The House of Morgan

by Ron Chernow

  By 1973, the burgeoning Morgan Stanley was surveying both uptown and downtown sites for new offices. Many partners refused to abandon Wall Street to follow corporate clients to midtown. Baldwin disagreed but couldn’t budge them. Then he lunched with Andre Meyer of Lazard Frères, which had moved up to Rockefeller Center. He told Meyer about the controversy. “Fine,” said Meyer, laughing, “I’ll be having lunch uptown with your clients while you’re having lunch downtown with your competitors.” Baldwin went back downtown all fired up. He prevailed upon his colleagues to look at three floors available in the Exxon Building on Sixth Avenue.

  Baldwin took them uptown via the Sixth Avenue subway, changing at West Fourth Street, rather than by way of the Seventh Avenue line, whose nearest stop, at Fiftieth Street and Seventh Avenue, was a popular spot for streetwalkers. The manipulation worked. In August 1973, Morgan Stanley, the very symbol of Wall Street, moved to the Exxon Building in midtown. The move underscored that paramount reality of the Casino Age—that once-proud and all but omnipotent bankers were now subservient to their corporate clients.

  BOB Baldwin’s palace coup at Morgan Stanley coincided with a top-secret attempt to recreate the old House of Morgan abroad. As finance became more global, the Morgan houses were colliding in obscure places and casting confusion. The problem was typified by fapan’s stubborn belief that Morgan Guaranty and Morgan Stanley—whatever their mischievous, self-serving denials—belonged to the same zaibatsu. The situation was endowed with comic-opera complexity on account of Morgan Grenfell’s global expansion in the late 1960s.

  In the dozy 1950s, Morgan Grenf ell was boxed into Britain by exchange controls and the fear of clashes abroad with Morgan Guaranty. In 1967, to jolt Morgan Grenfell from lethargy, Lord Harcourt had drafted his friend Sir John Stevens as the new chief executive. Like Harcourt, Stevens had been British economics minister in Washington and U.K. executive director of the IMF-World Bank. During his six-year tenure, Stevens would exert a pervasive influence on Morgan Grenfell. At a firm weak in broad strategic thinkers, his vision of a global future was exceptional. He also brought an air of adventure to the stodgy old bank. During World War II, he had parachuted into Italy as a member of the Special Operations Executive, Britain’s secret dirty-tricks intelligence unit, to finance the underground Piedmont Liberation Committee. He infiltrated occupied territory in Greece and France and in 1945 accepted the surrender of German divisions in northern Italy, receiving the freedom of the city of Turin for his work with Italian partisans. Fluent in six or seven languages, he became a roving emissary for the Bank of England and, in 1957, executive director. The next year, chattering in Russian and dazzling Muscovites, he made the initial contact between the Bank of England and the Soviet State Bank, later giving Morgan Grenfell a financial edge with the Soviets. By the early 1960s, Stevens was on the short list to be governor of the Bank of England. When he lost out, he accepted Harcourt’s offer to come to Morgan Grenfell.

  As Stevens toured the world opening up new Morgan Grenfell offices with Foreign Office recruits, the firm happily exploited 23 Wall’s fame. Morgan Grenfell’s overseas clients tended to be American companies who banked with Morgan Guaranty. As David Bendall, one of Stevens’s Foreign Office recruits, said, “As Morgan Grenfell went abroad, nobody knew the firm. But they did know J. P. Morgan and Company, and we used the name.”20 “They were known worldwide as the number-one American bank,” conceded Stephen Catto, “and so the Morgan Guaranty stake was very helpful in our establishing business abroad.”21 Of course, as Morgan Stanley and Morgan Grenfell traded on the name, Morgan Guaranty’s difficulties increased geometrically.

  Morgan Grenfell was growing restless with Morgan Guaranty, which prevented it from entering the vital, lucrative U.S. market. Under Glass-Steagall, Morgan Grenfell couldn’t function as an investment bank in New York. “And I’m sure that from the viewpoint of the older, more senior Morgan Grenfell people, we were American upstarts anyway—second-class citizens and clearing-bank types,” said Rod Lindsay.

