THE LAST PARTNERSHIPS Inside the Great Wall Street Money Dynasties phần 4 pdf

man rebuilt the transcontinental link so that it regained the superior place in east–west transportation that it was intended to occupy after the Civil War. Then he began to clash with the top financiers on Wall Street and usually won the battles. The battle for control of the Union Pacific was one notable example. In 1895, J. P. Morgan rejected the idea of reorganizing the Union Pacific, which had been tottering on the brink for years. The Treasury was demanding its money from loans made during the post–Civil War period, and a major battle was developing concerning who would win the right to put the railroad back on its feet. Harriman crossed swords with Jacob Schiff of Kuhn Loeb, who had designs of his own on the reorganization. But Harri- man proved that he could raise the necessary capital to rebuild the line at a rate cheaper than Schiff could provide. Kuhn Loeb eventually capitulated and reorganized the railroad according to the Harri- man plan. Harriman himself was named chairman of the board and later president of the railroad. In 1901, competing interests flared anew when the Northern Pacific Railroad again raised its head. Since the days of Jay Cooke, the railroad had had a troubled history under various managements before a war for its control developed. Harriman began to buy stock in the line to compete with its major shareholder James J. Hill, a Morgan customer. Using Kuhn Loeb to help him finance his venture, he successfully bought a large block of its stock before it came to the attention of Morgan and Hill. The buying set off a frenzy on Wall Street and the two forces bought more stock than actually existed, forcing prices to rise astronomically to more than $1,000 per share, a gain of more than $900 in one week alone. Then the collapse came, as the short sellers ran for cover and finally had to settle to cover themselves at a loss at a negotiated price. The New York Times ran the story, giving it much drama when it said that “the greatest general panic that Wall Street has ever known came upon the stock market yesterday, with the result that before it was checked many fortunes, the accumulation in some cases of years, had been completely swept away.” 9 The panic, in reality, was a short one and the market soon regained its footing, but the battle underlined the importance of railroads and finance in the economy—and the importance of personali- ties in helping move market prices. White Shoes and Racehorses: Brown Brothers Harriman and August Belmont 93 The battle for control resulted in the formation of a holding company, called the Northern Securities Company, that was controlled by both warring factions. This was the sort of organization Morgan had had in mind years before when the ICC was formed, and the antimo- nopolists quickly seized upon the newly formed company, using it as a rallying point. The United States subsequently filed suit in court claiming that the holding company was a monopoly of railroad interests, and the Supreme Court agreed, striking down the company as an illegal combination designed to restrain trade. Undaunted, Harriman went on to build railroads nevertheless and had elaborate plans to develop a railroad empire outside the United States, stretching from Siberia to Manchuria. But the grand plans were interrupted by his death in 1909. The American railroad baron did not live to see his international plans come to fruition. Fortunately, his sons had become able financiers in their own right and would see that the family tradition was carried on. Moving Toward Merger Harriman’s name, like those of so many nineteenth-century financiers, lived on because he was able to pass his legacy to his offspring. While he made his reputation in the nineteenth century, the family name in banking was not established until the twentieth. His oldest son, William Averell Harriman, founded W. A. Harriman & Co. in 1919, and in the 1920s he and his younger brother, E. Roland Harri- man, founded Harriman Brothers & Co. Both were investment banking houses, actively engaging in the sorts of deals the senior Harriman had put together during his lifetime. The 1920s boom brought many new companies to market, and the trend underlined the need for a merger partner for the Browns. More capital would be needed if the firm was to compete effectively in the new environment. In the years prior to the Crash, all of the major New York banks added underwriting to their sphere of activities, usually through securities affiliates. Stock underwriting was not as popu- lar as bond underwriting for the banks, and many, including Brown Brothers, accumulated a large number of bonds on their books that were unsold at the time of the Crash. Once economic activity began THE LAST PARTNERSHIPS 94 to diminish, the bonds were difficult to sell and severe strains were placed upon the partners’ capital. Brown Brothers had accumulated a large amount of South American bonds, and they proved especially difficult to sell. 10 The partners realized that they had a problem on their hands. Years before, Baring Brothers in London had suffered a collapse because of South American bonds and had required a bailout. Realizing that the Crash was just not another market “break,” in 1920s parlance, the Browns saw that a merger with the Harrimans began to make more and more sense. The Browns and the Harrimans had been friendly for decades, and members of the families had been at Yale together as undergraduates. The announcement of the merger was made jointly by Brown Brothers managing partner Thatcher Brown and E. Roland Harriman. The mar- riage brought together the Browns’ long tradition of conservative banking and a fresh infusion of capital from Harriman. Ironically, it