« Comments on Goldin and Katz | Main | Comments on Devine »

August 23, 2007

Comments

Niki Chen

One of the most important points of the article that stayed in my mind was that J.P. Morgan and Co. had a competitive edge over new or smaller firms because of it's sound reputation. The paper stated that in the pre-world war I era, although there appeared to be no visible barriers to entry, investors could not readily obtain information about a firm's values and the quality of it's management. What J.P. Morgan did was provide a "monitoring" intermediary role between firms and investors. Since the company had a large market share, it had a lot of incentive to preserve it's sound reputation and to be above suspicion in the short-run. This was contrasted with smaller companies, which may not make so much profit in the long-run, and which may have an incentive to go for higher short-run profits.

This made a lot of sense to me in that a firm's reputation is one of it's very valuable assets. It also allowed me to understand why the presence of one of the partners of J.P. Morgan could create so much common stock equity value if they served on the board of directors.

I also paid attention to the fact that progressives and finance historians attribute to J.P. Morgan and other oligopolies dominance as a reflection of their ingenuity and dominance. I noted that economists say such high short-run profits would quickly attract imitators and competitors whom would compete away the profits. This follows very well with the economic theory which I have learned so far.

One more aspect which I found particularly interesting about the paper was that the profits and deals in the pre-world war era were so tremendous and that the investment banking deals of today are only one-tenth as large as the economy. I also learned that the Glass-Steagall act was what broke the links of board membership and investment banking.

Joseph Chang

Summary: J.P. Morgan and Co, while charging exorbitant commission rates, provided a net positive (and perhaps even fundamental role when taken in context of the declining industrial power of Britain at that time) to the U.S. economy by ultimately allowing savings to be invested more efficiently (in terms of higher returns).By the very nature of the investment banking industry at that time, the J.P. Morgan was an honest, necessary, and ultimately net positive intermediary despite having conflicts-of-interest and possessing exorbitant commission rates. This is shown by (Professor) De Long's regression analysis. Companies overseen by J.P. Morgan and Co. were more highly valued (stock price/book value) AND made money more efficiently(earnings/book value). It did this by either (1) making its partner companies more efficient (2) making its partner companies into monopolies) (3) or both. Many of the aspects that may seem negative about the trust can in fact be excused as a product of the time or nature of the industry. For example, high commission rates (even as much as the value of thirty percent of a company's common stock) is explained away by the commission of investing banking firms being a proportion of the size of the economy as a function of time (as time passes the cost shrinks). This seems natural in light of organizational efficiency of the economy also increasing with the passage of time.

(2) Regarding the reference to the almost "socialist" system of a small group of employees at J.P. Morgan and Co dictating where savings should go and what it should be spent on, it does seem that way. Perhaps, had a person in that group that saw this and push his agenda, so that steel would receive preference over farm machinery, then it may very well have been similar to the system put in place in S.Korea in the 1960-70s and Japan (Of course, if someone did try to do this, maybe this money-trust would've been killed much earlier.

(3) The question whether it is better to have managers be unmonitored versus that to be responsible to financiers is a theme that seems to be referenced to.

I remember that there was an article that addressed this wide-spread belief that American managers focus on short-term goals was a negative aspect of the American economy. It went on and even showed a poll in which most American managers agreed, but data that went back decades comparing the performance of both domestic and foreign companies, showed American companies to have been not only just as profitable in the long-run, but, strikingly, more so. Maybe it's the belief that a desire to escape and be relieved from the pressures of achieving well in the short run that makes people think that it's a negative aspect (like in a way that most people are naturally averse to the principles of free-trade). Nonetheless, the "need" for a Sarbanes-Oxley did show its negative aspects as well.

(4) someone who says "political partisans who seek to make personal and Party capital out of a demogogic appeal to the unthinking" made me laugh. What would be the equivalent

Evan Caso

Delong's article provides a good persepctive on an issue that remains today. Many social commentators express concern over the vast wealth holdings of firms like Goldman Sachs. The issue is the same, but the name is different. In the early 20th century, JP Morgan accumulated a great deal of wealth by providing capital to various companies, including railroads. It is clear that a conflict of interest existed because many of Morgan's men served on the boards of directors for these various interests. Although JP Morgan and other investment bankers reaped enormous profits (and continue to do so today), they provide a valuable service to the economy by channeling investment into productive sectors. They also provide pretty good returns to individual investors. Evidence presented in the article points to the fact that JP Morgan's "stamp of approval" boosted the value of a company. Contemporary investment banks provide this same information to individual investors. I think this provides a sense of order in a market that seems vastly complicated. Individual investors simply don't have the time or desire to seek out detailed information about possible stock purchases. In this sense, Morgan and modern investment banks provided a valuable service to investors. Overall, although Morgan's profit seems staggering (and it is), his contributions were a net positive to the American economy as a whole.

