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

There is a somewhat contradictory message in this excellent and by no means dated study of the three Morgan-affiliated banks (JP Morgan, Morgan Stanley and Morgan Grenfell) from their founding to the early 1990s, when the book was published
It’s clear the author, Ron Chernow, was horrified by the brazen greed exhibited by the bankers in such legendary deals as the attempted LBO (leveraged buy out) of RJR Nabisco in 1988 and the London Guinness scandal of the same decade, when Morgan Grenfell was forced by Margaret Thatcher personally to fire its top three managers for share manipulation.
Greed-wise, little has changed. But despite the temptation, it’s not the ethical lapses that are the most striking aspect of modern banking. Rather, it’s the super abundance of capital that was just starting in the 1980s and is even more marked now.
Picture early bankers in the early 19th Century. With undeveloped capital markets linking depositors and borrowers, funds were scarce. The banker was therefore a man with enormous power. With uncertain government backing he had to be very careful who he was lending money to. Not surprisingly, he got the reputation as a cold and mean individual.
Yet because the world of finance was essentially private, he also had to work out a way of cooperating with his competitors. With government bank bailouts unthinkable, he and his colleagues was also the guardians of the system. It was he who, when underwriting bonds, had to guarantee the quality of those bonds to investors. In what was then a small network of bankers and investors, trust and reputation were prized, indeed essential for the system to function. 
How different to modern banking. Now a huge and well-organized financial industry scours the globe for money that was previously kept idle in bank deposit accounts or under mattresses. The resulting wall of money is now almost forced on individuals and companies, with anonymous bankers working for huge companies adopting the kind of hard sell tactics normally associated with insurance salesmen.
In this new system, unpleasantness abounds. Chernow mentions more than one LBO when the company, usually a well-run and profitable company or it would pose little attractions to the raiders, is forced to take on enormous debt levels to fund or fight the LBO. Whatever the outcome, the company has to shed workers as it strives to pay off the subsequent debt. It really does seem that the only winners are the bankers.
Yet surely today’s capital markets also represent a wonderful system for funding great business ideas. Entrepreneurs, small companies and giant MNCs, not to mention undeveloped countries, lesser-developed countries and hyper-developed countries, all have better opportunities for hedging their risks, increasing their return on investments and seizing growth opportunities, than at any other time in history. This, presumably, is good for global prosperity.
In China, for example, the lack of adequate capital markets is often cited as a drag on the country’s growth. On the mainland, some commentators argue, far too much reliance is put on the banking system. The banking system has much greater ‘moral hazard’ than the capital markets. No government can afford to let retail depositors lose their savings. So the more they are likely to collapse, the more likely the government is to support them. That’s essentially rewarding bad decision making. In the capital markets, if the company’s share price goes down, the company is aware that only an improved performance will improve things.
Despite the advantages of powerful capital markets, it’s difficult to put the book down and feel that the world’s financial system is in safe hands. Modern capital is so powerful that it needs to be regulated, not least because of the spectacular levels of greed and deceit it encourages. 
But there’s an awful irony at work here.  The more regulators try to do their jobs, the more the process seems to have unintended consequences.
For example, commercial banks were barred from the securities business in the aftermath of the 1929 US crash because losses in the volatile securities business could affect ordinary savers. Bankers were also known to repackage bad loans as bonds and sell them to their own unknowing depositors.
But as retail and wholesale lending became increasingly commoditized, commercial banks became starved for profit. The richest profits were going to the banks that had decided to focus on underwriting bond and securities issues, mergers and acquisitions and trading on their own account.
With an increasing number of banks worldwide competing to make loans, and the threat of disintermediation from growing equity and bond markets, banks were pushed into making increasingly reckless loans. South America in the 1970s is of course the most familiar graveyard of US and European bankers’ reputation.
In the meantime, the investment banks were freed from competition by the financial institutions most capable of competing with them.
The House of Morgan was notable because it thrived under the early system, when the gentlemanly code of banking predominated; and it flourished in the post-war world of increasingly cut-throat and ungentlemanly financial activity.
The rise of the Morgans parallels the rise of modern finance and the cast of characters that the bank’s evolution throws up make for a superb hook for Chernow to hang the story on.
One of the interesting subtexts of the book is the evolution of US capitalism. The early Morgans, intent on not losing their loans, ended up taking huge stakes in companies, especially the railroads, that had bungled their credits. That led to a concept of capitalism revolving around huge trusts and based on order, almost like private socialism. Bosses were paternalistic and looked after their employees. But competition was limited, whether it was between banks or the companies they served.
It wasn’t always obvious that an alternative version of capitalism, based on small, competitive firms being allowed to indulge in creative destruction, would win.
Despite its age, this book gives financial history an excellent name.

Share our publication on social media
Share our publication on social media