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

by Ron Chernow

  On June 28, 1978, Antoniu married Stanfill at a civil ceremony in Venice, neglecting to tell her family about the federal probe. Discovering this, Gleacher roared into the telephone from New York: “Unless you tell Mr. Stanfill before the church wedding, I will!”21 On July 1, the church wedding took place at the Basilica di San Pietro di Castello in Venice, with Albino Cardinal Luciani, about to become Pope John Paul I, bestowing his blessing on the couple in a written message. Adrian delivered a poetic toast: “Here’s to the longest run Twentieth Century Fox will ever have.”22 As guests waved good-bye, the newlyweds drifted off in a white gondola. Back in New York, Gleacher cleared out Antoniu’s desk. Within a month, the wedding was annulled, presumably because the Stanfills learned of the investigation.

  E. Jacques Courtois’s voluntary departure from Morgan Stanley in 1979 caused great anguish. “Morgan Stanley was rocked at the time,” said a colleague. “They had lost 3 people, including Jacques, in something like 3 weeks. They had a series of meetings to make sure they were hanging on to the rest of us.”23 Courtois said he might go into computer software or manage his investments. Marrying the niece of Colombia’s president, he moved to Bogota. Courtois was fingered by government investigators because he alone in the M&LA Department hadn’t worked on the takeovers in question. This raised questions about Morgan Stanley’s claim that their people never discussed takeovers with others.

  The criminal indictments handed down in February 1981 were the first such ever brought against investment bankers. Newman got a one-year prison sentence, while Antoniu’s plea bargaining got him a suspended sentence. Antoniu said, “Anyone familiar with the securities markets knows these circumstances are not uncommon.”24 Courtois spent a year in prison and paid $150,000 in fines.

  Morgan Stanley cooperated with the government and contacted clients to reaffirm its integrity. Lewis Bernard was chosen to inform the firm’s managing directors. He recalled, “People in that room cried. They cried out of anger. We have the feeling of being violated.”25 Although the overwhelming majority of inside tips came from Morgan Stanley, Bob Baldwin complained that Lehman Brothers received less publicity: “What do the headlines say? Morgan. We make the headlines in these darned situations . . . we had people practically crying around here, they work so hard to do a first-class job in a first-class way.”26

  Public reaction to this insider trading ring distinctly echoed that to the 1933 preferred-list scandal and the Richard Whitney affair. People unconnected to Morgan Stanley felt as if a public trust had been violated. “I’ve always thought of Morgan Stanley as the creme de la creme,” said Benedict T. Haber, dean of Fordham’s Graduate School of Business. “It’s like an icon has been knocked down.”

  CHAPTER THIRTY-TWO

  SAMBA

  BY the mid-1970s, J. P. Morgan and Company—the holding company of Morgan Guaranty—was drawing half its profits from more than twenty offices abroad. By a minor miracle, the bank’s pell-mell global expansion didn’t dilute staff cohesion. As Pat Patterson said, “Our operation is worldwide in a compact way.”1 The bank used various devices—from providing free lunches at its dining rooms to rotating executives—to preserve an inbred feeling. The refusal to open branch networks in foreign countries concentrated personnel, furthering intimacy. “It would be a little like a fish out of water for us to run a system of branches in Germany or England when we don’t have it here,” said the avuncular, balding Walter Page, who succeeded Patterson as chairman in 1978.2

  When Morgans started underwriting in Paris in the early 1960s, it wasn’t clear where the Euromarkets would settle; even Geneva and Zurich were in the running. During the oil boom of the 1970s, however, London emerged as the clear winner, recycling OPEC surpluses at a furious rate to debtor countries. The City of London suddenly had more American banks than Wall Street! They leapt into syndicated Eurodollar loans, which formed the genesis of the Latin American debt crisis. Latin American governments paid much higher interest rates on loans than corporations back home. And in the Casino Age, those corporations were bypassing banks to borrow in securities markets. Thus, the lemming rush into Latin American lending was symptomatic of the deterioration of the banks’ commercial lending business. Foreign borrowing now expanded beyond the industrial countries that had received the bulk of cross-border lending in the 1950s and 1960s.

