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

by Ron Chernow

  With a cool outsider’s perspicacity, Siegmund Warburg saw that the City disliked unpleasantness and would tolerate mediocrity just to avoid a row. This wasn’t surprising, with so many family-run banks and such extensive intermarriage in the City. Warburg also saw that merchant banks no longer had the capital to finance industry or government on a large scale. In the advisory area, by contrast, small capital was no handicap. “In the sense that bankers provide money for industry, they’re becoming less important,” he said; “but in the sense of being consultants—what I call ’financial engineers’—they’re becoming much more important.”45 This was the critical insight of the Casino Age, the idea that would push merchant bankers from the staid world of securities issues into the piratical world of takeovers. The merchant bankers would no longer hand out free merger advice to preserve underwriting relationships. Before Siegmund Warburg was through, the “stuffy” City would be rife with marauders.

  In 1958, Warburg mounted the first major hostile takeover in postwar Britain. Takeovers had existed there for decades—they had formed Imperial Chemical Industries, Unilever, Shell, and the big deposit banks. As early as 1925, Morgan Grenfell had negotiated General Motors’ investment in Vauxhall Motors. But these were genteel affairs, consummated over sherry. By mid-1958, Warburg had persuaded Reynolds Metal of Virginia to launch a hostile bid for British Aluminium. To give the move a British veneer, Reynolds allied itself with Tube Investments, a Midlands engineering group. Moving stealthily, Warburgs had bought more than 10 percent of British Aluminium by October 1958. Siegmund Warburg would shift the City battleground from contacts to capital and introduce an unsettling new form of democracy.

  When British Aluminium learned of Warburg’s scheme, management summoned Olaf Hambro and Lord Kindersley of Lazard Brothers. (Lazards was close to Morgan Grenfell in the 1950s, with the two firms even sharing a box at Covent Garden.) In comparison with the upstart raiders, British Aluminium had a true-blue patriotic image. The managing director, Geoffrey Cunliffe, was a son of the World War I Bank of England governor. Its chairman was the bemedaled Lord Portal of Hun-gerford, a wartime hero as chief of air staff and a president of the Marylebone Cricket Club. Although the firm was already negotiating a partnership deal with the American colossus Alcoa, the Hambro-Lazard defense rested on a bogus threat to national sovereignty. “One day, a party consisting of Olaf Hambro and other senior figures paid a state visit to the partners’ room at Morgan Grenfell,” recalled Tim Collins, a later Morgan Grenfell chairman. “They said, ’This is a patriotic duty and the City is going to collapse otherwise.’ The Morgan Grenfell partners joined in without a fight.”46

  In November, Sir Ivan Stedeford, the self-made chairman of Tube Investments, presented a proposal to Lord Portal by which Tube and Reynolds would buy a majority stake in British Aluminium for a generous 78 shillings per share. Lord Portal curtly refused, made veiled references to talks in progress, and brazenly withheld Stedeford’s plans from shareholders. Later he issued the following mystifying statement: “Those familiar with negotiations between great companies will realize that such a course would have been impracticable.”47 Although its defense was predicated on scare talk about a Yankee invasion—Tube was dismissed as Reynolds’s “window dressing”—British Aluminium continued talks with its “white knight,” Alcoa. Within a week, it negotiated a deal that allowed Alcoa to buy one-third of the company at a miserly 60 shillings a share. The institutional investors—the new powers of the age—were inflamed by this wanton disregard for shareholders. And they became a key constituency in Warburg’s camp.

  In the popular mind, it was still axiomatic that nobody could prevail against the unified power of the merchant banks. Schroders and Helbert Wagg sided with Warburgs. Otherwise, the City closed ranks behind British Aluminium in a seemingly invincible phalanx, including Hambros, Lazards, Morgan Grenfell, Flemings, Samuel Montagu, and Brown Shipley. From an aide-mémoire prepared by Hambros and Lazards, it’s clear that Warburg’s ungentlemanly method upset the group far more than the noisily trumpeted demerits of the Reynolds-Tube proposal. This internal document conceded the offer’s soundness, only inveighing against its irresponsible manner. It was clear that Warburg himself, not some alleged American invasion, was the real issue. The City establishment thought he had failed to play by accepted rules. Members of the establishment either had to join forces to defeat him, or he would wreck British industry.48

  The next day, these City men, who ordinarily negotiated unseen in their clubs, published the first defensive advertisement that had ever been used in a hostile takeover. The game was no longer being played in their preferred cloakroom style. In late December 1958, fourteen City institutions created a war chest of £7 million, with Morgan Grenfell chipping in £500,000. Where Lord Portal had been prepared to sell his company for 60 shillings a share, the City consortium now made a partial bid for British Aluminium at 82 shillings a share. This not only topped the Tube-Reynolds offer by 4 shillings but indirectly exposed the cheapness of the earlier deal.

