The House of Morgan

by Ron Chernow

  Business for the new Morgan Guaranty branch was extremely profitable, with huge profit margins on loans. The bank made yen loans to American multinationals in Japan and dollar loans to Japanese companies, including Hitachi, Toshiba, Nippon Steel, Honda, and Nippon Tel and Tel. Both Morgan houses targeted the Mitsubishi group, which stressed shipping and heavy industry and meshed with Morgan’s smokestack orientation. As a purveyor of clothing and other army provisions, the Morgan bank’s prewar favorite zaibatsu, Mitsui, hadn’t fared as well after the armistice.

  What made Japanese business irresistible was that dollar loans to companies were guaranteed by their Japanese bankers. In 1976, Ataka and Company, Japan’s third largest trading house, failed after taking losses on a Newfoundland refinery; Morgans had a loan outstanding to Ataka. The morning he received the news, Bob Wynn called Lew Preston, head of international banking, and said, “Lew, it looks like you’ve got your first loss in Japan.” Before the day was over, however, the Bank of Japan stepped in and ordered Ataka’s principal banker, Sumitomo Bank, to bail the company out. That afternoon, an astonished Wynn called Preston back to say their unsecured loan would be honored after all. “Why the hell are they doing that?” asked a bewildered Preston. “They’ve got their marching orders from the government,” Wynn replied.59 In this banker’s paradise, Morgan Guaranty would steadily expand its country lending limit. Nobody ever regretted the marathon ordeal of acquiring the Tokyo branch.

  CHAPTER TWENTY-EIGHT

  TABLOID

  ALTHOUGH Glass-Steagall had supposedly banished banks from the securities markets, the House of Morgan and other Wall Street banking firms exerted a major impact on the stock market through their trust departments. Despite their unequal size, J. P. Morgan and Company and Guaranty Trust brought $3 billion apiece in trust assets to their merger, forming America’s biggest trust operation. Morgan’s money was mostly in pension funds and Guaranty’s in personal trusts. The merged bank also provided “corporate trust” services that formed the infrastructure for much stock trading on Wall Street. As transfer agent for nearly six hundred companies, it received over twenty-five thousand certificates daily and sometimes handled a quarter of all shares traded on the New York and American stock exchanges. It mailed out twelve million dividend checks a year and maintained updated shareholder lists for many companies.

  The old House of Morgan had commanded a sizable portfolio for its own account, but it was a less-than-scientific operation. Allied with the Guggenheims and the Oppenheimers, it gambled 30 percent of its entire portfolio on copper stocks in the early 1930s. Before 1940, the bank offered investment advice informally to wealthy individuals and old families. Partners managed money for their pet institutions, such as Dwight Morrow for Amherst College, Tom Lamont for Phillips Exeter Academy, and Russell Leffngwell for the Carnegie Corporation. The House of Morgan was always a magnet for ecclesiastical institutions, which shared its discretion and somber dignity. In 1917, Jack Morgan contributed start-up money for the Episcopal church’s pension fund, and the bank always handled part of that money. Under Henry Alexander, the Presbyterians also switched their money to the Morgan Trust Department.

  Eligible for trust work after the 1940 incorporation, the bank converted Jack Morgan’s mirrored, marble-walled barber shop into a waiting room for patrons. The first objective was to snare estates of the rich and recently dead. This required patience, waiting until a sufficient number of clients had died. After a dinner spent wearily sifting through names of potential chieftains, George Whitney turned to a young associate, Longstreet Hinton, and said apologetically, “Street, I guess you’re it.”1 It was then considered quite daring and unorthodox for a nonlawyer to run a trust department, which was always entangled in legal estate questions.

