Interim Archives
JPMorgan ’ s Transformation Past , Present and Future
By Nicholas P . Sargen
Over the past four decades , the US banking system has undergone a radical change from being highly regulated and decentralized to becoming heavily concentrated with six institutions today accounting for 60 % of all assets . This transformation stemmed from efforts to liberalize the financial system by removing barriers on interstate banking and Glass-Steagall legislation that separated commercial and investment banks . It occurred amid a wave
Exterior view of the offices of JP Morgan and Company , located on the southeast corner of Wall and Broad Streets , circa 1900 . of consolidation that shrunk the number of US banks from 14,500 in 1980 to less than 5,000 today , with JPMorgan Chase emerging as the largest US institution .
What happened to the House of Morgan is truly unique in the annals of financial history . Morgan went from being a premier wholesale bank to being acquired in the fall of 2000 by Chase , a retail-oriented bank which itself had been acquired by Chemical Bank in 1996 . JPMorgan Chase has since evolved under Jamie Dimon into a financial powerhouse that combines wholesale and retail banking along with investment banking .
Morgan ’ s story is important because of its rich history and its mystique as the pillar of the US financial system before the Federal Reserve was created . What makes Morgan different is that it is the only money center bank that tried to build investment banking and securities capabilities entirely on its own .
The origins of Morgan ’ s transformation date back to Lew Preston ’ s tenure as chairman and CEO in the 1980s . He inherited an institution that was respected by competitors and regulators for its sound management , gilt-edged client base and culture of “ doing business in a first-class way .” Many observers at the time believed Morgan was a well-oiled machine that virtually ran itself . In addition to overseeing the firm , the informal responsibilities of Morgan ’ s leaders included assisting the Federal Reserve and US government in stabilizing the financial system and coming to the rescue of firms and sovereign entities that became troubled .
Then , in the early 1980s , the unexpected happened when the Less Developed Country ( LDC ) Debt Crisis hit . Preston and his trusted confidant Dennis Weatherstone , who would succeed him in 1990 , were caught completely off guard , as they realized Morgan ’ s loans to troubled borrowers such as Mexico , Brazil and Argentina matched the bank ’ s capital . For the first time in its history , the Morgan franchise was in jeopardy .
True to Morgan ’ s legacy , Preston and Weatherstone swung into action , bolstering the bank ’ s balance sheet while backstopping the financial system . Along with Alfred Herrhausen , chairman of Deutsche Bank , they formulated a strategy of “ managed lending ” to keep the multinational banks and their borrowers afloat . The essence of the strategy was that participating banks , large and small , would lend the interest that the debtor countries owed them so the loans would be considered current by regulatory bodies . The motto was “ a rolling loan gathers no loss .”
Morgan emerged from the crisis in better shape than rival banks . However , Preston realized that its business model of lending to sovereign borrowers and multinational corporations would have to change for it to stay competitive . While some members of the “ old guard ” resisted , Preston concluded that Morgan could no longer rely on lending as its principal revenue source when Continental Illinois had to be rescued in 1984 for making a series of bad loans to energy producers . It had become the largest US lender and earned the moniker “ The Morgan of the Midwest .”
28 FINANCIAL HISTORY | Fall 2020 | www . MoAF . org