  Awed by this strength, the London Times referred to “an array of City institutions on a scale never before seen in a take-over battle.”49 The Daily Express likewise trembled before the heroic show of firepower: “Lined up on the City side supporting British Aluminium are such famed financiers as Lords Bicester, Harcourt, Rennell, Astor, Glenconner, Kindersley, Cowdray, Poole, and Brand. . . . But as history has seen in the past when the big battalions of the City unite, they can almost be sure of victory.”50 One paper toted up twenty-seven titles on the British Aluminium-Alcoa side, including a marquess, sixteen lords, ten knights, and—as if tossed in for good measure—the queen’s uncle.

  By New Year’s Eve, the British Aluminium side had two million shares and felt confident of victory. Lord Cobbold, governor of the Bank of England, and D. Heathcoat Amory, chancellor of the Exchequer, asked Warburg to desist, noting that Prime Minister Harold Macmillan concurred. But Warburg had coldly analyzed the situation and later said, “It was not a deed of genius at all; I had just mobilized big amounts of money for the cash purchases of my clients.”51 Defying government pressure, Warburgs lifted its bid to 85 shillings a share and began huge share sweeps on the Stock Exchange, sometimes buying hundreds of thousands of shares per day. By January 9, 1959, Tube-Reynolds obtained over 50 percent of British Aluminium and declared victory.

  The City was stunned. It was an apocalyptic moment. At first, the merchant bankers refused to alter their style or acknowledge that things had changed. Lord Kindersley of Lazard said flatly, “I will not talk to that fellow” and would cross the street to avoid Warburg. The dazed elite couldn’t comprehend why the press and investors had lionized the outcast Warburg. Like Robert Young in his battle for the New York Central, Warburg realized the need to court public opinion as share ownership became dispersed. Henceforth, the City would shift from its opaque, secretive style to greater visibility. As one banker commented prophetically, “No company [head] whose shares are publicly quoted could sleep well from now on, because he must always wake up in the middle of the night and wonder who will make a raid on the company.”52

  After a period of estrangement, Olaf Hambro went around to see Siegmund Warburg. Embracing him, Hambro cried out, “Siegmund, haven’t we been awful fools?”53 The bitterness persisted much longer at Morgan Grenfell, which had thought Warburg’s behavior monstrous and unforgivable. After all, if capital and cunning counted for more than contacts, what would happen to Morgan Grenfell? For an astonishing fifteen years, the firm refused to deal with Warburgs, even as the latter became London’s most innovative firm in the Euromarkets. Warburg made peace overtures and even asked Morgan Grenfell to share in a deal for Associated Electrical Industries. Morgan Grenfell refused and, far from appreciating the gesture, haughtily said it wanted to do the deal alone.

  It’s tempting to say Morgan Grenfell’s fate was decided by the aluminium war. For beneath the indignation flowed new subterranean currents. A group of Young Tur
ks, notably Stephen Catto (son of Tom) and Tim Collins, son-in-law of Rufus Smith, felt the firm was stuck in suicidal snobbery. In many ways, they wanted to ape Warburg, not condemn him. “The aluminium war showed that Morgan Grenfell wasn’t aggressive enough,” said Stephen Catto. “It came as quite a shock here. We were outmaneuvered and demoralized. It was almost the first time and it had a marked effect.”54

  Within a decade, Morgan Grenfell would not only undertake but specialize in flamboyant takeovers and flaunt its transformation. It would learn to beat Warburg at his game and come to symbolize the new, aggressive way of doing business. Like Morgan Stanley in New York, Morgan Grenfell would show in bold relief the death of the sleepy old world of high finance and the dangerous birth of the new. As the firms that had profited most from old-fashioned relationship banking, the Morgan houses had the most to lose and would react to the threat in an unaccustomed, bare-knuckle style.

