JPMorgan's Fall and Revival
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JPMorgan's Fall and Revival

How the Wave of Consolidation Changed America's Premier Bank

Nicholas P. Sargen

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eBook - ePub

JPMorgan's Fall and Revival

How the Wave of Consolidation Changed America's Premier Bank

Nicholas P. Sargen

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About This Book

This book tells the untold story of how JPMorgan became a universal bank in the 1980s-1990s and the events leading to it being acquired by Chase in 2000. It depicts the challenges Morgan's leaders – Lew Preston and Dennis Weatherstone – confronted when the firm's business model was disrupted by the developing country debt crisis and premier corporate borrowers increasingly accessing capital markets, up to its current management with Jamie Dimon. It depicts what happened to Morgan in the larger story of U.S. banking consolidation.

As Morgan sought to re-enter the world of securities and navigate around Glass-Steagall barriers, their overriding goal was to ensure it would remain a pre-eminent wholesale bank serving multinational corporations. Opportunities to grow through acquisition were presented and considered, including purchasing a stake in Citibank in the early 1990s. However, Preston and Weatherstone were reluctant to integrate areas unfamiliar to Morgan such as retail banking or to assimilate cultures that were disparate from the firm's.

This first-hand account explores whether Morgan could have stayed independent had its leaders pursued the strategic plan that called for it to make targeted acquisitions in areas where it had well-established businesses. Instead, in the mid-1990s, it went from being the hunter to the hunted. Rival banks that had been burdened by bad loans to developing countries and commercial real estate capitalized on rising share prices during the tech boom to acquire other institutions. Meanwhile, Morgan's profits and share price lagged, which left it vulnerable.

During this time, all of the leading financial institutions struggled to change their business models. In the end, no U.S. money center bank was able to become a universal bank on its own. What ensued was a growing concentration of financial assets in a handful of institutions that was the precursor to the 2008 financial crisis, which is explored further using Morgan as a lens, in a book that is sure to interest banking and Wall Street professionals and business readers alike.

