As I wrote last month, I am once again enthusiastic about reading. At that time, I was about to start reading “The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance,” by Ron Chernow. I am happy to say I finished (!) reading this book tonight. This is no small feat considering it has been less than five weeks and the book is an eight-hundred page epic tome!*
Clearly I enjoyed the book, otherwise I wouldn’t have raced through it. However, I found the final third of the book frankly upsetting and not easy to read. In a prior post, I remarked on how favorably (overall) Chernow depicted the bankers in the House of Morgan. It turns out that was true only through World War II. Up to that time, Morgan bankers generally operated under “The Gentleman Banker’s Code,” an unspoken etiquette that governed how the banks conducted business. For instance, as Chernow writes, “The Gentleman Banker’s Code prohibited the raiding of customers. It was thought not only bad form, but dangerous. J.P. Morgan and Kuhn, Loeb feared that if they competed for each other’s clients, they would destroy each other in bloody, internecine battles.” (Chernow, p305) The book repeatedly refers to the code as being a guiding force in how the Morgan banks did business.
This all changed in the “Casino Age,” as Chernow calls the period after World War II through the 1980s**. During that time, as banking grew bigger than ever, the old “relationship banking” of the Victorian era morphed into modern “transactional banking.” Somehow this seems to have stripped the industry of its ethics, paving the way for hostile corporate takeovers and unrestrained greed. As Chernow writes,
The Reagan years saw the demise of relationship banking and with it the end of grace and civility on Wall Street. Wall Street was tougher, meaner, smarter, and more macho than ever before. The leisurely syndicate world faded… and the Gentleman Banker’s Code was fully obsolete. As the taboo against raiding clients and making cold calls broke down, investment bankers clashed with one another. There was no longer any agreed-upon etiquette to temper the greedy impulses that always existed in finance. Wall Street was run by bright, young executives who seemed curiously devoid of larger political or social concerns in their narrow pursuit of profits.“The House of Morgan,” p691
In the final third of the book, Chernow recounts how the Morgan banks–which by then were three different companies (Morgan Guaranty, Morgan Stanley, and Morgan Grenfell)–shifted from aristocratic statesmen of the banking world into corporate raiders and (sigh) morally-compromised institutions. Chernow notes how these banks felt they had to adapt in order to stay competitive in a vastly changed world:
“In rapid succession, major elements of the Gentleman Banker’s Code were breaking down. Like Morgan Grenfell, Morgan Stanley kept up its gentlemanly aura only so long as nobody poached on its territory; once threatened, it retaliated with a vengeance. Both on Wall Street and in the City, the graceful, leisurely world of securities syndicates was being replaced by the predatory world of mergers and the freewheeling, irreverent world of traders. Form was simply following function.”“The House of Morgan,” p588
Sadly, the Morgan companies adapted to the new world while capitalizing on the strength of the Morgan name. This lent legitimacy to increasingly more unethical practices. It also eroded the sanctity of relationships with the banks’ long-time clients. Loyalty was traded in for aggressive wheeling-and-dealing.
To me it is a sad commentary on modern finance that, as described by Chernow, it seems long on aggression and short on honorable conduct. As the tide changed, keeping up required aggressive new business practices, and “[f]rom these ashes arose the new, piratical Wall Street. Even conservative firms began adopting tactics once considered suitable only to disgruntled outsiders” (Chernow, 603). In the final analysis, “The House of Morgan” lends credence to modern distrust of bankers.
That being said, I very much enjoyed this enlightening, if sometimes frightening, glimpse into financial history.
Thank you, Chernow, for taking me on another exceptional reading journey!
*Okay…seven hundred and twenty not counting the end notes and index.
**Chernow goes no further than the 1980s, alas. But we can’t really blame him, since he published the book in 1990 😉