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

by Ron Chernow

Morgan Stanley directors had an emotional, protracted debate about whether to reject the IBM offer and miss a fee of approximately $1 million. The meeting was filled with high-flown rhetoric about upholding tradition. Bob Baldwin and Fred Whittemore were among the hawks who feared an IBM exception would embolden the other slaves to cast off their chains. After much resounding talk, nearly everybody voted to defy IBM and demand sole management. Morgan Stanley was shocked when word came back that IBM hadn’t budged in its demand: Salomon Brothers would head the issue, as planned. It was a landmark in Wall Street history: the golden chains were smashed.

  Before long, investment banks were raiding other Morgan Stanley clients with abandon, destroying the Gentleman Banker’s Code. A competitor observed cheerily, “Once the client list starts unwinding, it’s going to unwind all the way. It’s just a matter of time.”5 Afterward, most of IBM’s business went to Salomon. Swallowing its pride, Morgan Stanley agreed to share issues for General Electric Credit, Du Pont, and Tenneco. It even began to participate in syndicates below the level of manager—a sight as shocking to old-timers as that of a master suddenly donning the livery of his footman. The age of relationship banking was dead.

  Snubbed by its blue-chip clients, Morgan Stanley displayed a new receptivity to emerging-growth companies. It had long been chary of lending its imprimatur to untested companies—the name Morgan was synonymous with established—and had refrained from initial public offerings of stock. This squeamishness dated back at least to the preferred-list disaster of 1929. In 1980, perhaps taking a swipe at IBM, Morgan Stanley introduced rival Apple Computer to the stock market. (It also bought Hitachi computers for the office, something it wouldn’t have done before 1979.) For a long time, the firm had resisted high-tech start-ups. Now Morgan Stanley would lend its name to new ventures. Much like the indigent aristocrat who rents his castle to tourists, the firm would shamelessly trade on its class.

  AS underwriting became a more mundane, impersonal business, Morgan Stanley relied more on its takeover department, which boomed under Bob Greenhill’s tutelage. Already in the late 1970s, merger work was being hailed as the last gold mine by investment bankers who assumed that Glass-Steagall would someday collapse and lead to a securities business overrun by commercial banks.

  Takeovers transformed Morgan Stanley’s ethos. As a sponsor of securities, the old Morgan Stanley had fashioned a stately, incorruptible image. Emerging from the fury of Ferdinand Pecora, early partners took fright at the first breath of scandal. This culture was now tested by the more lucrative takeover work. By the late 1970s, the four-man M&A Department had expanded to a crack squad of fifty. Just five years after the watershed Inco-ESB raid, the firm was handling deals worth $10 billion yearly, with a hundred potential deals in the hopper at any time. M&A was now the firm’s major source of profits. At the same time, takeover work had become divorced from the old seamless relationship with faithful clients. It was a giant, disciplined machine separated from the rest of the firm.

  Greenhill’s brawny raids didn’t fit easily into the old collegial firm, especially with his department contributing so disproportionately to profits. As one former partner recalls, “Greenhill was making a hell of a lot of money, and he was lording it over everybody.” Opposition, predictably, emerged from the syndicate side. Thomas A. Saunders III, who replaced Father Fred as syndicate chief, issued truculent warnings: “Greenhill should remember that whatever success he has comes from the franchise.”6

  By now, Morgan Stanley had left the white-shoe stereotype far behind, as the brash style of corporate marauders replaced the sedate style of underwriters. The old leisurely syndicate pace gave way to the fast, staccato beat of takeovers, with their weeks of frenetic activity. People now wore beepers, worked ninety-hour weeks, and remained on call over weekends, restricting their outside cultural and political activities—hallmarks of partners in the old House of Morgan. As the corps of managing directors ballooned in size, decisions were no longer made by milling around, and the firm was run in a more autocratic, from-the-top-down style.

  Expanding swiftly, Morgan Stanley found it harder to screen people or instill the old culture. As happened in the 1920s, a burgeoning financial industry rapidly attracted a new generation of young people. Untested college graduates were slipped into positions of great responsibility, with almost instant access to information worth millions. The demographic accent tilted to youth.

