The Struggle

In November 1968 First National Bank of Jersey City, which had helped Leasco take over Reliance Insurance, began to buy Chemical stock for Leasco. By 6 November Leasco had gained control of 50,000 shares of Chemical stock "without giving rise to untoward rumors of market disruptions" (Brooks 1973, 39). Furthermore, Reliance, Leasco's new subsidiary, held more than 100,000 shares of Chemical. With a total of 150,000 shares, Leasco held more than 1 percent of the outstanding shares of Chemical without any contact with Chemical executives and without any apparent breach of secrecy (U.S. Congress, House 1969, 93).^[1]

In early January 1969 Leasco drafted a tender offer to Chemical's stockholders but did not release it. Leasco had not yet decided to go ahead with such an audacious acquisition bid. But at this point the secrecy was breached. William S. Renchard, chairman of Chemical Bank, told the House of Representatives investigating committee: "On January 31, we received what you might call solid intelligence to the effect that Leasco was the leasing company that wanted the Chemical Bank." Renchard apparently was not surprised by Leasco's intentions. Internal memos from Chemical Bank subpoenaed by the House Anti-Trust Subcommittee suggest that Chemical was carefully monitoring Leasco's acquisition activities as early as December 1967—a full year before Leasco began to buy Chemical stock (U.S. Congress, House 1969, 116, 477, 479–484).

When the confirmation of Leasco's bid to take over a bank came on January 31, Renchard wasted no time developing his strategy. He announced, "We intend to resist this with all the means at our command, and these might turn out to be considerable." Renchard "compared his battle plan to the authority of the President [of the United States] to order retaliatory attack should 'any unidentified

flying missiles appear'" (New York Times , 6 Feb. 1969, 52). Despite Steinberg's boast that nothing could stop him, "Chemical did—with a vengeance" (Forbes , 15 May 1969, 182).

Leasco's takeover bid generated the unheard-of prospect of a major bank's becoming "a mere division of an unseasoned upstart. . . . In established banking circles, the thought bordered on sacrilege" (Brooks 1973, 39). Since Chemical had been monitoring Leasco's acquisition activities for over a year, Renchard knew of its relations with First National Bank of Jersey City. To get the best possible intelligence on Leasco's intentions and activities, he called on fellow banker Thomas B. Stanton, Jr., president and director of the New Jersey bank. Renchard wanted to know "what was going on," and Stanton reported that Leasco was scheduled to have a board meeting to discuss the "possible acquisition of 'a major commercial bank'" (Brooks 1973, 40). Renchard moved quickly to establish a battle plan: he appointed J. A. McFadden (Chemical's chief loan officer) as director of an eleven-member committee to generate a defense strategy against possible takeover attempts.

Corporate board interlocks are often used as informational networks crucial to the control of capital flows. Stanton sat on Leasco's board of directors, forming the interlock between Leasco and First National (as did Samuel H. Bellam, Jr., of Fidelity Bank of Pennsylvania). That interlock with Stanton also facilitated the flow of information on Leasco from First National Bank of Jersey City to Chemical Bank. But the information network was not mutually beneficial, nor did it facilitate joint economic planning among all members. Rather, it fortified the joint efforts of the financial firms to the disadvantage of Leasco. At no time did Leasco participate in that joint planning. Important information traveled in one direction only—from Leasco to the banking community. Although the information network served Chemical's needs well in developing its strategy against Leasco, it would not have been as useful without the organized control of capital flows.

The consultation between Renchard and Stanton apparently occurred without Steinberg's knowledge. Leasco continued purchasing large amounts of Chemical stock with the aid of First National Bank of Jersey City. By then Leasco held 170,000 shares of Chemical Bank. Renchard was still uncertain about Leasco's intended offer to Chemical's stockholders, but he acknowledged: "We knew

well enough it would be tough going persuading our stockholders not to accept" Steinberg's anticipated generosity (Brooks 1973, 40). Chemical needed a strong defense. Renchard's first strategy was "to force Leasco's intentions into the open" (Business Week , 22 Nov. 1969, 89). Chemical knew of Leasco's intentions before the newspapers reported Leasco's rumored bid. Apparently Renchard planted the story as part of his defense strategy.

The news story forced Steinberg out into the open, a move that clearly benefited Chemical. Steinberg was accustomed to slow, methodical, and largely concealed takeover invasions; he was not ready to show all his cards or to publicly announce a tender offer. Although he had intended to wait a few months longer, the story forced Steinberg to admit his intentions immediately and push ahead.

