J.P. Morgan & Co. is a commercial and investment banking institution founded by J. P. Morgan in 1871. The company was a predecessor of three of the largest banking institutions in the world, JPMorgan Chase & Morgan Stanley, and was involved in the formation of Drexel Burnham Lambert. The company is sometimes referred to as the “House of Morgan” or simply “Morgan“.
The origins of the firm date back to 1854 when Junius S. Morgan joined George Peabody & Co. (which became Peabody, Morgan & Co.), a London-based banking business headed by George Peabody. Junius took control of the firm, changing its name to J.S. Morgan & Co. in 1864 on Peabody’s retirement. Junius’s son, J. Pierpont Morgan, first apprenticed at Duncan, Sherman and Company in New York City, then founded his own firm with a cousin, J. Pierpont Morgan & Company, in 1864. J. Pierpont Morgan & Company traded in government bonds and foreign exchange. It also acted as an agent for Peabody’s. Junius, however, considered some of Pierpont’s ventures to be highly speculative. Therefore, Pierpont took on Charles H. Dabney, a connection established when he was sent to the Azores as a child as a senior partner, and the firm was known first as Dabney, Morgan and Company (beginning in 1864) and then “Drexel, Morgan & Co.” (in 1871). In those firms, Pierpont used his Peabody connection to bring British financial capital together with the rapidly-growing US industrial firms, such as railroads, who needed financial capital. The Drexel of Drexel, Morgan & Co. was Philadelphia banker Anthony J. Drexel, founder of what is now Drexel University.
House of Morgan
On Junius’s death in 1890, Pierpont Morgan took his place at J.S. Morgan and Company. After Drexel’s death, Drexel, Morgan reorganized in 1895 and became J.P. Morgan and Company, eventually becoming one of the most powerful banking companies in the world and helping to transform the United States from an economic novice into the strongest industrial power in the world at that time. It financed the formation of the United States Steel Corporation, which took over the business of Andrew Carnegie and others and was the world’s first billion-dollar corporation. In 1895, it supplied the United States government with $62 million in gold to float a bond issue and restore the treasury surplus of $100 million. In 1892, the company began to finance the New York, New Haven and Hartford Railroad and led it through a series of acquisitions, which made it the dominant railroad transporter in New England.
Built in 1914, 23 Wall Street was known as “The Corner” and “The House of Morgan”, and for decades, the bank’s headquarters was the most important address in American finance. At noon, on September 16, 1920, an anarchist bomb exploded in front of the bank, killing 38 and injuring 400. Shortly before the bomb went off, an unknown person placed a warning note in a mailbox at the corner of Cedar Street and Broadway. The warning read: “Remember we will not tolerate any longer. Free the political prisoners or it will be sure death for all of you. American Anarchists Fighters.” While theories abound about who was behind the Wall Street bombing and why they did it, after twenty years of investigation the FBI rendered the file inactive in 1940 without ever finding the perpetrators.
Financing of Allied bonds during World War I
In August 1914, Henry P. Davison, a Morgan partner, traveled to London and made a deal with the Bank of England to make J.P. Morgan & Co. the sole underwriter of war bonds for Great Britain and France. The Bank of England became a fiscal agent of J.P. Morgan & Co. and vice versa. Over the course of the war, J.P. Morgan loaned about $1.5 billion (approximately $37.52 billion in today’s dollars) to the Allies to fight against the Germans.:63 The company also invested in the suppliers of war equipment to Britain and France, thus profiting from the financing and purchasing activities of the two European governments.
During the early 1920s, J.P. Morgan & Co. was active in promoting banks in the southern hemisphere, including the Bank of Central and South America.
Glass–Steagall Act and Morgan Stanley
In 1933, the provisions of the Glass–Steagall Act forced J.P. Morgan & Co. to separate its investment banking from its commercial banking operations. J.P. Morgan & Co. chose to operate as a commercial bank, because after the stock market crash of 1929, investment banking was in some disrepute and commercial lending was perceived to be more the profitable and prestigious business. Also, many within J.P. Morgan believed that a change in the political climate would allow the company to resume its securities businesses but that it would be nearly impossible to reconstitute the bank if it were disassembled.
