THE LAST PARTNERSHIPS Inside the Great Wall Street Money Dynasties phần 3 pdf

The boom years ofthe 1920s were not totally devoid of new bond offerings; in fact, much of the underwriting business was devoted to them rather than stocks.But the hefty fees were to be

Schubert Theater Corp A retail sales department was opened in 1927

by a salesman brought in from another retail-oriented firm, and thecompany opened offices in Albany, Chicago, Philadelphia, Pittsburgh,San Francisco, and Washington D.C., in addition to New York.15

By the late 1920s, J & W Seligman had ten active partners, withHenry Seligman the most senior among them Frederick Strauss wasalso a senior partner, and in many ways the captain of the ship Henumbered many industrialists and statesmen among his colleaguesand friends One day a new receptionist at the office announced tohim that “there is some nut out here who claims he’s John D Rocke-feller and wants to see you What shall I do with him?” The founder

of Standard Oil was shown into Strauss’s office

In the years immediately preceding the Crash of 1929, corporateunderwritings continued at a brisk pace Perhaps the best-known dealthe partnership underwrote was for the Minneapolis-Honeywell Regu-lator Company, later known as Honeywell Inc., the future electronicsand computer company Then in 1925, another partner, Francis Ran-dolph, made a proposal that would have a profound long-term effect onthe House of Seligman He proposed that the company sponsor aninvestment company, today known as a mutual fund Several years later,the issue was raised again In the interim, several hundred funds hadbeen established on Wall Street and the trend appeared to be growing.The funds were not necessarily pitched at the very small investor but atthose with sizable assets and little experience with investing

The new investment fund was an immediate hit It was named theTri-Continental Corporation, since it invested on three continents,not solely in the United States The Seligmans hired full-time staffand analysts to oversee it, not just market it to investors The firstfund sold out very quickly, and the second was launched shortlythereafter Unfortunately, the second was launched on August 15,

1929, two months before the fateful market drop in October In thesummer, however, the market was still very strong and euphoria pre-vailed Ironically, the first investment for the new fund was an orderfor U.S Steel, a stock that plummeted sharply when the marketturned down It was also the same stock that J P Morgan would try toprop up by asking Richard Whitney, president of the NYSE, to place

an order to buy as the Crash was occurring

The Crash provided a wrenching experience for the traditionallysmall but influential Jewish-American partnerships The Dow JonesIndustrial Average’s 10 percent collapse, the largest to date, signaled achange in the market structure in the United States and would usher in

a new political era as well In this respect, it was much more than just

an old-fashioned panic It had all of the hallmarks of a radical change inAmerican society The clubby atmosphere of the partnerships wouldcontinue for another generation, but their smug attitude towardinvestors and even the stock market would begin to change irrevocably

By 1929, the Seligmans were certainly one of the firms with the mostpatrician attitude The day the market crashed, October 28, JeffersonSeligman visited the floor of the NYSE for the first time He was thepartner of the firm to whom the seat on the exchange was assigned, but

he had never been on the floor before In fact, no partner of the firmever visited the floor in the firm’s history, although the seat had been

purchased in its early years Fortune magazine commented that he was

there “to see what a market crash was like.” While the market was lapsing in bedlam around him, Seligman watched bemusedly, dressed

col-in a frock coat and striped trousers with a bright flower col-in his lapel—hisusual business attire.16 While one of the New York afternoon paperscommented that his presence had a calming effect on the market, it wasstretching the point Visits from senior bankers were not going to stopthe rout any more than buy signals from J P Morgan were The day themarket dropped, society and Wall Street attitudes quickly changed with

it In a sense, the days of the partnerships were already numbered,although the cycle would not be complete for another fifty years Although the Seligmans were hurt by the Crash, the severity of theimpact was not as great as it might have been The partners decided

to adopt a long-term strategy, in the hope that the market wouldrebound They trimmed their staff and then rehired many of thoseemployees shortly thereafter But the market for shares of investmentcompanies took a severe beating during the latter months of 1929 andinto 1930 The travails of the investment trusts marketed by GoldmanSachs were the best-known, but not the only, examples of funds thatbehaved very poorly as the market dropped

