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

by Ron Chernow

  The clever, babbling Khashoggi tempted Morgan Stanley with another mesmerizing vision of riches. He said that his friend Crown Prince Fahd, having lost a reported $6 million while gambling in Monaco, was in hot water with King Faisal; to improve his image, the prince planned to set up a $1-billion foundation to perform good works, possibly with Morgan Stanley as its financial adviser. Would Morgan Stanley be interested in pursuing this with Prince Fahd at Deauville, in northwest France? Stenbeck, S. Parker Gilbert, and Bill Sword took a suite of rooms at a Deauville hotel. Khashoggi was a floor below, Fahd a floor above.

  At 8:30 one evening, Khashoggi ushered the trio into his suite to meet the prince. There were over a dozen chairs set up in a circle, with a stool beside each. The prince entered ceremoniously, sat beside Sword, and expressed a noble wish to do great things for humanity. At one point, when a gorgeous woman in an evening dress walked in, Khashoggi came over and whispered to Sword, “Do you mind if my secretary sits next to Prince Fahd?” Sword, a short, church-going Presbyterian, said no and slid over a seat, wondering at this beautiful secretary. Soon after, a somewhat older, but no less attractive, lady in her forties came in and sat down on Fahd’s other side. “We have here the wife of the editor of Paris Match,” Khashoggi whispered to Sword. “She’s doing a feature story on the prince.” Now every few minutes another beautiful young woman entered and sat down on a stool until there was one beside each man. When the room was full, Fahd announced that he had booked a Trouville restaurant for the evening. As the meeting ended, Sword went over and chatted earnestly with the Paris Match woman about Henry Luce, Axel Springer, and other publishers; he was surprised by how little she knew about publishing.

  Back at the hotel, with the door shut, Gilbert and Stenbeck burst out laughing. They had caught on sooner than Sword to Khashoggi’s game: he had flown in “models” from Paris for a party. Stenbeck kidded Sword: “The Prince and all the girls were very impressed that you had picked out the lead woman, the ‘editor from Paris Match.’ She was the biggest hooker of them all.”10 What Khashoggi’s biographer concluded of Stenbeck might be an epitaph for Morgan Stanley’s early efforts to drum up Saudi business: “He traveled with [Khashoggi] to see heads of state about projects to turn deserts into Gardens of Eden. But when the trips were over and the glitter gone, there was little to show for it.”11

  FOR Morgan Grenfell, the petrodollar boom was providential, taking up slack as the late 1960s takeover boom wound down. Although it arranged the first Eurosterling issue, in 1972, it lacked the capital to be a top-flight Euromarket competitor and needed a new act in order to survive. It was a pretty dismal time. British exports flagged badly as a near-depression atmosphere overtook the nation’s industry. Amid rising interest rates, the City was rocked by a bust in the property market and a secondary banking crisis in 1973–74. When Lord Poole of Lazards was asked how he survived the debacle, he replied: “Quite simple: I only lent money to people who had been at Eton.”12

  At Morgan Grenfell, the Arabs would temporarily answer the firm’s problems. With their penchant for secrecy and their appreciation of the confidential style of British merchant banks, the Arabs were naturally drawn to the mysterious maze of the City. They loved the cachet of old stately houses. Also, sympathy for the Arab cause was far more prevalent in the Foreign Office than in the State Department. “In the Mideast, Morgan Grenfell could take advantage of the U.S. inability to act,” declared Christopher Whittington, the firm’s deputy chairman. “We could sell them Tornado fighter planes, while the U.S. couldn’t because of Congress.”13 Morgan Grenfell had another edge: many London merchant banks were tainted by their Jewish ancestry. So 23 Great Winchester Street became the City firm most immersed in Middle East business. At its peak in the seventies, Arab business contributed up to 70 percent of the bank’s revenues.

  At first, the man leading the charge was Sir John Stevens, the inveterate traveler and former polyglot Bank of England executive who had advised Iran’s central bank. By then he had planted the Morgan flag in old imperial outposts of Hong Kong, Singapore, Australia, and New Zealand and got a Morgan office going in Moscow. David Bendall, brought in from the Foreign Office, did the same in Latin America.