Richard Schimbor

The story of JP Morgan and Co. is in many ways a story of asymetric information, which is usually the expanation for the existence of arbitrage in financial markets. JP Morgan was able to charge high fees because it was seen as a good judge of the potential value of a company and because of its presence on boards ensuring that the company is efficiently managed. However, the reason that JP Morgan was a good judge of future value was due to the connections that the investment bank possessed within the market. This asymetric information gave the appearance of remarkable foresight and allowed the firm to make riskless profit by charging high fees. It is true that overall these financial capitalists benefited their shareholders and the companies to whom they lent capital by increasing efficiency and taking advantage of economies of scale. However, it was not beneficial for the economy when the position of Morgan's lieutenants on boards in every sector of the economy and influence in government allowed those lieutenants to convince the market and regulating powers that they were taking advantage of a natural monopoly instead of an expolitative monopoly existing where competition would have lowered prices and eliminated excess profits.

Shuwen (Shirley) Liu

Delong’s article not only brought up the issue that happened in the investment banking field in the turn of the century, his argument also reflect on the current issue that happened in many companies (not just I banking field). In his article, he argues that JP Morgan’s middleman role has conflict interest with their clients because many of them (JP Morgan men) are the directors or on the executive broads in their clients’ companies. And this kind of issue has been continuously going on in the current business environment. From Delong’s article, even though many JP Morgan men explains that they won’t conflict the two different roles they are in now, but people still concern about some scandal may happen in the future.
And I feel this is very interesting that JP Morgan’s high status in the field is because of its reputation, and I think this interesting conflict issue also affects its reputation. If because of their outside JP Morgan’s position affects JP Morgan itself (reputation), why they still think this is an ok issue for them? And I think because of such ignorance of the interest conflict and cause JP Morgan’s decline, when people start not trusting JP Morgan or they try to find another way to take over JP Morgan’s role (like the Securities and Exchange Commission).

Cam-Tu Nguyen

It seems like DeLong's analysis of JP Morgan's contribution and influence as a large and reputable investment bank on many different industries in the American economy to be net positive during the early 20th century. "From an economist's standpoint, therefore, the combination of no visible barriers to entry, sustained dominance by a tight oligarchy of firms, and extraordinarily high profit rates is anomalous," the underlying barrier that prevented Morgan's potential competitors from reaching their equivalent achievement is JP Morgan & Co's competitive advantage in demonstrating long-run reputation as honest broker. Again, what has been changed for the contemporary law in the late 20th and early 21st century regarding investment banks placing their partners in their client's board of directors or management team? The Morgan partnerships saw themselves "as filling a crucial 'monitoring' and 'signaling' intermediary role between firms and investors in a world where information about firms' underlying values and the quality of their managers was scarce," which has a similar, yet different effect on today's financial industry because although investors have much more and further access to financial information of the company that they want to invest in, investment bankers' analysis reports are still highly regard in the financial industry today. In the article, John Moody argued, " that there was a functioning money trust, and that its existence was a good thing: supervision of firm managers by financiers was necessary given the need of enterprises for capital and the need of investors for trustworthy intermediaries to handle the selection of firms in which to invest." Coming from the investors' point of views, it is more reliable to invest financial capital in something that professional investment bankers have researched and analyzed, which is far better than going for a company that there is barely any financial information disclosure to the public. "And there is no sign that the Morgan name was used to trick investors into buying unsound and overpriced unduly 'watered' stock: the prices at which the Morgan syndicates offered common stock in Morgan-influenced companies appear to have been on average fair prices," showed that although there might have been conflicts of interests and the investment bankers favored their own interest, but they still provided fair and reasonably sound informations to
investors.

The econometric regression analysis of JP Morgan's different clients, whether the company's partners sat on their clients' board of trustees or not, demonstrated relevant proof and explanation of how JP Morgan's influence positively affected their clients. I thought the econometric analysis was a little difficult to follow possibly due to insufficient knowledge in this area of economics. What surprised me was the 4-10% fees that JP Morgan charged their clients, such a high price in comparison to today of .1% . Overall, this article shed light in the banking and finance industry from an economic historian perspective, which was very informative and analytical and interesting as well.

