Where is Jacob Schiff When We Really Need Him

Wednesday, April 19th, 2017

Jacob Schiff (1847-1920), a contemporary and banking rival of JP Morgan is a name that today does not draw much interest or recognition.  While there are multiple biographies of Morgan and other financiers such as Schiff’s in-laws, the Warburg’s, Schiff himself has largely been ignored. There are studies about his philanthropy, and he is discussed at length in Stephen Birmingham’s excellent 1967 book about the New York Jewish banking families, Our Crowd.  Yet a Google search of Jacob Schiff reveals that the most recent interest in his life and career currently comes from anti-Semitic conspiracy theorists, such as former Republican Congressman William Dannemeyer, who represented California’s 39th District (Orange County) from 1979 to 1993.  In his article, “Who Stole America,” Dannemeyer claims that Jacob Schiff was sent to New York by the Rothschild’s to take over the US banking system, which he accomplished by secretly orchestrating the formation of the Federal Reserve and then used it to finance the Russian Revolution. While these allegations are beyond being absurd, many people worry that following a bitter Presidential election with a surprising outcome, such tropes are making a comeback: but that is not why we should pay attention to Jacob Schiff.

The largest and most powerful banks and brokerages such as JP Morgan Chase, Wells Fargo and Goldman Sachs are richly valued, but the public perception of the companies and their management is closer to an all time low.  Recently Wells Fargo dismissed its CEO after being fined for engaging in deceptive sales practices, which included rewarding employees who opened unauthorized accounts for the bank’s customers. In 2014, JP Morgan Chase, paid out an eyeball popping record fine of $920 million to settle legal claims resulting from rogue bond trading in London. This debacle linked to one trader, known as the London Whale, resulted in a $6 billion loss for the bank, which they did not accurately state in their earnings report.  In the same complaint it was revealed that the firm had ignored many red flags and continued to do business with Bernie Madoff despite filing a document with a UK regulator in 2008 stating that “his returns were too good to be true.”  JP Morgan Chase’s Jamie Dimon, a widely admired CEO, initially described the $6 billion loss resulting from the London Whale trading debacle as “a tempest in a teapot,” but later admitted that neither he nor the bank’s London management understood enough about the complex derivatives being used by his own traders. Shortly after JP Morgan Chase paid the record settlement, Mr. Dimon received a significant increase in compensation.  Goldman Sachs CEO Lloyd Blankfein was praised and rewarded for keeping his firm in good financial shape during the financial crisis of 2008.  In 2010, however, this success was called into question by an SEC fraud complaint concerning an investment partnership called Abacus, created by Goldman Sachs so that hedge fund manager John Paulson could bet against sub-prime mortgages during the 2008 financial crisis.  Goldman needed to find investors plus an institutional manager to take the opposite side of the trade, but never informed them that Paulson had selected the bonds.  The bond fund manager told the Senate committee a Goldman trader who was later dismissed assured his firm that Paulson was an equity investor in the partnership. When confronted with these facts, Mr. Blankfein testified that Goldman had “no moral or legal obligation” to inform their clients that Paulson’s fund had selected and sold short the mortgages they were buying.   After Goldman settled the SEC fraud suit for a then record $550 million the firm admitted that they should have been more forthcoming about the short positions in Abacus and other similar debt instruments.

In an interview with the Financial Times following the SEC settlement, Mr. Blankfein proclaimed that Goldman Sachs was in excellent shape and back to “doing God’s work.” Presumably he was referring to the contribution his firm makes to the liquidity of the mortgage securities market which does greatly benefit the public and most people know very little about except for what went wrong with it in 2008.  Wall Street CEO’s could do much more to engage the public about their activities that help Main Street but also address the growing antipathy directed at their banks when they do fail at risk management and ignore their own red flags.  “I owe the public nothing!” JP Morgan famously bellowed at a reporter who dared to ask him a question about his railroad deals.  That was in 1901 however, and his bank had not received a taxpayer-funded bailout.   Whether they like it or not, the thriving beneficiaries of the 2008 bailout clearly do owe the public something.

These events would have likely both troubled and baffled Jacob Schiff.   Unlike JP Morgan, he did not have his name on the bank, which explains some of his anonymity, and he gave charitable gifts as acts of public philanthropy. Without Schiff, the Henry Street Settlement House, which aided tenement dwellers in New York, the American Jewish Committee, which rescued Russian Jews from pogroms, and the Jewish Theological Seminary would not exist.  Yet none of these institutions bear his name.  He worked for his father-in-law at Kuhn, Loeb, succeeding him as Chairman and made the firm a major player in financing railroads.  Perhaps his best known and signature deal was the restructuring of the then bankrupt Union Pacific Railroad in 1895—a transaction that per the prevailing code between Jewish bankers and their Protestant overlords, Schiff first offered to Morgan who declined the opportunity–something he later very much regretted.  “Let the Jews have that one,” was a phrase often heard on Wall Street in the 1890’s and in this case Kuhn, Loeb gladly accepted.  Schiff, according to one of Morgan’s early biographers knew more about railroads than all of his competitors put together, and “had probably inspected every railroad tie from Baltimore to Denver.”  As a result, Schiff, who Morgan referred to as “that foreigner,” better understood Union Pacific’s potential value and significance to mining, forestry and the growing US economy.  Long before globalization was a word, the key to Schiff’s signature triumph was to attract international investors, and it is fair to say that without his efforts the largest American railroad would not have survived.

What Jacob Schiff did by himself to create and complete the restructuring of Union Pacific in 1895 would now involve at least four separate departments of an investment bank: he was the merchant banker willing to risk capital on an opportunity others had missed, the underwriter who created the equity securities, the credit analyst who determined the interest rates and maturities of the bonds, and the domestic and international syndicate manager who oversaw where they were placed and at what price. In an environment where the playing field was not level, Schiff made sure he understood his bank’s business better than anyone else, because not doing so would definitely lead to failure. As noted by Stephen Birmingham in Our Crowd, Schiff believed and practiced his motto, that “our only attractiveness is our good name and reputation for sound advice and integrity.”

In 1913 Schiff led the reorganization of the Pennsylvania Railroad and Kuhn Loeb partnered with JP Morgan to finance building the Penn Tunnel under the Hudson River.  The project was controversial and how best to replace the 103-year-old tunnel remains so today.  Schiff, Morgan and their investors were roundly criticized by muckraking journalists and President Theodore Roosevelt chastised Wall Street Bankers as ”the malefactors of great wealth.” Yet Schiff corresponded extensively with Roosevelt, and later Wilson.  He tried to persuade both Presidents that the country benefited from the efficient management of the nations railroads and other industries such as steel and oil that resulted from monopoly ownership.  But in this case he badly misjudged the political headwinds and was called before a hostile Congressional Committee investigating his interlocking interests.   In contrast to his current counterparts, Schiff appeared without lawyers, openly testified about his transactions and cleared up some misconceptions, but the amount of securities underwritten by Kuhn Loeb became part of the public record and was in itself controversial. Today’s bank CEO’s might want to emulate both Schiff’s business and charitable ethos.  He ultimately gave most of his wealth away (as Warren Buffett plans to do), and firmly believed that he owed the American public not just something but a great deal.  In an environment with entrenched warring political factions, where too-big-to-fail financial institutions remain insular and are losing the public’s trust, a large dose of Jacob Schiff would be most welcome.

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