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Need of Reorganization

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J. P. Morgan & Co. and Kidder, Peabody & Co. had enjoyed long and friendly professional relations. Both had been associates in many successful flotation, most notably the financing of the American Telephone & Telegraph Company and its subsidiaries, as well as such other corporate giants as United States Steel and the New York Central. Together they had helped finance several foreign governments, among them Austria, Australia, Belgium, Czechoslovakia, Germany, and Italy. Close personal ties also existed among the partners of the two houses. Winsor had been a friend and business partner of both the elder Morgan and his son J. P. Qack Morgan. When Winsor died Morgan, in plug hat and black frock coat, walked across the street from his office at 23 Wall Street to express his condolences to Sargent and the other partners. And George Whitney, a Morgan partner who was to play a leading role in salvaging the Boston firm, had started on his career in finance as a clerk in Kidder, Peabody's Devonshire Street office in 1907. It was only natural that Kidder, Peabody should turn to J. P. Morgan & Co. for assistance during the 1930 market crash. All these considerations, as well as the very practical one of trying to avoid the calamitous consequences that might follow from the failure at a critical time of a house with Kidder, Peabody's traditions, persuaded the Morgan firm to intervene in the situation.

Negotiations lasted some four months, from December 1930 to March 1931. The first step was to provide Kidder, Peabody with some much needed cash. For this Morgan & Co. organized a revolving credit of $10 million, to which it and the Chase National Bank contributed $2.5 million each. The balance came from three other New York City banks and four in Boston. To secure the loan Kidder, Peabody's partners had to raise an additional $5 million themselves, which they did by borrowing from a group of eight wealthy individuals and seven banking firms, all but two from Boston and all with close personal or business ties with the financially hard-pressed banking house. The largest contributor ($950,000) was Frederic C. Dumaine, a close personal and business friend of the late Winsor and a widely respected New England businessman, president of the Amoskeag Manufacturing Company, the world's leading fully integrated cotton plant. Since 1923 and largely because of Winsor, Dumaine also was the head of the Waltham Watch Company. The next three largest contributors who together with Dumaine put up 58 percent of the required $5 million were Edwin S. Webster, Sr. ($750,000), the son of Frank G. Webster, who died at the age of eighty-nine after sixty-five years with Kidder, Peabody; William Endicott ($600,000), a recently retired partner; and Baring Brothers ($600,000). The balance ($2.1 million) was contributed by six Boston investment and commercial banks and five individuals, one of whom, Mortimer L. Schiff, was a partner in Kuhn, Loeb & Co. The entire group subsequently organized itself as the Commonwealth Corporation, with Dumaine as its president.

Within a month of the $15 million loan Kidder, Peabody was in need of cash again. Even worse, an audit by outside public accountants disclosed that its assets "had been so optimistically stated that the firm did not have enough funds with which to conduct its business." Not only had the value of the securities it held declined precipitously (the auditors estimated the loss at $6.5 million), but business was so poor that the firm was losing over $2,000 a day and there was no indication that the situation would improve in the near future. Indeed, every indication was that conditions would worsen.

Despite the grim prospects, Morgan & Co. considered Kidder, Peabody salvageable. Its greatest assets were its name and reputation, but it also possessed others. Some of the securities it held would-and subsequently did-regain value and the firm continued to enjoy the confidence of its clients.

Several solutions were considered. The one finally adopted was to ask Edwin S. Webster, Sr. to reorganize Kidder, Peabody. He had started in business with the house under his father's supervision, leaving it in 1889 to organize, with Charles A. Stone, the engineering, construction, and consulting firm of Stone & Webster. Webster already had shown his interest in saving Kidder, Peabody by responding generously to the partners' earlier appeal for assistance. He possessed the capital, ability, and experience to rehabilitate the firm, as well as the business contacts necessary to assure its success. Because of his age and responsibilities, Webster refused to do so. He was then in his early sixties and one of the two senior officers of Stone & Webster, as well as its principal stockholder. But his son Edwin S. Webster, Jr., who was then thirty-one years old and a vice president of Stone & Webster, had been considering going into business for himself. The opportunity to restore Kidder, Peabody, an old and reputable house with which his family long had been closely associated, appealed to him strongly. His father shared the son's enthusiasm and agreed to help him, not only financially but in negotiating the reorganization as well, since at the time young Webster was in the hospital recovering from a serious accident.

