The following is an excerpt from the book 100 Minds That Made the Market
by Ken Fisher
Published by Wiley & Sons, Inc.; August 2007;$19.95US/$23.99CAN; 978-0-470-13951-6
Copyright © 2007 Ken Fisher
John Pierpont Morgan
History’s Most Powerful Financier
Back when Teddy Roosevelt was President, J.P. Morgan was probably the most powerful man in the world. A capital-conjuring wizard, Morgan erected a one-man central bank, financing his era’s greatest mergers and saving America from perilous panic. His abrupt word was considered golden, and his formidable aura, almighty. For example, there is the legendary story of when an old friend’s son solicited Morgan financing for a questionable venture. Morgan declined, but chuckled, “Let me offer you something equally valuable!” — and he took the young man by his side for a stroll across the York Stock Exchange floor. Credit for the young man would never again so available from so many!
Unlike presidents and royalty who have power bestowed upon them, Morgan earned his larger-than-life status by sheer will. Dogmatic and domineering, he had the brains to pull it off, selling securities, reorganizing railroads and consolidating companies. Sure, he had a head start from his father, international banker Junius Morgan, but J.P. was the one who truly immortalized the House of Morgan by forming America’s first billion-dollar corporation in 1901 and, as big daddy, rescuing the economy from the grips of the 1907 Panic.
Morgan, an undaunted capitalist, was deemed savior of the Panic. As excessive speculation and stock-watering caused companies to fail and banks to collapse, Wall Street turned to Morgan for hope. Working at his own pace amidst the terror, Morgan mobilized funding from friends and rivals to salvage what they could. He played the role of last-resort lender for troubled institutions, that is now played by the Federal Reserve System. Allowing the “unsalvageable” Knickerbocker Trust to fail, Morgan — with a big, black stogy cornered in his mouth — instead funded the near-failing Trust Company of America. Then, as stocks tumbled faster than the ticker could record trades, he turned to the Stock Exchange, which threatened to close. Within minutes. Morgan patch-quilted $25 million to keep it afloat. No problem for Big J.P.
With a protruding ruby-red nose, steel-gray hair, and blazing eyes set under black bushy brows, J.P. created a banking empire second to none. He wasn’t particularly devious, although “the old man” knew a few treacherous tricks. Instead, he conducted business in his assured, gruff manner — succinctly and surely. He rarely changed his mind; once his word was spoken, he stuck to it. An old world gentleman, Morgan once secured a million-dollar loan in 15 minutes by announcing, “I’ll take the loan.”
Morgan’s favorite style was corporate consolidation. It was efficient and neat. It crushed “destructive” competition and, above all, produced order from chaos. How he despised chaos! When you had a higher share of the market than all your competitors, you could pretty well do what you wanted with product prices. No chaos. During his heyday, he spearheaded such horizontal consolidations as American Telephone & Telegraph, General Electric, Pullman, International Harvester, Western Union, and Westinghouse. But he set his sight on steel for his most impressive deal. By 1901, U.S. Steel was capitalized at $1.4 billion in stocks and bonds — nearly half of which was water (goodwill in accounting parlance). It engulfed the entire steel industry and created hundreds of millionaires by paying steep prices for small, privately owned companies.
En route, Morgan formed National Tube Company, and acquired American Tin Plate, Federal Steel, National Steel, and American Steel & Wire. He then focused on depreciating Andrew Carnegie’s giant steel firm so he could buy it cheap. When Carnegie survived J.P.’s competitive tactics, such as attracting Carnegie customers to Morgan’s steel, Morgan paid up, and Carnegie bailed out. Again in 15 minutes, J.P. agreed to pay $492 million in first-mortgage five-percent gold bonds. Underwriting syndicates took huge fees of $57.5 million — $11.5 of which went to the House of Morgan. Morgan, who suffered emotional breakdowns and frequent headaches, was so gifted at creating fees for his firms that some people suspected his consolidations were mere fee-funnelers — not the strategic, cost-cutting market share mergers he intended them to be. Newspapers had a field day with the deal, much to Morgan’s chagrin. Word had it that God created the world, but “it was reorganized in 1901 by Morgan.”
Born in 1837, J.P. entered the family business at age 19, working at George Peabody & Co. of London and gaining an impressive overview of international finance. He speculated successfully in coffee and Civil War gold and participated in the scandalous 1861 Hall Carbine Affair. In this exploit, J.P. loaned a colleague $20,000 to buy obsolete Hall carbines from the government at $3.50 each. He then resold them to Uncle Sam for $22 apiece!
Thereafter, he established his own firm, Dabney, Morgan, which by 1870 was ranked 16th among New York banking houses. Morgan ventured in railroads, first floating $6.5 million of Kansas Pacific bonds. Next, he sparred with pirates Jay Gould and Jim Fisk for control of the Albany & Susquehanna, absorbing their dubious ways — stock watering, blackmail, and political pole-vaulting. Whereas raiders Gould and Fisk wanted the line solely to loot it, church-going Morgan regarded the rails as an important form of transportation. By 1879, he was seen as a major railroad financier after successfully unloading William H. Vanderbilt’s $25 million interest in the New York Central Railroad. His prompt, private handling of the matter won him a seat on N.Y. Central’s board, admitted him to the upper echelon of railroad dealings and deemed him financial intermediary between American and overseas investors. The 1880s were a time for “Morganizing,” whereby Morgan provided new capital and reduced fixed costs by reissuing securities at lower interest rates or converting bonds to stock, always earning an investment banking fee en route. Also en route, and to insure his investments, Morgan became a director of at least 21 railroads.
The House of Morgan completely saturated American finance, so when reform (triggered by the 1907 Panic) became fashionable, J.P. was an obvious target. His mergers, in particular, came under fire from President Taft and blood-thirsty reporters. Even Congress joined the game, initiating the 1911 Pujo investigation into monopoly finance, which featured Morgan as a suspected money trust kingpin. But while the old-timer successfully defended his life’s work, his pride was mortally wounded. His kingdom and health in decline, arrogant and ornery Morgan died at age 75 in 1913, leaving a $77 million estate and $20 million in art.
No financier since has had the power Morgan wielded in his prime — not even close. He was power. Ironically, what he truly saw as power for good, the early 20th century’s reformers saw as evil. Was the world better with Morgan’s, mergers or with the perilous price deflation of the 1870s and 1880s that led to the profitless need for consolidation? We could debate history forever, but the key in thinking about Morgan is that, more than any other person, before or since, he personified what the stock and bond markets are ultimately all about — financing or refinancing American business. It’s one thing to worry about whether a given stock’s price will rise or fall, but ultimately all the fluctuations come back to which businesses will get money in the future and which won’t. The only person to attempt to rival Morgan’s significance was the recent junk bond evolution of Michael Milken of the former Drexel Burnham Lambert. Milken was a revolutionary in finance, but despite creating a huge amount of refinancing via junk bonds, he never came close to the truly central role Morgan played in our entire economy. And Milken’s legal problems and Drexel’s bankruptcy insure for decades to come that Morgan will hold the title of history’s most powerful financier.
Copyright © 2007 Ken Fisher
With permissions from FSB Associates.