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Post-War Changes

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Kidder, Peabody had built its strength as an originator and underwriter on its ability to sell a wide variety of securities to individuals with different investment needs and tastes, from wealthy dowagers to blue-collar workers of moderate income, and to an equally broad group of institutions that included the country's largest insurance companies as well as relatively small pension funds from coast to coast. This large and diverse clientele, built up in the 1930s and 1940s and carefully maintained and served in the 1950s and 1960s, paid the brokerage commissions that accounted for Kidder, Peabody's largest source of gross revenues, ranging from a high of 46.1 percent in 1946 to a low of 28.1 percent in 1953, with an overall annual average of about 38.6 percent for the period 1945 to 1970.

Brokerage, together with underwriting, constituted Kidder, Peabody's traditional business, generating as much as three fourths of the firm's total gross yearly revenues and occupying most of the partners' attention. Another 15 percent to 20 percent of Kidder, Peabody's annual income came from corporate and tax-exempt trading, buying and selling listed stocks and bonds and maintaining markets in non-listed securities, activities pursued by most large, diversified, full-service investment houses.

But in prosperous postwar America traditional investment banking no longer guaranteed a firm's continued success. That business failed to regain the central and privileged position it had occupied in the pre-1929 era, when the nation's leading Wall Street houses were the chief conduits for channeling savings into investments. Widespread changes on both the demand and supply sides of the capital markets and the development and increasing use of alternative methods of raising long-term capital led to a marked increase in competition among the nation's financial intermediaries. Clients that once had depended almost entirely upon investment houses for their long-term funds and financial advice found other intermediaries able and anxious to provide both. The progress of investment banking, as a result, was less marked than it was for some of the other financial institutions. Membership in the Investment Bankers Association of America (IBA), the trade group that included most of the leading firms, reached 796 in 1937 the highest point since the organization's founding in 1912 fell to 578 in 1943, then started a slow recovery up to 812 in 1955, the peak year before another downturn that continued, with only a few interruptions, until it merged with the Association of Stock Exchange Firms to form the Securities Industry Association (SIA), the new national trade body that was set up in January 1972. And while the more widely inclusive National Association of Securities Dealers, the self-regulatory agency established under the 1938 Maloney Act, showed no similar decline, the 4,470 broker-dealers that belonged to the organization in 1970 represented a rise of only some 13.2 percent from the 1938 peak of 3,871 members.



Lack of a significant increase in the number of investment banking firms reflected not only the highly competitive conditions that prevailed in the post-World War II securities industry and throughout the financial community but also what one analyst called the declining "influence" of Wall Street houses vis-a-vis their issuer clients. Corporations no longer found the services of investment banks indispensable. In 1950, for instance, internal sources, chiefly undistributed profits and capital consumption allowances, accounted for slightly less than 43 percent of the total funds used by nonfarm and nonfinancial corporations; by 1960 that share was up to 71.5 percent, and for the years 1965 through 1969 it averaged about 59.3 percent. More important still, when these corporations looked to the financial community for the funds they required, they did not rely only upon investment firms. Very often these companies turned to commercial banks for term loans. In some years, for instance in 1950 and 1965, bank loans exceeded the amounts raised by the sale of stocks and bonds, but even when more funds were raised by security issues than by bank loans, the latter rarely fell below 13.9 percent of all externally generated funds. Total bank loans to nonfarm and nonfinancial corporations during the six years from 1964 through 1969 amounted to $46.8 billion, or about 20 percent of all funds raised from outside sources, while the total dollar value of stocks and bonds sold by these companies during the same period ($67.4 billion) accounted for nearly 29 percent of all external funds used.