  Morgan Guaranty, meanwhile, was going like gangbusters in the Euromarkets and by the early 1970s had nearly six hundred people based in London—nearly the size of the entire bank in the 1950s. Companies that used Morgan Guaranty in home markets, such as Michelin and Siemens, flocked to it in London. When Danny Davison became Morgan Guaranty’s London manager in the late 1960s, he found Morgan Grenfell such a dry, sleepy place that he preferred doing business with Lazards or even Warburgs—a sore point at Morgan Grenfell. As liaison with 23 Great Winchester Street, Davison imagined he was entitled to share trade secrets. Early in his tour, he attended a partners’ meeting but found that confidential sections were neatly snipped from his briefing book. Insulted, he swore never to return. It was the same old confusion bred by the bizarre situation in which Morgan Guaranty held a giant stake in Morgan Grenfell, but was supposed to remain passive. If this appeased the Bank of England and the Federal Reserve, it went counter to logic and human nature.

  Around the same time, Lew Preston sent Sir John Stevens a letter protesting Morgan Grenfell’s mounting foreign-exchange dealings. As its New York banker, he was disturbed by excessively large open positions Morgan Guaranty had to cover. “From then on, there was a perceptible cooling off, although in the most friendly way,” recalled one ex-Morgan Grenfell executive. And as banker to Morgan Stanley’s new trading operation, Morgan Guaranty was also intermittently disturbed by its overdrafts.

  As shown by American Tobacco’s electrifying dash at Gallaher, Morgan Grenfell and Morgan Stanley had been drawn together by merger work. Sir John Stevens of Morgan Grenfell and Bill Sword of Morgan Stanley now contemplated a scheme for closer global cooperation. But they couldn’t proceed without Morgan Guaranty, which owned a third of Morgan Grenfell and shared in Morgan et Compagnie International, the Paris underwriting operation Morgan Stanley had inherited. (The latter now handled at least twice the Eurodollar financing of any other U.S. investment bank.) Morgan Guaranty was indeed intrigued by the notion of a foreign merger after a Morgan Grenfell delegation broached the idea at a confidential New York meeting in August, 1972. Disputes over the Morgan name, especially in Japan and the Middle East, had caused unending friction. Since some foreign customers would never fathom the whole Byzantine Morgan history, why not make an advantage of necessity? Paris had already shown the fantastic power latent in combined effort.

  So on June 20, 1973, exactly forty years after Pecora’s thunderous denunciations, members of the three Morgan houses journeyed to the Grotto Bay Hotel in Bermuda, a honeymoon hideaway, for a secret meeting. Its purpose—to resurrect the House of Morgan beyond U.S. regulatory reach. The precautions for secrecy were extraordinary. The operation had taken the code name Triangle and was so hush-hush that only the most senior people knew of the meeting. (Over sixteen years later, when Ralph Leach, then chairman of Morgan Guaranty’s Executive Committee, was asked about the Bermuda meeting, he replied, “What Bermuda meeting?” When it was described to him, he said bitterly, “Gee, it must be nice to be a Morgan insider.”22) For older Morgan people, the proposed reunion seemed to be a chance to relive glory days. The plan called for the three houses to pool their overseas securities business in something called Morgan International. Morgan Guaranty and Morgan Stanley would each have a 45 percent stake and Morgan Grenfell the remaining 10 percent. The new entity, in turn, would own half of Morgan Grenfell. In foreign outposts where they had sparred, the three houses would cooperate instead. It would be an elegant solution to the chronic identity problem.

  Important to these discussions was a momentous development that had taken place at Morgan Guaranty. In 1969, the firm created a one-bank holding company called J. P. Morgan and Company, reviving a name dormant since the Guaranty merger in 1959. “There was controversy about dropping the Guaranty name for the holding company,” explained Guido Verbeck. “But we just wanted to keep pushing that Morgan name. It was magical.”23 At first, Morgan Guaranty constituted virtually all of J
. P. Morgan and Company, but it would gradually shrink as Morgans became a diversified, financial conglomerate. Such one-bank holding companies allowed banks to expand into leasing and other fields and issue commercial paper exempt from Federal Reserve interest-rate ceilings. Along with CDs, commercial paper, and Eurodollar deposits, they helped to liberate 23 Wall from the constraints of Glass-Steagall. This new freedom perhaps made the bank more skeptical of any alliance.

  For all its imaginative appeal and historic resonance, the Bermuda meeting was a fiasco. A major obstacle was political: if banks no longer operated under direct political supervision, as they had with the 1920s foreign loans, they still behaved in a manner broadly consonant with national interests. They instinctively sought government protection for foreign loans and couldn’t casually defy the State Department or Foreign Office. As in the 1930s, geopolitical divergences in U.S. and British policy made cooperation difficult. “Morgan Grenfell was lending money to our friend Castro in Havana,” said Walter Page, then Morgan Guaranty president. “They were also lending money to North Korea. We couldn’t do that and Morgan Stanley couldn’t either. That kind of thing made it almost impossible.”24 The Cuban and North Korean loans were, in fact, guaranteed by the British government. Thanks to Sir John Stevens, Morgan Grenfell was also strong in export credits to Iron Curtain countries.

  For Morgan Grenfell, the meeting brought out an old ambivalence toward “big brother” in the proudly sensitive junior partner. As the smallest of the three Morgan houses, the British firm feared that it would be overpowered by the bigger Americans. This sentiment was especially prevalent in the Corporate Finance Department, which threatened a revolt if the deal went through. Great Britain was about to enter the Common Market. On that basis, David Bendall of Morgan Grenfell pleaded for a special British role, arguing that his firm had the best access to Commonwealth countries and should “lead” the new joint venture into Europe. “I guess I was the one who put his foot in the plate,” said Bendall. “The Americans said it was the most chauvinistic thing they had ever heard. But we felt we were being fitted into somebody else’s structure.”25 Lewis Preston and the Morgan Guaranty people felt they had been grossly misled as to the level of Morgan Grenfell enthusiasm. They had been prodded into the meeting in the belief of an imminent Morgan Grenfell-Morgan Stanley deal. The two American houses were also deeply offended by Bendall’s insinuation that Americans were disliked in Europe. Preston was so incensed that he threatened to sell Morgan Guaranty’s one-third stake, although he was soon calmed down by Morgan chairman Ellmore C. Patterson.

  The Baldwin coup at Morgan Stanley added complications. It had installed a new generation whose brusque, thrusting energy and irreverent style offended Morgan Grenfell sensibilities. “The Morgan Stanley boys were the real go-ahead graspers,” recalled a Morgan Grenfell official. “You could see a mile off they were just there for the grab. They were assuming they would be entitled to boss the thing and lead it.” Many Morgan Stanley naysayers, in turn, thought Morgan Grenfell a morguelike merchant bank full of lazy, pompous dukes and earls employing anachronistic methods. They were not about to play second fiddle to the Brits.

  The Morgan Guaranty people had secret reservations about the new venture with Morgan Stanley. As a former official at 23 Wall noted, “There was always a feeling at the bank that Wall Street [i.e., Morgan Stanley] was full of get-rich people.” The salary differential had always been a sore point: a Morgan Stanley partner might earn $150,000 in a bad year, $500,000 in a good year, so that even a junior partner might earn more than Morgan Guaranty’s chairman. Anybody who stayed at Morgan Guaranty had to believe it represented something superior. Otherwise why not jump ship and go to the more lucrative Morgan Stanley?

  Morgan Guaranty also jealously treasured the fruits of a spectacular decade of building up overseas branches and taking equity stakes in foreign banks. Of the three firms, it had experienced the most robust growth, traveling far beyond the little hothouse bank that stood in Morgan Stanley’s shadow in the 1950s. “By Bermuda, Morgan Guaranty was a real entity in this world and had more feet in a lot of places than any of the others,” Walter Page explained. “We would have been giving up a hell of a lot that we had accomplished already in Japan, Australia, Singapore, and Hong Kong.”26 By 1972, a third of J. P. Morgan and Company’s profits were coming from abroad, a figure that would soar to over 50 percent within a few years. It had moved furthest and fastest toward globalization and didn’t want to share its booty with others.

  The final set of reservations in this complicated game came from Morgan Stanley. Buoyed by its success in Paris, the firm felt understandably brash and confident and willing to go it alone abroad. “They thought they were big, independent, and successful and didn’t need nannies,” recalled an observer. Yet not everybody was opposed. Shep-pard Poor later said, “The internationalists thought it would be beneficial to expand our ties overseas. The domestic people thought we would be giving away more than we were getting.”27 Worried about Morgan Stanley’s limited capital, Frank Petito felt strongly about his firm’s need for Morgan Guaranty’s deep pockets. (The visionaries at all three firms were always obsessed with capital.) But Baldwin, suspicious of foreign business, which he often saw as a waste of time and money, didn’t provide the necessary push, despite his sentimental attachment to the Morgan name and history.

  At the Bermuda meeting, the House of Morgan—as a dream, a possibility, a will-o’-the-wisp—ceased to be. Afterward, the three firms largely went their own ways and evolved into separate and quite combative competitors. The age of interlocking partnerships, of spheres of interest and mysterious interplay among financial powers, was over. In 1974, Morgan Grenfell set up a New York representative office, the first beachhead of a counterinvasion. Far more than the two other firms, it would suffer from Bermuda’s failure, which might have given it a strong, early presence in global securities markets, albeit at the cost of its identity. A minority, led by Lord Catto, presciently believed that it was better to be a major player in global markets, even if in a junior role, than to be doomed to second-rate autonomy. In 1976, Morgan Stanley bought up the remaining one-third interest of the Paris operation, renamed it Morgan Stanley International, and packed it off to London under Archie Cox, Jr. In 1979, Morgan Guaranty, having at last recovered from the Schwab trauma, set up Morgan Guaranty Limited in London for Euromarket underwriting, facing off against the Cox venture. Both times Morgan Grenfell spurned invitations to participate, afraid of being swallowed up. Now the three Morgan houses would fight each other without quarter.

  At Bermuda, the House of Morgan died a quiet death. In characteristic Morgan style, the funeral itself was unknown to the outside world. No obituaries appeared in the press; it died in secrecy.

  WHILE Morgan Guaranty retained a tweedy, well-bred style of banking in the mid-1970s, Morgan Stanley experimented with a more muscular approach to business. It faced competitive threats that didn’t permit the old mannerly Morgan style. For all its braggadocio and chest-thumping swagger, the firm was very vulnerable, as Bob Baldwin realized when he campaigned for a new trading operation in stocks and bonds. As his chief visual aid, Baldwin would hold up an old tombstone ad and point out the legions of competitors who had perished. Morgan Stanley now faced a host of brawny rivals, trading powers such as Salomon Brothers and Goldman, Sachs, and that retail behemoth, Merrill Lynch. The gentlemanly way of doing business was becoming a privilege the firm could no longer afford. Morgan Stanley betrayed no mood of crisis. With clients such as

  General Motors, Exxon, General Electric, AT&T, and Texaco, it didn’t exactly panic. As Business Week said in 1974, “It is still the most prestigious of the investment banking houses, and its name still opens doors everywhere.”28 Even in appearance, Morgan Stanley partners seemed immune to the relaxed look of the times. Of a photograph of two dozen somber partners that illustrated the 1974 Business Week article, one writer noted, “The picture looked as though it might have been posed f
or at a mortician’s convention.”29

  Nevertheless, a crisis lurked below the surface. The investment banker’s historic role as middleman and gatekeeper of capital markets was being devalued. Mature companies could now sell commercial paper or place debt privately with institutions. Some companies had grown so rich—Ford; Sears, Roebuck; and General Electric—that they would serve as banks themselves. Lewis Bernard of Morgan Stanley accurately predicted: “Clients will try to do more for themselves. Our principal competition is our clients.”30

  The new trading and distribution wing shored up Morgan Stanley’s underwriting business. At the same time, it highlighted the fact that underwriting was becoming a humdrum commodity business. Morgan Stanley needed another main event, not just new sideshows. It found the answer in the predatory world of mergers and acquisitions, setting up Wall Street’s first M&A department in the early 1970s. As Morgan Grenfell had already discovered, it was an ideal business for posh but capital-poor firms.

  Merger work was no novelty to the firm. In the 1950s, Northey Jones had consolidated several carpet companies into Mohasco Corporation. Alex Tomlinson had been a matchmaker for British Petroleum in its purchase of a large stake in Standard Oil of Ohio. (Morgan Stanley’s role was hidden to avoid angering its seven-sister clients, who might not warm to a new oil giant in the U.S. market.) And Bill Sword aided Morgan Grenfell in the American Tobacco takeover of Gallaher. In the past, Morgan Stanley had collected a modest fee for such work or used it as a free loss leader to generate underwriting business. Merger work formed part of a total advisory relationship with clients. Some Morgan Stanley partners now objected to marketing it as a discrete service. This segmentation of the business, known as transactional banking, would gradually supplant the earlier system of comprehensive dealings with clients, or relationship banking.