On 6 February 1969 Renchard called another strategy conference to discuss Chemical's battle plan. McFadden reported in a memo that "there is some question about the breadth of the market on Leasco stock and it might be possible to attack its value if need be." When asked what he meant by "breadth of the market" Renchard replied, "It could mean that [a good proportion of the Leasco shares were concentrated in a few hands] . . . and also that there was a heavy concentration in some of the large funds" (U.S. Congress, House 1969, 507, 128). The memo, along with Renchard's testimony, indicates that Chemical was preparing to manipulate Leasco's stock by "making sales or short sales of Leasco stock over an extended period [and hitting] Leasco where it lived, since its high stock price was the source of its power, and above all, of the possibility of its taking over a firm . . . like Chemical." Such a "bear raid" (or concerted and deliberate sale of large blocks of a firm's stock) violates securities laws against stock manipulation. Yet as Brooks so perceptively pointed out, "The undeniable and striking fact is . . . that on that very day Leasco stock, which had been hovering in the stratosphere at around a hundred and forty, abruptly began to fall in price on large trading volume" (Brooks 1973, 40).

Tables 5, 6, and 7 document institutionals' simultaneous dumping of Leasco stock. Table 5 shows drops in price concurrent with large sales of Leasco stock from 3 to 20 February 1969, the period of Leasco's most disastrous decline. Table 6 shows large sales of

Leasco shares by brokerage firms over the same period. Although brokerage firms were selling on behalf of unnamed clients, only institutionals typically hold such large blocks of stock in any one firm. Table 7 indicates that mutual funds sold massive blocks of Leasco stock during the first quarter of 1969, which includes the period during which Leasco and Chemical struggled (U.S. Congress, House 1969, 538–540). These data attest that stock dumping substantially lowered the value of Leasco stock and suggest simultaneous activity by the institutionals. What makes this activity so remarkable is that "rumors of impending mergers, particularly between titans, customarily drive a company's stock price up, not down" (Brooks 1973, 40). Moreover, Chemical's struggle was not a rational effort to prevent its own stock price from falling; an internal Chemical memo demonstrates that a merger with Leasco

would have increased the market value of Chemical Bank stock by 86 percent (U.S. Congress, House 1969, 486).

Although Renchard was reticent about Chemical's role in the dumping of Leasco stock, he acknowledged that one of the strategies suggested at Chemical's meetings was "multiple flogging," which "seemed to be a fancy new name for an old-fashioned bear raid" (Brooks 1973, 42). Experienced veterans of takeovers and of Wall Street struggles know there are many ways to conceal a bear raid from legal observers, and they know the difficulty of legally proving deliberate, coordinated action.

Steinberg insisted that up to this point the only hint of pressure on Leasco came from Continental Illinois National Bank and Trust Company. Not only was Continental one of Leasco's leading lend-

ers, but it also held an enormous block of Leasco stock. When Leasco acquired Reliance Insurance in 1969, Reliance directors Richard A. Corroon and Edward S. MacArthur refused to accept Leasco stock in exchange for their considerable Reliance holdings. They held the largest blocks—14 percent—of Reliance stock. Instead, a group of institutionals led by Continental Illinois and Chase Manhattan purchased the Reliance stock from Corroon and Mac-

Arthur for $57 million, exchanged them for Leasco stock, and held this major block (about 10 percent) in their trust accounts (Forbes, 15 July 1970, 30). If they dumped these huge institutional holdings, Leasco's stock price would plunge. And it did just that, tumbling from $140 to $99 in just two weeks and ultimately forcing Steinberg to cease his takeover attempt.

The banks had access to the power of loan refusals, customer cancellations, bank refusals to sell Chemical stock to Steinberg, and—most damaging to Leasco—stock dumping. All these strategic mechanisms derived from the banking community's collective command of capital flows.

The free exchange of information and easy communication between banks illustrate the conscious unification of the banking comunity. Renchard testified: "I spoke to Mr. [Donald M.] Graham [chairman of Continental Illinois] and he told me he was planning to meet with the officials of Leasco. I suggested to him that he might consider discouraging them in their thinking about acquiring the Chemical Bank." Continental concurred with Renchard that Leasco's takeover of Chemical was disadvantageous for the banking community (U.S. Congress, House 1969, 125, 106). Graham conveyed this sentiment to Steinberg on 7 February 1969, together with the warning "that his bank [Continental Illinois] valued its association with Leasco highly and expected it to continue" (Brooks 1973, 42).

That Renchard could freely call on both First National Bank of Jersey City and Continental Illinois for information, advice, and support illustrates that cooperation, not competition, characterized the relations between financial institutions. Corporate board interlocks involving financial representatives on nonfinancial boards of directors can help preserve a market the financial institutions consider "rational."