Jun-An Chen

Delong’s article discusses the impact of investment bankers on various industries. Emphasis is placed on the reasons that made investment banking so profitable and remained profitable in the early 1900s. The overall success of Morgan’s firm contributed to its unrivaled position as the leader of investment banking. What gave J.P. Morgan its competitive edge is the reputation it has built over the long years. Other firms faced this barrier to entry because they cannot create identical reputation immediately. Although Morgan charges high fees for its services, the benefits it brought to its clients are definitely worth the money spent. Not only do the average value of the companies go up, but with support of Morgan’s partnership, the public becomes more willing to invest in these companies. The “stamp” of Morgan partnership because an asset in itself much like existence of brand names in any other industries. The most interesting point I find in this article is that investment banking, like many other traditional businesses, dwindles in profit with technological progression. Labor and information value diminishes, as the public is now able to gather vital information for their own investment without going through investment bankers. I have never thought that services, like machines, can become outdated and obsolete; however, investment banking is still a necessary and vital component in our economy. It is fundamental in that our economy is built on top of it.

Simon Shen

I was very impressed by the structure of Delong's paper. I felt that it was very effective how he addressed standard historical perspectives at first (progressives vs. finance historians), and then conducted a quantitative analysis in order to show that neither side was completely correct. However, I felt that the quantitative analysis of Morgan's value added was rather flimsy (although this was addressed several times throughout the paper) because the sample size was so small and the few outliers had a substantial effect on the analysis results. However, the regression analysis does convincing illustrate the J. P. Morgan's investment bankers added value, although how much value they added (vs. how successful the companies would have been without Morgan's influence) is still unclear.

What particularly interests me is the story of Morgan's decline... which was touched upon in the paper but not thoroughly analyzed. A key question that occurs to me is: Would the J.P. Morgan financial conglomerate have fallen apart without congressional regulation? That is, would technological innovations, changes in stockowner attitudes, and changes in societal attitudes have resulted in the natural disintegration of J.P. Morgan's financial trust? I feel that it would be very interesting and relevant to conduct a study of the J.P. Morgan trust's downfall and the evolution of the fiercely competitive underwriting and investment banking industry today. Such a study would shed valuable insights on the inefficiencies of the Morgan system (because inefficiencies would quickly wither away as the market became increasingly competitive), and also shed insight on the efficiency (and possible improvement) of our financial system today.

Luke Brennan

Delong's piece was a very interesting read. It left a primary question unresolved - whether J.P. Morgan and similar financial corporations generated the bulk of their revenue though the exercise of monopoly power or by strengthening the fundamental profitability of the firms in which they invested and who's operations they monitored. However, Delong argues convincingly that it is essentially impossible to tease out one factor from the other. Regardless, the paper shows that it is possible that Morgan could have enjoyed large and sustained long-run profits in a financial sector that did not have large barriers to entry, a theoretical anomaly. I began the article with thoughts of turn of the century Robber Baraons in mind, but I have been convinced that Morgan did play an important role in funneling capital into profitable enterprises. However, fees of 4-10% still seem enormous to me, and I have trouble seeing how J.P. Morgan could truly added enough value to take a 9 or 10% cut and still be creating net value for shareholders.
It was pointed out that the financial trust was ironically an almost socialist arrangement given it's centralized nature. I disagree - as the paper shows, there probably were not large barriers to entry, and if Morgan lost it's very professional reputation due to short-run dishonesty and manipulation, there were others ready to fulfill the same roll. Thus, there was a very effective mechanism of accountability, the lack of which is the primary problem in a socialized bureaucracy.

Tushar Kumar

I have to agree with the final words of the paper, "it is an irony that today many of the intellectual children and grandchildren of the Progressives appear to call for a return to “financial capitalism” because it seems that we have spent years trying to separate ourselves from that notion. On another note, I found it interesting that there was a "brand image" associated with investment banking. I'm referring to the fact that Morgan and Co. could charge more simply because of their reputation. Past mistakes in banking have made for a more secure world today. For example, who works with what deals is more regulated and monitored today than in the past. Unlike the past, where board members of certain companies would sometimes work a deal in their own favor even though it was not the best financial move for the investment bank, will not be able to do it today.

