The changing character of doing deals


Pierpoint Morgan, outspoken promotor of the importance of character in doing business, might not have taken Bernie Ebbers of WorldCom seriously, or decided that Andrew Fastow, the chief financial officer of Enron, met his tests of character. This is not part of the financial service sector’s credo anymore, but as we trace events in the history of the House of Morgan, some might wish this were the case again.

“There’s a big difference between committing a fraud and knowing the committer of a fraud,” it has been said. Yes, but it depends on what you mean by knowing. There is a difference between knowing someone socially and having a business relationship with them. And there is a difference between a neighbour and a best friend, between selling someone paper clips and selling their shares and bonds.

One tradition in the financial services sector was to not make much of these distinctions. There was little difference between the tests of character applied to friends and those applied to business associates.

This attitude was often associated with snobbery and discrimination but it served important functions. The link between social and commercial life raised the costs of opportunistic behaviour – if you damaged one, you damaged the other. Your standing, good or bad, affected the standing of those with whom you dealt. The prospect of inclusion in, or exclusion from, a favoured circle imposed integrity.

The statement at the start of this column was made by Jamie Dimon after his appointment last year as president of JPMorgan Chase, and so as successor to J. Pierpoint Morgan, the most famous of all bankers. Mr Dimon, who was talking about the leading US banks’ exposure to the bankrupt WorldCom, called for an end to “guilt by association”. This points up the extent to which the financial services industry has moved away from making character a criterion of doing business.

No one laid more stress on the importance of character in financial services than Morgan: he famously told a US Senate committee that all the money in Christendom would not persuade him to deal with a man he did not trust.There is dispute as to whether Morgan always practised what he preached. But his declaration had enough substance for JPMorgan to achieve prestige unrivalled among financial institutions.

The demise of that tradition in Britain can be dated to March 12 1985. On that day Norman Tebbit, the trade and industry secretary, rang the chairman of Kleinwort Benson, bankers for the Fayed brothers. The government was reviewing the Fayeds’ bid for House of Fraser, a department store chain that included Harrods. Mr Tebbit and his advisers wondered whether the purchasers had given an honest account of their antecedents and where the money to finance the purchase had come from. He sought reassurance that the reputation of the bank was associated with that of its clients. Two days later Mr Tebbit approved the deal, citing Kleinwort’s support of the Fayeds as a reason. A subsequent inquiry into the deal showed there had been good grounds for the government’s concerns.

Mr Tebbit’s call would not be made today. You can no longer expect that a respectable City firm has only respectable clients. Legislative changes mean that the character, competence and past behaviour of an acquirer are no longer grounds on which a proposed takeover can be rejected.

A similar transition occurred in the US. The size of the cheque, rather than clubbability, secured access to Wall Street’s most hallowed portals. And no portal was more hallowed than that of JPMorgan. The Glass-Steagall Act, which had forced the House of Morgan to divest its investment banking activities to Morgan Stanley, was steadily eroded by industry lobbying.

JPMorgan then aspired to re-establish a position in the remunerative areas of mergers and acquisitions and initial public offerings. But it was not the bank’s conservative clients at the centre of this action. Pierpoint Morgan might not have taken Bernie Ebbers of WorldCom seriously, or decided that Andrew Fastow, the chief financial officer of Enron, met his tests of character. But these were the people who dispensed investment banking fees in the 1990s.

Perhaps the derided senators Glass and Steagall, with their concerns about conflicts of interest, knew something after all. JPMorgan sacrificed its reputation as the most blue-blooded of commercial banks without making it into the top league of investment banks. JPMorgan’s transformation ended with large provisions against losses in lending, client lawsuits and, ultimately, merger into the more pedestrian Chase Manhattan.

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