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A Simpler Time on Wall Street
I was perusing Martin Mayer’s 1955 book “Wall Street: Men and Money,” looking for something different to discuss when I came upon a passage of his on J.P. Morgan and Morgan Stanley. So, in keeping with the two being prominently featured in the news 53 years later, it’s a tale that sheds light on just how far we had come, before the fall, as well as a look at a far simpler time on Wall Street. You’ll get a kick out of the fee structure, for example.
“John Pierpont Morgan was a banker, and J.P. Morgan & Co., Inc., was and is a bank. Before 1934 it was also an underwriter, and so were the Chase National Bank, the Guaranty Trust Company, the First National Bank of Boston and many, many others. This seemed a logical way to handle the underwriting business, because banks should know more about credit ratings than anybody else, and banks have depositors who are natural customers for new securities. The actual check that a corporation receives in payment from an underwriter is only in small part the underwriter’s own money; the rest represents a loan to the underwriter from a bank, to be repaid from sales to ultimate customers. So the simplest way of handling new securities was to have the bank underwrite the stuff itself, supply all the financing, all the brain work and all the selling effort.
“It was so simple it became a little too simple. In the early thirties the American banking system went broke, partly because it had been underwriting worthless securities, and still had a lot on hand. Notice of this phenomena was taken in Washington, and in 1934 there appeared a law to the effect that a bank had to decide whether it was going to handle corporate securities or accept customers’ deposits. Experience had proved that the attempt to do both kinds of business put too great a strain on both the ability and the morality of bankers.
“J.P. Morgan & Co., Inc., like most of its fellows, decided to stay in the banking-and-lending business and get out of the securities business. A number of officers of the bank (and of its sister bank in Philadelphia, Drexel & Co.) thereupon lost their function in the company. Headed by Henry S. Morgan and Harold Stanley, they went out on their own and formed the underwriting house of Morgan Stanley & Co., Inc. In 1941 the Inc. was dropped (it is far easier to say this than to do it); the company reorganized as a partnership to do a brokerage business on the New York Stock Exchange. Morgan Stanley is still trying to expand its brokerage business and over-the-counter business, but it spends more time arguing with The First Boston Corporation for the title of the nation’s greatest underwriting house. In 1954, according to the New York World-Telegram and Sun annual survey, Morgan Stanley managed syndicates that underwrote $914,718,000 worth of corporate securities, while First Boston led with $1,254,249,000. In 1953 the positions had been reversed.
“The two houses are not much alike. First Boston is a corporation with eight thousand stockholders; Morgan Stanley is a partnership with fewer than a dozen partners. First Boston is capitalized at $20,000,000; Morgan Stanley at $3,000,000. First Boston runs a department store and sells a large percentage of the issues it manages…Morgan Stanley is basically a money house and sells comparatively little. First Boston has about 450 employees; Morgan Stanley, last time they counted, had 83. First Boston has offices all over the country; and Morgan Stanley has one office, at 2 Wall Street, New York.
“It is a very pleasant office, too – high in the tower, looking over Trinity Church and the office buildings of Trinity Place, out to the Hudson River, the ships and New Jersey. Most of the partners sit together in one large corner room, with ten high, roll-top desks marching in pairs at right angles to the two long walls….There is no clutter, and no nonsense.
“Managing partner Perry Hall is short and chubby, and at sixty he still has his freckles; only the gray hair and the immense, friendly confidence testify to his age and importance. He wears a black suit and vest, in keeping with his dignity, and a Kelly green tie, in keeping with his personality and his carpet. A graduate of Princeton in the class of ’17, he went to work for Guaranty Trust (a ‘Morgan bank’) in 1919, moved over to J.P. Morgan & Co. in 1925 and the Philadelphia affiliate in 1930, then became one of the original officers of Morgan Stanley. Early in 1954 The New Yorker ran a sketch of him, calling him ‘open-faced’ and featuring his love of hunting for grouse and wild turkey….