  As at previous times in Morgan Grenfell history, stepped-up foreign business forged deeper links with Whitehall. Morgan Grenfell now specialized in arranging government-guaranteed export credits, which Britain was then using to win goodwill abroad. These credits led Morgan Grenfell to finance arms exports to Oman and Jordan as well as power plants, refineries, and other capital projects in the region. Through export credits, the bank also became more involved with Eastern Europe. In 1975, Morgan Grenfell became the first merchant bank to win the Queen’s Award for Export Achievement, for managing over a quarter of the government-guaranteed credits. Through all the vagaries of merger work, the firm’s rock-solid export credits and impressive portfolio management would lend strength to its balance sheet. In the last analysis, the dull, solid stuff would be its salvation.

  Aside from Saudi Arabia, most Arab states before 1973 were too impoverished to be considered good credit risks. The sudden, almost overnight, revolution in their financial status was revealed in a controversial loan that Sir John Stevens secretly negotiated during the Yom Kippur War, in the fall of 1973. On October 6, Egypt, Syria, and Iraq attacked Israel. On October 20, during a fierce, bloody phase of fighting, news leaked out of a Morgan-led loan to Abu Dhabi. Israeli tanks had just advanced fifteen miles beyond the Suez Canal, knocking out Egypt’s surface-to-air missile batteries. Disclosure of the loan sent up an uproar, especially among Jewish firms in the City. Official British policy was neutral. Then as now, Morgan Grenfell insisted on the loan’s peaceful nature. According to Chris Whittington, “The Abu Dhabi loan was already in the works before the fighting began. We just didn’t cancel it.”14

  It was the bank’s most controversial loan of the postwar era, sparking heated debate. With each new report, this mystery loan seemed to expand. First announced as a £40-million loan ($100 million), it suspiciously mushroomed to $200 million within three days. Even as Stevens talked of its use for hospitals or budgetary purposes, it sounded patently suspicious. Awash with oil money, the seventy thousand privileged residents of Abu Dhabi might have enjoyed the world’s highest percapita income. In those years, $200 million was an enormous Eurodollar loan, representing nearly $3,000 for each Abu Dhabi resident—absurdly wasteful and unnecessary borrowing for a tiny oil sheikdom under ordinary circumstances.

  Also heightening suspicion was the fact that on October 20, the London Times reported that the loan negotiations had just begun—suggesting that its origins hadn’t antedated the war after all. Even the loan’s dollar denomination raised eyebrows. All summer, the Soviets had sent weapons to Egypt and Syria and were now strapped for foreign exchange. It was known in diplomatic circles that in exchange for weaponry, they were demanding hard currency from the Arabs—in other words, dollars. Adding piquancy to the speculation was the fact that two of Morgan Grenfell’s Middle East specialists were the sons of cabinet ministers—David Douglas-Home, son of Foreign Secretary Alexander Douglas-Home, and Rupert F. J. Carrington, son of Defense Secretary Peter A. R. Carrington.

  With Abu Dhabi having just slapped an oil embargo on the United States, American banks reacted skittishly to a loan that, if problematic in the City, was plain anathema on Wall Street. Morgan Guaranty and First National City quietly bowed out of the syndicate—the more striking in Morgan’s case in that it advised the small sheikdom on its $2.5-billion portfolio. The Japanese had no qualms about joining, however. In fact, Japan’s government wanted to cultivate Abu Dhabi through direct oil purchases and thus bypass major oil companies. It saw a chance to buy friendship, and the Tokai Bank syndicated a $30- to $50-million piece of the loan among Japanese banks.

  Admitting that money was fungible, even Sir John Stevens couldn’t vouch categorically for the ultimate destination of the jumbo loan. Others involved no longer p
retend about it. One claimed:

  It was certainly a war loan. Eurodollar loans at that level were very few and far between. The loan was prepaid in a matter of weeks. In fact, it did Morgan Grenfell no good whatsoever. As soon as oil prices quadrupled, Abu Dhabi’s credit rating went from okay to extra special. So it was hard to explain to Abu Dhabi why the interest rate was so high. It seemed like pure usury to them. The reason the rates were high was because it was a war loan.

  On October 27, 1973, after six years at Morgan Grenfell, Sir John Stevens died at the age of 59. He had already recruited his wife’s cousin Bill Mackworth-Young, from the corporate stock-brokerage firm of Rowe and Pitman. Mackworth-Young was the leading new issue broker in the City, a man of acute intellect who would succeed Stevens as chief executive and figure importantly in the firm’s future. In retrospect, Stevens’s death deprived the firm of a figure who might have propelled it into a global powerhouse, like the rival Warburgs. But he had already injected some dynamism into the firm and set it on an upward international course, restoring it to the front ranks of London merchant banking. Bolstered by lucrative Arab business, Morgan Grenfell would chalk up record profits in a recessionary environment.

