The House of Morgan

by Ron Chernow

  Entering the 1960s, Morgan Stanley seemed secure, almost invulnerable, in its supremacy. The nonpareil of American investment banking, it counted as clients fifteen of the world’s twenty-five largest industrial companies, as well as Australia, Canada, Egypt, Venezuela, and Austria. These were comprehensive, exclusive relationships, a relic of the days when clients needed to wrap themselves in the aura of powerful banks. Morgan Stanley served its clients diligently and was always dreaming up new ways to finance AT&T or General Motors. As the Casino Age progressed, however, and capital was no longer so rare a resource, the traditional ties would erode.

  Morgan Stanley would go to any length to serve a faithful client. During the 1950s, it managed securities issues for J. I. Case, a farm-equipment manufacturer. In 1961, when Case faced bankruptcy and bankers threatened to pull their loans, Samuel B. Payne of Morgan Stanley became temporary chairman of the company. For six months, Payne spent three or four days a week at Case headquarters in Racine, Wisconsin, turning the company around. Later, a rehabilitated Case was sold to Tenneco. Similarly, Morgan Stanley undertook a record financing for the billion-dollar Churchill Falls hydroelectric project in Labrador, Newfoundland, twice the size of Grand Coulee Dam. Some Morgan Stanley partners worked on it daily for eight straight years. In 1969, when the chairman of the Churchill Falls Corporation was killed in a plane crash, partner William D. Mulholland stepped in and ran the company.

  The Morgan Stanley partner who first saw the cracks in this immaculate world of loyal bankers and loyal clients was Robert H. B. Baldwin, a protege of Perry Hall, who had retired in 1961. Baldwin was a man who sharply polarized opinion and was later seen as either the savior or the ruination of the firm. For better or worse, he would sweep away the cobwebs and drag Morgan Stanley into the modern era. At a place of proper gentlemen, Baldwin had a high energy level, fanatic drive, and a tremendous desire to manage people. Tall and athletic with cold piercing eyes and a brusque, humorless manner, he was the opposite of the archetypal Morgan man. His partners found him cold and awkward, a man who had trouble relaxing or making small talk, and he seemed misplaced in Wall Street’s most elegant firm. Yet that was perhaps an advantage, for he wasn’t shy about assuming power, as were the gentlemen.

  Opinion divides on the question of Baldwin’s intelligence. He had an outstanding academic record: a triple threat in sports at Princeton—football, baseball, and basketball—he also received a summa cum laude degree in economics. Yet his intelligence wasn’t subtle or reflective but obsessive and suggestive of an implacable will. In his office, he had a needlepoint pillow on which was stitched, “The harder I work, the luckier I get.”4 At a notably discreet firm, Baldwin would abruptly inform people that they were overweight or smoking too much. Entertaining clients, he would suddenly launch into extended monologues on his own achievements.

  Bob Baldwin would develop into a classic hell-on-wheels boss who would dominate Morgan Stanley for years, making life memorably miserable for his subordinates. “He could be a real bastard in the supercilious way that he would exercise his power with subordinates,” said one ex-partner. “And he sometimes made a terrible fool of himself in the process of trying to be a big wheel.” Said another: “He lacks humility, he’s self-centered and insecure and quite humorless. You don’t want to have a drink with Bob Baldwin.” Yet he was also honest and forgiving. More to the point, he was extremely perceptive about the strategic direction of investment banking.

  Baldwin was relentless in pushing an idea. He once harangued legislators during testimony in Washington, then harangued his companion in a cab; when his companion got off, he harangued the driver. His hero was no dreamy poet or thinker, but Admiral Chester Nimitz. When his son was at Phillips Exeter Academy in the early 1970s, Baldwin, an unabashed defense hawk, addressed the student body on “the other side of the military-industrial society that was in such disrepute.”5

  Much like the Young Turks at Morgan Grenfell, Baldwin was maddened by what he called the white-shoe thing—the notion that Morgan Stanley partners were inept stuffed shirts who succeeded because of blood ties and social contacts. “My grandfather was a conductor on the Pennsylvania Railroad,” he pleaded. “My yacht is a 13-foot Sunfish.”6 Or: “I get wild when they talk about that white-shoe thing. Why are we number one? Because we are nice people? Because we play golf? I stand on our record.”7 As at Morgan Grenfell, this discomfort with a sedate past sparked revolt among younger partners and enabled Baldwin to push for sweeping changes in the firm’s modus operandi.

