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

by Ron Chernow

  The New York banks doggedly fought to retain these privileges. At one point early in the Johnson administration, Washington tried to stop American banks from keeping Eurodollar accounts in branches abroad. An assistant Treasury secretary named Paul Volcker invited Morgan’s head of international banking, Walter Page, and others to Washington for comment. The bankers delivered a stern warning. “We said it was the end of the American banking system,” recalled Page. “You will throw us out of Europe and Singapore and Japan. And, my God, Paul that evening rewrote the whole basis with me. He got it all done before you could say Jack Robinson.”40 The regulation was dropped. In Volcker, Morgans had its paladin for the next twenty-five years.

  While Morgan Grenfell dozed, that perennial London iconoclast, Siegmund Warburg, sponsored the first Eurobond issue for the Italian Autostrade in 1963. Morgan’s new Paris subsidiary was an early star in this market. Since the Guaranty merger provided duplicate Paris offices and an embarrassing surplus of mansions, Morgan kept its place Vendome branch, while the new Morgan et Compagnie, S.A., moved into the chandeliered Guaranty branch at 4 place de la Concorde near Maxim’s. Once called the Hotel de Coislin, the building was a national monument. In it, Benjamin Franklin signed the treaty with France recognizing U.S. independence, and Chateaubriand wrote his romances. During World War II, it was occupied by the Gestapo. From its glittering interior, the House of Morgan would launch its assault on global securities markets.

  Besides opening up the Paris operation, the new Euromarkets provided a chance for the Morgan banks to expand their relationship with the Vatican. During the 1950s, almost all Vatican funds in New York were managed by the J. P. Morgan Trust Department, just as almost all Vatican funds in London were under Morgan Grenfell’s supervision. In the late 1950s, after the retirement of Bernardino Nogara—the mysterious, powerful creator of the Special Administration of the Holy See—the House of Morgan lost its foremost papal ally. To fortify the relationship, Morgan Guaranty, Morgan Grenfell, and Morgan Stanley joined with the Vatican in 1963 to form a Rome investment bank called Euramerica. The Vatican was financially rich and innovative in the 1960s—it controlled Immobiliare Roma, which built the Watergate Hotel in Washington—and Euramerica was supposed to be the first American-style investment bank in Italy.

  The new operation was managed by Dr. Nicola Caiola, whose father headed a prewar Vatican trade department and who himself grew up in Vatican City. After working as a junior stock analyst under Nogara in the late 1940s, he got a Banca d’Italia fellowship and apprenticed at J. P. Morgan and Company and Morgan Stanley in the early 1950s. While Caiola was visiting Rome in the early 1960s, the Vatican expressed interest in sharing an investment bank with the Morgans; Caiola returned to the United States to prepare a blueprint. Morgan Guaranty and Morgan Grenfell leapt at the chance, but Morgan Stanley, which then had a curiously provincial and complacent attitude toward the outer world, joined in only reluctantly. On the eve of Caiola’s departure for Rome, Harry Morgan summoned him and said, “Remember, it took us a long time to establish our name. Our name is now in your hands.”41

  The Vatican took a one-third interest, and the Morgan houses another third, while the remainder was divided among Italian companies. Despite its weighty Vatican patronage, Euramerica was a swinging operation, a Euromarket pioneer. Although based in Rome, it did dollar financing and challenged the investment banking monopoly of Italy’s omnipotent Mediobanca. It was profitable every year until 1971, when the Morgans bowed out because they faced a conflict of interest with their thriving Paris operation.

  Meanwhile, in Paris, Morgan et Compagnie, S.A., made what looked like an extremely auspicious debut. In February 1963, it launched a Euroequity (stock) issue for Germany’s largest mail-order house, Neckermann, which owned twenty-three department stores. In taking his company public, founder Josef Neckermann planned to retain a majority interest. Friedrich Flick, possibly Germany’s richest man, the scion of a steel family and a convicted war criminal, wished to sell his Neckermann stake. Neckermann feared that these shares would fall into the hands of German banks, which are permitted to hold industrial stakes. He was particularly eager to bypass Deutsche Bank, Germany’s largest, which controlled a veritable industrial empire. Neckermann favored global syndication, with only a small portion of the shares allotted to Germany.

