Federal regulation of the security markets also contributed to the growth of private placements. The Securities Act, by imposing new responsibilities on both issuers and investment houses, increased the cost of a public offering and lengthened the time to prepare it for SEC registration and approval. Private sales not only were less expensive than public offerings, sometimes substantially so, but they also were easier and quicker to arrange-often the entire transaction was completed in a week or two-and they allowed the investment banker greater flexibility in arranging terms that were satisfactory to all parties. Institutional buyers, particularly the life insurance companies, liked direct sales because they could influence terms, such as fixing the life span of the bonds or notes, an important consideration in their financial planning. Issuers found private placements attractive because they eliminated the delay and uncertainty accompanying a public offering.
Kidder, Peabody recognized the trend and cultivated it assiduously. At first private placements were assigned to the corporate finance department, organized by Moore when he joined the firm in 1934. He, together with Willard T. Grimm and Joseph W. Hibben, the resident manager and assistant manager, respectively, of the Chicago office, stressed the advantages of direct sales to issuers and institutional investors, large and small, across the country. They and the partners sought out companies in need of financing and, if practicable, tried to convince them to accept a private placement. Direct sales usually were planned and set up in the firm's New York office, but the representative and branch offices were expected not only to develop the business but also to help find the institutions that would buy the securities. The firm's commitment to national distribution was applied to generate a nationwide private placement capability. This, as much as anything else, made Kidder, Peabody a leader in this business. Its first private placement, $3.0 million of debentures, was for the Freeport Sulphur Company, a corporation that Kidder, Peabody had served previously. In January 1933 the firm had originated and managed a $2.5 million offering of convertible preferred for the Sulphur Company's wholly-owned subsidiary, Freeport Texas. This was Kidder, Peabody's last pre-SEC offering. The firm also arranged two other private placements in 1939, all three totaling $4.2 million. Kidder, Peabody continued to emphasize these sales, and between 1940 and 1945 it negotiated fourteen private sales amounting to nearly $68.4 million.
The firm also pioneered the use of direct sales to dispose of large blocks of common stock. "The passage of the Securities and Exchange Act convinced us," Gordon wrote a prospective client late in 1939, "that the distribution of large blocks of investment securities could be more advantageously sold by direct placing rather than by the auction method provided by the Stock Exchange." To facilitate such sales the firm developed close ties with several investment trusts in New York and Boston. "The first large block of shares handled off the Stock Exchange," Gordon said, "was the sale by us of 88,000 shares of F. W. Woolworth Company stock." Other similar transactions followed, with the annual number growing from two a year in 1939, 1941, and 1942 to four in 1943 and eight in both 1944 and 1945. Most of these sales were negotiated entirely by Kidder, Peabody; a few, such as the 1943 secondary offering of 100,000 shares of Bank of America NT&SA common, was arranged in collaboration with two other investment houses. By then the firm had made a specialty of this type of distribution.
During the late 1930s government officials, pressed by a few interested bankers and reformers still convinced of the existence of a money trust, urged the SEC and other regulatory bodies to require corporations they supervised to sell their securities at competitive bids as a means of destroying the alleged monopoly of the new issues business by a few New York City investment banking houses. Charges of the existence of a Wall Street banking monopoly were not dissimilar to those expressed a generation earlier by the Pujo subcommittee and revived during the Senate's investigation of stock exchange practices in the early 1930s. The topic was taken up again at the close of the decade by the Temporary National Economic Committee.
Competitive bidding, that is, the sale of securities at auction, was an old practice going back to the early years of the nineteenth century, one which had been debated periodically since then. This type of sale was favored by all who believed a few Wall Street bankers monopolized the marketing of new bonds and stocks, particularly the top-quality issues of the prime borrowers. Kidder, Peabody, like the vast majority of investment firms, opposed competitive sales. Matthews, the partner who headed the firm's Philadelphia office, urged his New York partners against joining any competitive groups. To do so, he wrote, "Would seem to be absolutely contrary to our best interests." Competitive bidding, Matthews continued, "would serve to encourage cut-throat competition and, in my opinion, would result in many cases of unsound issues". Gordon, one of the industry's most vigorous competers, also argued very strongly against competitive bidding, particularly for equities, and he added that the system deprived issuers and their bankers of the opportunity to work together in planning and marketing new offerings. But as much as he and the other partners opposed auction sales, they adjusted quickly to the SEC's ruling of June, 1941 requiring competitive bidding for most issues of public utility holding companies and their subsidiaries under the federal agency's jurisdiction. Even before the SEC's ruling went into effect, Kidder, Peabody had accepted underwriting participations in some competitive syndicates. After 1941 it started to manage and co-manage bidding groups of its own. Some of the firm's earliest winning tenders included a $4 million offering for Minnesota Rural Credit Deficiency Fund (1943), a $4.3 million issue of Central Ohio Light & Power Co. bonds (1944), and $16.5 million of first mortgage bonds for the Florida Power Corporation (1944), as well as others.