“In 1953 Morgan Stanley led First Boston by virtue of a single issue – a $300,000,000 bag of debentures underwritten by Morgan Stanley for General Motors. It was business that Morgan Stanley had gone out to get; in fact, the issue had its origin in a suggestion made by Hall to General Motors, more or less to the effect that GM had been expanding pretty fast and maybe the company could use a little money. This is the highest function of investment banking – solving a company’s problems before even the company knows that it has them – and Morgan Stanley richly earned more than its one-eighth of a point management fee, which ran to $375,000. It also earned its management, in 1955, of a $325,000,000 General Motors stock issue. No man is an island.
“Usually, of course, the company comes to the underwriter. ‘Our people.’ Hall says, ‘have been trained in the work involved in setting up large issues, and corporations know it. They respect us. They come in and they say, ‘We’d like to raise twenty-five million dollars.’ We’re supposed to be able to make recommendations, tell them what particular kind of financing suits their needs. The expense of making these recommendations, and preparing the issues, and organizing the syndicate, isn’t a great deal more on large financings than it is on small ones. For that reason, we’re always most interested in large issues. But Morgan Stanley is interested in quality at all times, whatever the size.’
“Northy Jones, a partner and the firm’s Stock Exchange member, wandered into Hall’s office in a casual tweed jacket. ‘Sit down, sit down,’ said Hall cheerfully. ‘Join the chorus.’ He returned patiently to his exposition. ‘Ever heard of the S.C. Johnson Company?’
“ ‘No, no,’ said Hall. ‘Let him guess. Give up? Ever hear of Fibber McGee and Molly – now we have it, Johnson’s Wax. Well, they came to us to underwrite an issue. I went home and said to my mother, ‘What’s the best floor wax?’ She said, ‘Johnson’s Wax.’ So I told the Johnson people we’d handle the issue. We sent a man out to Racine, to their plant, spent a lot of time with them discussing their needs. The issue we brought out amounted to only $848,000.’
“One-half of one percent of a $300,000,000 issue is $1,500,000. One-half of one percent of an $848,000 issue is $4,240. It isn’t very profitable to underwrite small issues, and do a good job at it.
“Up to 1941, Morgan Stanley did a wholesale business exclusively, selling to dealers who then took a mark-up and sold to the public. In 1941 (which was the first year of compulsory competitive bidding for SEC-regulated public utility companies) the firm started developing retail customers of its own in the New York area. Even today, however, much of Morgan Stanley’s actual participation in its underwritings will be sold through dealers, with two profits to come out of the difference between the price paid to the issuer and the price charged to the public. Most of Morgan Stanley’s income unquestionably comes from its management fee of seven to fifteen cents per hundred dollars on the total amount of the issue.
“Usually, the manager of a syndicate takes between 20 and 40 percent of the issue for himself – that’s why he is manager. Morgan Stanley’s average participation is ordinarily less than 10 percent. The firm is chosen by companies to underwrite their securities not because of its financial backing (though Hall could, as he puts it, ‘lay my hands on twice as much as our capital tomorrow, if I wanted to’), but because of its enormous ability and experience, and its reputation. Everybody likes to think that his name on an issue means a great deal to the sale of that issue; this happy boast is probably more true of Morgan Stanley than of anybody else.
“As many as 298 firms have helped Morgan Stanley underwrite an issue; as many as 801 dealers have helped Morgan Stanley sell one. They have accepted the leadership of this rather small firm because the name Morgan Stanley helps them sell; and for this reason also the list of companies for which Morgan Stanley has put out securities reads like a Burke’s Peerage* of American industrial enterprise.
“Like Burke’s Peerage, Morgan Stanley tries to keep its list simon-pure – but sometimes has to admit the bar sinister. Morgan Stanley’s outstanding bastard, as noticeable on first sight as a Mickey Mouse in a jeweler’s tray of Patek-Philippes, is a land-speculation company called Western Leaseholds; how this little item got in with the collection of tiaras is one of the deepest mysteries of Wall Street.”