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

by Ron Chernow

  There was no outright illegality in the Bell’s takeover, but things were skirting the edge. Apparently a Guinness employee, pretending to be a Scottish reporter, questioned Raymond Miquel.9 Also, Saunders had assured Bell’s shareholders that he might sell the Piccadilly Hotel in London but keep the rest. Then through Morgan Grenfell’s property arm, he set up a Dutch auction for the Caledonian and North British hotels in Edinburgh. The winning bidder, Norfolk Capital, came as a shock, because its chairman was none other than Tony Richmond-Watson of Morgan Grenfell. There were, predictably, accusations of favoritism and double-dealing. By this point, both Guinness and Morgan Grenfell seemed ripe for trouble. Christopher Reeves, meanwhile, kept telling Saunders that Guinness would have to digest another company if it wished to stay independent.

  In January 1986, Saunders entered into a more massive takeover whose record size would make the city tremble. A supermarket chain, Argyll, had made a bid for the far larger Scottish brewer, Distillers. This David assault on Goliath—a new City phenomenon—had clear class overtones. Argyll’s James Gulliver was a husky, rough-hewn grocer’s son, while Distillers was an aristocratic Scottish firm. From plush headquarters on London’s St. James’s Square, Distillers marketed drinks with a classy ring—Johnnie Walker, Haig and Haig, and White Horse scotch, Booth’s and Gordon’s gin. Behind the tony facade, however, the poorly run company was losing ground in the scotch market. And it had never completely overcome its infamy as the manufacturer of thalidomide, a sedative that when taken by pregnant women apparently caused cruel deformations in the developing fetus.

  Distillers scoffed at the Scottish commoner Gulliver. “Gulliver deals in potatoes and cans of beans,” said a deputy chairman of Distillers. “We are not selling brown water in cheap bottles. We are selling Scotch.”10 The Gulliver people exhibited their own class bias. Hoping to swoop down on Distillers by surprise, they favored an August raid, saying, “Let’s shoot them up the backside while they’re out on the grouse moor.”11

  So along came Ernest Saunders in January 1986, volunteering to be the “white knight” who would save Distillers from that coarse ruffian, Jimmy Gulliver. There was more than altruism here: Saunders was already considering pouncing on Distillers, anyway. If he could make a ceremonial entrance through the front door, well, so much the better. He even secured an agreement by which Distillers would defray Guinness’s fees for taking it over—a highly unusual measure.

  Saunders liberally distributed promises to win Distillers’ support. Chairman John Connell was apparently led to believe he would chair the merged entity. Ditto for Sir Thomas Risk, governor of the Bank of Scotland. The duping of Risk would be one of the most disgraceful parts of the Guinness affair. The Guinness forces needed to placate Scottish nationalists, who would protest the loss of Distillers’ autonomy. Charles Fraser, an Edinburgh lawyer and chairman of Morgan Grenfell, Scotland, was among those pressing for a Scottish non-executive chairman. To this end, Saunders and Seelig cajoled the respected Risk into agreeing to take such a post in the new firm, which would have its headquarters in Scotland. This promise was incorporated into takeover documents, and the Distillers board made it a precondition of the “friendly” bid; many institutional investors backed Guinness on its strength. Nevertheless, Guinness later reneged on its pledge, claiming that the two-tier structure was unworkable from a commercial standpoint. It even circulated rumors to blacken Risk’s reputation, claiming that he was unduly concerned with retaining Guinness business for his bank. Morgan Grenfell protested the treatment of Risk but didn’t resign. After an extraordinary general meeting, Risk was dropped by Guinness without legal repercussions. But the lingering resentment over the dispute would add extraordinary venom to the Guinness affair.

  Tony Richmond-Watson should have been Morgan Grenfell’s point man in the Guinness takeover. But he was busy helping United Biscuit complete a £1-billion merger with Imperial Group, so he bowed out. Roger Seelig took his place. (Some accounts say Saunders demanded the more aggressive Seelig.) According to Saunders, Reeves warned him that Seelig was a “very powerful personality and will want to do things his way.”12 As a member of the so-called Guinness war cabinet, Seelig sat by Saunders at meetings and was integral to everything that happened. Even before the later disclosure of share manipulation, it seemed a nasty campaign. Both sides stooped to such scurrilous ads that the Takeover Panel had to curb their use.

