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

by Ron Chernow

  At one point, AT&T came to Hinton and said, “We want to make you a major pension fund manager for AT&T, but we’ll only pay you quite a low fee.” Hinton said he couldn’t charge them less than any other client and refused to do business with them. Exxon said to Hinton, “We want to do business with you, but we want to direct the brokerage fee.” Hinton thought the Exxon treasurer wanted to make a big figure with his brokerage friends out in the Hamptons and said, “No way.” Another time, Meshulam Riklis bought control of a company that was a Morgan client and wanted to use its pension funds for his own machinations. Hinton threw him out of the office.15

  What made the affair so devastating for Hinton was that Lamont blamed him for making the purchases. (Perhaps the most convincing proof of Lamont’s innocence.) “He never forgave me,” recalled Hinton emotionally. “All the other Morgan officers tried to tell him he was wrong, but he never forgave me.”16 Lamont was haunted by the case and treated it as a personal crusade. Insisting upon his innocence, he ran up enormous legal bills with Davis, Polk and fought in both the legal and the political arenas. Stung by the Times coverage, he typed up a twelve-page critique and handed it to executive editor Turner Catledge over lunch. It said the paper had “over and over again given special emphasis to me in its stories dealing with the Texas Gulf case. . . . I am bothered by this record of inaccurate reporting and careless editing.”17 Ducking the issue, Catledge said that headlines by their very nature were cryptic.

  Some people charged by the SEC were clearly guilty of insider trading. One geophysicist had bought shares the day before the news conference; another company official, the previous night. Ordinarily, insider prohibitions disappeared once news was publicly disclosed. Now the SEC promulgated a new standard, arguing that news had to be released and digested by the public before insiders could trade—a hazy definition that would prohibit buying for minutes or days afterwards. At first, the SEC identified 10:55 as the moment the legal embargo ended, when the Timmins news moved on the Dow Jones tape. A year later, it arbitrarily stretched the period to encompass Tommy Lamont’s purchase at the office at 12:33 P.M.—an outrageously long time after the news conference was disbanded. As Hinton said hotly, “If the SEC intends to make a new rule on that point, well and good . . . but it is not fair to write a rule retroactively.”18

  Lamont’s defense team dwelled upon a supposed twenty-minute delay before Jerry Bishop’s report ran on the Dow Jones broad tape. Lamont was alleged to be the victim of a technical glitch. But Bishop and his editors didn’t think there was any delay at all. A year or two after the trial, Bishop figured out why there appeared to be a delay. Lamont’s lawyers had assumed that Norma Walter had filed her Merrill Lynch report after the news conference; in fact, she had filed her story twenty minutes before the other reporters. Whether or not Bishop is correct doesn’t affect the guilt or innocence of Tommy Lamont, who instructed Hinton to watch the tape. But if he is correct, Lamont must have gone to the phone almost immediately.

  In December 1966, District Judge Dudley J. Bonsai exonerated eleven of the thirteen defendants, including Lamont. He said the facts were public information once relayed to reporters on August 16, 1964, and that Lamont and Hinton had acted entirely properly. While the SEC appealed, Lamont’s health took a turn for the worse. He had a heart condition and suffered from fibrillations exacerbated by tension and depression. In April 1967, he checked into Columbia-Presbyterian Medical Center; he never regained consciousness after undergoing open-heart surgery. As soon as the SEC heard the news, they called S. Hazard Gillespie, Lamont’s lawyer at Davis, Polk, and said they were dropping their appeal. Perhaps in atonement, the Times ran a fulsome, three-column obituary of Lamont that was disproportionate in length to his historical importance. It was a recurrence of an old Morgan condition—public exposure and political harassment leading to death.

  However misguided in its pursuit of Lamont, the SEC in the Texas Gulf case drew attention to the growing dangers of financial conglomeration in the Casino Age. As both commercial and investment banks developed huge, diversified operations, it would be increasingly difficult for them to segregate diverse and often legally incompatible operations. A few years later, the Morgan bank was accused of selling stock in the failing Penn Central based on information passed to the Trust Department by a lending officer—charges the bank always denied and that were never conclusively settled. Its Trust Department was finally moved to Fifty-seventh Street so that it would be physically separate from the rest of the bank. Years later, the problem posed by conglomeration would reappear for Morgans as it entered merger work, and it would generally shadow the burgeoning Wall Street banks and brokerage houses throughout the postwar years.