was announced in the New York Times on the same day (December 12, 1930) that the failure of the Bank of United States in New York was announced, the largest commercial bank failure in American history. The bank collapsed under suspicions of fraud and graft, taking $300 million worth of customer deposits with it. Without a merger, the fate of the two houses could have been quite different, because many bankers and brokers were suffering the effects of the Crash. One of the partners from Harriman Brothers joining the new bank was Prescott Bush, father of future U.S. president George H. W. Bush. Clearly, access to the Harriman fortune through the sons was the prime motivating force behind the merger. The Harrimans were a growing but yet not major force on Wall Street when the merger was announced. But the combined firms instantly became a Wall Street powerhouse, ranking alongside Kuhn Loeb and J. P. Morgan as investment banks with considerable influence. When Congress passed the Glass-Steagall Act during Franklin D. Roosevelt’s first one hundred days, however, the powerhouse status proved to be ephemeral. Investment and commercial banking were separated by the act, and banks had one year to choose which side of the business they wanted to engage in. Brown Brothers chose commercial banking, not so much a radical choice as a natural return to the company’s nineteenth-century roots. White Shoes and Racehorses: Brown Brothers Harriman and August Belmont 95 The securities business was separated from the bank as required by the law, and some partners of the firm joined the new firm, Brown, Harriman & Co., the purposely created securities affiliate. Members of the National City Bank’s securities affiliate, National City Company, also joined in the venture. The name was later changed to Harriman, Ripley & Co. in 1938 after merging with a smaller broker, Joseph P. Ripley & Co., when it became apparent that the Glass-Steagall Act and the Roosevelt administration were not flashes in the pan and that the financial reforms were permanent. Brown Brothers Harriman once again became a commercial bank and remained a partnership. It was allowed to keep its seat on the NYSE because it conducted only agency business through it, acting as a broker for its clients rather than as a principal. It was the only bank allowed to do so. The other private banks all chose investment banking, so the new law forced them out of the commercial banking business while the commercial banks divested their securities affiliates. The Wall Street revolution was com- plete, and Brown Brothers again looked much like it had in the nineteenth century, this time with a fresh infusion of capital. History always played a significant role on Wall Street at crucial moments in its development. When the Glass-Steagall Act was passed, this was particularly true. Congress looked carefully at the record of private bankers and securities firms when determining the thrust and impact of new laws, especially ones as radical as the banking legislation and two pieces of securities regulation that would be passed in 1933 and 1934. The bankers’ track records often determined whether they would be treated harshly or lightly at critical moments. Brown Bothers’ reputation plus its unobtrusive approach to financing put them fairly low on Congress’s list of bankers who needed to be con- strained. J. P. Morgan topped that list, and the legislation, especially Glass-Steagall, affected his bank the most of any on Wall Street. In a sense, Glass-Steagall was also an effective piece of antitrust legislation, although it was never billed as such at the time. 11 The money trust that had irritated Progressives earlier in the century was effectively broken, although Brown Brothers did not figure prominently in the deliberations because of its record. After the Second World War, Brown Brothers Harriman continued in the commercial banking business and also provided investment THE LAST PARTNERSHIPS 96 management services for its clients. As part of the latter service, it also provided “buy side” research on equities in much the same way that the Seligmans had after their departure from private banking. Through the years, it remained a private bank. Its behavior in the markets has always been dictated by the fact that it chose to remain private, accepting the limitations that a relatively small capital base dictates. As a result, it has remained one of Wall Street’s more conservative institutions. In 2000, it announced that it would cease providing the brokerage services to its clients that it began providing in the 1980s and 1990s, recognizing that other, larger, full-service investment banks provided better services. It was the sort of announcement that Alexander or James Brown easily would have understood more than a century before. The Flamboyant Banker Whereas the Browns preferred to remain in the background and practice conservative financing, other nineteenth-century bankers were more flamboyant and craved public attention. The best-known socialite banker in the nineteenth century was August Belmont, an example of a young man who rose from obscurity in a very short period of time. But Belmont was no Horatio Alger–type character. His sud- den rise to prominence was almost totally based on good connections and deft maneuvering in the correct political and social circles. August Belmont’s name was the francophone version of his native German, literally meaning “beautiful mountain” in both languages. The name was changed to the French as a political expedient when his native German town was under occupation by Napoleon’s troops while Belmont was a child. Belmont was born in 1813 in the small Rhenish village of Alzey. His parents were descended from Spanish Jews who had escaped Spain during the