Business: Marriage of Convenience

Jay Cooke, who made his name and fortune financing the Union in the Civil War, went bankrupt during the Panic of 1873, and from the ashes of his Philadelphia banking house arose the firm of Chas. D.

Barney & Co. With the decline of Philadelphia as a financial capital the firm’s centre of gravity shifted to Wall Street, and today it is primarily a brokerage house. For all its years Chas. D. Barney & Co. is rated as a progressive firm. It not only was one of the first Stock Exchange houses to start investment counsel service in a big way but also was among the first to realize that such service should be divorced from the underwriting and commission business. And last week Chas. D. Barney & Co. had the distinction of having its senior partner, John W. Hanes, named as the first Stock Exchange member appointed to the SEC (see p. 53). Founder Barney, now 94 and long since retired, lives outside Philadelphia but two of his grandsons are in the firm, as is a great-grandson of Jay Cooke. It also has a partner named Fish. As old Mr. Barney approached 50 another firm was founded in Philadelphia by the late Edward Brinton Smith, a railroad & utility banker. In Philadelphia, where such things count, Edward B. Smith & Co. was socially the equal of Chas. D. Barney & Co., and financially it was not scorned even by Drexel & Co. (branch of J. P. Morgan). During the War, however, Edward B. Smith & Co. lost ground, and the founder’s son Albert and a group of young partners headed by John W. Cutler had to start almost from scratch. As in C. D. Barney, the Manhattan office became the head office but, instead of concentrating on the brokerage business, E. B. Smith set out to rebuild its underwriting business. It got off on the right foot by floating the first public offering of International Telephone & Telegraph common stocks. I. T. & T. financing soon got too big for the firm to handle and went to J. P. Morgan & Co., but E. B. Smith enjoyed the reflected glory and a fat slice of every I. T. & T. deal. Some of its other flotations like Roosevelt Field, Inc. and R. Hoe & Co. added nothing to its name, but E. B. Smith managed to avoid the subsequent attention lavished by the Senate Banking & Currency Committee on most of its peers.

Abruptly in 1934 Edward B. Smith & Co. changed from a firm with a good brokerage business and a relatively good underwriting business into a mighty underwriting house with a commission business sideline. With the divorce of underwriting from banking, the high-powered personnel of the Guaranty Co. (securities affiliate of Manhattan’s Guaranty Trust Co.) found itself out of a job, and after a little dickering moved into E. B. Smith. Senior partner of this bigger & better E. B. Smith was the old Guaranty Co. President, Joseph Rockwell Swan, to whom Senator Wheeler once remarked, in connection with Van Sweringen financing: “I do not doubt your good faith but I do doubt your judgment.” The old firm had capital and the Guaranty men had connections—most important factor in investment banking. Among the new partners from Guaranty Co. was a man named Fish.

In volume of underwriting E. B. Smith zoomed into such company as First Boston Corp., which was supercharged with old Chase Harris Forbes’ men, and Brown Harriman & Co., which drew heavily from old National City Co. The withdrawal of the big bank affiliates with their vast financial backing left the whole securities business undercapitalized but everything went well until last summer when E. B. Smith headed a banking group which underwrote a $44,000,000 issue of Pure Oil preferred stock and took a big position in another group which underwrote $48,000,000 of Bethlehem Steel bonds. In both cases the company stockholders were given first right to take up the offerings. But the 20-odd days which the stockholders had to make up their minds coincided with the worst drops in the recent market crash. The Bethlehem bonds which the bankers bought at 98 sold as low as 86. The Pure Oil preferred was taken over from the company at $97.50 and has never been offered. It is against just such contingencies that companies insure themselves by having their issues underwritten.

For E. B. Smith the losses were serious —at least $1,000,000 in Bethlehem and a paper loss in Pure Oil conservatively estimated at another $1,000,000. A firm’s capital is a deep, dark secret but good Wall Street guesses were that the total losses (thus estimated) amounted to about one-third of E. B. Smith’s capital.

Ugly rumors started to buzz, least libelous being that E. B. Smith would have to merge, perhaps with rich old Lazard Freres. But banks helped thaw out E. B. Smith with long-term loans which gave it the choice of continuing in business alone, if on a diminished scale. Meantime C. D. Barney had money but lacked underwriting “connections.” Moreover, merger mongers overlooked the fact that Barney Partner Edwin Fish was a brother of Smith Partner Irving Fish. Last week the betrothal of the two firms that grew up together in Philadelphia was formally announced. Thus the marriage, to occur at the turn of the year, will not be a shotgun affair but most certainly will be a marriage of convenience. Together the old firms have 40 partners and presumably a few of these will drop out along with many employes as parallel functions are eliminated. These details are still to be worked out, but last week it was decided that Edward B. Smith & Co. would move into the Barney offices at 14 Wall Street. Joseph R. Swan, with John W. Hanes conveniently removing to Washington, will be head of Smith, Barney & Co.