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Part IGlory Days

© The Author(s) 2020
N. P. SargenJPMorgan’s Fall and Revival
Begin Abstract

1. 23 Wall Street

Nicholas P. Sargen1
Nicholas Sargen Advisory LLC, Keswick, VA, USA
Nicholas P. Sargen
End Abstract
“There it is. The number 23 engraved in stone. No name. It must be the Morgan Guaranty Trust Company.” My first thoughts as I arrived for a job interview in the autumn of 1977, after I was contacted by a recruiter from Russell Reynolds about an opening in Morgan.
Being interested in US history, I was immediately struck by the significance of the setting. The House of Morgan formed the apex of a triangle that was flanked on one side by Federal Hall, where George Washington was inaugurated as president of the United States, and on the other by the New York Stock Exchange. This seemed fitting for a firm that financed governments and corporations and which had been considered the de facto central bank of the United States prior to the creation of the Federal Reserve (the Fed) in 1914. (See Box about 23 Wall Street at the end of this chapter.)
Once the door opened, one left the United States and entered a completely different world, one more European and cosmopolitan. The room was enormous, half a street block in one direction and a quarter in the other. Pristine white marble was everywhere—floors and walls—with rich, green brocade panels on the walls providing contrast. Looking up at the three-story ceiling there was an enormous crystal chandelier that hung in the middle of the lobby. “Must be Old World charm.” I certainly hadn’t seen anything like it on the West Coast.
The atmosphere was eerie. Rows of bankers sat behind luxurious roll-top desks in three distinct areas that were separated by marble railings. Some were talking with their colleagues; yet you couldn’t hear a sound. Even more amazing, there didn’t appear to be any customers. “What type of bank is this anyway?”
All of this made me apprehensive. Morgan, after all, had the reputation of being the bank for the world’s elite and an exclusive club for its employees. Its chairman and CEO Elmore “Pat” Patterson attended the University of Chicago, where he was captain of the football team. He was chosen to head the general banking division following the merger of Morgan with the Guaranty Trust Company in 1959, and he subsequently served as the head of the firm from 1972 to 1977.
Patterson played the dual role of many of his predecessors—first overseeing the bank while also playing a leadership role in ensuring the safety and soundness of the financial system. During the New York City financial troubles of the mid-1970s, he was instrumental in shaping the financial community’s response along with David Rockefeller of Chase Manhattan and Walter Wriston of First National City (later Citibank).
Morgan Guaranty’s president, Walter Hines Page, came from a prominent family, in which his father served as Ambassador to Great Britain. He also married the grand-daughter of J.P. Morgan and was the last partner to serve with him. Page’s background included extensive international experience. During the 1960s he helped set up Morgan’s offices in Frankfurt, Rome and Tokyo. Then, following the first oil shock in the early 1970s, he helped devise a plan for the creation of Saudi International Bank, and he maintained close ties with the Saudi Arabia Monetary Authority (SAMA), the country’s central bank. By the time of my interview, it was announced that Page would replace Patterson as chairman and CEO and Lewis T. Preston would become president.
Considering the pedigree of Morgan’s leaders and senior managers, I wondered whether I would fit into such a prestigious organization given my modest roots. Before accepting the interview I solicited the advice of Robert Aliber, a renowned professor of international finance, who was a visiting scholar at the San Francisco Fed while on leave from the University of Chicago’s business school. Bob encouraged me to seek out the opportunity, as he thought very highly of Morgan and its people.
To reach the point of being considered for a position in the International Economics Department, I first had to clear two hurdles—an intelligence test and a personality profile. Taking the tests first thing in the morning was tough, as I had been wined and dined by a headhunter the previous night and was suffering from a bad case of West Coast jet lag. When I had difficulty answering the first five questions on the test, I started to panic. How humiliating—a Stanford Ph.D. who flunked a routine test of math and verbal skills! Oh well, at least I made it through twenty years of school and six years of government experience before being exposed.
I managed to calm myself after answering the next few questions and began to get back into my old test taking rhythm. By the time the psychology test came, I was in full stride and ready to outsmart the evaluators. One question asked how you would react if you found a bird on the ground with a broken wing. I rejected the two extreme answers: (1) put the bird out of its misery and (2) feel melancholy, but don’t touch it. I opted to help the bird, which was the safe answer I thought a corporation would want.
After finishing the tests, there was a round of interviews. The first was with Dennis Weatherstone, the treasurer of the company. A short gentleman with a trace of a British accent greeted me in the reception area and escorted me to the treasurer’s office. I presumed he was an administrative aide because he was very genial and unassuming. I soon realized my mistake, however, when he sat behind the desk.
I came away from the interview not only taken by Weatherstone’s hospitality, but also with his intelligence and market savvy. Bob Aliber had told me Weatherstone was one of the most astute currency traders in the business, and he lived up to those high expectations.
Prior to becoming treasurer, Weatherstone headed the foreign exchange area of the firm, and most of our conversation was spent discussing exchange rate issues. I subsequently learned from others how he was admired as a British version of Horatio Alger. Weatherstone began his career as a clerk in the London office in the late 1940s and became a foreign exchange trader after receiving one of the highest scores in an exam. He subsequently became one of the firm’s most successful traders and was appointed to head the area by Lewis T. Preston, who ran the London office in the mid-1960s. Thereafter, Weatherstone’s career tracked Preston’s closely. This was reassuring to me, as it provided concrete evidence that you did not have to be a blue-blood to be successful at Morgan.
My next interview was with Bruce Brackenridge, who headed the administration division and previously served as the senior credit officer for the bank. Brackenridge, who was a classmate of Bob Aliber at Williams College, asked me about him and we exchanged pleasantries. The conversation then turned to Morgan’s involvement in lending to governments of developing countries. He was excited about their prospects and Morgan’s role in financing them, and he drew parallels with the role British entities played in financing US railroads in the mid-nineteenth century. He then asked about my work in developing a risk appraisal system for assessing country credits at the US Treasury and the San Francisco Fed. At the end of the conversation he mentioned that I was being considered for a similar role at the bank.
