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

by Ron Chernow

  It was also distinguished in trade and project financing. Morgan Grenfell had led in financing North Sea oil and chalked up several energy triumphs, including the record $1.6-billion financing for Woodside Petroleum’s natural gas project in Australia, the biggest such loan ever to hit the Euromarkets. It was also active in financing projects in the Soviet Union. And when other banks wrote off Africa in the 1970s as poor and hopelessly indebted, Morgan Grenfell established a business advising black African states. To please black Africa, it even ended most of its dealings with South Africa. Among the forty countries it advised outside of Europe were Sudan, Uganda, Tanzania, and Zambia.

  Yet despite these accomplishments, Morgan Grenfell was vulnerable. Like other capital-short merchant banks, it was somewhat anachronistic in modern, global markets. Unlike Warburgs, it never graduated into the front ranks of the City’s Eurobond and foreign-exchange markets. In that larger City, capital was decisive, with cosy ties counting for little—the reason takeover work had been such a godsend to Morgan Grenfell. The firm had thrived only in the insular City of British work, which would be a dangerous shortcoming as the decade progressed.

  The so-called Big Bang deregulation of October 1986 tore down the walls that had divided the two Cities since the Euromarkets emerged in the early 1960s. To guarantee London’s survival as a financial center, the Thatcher government decided to stop cosseting London banks and expose them to more domestic and foreign competition. Despite their evocative names, British merchant banks were tiny beside the new global conglomerates. Japan’s Nomura Securities, with a $20-billion capitalization, was forty times the size of Morgan Grenfell. It could swallow all the merchant banks for breakfast. By opening the City’s gates to foreign firms, the British government ensured London’s survival as a financial center but not the survival of individual London houses. They would have to compete against American commercial banks, which wanted to build investment banking operations in London that they could then repatriate to the United States after Glass-Steagall tumbled. At the same time, the big British clearing banks—National Westminster, Midland, Barclays, and Lloyds—had begun to encroach on the traditional turf of the merchant banks.

  In its specifics, Big Bang sounded innocuous. It ended the City’s antiquated fragmentation into bankers, brokers, and market makers, let foreign firms enter these areas, and scuttled fixed brokerage commissions. These measures collectively threw the formerly closed City wide open to competition. Christopher Reeves was aware of the carnage on Wall Street after fixed commissions ended in May 1975. He warned, “Greater risks will be run by those firms which do not adjust their business to exploiting the new opportunities.”1 Oddly, Morgan Grenfell would be just such a laggard and would figure as a major casualty of Big Bang. In a failure of vision, it would move too gingerly, too indecisively, and would squander its chance to translate its eminence to an international sphere.

  The little cottage industries of the City were swept away by Big Bang. Scores of small private partnerships, which had given the City its pleasantly Dickensian flavor, were taken over by world-devouring giants. At the same time, banker-company relations grew looser, more impersonal. As British corporate treasurers were besieged by foreign bankers, they got a new sense of what could be accomplished in global markets and were less content to rely on a single banker. Consolidations also meant sudden wealth for young deal makers and traders, whose salaries jumped as much as tenfold in a few years. Young bond traders were suddenly driving Ferraris and making six-figure salaries.

  The elite world of merchant banking faded as the rhythms of the trader speeded up City life. Long lunches at Boodle’s or White’s gave way to twelve-hour days. It was impossible to equip all the trading desks with old Etonians, and so the City became a more egalitarian place. Some people, of course, resisted the new ways. When the Economist tried to track down City executives, it discovered several absentees: “Many were sighted at the Wimbledon tennis tournament, the Henley regatta and the Ascot horse races.”2 For the most part, however, the City was now a more hectic, grueling place, with people grabbing lunches at the fast-food restaurants and crowded sandwich shops scattered among the Wren churches and new office blocks. It grew in such helter-skelter style that it almost made Wall Street seem gracious by comparison.