By the beginning of the 1940s the partners' decision to remake Kidder, Peabody into a national diversified investment banking house, capable of meeting the changing needs of borrowers and lenders, seemed on the verge of accomplishment. The firm had survived near-bankruptcy and had adjusted to the new era of federal regulation of the securities industry. Except for the first year (1931) when "we were putting the business on a realistic basis," to use Gordon's words, the firm showed steady annual profits with net earnings reaching over $250,000 in 1933 and over $750,000 in 1936. As much as 40 percent of Kidder, Peabody's annual profits, particularly during the first half dozen or so years, came from brokerage commissions. Total annual dollar volume from this source, the "bread and butter" of the firm's business, rose from $671,000 in 1934, the low for the decade, to $1.13 million in 1936, after which it fell to $745,000 in 1938, rose to $805,000 in 1939, dropped to $581,000 in 1941, then started moving up again, reaching $1.68 million in 1945.
Substantial progress also was registered in the number and dollar volume of syndicate managements and underwriting participations. Between 1932, the year the new firm cosponsored its first issue ($1.15 million of Milwaukee Gas Light bonds), and 1945, Kidder, Peabody managed or co-managed seventy-nine syndicates offering nearly $6.43 billion of corporate securities, with nearly 38.6 percent of the total dollar value for the entire fourteen-year period brought out in 1945. During these years the firm also was allotted eighty-six underwriting participations of $1 million or more, some 20 percent of which were in syndicates led by Morgan Stanley and another 10 percent in groups headed by Kuhn, Loeb. In addition Kidder, Peabody accepted numerous smaller participations in which the firm's name did not appear in public announcements advertising the offerings. Some of the firm's managements and underwritings were for corporations that had turned to Kidder, Peabody on the recommendation of Morgan Stanley and, with the notable exception of issues for AT&T and its subsidiaries; nearly all the other offerings the firm sponsored were for companies with which it had not been associated previously. Gordon credited the firm's growing volume of underwritings in the mid and later 1930s, as compared with its poor record in the 1920s, to its "active and aggressive... solicitation" of new business, a view that was confirmed by the SEC in 1936. Between July 1 and December 31 of that year Kidder, Peabody, according to the SEC, ranked fourth among the country's investment houses in terms of the number of underwriting participations in offerings registered under the Securities Act. Gordon's claim that the firm's "real progress since 1931" was the result of its forceful "solicitation of underwritings" was substantiated still further by Circuit Judge Harold R. Medina. After reviewing Kidder, Peabody's underwriting business between 1935 and 1949, Medina concluded his appraisal of the evidence by saying: "The partners and employees went after everything, from manager-ships, if they could be secured, if not for participations and even selling positions. No issue was too small, no participation too insignificant."
Not all the firm's underwritings proved successful or profitable. Two of its worst failures occurred early in September 1937, one month after the onset of the acute ten-month recession that brought sharp declines in stock and bond values, forced about 12,800 businesses to close their doors-an increase of some 3,300 over the previous year-and swelled the unemployment and relief rolls. Kidder, Peabody's losses in these two under writings amounted to some $750,000, wiping out nearly all the firm's 1936 earnings. The first of these costly transactions, a $44.2 million offering of Pure Oil Company convertible preferred managed by Edward B. Smith & Co. with forty-two underwriters, was negotiated at $100 a share; the stock found so few buyers by the time the registration statement had become effective that it immediately fell to $70 a share. The second, equally unsuccessful issue-$48 million of Bethlehem Steel Corporation convertible debentures offered to the company's shareholders-was brought out by a group of twenty-five underwriters headed by Kuhn, Loeb and Mellon Securities Corporation. When sales of the Pure Oil stock in the United States proved badly disappointing, Kidder, Peabody tried to distribute some of its 200,000-share commitment in Europe. Moore left for England and Holland hoping to find buyers among the officers of several Scottish investment trusts and the firm's Dutch clients, only to learn that the Europeans were as uninterested in the issue as Kidder, Peabody's American customers. Moore returned to New York without having sold a single share. The "two deals," he recalled later, "were a body blow and a lesson to us," as they were too much of the investment banking community. Edward B. Smith & Co., with much of its capital tied up in the two issues, merged with Chas. D. Barney & Co. at the end of the year to form the new firm of Smith, Barney & Co. Other managing houses, alarmed at the number of firms embarrassed by these two transactions, sought to insure themselves against similar misfortunes in the future by increasing substantially the number of participating underwriters in their syndicates. And Kidder, Peabody, which had to borrow from commercial banks to carry the unsold securities, established a commitment committee to make certain no single partner ever again could commit the firm to an underwriting participation on his own authority, as had occurred in these two instances.