  The essence of the Guinness scandal involved manipulation of share prices. The Lilliputian grocer, Jimmy Gulliver, was trying to take over a liquor company three times his company’s size. Where a comparable bid in the United States would have been financed with cash and junk bonds, Gulliver hoped to pay primarily with shares of his own company, much as American conglomerates did in the 1960s. As it started bidding against Gulliver, Guinness also relied on a swap of its own shares and cash. So the decisive factor would be the price of Argyll and Guinness stock; the more they rose, the more their individual bids would be worth.

  Guinness embarked on a campaign to pump up its own share price and thus enhance its bid. It wasn’t illegal for people to buy Guinness stock, nor for Morgan Grenfell to tout it. Roger Seelig got his friend, the beefy, bespectacled Lord Spens—formerly of Morgan Grenfell but now a corporate finance director with Henry Ansbacher—to coax his clients into buying two million shares. Jacob Rothschild bought. Robert Maxwell reportedly picked up two million shares. L. F. Rothschild Unterberg Towbin bought a six-million-share Guinness block, which it sold back to Morgan Grenfell when the battle was over. The illegality would arise only if Guinness underwrote share purchases or guaranteed buyers against loss by doing so. That would violate the Companies Act of 1985, which prohibited companies from buying their own shares or assisting others in doing so. Whether or not criminal acts took place in connection with the Guinness “affair” will, of course, be resolved in criminal proceedings to be commenced in 1991, in which the defendents denied all charges.

  Despite the law, Seelig, Saunders, and Guinness finance director Olivier Roux allegedly orchestrated what is called a concert party, or a fan club, to inflate the Guinness share price while deflating Argyll stock. They are said to have conducted their secret work on such a large and brazen scale that one wonders how, in the long run, they hoped to escape detection. The list of deals cut by the Guinness war cabinet makes for sobering reading. British businessman Gerald Ronson, chairman of Heron Corporation, had introduced Seelig to the notorious American arbitrageur, Ivan Boesky. At Seelig’s urging, Boesky poured £100 million into Guinness and, for good measure, “shorted” Argyll stock to depress it. The Boesky link would later clarify a mystery of the Guinness takeover: why Argyll shares dipped each afternoon in London, just about the time New York trading opened. The American company, Schenley Industries, bought £60 million of Guinness stock. By coincidence, it received an extended contract afterward to market Dewar’s whiskey in the United States. The biggest stake was taken by the venerable Bank Leu, Switzerland’s oldest bank, which bought tens of millions of shares and was allegedly indemnified against any losses.

  As Guinness’s share prices spiraled wildly skyward, buoyed by the coordinated buying, Gulliver complained to the Takeover Panel about the share levitation. As it had since 1968, Britain still relied on the private panel to enforce the Takeover Code. This self-regulatory body seemed too genteel to deal with the harsh tactics and mercenary culture of the modern City. Much to its later embarrassment, the Takeover Panel failed to act on Argyll’s complaint. Morgan Grenfell also accused Argyll of inflating its share price. A 25-percent jump in Guinness’s share price finally tipped the scales in the takeover. On April 18, 1986, Ernest Saunders declared victory over Argyll, claiming to have more than 50 percent of Distillers’ shares in a bid valued at £2.53 billion. Morgan Grenfell had won the biggest, ugliest, most searing takeover of the decade and basked in dubious glory.

  Ethics aside, Guinness involved some risky financial footwork for Morgan Grenfell, providing further proo
f of its win-at-any-cost mentality. It had bought £180 million of Distillers shares, straining its capital resources of only £170 million—to say the least. This behavior was deemed so irresponsible by the Bank of England that it promptly issued new rules, limiting such share buying by a bank to 25 percent of its capital—an implicit rebuke of Morgan Grenfell. Once again, the firm that was the Bank of England’s staunchest ally in Teddy Grenfell’s day now seemed its chief nemesis.

  As in any share-rigging scheme, there was a critical weakness: what would happen to artificially elevated share prices when the secret props were removed? Apparently Roger Seelig feared that friendly parties might suddenly dump up to 20 percent of Guinness’s shares on the market. And the price indeed began to slide sharply from the 355-pence takeover price. If, as alleged, Guinness had promised to insure the concert party against losses, its liability could be tremendous if the share price plummeted. Seelig appealed to institutions to hold their shares until autumn. Mayhew of Cazenove, Guinness’s broker, also worked out a plan for Guinness to buy back Morgan Grenfell’s stake in Distillers, which would be converted into Guinness shares after the takeover.

