Morgan Stanley Group Inc.

1251 Avenue of the Americas
New York, New York 10020
U.S.A.
(212) 703–4000

Public Company
Incorporated: 1935 as Morgan Stanley & Company, Incorporated
Employees: 6,414
Assets: $40.05 billion
Stock Index: New York Boston Pacific Midwest

Morgan Stanley is one of the world’s top investment banking firms. It has been underwriting, managing, and distributing corporate and governmental securities issues since 1935. In step with the deregulation of the financial markets during the 1980s, Morgan Stanley diversified its range of financial services. Today, in addition to traditional investment banking services, the company operates an active mergers and acquisition department, provides consulting services, and is active in real estate, futures trading, asset management, commercial paper, municipal finance, and leveraged buyouts. The investment banking field is considerably more complex today than it was in 1935, but Morgan Stanley has kept pace with the changes and remains a leader in the field.

The story of Morgan Stanley begins long before it was incorporated in 1935. The company traces its roots to 1860, when J.P. Morgan founded the world’s first international banking concern, Drexel, Morgan & Company. Morgan’s financial empire became legendary, as large industrialists turned to Morgan and his colleagues when they wanted to raise capital. By 1895, the firm had become J.P. Morgan and Company, and by the turn of the century Morgan was a premier agent for large quantities of securities, selling them both at home and abroad.

At this time, investment houses began to join together in syndicates to share the responsibilities and risks of financing to better serve the mushrooming capital requirements of American industry. They also affiliated themselves with large, prestigious banking syndicates to provide credibility and value to the issue of borrowers’ securities. Syndicates could often broaden the geographic scope of a company’s investors—the reason Boston-based American Telephone and Telegraph granted leadership to Morgan’s New York firm in 1906 to underwrite $100 million of a $150 million bond issue, although it retained Kidder, Peabody as its principal banker.

As industry depended on the banks for capital, and banks depended on the revenue created by generating that capital, it became very common for bankers and businessmen to serve on each others’ boards. These interlocking directorships became a primary concern of the United States House of Representatives Banking and Currency Committee, which decided to investigate. Its findings led to the Federal Reserve Act of 1913 and the Clayton Antitrust Act of 1914, which ended reciprocal directorships.

Regulation of investment banking remained an area of public concern throughout the first few decades of the century. Kansas was the first state to regulate all securities offered for sale to its citizens, a trend which spread across the nation. By 1933 every state but Nevada had enacted legislation to protect investors from fraud.

During World War I, investment bankers coordinated the sale of more than $2.2 billion in French and British bonds and the resale of more than $3 billion in American securities held in Europe. The house of Morgan accounted for more than $2 billion of that total. By serving in this capacity, investment bankers played a vital role in transforming the United States from a debtor to a creditor nation and in making New York the financial capital of the world.

The disastrous business practices of banks during the decade before the stock market crash on October 29, 1929 provided the real impetus for the birth of Morgan Stanley. During these years, commercial banks speculated with their depositors money—borrowed money—and played the market on margin. The frenzy escalated as hundreds of issues, many of them worthless, flooded the market and fueled the speculation. The market’s plummet devastated margin players on all levels. Upon taking office, President Franklin D. Roosevelt initiated a number of investigations and Congress enacted legislation to prevent a recurrence of the events that caused the crash.

The Banking Act of 1933, better known as the Glass-Steagall Act, affected the investment banking industry more significantly than any other piece of legislation by requiring the separation of commercial and investment banks. Deposit business went to commercial banks, and underwriting and syndication went to investment banks, thus making the average depositor’s money unavailable for speculation. The act became law June 16, 1933, and banks were given 12 months to comply.

J.P. Morgan and Company chose to pursue deposit banking. Within a year and a half of this decision, three of its partners organized Morgan Stanley & Company to enter the investment banking business. The new company was incorporated on September 16, 1935, and claimed some of the most experienced men in investment banking as assets. Harold Stanley, at age 42 one of the youngest J.P. Morgan and Company partners, was president. Henry Morgan, grandson of J.P., was secretary-treasurer. Morgan would play an integral role in the firm for more than 40 years.

The extensive experience of Morgan Stanley’s leadership was one key to the company’s immediate success. Another was the firm’s ties to J.P. Morgan and Company and the corporate connections that came with them. Personal endorsements carried a great deal of influence during this period. Morgan Stanley chose syndicate partners based on “historical affiliations,” meaning those that had been in place before Glass-Steagall.

During its first month alone, the new investment bank handled three major underwritings, including $43 million for AT&T—Morgan Stanley was blue chip from the start. It was also one of a select group that managed underwriting syndicates and handled wholesaling. It rarely participated in originations directed by another firm. Morgan Stanley’s clients included nearly half of the largest 50 companies in the nation, among them Exxon, General Motors, and General Electric. By the end of its first full year of operations, Morgan Stanley had acquired a 24% market share of negotiated corporate and foreign issues, and by 1938, Morgan Stanley led all New York investment firms in original bond issues.