The postwar years brought prosperity to Lehman Brothers as well,but the firm adopted a more aggressive game plan than did the Selig-

mans The corporate underwritings that began about 1906 proceededfull steam after the war, but the manpower problem was similar Atwar’s end, Lehman had only five partners, including Philip, Herbert,and Arthur The first nonfamily member, John M Hancock, wasadmitted in 1924 Another nonfamily member, Paul Mazur, joinedshortly after and would become known for his writings on the retail-ing industry, a neat fit with the firm’s underwriting history

Philip Lehman kept the firm on an even keel by continuing tofinance the same sort of firms that the unofficial alliance with GoldmanSachs had produced before the war Retailers were brought to marketalong with underwritings for automobile manufacturers and food com-panies While the Seligmans preferred bond underwritings, Lehmanunderwrote both common and preferred stocks primarily In fact, itdid not establish a bond department until 1922 The boom years ofthe 1920s were not totally devoid of new bond offerings; in fact, much

of the underwriting business was devoted to them rather than stocks.But the hefty fees were to be found in common stock issues, and that

is where the Lehmans shined The increased profits finally led them

to occupy their own building at One William Street, replete with itsown entertainment and dining facilities, said to be the most lavish onWall Street

Kuhn Loeb suffered the worst in the postwar years when it lost itsguiding light Jacob Schiff died in 1920 at age seventy-three His deathwas a major event in New York, reported on the front page of all themajor newspapers The day of the funeral, the streets were lined withpoor Jews from the Lower East Side who were not allowed into theservices, and Governor Al Smith and the mayor of New York attended

At his death, Schiff left an estate of $35 million, less than half that of

J P Morgan, who had died eight years before.17 His death left thefirm with only four partners Like the Seligmans’, the firm’s under-writing track record was impressive, but was mostly for bonds ratherthan common stocks Kuhn Loeb did not tally the number of under-writings done in a year and compare itself to others; it would totalthem for a decade or twenty years This was part of the firm’s empha-sis on its long track record with its corporate clients The best-knownpartner after Schiff’s death, Otto Kahn, summarized the partnership’slong-term approach to investment banking when he said, “It has long

been our policy and our effort to get our clients, not by chasing afterthem, not by praising our own wares, but by an attempt to establish areputation.”18In this respect his philosophy was not unlike that of theSeligmans, but both firms were in fact emulating J P Morgan Infront of a congressional committee investigating banking in 1912,Morgan claimed that no man could get a nickel from him for a loan if

he did not trust his character Chasing business was beneath manyinvestment bankers, or so they would have the world believe, but theyall actively and aggressively courted business at every opportunity Like other financiers, Otto Kahn of Kuhn Loeb was worried aboutthe inflated stock market in the late 1920s Bernard Baruch, Joseph P.Kennedy, and Charles Merrill would all correctly anticipate the mar-ket crash and adopt defensive positions so that their funds and firmswould survive Economist and statistician Roger Babson had alsobeen proclaiming that the end was near, and apparently Kahn agreed,but not publicly Former partner Paul Warburg, previously a member

of the Federal Reserve Board and roommate of Kahn in London ing their younger days, constantly warned him about the dangerinherent in the market, and Kahn took the advice seriously KuhnLoeb maintained very conservative positions during the late 1920s,and they saved the firm serious losses when the Crash occurred ButKahn’s public utterances about the condition of the market weremore of the standard Wall Street line As late as 1928, he stated thatthe market “curve is upward and will continue so for many years.”Concerning Babson, he said that he was “as wrong as any other manwho deals solely in statistics there is nothing in the underlyingconditions in the business world at this time to indicate anything but

dur-a continudur-ance of prosperity.”19 The lack of candor about the marketwas natural for someone who made a living from it, but it would provesomewhat lukewarm when congressional hearings were called toinvestigate the Crash

Despite their straitlaced business philosophy, both Lehman ers and Kuhn Loeb managed to have fun with their corporate clients.Both were active underwriters of motion picture studios, and theirpartners were involved with the studios on a personal level as well.Kahn of Kuhn Loeb was one who had become smitten with Holly-wood Despite his strong work ethic and the fact that he had once

