Values of the Participations' stocks fell precipitously after the October 1929 crash. The earnings of No. 1 illustrate the extent of the decline. Within a year net income fell from $446,000 (1929) to $195,000 (1930). Loss of earnings and liquidation of assets had resulted in a decrease in its investment account from $5.5 million in 1929 to slightly less than $2.5 million in 1932, with a capital deficit of almost $1.4 million. O. Kelley Anderson, president of the Consolidated Investment Trust into which the Participations and the Acceptance Corporation had been merged, testified that some 75 percent of the three Participations' remaining funds "were tied up in unmarketable securities of local New England industries."
The stock market debacle did much more than jeopardize the solvency of Kidder, Peabody's affiliates. It dealt an almost mortal blow to the firm itself. Not all its difficulties, however, were attributable to Kidder, Peabody's more recent ventures. These served only to aggravate a bad situation.
The sources of Kidder, Peabody's troubles were varied and deep-rooted. Its inability in the 1920s to hold on to its prewar position as a leading originator of prime new issues was the result, in part, of Boston's decline as a national and international capital market. Large corporations and governments looked to Wall Street not State Street for the funds they required, a development that had been in the making since the turn-of-the-century. Winsor's decision to enlist Morgan's assistance in financing AT&T's $100 million loan of March 1906 was an indication of Boston's slipping financial primacy.
Kidder, Peabody's difficulties, obviously, also stemmed from deficiencies within the firm. And among these none was more important in the 1920s than lack of initiative and ineffective leadership. Responsibility for these shortcomings rested with the partners, particularly Winsor, the undisputed head of the house. Though still only in his early sixties at the beginning of the decade, Winsor no longer was the effective, enterprising financier of earlier years. At a time when nearly all the new issues originated in New York, he continued to visit the firm's Wall Street branch only one day a week and even less frequently toward the end of the decade, leaving a partner, Sargent, to manage and supervise affairs there. Nor was Winsor as attentive to the firm's Boston business as he once had been.
There were several reasons why Winsor failed to provide the kind of leadership of which he had been capable. His wife, a semi-invalid for much of her life, occupied his time and after her death his own deteriorating health led him to withdraw almost entirely from active participation in the firm's affairs. Adding to his distress, Winsor was deeply hurt by a prolonged court suit that charged him, Kidder, Peabody, and three other bankers with conspiracy to defraud Willett, Sears & Co. of its corporate interests in some twenty New England companies. The suit, which dragged through the Massachusetts courts for six years and received wide newspaper coverage, grew out of the bankers' activities in reorganizing various floundering properties in which Willett, Sears owned stock. The first verdict, in December 1924, found the bankers guilty of fraud and ordered them to pay Willett, Sears $10.5 million damages, but on appeal the Massachusetts Supreme Court set aside the lower court's verdict. Despite the subsequent dismissal of all charges against him and the other bankers, Winsor never recovered from the ordeal of the prolonged trial, which finally came to an end in March 1927. The Willett, Sears case made him reluctant to assume any new responsibilities.
But it was not only the court trial and family and health reasons, important as they were, that account for Winsor's unwillingness to go after new business. Equally compelling was the fact that he considered it undignified, if not improper, for a banker to solicit business. At a time when the security affiliates of commercial banks and sales-oriented investment firms competed vigorously to underwrite new issues or to secure an appealing position in a syndicate managed by a prestigious house, neither Winsor nor Sargent deemed it appropriate to appear to be looking for clients. Like Morgan and Kuhn, Loeb's Otto Kahn, Winsor believed that Kidder, Peabody's name, reputation, and tradition were sufficient in themselves to attract corporate accounts and individuals in need of the firm's services.
Though no longer as active in the firm as he had been previously, Winsor remained its dominant partner. No one questioned his decisions. Walter H. Trumbull, his son-in-law and partner, said Winsor was "an autocrat" who "snapped the whip" and "frightened the younger people at the office," clerks and junior partners alike. "It had reached a point/' one of these young men recalled, "that one had to approach [Winsor] on bended knees to converse with him." And Albert H. Gordon, the subsequent head of the firm, testified: "Practically nothing was done in Kidder, Peabody & Co. without Mr. Winsor's full knowledge and approval."37 Winsor's dominance over the firm need not in itself have been disastrous. At different times both Morgan & Co. and Kuhn, Loeb had been dominated by power-ful, autocratic figures and survived the experience. Kidder, Peabody might have done so also had it not been for the crash. That event and the severe contraction that followed it not only exposed the firm's weaknesses but made it impossible to rectify them. Winsor and the firm's close ties with New England enterprises, for instance, had resulted in tying up a substantial part of Kidder, Peabody's capital in the securities of companies in that region. Some of these had been difficult to sell in the boom years; after the stock market collapse many of them became unmarketable at any price while others could be sold only at a considerable loss.
Kidder, Peabody's difficulties also were made worse by the failure of Caldwell & Co., the Nashville, Tennessee, investment house founded in 1917. Starting as a specialist in Southern municipal bonds, the firm soon expanded its operations and by the mid-1920s had developed a thriving brokerage and underwriting business much of which was conducted through Kidder, Peabody's Wall Street branch. The New York office often carried Caldwell's underwriting participations until the Tennessee house had found a market for them. During the 1920s Kidder, Peabody also had advanced Caldwell & Co. substantial sums and guaranteed stocks it had pledged for loans with various Tennessee banks, among them the Bank of Tennessee, founded and controlled by the Southern investment firm. Caldwell's bankruptcy compounded Kidder, Peabody's troubles.
As if all this were not enough, Kidder, Peabody also endured large losses of capital brought about by the death and retirement of five partners within the short span of five years, from 1926 through 1930. Remick died in October 1926, taking some $750,000 out of the firm; Webster and Winsor died in January 1930, within ten days of each other; and Benedict and Endicott retired in January 1928 and August 1929, respectively. The eleven partners added to the firm in that five-year period-two in 1926, five in 1928, and four in 1929-were admitted without requiring them to contribute any capital, a policy that with few exceptions had prevailed since the beginning of the house. A carefully drafted partnership agreement designed to protect the firm's capital might have prevented and certainly would have eased Kidder, Peabody's problems, but no such document existed. These matters, like most others among the partners, were decided privately and informally as had been the custom in the past.
The final blow to Kidder, Peabody's solvency came when depositors, apprehensive about the firm's condition, started to withdraw their funds. Early in 1930 the Italian government closed its account, taking out more than $8 million. This huge withdrawal, together with others, made it impossible for Kidder, Peabody to meet its current liabilities. By November 1930, faced with the possibility of having to close, the partners appealed for assistance to the house of Morgan.
The stock market crash, faulty leadership, poor management, and inadequate capital had brought Kidder, Peabody, one of the nation's most respected banking houses, to its knees. Strong leadership and careful planning together with utmost attention to protecting the firm's capital and maintaining its liquidity had allowed the firm to weather the great panics and long contractions of the 1870s and 1890s. No one can say that adherence to those principles would have saved Kidder, Peabody in 1930; on the other hand, no one can deny that failure to do so made it difficult, if not impossible, for the firm to survive the 1929 crisis without outside assistance.