  IN London, meanwhile, the City had sloughed off its sleepy atmosphere. By the mid-1960s, there were now two Cities. One was a clubby, bowler-hatted core that dealt in sterling and was protected from foreigners by the Bank of England. Here whispered references to Grandma meant the governor of the Bank of England. This world required attendance at good schools and the right contacts for success and was ruled by patrician families.

  The second City was a rich colony of foreigners trading in the new Euromarkets, and it would eventually surpass the domestic City in size. As if deploying an army for battle, Morgan Guaranty sent its crack young executives to London. So many Americans flocked to the City that the British press muttered about “Yank banks” and dubbed Moorgate the Avenue of the Americas. Starting with a Bankers Trust issue for Austria in 1967, these foreign bankers put together large syndicated loans, for many countries, paving the way for massive Latin American lending in the 1970s. In this more egalitarian City, capital, not contacts, determined success.

  With the Guaranty merger, Morgans inherited a full-fledged London branch on Lombard Street, a short walk from Morgan Grenfell. This sharpened an old dilemma: were Morgan Grenfell and Morgan Guaranty partners or competitors? Protestations of fraternal warmth were often clouded by mutual suspicion. Morgan Guaranty’s London staff thought Morgan Grenfell “didn’t help them any more than any other merchant bank and, in fact, were inclined to be a little more suspicious of them,” declared Rod Lindsay, later a Morgan Guaranty president.19 When Lew Preston managed the London branch in the late 1960s, he found Morgan Grenfell opportunistic, quick to share bad deals but tending to hoard the good business. “Lew perceived the one-way-street nature of things,” remarked an associate. “The benefits were flowing in one direction.” Preston found it hard to convince his troops that Morgan Grenfell wasn’t a competitor.

  There was cultural friction, too. Junior Morgan Guaranty people were excluded from the partners’ room at 23 Great Winchester Street when seniors went inside. Especially infuriating was Morgan Grenfell’s condescending treatment of a young British foreign-exchange trader, Dennis Weatherstone, son of a London transport worker. In 1946, Weather-stone, at the age of sixteen, had started as a bookkeeper at Guaranty’s London branch while attending night school. With his quick mind for figures, he excelled in the lightning-fast trading that was now transforming banking. In the mid-1960s, he was spotted by Lew Preston, who noticed that people kept stopping by his desk to ask questions; Preston promoted him to deputy general manager in London. The short, wiry Weatherstone was a local hero for working-class recruits to the City. Some of Morgan Grenfell’s aristocrats found no romance in this proletarian success story and snubbed Weatherstone, who later ended up president of the House of Morgan: he would decide that his career opportunities in New York were wider than those in the class-bound City.

  Morgan Grenfell was an inbred, marginally profitable firm that was being strangled by its own pomposity, as the acrimonious aluminium war had shown. Its stagnation spawned gloomy humor. One City journalist, Christopher Fildes, recalled his editor keeping a headline in standing type: “FIRST WIN FOR MORGAN GRENFELL”; the editor joked he might need it some day.20 Morgan Grenfell directors stuck to their old, informal style of doing business. They wouldn’t advertise, seldom held
formal meetings, and made decisions informally in their partners’ room.

  Entering the 1960s, the firm was owned by a tight-knit cluster of families—Grenfells, Smiths, Harcourts, and Cattos—and by Morgan Guaranty, which held a one-third share. To create incentives for its young executives, the bank issued new shares, which would gradually dilute the power of the old families. Morgan Grenfell also created new “assistant directors”—a seemingly petty organizational detail that for the first time allowed commoners to ascend into the formerly closed caste of directors: the senior partner, Viscount Harcourt, wanted to end the rigor mortis. In 1967, right before the second Lord Bicester—the jolly Rufie—died in a road accident, Harcourt recruited the virile Sir John Stevens, executive director of the Bank of England, to open up overseas outposts.