Broth-considered running for Parliament before coming to the UnitedStates, Kahn enjoyed the worldly pleasures of the motion pictureindustry In 1928, he made a speech in front of Paramount executives

in which he stated that the industry “has opened up dull, narrow liveswith romance and beauty, novelty and stimulation.” Hollywood wasjust as happy to attract serious financiers, because it gave it an aura ofrespectability Kahn ventured west to Hollywood, accompanied byIvy Lee, the acknowledged founder of the public relations industry

Otto Kahn of Kuhn Loeb was a benefactor of the MetropolitanOpera in New York He served as its president for years andattempted to introduce reforms that were considered too radical

for the times In 1929, he helped produce a German opera, Jonny Spielt Auf, which departed from classical opera It was mostly jazz

and included an onstage car crash Opera patrons were outraged,especially since it called for saxophones in the orchestra, whichwere not traditional orchestra instruments In the late 1920s, Kahnalso made plans to build a new opera house in midtown Manhattanthat would reflect the times by being more democratic in its archi-tecture and interior layout The number of boxes for the wealthywould be reduced so that more orchestra seating could be madeavailable This, too, raised the ire of other existing patrons, includ-ing J P Morgan Jr The outcry was so fierce that Kahn eventuallyabandoned his plans

Kahn also supported the early cinema and actors Along withClarence Dillon, he became something of a legend for being men-

tioned in a film Dillon even had one named after him, The Wolf of Wall Street In her first talking picture, My Man (1928), Fanny

Brice sang a song addressed to Kahn:

Is something the matter with Otto Kahn

Or is something the matter with me?

I wrote a note and told him what a star I would make.

He sent it back and marked it “Opened by mistake.”

Kahn remained a fan of Brice throughout her career And the songhelped his celebrity considerably

and adviser to John D Rockefeller He wanted to visit and see hand the industry that he had adopted as his own He became friendswith noted actors of the period, including Charlie Chaplin, and soondiscovered how exciting the business could be when he agreed tofinance several actresses so that they could study in Europe TheHearst newspapers quickly picked up the story, although Kahn vigor-ously denied it However, it was somewhat difficult for him to com-pletely disavow the story because, before he began his trip, he cabled

first-a Pfirst-arfirst-amount executive first-asking him to first-arrfirst-ange first-a reception with plenty

of members of the opposite sex present, “though it is not necessary tohave it 100 percent blonde, inasmuch as fortunately tastes vary.”20

Thus began a Wall Street flirtation with Paramount and Hollywoodthat would last for decades

Kahn was also a major benefactor of the Metropolitan Opera,becoming a major shareholder in the opera company shortly after itsfounding around the turn of the century His involvement with itlasted for more than thirty years, and he poured several million dol-lars into the company, ensuring its rise to prominence as one of theworld’s renowned companies He also owned one of the first seriousmovie houses in the country devoted to serious, artistic films ratherthan popular, Hollywood-style productions Like many members ofOur Crowd, his involvement with the arts helped New York achieve astatus on a level with London and Paris The contribution was signif-icant because several generations before, Jay Gould and Jim Fisk hadendowed the arts, in a manner of speaking, with an opera house adja-cent to the offices of the Erie Railroad Fisk kept close relationshipswith some of the “actresses” on the company’s payroll until a malefriend of one of them shot him dead, touching off a major New Yorkscandal Now the arts were becoming respectable in New York andwere a source of pride rather than simply a vulgar showcase for richfinanciers’ dreams

Passing of the Old Guard

Although the three partnerships survived the Crash of 1929, eventsover the next four years would change their business philosophies and futures substantially Late in 1932, Herbert Hoover launched an

investigation into stock market practices that eventually led to a tic overhaul of the securities industry The investigators floundered

dras-at first, but in 1933, while Franklin Roosevelt was awaiting ration, they picked up substantial momentum and began interview-ing both stock market officials and investment bankers concerningthe Crash

inaugu-These became known as the Pecora hearings, named after theirchief counsel, Ferdinand Pecora Dozens of witnesses were called totestify, including J P Morgan and other senior investment bankers ofthe period The focus of the hearings was similar to that of the hear-ings a generation before The top New York investment bankers dom-inated Wall Street and charged what appeared to be noncompetitivefees to their underwriting clients Pecora was a feisty New Yorklawyer in the Progressive mode who favored competitive bidding byinvestment bankers for new issues of securities rather than negotiatedfees, which were the norm His hearings, which proved sensational,occurred at the same time that the new Roosevelt administration had

to deal with the banking crisis during the darkest days of the sion As a result, they provided strong impetus for Congress to passboth the Securities Act of 1933 and Banking Act of 1933, the latterknown as the Glass-Steagall Act

