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U.S. Banks Regain Momentum As Market Rebounds

The Bank of North America was chartered in December 1781

AUGUST 29, 2015

Wells Fargo, J.P. Morgan Chase & Bank of New York

Of the Big Four U.S. banks, Wells Fargo (WFC) and J.P. Morgan Chase (JPM) are the larger two. They are widely held stocks, with $274B and $237B market cap respectively. Whereas Bank of New York Mellon Corporation (BK) is much smaller by comparison, with a $44B market cap.

These businesses fell, alongside the overall market in mid-August 2015. With a very sharp turn on August 24th, followed by another downturn Tuesday. The overall market found reinforcement mid-week.

These companies: Wells Fargo, J.P. Morgan Chase and Bank of New York Mellon, trace their history to early American finance. Though Wells Fargo, Chase and J.P. Morgan were founded in the mid to late 1800s, they ultimately, through mergers and acquisitions bought older banks.

Wells Fargo acquired, what was originally, the first central bank: Bank of North America, founded 1781. Chase bought Bank of the Manhattan Company, forming Chase Manhattan in 1955, then merged with J.P. Morgan in 2000.

      • The Manhattan Company was founded by Aaron Burr in 1799.

      • Whereas Bank of New York was founded in 1784 by Alexander Hamilton.

In 2006, Bank of New York exchanged their small business banking segment for J.P. Morgan Chase's corporate trust business; 202 years after the duel between the founders of the two New York City based banks.

The modern economy results from the careers of, really, everyone. Though, in history Alexander Hamilton and the people for whom he worked, were very important architects of the American economy. Their visions were carried forward. The most important quality, over time, is: They did not fail. The reason is: Leadership.

This article will summarize the careers of some of the architects of early American finance, momentarily. First let's look at the structure of Wells Fargo, J.P. Morgan Chase and Bank of New York Mellon. Then, this article will cross reference their corporate bonds.

Finance Subdivisions

Bank of New York now focuses on asset management, and lists 16 areas of service, with multiple subsidiary services. These are the 16 divisions of service Bank of New York Mellon lists:

Alternative Investment Services Asset Servicing Broker - Dealer Services Capital Markets US
Collateral Mngmt. Corp. Trust Depositary Receipts Foreign Exchange
Investment Mngmt. Liquidity Services Pershing Clearing Services Prime Brokerage
Retirement Securities Finance Treasury Services Wealth Management

Wells Fargo lists five areas of personal banking service on their homepage:

Banking Loans & Credit Insurance Investing & Retirement Wealth Management

Wells Fargo also offers small business and commercial services. Their small business services are similar to their personal banking services. The commercial services are listed as follows:

Commercial Financing Corporate Trust Services Investment Banking Securities
Commercial Insurance Institutional Investing Market Risk Mngmt. Shareowner Services
Commercial Real Estate Investment Services Retirement & Employee Benefits Treasury Mngmnt.

While J.P. Morgan Chase lists services offered by Chase and J.P. Morgan distinctly. Chase is divided into consumer business and commercial banking. J.P. Morgan lists:

Institutional Asset Management Investing Banking Investment Management Markets & Investor Services
Treasury Services Private Banking Wealth Management & Brokerage  

J.P. Morgan also provides commercial banking: Corp. Client Banking, Government, Not-for-Profit & Healthcare banking.

Liberty's Sons Needed A Good Broker

Haym Salomon was a broker for the first (and only) U.S. Superintendent of Finance: Robert Morris. Haym Salomon was no average banker, he did very well and was able to raise large sums for General Washington's Continental Army. He also personally funded some of the loans to the Continental Army.

Haym Salomon & Robert Morris, Background: Robert Morris House, Philadelphia; which became the President's House

Robert Morris was a prominent statesman, he signed the Declaration of Independence and would become a U.S. Senator in 1789. When the U.S. capital moved from New York City to Philadelphia in 1790, the president lived at Robert Morris' home through 1797 (with short intermissions to avoid yellow fever.)