Throughout the 1930s, investment banking was dominated by a relatively small number of firms, and by the end of the decade, the government had again taken an interest in the affairs of investment houses. Morgan Stanley’s quick success made it a particularly visible target. The Temporary National Economic Committee was formed to investigate monopolies in big business. In 1939, the committee called a number of investment bankers to testify in order to determine how much power investment banks held over industry through their control of the access to long-term capital markets. A key issue during the hearings was whether the negotiation of prices between corporations and securities underwriters infringed upon free trade. Many investment bankers, most notably Harold Stuart of the Chicago investment bank Halsey, Stuart & Company, were in favor of the competitive bidding system. Under this system, securities were auctioned off to the the highest bidder. Morgan Stanley, which benefitted immensely from its strong personal connections throughout the business community, was fiercely opposed to mandatory competitive bidding. The government, however, leaned in favor of the sealed bid system.

In 1941, the SEC required all public utilities companies to issue securities by public sealed bidding. Public utilities made up a substantial portion of the domestic market—between 1935 and 1939, they accounted for 13% of all U.S. common stock offerings. In addition, the Federal Communications Commission urged AT&T to use the competitive bidding system for its issues. Many investment banks feared the nature of their business would be drastically changed. In anticipation of the changes, Morgan Stanley decided to branch into the brokerage business. On November 28, 1941, in order to meet the criteria for membership on the New York Stock Exchange, Morgan Stanley & Company liquidated its stock and reorganized as a partnership.

World War II brought the securities business to a virtual halt. Morgan Stanley survived on brokerage commissions, consulting fees, and a small number of private placements. Founding partner Henry Morgan joined the navy, where he served on the Joint Army and Navy Munitions Board and as a Commander attached to the Naval Command Office of Strategic Services. Other high-ranking Morgan Stanley officers also entered the service in various capacities, including partner Perry Hall, who served as Executive Manager of the War Loan Committee of the Second Federal Reserve District. After the war, the company quickly reestablished its business relationships.

Government allegations of monopoly continued to plague Morgan Stanley in the late 1940s. In 1947, the Justice Department filed suit against Morgan Stanley and 16 other investment banking firms accusing them of conspiring to monopolize and restrain the securities industry. In forming syndicates, the government charged, investment bankers practiced both collusion and exclusion. After three years of pretrial hearings, proceedings opened in Circuit Court of New York on November 28, 1950. On September 22, 1953, three years after its introduction in court, six years after the suit was filed, Circuit Judge Harold R. Medina concluded that none of the 17 investment banks named in the suit were guilty of any of the charges brought forth by the government. “What is now taking shape,” Medina wrote, “is not a static mosaic of conspiracy but a constantly changing panorama of competition among the 17 defendant firms.” The antitrust storm had finally passed.

In 1951, Harold Stanley took a back seat in the operations of the company and Perry Hall, another of Morgan Stanley’s founding partners, took his place. Hall remained managing partner until 1961. The 1950s were a prosperous time for Morgan Stanley, and the firm grew steadily throughout the decade. In 1954, Morgan Stanley managed a $300 million bond issue for General Motors. It was at the time the biggest securities issue ever underwritten in the history of investment banking. At the time Perry Hall commented to The New Yorker, with the nonchalant confidence typical of Morgan Stanley & Company, “After the G.M. deal was cooked I went down to South Carolina for a week’s shooting. Shot two wild turkeys while I was down there. First time I ever got turkey. Generally got quail before. Come to think of it I got quail this time, too—fifteen of them.”

As the bull market of the 1950s continued into the 1960s, Morgan Stanley remained a leader in institutional investment banking. The company consistently ranked in the top five firms managing new issues. In its first 30 years Morgan Stanley had managed or co-managed over $30 billion in public offerings and private placements.

In the later 1960s, the firm expanded its base. In 1966, together with the Morgan Guaranty Trust Company, it established a French subsidiary to broaden its international operations. The new Morgan & Cie International S.A. managed and participated in underwritings of foreign securities. In 1967, Morgan Stanley moved its headquarters to 140 Broadway from its old home at 2 Wall Street in deference to the need for more space. In 1969, Morgan Stanley plunged deeper into real estate financing when it bought a controlling interest in Brooks, Harvey & Company, Inc. Brooks, Harvey had been in the business of advising and financing real estate developments for more than 50 years.