Patrick Humphreys

I thought the structure of the paper presented a balanced perspective. I also think it adds a great deal of insight into our understanding of Morgan, since we see that both sides have it wrong: the progressives failed to see the value that Morgan added and the financial historians failed to see the barriers to entry that existed. I disagree with the extreme progressive position that the Robber Barons were simply successful crooks. After all, people have always been willing to lie and cheat in order to become rich and powerful, so I do not see how even a particularly virulent strain of rapaciousness could lead to such immense profits. I also disagree with the extreme financial historian position that the claims of corruption were merely the fantasies of competitors or the uniformed. I think it is extremely naïve to ignore the manifest corruption of the times. In the end, Delong shows a balanced understanding of the benefits and costs associated with the Morgan men, providing a useful framework for evaluating the economic developments of the Gilded Age.

Aneesh Kadakia

This article explained fairly well in economic terms the operations of Morgan and how they were able to exist as a monopoly without any physical or outlined barriers to entry. This seems to also go against the notion of corruption of a robber baron, but it seems that Morgan's monopoly made it so they had to be as honest intermediary to the shareholder as possible, or else the business would fall apart. This also explains why no other company was able to challenge Morgan, because they lacked this sort of trust, therefore, JP Morgan had to be creating value to both the company and the shareholders that justified their high premiums. I think it is important for it to be recognized that while there appears to be a conflict of interest for Morgan partners to stand on boards of their clients, the econometric analysis seems to show that they did add value to the companies rather than just propping them up artificially.

David Thomason

The paper addresses the interesting question of how the Britain’s relative industrial decline was tied to its lack of financial capitalist institutions. The fact that there were no entities like Morgan’s investment bankers to encourage domestic investment led to much more capital exports and a high amount of overseas assets held by British investors. This made space for America to take over in areas of mass production and industry that Britain originally would have been predicted to have. As the paper describes, fast-growing economies are encouraged by financial capitalism. It makes me think that financial capitalism is one of the most important causes of American economic success, given that British decline in industry can be tied to a lack of financial capitalism, and America filled the void that the British left. Whether Morgan’s men created the monopolies or not, it seems like they deserve a lot of credit in the economic success of America around the beginning of the 20th century.

Eric Hsiao

Professor Delong’s argument that “financial capitalist institutions did in fact play the role in guiding and warranting investments” continues to hold contextual weight based on the rise of contemporary ‘private equity’ firms. More specifically, the role that investment banks in the early 20th century played seems to parallel that of specialized alternative investment firms today- provide managerial oversight that ensures the executives and board are meeting performance expectations. There are, of course, substantial differences. For one, the issue concerning conflicts of interests does not arise with the newer financial companies.

Representatives of private equity firms, in meeting with federal legislatures regarding regulation of their role in financial markets, have evoked the same essential argument those Professor Delong presents- shareholder value is increased by simply having a well respected private equity firm sit on the board of directors though the near guaranteeing of managerial excellence.

Jessica Li

In the years prior to World War I, the American economy was experiencing an age of “financial capitalism”, where wealth and capital were concentrated in the hands of few investment bankers. In Delong’s analysis of this particular American era, he offered different but interesting interpretations in explaining this phenomena. Many progressives have argued that this money monopoly was dangerous and evil to society, while financial historians believed it was Morgan’s innovation and ingenuity that allowed it to dominate. However, economic principles have contradicted the former two arguments. Instead, it was Morgan’s long-standing reputation as honest brokers that allowed it and its partners to keep their competitive edge and allowed them to flourish in the industry.
Though economics have disregarded the money trusts as monopolistic due to the lack of entry barriers, it was nevertheless a monopoly. The nonexistence of competitors allowed Morgan to have substantial influence and market power. However, these oftentimes referred to as Robber Barons, may have played a significant role in the transformation and shaping of modern-day American economy. Due to their long-standing reputation as honest brokers, they were able to raise massive capital and wealth for investment in the subsequent development of various industries. It was because of such influence and capital accumulation that facilitated the vast economic growth, thus transforming America into the dominate world power that it is today.

