Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe Read Online Free Page A
the rage. A new technological elitism was taking hold, and the trainees were in the vanguard of a bold new breed of banker.
For the Morgan Bank trainees, though, the mathematics was stressed to be only part of what banking was about; social factors, such as client relationships and reputation, were also heavily emphasized. Back in 1933, during the height of the populist backlash against Wall Street, the son of J. Pierpont Morgan—J. P. “Jack” Morgan, Jr.—had been grilled by Congress about his ethos. He declared that the aim of his bank was to conduct “first-class business…in a first-class way.” Fifty years later, that mantra of Jack Morgan struck much of the banking world as quaint. Years of bold innovation had made high-risk trading and aggressive deal making the gold standard of the street, and a “kill or be killed” ethic prevailed.
At 23 Wall Street, though, the senior bankers still talked about banking as a noble craft, where long-term relationships and loyalty mattered, both in dealing with clients and inside the bank. While at other banks, the emphasis had turned to finding star players, offering them huge bonuses, and encouraging them to compete for preeminence, at the Morgan Bank the emphasis was on teamwork, employee loyalty, and long-term commitment to the bank.
Many of the staff had worked only at J.P. Morgan, and while the bank paid less than most of its rivals, the trade-off was greater job security.The young trainees in the training program were told solemnly that while the bank would tolerate “errors of judgment,” an “error of principle” was a firing offense. “First-class banking” remained the mantra.
Peter Hancock easily passed the course and was dispatched back to the London office, where he spent a couple of years analyzing the credit-worthiness of North Sea oil companies. That was considered a plum job, because the Norwegian and British oil industry was starting to boom. But Hancock was hungry for more. As he looked around the City, he could see the revolution in derivatives and swaps building, and he wanted in.
The Morgan Bank was considered too stodgy to be a pioneer in the business. Aggressive Salomon Brothers and iconoclastic Bankers Trust were the real innovators. But shortly after Salomon announced the big IBM–World Bank swap, J.P. Morgan started looking for ways to do more such deals.
Initially, the epicenter of experimentation was not J.P. Morgan’s New York headquarters but the London branch of a corporate offshoot known as Morgan Guaranty Limited (MGL). While the Glass-Steagall regulations prohibited the main New York bank from playing in the capital markets, Glass-Steagall didn’t apply overseas. London’s regulatory authorities took a more laissez-faire attitude, generally permitting banks to engage in a wider range of services. As a result, Morgan Guaranty had built up a good capital-markets business. In the 1960s talented trader Dennis Weatherstone led the development of a flourishing foreign exchange business, and in the 1970s the office moved into the world of sovereign and corporate bond issuance. Business boomed in part because American companies realized they could pay less tax by raising finance in London rather than in New York.
That booming corporate bond business created the opening for Morgan Guaranty to move into the swaps world, and from the early 1980s, the Morgan Bank started to offer its clients deals through its London branch that allowed them to take advantage of the swaps magic. “This was an example of a fantastic innovation which really served a client need. It really solved problems in a useful way,” Jakob Stott, one of the young bankers who was on the swaps team, recalled.
Initially, arranging these deals was clumsy and time-consuming. Before a contract could be struck, two parties with matching needs had to be found. That alone could take weeks. On one of the first such deals, a swap between the Austrian government and
For the Morgan Bank trainees, though, the mathematics was stressed to be only part of what banking was about; social factors, such as client relationships and reputation, were also heavily emphasized. Back in 1933, during the height of the populist backlash against Wall Street, the son of J. Pierpont Morgan—J. P. “Jack” Morgan, Jr.—had been grilled by Congress about his ethos. He declared that the aim of his bank was to conduct “first-class business…in a first-class way.” Fifty years later, that mantra of Jack Morgan struck much of the banking world as quaint. Years of bold innovation had made high-risk trading and aggressive deal making the gold standard of the street, and a “kill or be killed” ethic prevailed.
At 23 Wall Street, though, the senior bankers still talked about banking as a noble craft, where long-term relationships and loyalty mattered, both in dealing with clients and inside the bank. While at other banks, the emphasis had turned to finding star players, offering them huge bonuses, and encouraging them to compete for preeminence, at the Morgan Bank the emphasis was on teamwork, employee loyalty, and long-term commitment to the bank.
Many of the staff had worked only at J.P. Morgan, and while the bank paid less than most of its rivals, the trade-off was greater job security.The young trainees in the training program were told solemnly that while the bank would tolerate “errors of judgment,” an “error of principle” was a firing offense. “First-class banking” remained the mantra.
Peter Hancock easily passed the course and was dispatched back to the London office, where he spent a couple of years analyzing the credit-worthiness of North Sea oil companies. That was considered a plum job, because the Norwegian and British oil industry was starting to boom. But Hancock was hungry for more. As he looked around the City, he could see the revolution in derivatives and swaps building, and he wanted in.
The Morgan Bank was considered too stodgy to be a pioneer in the business. Aggressive Salomon Brothers and iconoclastic Bankers Trust were the real innovators. But shortly after Salomon announced the big IBM–World Bank swap, J.P. Morgan started looking for ways to do more such deals.
Initially, the epicenter of experimentation was not J.P. Morgan’s New York headquarters but the London branch of a corporate offshoot known as Morgan Guaranty Limited (MGL). While the Glass-Steagall regulations prohibited the main New York bank from playing in the capital markets, Glass-Steagall didn’t apply overseas. London’s regulatory authorities took a more laissez-faire attitude, generally permitting banks to engage in a wider range of services. As a result, Morgan Guaranty had built up a good capital-markets business. In the 1960s talented trader Dennis Weatherstone led the development of a flourishing foreign exchange business, and in the 1970s the office moved into the world of sovereign and corporate bond issuance. Business boomed in part because American companies realized they could pay less tax by raising finance in London rather than in New York.
That booming corporate bond business created the opening for Morgan Guaranty to move into the swaps world, and from the early 1980s, the Morgan Bank started to offer its clients deals through its London branch that allowed them to take advantage of the swaps magic. “This was an example of a fantastic innovation which really served a client need. It really solved problems in a useful way,” Jakob Stott, one of the young bankers who was on the swaps team, recalled.
Initially, arranging these deals was clumsy and time-consuming. Before a contract could be struck, two parties with matching needs had to be found. That alone could take weeks. On one of the first such deals, a swap between the Austrian government and
Readers choose
Margaret Daley
K. Lyn
James Hilton
J.M. Madden
Lena Hillbrand
Eric Jerome Dickey
Kevin J. Anderson
Tiana Laveen