Depres-Pecora had little difficulty demonstrating that the investmentbankers acted with impunity, serving their own interests before those

of clients One of his main areas of contention was the investmenttrusts that had grown so popular in the 1920s After the Crash many

of them dropped significantly in value, some becoming almost less The Goldman Sachs funds, which performed poorly, were sin-gled out by Pecora as marketing gimmicks that had little value in abear market The Seligmans’ funds did not come under criticism, butthe activities of Kuhn Loeb did, much to the distresses of its partners,who were not accustomed to criticism from the outside

worth-Pecora was particularly interested in the organization and ing of the Pennroad Corp., a holding company that was organized in

financ-1929 just months before the Crash The purpose of the company was

to allow the Pennsylvania Railroad to acquire properties that could beused for expansion In reality, it was a vehicle used for fending off theAlleghany Corporation, a holding company organized by J P Morgan

to encroach on other railroads’ properties The company’s stock, most

of which was provided by the existing shareholders of the nia, was entrusted to the railroad’s directors and locked up for tenyears so that the actual shareholders had no vote in Pennroad’s affairs.Pecora seized upon the lack of accountability of the Pennsylvania tothe shareholders and the fact that the new shares also were distrib-uted to friends and preferential customers of Kuhn Loeb It waspointed out that Kuhn Loeb designed the company and was largelyresponsible for the financing scheme The firm’s profits for theundertaking were more than $1 million, and by selling stock options itmade almost $3 million more, which it retained for itself All of thiscame at a time when the country was mired in depression; investmentbanking profits looked especially obscene in the wake of widespreadunemployment and economic ruin

Pennsylva-Otto Kahn testified that in the four years that had passed since thePennroad Corporation was formed he had had a change of heartabout its organization Realizing that the shareholders were placed at

a disadvantage, he stated that many of details of the organization were

“inventions of the devil.” Perhaps he had a double-entendre in mind,although Jay Gould, the master of railroad financing, had been deadfor forty years And Kahn had other problems with Pecora The inter-rogator pointed out that Kahn had paid no income taxes between

1930 and 1932 and had been involved in what he thought were handed stock dealings with his daughter so that he could claim losses.Kahn pointed out in his clipped British accent that he had no knowl-edge of such things, that they were always left to his accountant Hedid try to square things with the committee by denouncing short sell-ing, singled out by Herbert Hoover and Pecora as one of the market’smost self-destructive devices “The raiding of the stock market, theviolent marking up and down of other people’s possessions, is in myopinion a social evil,” he declared to Pecora when the committee’sattention had turned toward market practices.21While politically cor-rect at the time, the comment showed the distance that the privatebankers tried to maintain between themselves and the rough andtumble of the market

under-Ultimately, both Kahn and Kuhn Loeb escaped the full wrath ofPecora, although it was becoming painfully obvious to the old guard

of investment bankers that their practices were no longer sacrosanctand that they were now coming under the public eye in ways notimagined twenty years before

The Pecora hearings also enabled Kahn to describe Kuhn Loeb’sapproach to banking By the late 1920s, it was clear that the old-lineinvestment banks were on different tracks The Seligmans had gonethe way of investment trusts, Lehman was underwriting small andmedium-size companies, and Kuhn Loeb maintained its traditionalbusiness of advising larger corporations in what would become known

as relationship banking Kahn described the approach when askedhow his firm conducted its business He responded, “It has long beenour policy and our effort to get clients, not by chasing after them, not

by praising our own wares, but by an attempt to establish a reputationwhich would make our clients feel that if they have a problem of afinancial nature, Dr Kuhn Loeb & Co is a pretty good doctor to go to.”22