  Among its young professionals, Morgan Grenfell’s stodgy reputation bred an exaggerated thirst for freedom. In 1967, Stephen Catto, the former partner’s son, invited film producer Dimitri de Grunwald for lunch at 23 Great Winchester. De Grunwald had a brainstorm: if distributors could finance film production through a global consortium, they could shatter America’s monopoly in filmmaking; he denied that only Americans could make westerns. Eager to show it could move with the times, Morgan Grenfell decided to back the venture.

  To prove his point, de Grunwald signed up Sean Connery and Brigitte Bardot for Shalako, a film about an aristocratic safari of Europeans deep in Apache territory; it was an instant success. The idea of a staid old merchant bank financing Brigitte Bardot was symptomatic of Morgan Grenfell’s inner ferment, its itch for experimentation. Elated, de Grunwald talked of his dreams for developing film talent. “He believes the secret of success is not to play safe,” noted the London Times. These famous last words set him up for the catastrophic Murphy’s War (Murphy’s Law might have been more apt), on which Morgan Grenfell took such a bath that the Bank of England intervened; Grandma placed a man at 23 Great Winchester to straighten the mess out. “At least it kept us out of the shipping and property disasters of the early 1970s,” said Lord Catto philosophically.21

  But the firm was shedding its past caution too quickly. The man who accelerated the process was Lord William Harcourt, a great-grandson of Junius Morgan’s. With trim mustache and narrow face, round spectacles, and a bow tie, Bill Harcourt was a funny, snobbish man who wouldn’t deign to shake hands with a junior member of the firm. Behind the imperious air, he hid a wicked wit, an acute sense of the ridiculous. He had served as British economics minister in Washington and U.K. executive director at the IMF-World Bank and was known as Morgan Grenfell’s political fixer.

  The son of a colonial secretary and grandson of a chancellor of the Exchequer, Harcourt graduated from Eton and Oxford and married the only daughter of Baron Ebury. Harcourt and his wife lived in splendor at Stanton Harcourt, a family estate with several acres of gardens behind high walls. A visitor, Danny Davison of Morgan Guaranty, recalls gaping at its magnificence. “Gee, this is a magnificent place you have here,” he boyishly told Harcourt. “When did you get it?” “Ten-eighty,” was Harcourt’s crisp retort.

  The contradictory Harcourt piloted the firm into the treacherous waters of controversial takeovers. They were common in the City by the mid-1960s, driven by a new management creed that only multinational corporations could survive in the new age. By 1968, seventy of Britain’s one hundred largest companies had been involved in takeovers in just two years. Where Morgan Grenfell had indignantly protested Siegmund Warburg’s tactics in the aluminium war, it was now determined that the firm would surpass him in verve and even ruthlessness.

  The takeover that revealed this shift was the battle for Gallaher, the manufacturer of Benson and Hedges cigarettes. In May of 1968, Morgan Grenfell and Cazenove, the blue-blooded stock broker, helped Imperial Tobacco sell off a 36.5-percent stake in Gallaher; Imperial had to divest it on antitrust grounds. The underwriting was a fiasco that left the underwriters with a third of the slumping shares and made Gallaher feel vulnerable to unwanted suitors. Indeed, by June, Philip Morris, backed by that Morgan Grenfell nemesis, Warburgs, began to close in on its prey.

  Following these events in New York, Barney Walker of American Tobacco told Bill Sword and Jack Evans of Morgan Stanley that he wanted to expand his Gallaher stake and rescue the company from Philip Morris. Sword called Ken Barrington of Morgan Grenfell, who had just returned to his flat after a summer lawn party with the queen at Buckingham Palace. Barrington and his colleague George Law promptly flew to New York. In American Tobacco’s boardroom, Barney Walker—a red-faced Irishman with no college degree—gave Sword and Barrington their marching orders. “Look, I wanna win,” he said. “I want an absolute guarantee that we will win. What will it take?” “I suppose it depends on the size of your purse,” said Barrington. “What’d he say?” grumbled Walker. “It depends how much money we’re prepared to pay,” an aide translated. Walker barked that money was no object. At this pivotal moment, it was industry, not the bankers, who demanded a new red-blooded, cutthroat style of business. Both Morgan Grenfell and Morgan Stanley would later plead, with some justice, that they were provoked into aggressive takeovers by their clients and that their metamorphosis into merger artists didn’t occur in a financial vacuum. In the 1960s, the bankers were still more the instruments than the engines of takeovers.