  Baldwin was also perceptive about Morgan Stanley’s defects in the mid-1960s. It was poorly managed and becoming too big for the old consensual style. There were no budgets, no planning, and no modern management—just endless collegial discussions. Bookkeeping was still done by clerks on high stools, who copied entries into leather-bound ledgers on tilt-top tables. All the while, the firm was growing and bursting in its small headquarters. In 1967, it vacated its cramped offices at 2 Wall Street. It was still unthinkable that Morgan Stanley would lack a Wall Street address. Harry Morgan was afraid that if the firm had a Broadway address, London friends might think him a theatrical producer. He was only reconciled to a new office building at 140 Broadway because it was the former Guaranty Trust address.

  During the 1960s, Baldwin made repeated efforts to run the firm but was rebuffed. Stymied by his slow advancement, he went down to Washington from 1965 to 1967 and served as under secretary of the navy. In these years, Baldwin was always promoting schemes to proselytize for the war on college campuses. Partners who found him pushy hoped he wouldn’t return. When he did, they again spurned his demand to take charge of daily operations, and he again decided to leave.

  He nearly escaped to the giant Hartford Insurance Company. Felix Rohatyn of Lazard Frères was playing matchmaker between ITT chairman Harold Geneen and the Hartford board. As Hartford’s investment banker, Baldwin frostily rejected an overture from Rohatyn. The Hartford board decided to bring in Baldwin as a one-man “white knight” to ward off ITT’s advances. In December 1968, Baldwin was set to become Hartford’s chief executive when Geneen, enraged by reports of his move, launched a hostile tender and forced Baldwin to retreat back to Morgan Stanley. Now it was a no-exit situation: Baldwin and Morgan Stanley had to come to terms. With his enormous frustration and bottled-up energy, Baldwin resumed his campaign to shake up the firm and in 1969 got it to call a rare planning session. Outvoted, he later conceded it was a “god-damned disaster.”8 What saved him was partly a generational change. As older, Depression-era partners retired, they were slowly being replaced by a new group recruited in the early 1960s. In 1970, the firm’s twenty-eight partners admitted six young men, including Dick Fisher and Bob Greenhill. They were known as the “irreverent group of six,” and eventually they would tip the power balance toward Baldwin, giving him the votes to launch change. But at first, they wanted the nice, tight, rich Morgan Stanley of old.

  Contrary to the views of more myopic partners, Bob Baldwin saw Morgan Stanley as fighting for its life. He queasily noted the rise of Salomon Brothers and Goldman, Sachs, which were using their trading skills to chip away at the four dominant firms—Morgan Stanley, First Boston, Kuhn, Loeb, and Dillon, Read. At this point, Morgan Stanley still exhibited vintage snobbery about “traders” being socially inferior to “bankers”—a tradition dating back to Pierpont Morgan. This was also true at First Boston, which would call its underwriting wing the House of Lords and its trading room the House of Commons. Trading was still thought a coarse commodity business best left to Jewish firms such as Salomon and Goldman, Sachs. In the Salomon Brothers culture, in contrast, traders stigmatized corporate finance people as “light-bulb changers” or “order takers.”9

  John Gutfreund of Salomon Brothers was using the firm’s trading prowess to win new business and secure a better spot in syndicates. “Salomon and the rest were besieging chief financial officers with suggestions and ideas that we couldn’t match,” said Sheppard Poor
, a former Morgan Stanley partner. “There was a proliferation of different financing vehicles.”10 Morgan Stanley had always cultivated the big corporations, the users of capital. Salomon and Goldman, in contrast, had close relations with the suppliers of capital, the institutional investors who now accounted for three-quarters of the New York Stock Exchange trading. And power was now tilting toward these providers of capital.