Inquisition three centuries before. And he was fortunate to possess valuable family connections. While he was still in his teens, his parents convinced friends in Frank- furt, the Rothschilds, to hire him as an apprentice in their banking house. By 1828, the family’s banking reputation was already well established and the job was a plum for the teenager. After several years, he gained positions of increasing importance, and in 1832 he White Shoes and Racehorses: Brown Brothers Harriman and August Belmont 97 was named a secretary to one of the partners. He began to travel, especially to Italy and the Vatican, and added Italian to his language arsenal, which already included French and English. This particular job opened the world to him and would prove crucial to his professional development. In 1837, civil wars on the Iberian peninsula required the Rothschilds to send a man to Havana to look after their interests in Cuba, and they picked Belmont for the assignment. To reach Cuba, he first had to sail to New York and then catch a connection to Havana. It was a connection never to be made. Arriving in New York at the time of the 1837 crisis, Belmont was fascinated by the United States and the consternation caused by the panic. He postponed his trip to Havana and began searching New York for the means to set up shop for himself. He quickly decided to open his own banking/brokerage firm, which he called August Belmont & Co. From the very beginning, he was quick to point out that he was the Rothschilds’ man in New York, a connection worth its weight in gold in a country starved for investment capital. Unlike Jacob Schiff some years later, he did not return home. The connection with his now former employers did not conflict, because the banking family had never opened a New York branch. The Rothschilds’ influence was found mainly in Europe, where they had opened a series of branches over the years. Their primary strength lay in their ability to personally arrange financings with kings and finance ministers, and they had had little serious competition for their services since branching out from Germany earlier in the century. But there was no New York connection, because the family would have entrusted the opening of a new branch only to a family member. In fact, Belmont was not even sent to take over the Havana office but only to gather facts and report back to Frankfurt. James Rothschild, the reigning partner, considered exploiting the possibili- ties that the panic had created in New York but evidently regarded this sort of job far in excess of Belmont’s capabilities. 12 That judgment backfired. Before anyone had time to take stock of the situation, Bel- mont had set off on his own. The upstart was now in business for himself. He established the banking family in New York de facto before any of the partners could object. Not having an American presence, THE LAST PARTNERSHIPS 98 there was little the Rothschilds could do to protest. Before long, Bel- mont’s assumption was accepted by all parties. Over the years, the Rothschild connection served Belmont well. He began by sorting out the mess left by the failure of J. L. & S. Joseph and then moved into the traditional sort of merchant banking business—dealing in foreign exchange, deposits, and commercial bills of exchange. Success was almost instantaneous. Since the Rothschilds were the major source of foreign capital for the United States along with Barings of London, customers realized that dealing with Bel- mont was in their own best interests and his business immediately prospered. Belmont, however, continued to give the Rothschilds fits. In 1841, he fought a duel over a lady’s honor and was wounded in the leg, which gave him a permanent limp that would hobble him throughout his life. When the banking family learned of the affair, they were horrified and contemplated taking the agency business that he had developed away from him. He was able to assure them that he was supported by the “best elements” in New York society and eventually succeeded in mollifying them. 13 After the affair, he settled down and became part and parcel of New York society. The social legend was beginning to build alongside the banking legend, but the limp was never quite forgotten. Like many of his contemporaries, Belmont fully exploited the Mex- ican War to his own purposes. Along with Clark Dodge, he became a major underwriter of the Mexican war bonds issued by the Treasury. But unlike his Yankee banking compatriots, he found himself oddly divided because of the Rothschild interests. Belmont committed a substantial amount of his firm’s funds to underwriting a $15 million payment through the issue of U.S. Treasury bills to indemnify Mexico for territory ceded to the United States. The Rothschilds thought that this sort of activity exceeded his authority to act on their behalf and eventually sent a young member of the family to New York to sort things out. But the emissary was impressed by Belmont’s role in American finance and the success he had achieved in such a short time. He wrote to London, describing Belmont’s role as “a position which is at once semi-dependent and semi-independent, simultane- ously that of an agent and a correspondent.” On top of Belmont’s strengths, no members of the family seemed willing to relocate to White Shoes and Racehorses: Brown Brothers Harriman and August Belmont 99 New York, so August Belmont & Company’s future was assured. 