This was essentially the same concept propounded by J P Morgan atthe committee hearings, and it was similar to the testimony given byPierpont Morgan at the Pujo Committee hearings twenty years before.White-glove investment banking meant that the firm’s reputationwould enable it to remain above the common fray of having to hustlefor business Morgan and Kuhn Loeb were the best practitioners ofthe method, although Kidder Peabody and Dillon Read also liked tothink that business came to them because of their reputation Rela-tionship banking would survive for another forty years before suc-cumbing to competitive pressures In the 1930s it was an indirectadmission that a money trust still existed that valued relationshipsabove competitive pricing for securities issues But as described byKahn, it seemed an enviable position to be in at the time

But it was not the Pecora hearings that proved most drastic to theold-line partnerships Congress passed the Securities Act of 1933 and then, a month later, the Glass-Steagall Act The Securities Actwas particularly vexatious to investment bankers, because it requiredcompanies that wanted to sell securities to register them with a gov-ernment agency (a year later, the authority was transferred to thenewly created Securities and Exchange Commission) and provide fullfinancial disclosure No investment banker was in favor of the law,and many started to organize against it But when Glass-Steagall

was passed, their anger turned to rage because of its major provision.Within twelve months, banks had to decide which part of the bankingbusiness they wanted to remain in They could be either investmentbanks or commercial banks, but not both A provision in the law lim-ited the amount of revenue that a commercial bank could earn fromsecurities dealings to 10 percent or less Congress had effectively cre-ated a divorce between the two sides of banking The only remainingquestion was which direction the banks would choose

The question was relatively simple to answer for Lehman and KuhnLoeb Both were essentially investment banks that also accepteddeposits, so when the time came for a decision, deposit taking wasshed in favor of the securities business The firms quickly recognizedthat they could survive without taking deposits The idea was to sepa-rate deposits from the risks of the markets, but the theory and theactual results were quite different Most of the banks that underwrotesecurities in a meaningful way survived the Crash of 1929 and theirdepositors did not suffer any significant losses But this legislation was a convenient way of getting the investment bankers out of thebusiness of controlling credit The law was actually a radical departurefrom the past After 1934, the notion of a private banker becamealmost defunct Banks now took deposits and made loans, and securi-ties firms underwrote and distributed securities The twain would notmeet again until the last year of the century But it was the beginning

of a significant change for the fortunes of the partnerships, which nowfound themselves regulated for the first time

The Seligmans also changed, but in a different manner The change

to investment management through Tri-Continental convinced thepartners that fund management was their future, not investment bank-ing They spun off the securities business to the newly formed UnionSecurities Corp., and the House of Seligman became fund managersexclusively Francis Randolph, the president of Tri-Continental, put itsuccinctly when he said that “suddenly the federal government hadthrown a great big rock into the channel, diverting it radically At first,the tendency was to curse the rock, but before long we realized that asinvestment men our job was not to belabor the diversion but to figureout where the stream was going.”23From that moment, the House ofSeligman was no longer a factor on the “sell side” of Wall Street They

were now to become major players on the “buy side.” Union Securitiescontinued in the investment banking business until 1956, when it wasmerged with Eastman Dillon & Co to form Eastman Dillon, UnionSecurities & Co

The only traditional private bankers to opt for commercial bankingwere J P Morgan and Brown Brothers Harriman Morgan spun offMorgan Stanley & Co., a new investment bank, headed by his son and former employees of the bank Drexel & Co., a longtime Morganaffiliate, was also spun off as a separate investment bank Morganapparently believed that the Glass-Steagall Act and the Rooseveltadministration would be short-lived and that the two sides of bankingwould be reunited when the country came to its senses Unfortunatelyfor the Morgan partnership, both assumptions proved incorrect It wasthe most serious miscalculation Morgan had made since his father andformer partners had refused to take the automobile industry seriously.The Roosevelt revolution on Wall Street proved to be the most influ-ential factor affecting the organization of the securities firms since thePanic of 1837 Within a few years, it became painfully obvious to WallStreet that it was the most influential of the century

