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As Ronald Reagan led his rebellion against government, a quieter one was born in the business community. Its leader was Walter Wriston, a tall, slouched, deeply intelligent and taciturn man with unusual ambition, little regard for tradition, and a highly conservative political ideology that he had inherited from his father. Wriston wanted to transform banking into a business like any other, capable of increasing profits as rapidly as the most admired companies in the nation. The goal would require undoing the federal financial regulations established during the Great Depression.
Walter Wriston was born in 1919 in Middletown, Connecticut, his father, Henry, an eminent history professor at the town's prestigious university, Wesleyan. When Walter was five, his father was named president of Lawrence College in Appleton, Wisconsin, where Walter grew up until he entered Wesleyan in 1937. Despite the Depression, the Wriston family remained comfortable during Walter's adolescence.
Henry Wriston's reputation rose in these years and he was named president of Brown University in 1936, from which perch he was able to preach against FDR and the New Deal, convinced that the programs would lead to a planned economy. His heroes included Adam Smith, who, despite the complexities in thinking of the Scottish philosopher, he saw largely as the father of the invisible hand and laissez-faire economic philosophy. He also deeply admired the British philosopher Herbert Spencer, who a century after Smith had become popular for what was later called social Darwinism. Spencer, who beginning in the 1850s was philosophically opposed to government intervention in markets, was the popular author of the notion that human poverty was natural because the "survival of the fittest" (a phrase Charles Darwin borrowed from him) was a law of nature.
At Wesleyan, Walter Wriston studied history, his father's field. He entered the Fletcher School at Tufts University, one of the nation's most prestigious schools of diplomacy, just outside Boston, to pursue a graduate degree in foreign affairs. Wriston was married to a coed he had met at Connecticut College by the time he graduated in 1942. He was drafted into the Navy in 1944 and sent overseas but did not see combat. He returned to the United States in 1946, one of hundreds of thousands of other soldiers wondering what to do with their lives-and whether the economy would slide back into depression.
Wriston said he did not want an academic career like his father's. "I knew I wouldn't do that because you'd have nothing but comparisons," he said. "My sister's an academic and a very good one. But I didn't want any part of that." Hostility toward his father surfaced when Henry remarried in 1947, only a year after his mother's death, at which point Walter stopped speaking to him.
Wriston at first had "very little" interest in business. It was his mother's doctor who suggested he go into banking. "If I stayed up all night, I couldn't think of anything more stupid to do," he said, but the bank "hadn't hired anyone new since 1933," and it badly needed recruits. Moreover, it was willing to pay salaries comparable to those in industry. So in 1946 he took a temporary job in New York with National City Bank, at that time a diminished version of its pre- Depression glory, when it had been the largest and most visible bank in the nation. He fully expected to leave in a year and return to his planned career in diplomacy.
When Wriston joined National City, banking was a stodgy and unimaginative business. Regulations had been imposed in the 1930s to prevent the excesses in finance that had buffeted America time and again. Overaggressive banks had been a serious national concern throughout the nineteenth and early twentieth centuries.
To attract savers, deposit-taking banks historically had to make good the promise to pay back a depositor's money at a moment's notice, which in the 1800s usually meant maintaining specie (gold and silver coins) against deposits and investing those deposits cautiously. The essence of banking was dependability. The banks redeemed deposits in specie when requested and some created paper currency they also would redeem in specie.
During good economics times ever more confident banks offered higher interest rates to attract depositors and made riskier loans to farmers and businesses at higher interest rates. They kept less in specie as reserves and paid back less in specie for their paper currencies, and the system of credit expanded rapidly to support speculation in agriculture and livestock, land itself, and countless new businesses. Regularly, speculative bubbles were created, then burst, and financial panic turned into severe recession. Banks went out of business by the hundreds, depositors lost money, and debtors went bankrupt-and, in the early years of the century, often to prison.
