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

by Ron Chernow

  In a carefully staged reconciliation, Lord Harcourt, a humble, hair-shirted suppliant, told the panel, “I should like to assure the committee that it was never my firm’s intention to show any lack of respect for the authority of the panel.”25 The Takeover Panel allowed that perhaps he and Hornsby had misunderstood the rules. Although Morgan Grenfell emerged unscathed and banked a gigantic $1-million fee, the damage to its reputation was severe. As London’s Sunday Telegraph said, “The days when Morgans spoke only to Cazenoves and Cazenoves spoke only to God were clearly at an end.”26

  For Morgan Grenfell, the American Tobacco takeover showed that merchant banks with modest capital and large client lists could make a fortune in the new takeover game—precisely what Siegmund Warburg had seen. Here they could capitalize on old-school ties while both lending and securities work became commodity businesses, dominated by the biggest and strongest. At first, the old financial aristocracy was squeamish about performing hostile takeovers, giving Warburg his head start. But now, only ten years later, the old guard had already lost its compunctions, proving that it could behave with a ferocity ordinarily not associated with the country-house set.

  SEVERAL months after the American Tobacco takeover of Gallaher, Morgan Grenfell entered a publishing battle that confirmed its new zest for controversy. In this case, it assisted Rupert Murdoch in his purchase of the News of the World, a London tabloid. The paper was a trashy mix of sports, pinups, Tory editorials, and royal gossip. Its major coup was the 1964 purchase of Christine Keeler’s memoirs recounting her dalliance with Secretary of State for War John Profumo and a Russian military attache. The paper sold six million copies every Sunday, topping all English-language newspapers. Half the British adult population loyally enjoyed its salacious pages.

  Breaking into British newspapers was then exceedingly difficult: Fleet Street was the preserve of family fiefdoms, and major papers seldom came up for sale. “They were almost looked down upon as toy things by the proprietors,” said Lord Stephen Catto, who was to advise Murdoch.27 Since the nineteenth century, the News of the World had been controlled by the Carr family, with Sir William Carr alone holding a 30-percent share. He was oblivious to the paper’s declining performance, said one observer, “because he was invariably drunk by half-past ten every morning, a habit which had earned him the popular alias ’Pissing Billy.’ ”28

  When Murdoch, Australia’s third-largest publisher, began scouting British newspapers in 1967, the objective was less to buy at rock-bottom prices than to crash the Fleet Street gates. He had already befriended Lord Catto, who was married to an Australian and, as a director of the Hongkong and Shanghai Banking Corporation, would stop by to see Murdoch on his Asian tours. Easygoing and convivial, Stephen Catto was less starchy and rigidly upright than his father, the former Bank of England governor. But his breezy manner and quick smile hid a shrewd detachment. Educated at Eton and Cambridge, Catto had trained at Morgan Stanley and J. P. Morgan and was good with “colonials.”

  Catto was emblematic of his era, just as his father had symbolized the City’s solemn prewar rectitude. Catto fils didn’t shrink from publicity and liked the fact that Murdoch was on call, day or night, in pursuit of a hot deal. In 1967, Murdoch visited Catto, saying he wanted to expand beyond Australia. “Much to my surprise, he sat down and said, ’I want to buy the Daily Mirror,’ “ recalled Catto, who patiently explained that Murdoch would have to pry it loose from the formidable International Publishing Corp. “Then let’s start buying IPC,” said Murdoch.29 Catto liked Murdoch’s confident, forthright style and had a premonition of bigger things ahead.

  Accumulating a small stake in London’s Daily Mirror, Catto and Murdoch spotted a more promising opportunity when Derek Johnson, a cousin of Sir William Carr, decided to sell his 26-percent stake in News of the World. Residing in France and Switzerland, Johnson had variously been a pilot, a steeplechase rider, and an Oxford spectroscopy professor. He wanted to spare his sixth wife onerous inheritance taxes by selling off the stake. Yet he had enough reservations about the Carr family that he didn’t automatically sell them the shares.

  Carr knew that by controlling the shares, he would possess a solid majority holding in the tabloid and so offered 28 shillings per share for the stake. This was a foolishly stingy offer that fell a shilling short of the stock’s current price on the London Stock Exchange. Not bothering to reply, Johnson’s London banker, Jacob Rothschild, peddled the block at 37 shillings a share to Robert Maxwell, the publisher of Pergamon Press, the largest scientific and technical publisher in the country. Labeling the move “cheeky,” Carr had his banker, Hambros, begin buying shares in News of the World.

