Rogue Whale

The white whale of American finance has returned. In January 2004, JP Morgan Chase & Co. acquired BankOne for $58 billion. This merger is the latest reflection of a two-decade reversal in public policy, which invites enormous conflicts of interest within banks. It was this deregulation that led to scandals of insider trading and investor deception and deepened the 2000-01 stock-market collapse, repeating the sordid history that led to tougher bank regulation in the 1930s. This latest acquisition brings the House of Morgan full circle, reminiscent of its power in the 1920s.

Yet just as a financial Moby Dick is rising again, so, too, is a new Captain Ahab. Eliot Spitzer, New York's attorney general, is working to reform the culture of Wall Street, filling a vacuum left by a pliant Bush administration. But mergers like Morgan's make Spitzer's task more difficult, because they create multiple opportunities for conflicts of interest.

By undertaking the third-largest banking merger in American history, Morgan becomes the second-largest U.S. bank in assets ($1.1 trillion to Citigroup's nearly $1.2 trillion) and deposits ($490 billion to Bank of America's $552 billion), with some 2,300 branches and 6,000 ATMs across 17 states. Post-merger, Morgan now issues the most Visas and MasterCards nationwide (some 95 million) and holds the largest share of U.S. credit-card balances -- $125.1 billion, or 18.9 percent of the market. (2003 was the first year credit cards were used more than cash or checks in stores.)

To preserve their historic influence, generations of Morgans have fought financial regulation. In the late 19th and early 20th centuries, JP Morgan & Co. was the world's most powerful bank. It was America's unofficial central bank, served as international guardian of the gold standard, and halted periodic financial panics (from which it profited). According to The Wall Street Journal, the "money trust" famously described by Supreme Court Justice Louis Brandeis as the greatest threat to the American economy was simply another name for J. Pierpont Morgan, the bank's eponymous founder.

Morgan exerted extraordinary government influence, particularly with the Republican Party. During the administrations of the 1920s, Morgan men routinely represented the U.S. government at international monetary meetings. President Herbert Hoover frequently phoned Morgan's CEO before breakfast. So many Morgan men, in fact, were on the U.S. delegation to the 1919 Versailles Peace Conference that some observers grumbled they were running the show. Benjamin Strong, governor of the New York Federal Reserve Bank from 1914-28 and America's most powerful central banker, began his career at a Morgan-associated bank and would likely have joined Morgan had the bank's partners not persuaded him to run N.Y. Fed instead. This Morgan-Fed connection continues today: Before President Reagan named him chairman of the Federal Reserve, Alan Greenspan served as a corporate director for Morgan.

Morgan was also the Roaring '20s emblem of securities abuse. The 1929 crash saw individual investors suffer as many banks, Morgan chief among them, favored their own stock offerings and profits over their investors' best interests. In May 1933, U.S. Senate Banking Committee counsel Ferdinand Pecora exposed how Morgan reserved shares at reduced prices for certain clients, giving guaranteed profits to former President Calvin Coolidge, Franklin Delano Roosevelt's sitting treasury secretary, the chairmen of the Republican and Democratic national committees, and the CEOs of General Electric, AT&T, and Standard Oil, among others. To curb these abuses, FDR signed the 1933 Glass-Steagall Act, which prohibited commercial banks from underwriting securities, and the next year signed the Securities Exchange Act, which created the Securities and Exchange Commission to police Wall Street and prevent stock manipulation.

Since the 1980s, however, financial lobbies have done end runs around banking and securities regulation. In 1990, Morgan became the first bank to receive Federal Reserve permission to underwrite securities, provided that they remain only 10 percent of its business. In 1996, the Federal Reserve reinterpreted Glass-Steagall, raising the securities limit to 25 percent of revenues.

Regulators also indulged megamergers of banks with investment banks and insurance companies, and one another, including Morgan's merger with Chase Manhattan, Citigroup's 1998 $72.6 billion merger with Travelers, and Bank-America's 1998 $61.6 billion merger with NationsBank. And in 1999, the process begun by the Federal Reserve was completed when President Clinton and a Republican Congress repealed Glass-Steagall entirely.

Not surprisingly, as regulation has been breached, abuses like those of the 1920s have recurred. At the same time, finance's political influence in the GOP has grown. The nonpartisan, nonprofit Texans for Public Justice reports that U.S. financiers account for one-third of the 32 new Bush re-election "Pioneers" and "Rangers" (those who raised $100,000 and $200,000, respectively) since 2000; a former Morgan regional chair and a Morgan consultant were major Bush fund-raisers in 2000, with the latter achieving Ranger status in 2004. More generally, the financial, insurance, and real-estate sectors favor Republicans, splitting their 2004 political contributions 61 percent to Republicans to 38 percent to Democrats.

Moby Dick requires a nemesis. For Morgan, Ahab has often been governor of New York, has often become president, and has twice been named Roosevelt. The historic battle began in 1901, between J. Pierpont Morgan and Theodore Roosevelt, who was governor of New York before becoming president. Roosevelt harpooned Morgan early, prosecuting Morgan's Northern Securities Company for antitrust violations and forcing it to break up in 1904. Morgan hated Roosevelt so much that the mere mention of the latter's name made the banker explode, "God damn all Roosevelts!"

Ironically, Morgan was responsible for educating the next Ahab. Morgan helped purchase land near Boston for the prep school Groton, where FDR first studied his cousin Teddy's exploits. As president, FDR specifically targeted Morgan via the Glass-Steagall Act. J.P. Morgan Jr. reportedly so loathed FDR that his grandchildren were told not to mention the president in his presence and Morgan's servants removed photos of FDR from the morning paper.

JP Morgan Chase's newest Ahab, Eliot Spitzer, is said to have his eye firmly on the New York governor's mansion. Echoing the Rooseveltian view that finance must be controlled rather than liberated, Spitzer has forced Morgan and other top New York banks to pay huge fines for their abuse of the financial markets, including a $1.4 billion collective settlement for Wall Street's 10 largest firms. As a result of Spitzer's relentless investigations, Morgan has surrendered numerous settlements, including $135 million for assisting Enron, $80 million for biased stock research, and $25 million for offering insiders improper access to initial public stock offerings.

Morgan has always flourished when allowed free rein, and its recent merger has given it concentrated power reminiscent of its founder. But a new Ahab is on the hunt.