  As questions of possible conflicts of interest in merger work surfaced, Bob Baldwin would quote Jack Morgan’s dictum of doing first-class business in a first-class way: “Nobody’s perfect, but we think we have the highest ethical standards in the industry.”7 In 1973, the New York Times ran an article on insider trading with this caption below Baldwin’s photo: “ROBERT H. B. BALDWIN OF MORGAN STANLEY THINKS THE PRACTICE IS PASSÉ.” “Maybe I’m naive,” he said, “but I think the day of partners swapping that kind of information is long gone.”8 Baldwin wasn’t cavalier about ethics, but he placed extraordinary faith in the power of so-called Chinese walls to insulate Greenhill’s operation from the rest of the firm.

  Morgan Stanley tried to throw the fear of God into merger specialists and monitored their activities closely. Briefed on legal and ethical issues, young professionals had to sign statements that they understood house rules. To foster a healthy paranoia about using inside information for personal gain, scare memos listing grounds for dismissal were circulated periodically. Oil analyst Barry Good remarked, “I have visions of someone stalking into my office to rip the epaulettes off my shoulders, break my calculator over his knee and drum me right out of the corps.”9 Every fortnight, security officers conducted electronic sweeps, and projects were camouflaged with the names of English kings or Greek philosophers. Staff members weren’t permitted to discuss them in halls or elevators and weren’t supposed to know each other’s deals. Stock-research people couldn’t even browse in the library’s corporate-finance section.

  These safeguards grew more important as more major deals churned through the Greenhill mill. The deals—and the fees—were growing astronomically. In a 1977 milestone, Morgan Stanley got a $2.7-million fee for representing Babcock and Wilcox against a takeover by McDermott, advised by John A. Morgan (Harry Morgan’s bulbous-nosed, ruddy son, rejected by Morgan Stanley after the Charlie Morgan controversy) of Smith, Barney. Babcock demolished the myth that billion-dollar companies were immune to takeovers. Because its stock doubled during the bid—way above the usual 40-percent premium—it attracted a new breed of professional arbitrageurs. These speculators swept up the outstanding stock of takeover candidates, concentrating it in fewer hands, thus setting the stage for merger mania.

  In the fall of 1977, Morgan Stanley became involved in an ethical tangle from which it never fully extricated itself. Like other big, Morgan-financed mining firms, Kennecott Copper wanted to diversify, and it turned to Greenhill as adviser. Among the prospects he scouted was a Louisiana forest-products concern, Olinkraft. While a friendly bid still seemed possible, Olinkraft provided Kennecott with confidential earnings estimates. Then Kennecott’s attention was distracted by a company named Carborundum, which it finally bought. Losing interest in Olinkraft, it returned the confidential data. Morgan Stanley apparently did not.

  In early 1978, another Morgan-organized mining conglomerate, Johns-Manville, showed up for diversification advice and was assigned to Greenhill’s sidekick, Yerger Johnstone. When talk turned to Olinkraft, Morgan Stanley mentioned earlier talks with the company but didn’t divulge the valuable data. By late June, Johns-Manville had decided not to pursue Olinkraft. Two weeks later, Texas Eastern made a $51-a-share offer for Olinkraft, which the latter’s board approved. Now, having seen confidential projections that Olinkraft would earn over $8 a share by 1981, Morgan Stanley knew the company was selling out very cheap. So it shared the data with Johns-Manville, which reversed its decision, stepped straight into a bidding war with Texas Eastern, and won with a top bid of $65 a share. As the dust settle
d, the question arose: had Morgan Stanley betrayed Olinkraft?

  According to its later defense, Morgan Stanley consulted Davis, Polk, and Wardwell and Joe Flom’s law firm of Skadden, Arps before making a move. Both approved disclosing data to Johns-Manville provided the confidential estimates appeared in an SEC filing connected with the bid. This was duly done. Yet when published in September 1978, the filing caused shock, since Morgan Stanley hadn’t received Olinkraft’s permission to share such internal information. It seemed that client-banker trust—the bedrock of merchant banking for a century—was being violated in an opportunistic way. When the Wall Street Journal broke the story on October 26, it saw the flap as betokening larger problems: “No one is accusing Morgan Stanley of any wrongdoing, but some close observers of the firm, including some clients, lately have grown uneasy about what they see as mounting aggressiveness at Morgan Stanley as it scrambles for sizable takeover-bid advisory fees.”10