14 However, the tension between New York and the European interests would continue far into the future. Belmont channeled Rothschild investment funds into many domestic projects. Bonds of state and city governments were favorites. The money was welcomed—by the states especially—but political and racial overtones were never far from the surface. Belmont learned this firsthand when several states defaulted on their obligations in the first municipal bond default after the Panic of 1837. Without the second Bank of the United States to provide them with necessary funds, the states found themselves short of liquidity and reneged on their interest payments. Not paying interest was quickly translated into a patriotic duty. The governor of Mississippi declared that his state would default on its interest so that the Rothschilds could not make “serfs of our children.” Paying interest to foreigners apparently was different from paying it to domestic investors and carried an emo- tional message. In times of financial crisis, Belmont and his heir, August Jr., would hear more of the same because of the Rothschild connection. Outside diversions soon competed for Belmont’s time. Before the Mexican War, he accepted an offer from Austria-Hungary to become its consul general in New York. The appointment allowed his company to become even more prominent than before, adding an international aura to the cachet of Rothschild influence. He severed the relationship in 1850 to devote all his attention to American politics, an avocation that was providing greater and greater attraction as time went by. And the diversions of social life in New York also vied for his time. Society and politics interested him more than banking, which he saw as the natural way to make the money necessary to indulge his tastes. At the same time that he accepted the job from Austria- Hungary, he supported James K. Polk in the presidential election of 1844 and became actively involved in Democratic Party politics. He became a U.S. citizen the same year. Outside activities did not deter Belmont from banking, although he clearly made some poor judgments along the way. When the Mexican War was ending, the Treasury gave him the right to be its transfer agent so that he could pass U.S. funds to the government of Mexico. THE LAST PARTNERSHIPS 100 He decided to clear the transaction without taking a fee, a strategy that Jay Cooke would later use in the early Civil War financings. But the strategy backfired slightly when the United States later decided to float another bond. Belmont bid for it, assuming that he had won all of the deal and would make a hefty commission for his trouble. He did not realize that the Treasury had granted Clark Dodge a similar number of bonds to sell and netted only half of what he had anticipated earning. Trying to win Treasury business by performing some transac- tions gratis was becoming a well-known ploy among banking circles and did not necessarily spell success. Too many bankers employed the strategy for it to be profitable for everyone. In 1849, Belmont married the daughter of Commodore Matthew Perry, a hero of the Mexican War and scion of one of the country’s older families. Although he was a Jew, religion apparently was not much of an issue, and they were married in the Episcopal Church of the Ascension in New York. At the time, a New York newspaper estimated his annual income to be $100,000, a tidy sum for someone who had entered the country only twelve years before. He joined the Union League, New York’s most prestigious club, and comfortably settled into the New York social scene. The event underlined the remarkable transformation of an immigrant who only a decade before had been considered neither clever nor old enough by the Roth- schilds even to open a New York office for them. It also marked an even more remarkable transformation: Belmont had grown from being a mere Jewish immigrant banker to an accepted member of New York society, a group that was not known for welcoming new- comers or outsiders. Within a few years, his ethnic status would never again be mentioned socially, although it was probably not completely forgotten. It was quite a remarkable series of events considering the personal history of the other major Jewish families, most of whom married within their clans rather than seek spouses from American gentile society. Belmont succeeded in capitalizing on his brashness, while other immigrant bankers relied more on business acumen and family relations to build their businesses. Of all the bankers who became overnight success stories before the Civil War, Belmont displayed perhaps the least business acumen. He continued to rely on the Rothschild connection to make money, and White Shoes and Racehorses: Brown Brothers Harriman and August Belmont 101 while it served him well, it did mean that he had to toe the company line to an extent to keep the relationship alive and well. While engaging in financing for the railroads and other new companies coming to market and continuing to do trade deals, his firm missed a major opportunity with the Civil War financings that made Jay Cooke famous. But the Civil War also gave him the opportunity to display loyalty to his new country and dissuade the Rothschilds from doing business with the Confederacy. At the beginning of the war, the Confederate Congress authorized the issuance of a $50 million loan to finance its war effort. Belmont stridently opposed the underwriting of any such bonds, comparing them to the worthless bonds issued in France during the Revolu- tion—a clever ploy, since it was just those sorts of issues that the Rothschilds shied away from. The family already had subscribed to Union bonds, and rather than play both sides of the fence, it declined an offer to underwrite, leaving the job to other sympathetic banks. 