Here's an example of a banking / broker advertisement, from 1781:

Advertisement from Pennsylvania Packet, December 1781

Alexander Hamilton was selected to be one of Washington's aide-de-camps, in March 1777 and supported, the already prominent Robert Morris as Superintendent of Finance. Both Hamilton and Morris agreed on the idea of a central bank. Soon after Morris' appointment, as Superintendent of Finance in December of 1781, the Bank of North America was founded.

The simple economics of the Revolutionary War were fairly close to a David versus Goliath scenario. The Americans had the will and from time to time they were able to gain supplies, by taking them from the British. Up until then, the Colonials were one source of Britain's revenue.

In general, however, many families and soldiers (both new to battle, like Hamilton, and veterans of the British military in North America) gravitated to the platform of: Freedom from Britain.

Hearts of Oak

Alexander Hamilton arrived in New Jersey in 1772. The year before he managed an exchange company (Beekman & Cruger) in the Caribbean, on the island of St. Croix (perhaps the basis for his knowledge of finances.)

"David Beekman and Nicholas Cruger, themselves transplanted New Yorkers, traded North American lumber, livestock, and foodstuffs for Caribbean sugar, molasses, and rum. Young Hamilton kept track of cargoes and prices, and often made decisions in his elders’ absence." Alexander Hamilton: New Yorker by Richard Brookhiser 1996

Less than two years later, in 1774 Alexander Hamilton was rallying his classmates at King's College (Columbia University) against the British. Hamilton was led by Hercules Milligan, a New York City tailor, who was married to the daughter of a Royal Navy Admiral. Hercules sided with the Americans; therefore he and Cato, who was a slave, were able to provide General Washington with valuable information regarding British battle plans.

Effectively, his introduction to Hercules Milligan, landed Hamilton in one of the headquarters of the American Revolution. When he enrolled in King's College, it was leaders in New York City's branch of Sons of Liberty, like Alexander McDougall, who provided him books.

Source: Gen. Alexander McDougall findagrave

In August 1775 a few soldiers, including Hercules Milligan and Alexander Hamilton undertook a mission to recover artillery guarded by the British. The arms were conveniently located at the dock of a British warship: The HMS Asia, on the southern tip of Manhattan. They dodged gunfire and cannon fire, to accomplish the task, and with the recovered artillery in Hamilton's hands, he became even more powerful.

After the Declaration of Independence was signed, Hercules Millagn took it upon himself, and a crew of soldiers to take down a large statue of King George III; located in a New York City park, on July 9, 1776. They melted the statue for ammunition. They would need that ammunition.

20,000 British swarmed Long Island on August 27, 1776 and forced the Americans back to Brooklyn Heights. Then back into Manhattan on August 28th. A few weeks later the Americans were pushed to Harlem Heights, and the following month the British overtook New York City based Fort Washington. Pushing the remaining Americans into New Jersey.

Several people thought to be American supporters, including Hercules Milligan and Haym Salomon, who arrived shortly before in 1775, were taken prisoner by the British, (Salomon was held for a year and a half.) Eventually able to secure release, where they continued to operate from within British controlled New York City.

Haym Salomon was again taken prisoner by the British, in 1778, and after his second release moved west, settling in Philadelphia. Alexander Hamilton was luckier, he avoided capture and led the soldiers under his command to safety; in New Jersey, Hamilton engaged in some successful campaigns against the British. It was then, in March 1777, he was chosen to be an aide-de-camp to General Washington.

Treaty of Paris (1783)

After Benjamin Franklin, John Jay, Henry Laurens (former president of the Continental Congress) and John Adams negotiated the 1783 Treaty of Paris, revolutionaries like Alexander Hamilton transitioned somewhat. In 1784 Alexander Hamilton was a leading founder of Bank of New York. Having been a leading force behind the central: Bank of North America just 2 years earlier.

From May through September 1787, Hamilton represented New York at the Constitutional Convention. Though Hamilton's concept for the Constitution was dismissed (it resembled the British government) Hamilton was the only signer of the Constitution from New York.

