NEW YORK (CNNfn) - Imagine Wal-Mart buying Tiffany. Now think Chase Manhattan snapping up J.P. Morgan.|
Sound like a stretch? Not exactly, experts in banking and finance say. The $33 billion deal, announced Wednesday, will join Chase Manhattan Corp. and its middle-of-the-road clients with J.P. Morgan & Co., long the nation's banker for the wealthy, whose name helped define American capitalism.
"It's not quite like Donald Trump and the Beverly Hillbillies, but the differences in these two banks are striking," said Ken Thomas, an expert in finance at the University of Pennsylvania's Wharton School of Business.
The deal comes as both banks try to keep up with larger rivals. Morgan needed the size and reach that a mass-market bank like Chase could provide, while Chase takes a big step forward in investment banking and wins the prestigious Morgan name. The new company will be called J.P. Morgan Chase & Co.
While the roots of the "House of Morgan" extend back to London in the 1830s, the firm began to take shape in earnest in 1861, when J. Pierpont Morgan, age 24, the son of one of the founders, established J.P. Morgan & Co. in New York.
Banker to wealthy; helping France fight a war
The firm set out lending to and advising powerful corporations and individuals, such as U.S. Steel, General Electric, and AT&T. It lent money to the French government in 1870 when it was fighting Otto von Bismarck and his plans to build a German empire, marking the bank's first push into the business of advising national governments.
The Morgan empire even helped rescue the American banking system in 1907, when a panic prompted a run on bank deposits and turmoil on Wall Street. After that episode, in 1913 the government created the Federal Reserve, the nation's first true central bank.
"It was certainly the august banking entity that other banks aspired to," Dimitri Papadimitriou, president of The Jerome Levy Economics Institute at Bard College near New York, told CNNfn.com.
After the stock market crash of 1929, federal laws passed in 1933 forced the separation of banking and securities companies. As a result, the company split into two pieces: J.P. Morgan & Co. (JPM: Research, Estimates), a commercial bank, and Morgan Stanley, the securities firm.
When J. Pierpont's son Jack Morgan died in 1943, Thomas Lamont became chairman, the first time the company had not been run by a Morgan since 1864.
Looking to expand, J.P. Morgan merged with Guaranty Trust Co. in 1959, a firm that was four times its size, giving it more clout in corporate lending. But when many of its corporate customers started raising money on their own by issuing stock and selling bonds, Morgan's business got hurt.
In 1989, J.P. Morgan became the first commercial bank that the Fed allowed to sell corporate bonds, and a year later it won permission to underwrite stocks. Morgan had been active in these businesses in Europe, and in that sense was already helping pave the way for major changes to U.S. banking laws -- changes that were finally enacted last year.
In recent years, Morgan had been trying to become an even bigger player in investment banking - the business of underwriting securities and advising on mergers and acquisitions - but it did not have the size of some of its larger rivals.
Seeking more investment banking clout
This, industry analysts say, helped drive it into the arms of Chase Manhattan (CMB: Research, Estimates), which itself has been building its investment banking business. New York-based Chase got its start in 1799 as Manhattan Co., established with the support of Alexander Hamilton and Aaron Burr to help financial development in New York City.
"This was really a gem sitting out there waiting for someone to acquire it. There are a lot of banks, but not too many with the J.P. Morgan name," said the Wharton School's Thomas.
A successor to Manhattan Co. eventually combined with Chase National Bank in the mid-1950s to form Chase Manhattan Bank, which became an international powerhouse under the leadership of David Rockefeller. It later merged with Chemical Bank, which had earlier combined with Manufacturers Hanover.
-- from staff and wire reports