  Street Hinton was from Vicksburg, Mississippi, and reminded everybody of a Southern cavalry general. He was tall and spare, ramrod straight, somewhat curmudgeonly, with a long face and prominent ears. His father had ended up as minister of Saint John’s of Lattingtown in Locust Valley, the “millionaire’s church” so dear to Jack Morgan. Hin-ton’s formative experience was in settling Jack Morgan’s estate. He drew upon the art expertise of Belle da Costa Greene. “She told me that Fifty-seventh Street was the crookedest place in the world and not to trust anyone,” recalled Hinton of his first foray into the world of art dealers.2 A tough customer, he quickly took control after the merger, telling the people who had run the Guaranty Trust Department: “What makes you think you know how to run a trust department?” He reminded them that they had lost their largest account, Ford Motor, to J. P. Morgan. Hinton ran the combined show.3

  Trust departments had been regarded as loss leaders. Hinton thought they should make money. Most trust managers were sober men with iron-gray hair who put money into government bonds and they weren’t notable for their imagination. When the Morgan Trust Department made its first common-stock purchase, in 1949, it was thought so audacious that Hinton had to telephone Russell Leffing-well, on vacation in Lake George, New York, to clear the purchase. After 1950, changes in tax laws and collective bargaining prompted an explosion in pension funds, and much of this money gravitated to commercial banks. After General Motors designated Morgans as one of its pension-fund managers and allowed investment of up to 50 percent in stocks, the business boomed. “What made us was the General Motors fund,” said Hinton. “When we led the parade there, then everybody else wanted us.”4

  In the early 1960s, the Morgan Trust Department operated from a wood-paneled room with antique furniture, facing the New York Stock Exchange. Forty impeccably dressed managers in dark suits and black shoes sat in leather armchairs before glossy rolltop desks. Invoking Pierpont Morgan’s philosophy, Hinton initiated the gospel of buy and hold. When a corporate director asked for a policy statement, he replied, “It’s easy. We don’t have one. We never sell stocks.”5

  Hinton had more flexibility than he conceded and was a cagey manager. At meetings with portfolio managers, he would call on Peter Ver-milye, the resident bull, if he wished to buy stocks; if he wished to sell, he favored Homer Cochran, a durable bear. During the Kennedy bull market, the Morgan Trust Department became a trendy place. Young Ivy League portfolio managers loaded up with the glamorous growth stocks of the day—the so-called nifty fifty that so mesmerized money managers. Hinton’s young highfliers bought Schlumberger before people could pronounce the name and were early buyers of Xerox, which multiplied a hundredfold. Symbolic of the new style was Carl Hathaway, who drove a fire-engine-red sports car and issued solemn dicta, such as “Never invest in companies run by fat men.” “Lazy people bore me,” he said. “The most successful of my friends remind me of a 727 at takeoff: full throttle and straight up.”6

  By the mid-1960s, Morgan was managing an incomparable $15 billion in assets, yet trouble lurked ahead. Control of such gigantic sums invited new public scrutiny, especially from Representative Wright Pat-man, the bullnecked populist chairman of the House Banking Committee. Like Louis Brandeis, Patman saw bankers’ possible abuse of “other people’s money” and feared that banks would use trust assets to exercise influence over business. In 1966, he issued a report that accused big commercial banks of dangerously “snowballing economic power” over large chunks of U.S. industry.7

  The Patman report disclosed how banks had hijacked the new pools of investment capital. Of more than $1 trillion in assets held by U.S. institutional investors, 60 percent resided in commercial banks’ trust departments. Because of the Wall Street merger wave, most of these assets were now concentrated in the hands of Morgans and four other banks. There were eye-popping figures on Morgan holdings. It held gargantuan stakes in two old Guggenheim standbys: 17.5 percent of Kennecott Copper and 15.5 percent of American Smelting and Refining,-and it could have bossed around the entire airline industry, with a 7.4-percent stake in Trans World Airlines, 7.5 percent in American Airlines, and 8.2 percent in United. The danger was more latent than actual, for the conservative Morgan bank u
sually sided with management in disputes and didn’t try to substitute its own judgment. But since a 5-percent holding could now control most companies in an age of dispersed share ownership, the numbers were disturbing.