  Maxwell wasn’t yet the world-devouring mogul of the Daily Mirror. Like Murdoch, he saw the Carr tabloid, for all its peephole proclivities, as his entree into the upper echelon of publishing. Born into a Czecho-slovakian peasant family as Jan Ludwig Hoch, Maxwell emigrated to Britain in 1940, changed his name, served in the British army, and took over Pergamon Press after the war. Massive, brawny, and smart, he had a prickly style that scared the daylights out of respectable folk. He was a self-made man who had been elected to Parliament as an avowed socialist. Recalling the episode, Catto stressed Maxwell’s somewhat murky business reputation at the time: “Pergamon Press had the hard sell with their encyclopedias. They were virtually forcing them on poor people. There were also doubts about the way he managed his financing. He mixed his own private company with publicly quoted companies in a way that made one uneasy.”30 Nevertheless, Maxwell made a tender offer of over 37 shillings per share for News of the World, making Carr’s bid look cheap and unsporting in comparison.

  To the Carrs, Maxwell was a foreigner unfit to run their Tory paper. This set them up for the blandishments of Rupert Murdoch. One morning in the fall of 1968, Catto’s wife heard on the news that the News of the World stake was up for sale. “Why don’t you get your friend Murdoch to buy it?” she asked Stephen. He soon cabled Murdoch that he had spoken with Sir William Carr’s bankers, Hambros, which had expressed interest in his support against Maxwell. Murdoch needed no coaxing.

  On Saturday, October 19, Catto summoned Murdoch to come to London at once, tracking him down at a sporting event in Melbourne. Murdoch jumped on a plane to Sydney, where his wife, Anna, handed him a suitcase and his passport. Then he jumped on a Lufthansa plane for Frankfurt, where he switched to a flight for London. Landing at Heathrow’s Terminal 2, he evaded reporters thronging Terminal 3. London was by now rife with rumors about Murdoch’s arrival, and the press hunted for him relentlessly. Murdoch thought his room at the Savoy might be bugged. So Catto put him up at his country place, where he paced up and down, jotting notes on backs of envelopes. The looming battle gave Morgan Grenfell another chance to shuck its musty image. As the London Observer said, “Morgan Grenfell, having been for long regarded as a grouse-moor bank, with a record of unsuccessful defensive battles, is nowadays determined to show it can be as aggressive as the rest of ’em.”31

  Despite the strident denunciations of Maxwell by the Carr forces, Murdoch resembled his competitor in many ways. Both were loners who hated committees and enjoyed a scrapping good fight. Even their politics weren’t so dissimilar. As an Oxford student, Murdoch had flirted with political radicalism, and his supposed anti-British sympathies were cited as reasons to oppose his ownership of the News of the World. Like Siegmund Warburg, Murdoch thought the British upper class weak and effete, and this emboldened him in his maneuvering. Murdoch’s output was already mixed. Though he published the staid Australian, he also put out a racy weekly called Truth. Nonetheless, Sir William Carr would embrace Murdoch as an unblemished white knight.

  During their country-house weekend, Catto outlined to Murdoch a three-pronged strategy that called for securing Carr’s support, beating Maxwell, then taking full control of News of the World. (Events would unfold in that precise order.) Carr wanted to use Murdoch to destroy Maxwell but without ceding full power to him. As Murdoch later
said, “I was expected not as a white knight, but as a Sancho Panza to Carr’s Don Quixote.”32 Catto laid out a plan to turn the tables on Carr. After buying a small stake in the News of the World, they would take advantage of Carr’s vulnerability to gain control of the tabloid. Catto’s guile was a revelation to Murdoch, who had equated the City with gentility, said one biographer; “yet here was Lord Catto, a principal in one of the City’s most celebrated banks, proposing a strategy that bordered on the Machiavellian in its slyness—perhaps even of the deceptive and fraudulent, as Sir William Carr, its victim, would later claim.”33

  Coached by Catto, Murdoch then had breakfast with Carr at his Cliveden Place residence on Tuesday morning, October 22. Murdoch brashly said that he would buy a majority stake in News of the World but that he wanted Carr to step aside as top executive. When Carr balked, Murdoch got up to leave. “I’m here to help you if you want it,” said Murdoch. “But I don’t like to waste time on dither.” “Sit down, Mr. Murdoch,” Carr replied.34 In a complicated deal, they agreed that Murdoch would buy more News of the World shares and secure their combined majority. In exchange, Murdoch would get a 40-percent stake in the paper through newly issued shares. They would jointly manage the paper, but Carr would remain as chairman. Murdoch chafed at these terms, but Catto assured him it was the “foot in the door” he needed.35