  The Morgan Stanley-Morgan Grenfell team flew off to the City to mount the most vigorous operation in London Stock Exchange history, fortified by a $150-million credit led by Morgan Guaranty. Stymied by LBJ’s capital controls, American Tobacco could afford only a partial bid, and this enforced economy led to the controversy. All over the City, insurance companies, pension funds, and other underwriters sat with unwanted, depressed Gallaher shares, gnashing their teeth at Morgan Grenfell. At a Sunday night meeting, the takeover team plotted its strategy with Sir Antony Hornby, senior partner of Cazenove and Company, who was assigned to handle the Stock Exchange operation. They decided to go into the Exchange the next morning and buy the shares from the May underwriters. This controversial tactic—which would redeem Morgan Grenfell in the eyes of the underwriters—also guaranteed that the takeover would enrich a handful of institutions while small shareholders wouldn’t learn about it until afterward.

  Lately there had been many questions raised about the City. As takeovers grew bloody and unscrupulous, the Labour government threatened to impose strict regulations. To avert that, the Bank of England had created a committee, chaired by Morgan Grenfell’s Ken Barrington, to strengthen the Takeover Code. To enforce it, Sir Leslie O’Brien, the Bank of England governor, had set up a Takeover Panel with offices in the bank itself. Lacking statutory powers, the panel was criticized as unhealthily close to the people it oversaw. Yet despite Barrington’s role in devising the new code, Morgan Grenfell posed the first and stiffest challenge. Article 7 of the Takeover Code said no shareholder in a target company should receive an offer “more favorable than a general offer to be made thereafter to the other shareholders.”22 This principle was challenged by the American Tobacco takeover, which was a so-called “street sweep”—a huge share purchase without a tender offer.

  On Monday morning, Hornby began whirlwind buying such as London had never seen. He went to the May underwriters and paid 35 shillings for Gallaher shares that had slumped to 18 shillings; he was instructed to purchase about five million shares that day. Instead, he was engulfed by a tidal wave of twelve million shares by morning’s end. Most small shareholders didn’t hear about the sudden windfall until lunchtime, by which point it was too late. They could get 35 shillings for only half of their holdings and were outraged by the apparent collusion between big institutions and merchant banks.

  Morgan Grenfell had always cooperated with the Bank of England instinctively and sided with the financial authorities. Now it was acting more like a cheeky, defiant outsider, bent on stirring things up and testing the rules of the new Takeover Panel. Suddenly it resembled the assertive, iconoclastic Warburgs that had so
offended its sense of propriety a decade before. In an amazing transformation, it had turned into its own worst enemy.

  The Takeover Panel censured both Morgan Grenfell and Cazenoves. To the astonishment of the press, Harcourt and Hornby, those City demigods, didn’t beat their breast in atonement. Within an hour of the panel’s ruling, they simply rejected it out of hand! Here were Sir Antony Hornby, on the board of the Savoy Hotel and Claridge’s, and Lord William Harcourt, with his huge estate, thumbing their noses at authority and rebuffing a panel clothed with the prestige of the Bank of England. Hornby sounded like a ruffian: “There’s a certain cut and thrust in the market that is the essence of City dealing. If you’re going to wait for the amateurs then business will stop.”23

  Bill Harcourt’s hauteur was memorable. He came up with a classic retort that expressed both his mischievous humor and magnificent contempt: “Can’t a man go in on Monday morning and buy a few shares?” He finished by telling a startled news conference that he would entertain no questions. “I am totally confident that the purchases are in fully conformity with the City code.”24 Bill Sword later claimed that the American Tobacco team had secured approval of the Takeover Panel for its action but that Harcourt courageously withheld this information, lest the panel’s authority be weakened. But his initial manner seemed far more defiant than respectful toward the panel and was so reported in the press.

  The public was in an uproar. Not only did the press back the panel, but the increasingly powerful institutional investors displayed almost unanimous support for censure. Three-quarters even favored further action. These institutions were the new countervailing powers; merchant banks no longer held all the cards. As would happen on Wall Street, the providers of capital—the mutual funds, pension funds, insurance companies and so on—were growing powerful at the expense of capital-short merchant banks in London and investment banks in New York.