In 1935, after being barred from securities business for over a year, the heads of J.P. Morgan made the decision to spin off its investment banking operations. Two J.P. Morgan partners, Henry S. Morgan (son of Jack Morgan and grandson of J. Pierpont Morgan) and Harold Stanley, founded Morgan Stanley on September 16, 1935 with $6.6 million of nonvoting preferred stock from J.P. Morgan partners. At the beginning, Morgan Stanley’s headquarters were at 2 Wall Street, just down the street from J.P. Morgan, and Morgan Stanley bankers routinely used 23 Wall Street in closing transactions.
Morgan Guaranty Trust
In the years following the spin-off of Morgan Stanley, the securities business proved robust, while the parent firm, which incorporated in 1940, was a little sleepy. By the 1950s, J.P. Morgan was only a mid-sized bank. To bolster its position, in 1959, J.P. Morgan merged with the Guaranty Trust Company of New York to form the Morgan Guaranty Trust Company. The two banks already had numerous relationships between them and had complementary characteristics as J.P. Morgan brought a prestigious name and high quality clients and bankers while Guaranty Trust brought a significant amount of capital. Although Guaranty Trust was nearly four times the size of J.P. Morgan at the time of the merger in 1959, J.P. Morgan was considered the buyer and nominal survivor and former J.P. Morgan employees were the primary managers of the merged company.
Return of J.P. Morgan & Co.
Ten years after the merger, Morgan Guaranty established a bank holding company called J.P. Morgan & Co. Incorporated, but continued to operate as Morgan Guaranty through the 1980s before beginning to migrate back to use of the J.P. Morgan brand. In 1988, the company once again began operating exclusively as J.P. Morgan & Co.
Also in the 1980s, J.P. Morgan along with other commercial banks pushed the envelope of product offerings toward investment banking, beginning with the issuance of commercial paper. In 1989, the Federal Reserve permitted J.P. Morgan to be the first commercial bank to underwrite a corporate debt offering. In the 1990s, J.P. Morgan moved quickly to rebuild its investment banking operations and by the late 1990s would emerge as a top-five player in securities underwriting.
By the late 1990s, J.P. Morgan had emerged as a large but not dominant commercial and investment banking franchise with an attractive brand name and a strong presence in debt and equity securities underwriting. Beginning in 1998, J.P. Morgan openly discussed the possibility of a merger, and speculation of a pairing with banks such as Goldman Sachs, Chase Manhattan Bank, Credit Suisse and Deutsche Bank AG was prevalent.Chase Manhattan had emerged as one of the largest and fastest growing commercial banks in the United States through a series of mergers over the previous decade. In 2000, Chase, which was looking for yet another transformational merger to improve its position in investment banking, merged with J.P. Morgan to form JPMorgan Chase & Co. The combined JPMorgan Chase would become one of the largest banks both in the United States and globally offering a full complement of investment banking, commercial banking, retail banking, asset management, private banking and private equity businesses.
- ^Moody, John (1919). The Masters of capitalism. New Haven, CT: Yale University Press. pp. 12–13. Retrieved May 5, 2015.
- ^ Jump up to:ab Morgan: American Financier by Jean Strouse
- ^Drexel’s father, Francis Martin Drexel, founded Drexel & Company, which was a predecessor of Drexel Burnham Lambert; DBL collapsed in 1990.
- ^Geoffrey Wolff (2003). Black Sun: The Brief Transit and Violent Eclipse of Harry Crosby. New York Review of Books. ISBN 1-59017-066-0.
- ^“New York Bank History”. Scripophily.com. Retrieved August 2, 2007.
- ^On July 13, 1989 J.P. Morgan & Co. underwrote an offering of 9.20% notes for Xerox Corporation, the first corporate debt offering underwritten by a commercial bank in the United States since 1933.
- ^ P. Morgan Weighs Merger And Cuts Jobs (New York Times, 1998)
- ^Banking’s Big Deal: The Trend; A Deal Built on Weakness, and Strength (New York Times, September 13, 2000)
- ^Banking’s Big Deal: The Overview; Chase Is Reported On Verge of Deal to Obtain Morgan (New York Times, September 13, 2000)
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder TBIL.co STATX Fund.