Other People's Money, and How the Bankers Use It

by Louis Dembitz Brandeis

A BANKERS’ PARADISE

Kuhn, Loeb & Co. were the Union Pacific bankers. It was in pursuance of a promise which Mr. Jacob H. Schiff—the senior partner—had given, pending the reorganization, that Mr. Harriman first became a member of the Executive Committee in 1897. Thereafter combinations grew and crumbled, and there were vicissitudes in stock speculations. But the investment bankers prospered amazingly; and financial concentration proceeded without abatement. The bankers and their associates received the commissions paid for purchasing the stocks which the Supreme Court holds to have been acquired illegally—and have retained them. The bankers received commissions for underwriting the securities issued to raise the money with which to buy the stocks which the Supreme Court holds to have been illegally acquired, and have retained them. The bankers received commissions paid for floating securities of the controlled companies—while they were thus controlled in violation of law—and have, of course, retained them. Finally when, after years, a decree is entered to end the illegal combination, these same bankers are on hand to perform the services of undertaker—and receive further commissions for their banker-aid in enabling the law-breaking corporation to end its wrong doing and to comply with the decree of the Supreme Court. And yet, throughout nearly all this long period, both before and after Mr. Harriman’s death, two partners in Kuhn, Loeb & Co. were directors or members of the executive committee of the Union Pacific; and as such must be deemed responsible with others for the illegal acts.

Indeed, these bankers have not only received commissions for the underwritings of transactions accomplished, though illegal; they have received commissions also for merely agreeing to underwrite a “great transaction” which the authorities would not permit to be accomplished. The $126,000,000 underwriting (that “single commitment on the part of bankers” to which J. P. Morgan & Co. refer as being called for by “the Attorney General’s approval of the Union Pacific settlement”) never became effective; because the Public Service Commission of California refused to approve the terms of settlement. But the Union Pacific, nevertheless, paid the Kuhn Loeb Syndicate a large underwriting fee for having been ready and willing “to serve,” should the opportunity arise: and another underwriting commission was paid when the Southern Pacific stock was finally distributed, with the approval of Attorney General McReynolds, under the Court’s decree. Thus the illegal purchase of Southern Pacific stock yielded directly four crops of commissions; two when it was acquired, and two when it was disposed of. And during the intervening period the illegally controlled Southern Pacific yielded many more commissions to the bankers. For the schedules filed with the Pujo Committee show that Kuhn, Loeb & Co. marketed, in addition to the Union Pacific securities above referred to, $334,000,000 of Southern Pacific and Central Pacific securities between 1903 and 1911.

The aggregate amount of the commissions paid to these bankers in connection with Union Pacific-Southern Pacific transactions is not disclosed. It must have been very large; for not only were the transactions “great”; but the commissions were liberal. The Interstate Commerce Commission finds that bankers received about 5 per cent. on the purchase price for buying the first 750,000 shares of Southern Pacific stock; and the underwriting commission on the first $100,000,000 Union Pacific bonds issued to make that and other purchases was $5,000,000. How large the two underwriting commissions were which the Union Pacific paid in effecting the severance of this illegal merger, both the company and the bankers have declined to disclose. Furthermore the Interstate Commerce Commission showed, clearly, while investigating the Union Pacific’s purchase of the Chicago & Alton stock, that the bankers’ profits were by no means confined to commissions.

THE BURLINGTON

Such railroad combinations produce injury to the public far more serious than the heavy tax of bankers’ commissions and profits. For in nearly every case the absorption into a great system of a theretofore independent railroad has involved the loss of financial independence to some community, property or men, who thereby become subjects or satellites of the Money Trust. The passing of the Chicago, Burlington & Quincy, in 1901, to the Morgan associates, presents a striking example of this process.

After the Union Pacific acquired the Southern Pacific stock in 1901, it sought control, also, of the Chicago, Burlington & Quincy,—a most prosperous railroad, having then 7912 miles of line. The Great Northern and Northern Pacific recognized that Union Pacific control of the Burlington would exclude them from much of Illinois, Missouri, Wisconsin, Kansas, Nebraska, Iowa, and South Dakota. The two northern roads, which were already closely allied with each other and with J. P. Morgan & Co., thereupon purchased for $215,227,000, of their joint 4 per cent. bonds, nearly all of the $109,324,000 (par value) outstanding Burlington stock. A struggle with the Union Pacific ensued which yielded soon to “harmonious coöperation.” The Northern Securities Company was formed with $400,000,000 capital, thereby merging the Great Northern, the Northern Pacific and the Burlington, and joining the Harriman, Kuhn-Loeb, with the Morgan-Hill interests. Obviously neither the issue of $215,000,000 joint 4’s, nor the issue of the $400,000,000 Northern Securities stock supplied one dollar of funds for improvements of, or additions to, any of the four great railroad systems concerned in these “large transactions.” The sole effect of issuing $615,000,000 of securities was to transfer stock from one set of persons to another. And the resulting “harmonious coöperation” was soon interrupted by the government proceedings, which ended with the dissolution of the Northern Securities Company. But the evil done outlived the combination. The Burlington had passed forever from its independent Boston owners to the Morgan allies, who remain in control.

The Burlington—one of Boston’s finest achievements—was the creation of John M. Forbes. He was a builder; not a combiner, or banker, or wizard of finance. He was a simple, hard-working business man. He had been a merchant in China at a time when China’s trade was among America’s big business. He had been connected with shipping and with manufactures. He had the imagination of the great merchant; the patience and perseverance of the great manufacturer; the courage of the sea-farer; and the broad view of the statesman. Bold, but never reckless; scrupulously careful of other people’s money, he was ready, after due weighing of chances, to risk his own in enterprises promising success. He was in the best sense of the term, a great adventurer. Thus equipped, Mr. Forbes entered, in 1852, upon those railroad enterprises which later developed into the Chicago, Burlington & Quincy. Largely with his own money and that of friends who confided in him, he built these railroads and carried them through the panic of ’57, when the “great banking houses” of those days lacked courage to assume the burdens of a struggling ill-constructed line, staggering under financial difficulties.

Under his wise management, and that of the men whom he trained, the little Burlington became a great system. It was “built on honor,” and managed honorably. It weathered every other great financial crisis, as it did that of 1857. It reached maturity without a reorganization or the sacrifice of a single stockholder or bondholder.

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