  For the new Paris operation, the Neckermann issue seemed a smashing success. Morgans bought the $30-million issue, then turned around and resold it to Belgian, Swiss, and Dutch banks. In London, where Morgan Grenfell led a large purchasing group, the issue shot up to a premium. Said Evan Galbraith, then a leading Morgan man in Paris: “It was the first internationally marketed issue. People saw you could distribute something on an international basis.”42 There was one telltale hint of trouble, however. When Morgans sent out the offering by telex, German banks didn’t answer. When Deutsche Bank then complained about the issue’s being sold outside Germany, Galbraith said Morgans was simply heeding the client’s wishes. He didn’t quite fathom the depth of anger he had aroused or how deeply he had offended tradition. Deutsche Bank would bide its time and get even in extremely dramatic fashion.

  Though extraterritorial in nature, the early Euromarkets were riled by fierce nationalistic clashes. Except in the Eurodollar market, banks expected to lead issues denominated in their own currencies. (The U.S. Treasury even briefly insisted that American firms lead Eurodollar issues.) The now-swaggering Morgans came up against this parochialism when it tried to invade the most sacred banking monopoly of all—that of Switzerland. Crédit Suisse, Swiss Bank Corporation, and Union Bank of Switzerland formed a cartel that dominated Swiss franc issues, and outside banks defied them at their own peril. The Morgan Paris operation did just that in September 1963, when the city of Copenhagen wished to raise money and its treasurer consulted friends at Morgan Grenfell. As Tim Collins of Morgan Grenfell, recalled, “Somebody had the bright idea that since interest rates were low in Switzerland, why not denominate the issue in Swiss francs?”43

  This time, Galbraith warned 23 Wall Street to expect an angry response, though nobody quite expected the furor that erupted. “The Swiss banks went bananas,” said Galbraith. “They called up Henry Alexander and said, ’You can’t do this. Swiss francs are not an international currency. They should be controlled by the Swiss. . . . Henry was swamped with phone calls, threatening all sorts of things.”44 The Swiss government told Washington that if further flotations occurred, they would convert dollars into gold and sink the dollar. They refused to let their money function as an international currency. They also pressured the Bank of England. “There was a froideur between the Bank of England and the Swiss central bank for some time,” recalled Collins.45 The ill-fated Copenhagen issue was both the first and the last Swiss-franc Euroissue for a generation.

  Meanwhile, the Germans still smarted from the Neckermann issue and awaited a chance to retaliate. When Morgan et Compagnie, S.A., announced an issue for another German mail-order house, Friedrich Schwab and Company, Deutsche Bank saw its golden opportunity for revenge. Instead of obtaining written contracts from underwriters, Morgans proceeded with far more tenuous “indications of interest.” This would prove a fatal mistake. The firm also enlisted a small German trade-union bank that would prove too weak to stop the coming onslaught. Once the issue was announced, Deutsche Bank sprang its power play, putting intense pressure on banks around the world not to participate. It was a full-scale disaster for Morgans, which had to swallow $9 million worth of the $13-million stock issue, a huge amount for those days. The New York office was stunned.

  The passive partner, Morgan Grenfell, was very upset by the brash “American” way in which the Morgan Guaranty people had conducted themselves. Under U.S. law, 23 Wall couldn’t pump in more capital, and Morgan Grenfell had to organize a temporary rescue among London’s merchant banks—an act for which it felt itself insufficiently appreciated by its American cousins. The Paris operation was later bailed out when Singer
Company chairman Donald Kircher, who sat on Morgan Guaranty’s board, bought Schwab for $16 million.

  In the meantime, another complication arose, deepening the sense of disaster in Paris. The SEC ruled that Morgans couldn’t both act as a trustee for companies in New York and underwrite for them in Paris. This was the last straw: Morgan Guaranty withdrew from running the Paris operation. “John Meyer, head of international operations, was very downhearted as a result of the Schwab deal,” recalled Galbraith.46 Shattered by the Schwab affair, Morgan Guaranty wouldn’t return to Euromarket issues for more than a decade. For a bank so surefooted in foreign markets in the 1920s, it was a crushing defeat and left a legacy of self-doubt in securities work.

  Enter Morgan Stanley, then a bit belatedly discovering the Euromarkets. While Henry Alexander had busily set up operations around the world, Morgan Stanley still lacked a single European office. It began to shed its insularity in 1966, when Bill Sword and Frank A. Petito made a secret trip to Rome and met with Guido Carli, head of the Banca d’Italia. Petito, born in Trenton, New Jersey, was the first Italian-American partner at Morgan Stanley and had always been a potential secret weapon in Italy. But he didn’t speak Italian, and the aging, aristocratic Giovanni Fummi, who still advised the Morgan houses in the 1950s, scoffed at him as a peasant.