The 1970s, however, were a more volatile time for Morgan Stanley. Early in the decade, the company went through a major corporate restructuring, reverting to incorporation from a limited partnership. The trend in investment banking was toward full service. Morgan Stanley, like other large investment banks, entered retail markets, added venture capital units, and aggressively sought foreign customers. In 1971, Morgan Stanley moved its headquarters for the second time in five years, to the Exxon Building in Rockefeller Center, in order to be nearer its corporate clients’ midtown headquarters. Samuel Payne was the reorganized company’s first president. He was soon followed by Chester Lasell, and in 1973, by Robert Baldwin. The company created a mergers and acquisition department in 1972 to help its clients find and evaluate appropriate acquisition targets and to provide strategic planning to complete the deals. It also broadened its real estate activities with the creation of Morstan Development Company, Inc. In 1973, Morgan Stanley opened a research department and entered the equity markets full-scale. Morgan Stanley’s Asset Management Division, which began in 1975, became a strong revenue producer. Morgan Stanley began to offer individual investment services to wealthy individuals and to smaller institutional investors in 1977.

Not only did the substance of Morgan Stanley’s business shift during the 1970s, but the tone of its leadership did too. In 1973, Frank Petito became chairman of Morgan Stanley, the year Robert Baldwin became president. Petito, and to an even greater extent Baldwin, represented the new breed of investment bankers. While Morgan Stanley had until now depended heavily on relationships and personal affiliations, the revamped company, following the general trend in big business, concentrated on the bottom line. Under its new leadership, Morgan Stanley grew rapidly. Paid-in capital mushroomed from $7.5 million in 1970 to $118 million in 1980, and the staff swelled from fewer than 200 to 1,700 in the same period.

Growth did not come without pain, however. IBM abandoned its long-term relationship with the firm when Morgan Stanley refused to share managership with Salomon Brothers on a $1 billion note issue. Olincraft, Inc. sued Morgan Stanley for divulging confidential information for use by another client in a hostile takeover, and Occidental Petroleum filed a separate suit on similar grounds that was later dropped.

The court ruled in favor of Morgan Stanley in the Olincraft case, stating, “Olincraft’s management placed its confidence in Morgan Stanley not to disclose the information. Morgan Stanley owed no duty to observe that confidence.” Not surprisingly, despite winning the suit, Morgan Stanley was subsequently viewed in a different light by corporations and by its competitors. The firm’s reputation, commonly referred to as “the franchise,” was not as lily-white as it once had been.

In 1981 it came to light that two former employees of Morgan Stanley had passed on inside information during the mid-1970s to a number of outside traders in return for a share of the resulting profits. Information on at least 18 acquisitions was leaked between 1974 and 1978. The incident focused a great deal of attention on insider trading, and the business community called for harsher penalties for violators.

As the firm entered the 1980s, competition in investment banking was as fierce as ever. Although Morgan Stanley continued to grow at a considerable pace, it was outperformed by its rivals. While investment bankers like Salomon Brothers and Goldman, Sachs began trading in commercial paper, mortgage-backed securities, and foreign currencies early in the decade, Morgan Stanley, fearful of overextending itself, dragged its feet in these areas. The company also lagged behind in leveraged buyouts and the explosive municipal bond market.

In 1984, leadership passed to an even more aggressive team. S. Parker Gilbert, the stepson of Harold Stanley, became chairman, and Richard Fisher became president. The company had set out to fill the gaps in its financial services in 1983 by hiring an aggressive staff. By the time the new management team was in place, the firm was making headway in a number of key areas.

Throughout the 1980s, the U.S. government deregulated financial markets, allowing increased competition across the board. Commercial banks began to operate in the capital markets for the first time since the Glass-Steagall Act. Competition, both at home and abroad, increased as financial service companies expanded the range of services they offered. In 1986, in order to meet the demands of the increasingly complex marketplace, Morgan Stanley went public in order to broaden its capital base.

By the end of the 1980s, Morgan Stanley had regained its position. The company was the only New York investment bank to increase its profits in 1987. Its activities in leveraged buyouts were exceptionally profitable—the company’s first leveraged buyout fund earned more than 25 times the original investment. By the end of the decade, Morgan Stanley’s long-term equity investments were worth more than $7 billion.

Morgan Stanley has withstood many changes since it began in 1935. It continues to adapt to the volatile capital markets. Having correctly assessed that investment banking would become a global business early in the 1980s, Morgan Stanley positioned itself accordingly by establishing new offices throughout the world including two in Australia and one in Japan. It has focused on long-term equity investments, causing stock analysts to recommend Morgan Stanley as a solid investment for the future. Throughout its history, Morgan Stanley & Company has blended tradition with innovation and proven itself a formidable investment banker.

Principal Subsidiaries

Morgan Stanley Asset Management Inc.; Morgan Stanley Canada Ltd.; Morgan Stanley International; Morgan Stanley Ventures Inc.; Brooks Harvey & Co., Inc.; Morgan Stanley Realty Inc.; Morstan Development Company, Inc.; Execution Services Inc.; MS Securities Services Inc.

Further Reading

Carosso, Vincent P. Investment Banking in America: A History, Cambridge, Harvard University Press, 1970; Ferris, Paul. The Master Bankers, New York, William Morrow, 1984; Hoffman, Paul. The Dealmakers: Inside the World of Investment Banking, Garden City, New York, Doubleday, 1984.