Generational divide kills a bank rescue

UPDATE: Dan Rottenberg will discuss "The Outsider" at 6 p.m.   Tuesday, Sept. 16 at: the Historical Society of Pennsylvania, 1300 Locust St. ($15 for nonmembers, register at www.hsp.orgcq); and at 11 a.m. Sept. 21, at the Gershman Y, 401 S Broad St. For tickets, call 215-545-4400 or visit www.gershmany.orgcq.

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The following excerpt is from Dan Rottenberg's "The Outsider: Albert M. Greenfield and the Fall of the Protestant Establishment," released this month by Temple University Press. Greenfield (1887-1967), a Russian immigrant outsider, built a Philadelphia empire that encompassed banks, real estate, department stores, newspapers, and transportation companies. Despite his wealth and success, this outsider often clashed with the city's business elites, never more dramatically than in December 1930, when his Bankers Trust needed help to stay alive during the Depression.

Formally, the decision to rescue Bankers Trust would be made by the Clearing House Association, represented by the eight members of the Clearing House Committee headed by William Purves Gest. . . . But in practice the Clearing House Committee would not act without the assent of Drexel & Co., the only Philadelphia banking house large enough to guarantee a bailout of such magnitude, and that approval could come only from a single man: Drexel's senior partner, E.T. Stotesbury.

In effect, the plan asked Greenfield and [William] Fox - the two largest shareholders in Bankers Securities, which was in turn the largest shareholder in Bankers Trust - to guarantee $5 million of Bankers Trust assets. If those conditions were met, the Clearing House banks would advance "a substantial amount" - unspecified in the minutes, but contemplated at $5 million - to Bankers Trust. Thus, the total loan package would come to $10 million.

As Greenfield put it nearly eight years later, this demand represented a "staggering commitment," to which he and Fox nevertheless acquiesced. . . .

The meeting to approve the rescue plan was called for the following evening - Sunday, the 21st - at the Merion home of William Purves Gest. . . . Precisely who . . . attended . . . is unclear; no minutes were taken, and no one present ever gave an account of what transpired. What is certain is that neither Greenfield nor Fox nor anyone else representing Bankers Trust was invited. . . .

At that meeting, despite Greenfield's and Fox's assent to their conditions, the assembled bankers rejected the [rescue] plan and declined to offer further assistance, in effect dooming Bankers Trust. "Someone higher up gave adverse orders," Greenfield later speculated, "and the Bankers Trust Company's plea was turned down. We have never been told why but we have our own opinion."

What exactly occurred at the home of William Purves Gest that night? . . .

For decades thereafter the bankers' last-minute rejection of Greenfield was widely blamed on E.T. Stotesbury and ascribed to the banking fraternity's innate anti-Semitism, or to its revulsion for Greenfield's rambunctious style, or both. "The Clearing House banks did not keep their word, apparently feeling that Mr. Greenfield had become too big, had tread on their toes, and here was a chance to check him," explained an article written about Greenfield for Forbes magazine in 1948. To Greenfield's friend J. David Stern, the decision made by the bankers that Sunday night was "a dirty double-cross by his 'best friends' if ever there was one." More than 30 years after Bankers Trust closed, Stern elaborated in his memoirs:

"The other Philadelphia bankers had resented the rapid growth of Al's bank. . . . They had persuaded him to take over and save from closing a string of suburban banks. They promised their support. When he needed it, they turned thumbs down."

Greenfield . . . went a step further: He suggested that he had been deliberately set up to fail when he was persuaded to acquire the Bank of Philadelphia in July 1930 and that the run on Bankers Trust that fall had been deliberately orchestrated. "It was evident a more or less concerted movement was at work to spread discontent among the depositors," he said. . . .

Yet in the cold light of historical analysis, . . . the notion that Philadelphia's leading bankers deliberately set Greenfield up to fail probably credits them with more ingenuity and deviousness than they possessed. It also flies in the face of logic and the available facts. Had Joseph Wayne and Stevenson Newhall conspired to destroy Bankers Trust from the outset, presumably they would not have loaned Bankers Trust more than $7 million on its way down. More to the point, Wayne and Newhall and their fellow bank chiefs were keenly aware that the failure of a large bank like Bankers Trust would likely lead to withdrawal stampedes at other banks, including their own.

Why, then, did they reverse themselves at the last minute and decline to rescue Bankers Trust? . . .