  There were also new fears about insider trading of a sort that took the banks by surprise. In the twenties, fortunes had been made through whispered tips and sly winks. The public tolerated this because only a tiny percentage of them owned stock. As personal investing grew in the 1950s and early 1960s, the public didn’t wish to take part in a rigged game. It took time for the banks to perceive the danger, or at least the new public apprehension. In the 1960s, trust departments weren’t yet segregated from other departments. At Morgans, senior bank officers—many of them directors of five or ten companies—sat on the Trust Committee, which also had as members outside directors of the bank, including, at various times, people such as Alfred P. Sloan of General Motors and Henry Wingate of International Nickel. These men were expected to bring their specialized knowledge to bear in picking stocks. At that point, banks didn’t worry that they might misuse confidential information from the lending side in making investment decisions; there weren’t yet legal barriers, or “Chinese walls,” between the commercial and the trust departments.

  It was amid new concerns that the SEC in April 1965 charged thirteen people associated with Texas Gulf Sulphur of profiting from inside information about an Ontario ore bonanza. One illustrious name leapt from the headlines—Tommy S. Lamont, son of the famous partner and only recently retired as Morgan Guaranty’s vice-chairman. Lamont was accused of relaying information to Longstreet Hinton, who had bought Texas Gulf for Morgan trust accounts. It was a shocking charge, for since the 1930s the bank had been obsessed with its integrity and was undoubtedly one of the world’s most reputable banks. Street Hinton worshiped George Whitney and had watched his anguish over his brother’s scandal. Tommy Lamont had gone through the Pecora hearings, in which he was charged with making “wash sales” to his wife—an experience he didn’t care to repeat—and he had cherished a reputation as a highly principled banker.

  Thomas Stillwell Lamont resembled his father. Perhaps the face was rounder, the neck a shade fuller, but he had the same strong voice that emerged surprisingly from a slight build. Like many at Morgans, he patterned himself after a sainted father, adopting his interests. He became president of the Phillips Exeter board and a member of both the Harvard Corporation and the Council on Foreign Relations. Adopting his father’s literary bent, he mailed birthday verses and sentimental greetings to friends and proudly chronicled the Lamont family history. Yet despite certain outward similarities, Tommy Lamont was more proper, more remote, and certainly more private than his famously gregarious father.

  Tommy Lamont had been the House of Morgan’s ambassador to the mining world, joining the Texas Gulf board in 1927. He had helped install Claude Stephens as company president and rated him so highly that he recommended the stock to Street Hinton for the Trust Department in the early 1960s. When the company cut its dividend, an already skeptical Hinton soured on the stock, and there matters stood for a while.

  In November 1963, Texas Gulf drilled a secret hole at Timmins, Ontario, that flabbergasted its chief mining engineer: it was richer than anything he had seen, richer than anything ever reported in the technical literature. This mother lode of copper, zinc, silver, and lead was later valued at up to $2 billion, it was rich enough to supply 10 percent of Canada’s need for copper, 25 percent of its zinc. It was a vein so fabled that the ore sat right on the surface and could be “scooped up like gobs of caviar,” as one miner said.8 As Texas Gulf ran tests that winter, its stock doubled, based on rumors of feverish miners mortgaging their houses to buy more shares in the company. Texas Gulf withheld an official announcement of the strike, fearing it would drive up the cost of surrounding property.

  How to hush up reports of El Dorado? On April 10, 1964, Claude Stephens telephoned Tommy Lamont and asked whether he had heard the rumor. Lamont said he had. “Is there any truth in it?” Lamont inquired. “We don’t know,” Stephens replied. “We need a little time to evaluate our program in this particular area.”9 Lamont advised him to delay any statement, suggesting that he wait for the April 23 annual meeting in New York to make a formal press announcement.

  The next morning, the New York Herald Tribune reported the biggest strike since Yukon days, a legendary bed of copper six hundred feet thick. On April 12, prodded by the SEC, Texas Gulf issued a statement of such cool understatement that the government later condemned it as false and misleading. Even though it knew it had at least ten million tons of copper and zinc, the company blandly described Timmins as a “prospect” that required more drilling for “proper evaluation.”10 Texas Gulf scheduled a board meeting and press conference at the Pan Am Building in New York for April 16. Street Hinton had taken notice of the wildly gyrating stock and asked Lamont to report to him after the meeting.

