My Amazon Review of Nicholas Sargen's "JPMorgan's Fall and Revival: How the Wave of Consolidation Changed America's Premier Bank"

 

A Reflection on the House of Morgan

 

Nick Sargen, longtime Wall Street economist and a friend and former colleague, has written a personal memoir of his working at JPMorgan, a history of the financial markets from 1978-2005 and a too endearing recent history of JP Morgan and the strategic issues it faced in the late 20^th century.* To me it is a misnomer to call JPMorgan “America’s premier bank,” in that as of yearend 1976 Morgan, with $28 billion in assets was the fifth largest bank holding company with roughly one-third the assets of Bank of America and standing behind Citicorp, Chase Manhattan, and Manufacturers Hanover. Simply put JPMorgan’s past was brighter than its future.

 

Sargen arrives at Morgan in early 1978 with an economics Ph.D. from Stanford after a stint at the Federal Reserve Bank of San Francisco where he specialized in international economics. He is thrust into a rapidly inflating global economy and the world of sovereign lending to Asia and Latin America and is taken under the wing of the banks lead international economist, the highly respected Rimmer De Vries. In the early 1980’s Morgan had a virtual murderers row of economists that included Dick Berner (later Morgan Stanley’s chief economist), Bill Dudley (later Goldman Sachs’ chief economist and later President of the NY Fed), and Steven Roach (later Morgan Stanley’s chief economist). It was quite the intellectual hothouse.

 

By 1982 the American banking system and JPMorgan found themselves facing the imminent default of a host of Latin American countries as their scheme to recycle petro-dollars went awry. For all practical purposes the banks were insolvent. Sargen whose early warning system at the San Francisco Fed signaled the crisis, was not heeded at Morgan and elsewhere as the lure of high spreads dazzled the commercial banker of that day. To me, of all banks, Morgan should have stayed away given its experience with the Dawes Plan of the 1920s which recycled German reparations payments. Morgan partner Tommy Lamont was in up to his eyeballs with German loans. Of course, that all came crashing down when the New York call money market sucked money in from all over the world and the Fed’s 1929 tightening brought that episode to an ignominious end. The Volcker tightening of 1979-82 had the same effect. Simply put, Morgan should have known better.

 

Sargen describes a very insular and elite coat and tie “WASP” culture that only hired from the best of schools. There is no way Morgan would have hired me as a Jewish street kid from Queens with a UCLA finance Ph.D.  Although it was somewhat of a culture shock when Sargen was lured away from Morgan to the rough and tumble shirt-sleeve culture of Salomon Brothers. Sargen arrived in 1984 and I arrived there two years later. There Sargen learned the power of Salomon’s trading floor and he was shocked to see the firm’s chairman John Gutfreund sitting at open desk right on the floor. A far cry from JPMorgan. While there Sargen witnessed the collapse of the dollar, the 1987 stock market crash and the Brady Plan for Latin debt and Salomon’s infamous treasury scandal. By 1991 he was looking for greener pastures and ended up running money for Prudential and then in 1995 he returned to Morgan to be the chief strategist for its Private Bank. All the while he keeps up with the fits and starts problems facing Morgan as it enters investment banking.

 

Sargen rightly notes that Morgan’s strategic dilemma was that its core strength of banking for America’s top corporations was being disintermediated by the Wall Street investment banks who picked off its clients by offering better terms and conditions via the short-term commercial paper and long-term capital markets. Morgan under the leadership of Lew Preston and Dennis Weatherstone understood the problem and began to build an investment bank skirting around the requirements of the Glass Steagall Act that limited commercial banks from underwriting securities. They were successful to a degree, but at great cost. According to Sargen, Morgan’s biggest strategic mistake was not buying State Street Bank in 1990 when it had the chance.

 

With the late 1990’s bull market in full swing Morgan is left behind. All the action is in the new economy, while Morgan is wedded to the old economy. Its stock lags and of a sudden Morgan becomes takeover bait. Sargen cites an interesting vignette when Morgan invites twenty something TheGlobe.com CEO to address their annual managing directors meeting. Krizelman addresses the crowd in jeans and a tie-dyed T-shirt. The game was over, and Chase Manhattan Bank would soon acquire Morgan. However, the culture class was enormous with Chase and Morgan people hating each other’s guts. It would only settle down after JPMorgan Chase would acquire Bank One bringing with it a star banker named Jamie Dimon. It would be Dimon who restores the franchise to its past glory, but in a completely unrecognizable incarnation. Sargen would be long gone by then.

 

Because I am a finance and history geek and was involved in many of the big events discussed in the book, I thoroughly enjoyed reading Nick’s account. However, I am not so sure about the general reader. It would have helped if either there was more discussion about all the Morgan executives named in the book, or alternatively dropping a host of names. It was confusing at times. Further it would have helped to have annual data on Morgan’s profitability metrics and stock price. Nevertheless, from my biased perspective it is well worth the read.

 

*-I received the book from Sargen.

For the full Amazon URL see: A Reflection on the House of Morgan (amazon.com)