  With the chameleonlike adaptability of a merchant bank, Morgan Grenfell took on Arab colors with remarkable speed. To please the Middle Easterners, it adopted a policy of not hiring Jews, at least not on the international side. The firm would resort to euphemisms to describe this rule—saying it was “Arab-oriented” or “non-Israel-oriented”—but it boiled down to blackballing Jewish employees and Israeli business. The newly Arabized Morgan Grenfell advised Qatar and Dubai on investment strategy, entered into a joint venture with Jordan’s Arab Bank, opened offices in Egypt and Iran, and formed a link with France’s Compagnie Financiere de Suez, whose subsidiary, Banque de l’lndochine, had branches throughout the Middle East.

  As its Middle East fame spread, Morgan Grenfell found at its doorstep people who required inside knowledge of Arab finance or introductions into Persian Gulf diplomatic circles. In 1975, it drew a suitor who demanded an ironclad guarantee of confidentiality—Henry Ford II. Emissaries from Ford Motor posed a maddening riddle: how could the company, blacklisted by the Arab boycott, operate in both Israel and Egypt? This seemed the political equivalent of squaring the circle.

  Ford Motor was a pariah in the Middle East. From 1950 to 1966, it had operated an assembly plant in Alexandria, Egypt. Then an Israeli Ford dealer got permission to assemble Fords in Israel from imported parts. Despite the absence of direct Ford investment or personnel in Israel, the Arab League threatened a regional boycott of Ford cars if the Israeli deal weren’t scuttled. For Henry Ford, the decision was sensitive because of embarrassment about his grandfather’s anti-Semitism. So the grandson refused to renounce his principles or submit to Arab pressure, and the Israeli operation proceeded unhindered. “It was just a pragmatic business procedure,” he later said. “I don’t mind saying I was influenced by the fact that the company still suffers from a resentment against the anti-Semitism of the past. We want to overcome that. ”15 Some observers also credited Ford with a shrewd public relations maneuver.

  When Ford Motor appeared on the Arab blacklist in 1966, its Alexandrian operation was shut down, starting Ford’s exile from the Muslim world. Despite the loss of Arab business, Henry Ford never wavered in his decision. As he flatly told his close friend Max Fisher, a top American fund-raiser for Israel, “Nobody’s gonna tell me what to do.”16 In 1972, Fisher accompanied Ford on a tour of Israel, where they were received by Prime Minister Golda Meir, Moshe Dayan, and Shimon Peres. Ford seemed quite comfortable with his decision.

  What Henry Ford never told Max Fisher was that he undertook secret efforts through Morgan Grenfell to reintroduce his company into the Arab world. He wanted to reopen the Alexandria plant as a joint venture with Egypt to manufacture diesel engines, tractors, and trucks. There was a high-level political agenda. Ford thought his company’s presence in Egypt might erode Arab resistance, dissolving the sharp distinction between pro-Israeli and pro-Arab American companies. Egypt was more relaxed about the boycott than other Arab countries, although it still put up formidable obstacles. The Ford people had picked up encouraging hints in Washington and the Arab world that the company might soon come off the blacklist.

  Ford came to Morgan Grenfell circuitously, after sounding out Morgan Guaranty and other banks as to who had the best Middle East connections. In the early postwar years, Ford Motor had viewed the House of Morgan warily because of its historic association with General Motors. Over the years, however, Morgan Grenfell had handled a remarkable variety of Ford business. It supervised the final sale of Ford U.K. to the Detroit parent company (which then held only a partial interest), introduced Ford stock on the London exchange with Lazards, and managed Ford U.K.’s pension fund. As added incentives to Henry Ford II, Morgan Grenfell had been commissioned by Egypt’s central bank to study its nation’s foreign-investment law and had even entered into a joint venture with the speaker of Egypt’s Parliament.

