All the Presidents' Bankers (42 page)

A seasoned lawyer and negotiator who knew more about banking than Congress, public-private citizen McCloy won the argument, as he usually did. Though the assistant attorney general and five other Justice Department officials lobbied for the more restrictive legislation, the Clayton Act was never amended.
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The Justice Department remained impotent, legally and operationally, against banking power.

McCloy was irrevocably altering international and national banking. He had fashioned the World Bank into a mechanism whose financial cues came from the banking community’s decisions, and now he had set the stage for mega-mergers that would consolidate power under the largest banks. It was not the first time he won a major battle against antitrust rules (he had already done that on behalf of John D. Rockefeller’s Standard Oil Trust). But as a result of his more recent efforts, big banks engaged in a litany of mergers. Thanks to his quiet intervention, their financial power and influence scaled heights not seen since the 1920s.

When McCloy presented his case, the top 100 banks held 46.6 percent of the nation’s deposits. Banks now rushed to engineer more powerful mergers. Neither legislators nor the Fed did anything about this. (By 2012 just the nation’s new “Big Six” banks would control 40 percent of deposits, rendering them “too big to fail.”)

McCloy’s timing was perfect. In the early 1950s, all the major New York banks, Chase included, sought fresh sources of lendable funds to service their corporate customers’ credit needs and expand internationally. Retail-focused banks like the Bank of Manhattan, which tended to service individual customers, were growing their deposit bases, while giant wholesale banks like Chase, Guaranty Trust, and to a lesser extent National City Bank, which focused more on corporate and government clients, were losing their deposits to other forms of financial firms and funds. Acquisitions were needed to grow, compete, and survive. Without deposits, speculative global lending would be severely restricted.

The thirst for wholesale commercial banks to acquire branches and commandeer their deposits was intense. Aldrich, who had been ahead of the curve, had already tried to merge the Bank of Manhattan and Chase in 1951, but the deal had fizzled because of a personality clash with the Bank of Manhattan’s chairman, J. Stewart Baker.
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Additionally, the Bank of Manhattan’s 1799 charter required unanimous consent of its shareholders in order to be taken over, and they weren’t budging.

McCloy was determined to complete what Aldrich had begun: to close Chase’s acquisition of the Bank of Manhattan, which would be one of the biggest mergers in American banking. To get around the charter issues he simply structured the deal so that the Bank of Manhattan appeared to be taking over Chase, not the other way around.

Thus, in 1955, the Chase Manhattan Bank was born. The marriage opened the floodgates for a slew of similar mergers, all predicated on the same “Jonah eats the whale” technicality. Ordinary Americans didn’t raise their eyebrows at any of this; at the time, much of the US population was enthusiastically investing in the stock market and oblivious to the old money-trust concerns that followed the Panic of 1907 or the role that the big banks had played in precipitating the Crash of 1929. On November 21, 1955,
Time
magazine ran a cover story titled “Wall Street: Every Man a Capitalist,” about New York Stock Exchange president George Keith Funston. A professional marketer, Funston vowed, “I’ll try to be a salesman of shares in America.” And he was. During his reign, the number of American shareowners more than tripled, rising from 6.5 to 21.5 million.
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The Dow tripled in value over the decade.

The markets had gathered steam after the Korean War, but the Cold War kept them going. Defense companies, flush with government contracts, represented 10 percent of GNP from 1954 to 1959. The Interstate Highway Act of 1956 would unleash a construction boom spurring cars, suburban homes, motels, fast food chains like McDonald’s, and amusement parks like Disneyland.

All sorts of new mutual funds catering to small and midlevel investors sprouted, as did corporate pension and retirement funds. Huge open-plan trading floors were erected around Wall Street. People carted out the money they’d “stuffed under their mattresses” during the Great Depression and started buying stuff like crazy—on credit.

As a result, private debt nearly tripled during the 1950s, growing from $100 billion to $260 billion. The more accounts a big bank held, the more chances to spin deposits into debt for its customers. McCloy was not the only banker who saw that wave coming. They all did. He was just the man who battled Congress for the privilege.