  More direct measures were taken to stop selling. Lord Spens had a two-million-share block for which Guinness allegedly paid him £7.6 million. Seelig and Oliver Roux, Saunders’s financial adviser, are said to have characterized the £7.6 million as an interest-free deposit in order to dissuade Spens from selling. It was hard to see what the difference would be between such a de facto guarantee and an outright purchase. It is also alleged that Bank Leu in Switzerland also got a £50-million “deposit” from Guinness to ensure that it wouldn’t liquidate its shareholding. During the summer of 1986, Guinness transferred £69 million to a venture fund managed by Ivan Boesky, who had invested so heavily in Guinness shares. It was this aspect that later outraged the Guinness board and precipitated the dismissal of Ernest Saunders. When all the deals finally surfaced in the press, share manipulation apparently added up to a staggering £200 million.

  To understand the fierce public outcry that greeted the exposure of the Guinness scandal, one must note several factors. Billion-pound hostile deals were becoming common for the first time. And during the Thatcher years, the number of shareholders in Britain had more than tripled, to nine million. Never before had so many people been riveted on the doings of the City. Big Bang was accompanied by a numbing barrage of publicity. And at least part of the populace revered the new money makers. At the time of Guinness, the white-hot Morgan Grenfell was receiving about fifteen hundred job applications yearly from university graduates, half from Oxford and Cambridge, for thirty places. So some of the public disenchantment reflected the earlier worship of new idols.

  Among other factors was a growing sense that the City was corrupting the general culture and harming the economy. The New Statesman called the City “an unpatriotic casino which pays itself obscenely high salaries for dancing on the grave of British industry.”13 Sir Claus Moser of N. M. Rothschild warned, “the City is absorbing too many of our ablest people. If I were a dictator over Britain, I’d move 9/10 of them into manufacturing, industry and teaching.”14 As on Wall Street, high finance was no longer principally involved in financing the operations of industry. Instead, it was financing changes in the ownership of industry, to the stunning benefit of bankers and raiders. Add to this the sheer envy of ordinary Britons at the stratospheric salaries in the City, and one can understand the incendiary public reaction to Guinness.

  The year 1986 was one of double scandal for Morgan Grenfell. Right after Big Bang and before the Guinness revelations surfaced, the firm was tarred by an insider trading scandal. Its new chief securities trader, thirty-five-year-old Geoffrey Collier, had been hired for Big Bang at a salary of $284,000. He had joined the firm the year before after setting up a New York office for Vickers da Costa, a broker later taken over by Citicorp. In the past, British authorities had taken a relaxed attitude toward insider trading, which wasn’t even a criminal offense until 1980. This laissez-faire attitude was incompatible with the new conglomerates encouraged by Big Bang. There were now fears that traders would abuse information from their mergers departments. In global financial markets, there was also a need for higher universal standards—a particular concern of the Thatcher government in its quest to insure the City’s worldwide standing. Right before Big Bang, Morgan Grenfell distributed a little in-house manual in which it stated that any staff purchases of shares had to be channeled through Morgan Grenfell’s own brokers. The penalty for violating the rule was summary dismissal.

  Collier made illegal purchases through his old firm, now Scrimgeour Vickers. He made small profits on a sixty-thousand-share purchase of Associated Engineering after he learned that Hollis, a Morgan client, was about to acquire it. He almost made a killing on his purchase of call options on Cadbury Schweppes, then being acquired by General Cinema, another Morgan Grenfell client. But his trade in Associated Engineering led to suspicions and forced him to sell the Cadbury options prematurely, at a loss. After Scrimgeour Vickers tipped off Morgan Grenfell about Collier’s trading, the firm forced his resignation, on November 10, 1986, shocking the City. Collier got a one-year suspended sentence and £25,000 ($44,250) fine. The case fortified the resolve of those who wanted stricter regulation as firms turned into conglomerates fraught with potential conflicts of interest.