  At first, Morgan Stanley couldn’t produce a coherent defense. After its managing directors met for several hours, a spokesman said lamely, “I’m afraid we’ve decided we can’t comment.”11 While some Morgan people reacted angrily toward the press, others, troubled by Greenhill’s bravado, welcomed what they saw as a salutary rebuke. Petito and Baldwin published a nine-paragraph defense in the Wall Street Journal, which asserted that the firm had “acted with the highest standard of professional responsibility” in showing the Olinkraft data to Johns-Manville.12 They pointed out that Morgan Stanley’s action had benefited Olinkraft shareholders, who reaped a 25-percent premium over the Texas Eastern bid. True enough. But was such bidding fair to Texas Eastern? Greenhill argued that the withholding of vital information from Johns-Manville might have posed questions, too. “If someone tried to stir up trouble, he might come in and say, ‘Hey, these guys are trying to buy a company with undisclosed, secret information.’ ”13 This was a valid point—and a perfectly good argument for bowing out of the deal altogether.

  Morgan Stanley’s attempts at explanation only worsened matters. Speaking to Institutional Investor, Greenhill and Dick Fisher said the firm had neither a verbal nor a written agreement with Olinkraft that enforced confidentiality. For the House of Morgan—the historic custodian of the “my word is my bond” approach to business—this defense seemed a betrayal of the Morgan tradition. As Institutional Investor said, “Morgan Stanley appeared to be enunciating a new investment banking doctrine: that any information a corporation provides to an investment banker will not necessarily be kept in complete and lasting confidence unless that corporation obtains either a written or oral promise from the investment banker to keep the information confidential.”14

  There was more bad news. About two years before, Morgan Stanley had set up a “risk arbitrage” department to speculate in takeover targets. As would become clear during the insider trading scandals of the 1980s, such operations were incompatible with M&A work. How could one side of a firm execute takeovers while another side was betting on them? Again Morgan Stanley extolled its Chinese wall, insisting its arbitrageurs existed in a sealed universe apart from Greenhill’s group. Then, a second Wall Street Journal story disclosed that the Arbitrage Department had taken a 150,000-share position in Olinkraft in mid-July, soon after the original Olinkraft-Texas Eastern discussions were revealed. This $7-million stake was unusually large. Only two months later did Johns-Manville learn that one wing of Morgan Stanley had a huge vested interest in seeing it pay top dollar for Olinkraft.

  Bob Baldwin refused to concede any lapse in the firm’s vaunted integrity: “If you ask any 50 investment bankers on Wall Street which firm has the highest standards of ethics, I can assure you that Morgan Stanley will be the firm that is most often mentioned.”15 Elsewhere in Wall Street, the Olinkraft episode produced deep uneasiness. Morgan Stanley was the flagship of Wall Street and its troubles tarred everyone. “The Morgan Stanley situation is going to hurt all of us,” said a rival. “For years we have all been cloaked in the integrity Morgan Stanley has shown in the corporate world.”16

  Olinkraft showed that as Wall Street firms grew and diversified, there were myriad opportunities for cheating and cutting corners. For some ex-partners who had grimly watched the firm evolve over the previous ten years, Olinkraft confirmed their fears. Some had thought it a matter of time before “accidents” occurred. One former partner said:

  Morgan Stanley took on jobs that visibly represented conflicts of interest and sooner or later they got into trouble. Before, the attitude was that if you saw a conflict of interest, you said “no” right away. There was no idea that you had to go for the last nickel. And you never looked at an individual buck outside of its effect on that basic business of preserving client relationships. That’s what Morgan Stanley slipped away from for quite awhile. I always felt they lost their soul.

  By now, the merger business had acquired an irresistible momentum. In 1979, Morgan Stanley earned a stratospheric $14.3-million fee for advising Belridge Oil on its sale to Shell Oil—then history’s largest takeover. Among the losing auction bidders were two furious Morgan Stanley clients—Mobil and Texaco. The irate Mobil gradually shifted business to Merrill Lynch, while Greenhill pretended to be blase: “We’ll always do our best for a client, and Belridge was the client.”17 Unlike syndicate work, takeover business required antagonizing some clients to please others. It therefore eroded historic ties on Wall Street.

  This was again revealed in August 1981, when Du Pont bought Conoco for $7.8 billion. Advised by Morgan Stanley, Conoco turned to Du Pont as a white knight to ward off Seagram’s advances. Because Greenhill and Flom were already teamed up with Conoco, Du Pont—a House of Morgan mainstay from the World War I Export Department and the 1920 General Motors takeover—had to drop Morgan Stanley and turn to the surging First Boston team of Joe Perella and Bruce Wasserstein. The three-month battle netted Morgan Stanley $15 million. Afterward, Morgan Stanley found itself sharing Du Pont under-writings with First Boston. The new banker ties developed through takeovers translated into less loyalty in underwriting as well.