  CHAPTER TWENTY-SEVEN

  JONAH

  IN the late 1950s, it seemed the parade had passed J. P. Morgan and Company by and that the name would take on a venerable but slightly antiquated ring, as Rothschild and Baring had. It seemed to be a banking dynasty in terminal decline. While Morgan bankers stuck to their wholesale formula, the competition took banking to the masses. Such large commercial rivals as National City and Chase were raking in consumer deposits, invading shopping centers, and appealing to the new suburban middle class of the Eisenhower era. Bankers Trust, which had insisted on a $5,000 minimum account, dropped the rule and went retail, too.

  Henry Clay Alexander, who succeeded George Whitney as chairman in 1955, saved Morgans from genteel oblivion. Despite a shared sense of the essence of banking, the two men were very different. Whitney was the East Coast patrician, while Alexander “was graced with an easy Southern affability, relaxed in conversation, intense and enthusiastic at business—Hollywood handsome with an unruly forelock,” recalled Jim Brugger, then the bank’s publicist.1 Both Whitney and Alexander were so handsome that when they appeared in public, women chased them down the block.

  Henry Alexander was probably Wall Street’s most popular banker in the fifties. He appeared on the cover of Time, and his winning personality took some starch from the Morgan image. As a young Davis, Polk lawyer, he had been assigned to lack Morgan during the Nye “merchants-of-death” hearings. “I like that young man,” Jack had said. Those five words secured Alexander’s fortune. On Christmas Eve 1938, Jack invited him to become the first new partner since the Pecora hearings. “Think about it,” Jack said. “We will have a talk a month hence.”2 Alexander agonized over whether to be a Morgan or a Davis, Polk partner. “You have been dealt two straight flushes,” a law partner said, “and you’ve got to pick between them.”3 He chose Morgans and performed legal work for the bank’s incorporation. He was a protege of Lamont, who thought him precociously wise, and of Whitney, who said, “Henry’s so remarkably able.”4

  Like Lamont, Alexander was a self-invented figure whose elegance appeared hereditary. Tall and slim with wavy hair and a weak chin, his dapper look was sometimes accentuated by a pocket handkerchief and homburg. Yet he was from Murfreesboro, Tennessee, the son of a grain-and-feed merchant. He attended public high school, Vanderbilt University, and Yale Law; he first learned law hanging about a sleepy southern courthouse. He had a politician’s versatility. Once on a visit to Tennessee, he chatted with a mule farmer who said afterward, “He is the nicest mule trader I ever met.”5

  Alexander projected contradictory images. He was a Jacksonian Democrat by birthright, he said, yet a registered Republican. He favored sound, orthodox financial policy—as well as tax cuts to spur growth. As a Methodist with an Episcopalian wife (who was a former Powers model), he would say, “I’m a Methodist in town and an Episcopalian in the country.”6 This kept everyone thoroughly confused about his identity. Tutored in secrecy, Alexander wouldn’t name clients and once told a reporter, with excruciating circumlocution, that the number of Morgan clients was “more than half-way up to 10,000.”7

  Alexander relaxed the bank’s pontifical image. He sailed a ten-foot dinghy, drove a Chevrolet station wagon, and bought suits off the rack. As American business power shifted toward the South and the West, the home base of many oil companies and defense contractors, it helped to have a chairman with a southern accent who could drum up business in Texas, California, and other places so long terra incognita for the bank. Alexander played the smart hick superbly. His occasional corn-pone patter—his sly, down-home aw-shucks manner—belied real sophistication. “When and if you decide you would like to borrow a little money,” he would tell corporate executives, “I hope you will not forget your country cousin at 23 Wall Street.”8 It was a shrewd way to disguise the fact that the bank badly needed new business.

  During Eisenhower’s second term, the Morgan bank had excellent access to the White House. In early March 1956, Ike had wrestled with the decision of whether to keep Richard Nixon as his vice-president. A flurry of rumors reported that he would dump Nixon, who prepared to announce his retirement. Eisenhower made it the subject of a “stag dinner” and invited George Whitney to attend. Whitney recommended that Ike choose the older and more experienced Christian Herter as his running mate. Nixon, he said in a subsequent letter, could be better groomed as a future Republican leader in a high-appointed post—a tactful way of shoving him aside. In a reply marked “personal and confidential,” the president agreed, but added resignedly, “The attitude [among politicians] seems to be ’do the thing that seems most popular at this moment.’ ”9

  Henry Alexander was so popular at the White House that the press dubbed him “Ike’s banker.” Although Alexander was the most domestically oriented chairman in Morgan history—he came in after the foreign loans of the twenties and never lived abroad—he fully internalized the Morgan identification with Britain. This was patent during the Suez affair. On July 26, 1956, Egypt’s prime minister Gamal Abdel Nasser nationalized the Suez Canal. The next day, the British prime minister, Sir Anthony Eden, informed Eisenhower that Britain was drawing up military contingency plans to reclaim the canal. By early November, Britain, France, and Israel invaded Egypt, to the great dismay of Eisenhower and his secretary of state, John Foster Dulles.