  Along with Warburgs and Kleinwort Benson, Morgan Grenfell had a chance to parlay past glory into modern power. Christopher Reeves welcomed Big Bang as an opportunity to form an integrated securities firm that could compete in world markets. This was a radical shift for Morgan Grenfell which had always shied away from the risks and capital investment associated with securities trading. Like Morgan Stanley in the 1950s, it had maintained an aristocratic distance from markets, drawing on brokers to price the securities it issued. Under the British underwriting system, the august “houses of issue,” such as Morgan Grenfell, didn’t put their capital directly at risk. They placed the issues with institutional underwriters, who provided a contingency backing for issues. Big Bang elicited predictions that “bought deals” would revolutionize London as they had New York after Rule 415. This meant that underwriting would suddenly require enormous piles of capital. Of the merchant banks, Warburgs responded with great clarity to Big Bang, while Morgan Grenfell vacillated and lagged fatally behind.

  Morgan Grenfell’s bungling of Big Bang would do more lasting damage than the Guinness scandal. Early on, a split developed, mostly between the younger directors, who favored audacious, far-reaching action in response to the challenge, and the traditional directors, who were fearful of venturing into risky new businesses. In 1984, Morgan Grenfell was approached by the brokerage house of Rowe and Pitman, Mackworth-Young’s old firm, about a possible alliance. Afraid it would cost too much, 23 Great Winchester dithered and lost its chance; later Warburgs grabbed the firm, helping to make it preeminent among merchant banks in international markets. The most insistent foe of the Rowe and Pitman deal was evidently Graham Walsh, the takeover chief. “Walsh was very adamant against it,” a former colleague recalled angrily. “He said, ‘We’re doing beautifully as we are, we’re on the top of the pile, and it’s risky to do this.’ “ So the easy, seductive profits of takeovers clouded the firm’s strategic vision at a critical moment.

  Morgan Grenfell frittered away other chances: it passed up the opportunity to buy Phillips and Drew and Wood Mackenzie; fumbled a chance to merge with Hoare, Govett by demanding majority control; and was blocked from taking over Exco, a financial services group, first by a Bank of England veto, then by its own indecision. It ended up doing Big Bang on the cheap, buying two firms that many thought booby prizes—the antiquated Pember and Boyle (a broker) and Pinchin Denny (a jobber, or market maker). Expressing a common judgment, an indignant former director said, “They hemmed and hawed and finally bought a cheap jobber and a cheap broker. They got the worst of all worlds.” As time has confirmed, the new financial order would tolerate global firms offering a comprehensive package of services or domestic boutiques specializing in a few functions. It would be pitiless toward those, such as Morgan Grenfell, stuck in the middle bracket.

  Right before Big Bang, in June 1986, Morgans overcame historic reservations and sold shares to the public to amass capital for trading. It raised £154 million ($229 million) and borrowed another £140 million ($200 million). Although some jowly die-hards were petrified that shareholders might demand shorter lunches or even interfere with weekend shooting (God forbid), most accepted the grim necessity. The Bank of England had just chastised the firm for having inadequate capital to back its share purchases during the Guinness takeover of Distillers, and raiding was becoming a more capital-intensive art. Like its Wall Street counterparts, Morgan Grenfell might someday have to provide temporary “mezzanine” financing or even issue junk bonds in takeovers.

  There were also unspoken reasons for going public. A former corporate finance director explained: “A principal reason was to have publicly quoted shares as acquisition currency. It didn’t work o
ut that way.” Another speculated that it was a way to appease the firm’s takeover stars, Roger Seelig and George Magan: “I suspect they weren’t making enough money and needed an equity hit. They both had standing offers from American investment banks to pay them $1 million to go to them—much more than they were getting from Morgan Grenfell.”

  The confused and halfhearted way that Morgan Grenfell reacted to Big Bang reflected an unhealthy dependence on takeover work. The firm might boast that it offered thirty-two services, and it could point to twenty-two overseas offices, yet the heart of the operation was mergers. By Big Bang, the 120-person takeover unit was reportedly chipping in almost half the pretax profits in a firm of 2,000 people. As London’s premier takeover house, it was handling an awesome volume of business—some fifty-one deals in 1986 valued at almost £14 billion.

  Like Morgan Stanley, Morgan Grenfell usually took the offensive, earning a reputation as “the most aggressive agent in the City for the hostile bidder,” in Euromoney’s words.3 As a blue-blooded firm, it legitimated a new, swashbuckling style of finance. On Wall Street and in the City, traditionalists were appeased when a Morgan firm validated controversial practices. Aware of the mounting takeover frenzy in the United States, Morgan Grenfell was determined to show it could slug it out with any Yanks that came to London.