Ed Lam

Although J.P. Morgan and Co. may have created a conflict of interest through “financial capitalism,” Delong states the value added to shareholders and management surpasses the negative aspects. Regression analysis reveals companies with affiliates from J.P. Morgan had a higher market valued and were more profitable. Even with charging high brokerage fees, J.P. Morgan ultimately justified the cost of their expertise by creating net gains for clients and investors. Their dominance and influence indirectly made them financial advisors for many investors by putting their solid name and reputation on the line. The key for justifying the high fees and conflicts of interest is the fact J.P. Morgan ran an honest and very ethical business. At the end of the day, their clients benefited substantially from the service and expertise.

Even in modern times, conflicts of interest within investment banking still exist. The establishment of greater regulations and heightened awareness in unethical corporate behavior has better protected investors but ironically, the value added by J.P. Morgan in the 1910s most likely exceeds the value added by investment banks in the current era due to fierce competition and half-hearted honesty.

Jashoda Kashyap

I think that the way the article was laid out was very clear. It lays out the discrepancy, and states that from the economic standpoint there must be a way to explain JP morgan’s success, and to show that neither views on this were completely correct. The paper validates the progressives’ fear of investment banking, in that there were conflicts of interest. Also, it is interesting to know that JP Morgan’s edge is attributed to its reputation. Lastly, I enjoyed and agree with the quote in the conclusion section by Keynes.

Ben Sumarnkant

The fact that the investment bankers from J.P. Morgan were able to position themselves as legitimate board members for client companies represent the historical state of the financial markets. With developments in technology allowing for instant access to information, an increasing amount of investors no longer rely on just the advice of investment banks to make sound investing decisions. In the pre-depression era of bank dominance, investors did not have immediate, up-to-date access to fundamentals, so they interpreted bank involvement at an executive level as a sound business practice. This lack of information should not be interpreted as justification for bank involvement, but it certainly explains why such a practice was widely accepted by all stakeholders involved.

Ben Sumarnkant

The fact that the investment bankers from J.P. Morgan were able to position themselves as legitimate board members for client companies represent the historical state of the financial markets. With developments in technology allowing for instant access to information, an increasing amount of investors no longer rely on just the advice of investment banks to make sound investing decisions. In the pre-depression era of bank dominance, investors did not have immediate, up-to-date access to fundamentals, so they interpreted bank involvement at an executive level as a sound business practice. This lack of information should not be interpreted as justification for bank involvement, but it certainly explains why such a practice was widely accepted by all stakeholders involved.

Qingyun Tang

The paper talks about the history of J.P. Morgan and Co. before World War I era. It is very interesting to me that the company charges high fees, and it is still able to get a lot of business and deals. In economic perspective, people would find the least expensive partner of doing business in order to maximize the profit. However, the article provides a strong argument that keeping high reputation for good judgment and for giving the ultimate investors in their deals good values will boost the business of the company, which turns out to be true for J.P Morgan and Co.

Sheena Mathew

After reading the Delong article, I was surprised to see that despite the monopolistic tendencies of JP Morgan during this time period, they ended up being more beneficial than harmful to society. It seemed as though they managed to help the majority of the companies they represented and they were successful by increasing the profitability of these firms. I also found it interesting that the advantage that JP Morgan had, which prevented smaller firms from entering the market easily, actually forced JP Morgan to be more helpful to their clients. In order to keep their good reputation intact, JP Morgan avoided very profitable short term deals, and instead focused on the long run. This act benefited both the clients and the company, so for the time period their stronghold on the market was not so bad.

Peter Li

This paper touches upon the effect of JP Morgan's reputation on the successful business of the investment bank and its role as a barrier to entry to other banks. Today, there are quite a few more banks that have significant influence and size than in the early 1900s, but still reputations play a big role in what deals get done with which banks. Companies today often choose one bank over another for the chosen bank's reputation, even if another bank has more competent employees or better ideas. This happens because investors are more confident if a bank with a better reputation provides the advising or underwriting services for a company than a bank with not as good of reputation; and this influences the outcome of a transaction and the ensuing stock price. So although the competitive landscape between banks is greater today than before, the strong reputations that a few prominent banks hold still plays a large role in these banks getting the bulk of deals.

Ryan Smrekar

As students at Cal and those of us taking this class in particular, we all have a general stereotype of what investment banking is about. This article gave good background as to where this industry came from and the impact it had on the growth of such a young economy. JP Morgan was able to establish itself as "the brand" in investment banking and as such, was able to beat out competitors on a name basis. Yes, the return on investment from JP Morgan was high and their clients' assets grew much more than they would have in a normal savings account. However, the company did charge unnecessary high fees and sometimes were involved in deals which solely benefited the board of directors. I found it interesting that the emphasis was on long term deals instead of taking advantage of some "get rich quick" schemes that were available at the time. All in all I was surprised that the collusion of JP Morgan was actually beneficial to our economy.

