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The Bounce Back Period

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During the years of deep depression and widespread political, social, and economic change that Kidder, Peabody's partners laid the foundations for the firm's recovery and growth. All had agreed that Kidder, Peabody would emphasize the underwriting and distribution of securities, the business the partners considered themselves most competent to conduct. The firm also decided to develop its commission and bond trading business, activities that would allow it to offer the public a diversified range of investment services. The partners decided not to deal in commercial paper, trade in commodities, or manage investment trusts. The decision to avoid these operations was dictated partly by the need to conserve the firm's limited capital, but also by the fact that the partners, particularly Gordon, did not want to be distracted from their primary objective, investment banking.

All four partners also agreed on several other basic policies. Though Gordon was assigned and did take on the major responsibility for recruiting new business, the other partners also were expected to contribute significantly to this effort, as well as fill other jobs. Webster, for example, not only provided most of the capital that kept the firm functioning, but he also used his Stone & Webster ties to widen Kidder, Peabody's corporate connections, particularly among the country's electric and gas utility companies, enterprises with which his father's firm was closely associated. Hovey and Kinnicutt, on the other hand, devoted themselves almost entirely to supervising the firm's internal operations, the former in Boston and the latter in New York City.

But it was Gordon who made the greatest contribution to Kidder, Peabody's revival. He "picked up a firm in shambles and built it up from scratch," one of the firm's employees recalled later. Gordon not only was the principal recruiter of new business, but he was also the chief policymaker; his energy and drive were felt throughout the firm. He set the pace and established the pattern of operation. Frederick L. Moore, who left the Guaranty Company, the security affiliate of the Guaranty Trust Company, to join Kidder, Peabody in March 1934, stated that Gordon "was operating a one-man show." But unlike the autocratic and unapproachable Winsor, Gordon was a "tough but fair boss," friendly and courteous with everyone. "His office door always was open; the junior men felt free to go and speak with him, to complain or offer advice." Gordon "not only listened, but if someone's suggestion was good, he took it and gave credit for it."

Gordon's primary purpose was to reestablish Kidder, Peabody's reputation and restore the firm to its once prestigious position in the nation's capital markets. The best way to achieve this dual objective, Gordon believed, was to build a record of demonstrated achievement in distributing quality securities. Efficient nationwide distribution, he maintained, was the only certain route to increased underwriting participations. His ultimate goal was to make Kidder, Peabody a major originator, underwriter, and distributor, and the kind of house that was able and competent to provide issuers with complete investment banking services, from the conception of a new offering to the final sale of the security.

The decision to build Kidder, Peabody into a national distributor or, as a contemporary observer once said, the policy of "selling your way to success," was implemented at once. The addition of the Chase Harris Forbes and Philadelphia Company's sales personnel was a move in the direction of making Kidder, Peabody a firm that the leading houses of issue would consider to be essential to include in their syndicates to help sell their underwritings. The old firm also had tried to tap a national market, relying on correspondents across the country to distribute the securities it sponsored. Gordon continued the practice, but because he wanted to develop Kidder, Peabody's own independent sales capacity, he also started opening branches in key cities. When a branch's sales had increased sufficiently and the prospects for other business appeared promising, it was turned into a regional office. The first of these, Philadelphia, was opened in June 1934, at the time Kidder, Peabody took over the Philadelphia Company. Acquisition of this organization gave Kidder, Peabody increased sales strength throughout Pennsylvania, southern New Jersey, and Delaware. The next regional office, Chicago, opened in August 1937, was designed to give Kidder, Peabody access to an increasingly important capital market, one which the partners believed would add not only to the firm's sales capacity but, in time, also bring it new corporate clients.

