Leadership

J.P. Morgan Returns to Its Rescue Roots

A storied bank was in the bailout business long before Bear Stearns.
Alan RappeportMarch 18, 2008

When J.P. Morgan Chase & Co. swooped in to save Bear Stearns from collapse on Sunday, it was not the first time the big bank had embarked on such a rescue mission. Taking on a balance sheet laden with toxic mortgage securities for $2 a share was bold but in keeping with the tradition of the firm founded in 1861 by John Pierpont Morgan. After all, the bank has made a habit of bringing a dose of calm during a financial panic, while often managing to make money out of dire predicaments.

“The early House of Morgan was something between a central bank and a private bank,” writes Ron Chernow in The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. “It stopped panics, saved the gold standard, rescued New York City three times, and arbitrated financial disputes.”

In 1895, a mercantile and credit crisis left the federal government close to default. As the gold standard was beginning to tarnish, J.P. Morgan stepped in and offered to buy $62 million of government bonds in exchange for European gold. Despite disapproval from those hoping to move to a “multi-metallic” platform, the move President Grover Cleveland allowed gave the dollar some room to recover. Meanwhile, “Morgan Bonds” were born.

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The lore does not end there. In A Financial History of the United States, Jerry Markham calls Morgan a “one man Federal Reserve Bank” for his heroics during the panic of 1907. At that time, the failure of the Knickerbocker Trust Company started a run, leading to the closure of 2,000 firms, 100 state banks, and 30 national banks.

Customers hoarded cash and banks started printing scrip. With the New York Stock Exchange in shambles, Morgan gathered 50 bankers and trust company presidents and locked them in the library of his Fifth Avenue home, Markham writes. Making a final stand, they agreed to raise $25 million (about $570 million in 2007 dollars) to supply call money to the floor of the New York Stock Exchange and bail out the failing Lincoln Trust.

By 1917 Europe was at war and Britain was off the gold standard. But the British and French were desperate for ammunition and shipped loads of gold to the United States in exchange for weapons and ammo. To cover the costs, J.P. Morgan (the firm) acted as a purchasing agent for U.S. allies, orchestrating the $500 million Anglo-French loan, then the biggest in Wall Street history.

Despite some reluctance, the loan marked the rise of America as “the world’s chief creditor nation,” according to Chernow.

J.P. Morgan drew cheers again on Black Friday in 1929. The market lost $10 billion in the first two hours of trading that day, as hand-holding men jumped off buildings in despair. Chernow explains that this time it was Tom Lamont, a top partner at the bank who tried to stanch the bleeding. He gathered top bankers and wealthy investors, such as the Guggenheims, and pledged $240 million for steel stocks, hoping to bring some order to the chaos.

While the purchase did ease conditions for a time, it was seen as largely symbolic. “It was just a finger in the dike, but it was the best they could manage,” writes Chernow.

Banks, of course, have plenty to gain from putting financial panic to rest. Decades after Black Friday, J.P. Morgan, along with a consortium of banks joined together in 1998 to bail out Long Term Capital Management, a hedge fund that lost $4 billion after a debt default spooked the market for mortgage-backed bonds.

That rescue was organized by the Federal Reserve, fearing greater risks to the world’s financial system after the hedge fund made misplaced bets on interest-rate swings. Although some criticized the Fed as an enabler of moral hazard, then Federal Reserve Board chairman Alan Greenspan warned that the market failure could have spread and “impaired the economies of many nations, including our own.”

One of J.P. Morgan’s last major banking mergers came in 2000–when Chase Manhattan Bank acquired it. That was followed by JP Morgan Chase’s 2004 acquisition of Bank One. But its latest bailout of Bear Stearns for $240 million, amid the credit crisis, marks a return to its roots. Whether the bargain-rate $2 per share it will pay for Bear Stearns will be a wise investment has yet to be seen. But J.P. Morgan has had success in the past at doing well and doing good at the same time. As Chernow writes, “If its concerns transcended an exclusive desire for profit, it also had a peculiar knack for making good works pay.”