Alexander Hamilton also wrote several of the Federalist Papers; notably: Federalist No. 1, in October 1787. To encourage the ratification of the Constitution. In the first paragraph of Federalist No. 1, Hamilton wrote:

"It has been frequently remarked that it seems to have been reserved to the people of this country, by their conduct and example, to decide the important question, whether societies of men are really capable or not of establishing good government from reflection and choice, or whether they are forever destined to depend for their political constitutions on accident and force. If there be any truth in the remark, the crisis at which we are arrived may with propriety be regarded as the era in which that decision is to be made; and a wrong election of the part we shall act may, in this view, deserve to be considered as the general misfortune of mankind."

A couple years later Alexander Hamilton was appointed by Washington to be Secretary of the Treasury. Serving from 1789 to 1795.

Monetary Loss & Alcohol Tax Led To Hamilton's Unpopular Turn

While Hamilton was successful in many endeavours, popular sentiment shifted when veterans received $0.20 on the dollar, for promissary notes they were issued for Revolutionary War service. In 1791 Hamilton successfully passed a charter to establish a new national bank: First Bank of the United States, though prominent politicians (like James Madison) argued against the charter. Still the president, Washington, signed it.

This led to the Whiskey Rebellion between 1791-1794, as Hamilton's Bill included a new tax on alcohol for revenue (to repay debt from the Revolution.) The tax was eventually overturned by Thomas Jefferson and his first vice-president: Aaron Burr.

Burr had established the Manhattan Company and Bank of the Manhattan Company, in 1799. After serving as New York's attorney general, and U.S. Senator. He was also a soldier, who retired as a Lt. Col., in 1779. One regret Burr had was he wanted to be a general and Washington declined to appoint him.

Aaron Burr was vice-president in 1804 when he dueled with Alexander Hamilton. Hamilton was really at the heart of the military victory over the British. The level of work he accomplished was greater than Burr's, who did a lot of work in his own right; he simply was not one of Washington's major generals, and beyond rank: One of Washington's chosen few, as Alexander Hamilton was.

The duel between Burr and Hamilton in July 1804, was caused by Burr believing Hamilton was speaking out against him. When, of course Hamilton was speaking out against the Jefferson administration (their disagreement dated back to Jefferson's service as Washington's Secretary of State while Hamilton was Secretary of the Treasury from 1789-1795.) Hamilton and Burr's political ideologies were opposite each other; furthermore Hamilton was the focal point of the Jefferson Democratic-Republicans' platform. Though, obviously the contempt Burr had for Hamilton ran deeper than politics, as their businesses directly competed.

Both Hamilton & Burr's Businesses Succeeded

Both Bank of New York and Bank of the Manhattan Company performed well in the long-term. Hamilton tried to manage finances, in an economy that was extraordinarily different from today's. There was some wealth, though obviously the nation had just been minted.

So, Hamilton was the one who had to make the decisions; while others rendered opinions. As is always the case some of Hamilton's strategies worked and some did not. Hamilton was also affected by propaganda from former officers who were displeased with Washington (and his administration.)

Advertisement from Independent Gazeteer, September 1792

The editor of the Independent Gazeteer was an Anti-Federalist, with a particular disdain for Washington. As he was a senior officer under court-martialed General Charles Lee. Lee had wanted to be the top general in the Continental Army, and was very critical of Washington. After the Battle of Monmouth in 1778 General Lee spoke out against Washington and was removed from his position. Subsequently Lee was injured in a duel with another of Washington's aides-de-camp: Lt. Col. John Laurens. Alexander Hamilton attended the duel and wrote an account of it.

So, Alexander Hamilton had his work cut out for him. He had to contend with a mountain of critics, from Washington's ranks; over military disputes from long ago. Additionally well-respected politicians like James Madison waged political war against him, over his second central bank and tax plan in 1791.