The Bank Holding Company Act of 1956

Despite McCloy’s 1955 victory over antitrust laws, Congress made other attempts to ensure that banks didn’t expand too dangerously, especially across state lines. The lessons of the Great Depression weren’t
that
far behind. Since the Banking Acts of 1933 and 1935 were passed, there had been considerable back and forth between the House and Senate over various versions of the Bank Holding Company Act. By early 1956, though, it appeared that a compromise bill would be approved.

On April 30, a worried McCloy telegrammed Eisenhower’s chief of staff, Sherman Adams, urging him to tell Eisenhower to “make a careful examination of the Bank Holding Company Bill, before signing.”
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It wasn’t the act he minded as much as the possibility that it might wrestle regulatory authority away from the banks’ major regulatory friend, the Fed. As it turned out, the act would ultimately give the Fed even more authority. Eisenhower signed it into law on May 9.

The act did three things. First, it required bank holding companies to secure Fed approval before acquiring additional banks. Second, bank holding companies had to divest themselves of nonbanking investments and were prohibited from making them in the future. Third, it prohibited bank holding companies from acquiring banks across state lines, a concession to North Dakota Republican senator Milton Young, one of the longest-serving senators in US history.
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In practice, the act solidified the Fed’s power within the banking industry. The requirement to divest nonbank holdings mostly hurt Bank of America, whose constellation included nonbank companies like fisheries. But the New York banks were dealing mostly in financial ventures anyway, so it didn’t bother them—as long as the Fed could continue to approve their mergers.

Nonetheless, the definition of “nonbank” investments would be disputed by the banking sector for decades. Ike hadn’t really restricted the big banks at all; he’d merely signed regulation that the elite New York banks had no reason to object to at the time. By the time the act was passed, most major mergers had already taken place.

The Chase Manhattan merger was the largest and served as the catalyst for the others that followed. All four of JPMorgan Chase’s major ancestral firms grew significantly through 1950s mergers: J. P. Morgan & Company, the Chase Manhattan Bank, Manufacturers Hanover Trust Company, and Chemical Bank. Chase even came close to merging with J. P. Morgan when McCloy persuaded Morgan head George Whitney to strongly consider it. But other Morgan partners prevented it; that merger would wait until the year 2000.

Instead, J. P. Morgan merged with Guaranty Trust. Chemical Bank acquired Corn Exchange Bank in 1954 and took over New York Trust in 1959, becoming Chemical Bank New York Trust.
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Not to be outdone, Chase’s main rival merged when National City Bank of New York bought First National Bank of New York in 1955.
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The Justice Department occasionally paid lip service to possible antitrust violations in banking, but it did nothing to prevent them. Nearly every bank leader had an official or unofficial advisory role in the Eisenhower administration at the time, which didn’t hurt.

A small group of powerful banks came to dominate Wall Street more substantively, cornering a larger share of the population’s funds than they had in the earlier part of the century. Commercial banks utilized advances in technology to automate banking processes; ATMs were introduced in the late 1950s to expand customer service and attract deposits for more ambitious activities. Meanwhile, investment banks, which had been sidelined during World War II, reemerged. But it was still the international frontier that held the most promise for real power expansion.

The Aswan Dam and McCloy in the Middle East

In December 1955, after a series of private consultations, McCloy and World Bank president Eugene Black concluded it made sense to join the American
and British governments in financing the Aswan Dam in Egypt. The idea was to keep Egypt from embracing Communism by providing it with development capital. Black pledged that the World Bank would lend $200 million at 5 percent interest to support the project.

In February 1956, McCloy embarked on the first of many trips to the Middle East, under the auspices of expanding Chase. As his biographer Kai Bird wrote, his “high-level conversations with foreign leaders constituted a special form of private diplomacy. . . . This was a man who on the basis of his own authority and contacts could provide material aid to a country desperate for Western investments.”
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McCloy was seeking relationships that would expand upon Chase’s business of financing oil companies to help develop new oil fields and technologies in the Middle East.