  Previous cycles of Latin American lending and default dated back at least to the 1820s. During the Great Depression, every Latin American country save Argentina had defaulted on its foreign debt. The nations had been sternly lectured by the bankers that they would be forever barred from future lending. Yet this history was conveniently forgotten by the young bankers on the swank London party circuit, who booked huge loans to those same countries. As members of a venerable old bank, Morgan people should have had a better memory, and to some extent they did. “Lew Preston and I spent a lot of time talking about the parallels,” recalled A. Bruce Brackenridge, the senior credit officer in the late 1970s. “We used to refer to the loans that the British made here to our railroads. The money that J. P. Morgan and Peabody raised to build America—that was the sort of loans we made to the Itaipu Dam in Brazil. There’s a very clear analogy there.”3 It was, alas, the wrong analogy, skipping over all the disastrous Latin American precedents. It also overlooked the fact that many American state and railroad loans in the nineteenth century had defaulted—a history that haunted George Peabody and subsequently made the Morgan imprimatur so sacred to European creditors.

  In earlier generations, Rothschilds, Barings, and Morgans made Latin American loans through large bond issues that distributed risk among thousands of small investors. (An estimated half-million Americans were stuck with largely worthless foreign bonds during the 1930s.) Modern Latin American loans, in contrast, took the form of bank debt, concentrating the risk in the banking system. Large syndicate managers, such as Morgan Guaranty and Citibank, would unite up to two hundred banks for a loan. If this spread risk, it perhaps also created an illusory sense of safety in numbers.

  Why didn’t banks sell Latin American bonds? “Because you wouldn’t have been able to sell the bonds,” explained Brackenridge. This should have been a tip-off of high risk.4 Since only a handful of developing countries were eligible to sell bonds, Morgan Stanley and other investment banks were mostly spared the Latin American debt crisis. (Both a commercial and an investment bank in American terms, Morgan Grenfell participated in some export credits and syndicated loans to Brazil and elsewhere.) So banks rushed in where investors feared to tread. This spared the “little people” the bloodshed of the earlier debt crisis but also introduced the potential for large disruptions in the global financial system.

  Because the Latin American debt crisis originated with the recycling of Arab petrodollar deposits, the banks would later cite official approval of such lending. Indeed, Washington and the other Western governments cravenly ceded responsibility for the problem to the private banks. But as shown by the experience with German reparations and Allied war debt in the 1920s, even explicit official approval of loans didn’t guarantee government support in case of trouble. There would always be popular cynicism about spendthrift foreign debtors—not to mention an assumption of banker greed—that would arise to hobble governments in solving the problem. Ironically, the petrodollar blackmail so feared by Senator Church wasn’t the real problem. By keeping petrodollars and lending them out to Latin America, banks damaged themselves and the world economy.

  Morgan Guaranty was a good bellwether of changing American attitudes toward Latin American lending. In the 1920s, the bank had proudly boasted of the number of South American governments it had turned down. In the 1940s, Tom Lamont was aghast when Franklin Roosevelt advocated postwar lending to Brazil, and Russell Leffingwell urged World Bank president John J. McCloy not to lend to the region. In the 1950s, the Eurocentric Morgans largely limited foreign lending to England and France. But with its core lending business eroded in the Casino Age, it suddenly emerg
ed in the 1970s and 1980s as an “MBA bank”—so-called after the first initials of the three largest Latin American debtors: it made $1.2 billion in loans to Mexico, $1.8 billion to Brazil, and $750 million to Argentina. For Wall Street’s most conservative bank to have its largest foreign stake in Brazil showed its reliance on progressively riskier loans for profitability.

  Several overriding illusions clouded judgment. One was that countries didn’t go bankrupt—a canard associated with Citicorp’s Walter Wriston. This almost inverted historic truth. Default on sovereign debt had been commonplace for 150 years. Even the discriminating old House of Morgan ended up with massive defaults on Austrian, German, and Japanese loans by World War II. There were more recent cases of debt repudiation as well, including China in 1949, Cuba in 1961, and North Korea in 1974. Banks could foreclose on companies but not on countries, making the latter more careless about repaying loans. And political risk was always piled atop economic risk.