Chung Leung

Something important to note about this paper is that two alternative points of view are offered, the progressive and finance historian, yet neither is necessarily deemed "incorrect." Delong only goes so far as to say they are incomplete.

Much like the economic analysis of who benefits from slavery, this paper analyzes why it appears that JP Morgan and associates were able to maintain a large market share with huge profits in a field where barriers to entry were rather insignificant.

And like the paper analyzing the economic cost of the Civil War, this paper analyzes the benefits and costs of the monopoly-bent banker's involvement in profitable firms, without singling out one conclusion but rather exposing several that may or may not have worked together (i.e. JP Morgan's efficiency and reliability making it the most trustable advisors, translating into larger confidence in firms).

Even if the analysis loses its reader, one can still grasp the fact that JP Morgan's business was neither completely evil or good, but rather a lesson on how economies of scale can be exploited and possibly how a better alternative would be more beneficial and less dangerous.

Robert M Lee

I thought this article was an extremely insightful look into
the economic history of the major financing firm JP Morgan. I believe
the lack of technology forged different practices in investing.
Pre-WWI, reputation and name went a long ways in building profit in the
long-run. Back then, it was obvious that reputation was one of a firm's
greatest strengths due to the inability that investors had in
researching the firm's organizational cohesion and management quality.
This is definately the way that JP Morgan was able to take on this
middleman role and make profits up to an amazing 10% commission. With
such a reputation and large market share, it made alot of sense that
they would make such an effort to overturn management where needed
and especially to make investors feel confident and safe by putting
JP Morgan's "own men" on the board. I especially found it interesting to
learn about the prominence of the investment banking in our economy
in comparison to our time and Pre-WWI.

Christina Chander

I was very impressed with Delong’s article. It was clear, well planned, and interesting. I was shocked to read in the introduction that during 1910-1912, having a JP Morgan partner on a company’s board of directors added 30% to common stock equity value. That is a very significant amount so of course it would lead to questions as to why that was. JP Morgan, due to its reputation, definitely had a competitive advantage. People trusted them so they could charge high fees to give companies the “stamp” of their partnership. The issues this article deals with reminds me of the accounting scandals in previous years where the auditors were given personal incentives to make the companies that they were auditing look good. I’d like to hope that these relationship between companies and their I-bankers and auditors are really regulated and controlled a lot more strictly than they were in the past so that consumers are better protected. I also really like the Keynes quote in the end because it is important to look long term when dealing with economic and financial matters.

Dwight Upshaw

I thought that this article had a very good overview of the issues during this time period surrounding J.P. Morgan. it is interesting to look at whether or not the investment bankers at the time added any real value to the industry or were they just merely placing a burden(tax) on the system. The arguments are that J.P. Morgan could have added some value because they were really that good, but on the other hand, there was such a collusion of the higher ups in society that it more closely looked like insider trading.

The argument by an economic historian would be that these guys knew how to work the system and they had a tremendous competitive advantage because of the reputation earned through their work. In the article we assume no barriers to entry and a free market. Given that, it was really hard for the little firms to compete with J.P. Morgan because there reputation for making solid decisions made it almost impossible to compete. Smaller firms would have to make unsound investments with a large chance for failure, but a high reward in order to entice any kind of invester.

In conclusion the article basically says that they might have added value. They were really good, but also probably corrupt, as they built a monopoly in the system.

Diana L i

I liked that this article was really clear and easy to understand. It makes sense that there needs to be an intermediary role between investors and companies. And because investors trusted the reputation of JP Morgan, it increased the company’s value up to 30%. From JP Morgan’s perspective, their reputation was one of their most valuable assets. And because their reputation was so important in their long run profits, it makes sense that they wouldn’t be willing to sacrifice it in order to obtain short run profits. Also, it was difficult for smaller firms to compete with JP Morgan because establishing a reputation as strong as JP Morgan’s was very difficult and took a long time. Therefore, smaller firms had more incentive to sacrifice their reputation for short run profits.