Strong sales depended, of course, upon winning and holding the confidence of investors, both large and small. And this, the partners agreed could be accomplished only by carefully selecting the securities sold. Kidder, Peabody had earned much of its reputation as a distributor of American Telephone & Telegraph (AT&T) bonds and stocks, securities that had weathered the depression as well as any and had continued to pay their owners interest and dividends regularly. The goodwill the firm had gained from the sale of these issues had been partly dissipated. Some of the securities Kidder, Peabody had sponsored in the 1920s, like those of so many other houses, had suffered serious declines, and dissatisfied clients blamed the firm for their losses. The most effective way to restore Kidder, Peabody's reputation, win back disgruntled clients, and attract new ones, the partners maintained, was by distributing only high grade securities. "By accenting quality," a later partner explained, "we hoped to boost sales, earn enough to stay in business, and attract underwritings."

To restore Kidder, Peabody to its former position as a leading underwriter proved to be no easy task. The firm's once eminent reputation as an underwriter and its close and influential contacts with prime issuers had deteriorated badly in the 1920s. Even its ranking as a top underwriter and distributor of AT&T issues had declined. Before World War I the firm had sold approximately 47.5 percent of this company's offerings; in the 1920s Kidder, Peabody's share of this business had dropped to 31.5 percent.

The likelihood that Kidder, Peabody would inherit some of the old firm's underwriting accounts, including its former position in AT&T bond syndicates, was slight at best. Some of the new firm's partners sometimes spoke as if they would regain some of the old Kidder, Peabody's underwriting business. Gordon never did so. He was too much of a realist to expect that this would occur. George Whitney of Morgan & Co. told him as much. In a conversation concerning new AT&T offerings, Whitney told Gordon that Kidder, Peabody's participation in any future syndicates managed by the Morgan firm would be determined strictly on the merits, without any reference to the old firm's previous position.

The task of rebuilding Kidder, Peabody's underwriting business was made more difficult by the depression, which reached its depth in the months between Roosevelt's election and his inauguration. The deepening crisis virtually eliminated the need for corporations to raise new capital to expand and improve idle plants. As though the depression was not enough to deter business executives from planning new financings, the uncertainties created by the United States going off the gold standard, Roosevelt's scuttling of the London Economic Conference in June 1933, and Wall Street's fears concerning the New Deal's banking and securities statutes made corporations all the more reluctant to seek new funds. The result was a near cessation of new capital issues, with the volume of these offerings dropping from nearly $1.6 billion in 1931 to $152 million in 1934. That year Kidder, Peabody managed one new offering, the first public sale under the new SEC's rules. The firm developed and sold $8 million of privately held bonds of the Scovill Manufacturing Company.

But if the depression produced a sharp decline in new capital issues, the fall in interest rates that accompanied the contraction led many businesses to take advantage of cheaper money to refund their bonded debt. In 1934, refundings accounted for nearly 60.2 percent of all corporate offerings, and the next year these issues represented 80.2 percent of the total. Between 1934 and 1939 refundings never amounted to less than 49.1 percent of all corporate offerings. Kidder, Peabody participated in some of these underwritings, but most of these offerings were managed by the banking houses that had brought out the original offerings.

Realizing that refundings, like the underwriting accounts of most large corporations, were as Gordon put it, "sewed up," he decided to rebuild Kidder, Peabody as an originator of new issues by recruiting sound smaller companies with potential for growth, a group usually neglected by the more prestigious houses of issue. This was the policy that Lehman Brothers and Goldman, Sachs & Co. had employed early in the twentieth century when these two firms first became underwriters. Gordon's strategy, to help young companies and grow with them, became a fixed policy, one that Kidder, Peabody has continued to follow to the present day. Not all the corporations, the firm financed in the 1930s remained with Kidder, Peabody, but enough of them did so to confirm the wisdom of the policy.

