John Gapper How John Mack defied history for his shareholders

There is a nice footnote to history in the revelation that the US government tried to force Morgan Stanley to sell itself for $1 a share to JP Morgan Chase at the height of the financial crisis last year.

Had the takeover gone through, it would not only have been a humiliating end to the career of John Mack, Morgan Stanley’s chairman and chief executive, but would also have reversed the enforced break-up of J.P. Morgan by the US government following the 1929 crash.

Morgan Stanley was originally the securities underwriting and trading arm of J.P. Morgan, and broke away in September 1935 after the Glass-Steagall Act separated commercial and investment banking in the US.

Andrew Ross Sorkin’s forthcoming book on last year’s crisis, Too Big to Fail, recounts that Hank Paulson, when he was US Treasury Secretary amid the financial turmoil, attempted to orchestrate deals between Goldman Sachs and Wachovia, and JP Morgan and Morgan Stanley.

Mr Mack, who will be succeeded at the top of Morgan Stanley by James Gorman at the end of the year, stood his ground more trenchantly than Ken Lewis, who has just announced his resignation as chief executive of Bank of America after being dogged by the ill-fated acquisition of Merrill Lynch.

This is a description of the event from Vanity Fair, which is carrying extracts from Ross Sorkin’s book:

Meanwhile, the government demanded Morgan Stanley merge with JP Morgan, an idea that both John Mack, Morgan Stanley’s CEO, and Jamie Dimon, JP Morgan’s CEO, did not want to pursue, but both held brief talks at the government’s urging.

Paulson, Bernanke, and Geithner told Mack that he should be willing to sell his firm to JP Morgan for $1 a share.  Mack, in an impassioned phone call with the three government leaders, rejected their demand: “There are 35,000 jobs that have been lost in this city between AIG, Lehman, Bear Stearns, and just layoffs. And you’re telling me that the right thing to do is to take 45,000 to 50,000 people, and put them in play, and have 20,000 jobs disappear? I don’t see how that’s good public policy.”

Morgan Stanley subsequently gained a $9bn capital injection from Mitsubishi UFJ, the Japanese bank, in exchange for a 21 per cent stake. Its shares were today trading at about $30, up from a 52-week low of $6.71, which shows that Mr Mack made the right call.

Of course, he also took a gamble for, without the help of the US government and Mitsubishi, Morgan Stanley might not be around at all, as Ross Sorkin notes in a Vanity Fair interview:

If the Mitsubishi deal had not gone through, I truly believe that Morgan Stanley would have either gone by the wayside like Lehman Brothers, probably putting so much pressure on Goldman that it may have toppled as well, and we would have seen even greater havoc in the marketplace. Now, there was always the possibility – it was never really raised that weekend, or at least not aloud – about whether the government at that point would have decided to step in itself and put capital into Morgan Stanley the same way they did AIG. But barring a capital injection, Morgan Stanley would have died, then Goldman Sachs – and then General Electric.

All the same, Mr Mack turned out to be doing a very good job for his shareholders by refusing to buckle to Washington pressure, or to nod to history.