James Wang

I find it interesting to compare today’s financial market with the early American financial market. The two biggest things that stood out to me were the availability of information and the relative scale of the companies. It seems to me that Morgan’s ability to make good investments had a large amount to do with his far-reaching network. By having people on the boards of many major companies, he would have had access to information that was not available to the general public, especially with the technology of the times. Compare that to today, where vast amounts of information are available to all those who want it; it makes for a more fair market system today. This unequal distribution of information could very well be one of the intangible barriers to entry that allowed Morgan to make exorbitant profits. The market described in the paper also seemed more compact and concentrated, take the size of US Steel, for example. I would think that it would be easier for any individual or firm to exert more control over a condensed market like that. With more firms and smaller market shares, the market becomes much more competitive.

Chuong Quach

Delong provides an interesting concept that the United State's economy at the beginning of the 20th century was spurred by financial capitalism. An important part of financial capitalism's success was the constant monitoring and intervention of financial capitalist institutions. In the United States, these financial capitalist institutions were held in the hands of a small group of investment bankers, primarily that of J.P. Morgan and Company. According to the article, just the presence of a J.P. Morgan associate on the board of directors added on average 30 percent to the common stock equity value of a company. In essence, J.P. Morgan practically held a monopoly in the financial market, yet they did not abuse it's responsibilities and provided more positive services by implementing an honest reputation. There were no signs that the Morgan name was used to manipulate investors into buying "watered" stocks that were unsound or overpriced. Actually, the prices of stocks were on average fair prices, and many of the companies monitored by Morgan partners increased the company's value not by raising the share price of company, but by providing policies that increased profitability.

It seems as though financial capitalism was the "in" thing during that time frame as other countries saw success elsewhere. In Germany, large banks - such as the Deutsche bank - monitored and supervised corporate managers and coordinated their transactions which generally benefited the company and the economy as a whole. In Japan, the zaibatsu (and later on known as keiretsu) was a system developed to coordinate transactions between companies that were supervised and influenced by banks. Even with its head start in the industrial revolution, Great Britain did not see aggressive growths in the financial capitilism era due to it's focus in overseas investment and absence of financial capitalist institutions.

Mark Wes

I enjoyed reading this article because it sheds some light on the history of I-banking in the U.S. I find it interesting that the investment bankers claim that there are three main reasons why having an I-banker on the board helps the company. They claim that 1) having a banker on the board means that the company is managed correctly, 2) the bankers can (and will) dismiss any manager that is not performing, and 3) the concentration of the market improved the function of the market. Another key point that the I-bankers claim is that their reputation in the business world is paramount. This is still seen today with financial services companies like accounting firms. With scandals like Enron, Worldcom, Tyco, etc. the reputation of a firm is crucial. The accounting firm Arthur Anderson, one of the “Big Five” accounting firms, was forced to shut down because of their involvement with the fraud in Enron and Waste Management. After these scandals came to light, their reputation was permanently scarred and they were thus forced to shut down. In the article, the partners at J.P. Morgan claimed that maintaining reputation was enough to keep them honest, but in today’s world it would appear that upholding reputation is not enough. As the article states, “the concern expressed by Berle and Means (1932) that corporate managers had become accountable to no one, and would divert corporate wealth and assets to their own selfish purposes,” echoes this theme.

Simon Zhu

The acquiring of large amounts of money by way of having a certain reputation, and the refunneling of much of this money into maintaining that reputation seems like the modus operandi of a different group of dubiously value-adding people, political lobbyists.

This system is expensive, is it preferable to today's situation where an investor can find thousands of smaller funds with nothing to recommend themselves but a few years of past performance which may have been by chance? I think when a company has to pay expensive fees to earn this stamp of approval, it actually hurts smaller companies, the ones who really need the capital, but cannot divert any of their scarce cashflow to improving image in this way.

Katelynn Nguyen

Delong’s article visits the topic of J.P. Morgan and Co. in it’s intermediary services in the early 20th century. As an intermediary banking, J.P. Morgan and Co. assisted firms in their capital development as well as expanding firms. They were able to retrieve a good sum of commissions on these deals. The investment banking industry at that time allowed J.P. Morgan, a trustworthy, beneficial, and ultimately net positive intermediary despite the fact that they had conflicts of interest and steep commission rates shown by the regression analysis in the article. J.P. Morgan and Co. were successful in their deals by making companies into monopolies, making its partners more efficient, and lastly, making it into a combination of both. High commission rates can be explained by the large proportion that the investment banking firms take part of the economy. Their conflict of interest was a result of the fact that many of their men served as board of directors for many firms; therefore, there were contradicting ethics being played out. Overall, J.P. Morgan and Co. were able to benefit both firms and individuals in building their investment portfolios and expanding capital for firms, including railroad companies.