  The first phase of the tabloid battle resembled a straight bidding war. Maxwell put together a 30-percent stake by buying the original Derek Johnson block plus additional purchases. The Murdoch forces adopted more controversial tactics. Carr’s banker, Hambros, bought News of the World shares in apparent violation of the Takeover Code, which forbade companies to buy their own shares. And through a Morgan Gren fell account, Catto bought a 3.5-percent stake in the paper that would be set aside for Murdoch.

  In the American Tobacco-Gallaher affair, Lord Harcourt had arrogantly dismissed the press at his peril. Now, in announcing his pact with Carr, Murdoch hired a publicist. Catto found this departure exciting—while his father would doubtless have found it abhorrent and beneath a banker’s dignity. At a press conference on Wednesday, October 23, Murdoch, age thirty-seven, made his debut on the British stage. He was tagged the “quiet Australian” by the London press, which knew little about him. At first relaxed and grinning, he tried to answer questions frankly, but he was stunned by a barrage of hostile questions accusing him of violating the Takeover Code. Catto sat quietly by his side, a contemplative finger at his lips.

  Robert Maxwell protested to the Takeover Panel what he saw as a side deal between management and Murdoch not in the best interests of shareholders. He also claimed that the Carrs were violating the code by buying their own shares through a surrogate, Hambros. Maxwell had boosted his bid to a hefty 50 shillings per share, but was thwarted by the pact negotiated at breakfast at Cliveden Place. The panel found enough merit in the charges and countercharges to suspend trading in News of the World stock for two months. At the time of the standstill, neither side had a 51-percent stake. The panel turned the battle into a proxy fight to be decided at a general shareholders’ meeting on January 2, 1969. Catto rallied Murdoch’s spirits, saying the decision enhanced their chances for victory. Shortly before the meeting, the panel said neither side could cast votes obtained before Maxwell’s first tender offer.

  Sir Leslie O’Brien, the Bank of England’s governor, fretted that the angry contest would wreck the code. Voluntary self-regulation seemed a feeble way to restrain the mercenary tendencies of the Casino Age. At the Lord Mayor’s banquet on November 11, Prime Minister Harold Wilson had reiterated his dislike of the new marauding style in the City, exhorting merchant bankers to police their own behavior. Once again, Morgan Grenfell, long part of the City establishment, openly sparred with City authorities.

  When the Carr-Murdoch deal was voted on at the Extraordinary General Meeting held on January 2, the atmosphere was ugly and xenophobic. The Great Queen Street hall was packed with ringers. Murdoch later admitted that some pro-Carr shareholders who couldn’t attend had temporarily signed over their shares to News of the World staffers. When Sir William Carr marched in like a benevolent patharch, he was lustily cheered. Dressed in a flashy blue suit, Maxwell was hooted and booed by a chorus shouting “Shame!” “Withdraw!” and “Go home!”36

  Although Maxwell’s standing offer of 50 shillings was the financially superior one, the discussion pivoted on his fitness to run the paper. While Murdoch pretended that he would retain Carr as chairman, Maxwell candidly said he would replace him, telling the paper’s publisher, “Every time I have a haircut at the Savoy late in the afternoon, around 4 P.M., I find you and your News of the World cronies still drinking Martinis and I don’t think that is suitable training for any chairman of mine.”37 Maxwell’s combative style didn’t work nearly as well as Murdoch’s crafty, self-effacing manner. In the final vote, the Carr-Murdoch group got 4.5 million shares, and Maxwell, 3.2 million. Murdoch celebrated with a party at his Embankment flat that night. For Morgan Grenfell, it started a long relationship with the world’s most powerful publisher. As an influential board member of Murdoch’s News International board, Catto would negotiate his future U.K. newspaper purchases, including that of the London Times. Yet the relationship between Murdoch and Morgan Grenfell would have a curious ambivalence, for the banking side of the firm wouldn’t lend to Murdoch, believing his operations too dangerously leveraged.