  The Suez affair produced a deep rift in the Atlantic alliance—always painful for the House of Morgan—and the bank tried to win back U.S. support for Britain. Speaking at the Executive’s Club of Chicago on December 7, Henry Alexander, in a rare bit of verbal pyrotechnics, conjured up a Nasser who “stirs the Arab world and breathes fire and damnation.” He argued that the Soviet Union planned to join with Nasser in strangling NATO through their joint control of Middle East oil. Alexander proposed an American doctrine for the Middle East like that which the United States had extended to protect Greece, Turkey, and Formosa. In his peroration, he urged that the United States get back on “speaking terms” with Great Britain and France. He said, “We must save our alliances. They are mainstays of our defense, the floodgates holding back the Communist tide.”10

  George Whitney, meanwhile, had always refrained from exploiting his friendship with Eisenhower; this modesty had enhanced his credibility. But on December 26, 1956, in an unusual step, he sent Ike a grave letter bluntly advocating a tougher approach toward Nasser:

  At some point somebody has got to tell [Nasser] where he gets off in no uncertain terms, taking the calculated risk of what this may blow up. Probably you have already done so; if not, I am afraid you might. Every day that goes by without some forward motion carries with it more serious risks. It is not only the financial plight of Western Europe, it is the injury to the prestige of the Western powers that to me is the most unfortunate repercussion. I am ready to assume the United States’ position has been improved with a good many people in Asia and Africa, but I am afraid that this may have been attained at an unprecedented cost to the Western world.11

  Eisenhower showed the letter to Dulles, who knew Whitney well. The secretary of s
tate reminded Eisenhower that the Morgan bank was the fiscal agent for the British government and submitted that Whitney’s sources were “somewhat biased.”12 Ike sidestepped Whitney’s letter. By the time he replied, he reported that he had just heard of Anthony Eden’s resignation as a result of England and France’s lack of success in the Suez affair. Then he abruptly turned to personal pleasantries.

  Unlike the situation of the 1920s, the Morgan influence at the White House was vastly disproportionate to the bank’s slender resources. During the fifties, the bank seemed to shrink, if only because its rivals grew so rapidly. It had to cobble together syndicates to serve large clients, such as France. Nevertheless, Alexander stayed aloof from branch banking and the spree of banking mergers. The old Wall Street vanished as musty, dignified old banks were snapped up by hungry retail giants. The First National Bank of New York—the bank of Pierpont’s pal George F. Baker—was illustrative of the situation. Refusing to hustle for business and demanding client introductions, it was dying with dignity, like a fussy old dowager, and was acquired by National City. Spurned by Morgans, Chase took over the Bank of the Manhattan Company; Chemical acquired New York Trust; and Manufacturers Trust later merged with Hanover Bank. Over a third of New York’s banks vanished. They had to merge if they were to grow to a size commensurate with their multinational clients.

  It was a brand-new age of banking, one with a less austere image. The stereotypical banker had been a grumpy Scrooge who closely scrutinized loan applications and was congenitally biased toward rejecting them. That befit a historic situation of scarce capital rationed by bankers. But the situation was reversed in the Casino Age, which was characterized by new financial intermediaries and superabundant capital. The banker now evolved into an amiable salesman who belonged to the Rotary Club, played golf, and smiled in television ads. Where banks once resembled forbidding fortresses or courthouses flanked by Corinthian columns, they switched now to inviting exteriors. In 1954, Manufacturers Trust opened a Fifth Avenue branch that wooed pedestrians. Its thirty-ton safe sat behind the bank’s plate-glass window so that strollers could peer through its open door. Inside the new banks, marble corridors and tellers’ cages gave way to soothing pastel shades, open counters, and soft furniture. Chase launched its advertising campaign with the slogan “You Have a Friend at Chase Manhattan.” For elitist Morgan bankers, this was too much. “You can’t provide custom tailoring to a mass market,” sniffed Henry Alexander.