  Mackworth-Young and Reeves presided with a light hand over their circus of takeover prima donnas. The Seeligs and the Magans had great power in the firm, for they captured new clients; the old taboo about poaching clients was fading. Morgan Grenfell had an individualistic culture very unlike the team spirit drilled into recruits at Morgan Guaranty, S. G. Warburg, and Goldman, Sachs. Not surprisingly, it encouraged a flamboyant, free-wheeling star system among its young professionals, who became recognizable figures in London, like pop stars. But such freedom, if conducive to inventive takeover work, could also induce a perilous euphoria, a giddy sense of invulnerability.

  The group’s superstar was Roger Seelig. In a more innocent age, his background might have fitted him for tamer pursuits. In 1971, after taking a degree from the London School of Economics and working at Esso, Seelig joined Morgan Grenfell. (That he was Jewish apparently mattered less in those days before the petrodollar boom.) He and his mother shared a three-story Gloucestershire mansion—a very grand, formal place topped by a row of balusters. It wasn’t far from the Prince and Princess of Wales’s Highgrove House. The bachelor Seelig’s girlfriend lived with him at his Marble Arch apartment, but he professed to be “too busy” to marry, as if matrimony might cost a valuable deal or two. He rode with the Beaufort hunt, belonged to the Royal Society of Arts, and was partial to official balls—not your usual corporate stalker.

  At Morgan Grenfell, Seelig ran his own show and Reeves proudly touted him to clients as the most “entrepreneurial” of the takeover stars. Seelig made his own hours and served as his own boss. Carrying a mobile telephone, he would pop up at theaters or expensive nightclubs, Annabel’s in Berkeley Square being a favorite spot. He was a high-tech dandy, financial impresario, and gentleman masher. Speaking in a clipped, affected manner, he had a smugly theatrical smile, with lips pursed and corners drawn down, like a rogue in a Restoration comedy. His debonair ascot-and-handkerchief style transported a country-house ethos into the cutthroat takeover world.

  One former corporate finance director remembers him thus: “Roger loved to fly his spinnaker. He wore suits nipped heavily at the waist and had a Beau Brummel stride, with his chest thrown out. It was a metaphor for his personality. He liked to ‘mingle’ with grand people, like Jacob Rothschild or Henry Kravis. He was a talented banker, but his manner masked an inferiority complex.” Earning £250,000 annually for snuffing out targets, Seelig was London’s top deal maker. He was especially good at latching onto acquisition-hungry firms, such as the giant retailer Storehouse PLC, which owned the Habitat home-furnishing stores in England and Conran’s in the United States; Storehouse was chaired by Seelig’s friend Sir Terence Conran. With sixteen professionals in Morgan Grenfell’s takeover department, Seelig reportedly hauled in a quarter of the profits, encouraging management to view his tactics benignly and allow him considerable leeway. He developed an attitude that takeover rules were silly hindrances to be tested by clever financiers. In 1985, he boasted that rivals “may just be reading the rules. We changed most of the rules.”4

  Mirroring Morgan Grenfell’s split personality, the other takeover star was George Magan, a short, sharp-faced man with glasses. His manner was entirely different from Seelig’s. The offspring of an old Irish family, an accomplished pianist with a dry, delightful wit, Magan was popular with his colleagues. He was nicknamed Teddy, short for teddy boy, because of his slicked-back hair and slick suits. Though unlike Seelig in other ways, Magan also gloried in aggressive tactics and talked of “using every inch of the playing surface.”5 Ubiquitous on London’s takeover scene, he was involved in six of Britain’s top ten deals in 1985.

  There was a lot of jockeying and rivalry among the prima donnas, and Morgan Grenfell created an unstructured environment that allowed them to wheel and deal without bumping into each other. This required a conciliatory figurehead to oversee the Corporate Finance Department. His name was Graham Walsh. An accountant and former director general of the Takeover Panel, Walsh was a shy, neat, introverted man who never quite made eye contact with other people. Known as a hypochondriac, he would shuffle about shutting windows in winter. Walsh feuded with Seelig, and they ended up scarcely on speaking terms. As he kept his department humming tidily along, Graham Walsh little dreamed that Margaret Thatcher would someday take a personal interest in his job.