15 The way was then clear to help Salmon Chase raise money for the Northern war effort. At first, Belmont sounded very much like Jay Cooke when he coun- seled Chase about raising money for the Treasury. “Before the war can be brought to a satisfactory termination, we shall require from 50 to 60 millions of dollars,” he told Chase authoritatively when he first visited Washington to discuss the war effort. His idea of marketing bonds was also familiar: “A national subscription ought to be opened in all our large cities; amounts as low as one hundred dollars, or even fifty dollars, should be accepted, and bonds for those fractions issued.” But he felt that not all of the estimated amount could be raised domestically. “It is impossible to say how the capitalists of Eng- land and the Continent may be affected toward an American loan. There is evidently a belief in the European cabinets that by withhold- ing all aid from us, they may force us into a settlement of some kind with the Southern states.” 16 The only way to discover European inten- tions was to visit the various governments, something that Belmont volunteered to do. Any opportunity to play a major role in helping Washington was soon lost. Belmont traveled to Europe to help Washington sound out the possibility of selling bonds there to help the Union effort. His THE LAST PARTNERSHIPS 102 [...]... and the house participated in the loans to the Allies and Russia that Jacob Schiff at Kuhn Loeb objected to The issuing activity was not out of the ordinary, in view of the war The firm remained the same size throughout the war years, and like the other firms of the period did not add any new partners or expand greatly in size By the time the 1920s began, it needed to expand to keep pace with the new... Americans were assigned to the United States by the Soviet government to settle previous debts A lower court upheld the Belmont heirs’ refusal to return it and the case ultimately went to the Supreme Court The court reversed the lowercourt decision and ordered the Belmonts to repay the money At the time, the amount was $25 ,43 8.25 But similar cases were in the pipeline, because the Soviets had more than... banking deals with generous fees to their colleagues regardless of the amounts paid They were enriching themselves and their friends at the expense of depositors and companies who had no say in the deployment of their money As Louis Brandeis said in his famous book published after the Pujo hearings, the bankers made a fortune using other people’s money The bankers recognized the issue but refused to acknowledge... coherent objectives for the future As the previously loose regulatory and professional framework under which the Wall Street firms operated became more formalized, the influence of the larger Wall Street houses became slightly diminished, although no one would argue that J P Morgan remained at the very top of the hierarchy But the effects of the war and the new prosperity in the 1920s would also signal... Kidder Peabody as the importance of the Baring connection began to fade The New Era Despite the revelations of the Pujo hearings, the investment bankers again appeared in their usual concentrations to help finance the war effort The Treasury had great success selling the various Liberty Loans directly to the public, usually employing the investment bankers to solicit the public by mail The investment... subsided as the number of domestic investors increased dramatically The general prosperity of the 1920s attracted millions of new investors to the market Although the numbers were not as great as they would be later in the century, this vast new source of investment funds was actively courted by Wall Street, especially by brokers such as Charles Merrill At the same 111 THE LAST PARTNERSHIPS time, the phenomenon... among the partners on an informal basis The role the partners played in the firm as well as the amount of money they made annually was never written down; rather, it was a matter of informal record only During the nineteenth and early twentieth centuries, that sort of arrangement worked well, but by the 1920s, as Wall Street was becoming larger, the informal relationships began to strain under the volume... followed for the telephone company, catapulting Kidder into the first rank of Wall Street underwriters and investment bankers Business was so good before World War I that Kidder found itself atop the Wall Street league tables Along with Morgan, Kuhn Loeb, and Lee Higginson, it became a member of the money trust,” the name given to the bankers who helped finance the giant trusts of the day The group got... business with the revolutionary movement The connection between the disputed funds and the name of the horse was not lost upon the Irish community in New York Thomas Meehan, the editor of the Irish-American, a New York newspaper, wrote to Belmont asking about the connection between the funds and the horse at the time of the original lawsuit Belmont wrote him a short note stating that the connection... diminished the importance of Belmont and the other Jewish banking houses that relied on foreign investment They either adapted to the new trend or disappeared Belmont did not adapt After the death of August Jr in 19 24, the family firm was dissolved Its business had diminished after the war to the point where it was effectively defunct by the time the official liquidation began Its seat on the NYSE lapsed . rather than play both sides of the fence, it declined an offer to underwrite, leaving the job to other sympathetic banks. 15 The way was then clear to help Salmon Chase raise money for the Northern. so the new law forced them out of the commercial banking business while the commercial banks divested their securities affiliates. The Wall Street revolution was com- plete, and Brown Brothers. helped bring THE LAST PARTNERSHIPS 110 gold back into the country, and the crisis soon subsided without the United States having to face the ignominy of defaulting on its other debt. But the intervention

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