  The imaginative Petito had an inspiration. From Italian exports and overseas remittances, Carli had stored up $4 billion in excess dollars. Petito suggested that Morgan Stanley’s big clients in Italy—Exxon, General Motors, and Du Pont—could borrow in liras and convert them into dollars the same day, relieving Carli of his excess. Carli was delighted and swore Morgan Stanley to silence about this exclusive deal. In two whirlwind months, Morgan Stanley did $600 million worth of the secret lira loans, whetting the firm’s appetite for European work and building its reputation for finding pockets of money buried around the world.

  In January 1967, Morgan Guaranty brought in Morgan Stanley to run the ailing Paris operation, selling it two-thirds of the business; it retained a one-third share with Morgan Grenfell, the Dutch firm of Mees and Hope, and the Wallenberg family’s Enskilda Bank of Stockholm. The one-third stake was patterned after Morgan Guaranty’s one-third stake in Morgan Grenfell. Petito was willing to give Morgan Guaranty half the Paris operation, but the bank’s confidence was shattered after the Schwab debacle, and it preferred a minority share.

  For this new Morgan et Compagnie International, the old crew was pushed out and a more seasoned Morgan Stanley group under Sheppard Poor came in to run it. Their advent coincided with a Eurobond boom. Once Morgan Stanley shook off its insularity and discovered the outside world, it made a spectacular success in Paris, financing Standard Oil of New Jersey, U.S. Steel, Eastman Kodak, Texaco, American Tobacco, Procter & Gamble, Amoco, and so on. As the lugubrious atmosphere waned, the Paris venture surpassed all rivals. By 1975, it would issue $5 billion in yearly offerings.

  With Morgan et Compagnie International, the Morgan community of interest evolved into a more direct fusion of overseas securities work. Without fanfare, the House of Morgan was being welded back together. It was a loose partnership. Morgan Guaranty’s involvement in Paris was passive, one of many minority stakes it held, and John Meyer, Jr., saw it mostly as a way to avoid having to refer clients to Chase or First National City for Eurobusiness. Yet whatever its limitations, Morgan et Compagnie International represented partial repeal of Glass-Steagall.

  At 23 Wall, it hurt Morgan Guaranty to hand over the Paris reins to Morgan Stanley. The Morgan Stanley people felt Morgan Guaranty never delivered the promised clients, while Morgan Guaranty always sensed inadequate gratitude for having launched Morgan Stanley abroad. (The Morgan houses were always amazingly thin-skinned with each other.) It was a turning point for Morgan Stanley, which gained a critical foothold in Europe. It sent “revolvers” to Paris, who got international seasoning. Morgan Stanley proudly applied its new Morgan et Compagnie label to all overseas issues except those of Australia. In those days, it never dawned on Morgan Guaranty that it was breeding a competitor or that it would emerge as a rival investment bank of Morgan Stanley in the 1980s.

  Morgan Guaranty kept one piece of European business all to itself. In 1968, it started Euro-clear in Brussels, the largest clearing system for Eurosecurities and the first to automate the market. Initially it aroused powerful, paranoid resistance from European banks, which thought their inner secrets would be divulged to the House of Morgan. The genius of Euro-clear, in fact, lay elsewhere. It became enormously lucrative because traders left in the system money that could be lent to other participants, who used their Eurobonds as collateral. Morgan Stanley was never invited to share in the Brussels operation. The community of interest among the Morgan banks was always a community of convenience. Whenever one bank dug up buried treasure, it hoarded it and tried to keep it from its Morgan brethren. Hence, this era of collaboration among the Morgan banks, far from bringing them closer together, would eventually drive them apart, breeding mutual suspicions and accusations of double-dealing. Their relations would end up having the special rancor of a family feud.