In its early years, the United States had had a national bank, the principal legacy of Alexander Hamilton (there had also been an earlier, informal national bank just after the Revolution), to restrain overspeculation, but it also tended to restrict lending to elite businesses and urban financiers. The bank's original charter was renewed under President James Madison in 1816 for another twenty years. But in 1836, President Andrew Jackson's veto ended the reign of the Second Bank of the United States. Jackson flamboyantly sided with the farmers and populists who believed the big Eastern bankers were corrupt and habitually made credit too scarce or expensive for them.
Jackson's anti-bank policies have been widely criticized by business historians, but the farmers were correct about often inadequate credit from the national bank for smaller borrowers. Looser banking standards did contribute to economic growth and the democratization of credit in these years. But a balance between adequate credit and overspeculation could not be reached. Big centralized banks favored elites, and overspeculation at smaller banks almost invariably had painful consequences, contributing to the uneven if occasionally exuberant growth of the nineteenth century.
In the wake of a devastating panic in 1907, the U.S. Federal Reserve was created in 1914 to avoid such unstable conditions. But the bankers who manned the new young central bank had neither the experience nor the will to do the job properly, and lacked some of the necessary authority. Flagrant abuse in the financial community was unchecked in the 1920s and the roaring stock market, supported by highly indebted speculators, burst in 1929. The real estate market, also supported by mammoth levels of debt, collapsed as well. By then, banks were not only making business and consumer loans in excess, but also selling stocks and bonds, running investment management companies, and creating new and highly speculative investment vehicles for individuals-as well as promoting their own stock prices.
Such a credit boom and bust alone may not have resulted in the Depression but it contributed substantially to its severity. Thousands of banks failed in the early 1930s as savers withdrew their funds, fearing that the banks had no assets with which to pay them-a classic bank run. By 1932, one fourth of all U.S. banks had failed, and state after state imposed a moratorium on banking. Franklin Roosevelt, on taking office as president in 1933, declared a bank holiday, closing the deposit and withdrawal windows around the country temporarily. Roosevelt resisted pleas to nationalize the banks, but he and his advisers established comprehensive new regulations. Under Roosevelt, the federal government created the Federal Deposit In-
surance Corporation (FDIC) to insure savers' deposits in case of bank failure, giving the government further oversight of member banks. The federal government also restrained overly risky investments with insured deposits by establishing limits on the interest banks could pay savers to attract their money (Regulation Q of the new law), and eliminating interest entirely on checking accounts. The fear was that competition for deposits would drive rates up and encourage banks to make more risky investments to earn higher returns.
FDR and members of Congress were determined to end the conflicts of interest of the financial institutions. If a commercial bank owned equity in a company, it had incentives to lend money to the company, disregarding the risk of the loans. There were natural incentives to provide biased information to stockbroker clients about companies in which the banks had investments or to whom they made loans. The Glass- Steagall Act of 1933, named after its congressional sponsors, Senator Carter Glass and Congressman Henry Bascom Steagall, legally separated commercial banks, which collected deposits and lent money, from investment banks and stockbrokers, who could own parts of companies, raise equity for clients, and advise investors on what investments to make. (The establishment of the FDIC and Regulation Q were parts of the legislation as well.)
Wriston's bank, National City, was, before the Depression, the largest bank in the world, and was an aggressive leader in many of the interdependent businesses that eventually caused so much trouble, including stockbrokerage. Its high-profile chairman, Charles Mitchell, was forced to resign in 1933 in the depths of the banking panic, but the bank survived. Under Glass-Steagall, National City, like other major banks, was required to divest itself of its brokerage and underwriting arms, and do business only as a commercial bank, accepting deposits and making conservative purchases of government securities or cautious loans to business. The prestigious J.P. Morgan bank, run by the most influential financier of the age, was also separated from its investment banking arm, which took the name Morgan Stanley. The investment banks and brokerage firms were now regulated by the newly created Securities and Exchange Commission, whose first chairman was Joseph P. Kennedy, an aggressive financier himself and the father of a future president. The principal demand of the SEC was disclosure of far more information by investment banks about the firms for which they raised money, and other investor protections. America thus entered the post-World War II era with New Deal programs and state government regulations to control interest rates on consumer loans, which in sum regulated banking and the financial system far more thoroughly than at any time in its history.