Equally significant changes also occurred on the supply side of the capital markets. Among the most notable of these was the growing prominence of institutional investors, not only such longtime clients of investment houses as life insurance companies and trust funds but also the newer financial intermediaries that came of age after World War II, particularly private non-insured pension funds and investment companies. The assets of all financial intermediaries grew significantly during the prosperous postwar years-those of life insurance companies, for example, up from slightly less than $44.8 billion in 1945 to $199 billion in 1970. But it was the noninsured pension funds and investment companies that registered some of the most striking increases of the era. The assets of these two groups of intermediaries, which stood at about $1 billion each in 1950, soared during the next twenty years, reaching $107.2 billion for the pension funds and $47.6 billion for the investment companies. Institutions of this type, together with the life and general insurance companies, were large buyers of corporate securities, not only bonds but after 1960 of stocks as well. Total stock holdings of the four leading institutional investors-private noninsured pension funds, open-end investment companies (mutual funds), and insurance companies (life, property, and liability)-more than tripled, from $44.4 billion in 1960 to $139.6 billion in 1970, with the largest increases being registered by the pension funds ($50.6 billion) and open-end investment companies ($28.5 billion). Managed by experts, these institutional clients required varied and complex services. To win and hold the business of these giants, investment houses developed new and highly specialized services. Some firms responded to the growing volume of institutional trading-in the early 1960s it accounted for more than 30 percent of all stock exchange trades and would double by the 1970s-by limiting their operations almost entirely to buying and selling securities for institutions.

Kidder, Peabody met the challenge of changes in the demand for its services in several ways. To satisfy a growing, increasingly diverse and nationwide clientele of individuals and institutions, the firm added to its exchange memberships outside of New York and Boston by joining the Midwest (1949), Pacific Coast (1957), and Philadelphia-Baltimore-Washington (1958) exchanges, and it expanded and reorganized its branch system. The older branches, Boston and Philadelphia, were enlarged and turned into regional offices, each with its own new business, underwriting, sales, and trading departments, and staffed to serve individual and institutional investors as well as local corporations and governments in need of raising capital.

Similar organizational changes were implemented at the firm's newer offices. In 1948 the Chicago branch was reorganized and made into a regional office with a resident partner as its manager. This was the first time in Kidder, Peabody's history that a partner held a permanent assignment outside of New York or Boston. Subsequently four other regional offices were established: two in California-San Francisco (November 1952) and Los Angeles (January 1956)-another in Atlanta (December 1965), and still another in Dallas (September 1966). In April 1967 the firm opened a branch in Detroit and expanded into the Pacific Northwest, the only region of the country where it did not have any offices of its own. The addition of branches in that growing section of the nation followed Gordon's tested policy of expanding, whenever practicable, through the acquisition of an established house. In this case Kidder, Peabody took over the investment banking and brokerage business of the Pacific Northwest Company, a Seattle firm with thirteen branches in three states-Washington, Oregon, and Idaho. Kidder, Peabody kept open the Seattle, Spokane, and Portland offices and closed the others. By the end of the decade the firm's New York City headquarters, with four branches of its own, supervised a nationwide operation of seven regional offices with a total of twenty-three branches scattered from coast to coast and from Fort Lauderdale, Florida, in the South to Minneapolis in the North. At none of these locations did the firm maintain facilities for clients to watch the continuously changing prices of securities on the nation's principal exchanges. The absence of a board room at Kidder, Peabody's offices, Gordon explained, "lies primarily in the fact that we believe that what you buy or sell is more important than when you buy or sell."

Direct, more comprehensive representation in the nation's chief financial centers reflected the partners' growing awareness of the many important changes occurring in the structure and operations of the country's capital markets, among them the relative decline of New York City as an investment outlet. Recognition of these changes also accounted for the firm's decision to give top priority to achieving as quickly as possible effective nationwide underwriting and sales ability.

Another of the firm's early postwar policy decisions was to diversify operations still further. Regional offices and branches added to Kidder, Peabody's recognized strength as a national distributor of securities; diversification promised to attract a greater variety of individual and institutional clients and enable the firm to provide them and its corporate underwriting customers with a wider range of services. Neither policy-nationwide offices or diversified services-was entirely new. Nor were they unrelated. Both were in the firm's tradition, and each was designed to complement the other, to meet the competition of other intermediaries, and help keep Kidder, Peabody among the leading full-service, national investment banking houses in the industry.
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