  The Collier scandal was a mere curtain raiser for the next act in the drama. In late 1986, Morgan Grenfell was winding up a superlative year, bolstered by $833 million in capital, double the year before. Then Ivan Boesky pleaded guilty in November to one felony charge and agreed to pay a $100-million penalty for insider trading. Nobody yet dreamed of any Morgan Grenfell connection. But in the Collier investigation, the SEC had already shared information with Britain’s Department of Trade and Industry under a new, bilateral pact. It was information from Boesky, relayed by American authorities to the British, that provoked the Guinness investigation. The suspicious stock gyrations during the takeover had not in themselves produced a full-blown probe.

  Equipped with new Big Bang powers, investigators from the Department of Trade and Industry moved into action. In early December, three weeks after the Collier affair, they staged simultaneous morning raids on Guinness headquarters in Portman Square and on Morgan Grenfell to round up records. Then a month of revelations flooded London’s press, drawing to the surface the latent public resentment of the City. Nobody at 23 Great Winchester quite saw the gathering storm. Seelig himself thought the firm would stand behind him. When a journalist said, “Mr. Seelig, your colleagues are going to throw you to the wolves,” he was incredulous. “Now you’re making me very angry,” he replied. “We’re very solid here.”15 But under intense pressure, Morgan Grenfell told Seelig he was drawing too much publicity and had to be sacrificed. In a tumultuous series of late-December decisions, Morgan Grenfell resigned as Guinness’s merchant banker and fired its brightest star, Roger Seelig. Since the Guinness board had already brought in Lazard Brothers as their new adviser, some observers saw an empty public relations gesture in Morgan Grenfell’s resignation.

  Morgan Grenfell hoped this would cleanse the firm and close the scandal. It circulated a reassuring letter to shareholders to that effect. But the public pressure to go further was unrelenting. Even within the City, there was thinly veiled satisfaction at seeing Morgan Grenfell punished. “When a firm has been so outstandingly successful on the back of very aggressive people and go no distance out of their way to be popular or help other firms—then the absence of friends shows up at once when they trip up,” said a rival executive. “It was very noticeable that people didn’t jump to their rescue.”

  Inside the firm, the shifting ground suddenly turned to quicksand. A former staffer recalled, “The first reaction was absolute shock and horror. It didn’t happen as one big announcement. It was like a faucet dripping lousy water. It kept on coming. It was a real horror that tore the guts out of the firm.” On January 9, 1987, E
rnest Saunders stepped down as Guinness’s chairman. A week later, Price Waterhouse outlined the £200-million share-support operation, mapping out links across several countries. They reported to the Guinness board the existence of £25 million in mysterious invoices. The operation seemed almost inconceivably vast.

  Once Morgan Grenfell could have counted on the Bank of England’s goodwill, but it had let that historic relationship lapse. Since the death of Sir John Stevens, in 1973, Morgan Grenfell hadn’t had a director on the Court of the Bank of England. Some saw this as reflecting official displeasure; for others, it simply betokened an absence of executives of real stature at Morgan Grenfell. The bank’s deputy governor, George Blunden, wasn’t appeased by Seelig’s removal and thought Reeves and Walsh were either knaves or fools. As late as January 18, 1987, Reeves, earning £300,000 a year, and Walsh, earning £200,000 a year, felt secure and insisted they would stay. They saw no systematic corruption that merited further action and so informed the staff. “They called together everyone in corporate finance,” said an ex-director. “They said management had done an exhaustive, internal look at the big deals and not to worry. They said, ‘We’ll be sticking here; there’ll be no resignations.’ ”

  This wishful thinking was exploded within forty-eight hours. Expecting a general election in the near future, the Tories feared retribution if they seemed to coddle the City. Presumably, Margaret Thatcher saw a chance to steal the thunder of the Labour Party by seeming tough in disciplining her own kind. Many in the City also feared that the spreading scandal would bring calls for statutory regulation of a sort that was always abhorrent to the City. Robin Leigh-Pemberton, Governor of the Bank of England, told a dinner audience that Guinness was “a threat to the entire basis of trust which still predominates in our business life and in the City of London in particular.”16 So great was the fear of seeming soft on the financiers that John Wakeham, chief Tory whip and close Margaret Thatcher adviser, was heard to say, “We’ve got to get the handcuffs on quick.”17 Handcuffs became a metaphor that thrilled the public, with its suggestion of rough justice and a leveling of the mighty. It worked its way into several anonymous newspaper threats leaked by government officials.