  Another factor of comfort to the bankers was the International Monetary Fund. By the 1970s, gunboat diplomacy was passe. For reasons of foreign policy, Washington was often more eager to appease Latin American governments than bully them about loans. Bankers didn’t like meddling in foreign countries, especially now that they had branches abroad. In 1976, when Peru was nearly bankrupt, Citibank, Morgans, and other banks imposed an austerity plan in exchange for a $400-million loan. Requiring a steep rise in food and gas prices, it provoked riots in Lima and new charges of dollar diplomacy. The banks were appalled by the backlash. “It doesn’t take much to whip up the peasantry with stories about the House of Morgan and U.S. imperialism to explain why there’s no food,” said a congressional staffer.5 Stung by bad publicity, the banks turned to the IMF as a surrogate that could withstand political criticism in debtor countries. It seemed a useful shield behind which to effect painful economic reforms.

  The IMF laid down strict conditions for loans. As banks made their loans contingent on agreement to the IMF austerity programs, the fund’s power soared. The problem was that the fund was set up to handle temporary payment imbalances, not protracted debt problems. Nobody knew whether its orthodox prescriptions—cutting spending, ending subsidies, and deflating economies—revived economies or simply squeezed them to pay off bankers. There was the further problem that strong Third World countries, such as Brazil, bypassed the fund altogether and borrowed only from commercial banks. Yet whatever the fund’s limitations, it encouraged bankers to believe that they had some control over errant debtors, forcing them to undertake sound policies. And during the Latin debt crisis, the fund would indeed provide forms of control over debtor countries unknown to earlier generations of bankers.

  The structure of syndicated loans invited banks to abdicate responsibility and coast along with the others. Some fifteen hundred banks worldwide piggybacked onto the expertise of a Morgans or a Citibank, especially in Brazil. Often new to foreign lending, small banks left the scrutiny of loans to the larger banks. In a world of telex-driven anonymity, banks would receive cursory “offering memorandums” of mostly boilerplate language. Tens of billions of dollars in loans were assembled through $10-million participations. By the late 1970s, a fierce price war cut profit margins on loans until they no longer reflected the gargantuan risks involved. Said one Morgan banker involved: “By the mid-1970s, it was very clear that things were getting out of control, with crazy lenders and crazy borrowers.” It was a giant mechanism gone mad.

  Somewhat more than most, Morgans tried to resist the wild grab bag. In 1979, its London syndicate operation was run by a young Smith graduate, Mary Gibbons, known for her toughness. “At 31, wielding all the power that Morgan Guaranty’s position in the Eurocurrency market commands, Gibbons is unquestionably the most influential female decision maker in the City, if not in the entire world of international banking,” said Institutional Investor.6 She balked at credits even for Britain, Sweden, and Canada, fearing watered-down standards. In general, however, Morgans was swept up in the bankers’ suicide dash. One ex-Morgan banker recalled, “There was a lot of unscrupulous lending and forcing loans down the throat of these countries. Anything to get a loan to a government.”

  The most convoluted, baffling Morgan relationship was with Brazil, a newcomer among its clients. Even as the House of Morgan advised the country, Brazil balked at granting it a branch, which rankled at 23 Wall. “They said that if Morgan got a branch, they would be dominant and then the government would have to let in forty other banks,” said an ex-Morgan official. “It was a real sore point.” The Morgan people were proud of their Brazil loans, which went to seemingly well-managed mining and electric enterprises. Recipients included the vast Itaipu hydroelectric project, with its World Bank patronage. The bank also boasted that Brazil had a good credit profile—that is, its loans matured at nicely spaced intervals. Sometimes Morgan people sounded as if history had cheated them, making their splendid Brazilian portfolio look miserable.