Changing Tides

The 1930s and 1940s were quiet decades for Wall Street in general.The Depression did not bring much opportunity for fat profits, andthe war years that followed were similarly quiet During the war, mostfinancing occurred for the U.S Treasury, which needed to raise enor-mous amounts to finance the war effort on both fronts Wall Streetfirms certainly helped in the effort, but the margins of profit on com-missions were negligible and most firms that helped the Treasury did

so purely out of patriotism Politicians in Washington rememberedwell the stories about Jay Cooke and the financing of the Civil War,and many had personally experienced the financing arranged by theinvestment bankers that brought so much criticism during the FirstWorld War The war against Germany and Japan would be devoid ofcriticism when compared to those previous conflicts

Once the war was over, prosperity returned—and with it the fortunes of the Wall Street partnerships But a new phenomenon

appeared that actually bore the seeds of the partnerships’ destruction,although it would take another generation to run its course The smallinvestor appeared on the scene in the 1950s in numbers that madethe 1920s look serene by comparison Rising wages and pent-updemand for all sorts of consumer goods—and securities—brought theretailers into the spotlight Sears Roebuck, Marshall Field, and Para-mount Pictures all proved enormously popular, as did the products ofGeneral Motors, General Electric, and RCA But the banks that hadbrought many of the retailers to market years earlier were not solucky, because the concept of retailing was not well developed onWall Street And the firms that did specialize in selling stocks to thepublic were still frowned upon by the old-line investment bankers.Wall Street was going to have to learn to play catch-up with Americansociety as a whole

Some of the smaller Our Crowd firms that entered the investmentbanking fray late were more attuned to the change than were the old-line firms Loeb, Rhoades & Co was founded in 1931 at a time whenprospects for Wall Street were not particularly healthy Carl Loeb,who had retired as president of the American Metal Company,founded the company His son, John, who married a daughter ofArthur Lehman, ran the new firm, which absorbed an older firm,Rhoades & Co., shortly after its own founding and developed into amedium-size firm that had a large retail operation Throughout itsshort history, John Loeb, who ruled the partnership in a manner akin

to that of Jacob Schiff or J P Morgan, dominated Loeb Rhoades Hispaternal attitude and generosity for favorite causes were legendary,but he clearly belonged to the previous generation He opposed sev-eral reforms that were beginning to take shape on Wall Street, notably

a move toward negotiated commissions by NYSE member firms Healso opposed investment banks selling stock in themselves and goingpublic, something that Donaldson, Lufkin & Jenrette and MerrillLynch accomplished much later, in the early 1970s His firm wasclearly doing business more characteristic of a 1920s firm than one ofthe late 1960s and early 1970s But the investment banking and bro-kerage business was good for Loeb, who proudly displayed a portrait

of himself painted by Salvador Dali in his Westchester home.24

Although the firm was an underwriter for many companies,

broker-age was an important part of its revenues, a fact based on the simpleprinciple that selling what one underwrote was an important part ofthe service provided to corporate clients

If the firm had survived as an independent, its stature undoubtedlywould have been greater It could easily have been compared to the Seligman firm or Kuhn Loeb, since its clientele, both retail andinstitutional, was from the wealthy ranks Under Loeb’s guidance, itachieved a remarkable degree of success until its fortunes turneddown in the early 1970s Loeb himself was named an “honorary

WASP” by Time magazine, a title that would have made the

Selig-mans of previous generations envious But the firm’s undoing also was attributable to the bull market of the 1960s and all of theinvestors it attracted In the late 1960s, the sheer volume of ordersexperienced by many of the brokerage firms led to a serious break-down in backroom activities, the place where customer orders wereprocessed The problem became so bad that the stock exchanges and member firms proclaimed a holiday during the workweek toattempt a cleanup It was not entirely successful Many firms actuallysuccumbed to the pressures of lost or unrecorded customer ordersand finally were forced to close their doors or seek merger part-ners with healthier firms Loeb, Rhoades was hit with the same problem because its management did not pay attention to such mundane matters, and it lost money As a result, in 1977 it sought

a merger with another medium-size member firm, Hornblower,Weeks, Noyes & Trask After the merger, the situation worsenedwhen it was discovered that Hornblower’s back room was in evenworse condition