To hold on to its issuer-clients, Kidder, Peabody not only had to provide them with top quality service but also had to make it financially attractive to corporations to employ the firm as the originator and underwriter of their securities. Gordon's decision to build a strong national distribution system made it possible for Kidder, Peabody to secure up-to-date information on market conditions across the country, to gauge the likely reception for a new issue, and to determine the best possible price at which it could be marketed successfully. Gordon's reputation as an "expert pricer," one of the "toughest on the Street," grew out of his close, intimate knowledge of the new issues market, most of which he gained from the firm's sales and corporate trading personnel. "The secret of correct pricing is direct contact with the market," Gordon said repeatedly, "not to be dependent on other houses for the information you need, to develop your own through your own sources." Gordon made "good pricing" a Kidder, Peabody trademark, one which he used to attract business. "He always tried to get a little better price than the market seemed to dictate," said one of the firm's longtime employees. Gordon's loyalty to issuers and his conservatism in spending other people's money made the firm "sweat" for its profits, but impressed corporate executives and attracted new accounts.

Service and sales capacity became two of Kidder, Peabody's most effective arguments in competing for new business. The firm went after any account it believed there was a chance of winning. Unlike Winsor, who had considered it undignified for a banker to solicit business, Gordon and his partners "went out and rang door bells," as one of them later recalled. They tried to learn of companies planning new issues, wrote to or made personal calls upon the officers, board members, or anyone who might help get Kidder, Peabody an underwriting position. A typical letter to win an account or participation included a review of the firm's recent record in distributing securities and concluded with a statement similar to the one Gordon used in writing to a vice president of Westerrt Cartridge Company in November 1939. "If now or in the future you have need for an investment banker, we hereby apply. Our experience, our position in the business, and the reputation we believe we have in financial circles throughout the country make us confident that we can do whatever you wish better than any other concern."

Kidder, Peabody also worked to develop close ties with the major houses of issue, the ones that managed most of the large syndicates. The firm's partners sought to impress upon the heads of these firms Kidder, Peabody's record as a distributor and the advantages of including Kidder, Peabody in their underwriting groups. In September 1935 when Morgan Stanley & Co. was organized as a wholesaler of securities and AT&T turned to this firm to finance one of its subsidiaries, Gordon immediately called on Harold Stanley, a top officer in the new house, to seek a participation in the proposed syndicate. "I used every argument at my command to get as large a position as possible for my firm," Gordon testified later. "The matter was of very great importance to us, obviously." Kidder, Peabody secured a position in the syndicate, but its underwriting percentage in Bell System bond offerings, which had been 31.5 percent in the 1920s, fell to 12 percent in this issue, then to 6 percent in subsequent ones. "The 6 percent hasn't been taken from us because we haven't built up our distribution or because we have failed," Gordon explained, "it has been taken from everybody in order to get more people into the business, in order to do the job more and more effectively." Gordon also understood that the only way Kidder, Peabody could hold on to its 6 percent was by demonstrated ability to distribute telephone securities. "If we ever fall down on our distribution, then we would expect to be reduced."

Gordon's approach to Morgan Stanley was not unique. Other partners used similar tactics with other major houses of issue. Orus Matthews, the head of Kidder, Peabody's Philadelphia office since June 1934 who became a partner in January 1935, used his former connections with the Philadelphia National Company to develop friendly ties with the newly organized Mellon Securities Corporation of Pittsburgh. "In my opinion, outside of Morgan Stanley," Matthews wrote his partners and senior associates in September 1936, "the Mellon Securities Company represents the best prospect for participations in excellent business." Matthews suggested that "one or more of the partners arrange to go to Pittsburgh from time to time during the next few months... for I believe now is the time to actively develop this contact."

The partners did not limit themselves to rebuilding the firm's traditional investment banking services. They also developed, expanded, and adapted to the needs of the times the old but until then little used method of selling a corporation's securities directly to a few buyers, usually institutions-life insurance, trust companies, investment trusts, and pension funds. Before 1933 direct sales of this type, commonly called private placements, had accounted for less than 3 percent of all security offerings; between 1934 and 1939 direct sales of corporate bonds and notes averaged 23.3 percent a year, and their volume, both in number and dollar value, grew still further after World War.
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