  In 1975, Morgan Grenfell outlined a precise sequence of steps to circumvent the Arab blacklist. The firm knew exactly which sheiks could fix things so that behind a facade of Arab militance, business could proceed unimpeded by religious or political zeal. Morgan Grenfell suggested selling equity stakes in the Alexandria operation to influential bankers, families, and institutions across the Arab world, not just in Egypt. This would build a powerful Arab constituency for getting Ford off the blacklist and would also help to line up cheap Middle East financing. This last was crucial, for Ford believed that only cheap financing could offset prohibitive operating costs in Egypt.

  President Anwar Sadat took a personal interest in furthering the project. He was sympathetic to removing American companies from the blacklist if they made investments in the Arab world comparable to those they had in Israel. He insisted that Ford be removed from the Arab blacklist as a precondition for operating in Alexandria but also intimated that he might just go ahead and unilaterally strike Ford from the Egyptian blacklist. It was never entirely clear whether in the end he would courageously defy his Arab brethren or back off.

  For two years, Morgan Grenfell and Ford Motor tried to seduce various sheiks. They played on the willingness of royal Arab families to exploit their positions for personal gain. The Morgan Grenfell strategy accurately gauged the depth of Arab cynicism. Some shieks wanted exclusive Ford dealerships before participating. Some bankers wanted a personal share of Ford’s Egyptian plant in exchange for loans. In Saudi Arabia, Morgan Grenfell had targeted Khalid Alireza, a shareholder in Morgan Grenfell and the Egyptian Finance Company. The Alirezas were a powerful, highly respected merchant family and importing agents for many American, British, and German companies. They had even held the Ford dealership before the Arab boycott. Nevertheless, as strict Muslims and uncompromising anti-Zionists, they finally refused to participate. In general, the Kuwaitis were more receptive than the more militant, hard-line Saudis.

  This clandestine lobbying continued during the 1976 presidential campaign, when Henry Ford II was a leading business fund-raiser for Jimmy Carter. During the fall campaign, Morgan Grenfell shepherded Ford people around the Gulf states, a mission requiring airtight secrecy, given Ford’s link with Carter and the potential for political embarrassment among Jewish voters. In February 1977, promoting his proposed Egyptian operation, Ford met privately with President Sadat for several hours. Sadat saw the Ford plant as a magnet that might draw other companies into an Alexandrian industrial zone. To Ford Motor, Coca-Cola, Xerox, and other American companies barred from the Arab world, he wanted to offer a deal—invest in Egypt, and he would work to delete them from the blacklist.

  In May 1977, Morgan Grenfell nearly pulled off the supreme trick of Middle East politics: Egypt announced a joint venture with Ford to assemble trucks and diesel engines; Egypt’s approval was contingent on Ford’s securing the removal of its name from the pan-Arab blacklist.
Egypt was to contribute 40 percent of the capital, and Ford Motor 30 percent, with the remaining 30 percent parceled out to the Arab friends Morgan Grenfell had rounded up. In October 1977, after Egypt removed Ford from its own blacklist, the agreement was signed.

  In the end, the project was stillborn, apparently for a variety of reasons. There was thunderous Arab opposition: the lobbying effort hadn’t silenced Arab militance or purchased the necessary high-level cooperation. Mohammed Mahgoub, Sudanese head of the Arab boycott, bitterly denounced Ford and threatened to boycott products made in the Alexandrian plant. And since the plant was to produce for export as well as domestic consumption, this would reduce its value to Ford. Perhaps the greatest sticking point was that the Egyptians, after endless haggling with Morgan Grenfell, refused to modify their Public Law 43, which set tough conditions on foreign investment. Without such changes, Ford felt that it couldn’t operate at a profit.

  The Egyptian initiative would disappear, despite public announcement of the deal in 1977 and more meetings that year between Ford officials and Anwar Sadat. It was almost as if it had never happened, so completely was it buried and forgotten. When approached about it, Ford Motor wouldn’t comment, saying the information was “legally privileged.” And when Henry Ford’s close friend Max Fisher was asked, he said, “Frankly, I have never heard of any of this before.”17 It was a Morgan operation in the classic style of Teddy Grenfell: it left no footprints behind.

  THE exorbitant oil prices and interest rates that followed the Arab oil embargo produced many bankruptcies, and Morgan Guaranty spent much of 1975 desperately plugging fingers into dikes. It was lead banker to W. T. Grant, America’s third largest variety-store chain, which foundered that year in history’s largest retail failure. The House of Morgan took a $50-million write-off. “We don’t make many mistakes,” said Morgan’s Rod Lindsay, “but when we do make one, it’s a beaut.”18