  As a latecomer to Latin America, Morgan’s position as chief adviser to Brazil was a startling achievement. It was accomplished through the virtuosity of an engaging young banker of mixed nationality named Antonio Gebauer. Born in Colombia to a wealthy Venezuelan brewer of German birth, Gebauer had been educated at Columbia University’s Graduate School of Business and was married to a Brazilian. He retained his Venezuelan citizenship while at Morgans. Short, with horn-rimmed glasses and sandy hair, he was fluent in Spanish, Portuguese, German, and other languages. He was both charming and impatient, bright but prone to a brusque arrogance. When he started at Morgans in the 1960s, domestic bankers were kings, and he seemed to have a slim chance for advancement. Then, as Latin American lending surged in the 1970s, the Anglophile Morgan bank, with its European bias, found Gebauer providential in catching up with Chase and Citibank in Latin America. His delighted bosses gave him a wide berth.

  Tony Gebauer spectacularly developed new business and was trusted by Brazilian officials. He socialized in elite circles and was probably on a first-name basis with every Latin finance minister and central banker. In the heady world of petrodollar recycling in the 1970s, Gebauer was a jet-setting star, a frequent guest at Brazilian coffee plantations, his doings covered by Rio de Janeiro gossip columnists. He appeared on Brazilian television, landed on the cover of the country’s top news magazine, Veja, and became president of the Brazilian-American Chamber of Commerce. It was highly unusual for the Morgan bank to tolerate such a high-profile approach to banking. Other bankers watched in wonder. At home, Gebauer threw flashy parties in his East Side apartment and at his East Hampton weekend home, which was called Samambaia, or “fern” in Portuguese. Carlos Langoni, Brazil’s young central bank president, spent weekends there. All the while, Gebauer was booking Brazilian loans 2 percentage points above Morgan’s own costs—spreads so profitable as to ease doubts about their soundness.

  Occasionally there were fleeting concerns at high levels about this lending binge. At one point, Chairman Pat Patterson received an award from Brazil declaring him the country’s best banker. He was slightly jarred and confided to President Walter Page that it was perhaps a dubious achievement. “Maybe we better not get another award and be busted,” Patterson told Page.7 But such doubts were momentary. By pushing back the exposure limits in each borrowing country by small increments, bankers averted their eyes from the developing danger. Brackenridge recalled, “We didn’t say, ‘How much of our capital should be in these loans?’ We played with it, but we really didn’t say, ‘Hey, we really shouldn’t have more than 50 percent of our capital in loans to Brazil just out of a spread of risk.’ ”8

  Despite Gebauer’s virtuosity, the Morgan bank had limited power to force Brazil to curb its prodigal, inflationary spending. In 1980, it vainly badgered the country to go to the IMF. When the bank went to the IMF instead to get its perspective on Brazil—an exercise meant to instill market confidence—Delfim Netto, Brazil’s short, squat, bespectacled planning minister, got very angry. He thought Morga
ns was going behind the country’s back to check up on it. So the banks found it hard to police sovereign clients without antagonizing them. They began slipping into a situation in which they were hostages to their large debtors. The full extent of this bondage wouldn’t become apparent until the fall of 1982. Then everyone would rediscover the old adage that if a debtor is big enough, he controls the bank.

  THE April 1982 war over the Falkland Islands cast a black cloud over Latin American lending, projecting a view of the whole region as unstable. After Argentina invaded the islands, Britain retaliated by freezing its London-based assets. When hostilities ended, the House of Morgan undertook secret diplomacy to patch up relations between the two countries. The central banks of England and Argentina didn’t know how to resume relations without losing face. Who would initiate talks? Tony Gebauer, now the senior vice-president for Latin America, acted as matchmaker. Representatives from the two central banks flew to New York and were closeted in a conference room at 23 Wall—the ice-breaking contact between them.

  After the war, it grew harder for bankers to make nice distinctions among Latin American debtors. Regional banks were less disposed to share Morgan’s view of Brazil as a textbook Third World country investing in sound infrastructure. Rather, they saw a nation grotesquely burdened with a $90-billion debt—the world’s biggest—borrowing a stupendous $1.5 billion monthly to stay afloat. Morgans urged Carlos Langoni to come to New York to make reassuring speeches. In a rare coup, it even got Secretary of State George Shultz—as Bechtel president, a Morgan director in the 1970s—to accept an award from the Brazilian-American Chamber of Commerce along with Ernane Galveas, Brazil’s finance minister; Shultz seldom consented to such mingling of private and public purpose.