  Such an operation required a strong chief executive to curb the animal spirits of Walsh’s takeover professionals. Yet Christopher Reeves accentuated the impetuosity of the takeover team. He sometimes made rules sound optional: “Merchant banking is all about innovation. . . . We must not believe that rules are written in tablets of stone.”6 As one former Morgan Grenfell official said bitterly, “He was imbued with this win-at-any-cost or by-any-means attitude. And it communicated itself down to the operatives in the Corporate Finance Department.” From 1980 to 1984, a healthy equilibrium existed between Reeves’s red-blooded dynamism and Mackworth-Young’s wise discretion. An outside adviser recalled, “Christopher Reeves had tremendous thrusting ability, but he needed the balancing factor of Mackworth-Young’s slightly wider and more public-spirited view. Christopher Reeves was all accelerator and no brake.” In 1984, when Mackworth-Young suddenly died, it robbed Morgan Grenfell of this temperate influence.

  The dazzling team of Seelig and Magan made Morgan Grenfell untouchable in takeover work, with only second-place Warburgs remotely approaching it. Between 1982 and 1987, Morgan Grenfell ranked number one in mergers and acquisitions year after year. It was on such an intoxicating ride—in 1985, directors received twice the pay of the year before—that the gray old men of Morgan Grenfell tolerated the antics of the young hotshots. As the scale of the takeover wars escalated crazily, the temptation to break the rules heightened. Before 1985, London had never seen a £1-billion takeover bid; there were four on the table by year’s end. Much to the British Treasury’s annoyance, 23 Great Winchester blithely refused to work on Margaret Thatcher’s privatization boom. Why? Because corporate finance people thought the fees trivial and didn’t want to pull stars off the glitzy merger carousel.

  The momentum was pushing Morgan Grenfell toward ever more hazardous enterprise. “Merchant banks tend to attract business by their reputation,” explained a former corporate finance director. “And Morgan Grenfell was being approached by more racy people because they were doing racier things.” The press noted this vicious circle. As London’s Business magazine said in 1986, “The mention of Morgan Grenfell in some banking circles gets the sort of reaction the sight of Attila the Hun must have provoked in Rome.”7 One observer remarked, “They are trotting into action with all the arrogance of a crack Polish cavalry regiment in 1939.�
��8 These would be prophetic judgments.

  Morgan Grenfell’s balloon was finally punctured by the Guinness scandal, which convulsed Britain and focused more anger against the City than had any scandal since the “rascally stock jobbers” of the eighteenth century. It started with an exceptionally aggressive client—Guinness chairman Ernest Saunders. As his most famous product, black Irish stout, lost favor with wine-tippling yuppies, Saunders wanted to diversify his huge conglomerate. Like Robert Maxwell, Saunders was an immigrant who craved acceptance by the British establishment. His Jewish parents had fled Nazi-controlled Austria in 1938 and settled in London. The Jewish-born Ernst Schleyer was re-invented as the Anglican Ernest Saunders. He would acquire all the trappings of upper class success, including a Buckinghamshire mansion.

  At the start of his buying spree, Saunders booted out Guinness’s old adviser, N. M. Rothschild, and brought in Morgan Grenfell. At a dinner at the Connaught hotel in early 1985, Christopher Reeves advised Saunders to expand aggressively, lest Guinness itself be a takeover target. In June 1985, advised by Tony Richmond-Watson of Morgan Grenfell, Saunders launched a £330-million hostile bid for the Scotch whisky and hotel company, Arthur Bell and Sons. Bell’s chairman, Raymond Miquel, was flabbergasted, because Morgan Grenfell had represented his firm for twenty years, assisting in its purchase of the Gleneagles Hotel Group and even handling its public offering in 1971. When Miquel complained to the Takeover Panel, Morgan Grenfell countered with evidence that Bells had terminated its services in November 1984; Miquel cited more recent links.

  Whatever the exact truth, Morgan Grenfell had twenty years’ worth of intimate knowledge about Bells and thus subverted a tradition of merchant banker confidentiality. (This was the rationale for having traditional bankers: a company’s innermost secrets were safe from competitors.) At first, the panel mildly rebuked Morgan Grenfell, then retracted even that. Some attributed its leniency to Christopher Reeves’s informing the panel that Morgan Grenfell had booked only £20,000 in fees from Bells versus £6 million from Guinness in the previous two years. Such an argument, it was thought, swayed the banker-oriented panel.