  JAPAN was the country that produced the most persistent friction between Morgan Guaranty and Morgan Stanley. Outside Europe and North America, finance ministers frequently assumed Morgan houses were closely affiliated and constituted a de facto House of Morgan. This confusion was most pronounced in Japan, which had its own conglomerates, or zaibatsu, organized around core banks. “Every time they wrote about us in the Japanese newspapers,” recalled Jack Loughran of Morgan Guaranty, “they would refer to the Morgan zaibatsu that controls General Motors and U.S. Steel.”47

  For a long time after the war, the problem seemed academic as Japan emerged slowly from its defeat. When Tokyo’s stock exchange reopened in 1949, it was a small, provincial affair. During the occupation, General Douglas MacArthur reformed Japanese finance along American lines and even authorized a Glass-Steagall equivalent, Article 65, separating banking and securities work. MacArthur wanted to splinter and neutralize the zaibatsu that had dominated interwar Japan and cooperated with the military in their East Asian conquests. Briefly, Japanese banks took on neutral occupation names. When the Americans left, Mitsubishi, Sumitomo, and the others reverted to their traditional names. During the occupation, four American banks—National City, Bank of America, Chase, and Manufacturers—set up branches to serve military personnel. After admitting American Express for traveler’s checks, the Ministry of Finance halted further foreign penetration, and the “bamboo curtain” descended.

  As their economy rebounded in the early 1950s, the Japanese wanted to reinstate their spotless credit reputation and make good on old Morgan-sponsored debt—the 1923 earthquake loan and the 1930 gold-standard loan—on which they had stopped payment after Pearl Harbor. Boasting that they hadn’t defaulted in two thousand years, they made a great ceremony of resuming payment and refurbishing their Morgan ties. After Japan signed the peace treaty with the United States in 1951, a Ministry of Finance official came to 23 Wall saying, “I have come to honor my signature.”48 With help from Smith, Barney and Guaranty Trust, Japan serviced its bonds in full, and two Smith, Barney officials were decorated by the emperor.

  J. P. Morgan and Company had always been proud of its preeminence in Japan. The bank would cite decorations bestowed by Emperor Hirohito upon Jack Morgan, Tom Lamont, and Russell Leffingwell. But in the 1950s, its scant resources were exhausted by England and France, and it couldn’t re-create its special relationship with Japan. This began to change after the merger with Guaranty, which had been a major trustee for Japanese government and electric-utility bonds. It was also a Wall Street training ground for many Japanese bankers, who went home and copied its forms for their own banks.

  The two banks had another advantage in pursuing Japanese business—a virtual monopoly in American depositary receipts or ADRs, which were invented by Guaranty Trust back in 1927. ADRs permitted American investors to buy foreign stocks in the Unite
d States with a minimum of difficulty. They would actually buy receipts against shares held in a foreign bank vault. The coopera-ting American bank would convert dividends into dollars and spare the investor foreign-exchange problems. In the spring of 1960, Regis Moxley of Morgan Guaranty, an evangelist for ADRs, visited Japan to preach their virtues. Afraid ADRs would breach the nation’s capital controls, the Ministry of Finance warily consented to an ADR for Sony, the first ever for a Japanese stock. Setsuya Tabuchi, chairman of Nomura Securities, later said, “If there was a single milestone in the internationalization of the Japanese financial market, it came in 1961 when Sony issued American depositary receipts in the U.S.”49

  As with Schwab, Morgan Guaranty, long absent from foreign markets, inadvertently stirred up local ire. With ADRs, Morgans had to assign a foreign bank to hold the actual shares while it issued tradable receipts in New York. Naively hoping to spread business democratically among Japanese banks, Moxley tapped the Bank of Tokyo as custodian for Sony’s ADR. He didn’t realize that as Sony’s principal banker, Mitsui would resent encroachment on its territory. An incensed Mitsui delegation appeared at Morgan’s doorstep to protest this serious violation of protocol. “They almost chopped my head off,” declared Bob Wynn of Morgan Guaranty. When the bank issued ADRs for Toshiba, Hitachi, and Fuji Iron and Steel, it didn’t repeat the error.

  In the 1960s, Morgan Guaranty decided to pierce the bamboo curtain and upgrade its representative office into a Japanese branch—extremely difficult at the time. It faced a terrible handicap because of Morgan Stanley’s attitude toward the country. Morgan Stanley had mostly confined its foreign dealings to tried-and-true Western clients—Canada, Australia, France, and Italy. Spoiled by its rich American clientele, it was more ambivalent about foreign markets than was Morgan Guaranty. The problem was compounded by the fact that several partners were war veterans and openly antagonistic toward Japan. This attitude didn’t matter in the 1950s, when Japan was still poor and borrowed heavily from the World Bank. Later in the decade, however, World Bank president Eugene Black told two Ministry of Finance representatives that a rejuvenated Japan had outgrown the World Bank and should tap Wall Street on its own. When they asked Black whom they should see, he handed them—just by coincidence—a World Bank prospectus with First Boston and Morgan Stanley on the top.