  In the volatile 1960s, with inflation induced by Vietnam spending, pension funds, insurance companies, and so on were managing their portfolios more actively. Instead of buying large blocks of bonds and holding them until maturity, they wanted to swap new blocks for old ones. This was impossible for an underwriter like Morgan Stanley, which had no trading operation. Large investors had other specialized needs. Trading big cumbersome blocks of stocks, they needed intermediaries to do “block positioning”—that is, temporarily taking the block off their hands and selling it whole or piecemeal. Salomon Brothers had the capital and trading strength to perform such intricate feats and used these services to expand its underwriting business. As an outsider, John Gutfreund had no scruples about raiding clients or doing other things anathema to the Wall Street club. He was the first to show that “the power to distribute securities would become the power to underwrite them.”11

  Gutfreund seemed to enjoy tweaking Morgan Stanley. When former defense secretary Robert McNamara became World Bank president in 1968—the bank’s first non-Wall Street president—he wanted to stimulate competition among underwriters and brought in Salomon Brothers along with Morgan Stanley and First Boston. In a tough bargaining session with the three firms, McNamara demanded a better price. Larry Parker of Morgan Stanley got up and said, “Well, I’ve got to go and consult my partner.” In a puckish mood—but also telegraphing that he would compete on price—Gutfreund rose to consult his partner. Then he suddenly sat back down. “Well,” he said slyly, “she’s always said yes to whatever I want to do.” This put pressure on Morgan Stanley and First Boston to follow his lead.12

  To maintain syndicate leadership, Baldwin saw that Morgan Stanley would have to admit people long shunned as the rabble of the business—salesmen and traders. This move toward trading and distributing securities—and not simply allocating them to other firms to sell—would explode the small, posh Morgan Stanley, which then had about 250 people. The firm could no longer monitor securities markets from a lordly distance. At a 1971 planning session, Bob Baldwin finally got a decision to develop a sales and trading operation, and Morgan Stanley ceased to be the stately underwriting house created in 1935. It would develop relationships with institutional investors by trading and distributing stocks and bonds. “We made one decision,” said Dick Fisher later, “and that simple decision led to all the subsequent growth of our firm.”13 The changes were implemented piecemeal, with Fisher put in charge of corporate bond trading. Later, Archie Cox, Jr., son of the Watergate special prosecutor, presided over equity trading.

  Trading meant risk and required more than the $7.5 million in capital that Morgan Stanley had in 1970. The younger partners had long feared that the firm’s precious capital might be depleted by the death of its aging partners. To preserve capital, Morgan Stanley switched in 1970 from a partnership to a partially incorporated firm. This also allowed dividends to flow in from Morgan et Compagnie International in Paris without punitive taxes.

  As Morgan Stanley expanded into a full-service firm, the corporate culture changed. For almost forty years, Morgan Stanley men had traveled in a sedate, elite world, dealing only with chief executives. Traders inhabited a rougher world. “It was a different kind of culture,” said one trader. “Instead of the low-key, white-shoe style, this group was the raucous, tough-minded, four-letter-word kind of crowd that you get in a high-pressure situation.” Many older partners wrinkled their noses at the traders. “There were also young partners who looked down on us as if we had dirt under our fingernails and were an inferior breed,” recalled a former trader. Tastes changed: Morgan Stanley suddenly had a Sky Box at Madison Square Garden. A former partner noted that “Morgan Stanley partners didn’t go to basketball games up till then.”

  At first, it was difficult to recruit people: nobody believed the august Morgans was serious about trading. Traders lived in a world of split-second, high-pressure decisions. Where corporate finance people ambled in at 9:30 or 10:00, traders were at their desks by 8:00. When Fisher tried to ban employees from eating lunch at their desks, he couldn’t enforce the rule. In the superhuman effort to recreate the firm, some people worked all night. “I can remember someone asking me early one morning whether I was coming or going,” recalled Frederick H. Scholtz, who came in from General Foods to oversee planning.14 His secretary would surreptitiously change her dress to hide that she had stayed all night.

  The trading operation was built from scratch. Morgan Stanley hadn’t had its own floor trader at the New York Stock Exchange. Partners had feared, rather vainly, that if the Morgan trader sold General Motors or AT&T, it would precipitate an avalanche of selling. Now traders were installed without setting off any market crashes.