  In 1981, Morgan Stanley was destined to suffer an embarrassment greater than that precipitated by the Olinkraft takeover. The case would darkly foreshadow later Wall Street scandals. It started with the hiring of Adrian Antoniu, a Romanian refugee whose family settled in New York in the 1960s. The Antonius had no money and spoke no English; Adrian’s would be a classic success story: after his father died, he supported his mother, worked his way through NYU, and in 1972 graduated from the Harvard Business School. Hired as a Morgan Stanley associate that year, he worried about money. He fretted about his mother’s failing fabric business in Queens and was concerned about making payments on his student loan.

  Bright and sociable, Antoniu was mesmerized by the new wealth around him and took up a trendy lifestyle, complete with BMW and Park Avenue apartment. He belonged to a tony club called Doubles, frequented smart restaurants, and hung out at the Hamptons. The more perceptive wondered what lay below the aura of sophistication. “He just looked too good, too well-pressed and too well-groomed,” said an acquaintance.18 Starting in corporate finance, Antoniu was soon drawn into Greenhill’s growing merger operation, where a newcomer could quickly lay his hands on valuable information.

  In 1973, Antoniu hatched a deal with a former N.Y.U. classmate, James Newman, who worked in a brokerage house. Antoniu would feed names of takeover candidates to Newman, who put up the money to buy the stocks; profits were to be shared equally. He cut similar deals with two other graduates from his business-school class. At first, the bets were touchingly modest. In the first of eighteen deals, Antoniu told Newman that Morgan Stanley was defending CertainTeed in a tender offer by Compagnie de Saint-Gobain-Pont-a-Mousson. Their CertainTeed purchases netted $1,375. In a second deal—Newman had now moved to Miami and taken another brokerage job—Antoniu revealed that Ciba-Geigy, advised by Morgan Stanley, would soon launch a bid for Funk Seeds. Soon they were placing bigger bets. For instance, wh
en Morgan Stanley helped North American Philips in its bid for Magnavox, Antoniu and Newman bought 17,600 shares of Magnavox. Starting to show real flair, the young men took to using offshore Bahama bank accounts.

  They grew strangely heedless of danger. Later on, they read a newspaper account of an insider trading case against three people at Sorg Printing who used inside information from tender-offer documents they were printing. “Look what happened to these people at Sorg,” said Antoniu, briefly dismayed. “Well, you see the worst that could happen in a case like this,” Newman replied. “They ask for your money back, and they give you a slap on the hand. People have to steal or kill to get this kind of money, but you don’t have to go to jail for it.”19

  In early 1975, the conspiracy nearly ended when Antoniu was edged out of Morgan Stanley and hired for M&A work by Kuhn, Loeb, soon to merge with Lehman Brothers. Luckily, he found a new Morgan Stanley confederate in yet a fifth member of the Harvard Business School class of 1972. Unlike the free-and-easy Antoniu, the French-Canadian E. Jacques Courtois had an intense, tight-lipped expression. His father, a rich Montreal lawyer who headed a group that owned the Montreal Canadiens, sat on a bank board. Over chess at the Harvard Club, Antoniu drew Courtois into his scheme. Courtois promptly repaid his confidence with a tip—that Pan Ocean Oil, a Morgan Stanley client, was involved in merger talks with Marathon Oil. They made a quick killing of $119,000. Between 1973 and 1978, they would earn $800,000.

  It took time before the authorities zeroed in on Antoniu. Meanwhile, he had fallen in love with Francesca Stanfill, daughter of Dennis Stanfill, the powerful chairman of Twentieth Century Fox. By the spring of 1978, when the government targeted him as a prime suspect, Antoniu was engaged to Francesca, who wrote about fashion for the Sunday magazine of the New York Times. He somehow neglected to tell Eric Gleacher, his boss at the M&A Department of Lehman Brothers Kuhn Loeb, that he was being investigated. Learning of this fact on the eve of Antoniu’s wedding, Gleacher saw double disaster: not only was Antoniu his employee but Twentieth Century Fox was a major Lehman client. He insisted to Antoniu, “If there is nothing to the charges and you want to have the Stanfills stand by you in defending against them, you really ought to tell them.”20