Participating in the negotiations were Chandler Hovey and Albert H. Gordon. Together with young Webster, they were to become the three founding partners of the reorganized Kidder, Peabody. Whitney, the Morgan partner most directly concerned, though not involved in the actual negotiations always stood ready to help and was consulted frequently.

Hovey, the senior Webster's son-in-law, was fifty-one years old at the time and some twenty years older than his prospective partners Webster and Gordon. Hovey came from an old, moneyed Boston business and newspaper family. His grandfather, C. F. Hovey, had been the founder, in 1833, of a dry goods firm that continued in business under his name for more than a century, and his father, William A. Hovey, had been a longtime editor of the Boston Evening Transcript. Hovey himself brought to Kidder, Peabody thirty years of experience in finance, mostly in the brokerage business. He had been with Kidder, Peabody early in the century, starting as a messenger in 1900 and, after nine years, rising to order clerk at $35 a week. In 1909 Hovey left Kidder, Peabody and joined the brokerage house of Bradley & Cutler, leaving it the next year to organize his own stock commission firm, Chandler Hovey & Co., which he operated until 1931 when he withdrew to become a partner in the newly reorganized Kidder, Peabody.

Gordon, the youngest of the three at age thirty, was born in North Scituate, Massachusetts, the son of a prominent Boston leather merchant. Gordon and young Webster were classmates at Harvard College and the Harvard Graduate School of Business Administration. Upon completing his business degree in 1925, Gordon, taking his father's advice-go "to New York where the pot boils the fastest"-accepted a job selling commercial paper for Goldman, Sachs & Co. Like Webster, Gordon too was anxious to go into business for himself. The opportunity to participate in salvaging Kidder, Peabody appealed to him. The firm's name, he recalled later, appeared to offer "excellent opportunities."

Gordon, Hovey, and the elder Webster acting for his hospitalized son settled the numerous questions that led to their purchase of Kidder, Peabody. One of the first decisions agreed upon was that the main office of the new firm would be in New York City, not in Boston. Gordon was convinced that if Kidder, Peabody was to reestablish itself as a leading national investment house its main office had to be at the financial center of the country. Had it been there in the 1920s, where he believed it belonged, instead of in Boston, where Winsor insisted on keeping it, the problems and difficulties Kidder, Peabody faced might have been averted, certainly prevented from deteriorating to the point where they threatened the firm's very survival.

It required considerably more deliberation-and still greater daring, considering how starved Kidder, Peabody was for capital-to decide not to invite anyone else to become a partner. Hovey had suggested bringing in an older, well-known banker to give the firm added stature and wider contacts in the financial community. He had proposed inviting E. V. R. Thayer, the head of Chicago's Central Trust Company. Thayer had all the business and financial qualifications Hovey considered desirable, and he was also the grandson of Nathaniel Thayer, the later head of J. E. Thayer & Brother, the predecessor firm to Kidder, Peabody. Thayer was interested, but when he made it known he intended to alter the firm's name to include his own, the plan was dropped. No one was prepared to make such a concession, neither the new partners nor the members of the revolving credit.

Nor was it considered wise or practicable to invite into the new firm any of the partners from the old one. Such a move would have meant asking established bankers to accept a lesser interest than the one they then held. No one wanted to do this. Even more important, it would have defeated the very purposes for which the reorganization was intended: to separate the new firm completely from the old one. "We were fearful that undisclosed liabilities would rise up to haunt us," Gordon said.

By early March 1931 the final terms of the sale had been arranged. The new partnership assumed the deposits of the old one, which amounted to some $8 million, and purchased its name, goodwill, accounts receivable, and the former partners' seats on the New York and Boston stock exchanges, as well as certain securities "with readily marketable value." Special care was taken, Gordon declared, to purchase "only those assets we considered current and liquid."

No cash was paid at the time of the sale. The new firm agreed to pay the old partners, who organized themselves into a corporation named Devonstreet & Co., 25 percent of net earnings up to $2 million. The new firm also agreed that once this amount had been paid it would turn over 10 percent of its net earnings for five years to the old Kidder, Peabody's creditors, the Commonwealth Corporation. Both these obligations were subsequently reduced considerably. The $2 million payment to the old partners was cut to $700,000, all of which went to satisfy the deficit of the revolving credit, and the new firm's obligations to the Commonwealth Corporation were trimmed substantially by buying a sizable block of its common stock. On March 16, 1931, the reorganized Kidder, Peabody opened officially for business, with Gordon the active partner in New York and Hovey in charge in Boston.
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