The decision to set up a commitment committee, like the one to reorganize and expand the corporate finance department in 1935, was part of an ongoing effort to strengthen every area of the firm's operations. From the start the partners, and Gordon in particular, recognized the firm's shortcomings and capabilities, and while they sought to correct the former and develop the latter, they realized that a successful, diversified investment house needed strength in all departments-brokerage, trading, underwriting, research, and new business, as well as effective internal management-and that each area depended upon all the others. In April 1931, a month after the new firm had opened for business, Gordon wrote Baring Brothers to inform the London house that the "numerous changes and consolidations in departments" being instituted were designed to permit the firm to transact its affairs "more expeditiously and with less confusion than was previously the case." Since the brokerage business had to "carry the greater part of our overhead," Gordon wrote, this was the area of operations that had received top priority, and the one that continued to occupy the partners' chief attention. Turnover among salespeople was large and rapid, with only those who produced being kept and rewarded.
By 1935 the entire sales department had been reorganized, its operating costs reduced substantially, and its productivity increased. Amy as Ames, who had started on his investment banking career in 1931 as a salesman and analyst at Kidder, Peabody's Boston office, moved to New York as assistant sales manager in 1934, where he helped guide the reorganization. The next year, while still only in his late twenties, Ames was made sales manager. A similar revamping occurred in Boston where John C. Flint, the sales manager since 1931, undertook to revitalize the firm's merchandising capability in New England.
Other changes aimed at making Kidder, Peabody more efficient and attractive to a diverse clientele of individual and institutional clients included the expansion of the municipal bond department. Frank Gallagher, brought to Kidder, Peabody by Fred Moore, was a former employee of George Gibbons & Co., a house specializing in the sale of New York state and municipal bonds. In March 1938 he was put in charge of the firm's municipal department. The partners also approved a marked increase in the size and budget of the research staff which had been cut to two statisticians in the great "blood-letting" of 1931, when the business, in Gordon's words, was "being put on a paying basis." He saw research as an essential staff function, one that would give strength to both the sales and underwriting departments by providing each with a wide range of detailed, in-depth information that kept the firm abreast of technological innovations in industry and other changes in the economy that might affect the needs of both lenders and borrowers.
None of the policies adopted to rehabilitate Kidder, Peabody was more important than the decision to strengthen the firm's internal operations-accounting, stock and bond transfers, and the myriad of other administrative and clerical details required to support the house's various operations. Poor accounting practices had contributed to the old firm's difficulties; the new partners were determined to avoid a similar experience. That they did so is in no small measure the accomplishment of William N. Loverd, whom Moore called the "hero in our midst." A high school graduate who had started on his Wall Street career as an accountant with Kissel, Kinnicutt & Co., Loverd joined Kidder, Peabody in December 1931 at the time it took over the former house. Starting as assistant to Kidder, Peabody's head accountant, Loverd helped establish an efficient system of accounting controls and, more important, implemented Gordon's policy of creating reserves against inventory losses and a general reserve fund that by the close of the 1930s gave the firm a stronger financial base than it had enjoyed since the immediate post-World War I era.
Responsibility for the firm's total operations, of course, rested with the partners. They were the firm; they set its course, tempo, and image. The three founders-Webster, Gordon, and Hovey-were active, dynamic individuals who got along well with each other and enjoyed the challenge of remaking an aging firm; as the business grew they sought associates who shared their views and objectives. The three partners added in the mid-1930s-Matthews (1935) and Moore and Flint (1936)-were men who had contributed significantly to rebuilding Kidder, Peabody and promised to contribute still more to its development in the future.
