley in the 1980s.

  56. Lady Nancy Astor, right, and her son William Waldorf entertain the Henry Fords at Cliveden. Several Morgan partners sympathized with the Appeasement sentiments of the Cliveden set.

  57. Jack Morgan at the 1939 Harvard commencement exercises with his sons. Junius (left) remained with J. P. Morgan and Company; Harry was a founder of Morgan Stanley.

  58. Harold Stanley (left), George Whitney, and Russell Leffingwell (right) at congressional monopoly hearings in 1939. Whitney’s hair has turned white since his brother’s scandal.

  The Richard Whitney

  59. Richard’s wife, Gertrude, at the Whitneys’ New Jersey estate during a hunt of the Essex Fox Hounds.

  60. George Whitney, who survived his brother’s embezzlement to become chairman of the Morgan bank in 1950

  61. Richard Whitney entering Sing-Sing to serve a five- to ten-year sentence for grand larceny. Note Whitney’s pocket handkerchief.

  World War II

  62. King George VI and Jack Morgan sip tea at the embassy garden party in Washington, June 1939.

  63. Jack Morgan greets “war babies” at a Manhattan pier in July 1940. Beside him are eleven-year-old Lord Primrose and six-year-old George Vivian Smith, grandson of Morgan Grenfell’s Lord Bicester. The two boys spent the early war years at Jack’s estate.

  The 1950s

  64. Judge Harold Medina, who supervised the antitrust trial against seventeen leading investment banks. The judge’s humor enlivened a dreary ordeal.

  65. Perry Hall, the towering figure at Morgan Stanley in the 1950s

  66. Texan Robert Young lifting his arms in victory after his successful 1954 fight for the New York Central. He is seen here with Lila Acheson Wallace of the Reader’s Digest, whom he made a director of the railroad.

  67. A 1955 dinner in New York. Vice-President Richard M. Nixon chats with Fed chairman William M. Martin (second from right) and Viscount William Harcourt (far right), a Morgan Grenfell partner then serving as British economics minister in Washington. At far left is Rudolph Smutny of the Investment Bankers Association.

  68. Morgan Guaraniv chairman Henry Clay Alexander (left) as he tried to mediate the 1962 dispute between President Kennedy and U.S. Steel chairman Roger M. Blough (center) after the latter raised steel prices

  69. Frustrated by his slow rise at Morgan Stanley, Robert Baldwin (right) served as navy under secretary from 1965 to 1967. He is sworn in by Rear Admiral Wilfred A. Hearn and Navy Secretary Paul H. Nitze (center).

  70. Bob Greenhill of Morgan Stanley, the first takeover star of the new Wall Street, wearing his trademark suspenders.

  71. Antonio Gebauer, head of Morgan Guaranty’s Latin American lending in the early 1980s and later at the center of an embarrassing scandal

  Morgan Grenfcll

  72. The partners’ room of Morgan Grenfell. In this pre-Guinness photograph, Lord Stephen Catto, chairman of the holding company, sits between joint chairmen Christopher R. Reeves (right) and Charles F. M. Rawlinson.

  73. 23 Great Winchester Street, home of Morgan Grenfell since the 1920s

  The Guinness affair

  74. As chief adviser to Guinness, Roger Seelig led Morgan Grenfell into the worst scandal in the firm’s history.

  75. Chairman Bill Mackworth-Young, whose untimely death, in 1984, set Morgan Grenfell up for the scandal

  76, 77. Margaret Thatcher demanded the heads of Christopher Reeves (left), chief executive, and Graham Walsh, corporate finance chief.

  The modern House of Morgan

  78. White House meeting on the New York City fiscal crisis in 1975. From left to right: L. William Seidman, President Ford’s economic assistant; Ellmore C. Patterson, Morgan chairman; Walter Wriston, Citicorp chairman; Treasury Secretary William Simon; President Gerald R. Ford; Chase chairman David Rockefeller; and Fed chairman Arthur Burns

  79. Dennis Weatherstone, the London transport-worker’s son who rose to the top of the House of Morgan

  80. Lewis T. Preston, the tough, witty ex-marine who steered the Morgan bank back toward investment banking

  81. 60 Wall Street, the new Morgan bank headquarters; more space and computers, but less poetry and mystery

  The advent of Phillips helped Morgan Guaranty solve its Morgan Stanley probl
em. To overcome any lingering Japanese doubts about the Morgan banks, John Meyer kept urging John Young of Morgan Stanley to open a Tokyo office. With the imposition of U.S. capital controls, Morgan Stanley needed to find money around the world for its clients, and Japan was becoming too big to ignore. So in 1970, Morgan Stanley agreed to set up a Tokyo representative office on two conditions—that it get space adjoining a new World Bank liaison office in Tokyo and that David Phillips head the office. Morgan Guaranty obliged on both counts.

  So remarkable was Phillips’s work for Morgan Stanley that in 1977 he became its first nonwhite managing director. He always surprised new clients. “I’ve been with David a few times when we are meeting clients,” said Morgan Stanley’s Bob Greenhill, “and you can just see their jaws drop.”58 Phillips signed up Hitachi, Mitsubishi, Industrial Bank of Japan, and Nippon Steel. He won a large private placement from Sony despite competition so feverish that Goldman, Sachs reportedly asked Henry Kissinger to talk with Sony chairman Akio Morita. Yet as much as Morgan Guaranty people admired Phillips, they watched with dismay as he exploited the old confusion about the Morgan zaibatsu. Morgan Guaranty, for instance, had floated a convertible Eurobond issue for Takeda, a Japanese pharmaceutical company. Yet after the senior Takeda died, his son took a bond issue to Morgan Stanley, thinking he was rewarding an old friend. David Phillips, thought the Morgan Guaranty people, didn’t always clear up such misconceptions.