  This helter-skelter expansion had healthy side effects—especially an end to the firm’s homogeneity. Before long, the Wasp citadel had “partners” with strange ethnic names. In 1975, Luis Mendez, a Cuban refugee with a distinctly Spanish accent, who had once wrapped packages in B. Altman’s basement, was made a partner from the bond-trading desk. His success reflected a new stress on performance. This trend was strikingly revealed when Robert McNamara visited the firm. At a luncheon with Morgan Stanley executives, McNamara ignored more senior figures to question Mendez, who sat in the rear and could clarify pricing mysteries about World Bank issues. The blunt, streetwise Mendez told McNamara that the World Bank was overpricing its issues and alienating customers. Afterward, McNamara said to his companion, Eugene Rotberg, “This firm isn’t as stuffy as I thought it was.”15

  Morgan Stanley tossed many traditions out the window. It no longer had the luxury of growing its own people and inculcating them with Morgan style. In recruiting traders, it had to favor those with youth, nerve, and stamina; almost half the managing directors enlisted after 1970 were under thirty-five. To attract traders, the firm introduced production-oriented compensation, which eroded collegiality and generated new rivalries and tensions. Baldwin gloried in this rough world of sharp elbows. Where Morgan men had disdained competition, he said approvingly, “The only way to make investment banking more competitive would be to gouge eyes out.”16 As the firm increased tenfold in a decade, it suffered terrible growing pains and throbbed with new tensions.

  To woo institutional investors, Morgan Stanley established a Stock Research Department. In April 1973, Frank Petito called in Barton Biggs, a Yale man and an ex-marine, who had managed a hedge fund in Greenwich, Connecticut. Biggs had been a go-go “gunslinger” portfolio manager of the late 1960s, but a respectable version of the breed. As Institutional Investor said, “Biggs was definitely the kind of gunslinger you could introduce to your daughter.”17 Petito offered Biggs a partnership, which he accepted on the spot. It was one of the rare times in Morgan Stanley history that anybody was brought in as a partner.

  The stock-research decision was controversial. Perry Hall and other senior people opposed it, claiming it might threaten their blue-chip franchise and open up conflicts of interest with clients. As partner Larry Parker said, when Morgan Stanley started equity research, “We took a very deep breath.” To establish his autonomy, Biggs fired salvos at IBM in a 1974 piece in Barron ’s. Scrapping an old Wall Street taboo, Morgan Stanley raided other firms, hiring analysts with such abandon that Baldwin was besieged with angry calls. “I’ve had a number of good friends call up and be damned mad at me,” he said. “I’ve promised we’d take no more.”18

  In rapid succession, major elements of the Gentleman Banker’s Code were breaking down. Like Morgan Grenfell, Morgan Stanley kept up its gentlemanly aura only so long as nobody poached on its territory;
once threatened, it retaliated with a vengeance. Both on Wall Street and in the City, the graceful, leisurely world of securities syndicates was being replaced by the predatory world of mergers and the freewheeling, irreverent world of traders. Form was simply following function.

  During this transition, Harry Morgan continued to represent standards in a firm that was easily tempted to forget them. Although he became a limited partner in 1970 and technically lacked a vote, he still made his influence felt. Shortly after Morgan Stanley was incorporated, American Express tried to acquire it. Opinion was divided, some older partners favoring the acquisition, many younger ones dead set against it. Harry Morgan, in an emotional speech, said he wouldn’t sell his birthright for a mess of porridge. “You can do what you want, but the name Morgan is not for sale.” American Express was sent packing.

  Similarly in 1969, the firm entered into a new venture with Brooks, Harvey and Company to finance and invest in real estate. This real estate offshoot got off to a shaky start. At one point, the Teamsters came along with an irresistible proposal: they wanted Morgan Stanley to manage all their properties in the United States. Almost everyone favored the move except Harry Morgan, who sat silently through the discussion. “Young fellows,” he said at last, “as long as I’m alive, this firm is not going to do business with the Teamsters.”19 The discussion ended.