The deciding voice was almost certainly that of E.T. Stotesbury, acting in his customary role as unofficial adviser to Philadelphia's banking fraternity. Stotesbury alone commanded the combination of resources, experience, and esteem capable of credibly questioning a decision that had seemed preordained. The Clearing House Association could not have acted without his approval. . . .

Of Stotesbury it was said that if he did not like a deal, nothing could make him change his mind. Yet to the extent that it is possible to probe that mind, neither anti-Semitism nor personal animus toward Greenfield seems to have influenced his decision. Stotesbury may have had few Jewish friends, but he did have some - notably the New York banker Otto Kahn, at whose funeral Stotesbury served as a pallbearer. Furthermore, he was never known to express anti-Semitic sentiments. . . .

Ultimately, Stotesbury's objections to bailing out Greenfield's bank boiled down to an honest philosophical difference between two men of vastly different ages and business experiences. Greenfield, at 43, had spent his entire business career in the 20th century; he had never experienced a financial depression, and as an immigrant he saw only what seemed to him the limitless upward possibilities of American enterprise.

Stotesbury, conversely, was 81 and very much a creature of 19th-century America, with its recurrent cycle of financial panics in each generation. He had been centrally involved in alleviating the Panic of 1907, to such an extent that J.P. Morgan Sr. himself had visited Stotesbury in Philadelphia to discuss relief plans. The stress caused by the Panic of 1893 may well have contributed to the death that year of Stotesbury's mentor, Anthony J. Drexel. Stotesbury was the only banker left in Philadelphia who remembered the Panic of 1873, when hundreds of American banks and 18,000 businesses (including more than half the nation's railroads) failed, half the nation's industrial workers were laid off, and federal troops had to be mobilized to contend with the strikes, lockouts, and riots that ensued. It is even possible that, as an 8-year-old, Stotesbury witnessed the crowds of anxious depositors outside Philadelphia's Chestnut Street banks, just a few blocks from his home, during the Panic of 1857.

Stotesbury's firsthand memory of the devastation caused by these previous panics left him averse to supporting any enterprise that was heavily dependent on illiquid assets, such as real estate, especially during a market downturn. Indeed, in anticipation of the property "bubble" he had foreseen, Stotesbury himself had been unloading Drexel's real estate investments (as well as his own) since the early 1920s. . . .

By contrast, Greenfield's faith in real estate - and specifically in his ability to visualize what might be done with a vacant lot or field - never faltered, even after the great crash of 1929. "Stocks and bonds are only claims on a wealth that may some day be produced, or the means of its production," he continued to insist even a generation later. "Real estate plus the creative labor of mind and hand are the only two sources of production and wealth."

In a very real sense, Greenfield was a visionary unencumbered by the lessons of the past; Stotesbury was a man of profound experience but incapable of perceiving that the future might be different. In his prime Stotesbury had demonstrated sufficient imagination to participate with Pierpont Morgan in the creation of U.S. Steel, the world's first billion-dollar corporation, in 1901. But as one Stotesbury biographer acknowledged, by 1930 "he showed a tendency more and more to exercise a veto power in business. The day of adventure for him was gone."

It seems reasonable to conjecture that Stotesbury was not privy to the original decision . . . to lend money to Bankers Trust during the run that fall. . . . More likely, Stotesbury was not brought into the discussion until the eleventh hour - specifically, the Sunday night meeting at William P. Gest's home. The Clearing House bankers, having made demands that Greenfield and Fox had accepted on Saturday night, needed affirmation from a respected authority, and Stotesbury was the authority to whom they logically turned.

Stotesbury had often performed this function. He recognized the tendency of bankers to get carried away, sheep-like, by wishful thinking; at such moments he prided himself on his ability to cut to the heart of the matter with cold and independent judgment. The heart of the matter in this case, as Stotesbury probably saw it, was neither Greenfield's religion nor his character (nor William Fox's) but the dubious real estate collateral held by Bankers Trust. With a single cryptic but incisive question from Stotesbury - perhaps "Are you throwing good money after bad here?" - the entire mood in Gest's living room would have shifted. . . .

Greenfield kept his thoughts on this issue to himself for nearly eight years - resolving, he said, "to bear in silence any blame that was wrongly placed on me" - until a new wave of political attacks in 1938 forced him to discuss the closing publicly and in detail. "The closing of Bankers Trust was a wrong done to the people of Philadelphia," he insisted at that time. "It should never have been permitted. . . . It closed only because in 1930 a small, secret group of powerful men had the power of life and death over banks."