The next stop was with Jack Noyes, Morgan’s chief economist. Prior to joining Morgan, Noyes headed the Research Division of the Board of Governors of the Federal Reserve System. It was reassuring that someone with such a prominent position at the Fed would be willing to give it up to head economic research at Morgan. After Noyes compared Morgan and the Fed, I felt more comfortable about the transition I was contemplating.
Noyes oversaw the bank’s publication, The Morgan Guaranty Survey, which was edited by Milton Hudson and widely followed in the financial community and by policymakers. When I asked about his views on the US economy, he gave a very balanced response: On one hand, the economy was growing at a healthy clip; on the other hand, inflation was showing signs of accelerating, which was a problem. Later, a Morgan employee told me my first Wall Street joke about two-handed economists: Noyes’ name really meant NoYes—get it? I got it.
The most memorable part of the interview occurred at the end, when Noyes showed me the chartroom where Morgan’s economists conducted briefings for clients. Once he turned on the lights, I was overwhelmed by how ultra-modern the room was. My first impression was that it was small movie theater, with plush seats and carpet that were a shade of “bordello purple.” The two side walls were filled with lighted panels that displayed charts of US and international economic indicators, and additional slides were displayed on a screen next to the podium. Noyes mentioned that bankers liked to bring clients to the room to impress them about Morgan’s state-of-the-art coverage of the global economies and financial markets.
The climax of the day was my meeting with the head of the International Economics Department and my prospective boss, Rimmer de Vries. As the editor of World Financial Markets (WFM), Morgan’s flagship publication, Rimmer was the best-known international economist on Wall Street. An interview with the New York Times about the fallout from the second oil shock described him as follows:
One of the most knowledgeable analysts of the international financial scene is Rimmer de Vries, senior vice president and chief international economist for the Morgan Guaranty Trust Company. Mr. DeVries, a crusty Dutch-born economist, is frequently sought out by United States Government officials and central bankers around the world. Morgan’s monthly World Financial Markets produced under his guidance, is considered one of the most authoritative publications on international finance in the country. Mr. DeVries, like many others, is worried.1
I read WFM regularly while I was at the Treasury and Fed and was impressed by how informative and influential it was. The idea that I could contribute to a publication that was read by officials, business leaders and academics around the world definitely appealed.
The interview with Rimmer was different from the others. His office was at the end of a long corridor that was flanked by two rows of economists who sat behind elegant desks. No one spoke as I passed by, and it seemed as if I was back in Europe again. Suddenly, a voice from the back boomed, DAVID!!! and one of the economists went scurrying in to the office.
When I arrived at the door, a lanky Dutchman greeted me and introduced me to his colleagues, who were making final edits for the next issue of WFM. Rimmer explained the issue would discuss the worsening US trade situation and its implications for the dollar. He said he was concerned that the dollar was likely to depreciate significantly if US policymakers did not heed warning signs about impending inflation.
When Rimmer asked what my views were, I was unsure if he wanted to know what I really thought, or if he was fishing for information about what the Fed believed. He had a reputation for being able to get information out of officials, even when they did not intend to disclose it. I decided to play it safe and gave him the official party line. I answered that the dollar was not a major risk, because inflation was under control and overseas investors were still eager to provide financing for the US trade deficit. My own personal view was that inflation was beginning to heat up and interest rates were about to rise; hence I had refinanced my mortgage.
Rimmer next asked several questions about my personal background. I mentioned that my father was a Greek immigrant, and he asked if I was raised Greek Orthodox. (That was permissible then.) I told him I resisted learning Greek in my youth, and that my parents sent me to a near-by Lutheran grammar school. Rimmer seemed pleased by this, as the Lutheran Church and Dutch Reformed Church, of which he was an elder, followed similar precepts. The next question caught me off guard, “Were the children being raised Lutheran?” “No, my wife’s Episcopalian,” I answered. I could see the disappointment on his face.
Just when I thought I failed the final screen, Rimmer burst into spontaneous laughter. He held out his hand and indicated he would make me a formal offer if I was interested. I told him I was definitely interested in the job, but my wife, Susan, and I were both from the West and were nervous about moving to the New York area. The headhunter who contacted me about the position suggested I consider living in northern New Jersey, because of its easy access to Wall Street by train. However, based on jokes I heard about the state, I wasn’t sure about raising a family there.
Rimmer seized on this, inviting me to visit his home in Oldwick, New Jersey, before I returned to the West Coast. He explained the town had been established by Dutch settlers 200 years ago and retained its original charm. I took him up on the offer, as I was curious to see what New Jersey was really like.
Upon arriving at his farm the next day, Rimmer was tilling his garden in the rain wearing wooden Dutch shoes. He mentioned that he had enough acreage cultivated to feed his family, as well as to sell produce to his neighbors and Morgan colleagues, for which he charged a reasonable price. After visiting with him, I came away impressed that Wall Street’s top international economist could literally be so down to earth.
On my flight back to the West Coast, the fun part of the job search was over—flying to New York, being wined and dined and meeting interesting people. The hard part—deciding what to do—was just beginning. And I would have to give Morgan my answer in just two weeks.
Given my training in economics, I started by listing the pluses and minuses of taking the job and moving my family to New York. However, it was a futile exercise. The decision was really about choosing a career or a lifestyle. If it was simply a matter of picking the best paying job or the one with the best opportunity for advancement, Morgan was the clear choice. But my wife and I were both born and raised in the West, our families and friends were there, and Wall Street was a completely different world from the one we knew and liked.
When I told my colleagues at the San Francisco Fed about the offer, they were happy for me, but also raised another doubt. Was I ready to give up a career in economic research to become a “business economist”? Within the economics profession, ...

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