Documents the House of Representatives made public testify to the development of bank coalescence. A Chemical memo asserted that mergers could be resisted by attempting "to discourage the lending of funds to the potential acquirer . Through banking and other financial contacts the company officials may be able to prevent the company making the offer from obtaining sufficient funds to finance the purchase of shares tendered" (U.S. Congress, House 1969, 495; emphasis in original). Another Chemical memo in-

cluded a list of all the banks involved in Leasco's $80 million in outstanding loans (U.S. Congress, House 1969, 531). These suggest that the banks tried to frustrate the takeover by refusing or withdrawing Leasco's borrowing capacity. Such a strategy depends on the united, coordinated action of the banking community.

This sense of lender unity is reinforced by the many letters Chemical received from financial institutions in the United States and Europe offering to support Chemical in its fight against Leasco. They included

1. offers to purchase Chemical stock to "keep it in friendly hands" (U.S. Congress, House 1969, 508)

2. promises (from Continental Insurance) to refuse to sell Chemical stock to Leasco (U.S. Congress, House 1969, 510)

3. the open-ended vow (from Shearson Hammill and Co.) to be "ready at any time to do whatever we could to be of assistance to you [Chemical] in the event that the threat [of Leasco's tender] became a reality. By assistance, I mean not only time and effort but also hard cash if needed" (U.S. Congress, House 1969, 511)

4. the promise (from the chairman of the Bank of London and South America) that if a firm like Leasco "were to acquire an important bank such as the Chemical, then I should at once close our account" (U.S. Congress, House 1969, 513)

An internal Chemical memo stated that

on the matter of reaching institutional investors whose shares stand in the name of bank nominations, Mr. Flom [Chemical's lawyer] noted that in his experience, most banks were quite cooperative in arranging meetings between institutional shareholders for whom they act as nominee and companies whose shares are owned by such investors. (U.S. Congress, House 1969, 720)

Apparently bank cooperation and coalescence are routine, rather than unique to this particular case. Moreover, such coalescence exceeds the confines of corporate boards or interlocks. The cooperative meetings referred to above occurred outside corporate board meetings. Furthermore, the participants do not necessarily have to sit on nonfinancial boards to attend these meetings. But they must be in control of capital flows (that is, they must make investment and divestment decisions as nominees for trust and pension funds)

to participate. This cooperation between banks suggests that networks of interlocks may not necessarily be the most salient source of bank power. Other aspects of the organized control of capital flows—the control of loan capital and pension fund investment decisions—seem even more important.

Because Chemical Bank could call on other financial firms for assistance, it had great flexibility in mounting a counterattack. The final decision was made at a meeting on 8 February 1969 at Chemical's headquarters in Manhattan.^[2] "By coincidence, that same weekend was the occasion of the American Bankers' Association's annual trust conference, and consequently New York City was swarming with hundreds of important bankers from all over the country" (Brooks 1973, 42). Many important financial institutions, all sympathetic to Chemical, were represented at the strategy meeting, and several actions were proposed.^[3] Word of Chemical's strategy session leaked out that evening to bankers at the ABA conference and became a topic of conversation at their informal and formal gatherings. Renchard conceded: "I can't rule out the possibility of having a casual conversation [with other bankers] at one of those gatherings that I referred to earlier [namely, cocktail parties and dinners of the ABA convention]. Undoubtedly, there were representatives of some of these banks [Leasco's creditors]" (U.S. Congress, House 1969, 147).

Confident that the power of the banking community was behind him, Renchard made his next move. On 11 February Chemical's president Howard McCall asked for a list of Leasco's creditors, and several of the banks on the list were checked off. The House subcommittee never fully established the exact meaning of the check marks. Brooks (1973, 48) points out that "at about that time Steinberg began to feel 'pressure' from the banking business, in the form of calls from Leasco's two investment bankers—Lehman Bros. and White Weld—informing him that they would refuse to participate in any Leasco tender offer for Chemical." The two investment bankers admitted that several banks pressured them to

refuse to help Leasco—"a ticklish situation since Lehman is a heavy borrower of bank money" (Business Week, 26 Apr. 1969, 144). Steinberg noted, "I'm told they [Lehman and White Weld] got more pressure than we got" (Forbes, 15 May 1969, 82).

At the same time, "major customers of Leasco were said to have threatened to cancel their contracts with the company if Mr. Steinberg did not call off his attempt. Commercial banks were said to have intimated that Leasco would have trouble obtaining financing if it went ahead" (New York Times, 21 Feb. 1969, 65). The compelling power of the threat did not derive solely from Chemical Bank or other individual commercial banks, but from their collective monopoly over capital flows.