The New Deal philosophically infuriated Wriston as much as it had his father. When he joined National City (it changed its name to the First National City Bank of New York in 1955), state law restricted it to operate branches in only the five boroughs of New York City. Regulation Q, with its limits on interest rates on savings and checking accounts, particularly frustrated Wriston. Since access to new funds was restricted, its lending policies were restrained as a result. Wriston felt the company he worked for could never thrive under the weight of such regulation, and might not even survive.
Wriston's effort to undo one regulation after another became a personal crusade, driven less perhaps by the desire for profit than by an almost inchoate anger against government intrusion. The desire to have one's way can rise to the level of greed, too. "There was something emotional about his drive," said Albert Wojnilower, a leading Wall Street economist of the time. "I felt Wriston wanted simply to dismantle the financial system as we knew it."
Wriston's early career was characterized by clever innovation, a useful willingness to discard tradition for its own sake, and considerable intelligence. He made small but rapid advances up the ranks at National City, soon becoming a lending officer. A year into the job, he was assigned Ari-stotle Onassis as a client. Onassis, in his early forties, was already a wealthy and glamorous Greek shipping entrepreneur, a conspicuous member of the new international jet set, who had been borrowing at National City for years. After World War II, he saw an opportunity to expand his operations. A postwar boom in energy demand, and a surge in oil discovery and production in the Middle East, would mean the world was short of ships to transport adequate petroleum supplies efficiently. Onassis needed substantial financing to acquire more tankers, and eventually the enormous supertankers that came to dominate trade on the seas. When Wriston's superiors passed Onassis on to him, Wriston was only twenty-eight.
In the past, the cautious banks and insurance companies had made collateralized shipping loans based only on the asset value-in other words, the resale value-of the ship itself. But just after World War II, a steep recession made the ships almost worthless, and undermined confidence they would recover their value. Onassis argued that growth of energy demand was inevitable, but bankers, who had money on the line, were not as confident in the future as he claimed to be. In his first encounter with Wriston, Onassis told him he was willing to pledge the income from the charter he was awarded to deliver oil for Texaco as collateral against a loan rather than on the resale price of the ship. Wriston was convinced, believing that such a loan, if unprecedented at National City, was less risky than it seemed. Wriston won quick approval from his open-minded boss, George Moore. Moore, a rare charismatic banker and then head of the lending department, encouraged Wriston's willingness to take risks and some observers credited Moore with the new entrepreneurial spirit at the bank, and with some of the innovations Wriston eventually implemented. While Moore alone would not have been able to accomplish what Wriston did, he gave Wriston the green light time and again, and approved of his aggressive instincts. Wriston would not have done it without Moore, as he readily acknowledged. "The rest as they say was history," said Wriston.
National City soon became the largest bank lender to shippers, often in tandem with Metropolitan Life, the insurance company that made the longer-term tanker construction loans. Since insurance policies had long-term payouts, it made sense for insurance companies to make long- term loans. Banks, in contrast, had to meet withdrawal requirements from depositors on short notice, so they typically tried to make short- term loans, at least if they were managing their funds prudently.
Shipping loans based on income rather than asset value became a model for loans to finance trucks, railroad cars, planes, and office buildings. The other major shipping magnate of the time, Stavros Niarchos, Onassis's brother-in-law, offered Wriston's counterpart at Metropolitan Life, Walter Saunders, a permanent job directing his financing. Saunders moved to Monaco, where both Onassis and Niarchos lived. Onassis then offered Wriston $1 million a year to come with him to Monaco. It was too bold for the modest Wriston, who was then living in Stuyvesant Village in Manhattan, a middle-income housing project, with his wife and daughter. Wriston, well paid by banking standards, would not earn more than $1 million in a single year until 1982, the first commercial banker to do so in the post-Depression era. Wriston remained friends with Onassis and his eventual companion, the celebrated opera singer Maria Callas, and later with the former first lady, Jacqueline Kennedy, who wed Onassis in 1968.