Wall Street’s Prudent Powerhouse

Wall Street both fascinates and repulses we Americans. The glowing power and the staggering flows of money, its ability to shape or destroy not only industry but entire countries. As a result – and depending on economic and social conditions – we have had a long episodic relationship with our financial titans, at times adulating them, at times seeing them as the fonts of all corruption and needing to be broken apart and controlled like dangerous animals.

We are vividly reminded of this odd and uneven relationship in Zachary Karabell’s richly absorbing and truly fascinating new book, “Inside Money: Brown Brothers Harriman and the American Way of Power . Using the long, storied history of Brown Brothers Harriman and its two antecedent firms, Brown Brothers and H.E. Harriman, we give both a grand and at times poignant tour of American finance and the massive role it has played in building our nation. Moreover, as a critical sub-theme of his book, we are shown that not all Wall Street investment houses of uncontrolled greed and fiscal imprudence. Case in point: Brown Brothers Harriman.

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Of the two firms, Brown Brothers is the oldest, tracing its history back to late 1700’s Ireland where we find Alexander Brown launching a successful business as a linen merchant. But Ireland was a troubled place then and, as a result of the Irish Rebellion of 1789, Brown was forced to flee the Emerald Island for Baltimore, Maryland with his wife and his youngest son (the three elder ones being in schools in England) to re-launch his firm. Baltimore was at that time the major trade port in the US, as southern states sent their goods north as well as Europe while in return being voracious consumers of fine Irish linen.

Brown was soon joined by other sons and within a few years had dispatched them to set up outposts in Philadelphia, New York, and Liverpool, England. As the years rolled by, Brown Brothers became a major – if not a dominant - financial force in the young United States and England, expanding beyond linen to corporate finance including sponsoring the first initial public offering in the US in 1808.

Yet – and here is that persistent sub-theme of the book - Alexander Brown did not let the business grow too fast. Prudence was the order of the day, every day for Alexander Brown. He demanded this of his sons in numerous letters preaching careful analysis of any new business proposition. Greed and ostentatious living were the greatest sin a Brown could commit, and, in its place, he demanded a strong sense of service to community and nation. As Karabell carefully documents, it seems Brown Brothers declined more opportunities than embraced which resulted in the firm not only surviving but thriving through numerous economic and financial crisis’ in the first half of the 1800s. These crises created the Progressive firebrands of the day, the biggest and most powerful being President Andrew Jackson who denounced the big financial firms as being a relic of “nobility systems that enabled a few and rich intelligent men to live upon the labor of many.”

It is not until the latter half of the 1800’s that we meet E.H. Harriman. Born in 1848 the son of an Episcopal pastor, Harriman was a slight, slender man who – to the horror of his father - abandoned schooling at the age of 14 to work as a runner for a New York brokerage. He was a keen learner and showed a genius for finance which, at the age of 34, he unleashed by making his first big acquisition: The Illinois Central Railroad. America was rapidly expanding West and the “iron horse” was the greatest and fastest way to make that expansion happen. Harriman’s acquisition instantly become a national railroad baron. (Interestingly and conversely, Brown Brothers took a hard pass on investing in railroads, believing it too speculative and not prudent). Despite that slight physique, Harriman proved to be an extraordinarily steely businessman. The author offers a fantastic look into how Harriman soon took on legendary financiers/railroad barons J.P. Morgan and Jacob Schiff (head of Kuhn, Loeb & Co., the forerunner of Lehman Brothers), beating them at their own game and bending them to his vision.

E.H. Harriman was now a major financial power, and it was not long before the two firms of Brown Brothers and H.E. Harriman were working in tandem on bond deals not only in the US but in Latin America and across Europe. But Harriman, like Alexander Brown, was a man also reliant on prudence to build out his business. Despite plunging into the go-go, boom-or-bust world of railroads at the time, it was his prudent, careful management of business that made him a success, and which ultimately won him the support of Morgan and Schiff. And, like Alexander Brown Harriman produced and carefully cultivated and trained heirs to join him at the firm and eventually succeed him: Averell and Roland.

Averell would, of course, go on to be Governor of New York and something of a legendary diplomat. He was the big idea guy, less so the day-to-day manager type. That was Roland’s forte. A prudent (there is that word again) and a strong manager who helped assemble a team of brilliant bankers who shared a nose for smart, careful yet financially rewarding deals.

The rise of Averell and Roland as leaders of H.E. Harriman in the 1920’s brought the most natural alignment with the men leading Brown Brothers. The bond was school, specifically Yale University where they all seemed to be members of the elite Skull & Bones Society or other elite societies and where their friendships for life were bonded and marriages even made them relatives (Alex. Brown in Baltimore along with the other affiliate set up in Liverpool nearly a century before, Brown Shipley, had effectively split off decades before due to US tax law changes).

It is here that Karabell demystifies – and also confirms – the clubby world of early 20th century Wall Street. Indeed, the belief in the US at that time that “…a small clique of elites pull[ed] the strings…usually centered on coastal elites that the Browns and Harriman’s epitomized” was strongly held by much of the country. In 1930, that opinion only grew as the boys from Yale were not only financing the biggest companies in America, quietly making big fees despite the stock market crash and resulting Great Depression but were now going to merge.

And where and how was the merger arranged? On a private train going from New York to New Haven, Connecticut to attend the Yale football homecoming game. Of course. Over fine scotch and good cigars, they worked out the details, smoothly bringing together the great financial houses into one. The result would have a much bigger impact on US and world history: The merger elevated a young Prescott Bush – father and grandfather to future US Presidents – as leader of the combined firms.

Today, the firm’s history and culture speak for itself. Yet, in today’s modern financial world, Brown Brothers Harriman stands as a stark anomaly to other firms. Too many on Wall Street, it is somehow seen as shrinking, fading business. But this is factually incorrect. It is still run as a partnership, having eschewed the big money the other large firms grabbed via listing themselves on the stock market. It is indeed a successful firm, and it is successful in the businesses it has chosen to pursue. Moreover, unlike virtually every other large investment bank and brokerage, Brown Brothers Harriman is never in the news, never engulfed in intense regulatory scandals that has hit every big-name financial house over the course of the last 30 years.

Karabell argues that over the years we seem to have quietly changed the definition of capitalism and what constitutes success in financial markets. “In what universe does surviving and thriving for over the course of more than two hundred years constitute failure? In what healthy system does never becoming too big to fail get judged negatively? Why is sustaining a culture that shuns the spotlight and remains both viable and modest not valued, while becoming a behemoth is celebrated and reviled? Why is Michael Milken a parable, while Brown Brothers a faint echo?... Over the centuries, they [Brown Brothers Harriman] made considerable money, and much of that money made America. For two hundred years, the firm stuck to its last.”

Karabell is spot on in his challenge, one all of today’s titans of Wall Street should pause to consider as we enter a rapidly changing and increasingly turbulent world.