Tanya Malik

This article has two perspectives in addressing the question of added value from the men of JP Morgan. One perspective is the progressive perspective which asserts that the men used exploitation in order to add value. The other perspective is the finance historic perspective which asserts that the men are there they are knowledgeable and are the key signatures of the significance of the firm and are incentified by reputation. This was a very interesting article because is illustrates how these men created a successful competitive monopoly with questionable actions. It does a good job of describing the competative markets of the early 20th century.

Krista Seiden

I found DeLong's article on JP Morgan to be very interesting. It shows that a firm's reputation can get it a long way, even as far as preventing competitors from entering the market. I also find it interesting to see the net positive affect of JP Morgan investors sitting on the boards of their various investments. In some cases this made a huge difference in profits. The existence of a brand name boosted the reputation, and value, of these various industries, as the professor points out in the article, JP Morgan's "stamp of approval" added to the value of the company.
Despite the questionable practice of sitting on the board of their investments, JP Morgan provides a valuable service to the economy by channeling investment into productive industries. They also help individual investors by providing good returns to investments. Overall, I think it is important to have companies like JP Morgan, Goldmen Sachs, and others that work in investment banking, because it helps the economy as a whole.

Anshul Shah

After reading this paper, I realize that investment banking profits and value-added for public companies was so great in the early 1900s because there were few regulations in the industry at that time. Also, as mentioned, It is also very true that a firm with a large market share has to be careful to maintain its reputation, while a smaller firm can bend a little and go for short-term profits.
This issue is just as important today as it was back then. For example, if a respectable bank today like Goldman Sachs acts in a way that tarnishes its reputation, there will be much more severe consequences for GS than say, with a much smaller boutique investment bank. Not only that but Goldman's also common stock price will be drastically affected since GS has such a large market capitalization.
I also think that when anything is in its early stages, it is easier to profit in that industry. In this case, the industry was very loosely regulated in the beginning. As shown in the paper, as soon as the SEC ruled that bankers weren't allowed to sit on the board of the companies, it became a little harder for the banks to make those same profits. This reminds me of the "Chinese wall" today, that is intended to prevent communication between a firm's investment banking division and its Equity research division, due to the same reason which is conflicts of interest. In the paper, it is mentioned that "typical fees on mergers and restructurings ranged between four and ten percent of the capital value of
the businesses involved". Today, that fee is much lower.
I think that reputation and loose regulation of the industry greatly helped JP Morgan to stay at the top. Compare that to today's most well-respected bank, Goldman Sach's, which still gets an immense amount of competition from banks like UBS, and Morgan Stanley. This leads me to believe that reputation was enough to by back then, but today there is still a lot more competition even when one takes into account the firm's reputation.

Alexis Geno

I found this article to be really interesting. I just always had this impression that JP and the big investment banks during that time were always seen as powerful dictator of financial activities. No one has ever presented the view that there must be a legitimate reason as to why it has able to dominate during that time. People trusted this company so much that having a Morgan stamp in any huge financial transaction brings more value than before. JP Morgan and the other big banks in that era did put value into these businesses and not simply controlled the business world. But I should say that I do think that their power did somehow arrive from some sort of monopoly, but I also think their power alone was not the result of such control.

Sean Salas

Delong’s article highlights the role of reputation for an investment bank; a role I will elaborate on in terms of its relevancy in the modern financial world. Reputation to increase a clients company value remains to be a key competitive advantage for investment banks. In the early 20th century reputation was dependent on a banks management ability to increase company profitability, ultimately, leading to the increase in a firm’s market value. Delong’s article highlights investment banks were most successful in increasing company profitability via management decisions since investors shared a long-term view in seeking investment opportunities.

Currently investment bankers are no longer able to be on the board of its clients which has led to the use of alternative methods of increasing company value. Contemporary methods of financial advisory are tailored to the new short-term investment perspective of investors. In sum, reputation is currently dependent on its ability to advise companies on investment opportunities which offer short-term gain. As a result, we see a shift from an early long-term to contemporary short-term focus on seeking investment opportunities in the modern financial world.

The comments to this entry are closed.

From Brad DeLong

Search Brad DeLong's Website

  •  
Brad DeLong's Schedule

About Brad DeLong

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal

Pages