  April 16, 1964 would be a day nightmarishly imprinted on the memories of both Hinton and Lamont. The Texas Gulf meeting began at nine sharp, with a full complement of fifteen directors. At about ten o’clock, twenty reporters were herded in for a press conference. It was “a New York corporate version of the old days when the old prospector rushed into the saloon to announce he had struck it rich,” said Jerry E. Bishop, who was there for the Wall Street Journal.11 The company wanted to keep all reporters in the room until the press conference was over. But once Claude Stephens finished his announcement, Norma Walter, covering her first spot news story for Merrill Lynch’s monthly magazine, managed to slip out a side door. She got the news on the firm’s in-house network at 10:29 A.M. A reporter for a Canadian wire service got out another door. Meanwhile, the other reporters stayed put, forced to watch color slides of the ore deposit. At the first moment of freedom, they dashed to the telephones to report the sensational news. Jerry Bishop’s dispatch appeared on the Dow Jones “broad tape” of market news at 10:55 A.M.

  After the meeting, Lamont mingled with reporters, viewing core samples and color slides of Timmins. About 10:40 A.M., he phoned Hinton from the Texas Gulf offices. “Take a look at the ticker,” Lamont said. “There is an interesting announcement coming over about Texas Gulf.” “Is it good?” Hinton asked. “Yes, it’s good,” Lamont said.12 Later Hinton would testify to a curious sense of having seen the news flash over the broad tape. In fact, he failed to verify that it had appeared. Hinton then was treasurer of the Nassau Hospital Association and personally ran its portfolio. He at once telephoned the trading desk and bought three thousand Texas Gulf shares for the hospital. Then he advised Peter Vermilye to add the stock to a Morgan Guaranty profit-sharing plan and a mixed fund that invested for two hundred pension plans; Vermilye bought one thousand and six thousand shares respectively. All the while, the story hadn’t shown up on the Dow Jones broad tape, even though it had been flashed to 159 Merrill Lynch branches.

  Unaware of having committed any crime, Lamont returned to his office at 15 Broad Street and at 12:33 P.M. bought three thousand Texas Gulf shares for himself and his family. Now the news had been on the Dow Jones wire for over an hour and a half. The stock market had reacted deliriously. Driven by a 7-point rise in Texas Gulf stock, by day’s end the New York Stock Exchange smashed all previous volume records. Far from feeling guilty, Hinton was disappointed the next day to learn how modestly Vermilye had bought. Only twelve days later did Lamont learn of the Trust Department purchases triggered by his call. He hadn’t advised Hinton to buy. He later claimed he was discharging a duty and not phoning in a hot tip.

  A year later, Texas Gulf directors were planning a reunion to savor their Timmins triumph. Though still a Morgan director, Tommy Lamont had now taken his mandatory retirement at age sixty-five. On the eve of the Texas Gulf meeting, a reporter reached him at home to say that the SEC had just charged him with “tipping off other bank officials” about the Timmins strike. Lamont was stunned. “I did not tip off other bank officials,” he shot ba
ck.13 The publicity value of his golden name was such that it dominated a front-page headline in the Times the next morning. He was tossed in with Texas Gulf executives and geologists who had blatantly traded on the inside information—a bit of editorializing that deeply embittered him. The Times sent a reporter to eighty-three-year-old fudge Ferdinand Pecora, now an elderly New York Supreme Court justice. Leaning back in his large red-leather chair on East Seventieth Street, Pecora marveled at the “extraordinary coincidence” that Thomas W. Lamont’s son was involved in the insider trading scandal: “It’s history repeating itself. It’s symptomatic of the temptations of Wall Street.”14

  That Lamont was a member of the Morgan Trust Committee allowed the SEC to spotlight a broader problem of institutional investing. It branded the entire department an inside trader. Although not directly charged, Hinton was crushed, thunderstruck. Inside the bank, he had a reputation for sometimes ferocious independence and for telling the rich and powerful where to go. Peter Vermilye, now head of Baring America Asset Management, recalled: