The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  In the Truman years, there was still a lingering New Deal suspicion of Wall Street which culminated in one last cannonade against the Morgan interests. In October 1947, the Justice Department filed suit against seventeen investment banks and their trade group, the Investment Bankers Association, charging them with conspiracy to monopolize underwriting in violation of antitrust laws. The suit, U.S. v. Henry S. Morgan et ah, designated Morgan Stanley the leader of the plot and Harold Stanley its devious mastermind. Now in his sixties, the very proper Stanley—nobody’s idea of a conspirator—gruffly dismissed the case as “utter nonsense.” He thought the instigator of the suit was Cleveland financier Cyrus Eaton, the head of Otis and Company, who had tried to make a financial comeback after the collapse of his investment trust in the 1929 crash. In a thinly veiled reference to Eaton, Stanley said that “someone, for whatever reasons, has misled the Department of Justice.”2

  Dubbed the Club of Seventeen, these swank gangsters handled 70 percent of Wall Street underwritings. The rich procession of suspects included Kuhn, Loeb; Goldman, Sachs; Lehman Brothers; First Boston; Smith, Barney; Kidder Peabody; Dillon, Read; and Drexel and Company. Such firms as Lazard Frères, Merrill Lynch, and Salomon Brothers (which sympathized with the government’s case), weren’t yet influential enough to be suspected of gross criminality. Some, however, were secretly heartsick at being excluded from this band of class martyrs. As defense lawyer Arthur Dean of Sullivan and Cromwell said of those snubbed by the government, “It made them feel like second-class citizens.”3

  The suit extended charges raised in the late 1930s by the Temporary National Economic Committee. The chief instigators were vocal Morgan critics who had then advocated competitive bidding for railroads and public utility issues—Cyrus Eaton; maverick railroad man Robert Young, chairman of the Alleghany and C&O railroads, who had ambushed Harold Stanley by demanding competitive bids at a C&O board meeting in 1938; and Harold Stuart of Halsey, Stuart and Company, formerly banker to utility mogul Samuel Insull. Although larger than some Club of Seventeen firms, Halsey, Stuart and Eaton’s Otis and Company were excluded from the suit, confirming suspicions that those firms had provoked it. Toward the end of World War II, Stuart and Eaton held dozens of briefings with the Justice Department. Their efforts got a fillip when Truman became president: Truman, a disciple of Brandeis, favored compulsory bidding for securities to drive a wedge between companies and their customary bankers.

  When the Justice Department first lodged its suit, in 1947, some pundits saw an attempt by Truman to resurrect FDR’s crusade against the “money changers.” If so, Truman quickly lost interest, for there was no longer a public clamor to slay the bankers, who now looked more like dwarfs in giants’ robes. The suit came at a time of meager earnings, and the Money Trust had never looked less forbidding. The New Deal had chased the real financial giants—the old House of Morgan, National City, and Chase—out of the securities business. Ten members of the Club of Seventeen couldn’t even muster $5 million in capital. If one added up the combined capital of Morgan Stanley and the next seven investment banks, together they were only a third the size of the Chase and National City securities affiliates of 1929. Investment banks were populated by genteel, graying men in their fifties and sixties; younger men still shied away from a stodgy Wall Street that had never fully recuperated from the damage of 1929.

  The case was assigned to Judge Harold Medina, who would monopolize it like a stand-up comic working a nightclub audience. With clipped mustache and glasses, bow tie and furrowed brow, the cigar-smoking Medina sat through the interminable trial like a frazzled Groucho Marx, murdering the self-confidence of the prosecution. Appointed to the bench by Truman in 1947, Medina had sacrificed a lucrative law practice. He specialized in real “stinkers,” as he called them—long, tough, complex cases. After presiding over a stormy trial of eleven Communist party officials charged with conspiracy to overthrow the government, he won the nickname of the Patient Judge. But his patience flagged during the juryless trial against the Club of Seventeen. As the case dragged on for more than six years, producing a thirty-two-thousand-page transcript, Medina turned it into a comic purgatory, from which he delivered occasional howls of pain.

  The trial itself began on November 28, 1950. The government’s case was fine sociology but inept prosecution. It mistook a club for a conspiracy and a highly ritualized form of competition for oligopoly. Prosecutors got the externals of investment banking right, showing a white-glove world governed by gentleman’s agreements, back scratching, and tacit understandings—the Gentleman Banker’s Code. These practices were unquestionably clubby and unfair and worked to exclude outsiders. They just weren’t illegal.

  The case hinged on something called the triple concept. This said that blue-chip companies possessed “traditional bankers,” who retained exclusive rights to manage their issues. When these bankers formed syndicates to float a company’s securities, the rules of the game required that they assign the same “historical position” to participating firms—that is, the same allotment as on previous issues. Finally, by the rule of “reciprocity,” investment banks would swap places in each other’s syndicates. The triple concept captured the collusive form but missed the cutthroat spirit of Wall Street. The rules didn’t civilize the sharks but kept them from devouring each other in vicious feeding frenzies. Any firm would happily steal away another’s client—if they could—but most of the territory was pretty well carved up. Even Morgan Stanley never chased department-store business, which was locked up by Jewish houses.

  At first, the government traced the conspiracy to Morgan’s $500-million Anglo-French loan of 1915. While this added a little wartime drama, it also introduced a problem: how did the conspiracy survive Glass-Steagall and the breakup of so many banks? To solve this, the government devised the notion of “successor” firms—that is, J. P. Morgan had metamorphosed into Morgan Stanley, Guaranty Trust into Smith, Barney, and so on. Although Harold Stanley dismissed this as “farfetched” and “silly,” it had a rough plausibility. Old-timers still called First Boston “First of Boston,” which was an echo of its derivation from the First National Bank of Boston. To keep the trial’s length manageable, Medina cut off the successor issue. So the government revised the conspiracy to date from Jack Morgan’s 1933 statement before Ferdinand Pecora. Why Jack would have broadcast the new conspiracy to a nationwide audience before a hostile investigating committee wasn’t clear.

  Swamped with thousands of documents, Medina ordered an intricate, custom-made cabinet to manage the flow of paper. To learn more about underwriting, he followed a syndicate put together for a Con Edison issue at Halsey, Stuart’s Wall Street office. Yet the trial nearly brought him to a nervous collapse, a strain relieved only by doomsday humor. Bemoaning the suit’s slowness, he said, “I guess I was never supposed to have been a judge.”4 At one point, he counted six children born to lawyers during the trial. When a government attorney suggested a recess, his face brightened. “It’s wonderful to see that little glimpse of paradise,” he said.5 Coming back from one summer recess, he said bluntly that he “hated to get back to the trial.”6 At another point, the tension became so great that he leaned across the bench and whispered to the opposing lawyers, “How about a ball game?”7 They recessed to attend a Dodgers-Giants baseball game. When it came to gallows humor, Medina vied with Morgan Stanley’s lawyer, Ralph M. Carson of Davis, Polk, who described the proceedings as an “endless sandy waste” and “a Sahara of words.”8

  As a legal duel, the trial was highly uneven—three or four government prosecutors lined up against thirty-five of the highest-priced attorneys in New York. The courtroom crackled with sophisticated repartee. Terrified of losing, Morgan Stanley thought the suit was too important to be left only to lawyers. Young associates dredged up soot-blackened syndicate records from 23 Wall’s basement, and Perry Hall proofread the trial transcript daily. The partners only reluctantly opened their files to competitors and spent a lot of time s
tudying other firms’ documents. As letters and memos were made public, clients were also examining them in what turned into a great game of rampant voyeurism. Some at Morgan Stanley thought that Con Edison was never again as close to the firm after certain documents were made public.

  As managing partner until 1951, Harold Stanley was most directly involved. Unlike the feisty, red-blooded Perry Hall, Stanley was austere and remote and, to young associates, seemed older than God. He was so aloof from everyday affairs that at one syndicate meeting at 2 Wall, he was asked for his name by a young Morgan clerk. When he said, “Harold Stanley,” the young man replied, “And the name of your firm?”9 He was prepped for the trial by two young assistants, Alexander Tomlinson and Sheppard Poor. One day, Poor was waiting for a cab when Stanley appeared on the same corner, and the assistant graciously yielded to the older man. As Poor held the door open for him, Stanley said, “Thank you, Tomlinson.”10 Clerks were indistinguishable. But Stanley’s depositions proved a major factor in the trial.

  At first, Medina was impressed by the plethora of government documents. Yet in scanning charts of the Club of Seventeen’s performance, he noticed that while Morgan Stanley always stood at or near the top, telltale shifts occurred down below. First Boston zoomed up from number-ten underwriter during World War II to second place behind Morgan Stanley by the time of the trial. If the defendants were united by a deep, dark pact, why these striking shifts? Medina was also struck by the fact that no Morgan Stanley letter or memo even vaguely referred to the conspiracy. What sort of conspiracy lasted for decades but left no fingerprints? Without a documented agreement, Medina refused to apply the antitrust provisions of the Sherman Act.

  By the time Medina published his landmark 212-page opinion in February 1954, he believed he was chasing a phantom conspiracy constructed from flimsy circumstantial evidence. Where the government saw collusion, Medina saw “a constantly changing panorama of competition among the seventeen defendant firms.”11 He noted that when companies switched bankers, the winning firm gladly accepted the new client—a violation according to the rules of a conspiracy. Firms didn’t hustle Morgan Stanley’s august clients, he said, because “there was no point in running around, wasting one’s time, in a patently futile attempt to get business, where a competitor was on good terms with an issuer and doing a good job.”12

  Medina’s opinion was a paean to Morgan Stanley and probably the best advertising the firm ever got. He was amused by its policy of appearing alone atop syndicate mastheads or not at all, which reminded him of Hollywood starlets fussing over their marquee billing. He was enormously impressed with Harold Stanley. He praised Stanley’s “absolute integrity” and said Morgan Stanley’s entire history would have been different without him. Then he added, “The fact that Stanley denied the existence of any such conspiracy as charged . . . is one of the significant facts of the case.”13 This was a very peculiar statement: Medina was saying that a defendant’s mere assertion of his own innocence was somehow proof of that innocence.

  The Medina trial would soon seem an almost nostalgic glance at a rapidly fading Wall Street. “Banker domination” wouldn’t be the problem of the Casino Age, and even dedicated trustbusters at the Justice Department thought the suit about fifteen years too late. The cozy banker-company ties would finally end, not through judicial ruling or executive fiat but by structural changes in the marketplace. Over the next generation, the entire system that the Justice Department exposed would be rudely torn apart, and the firm most directly threatened would be the one with the most loyal clients to lose—Morgan Stanley.

  IN the last stages of a trial conducted by depositions, Judge Medina yearned to question a live witness—someone he could “look in the eye,” as he said eagerly. The government obliged with Robert Young, chairman of the Chesapeake and Ohio Railroad and certifiably America’s most rabid Morgan-hater. He was the man who smarted after being rebuked by Tom Lamont for his testimony at the Wheeler railroad hearings in the late 1930s. Touted by the press as the Justice Department’s “anti-Morgan machine gun,” he so ardently supported the suit that Davis, Polk’s Ralph Carson suggested it be renamed Young v. Morgan.14 Sounding his favorite theme of Morgan and Kuhn, Loeb domination of the railroads, Young fired broadsides from the witness stand until Medina glared at him. “This is a courtroom and there will be no appealing here to the public over the head of the judge,” Medina snapped.15 He criticized Young’s “hell raising propensities” and mocked the notion that any banker could control Robert Young.16 When Young stepped down from the stand, he extended his hand to Medina, who just gave it a withering look.

  A dapper, pint-sized Texan, Young could seem boyish, with his bulbous nose, pink cheeks, and dimples. Then his face would tighten, his blue eyes would blaze, and he would stare with icy fury. His lifelong Morgan obsession bespoke secret envy. He told Medina that as a young man, he felt “in banking all roads led to Rome and to me the Corner was Rome.”17 He rose through the Morgan universe, first as a worker at a Du Pont plant during World War I, then as a General Motors assistant treasurer in the 1920s. Before the 1929 crash, he advised Pierre du Pont to switch from stocks to bonds and won a following as an investment adviser among rich executives. And in 1937, Young and his sidekick, Allen P. Kirby, had bought control of the bankrupt Alleghany empire, still heavily indebted to J. P. Morgan and Guaranty Trust. The House of Morgan always suspected that he espoused competitive bidding to camouflage the fact that, by controlling six railroads, he was a monopolist himself.

  Robert Young was a prototypical man of the new age, a publicity monger adept at courting public opinion. In the early 1950s, he seemed to grin from every magazine cover, deriding the sleeping cars he called rolling tenements and blaming “Wall Street banker control” for decaying railroads. In one celebrated ad, he showed a happy hog riding in style in a cross-country cattle car, the caption read, “A HOG CAN CROSS THE U.S. WITHOUT CHANGING TRAINS—BUT YOU CANT.’18 He even had a magazine moniker dreamed up by his publicists—the Daring Young Man of Wall Street. This exponent of people’s capitalism lived like a mogul, buying a forty-room Tudor mansion in Newport from a Drexel family member. He had a cream-colored Spanish villa in Palm Beach and a sumptuous apartment at Manhattan’s Waldorf Towers.

  For a man of such ambition, the giant C&.0—a dusty, coal-carrying railroad—lacked suitable cachet. Instead, he craved the glamorous New York Central, America’s second-biggest railroad, which ran sleek passenger trains, such as the Twentieth Century Limited from Chicago. For a century, it was known as the Vanderbilt road or the Morgan road. It still boasted two authentic Vanderbilts on its board, plus George Whitney and five other Wall Street bankers. For a Texas insurgent like Young, the New York Central epitomized the eastern financial establishment. It was the final inner sanctum that he longed to enter. By 1947, Young, with four hundred thousand shares of the railroad, was its largest stockholder. But feeling threatened, the board refused to grant him more than two seats, and even these were then withheld by the Interstate Commerce Commission on antitrust grounds.

  By late 1953, Young and his troops amassed one million shares of New York Central stock, or nearly 20 percent of the total. Ordinarily this would translate into control, but the railroad wouldn’t submit gracefully to its fate. In February 1954, its blue-ribbon board met at the University Club and adamantly refused to put Young on the board or make him chairman, as he demanded. It was a pompous, hidebound reaction of people who were clinging to outdated prerogatives. Perhaps to forestall charges of Vanderbilt-Morgan control, one Vanderbilt and George Whitney skipped the critical meeting. A humiliated, vengeful Young launched a proxy battle that would turn into the decade’s most bellicose corporate skirmish, prefiguring takeover wars of a generation later. To avoid antitrust problems, he resigned from the C&O board and sold its New York Central stake to a friend, Cleveland financier Cyrus Eaton. Now he could storm the Central.

  Though Young mouthed old Money Trust cliches, the financial landscape had cha
nged markedly. Family ownership was a disappearing force in the American economy. Where William Vanderbilt had once inherited 87 percent of the New York Central from Commodore Vanderbilt and hired Pierpont Morgan to disperse the shares, his descendant, Harold Vanderbilt, now owned less than 1 percent of outstanding shares. The “banker-dominated” board held less than 2 percent of all shares. After Glass-Steagall, Morgans, Chase, National City, and the rest couldn’t hold large equity stakes in companies, further eroding their influence. So the glue that compressed companies, banks, and rich families into a coherent financial class was coming unstuck. Meanwhile, New York Central stock was dispersed among forty thousand small shareholders, whom Young called Aunt Janes and assiduously courted. However much he railed against the “interests,” Young knew that financial power was becoming more pluralistic in the new age. The real threat to the House of Morgan would come, not from Washington, but from new financial powers beyond the control of the old eastern elite. The short Texas raider was a portent of later raiders and mavericks, many from the old populist strongholds of the South and West, who would take pleasure in taunting the Wall Street establishment.