Meanwhile, Chemical held further strategy sessions during which defenses less devastating to Leasco were discussed. Chemical considered altering its holding company charter to legally preclude a Leasco takeover or acquiring its own fire and casualty firm so that a Leasco takeover would violate anti-trust laws (U.S. Congress, House 1969, 486). These actions would have prevented the takeover without necessarily debilitating Leasco. But apparently Chemical intended to do more than merely fend off an unwanted takeover. It wanted to punish Leasco for what was viewed "in established banking circles" as "sacrilegious" aggression against the banking community as an example to other nonfinancials that might consider going after a bank (Brooks 1973, 39).

Chemical next undermined Leasco's resources for the acquisition of the bank. It placed the two leading proxy-soliciting firms, Dudley King and Co. and Georgeson and Co., on retainer, thus denying Leasco access to their talents (Forbes, 15 May 1969, 32). An internal memo written by Chemical Vice President Robert Lipp explained that the bank wanted to obtain "the best proxy solicitation firms both for Chemical's use and to deny these firms from the opposition" (U.S. Congress, House 1969, 486). Meanwhile, Leasco's stock continued to fall steadily.

Chemical also activated a legislative counterattack. In early February 1969 Chemical's lawyer, Richard Simmons, "began devoting himself full-time to the Leasco affair. He concentrated his attention on drafting a law specifically designed to prevent or make difficult the takeover of banks similar to Chemical by companies that resembled Leasco, and on getting a coy of this into the hands

of the Senate Banking and Currency Committee, in Washington" (Brooks 1973, 50). This proposal was sent directly to Senator John J. Sparkman, chairman of the committee. Simmons testified before the House Anti-Trust Subcommittee that Sparkman asked him to draft the bill. Simmons also testified that he "did it on time billed to Chemical" (Business Week, 22 Nov. 1969, 92).

The bill was introduced on 28 February, and although no action was taken on it, Steinberg began to comprehend the depth and breadth of Chemical's power and influence beyond Wall Street. He discovered that Chemical had friends in the New York State legislature in Albany as well as in Washington. Governor Nelson Rockefeller, whose family had longstanding ties to Chase Manhattan Bank, "urge[d] the New York State legislature to enact a law enabling the state to prevent any takeover of a bank by a conglomerate from occurring within its boundaries" (U.S. Congress, House 1969, 620–621, 719). The bill, identical to the one considered in Washington, passed in June 1969.

Chemical also appeared to have friends in the Department of Justice, which sent a warning letter to Steinberg on 18 February indicating its awareness of Leasco's intentions to take over the bank: "Although we do not suggest that such a transaction would violate the anti-trust laws, questions under these laws are raised thereby." The applicability of the Clayton Act to the Leasco-Chemical case is uncertain at best. Although no reliable information has emerged about why the Justice Department became involved at that point, an internal Chemical memo suggested a defense strategy of "creat[ing] a roadblock in terms of the Justice Department looking into any takeover attempt by Leasco" (U.S. Congress, House 1969, 330, 491). The Justice Department's involvement was certainly premature and occurred at Chemical's behest.

Formidable forces were marshaling against Leasco. Chemical Bank, itself a powerful opponent, numbered among its powerful and influential supporters a united banking community; the Federal Reserve Board; the Wall Street law firm of Cravath, Swaine, and Moore, which provided Simmons's legislative drafting talents to Chemical; the two leading proxy solicitors; the New York State legislature; the New York governor; the U.S. Senate; and the U.S. Department of Justice. Together these forces waged an effective legislative and financial offense against Leasco on Chemical's be-

half, without the aid of corporate board interlocks. "The nation's big banks, rocked by the thought of one of their number being taken over, did cluster together to create what one banker calls 'a massive groundswell of opposition that was felt in Washington and Albany.'" One Wall Street source said, "Chemical didn't have to do very much. It had so many friends, and everyone wanted to help" (Business Week, 26 Apr. 1969, 144).

Throughout the struggle Leasco's stock continued to tumble until 20 February 1969, when Steinberg announced that Leasco had "no plans to acquire control of the Chemical New York Corporation" (New York Times, 21 Feb. 1969, 63). Although Chemical had access to several mechanisms to undermine Leasco's acquisition efforts, none was as effective as the banks' ability to divest its pension and trust funds of Leasco stock.

Dun's Review (March 1970, 69) reported that "the Establishment, which banked at the Chemical, cut the ground from under Steinberg." A Wall Street friend of Steinberg's said, "Saul found out there really is a backroom where the big boys sit and smoke their long cigars" (Business Week, 26 Apr. 1969, 144).