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Blue Blood and Mutiny
The Fight for the Soul of Morgan Stanley
432 pages; ISBN 9780061207730
A First Class Business
The "Grumpy Old Men" of the 2005 battle were the Young Turks who came to Morgan Stanley between 1958 and 1976, entering a firm that was hardly bigger than it had been when it was founded in 1935. Those who called the Group of Eight conservative and accused its members of being stuck in the past forgot that the firm had remained preeminent because, while its executives were nimble, creative, and aggressive, they also kept certain underlying values alive. Chief among those were the emphasis on meritocracy, ethics, and an inclusive, debate-driven partnership.
As late as 1970, Morgan Stanley had only 34 general partners, 4 limited partners, and 165 employees, of whom 65 were professionals. It was meagerly capitalized—in 1964, former chairman Perry E. Hall declared that he didn't see the need for more than $10 million in capital. The business was dominated by "relationship banking," underwriting equity and debt for the blue chip companies of smokestack America. Its clients were so loyal that competitors didn't even try to solicit their business.
When the time came for the new, postWorld War II generation to shake things up, it would take courage, strategic intelligence, and a willingness to smash icons to move forward without losing the firm's real capital: its name and all it had represented in the American and European financial markets for nearly one hundred years.
The first Morgan financier was Junius Morgan, a London-based American, who emerged as an international banker in the mid-nineteenth century. His most stunning accomplishment was to organize a 250-million-franc ($50 million) loan to the French during the Franco-Prussian War, an amount few bankers anywhere in the world could raise at that time. Yet despite an enormously successful career, he operated in an era when the United States was still a debtor, not a creditor nation, and the Industrial Revolution was yet to hit its peak. Junius would be overshadowed in the history of business and the development of nations by his only surviving son, J. Pierpont Morgan, who began his career when the great opportunities were American and industrial.
J. P. Morgan established himself in New York in 1857, founded the company that bore his name, and focusing on "industrial architecture on the Jurassic scale," he set the pattern for the enormous corporations that dominated global industry. When Morgan Stanley was founded in 1935, many of the great trusts and mergers J. P. Morgan put together—steel, farm equipment, railroads, communications—would become Morgan Stanley clients.
Morgan Stanley was born during the Great Depression, not because that was a propitious time to start a new business, but because the Senate Banking and Currency Committee hearings on Wall Street practices challenged the primacy of the great private banks, and the Glass-Steagall Banking Act of 1933 required them to separate their commercial and investment banking businesses.
In the early 1930s there weren't many companies that were looking to refinance, and J. P. Morgan & Co. decided to keep its commercial business and close down investment banking. Two years later, when interest rates were low and the economic climate was more favorable, a small group of J. P. Morgan partners got together to form a new firm, Morgan Stanley, to handle its clients' investment banking needs.
Morgan Stanley's first, and for many years its biggest, client was AT&T, a J. P. Morgan legacy; in 1906 Morgan had been part of a group that co-underwrote a $100 million bond issue to refinance American Telephone and Telegraph. From that time onward, J. P. Morgan was AT&T's principal banker, and when Morgan Stanley took over the investment banking functions, AT&T was a significant influence in the decision to found the new firm. Between 1936 and 1968 Morgan Stanley issued $4.85 billion of securities for AT&T.
Morgan's most famous trust, created in 1901, was United States Steel, the world's first billion-dollar corporation. A merger of small and large steel companies, it was capitalized at $1.4 billion, more than 15 percent of the total market cap of all American manufacturing companies. Between 1938 and 1961, Morgan Stanley would issue more than $1 billion in equity and debt for U.S. Steel. In 1902, Morgan organized another great merger, creating International Harvester, which controlled 85 percent of the U.S. farm equipment business. In 1954, when International Harvester wanted to issue $34 million in secondary offerings of preferred and common stock, it brought the deal to Morgan Stanley. One of the oldest associations was with General Electric: J. P. Morgan's Philadelphia affiliate, Drexel Morgan, underwrote the first bond offering for the newly formed General Electric Company in 1892, and J. P. Morgan himself joined the GE board. In 1956, Morgan Stanley issued $300 million in GE debentures.
While Morgan Stanley inherited and then earned the respect and trust of industrial America, the firm was also bequeathed the responsibility and public attention that went with a great name. At a time when the United States had no central bank, the Morgans came to the rescue in times of economic crisis, earning the firm and its principals the awe and, often, the distrust of the general public.
The Morgans' most effective public interventions were the most controversial. In 1895, when U.S. gold reserves fell to $68 million, and the government vaults on Wall Street held only $9 million in gold, a $10 million draft against the gold was in the offing. J. P. Morgan traveled to Washington in a blizzard to meet with President Grover Cleveland, and as Morgan ner-vous-ly crumbled his cigar, he proposed to lead a syndicate in partnership with the Rothschilds to raise $65 billion in gold bonds. The Morgan and Rothschild interests secured the bonds with a reserve of 3.5 million ounces of gold, which they assembled and held, stabilizing the price and the supply. The issue sold out, and J. P. Morgan turned a profit: the bonds were issued at 104½ but traded between 112¾ and 119, with the . . .