The situation lasted until 1979, when the firm was bought byShearson Hayden Stone and became Shearson Loeb Rhoades Thedeal was executed by Sanford Weill, who years before had begun hiscareer as a runner at Bear, Stearns after graduating from Cornell.Like many Wall Streeters, he had a difficult time finding his first jobbefore landing one that enabled him to learn the ways of the Street.The merger was a major coup for Shearson but something of a set-back for Loeb, Rhoades, which had always considered itself theembodiment of the traditional, somewhat supercilious investment

banking tradition begun in the previous century It was an example ofwhat would become a long line of mergers that would leave few tra-ditional firms still perched at the top of the Wall Street tree

The great irony for many prestigious firms was that although theirprowess in the market was never doubted, their capital was limited.Some of the activities they engaged in, like advising on mergers andacquisitions, required market savvy and strong corporate relation-ships, but little actual capital had to be deployed Kuhn Loeb andLehman were very adept at advising on mergers; it was a naturalextension of their vast contacts in the corporate world at a time whenAmerican industry was consolidating at a record pace But in areaswhere capital was required, such as underwriting and trading, part-nerships were proving to be a liability The firms had to have enoughcapital on their books to satisfy their bankers and commit to deals thatwere becoming larger and larger all the time New stock and bonddeals were setting records every year for amounts raised in the 1960sand 1970s As revenues increased, so did the urge to cash in on thegood fortune Traditionally, partnerships had allowed the individualpartners to cash out when they retired or occasionally to tap the part-nership pool for money Lehman put a stop to the practice after thewar and required partners to leave their money with the firm untilretirement, and then take it only on a periodic basis Clearly, the part-nership format was rapidly becoming obsolete in a world where dealswere becoming bigger all the time Permanent capital was needed

In the postwar years, Kuhn Loeb began to experience the winds ofchange more quickly than did some of the larger names Still one ofWall Street’s most prestigious firms, its focus was somewhat narrowwhen compared to that of its larger brethren The firm never soldsecurities directly to the public, preferring to distribute its underwrit-ings to selling agents instead—those houses on Wall Street that couldnot or did not underwrite new securities The top brackets for mostcorporate underwriting deals were still clubbish, with Morgan Stan-ley, Kuhn Loeb, Lehman Brothers, and Kidder Peabody among thefirms that used others as selling group members to distribute securi-ties As in the days of Jay Cooke, fees for this group were smaller thanthose for the underwriters, although it was recognized that crumbs

from the table were better than no crumbs at all But a revolution stirring at the middle of the Wall Street pecking order was beginning

to work its way slowly to the top Investment banks with extensivesales forces were commanding more and more respect and werebeing invited into deals because of their ability to sell to the public.Those firms that could not make that claim found themselves increas-ingly isolated in a changing world and soon needed to seek mergerpartners

Finally, in 1977, the inevitable occurred when Kuhn Loeb lost itsindependence and merged with Lehman Brothers The firm was run-ning very low on capital and was in danger of having to scale back itsoperations in order to survive Pete Peterson, the president ofLehman, masterminded the deal Shearson under Sanford Weill alsohad been in hot pursuit of Kuhn Loeb after it absorbed Loeb,Rhoades, but the Kuhn Loeb partners felt more comfortable beingabsorbed by another Our Crowd firm than by the brasher Weill andhis Shearson firm, which was more of a retail house than Lehman.But Weill was not yet out of the picture: Lehman itself was the nexttarget on his acquisitions list

Lehman Brothers was ruled for more than forty years by Robert

“Bobbie” Lehman The son of Philip Lehman, Bobbie was ble for the shape of Lehman Brothers in the twentieth century Hedirected the company to form the Lehman Corp in 1928, just beforethe Crash Like the Seligmans, the Lehmans directed their fundmanagement business to the newly formed company The LehmanCorp., although separate from Lehman Brothers itself, relied on itsparent company for its actual fund management Under Bobbie,Lehman Brothers was run like a fiefdom The partners all had indi-vidual specialties and often would go in their own separate directions.The only unifying element in the firm was the desire for profit.Administratively, Bobbie ran the firm and doled out the annualbonuses One partner remarked that Bobbie ran things much like aMafia don and that his specialty was keeping people at each other’sthroats Being an old-line Our Crowd firm, Lehman was able to getaway with that management philosophy until the years followingWorld War II But beginning in the 1960s, loose management and a