His predecessor, Aldrich, had initiated cordial relations with Egypt six years earlier, and the firm had already established branches in the region. But McCloy cultivated his own relationship with Egyptian president Gamal Abdel Nasser.
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He also spent three days in Beirut, accompanied by two of Chase’s petroleum consultants and the chairman of Empire Trust.
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His first visit to Beirut was hailed by the local press as validation of Lebanon’s liberal financial policies, which had opened the country to foreign capital.

But when the British and Americans withdrew from the Aswan Dam deal after Egypt appeared to be embracing the Soviets, Black withdrew the World Bank’s lending support—and revealed its true colors. As British author Anthony Sampson wrote of the incident, “For the first time the West had used aid openly as a policy weapon in the developing world. And the withdrawal soon precipitated Egypt’s nationalization of the Suez Canal and the subsequent Suez War.”
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But there was more to it than that. McCloy believed, as did Aldrich, that the event resulted from the diplomatic ineptitude of Secretary of State Dulles. The Egyptians were very anxious to get the British troops out of their country. But as Aldrich recounted, “up to the time when Dulles, without warning to anyone, suddenly canceled the agreement that had been negotiated between the British, the United States and the World Bank to build the high dam in Aswan . . . Nasser had had no excuse to act.”
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A crisis brewed after Nasser responded by nationalizing the Suez Canal. Britain and France informed Washington they stood ready for battle. The US Treasury froze the assets of Egypt and the Suez Canal Company—which had sizable deposits with Chase in New York and London. By October 1956, tensions were rising. Rather than ask Aldrich about Britain’s thoughts on the developments, Dulles asked McCloy if he’d seen a large extraction of British sterling by British clients that might indicate hostile positioning. But McCloy
hadn’t. Shortly thereafter, Israel launched a ground attack, and the British and French waged a bombing campaign. Later, Eisenhower obtained a cease-fire. UN Secretary-General Dag Hammarskjold and McCloy collaborated to calm the situation.

McCloy flew out to talk with Nasser, who insisted that he was not under undue Communist influence. Back in the United States, McCloy briefed two hundred Council on Foreign Relations members, assuring them that Nasser was following a policy of independence. Still, McCloy believed that “Nasser and other nonaligned leaders like him were the kind of men whom Washington had to work with if the United States was to conduct a sound foreign policy, grounded in the political realities of postcolonial nationals.”
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Though Dulles didn’t exactly agree, McCloy’s foreign policy views, which fit nicely with US bankers’ international objectives, remained prevalent.

The incident further strained not just Aldrich and Eisenhower’s relationship but also that of America and Britain. Aldrich blamed it on Dulles and, by extension, Eisenhower. As he commented later, “I say in one of these papers that I was very disappointed in him. . . . He just turned foreign affairs over to Dulles and he simply coasted along.”
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In the fall of 1956, just after the Israelis launched their ground assault on the Sinai Peninsula and British and French forces began bombing Egyptian airfields, Dulles phoned McCloy, pulling him out of a Ford Foundation meeting to discuss whether Israel should be “restrained.”
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McCloy felt that the United States should take a harder stance with Israel. Given his private ties and professional ambitions, he was more interested in maintaining a strong relationship with the oil-rich nations, a stance that would become eminently clear during the Iran hostage situation in 1979.

Arguably Eisenhower’s major foreign policy crisis, the Suez crisis pitted the United States against its traditional allies, Britain and France. Eisenhower’s public condemnation of the invasion further drove a wedge between the new and the old superpowers.

After the crisis subsided, Aldrich was “completely fed up at Dulles.”
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He wanted to return home, but Eisenhower demanded he remain in Britain until the crisis blew over. Afterward Aldrich expressed “a very unfavorable opinion of Eisenhower—publicly.”
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He was disappointed in the president for turning over his foreign affairs to Dulles.