  By mid-1969, Sir William Carr saw that with Murdoch he had admitted a Trojan horse. The Australian continued to buy shares after the meeting, so he would safely control more than 50 percent of the paper. He fired Carr’s jingoistic editor, Stafford Somerfield. Then he demoted Carr to president and took the chairmanship himself. Murdoch was launched in Britain. That December, he bought the London Sun, which would prove his real profit maker. Loading it with pinups, he soon doubled its circulation, to two million, and established it as Britain’s biggest daily paper.

  The American Tobacco-Gallaher affair and the Murdoch-Maxwell brawl prompted reform of the Takeover Panel, which got a full-time chairman in Lord Hartley William Shawcross, a Morgan Guaranty adviser and a director of Morgan et Compagnie International. The code was revised to forbid partial bids of the American Tobacco variety, and new sanctions were introduced. In a single tumultuous year, Morgan Grenfell’s character had changed almost beyond recognition. Mergers were suddenly pitching in a third of the firm’s profits. It was operating publicly and flouting authority in a way that would have been inconceivable a decade earlier. Though the firm still issued securities and managed money, it increasingly would take its tone from the piratical world of mergers. This change would also affect the firm’s sociology; now a premium would be placed on intellect and experience, Morgan Grenfell would attract a new breed of talented, well-trained lawyers and accountants who could master the intricacies of the complex deals. The new City would be more ruthless but also more democratic, and it would look much more like the Warburgs of the 1950s than the Morgan Grenfell of the 1950s.

  CHAPTER TWENTY-NINE

  SAMURAI

  LIKE Morgan Grenfell, Morgan Stanley entered the 1960s a model of civility, then turned itself inside out. In the early 1960s, it radiated a winner’s confidence. Nearly two dozen partners in Brooks Brothers suits and monogrammed shirts sat behind rolltop desks at 2 Wall Street. Decorated with English hunting prints, this platform area was a sanctum of mystical power. As one partner said, “It’s one of the few places where a single phone call can raise $100 million.”1 Morgan Stanley partners didn’t raid, compete, or crudely solicit business and had exclusive relations with their clients. If they hired somebody from another firm, they politely asked that firm’s permission.

  As befit a firm of illustrious heritage, tradition was venerated. The old House of Morgan had encouraged attendance at partners’ meetings by handing out gold coins. In a modern variant, Morgan Stanley gave out ten- or twenty-dollar bills to partners when they entered a meeting. They also got to divide
the booty left by absentees. The only unanimous attendance occurred once, in a snowstorm, when everybody planned to make a killing.

  As students protested the Vietnam War in the 1960s, it was hard to lure graduates to Wall Street. When Frank A. Petito went to the Harvard Business School to try to recruit students, he ended up sitting alone in a classroom until a professor took pity on him and stopped by to chat. Although they had mostly gone to Princeton, Yale, or Harvard, Morgan Stanley partners came from diverse backgrounds. Like the old Morgan bank, Morgan Stanley was receptive to talented poor boys, even though it was unfairly stereotyped as a Social Register firm. Dick Fisher, a future president, was discouraged from applying for a job by a Harvard Business School professor who said Morgan Stanley required “blood, brains, and money” and that Fisher failed on two counts.

  Nevertheless, the hauteur of the senior partners could be oppressive. Once at the firm, Fisher drove up to Canada with one of the partners to work on the Churchill Falls hydroelectric project. At the border, an immigration official, peering at Fisher in the backseat, asked the partner, “Who’s that in the back with you?” “I’m traveling by myself,” the partner answered. When the officer gestured toward the person sitting in the backseat, the partner said gruffly, “It’s no one. It’s a statistician.”2

  By the 1960s, Wall Street’s religious segregation was crumbling. Many Jewish firms had Protestant partners, especially in syndication, where they had to truckle to Morgan Stanley and First Boston. In 1963, Morgan Stanley hired its first Jew, Lewis W. Bernard, who had roomed at Princeton with Frank Petito’s son and frequently stayed at the Petito home. “When Bernard was interviewed, everybody was in favor of hiring him,” recalled a former partner. “But it was very hard for some older partners to overcome their ancient prejudice.” One Morgan Stanley partner even rushed over to Standard Oil of New Jersey to sound out an official: if Morgan Stanley ever sent over a Jewish employee, would the company be upset? “I think you ought to know, if you don’t,” the official bristled, “that our chief executive officer is Jewish.”3 The partner slunk away. In 1973, at age thirty-one, Bernard became the youngest partner in Morgan Stanley history (except for the special case of Charlie Morgan), and he would develop into an important strategic thinker.