Modern Day Finance, In Economy Envisioned By Some

Ultimately the American economy did live up to Hamilton's expectations. Additionally, Hamilton's original tax strategy was finally implemented after many years of no "direct taxes." The Dept. of Treasury summarized the history, as so, in 2003:

In 1794, a group of farmers in southwestern Pennsylvania physically opposed the tax on whiskey, forcing President Washington to send Federal troops to suppress the Whiskey Rebellion, establishing the important precedent that the Federal government was determined to enforce its revenue laws. The Whiskey Rebellion also confirmed, however, that the resistance to unfair or high taxes that led to the Declaration of Independence did not evaporate with the forming of a new, representative government.

During the confrontation with France in the late 1790's, the Federal Government imposed the first direct taxes on the owners of houses, land, slaves, and estates. These taxes are called direct taxes because they are a recurring tax paid directly by the taxpayer to the government based on the value of the item that is the basis for the tax. The issue of direct taxes as opposed to indirect taxes played a crucial role in the evolution of Federal tax policy in the following years. When Thomas Jefferson was elected President in 1802, direct taxes were abolished and for the next 10 years there were no internal revenue taxes other than excises.

To raise money for the War of 1812, Congress imposed additional excise taxes, raised certain customs duties, and raised money by issuing Treasury notes. In 1817 Congress repealed these taxes, and for the next 44 years the Federal Government collected no internal revenue. Instead, the Government received most of its revenue from high customs duties and through the sale of public land. - History of the U.S. Tax System, Dept of Treasury

Of course taxes were a central topic, as they were before the Revolution and still are today. As the size of the nation expanded and the Civil War approached, political focuses shifted from import taxes and excise taxes, to tax on everything. Though, one reason is the scale of the nation necessitated more revenue.

Certainly changes in tax system affected the business of finance; though tax revenue paid off debt and also went back into the general economy. Ultimately banking services benefited from the overall wealth generated and employed by individuals and businesses.

Though, the title of this section: Modern Day Finance, In Economy Envisioned By Some alludes to the vision expressed in Alexander Hamilton's Federalist No. 1. It was the opinion-based-on-experience, of the first presidential administration and Democratic-Republicans like Virginia Congressman James Madison, for there to be a federal district. Though the majority of U.S. Constitution signers represented the north, the top leader was from Virginia, so both sides had opportunity to make the case for their interests. One person represented New York.

In the beginning of Federalist No. 1, Hamilton wrote: " are called upon to deliberate on a new Constitution for the United States of America... comprehending in its consequences nothing less than the existence of the UNION... the fate of an empire..."

Those appear to be the words of someone convinced the Revolution and U.S. Constitution intended a greater good. As with any subject, the result could be argued either way; though, it turned out the United States produced a strong economy. Between Wells Fargo, J.P. Morgan Chase and Bank of New York Mellon there is approximately $555B in value currently. Fair to say: A half trillion dollars, that would not be there if it were not for a few good rebels, among them the first Secretary of the Treasury.

Bond Comparison

Take a look at a few of Wells Fargo, J.P Morgan Chase and Bank of New York's corporate bonds. None of these bonds standout especially for yield, though could fit into some bond ladders. Keep in mind there are expectations for the Federal Reserve to eventually (perhaps in September) raise interest rates, though the pace is up to the Board of Governors of the Federal Reserve System. Since the economic downturn in 08' and 09' the market has been particularly sensitive to interest rates and they have been pushed down. Where, in the long-term Treasuries have been an important part of portfolios, in order to balance risk and create wealth.

Keep in mind J.P. Morgan Chase and Wells Fargo's subordinate bonds carry lower credit ratings, compared to senior debt. Wells Fargo's subordinated debt is rated A3/A, while J.P. Morgan Chase's is rated Baa1/A-. (Bank of New York subordinated notes are rated A2/A, however this list does not include Bank of New York subordinated debt.)

Moody's / S&P
46625HJM3 JP Morgan Chase & Co Sub Nt 5.625% 8/16/2043 Baa1/A- $109.95 4.96
949746RF0 Wells Fargo & Co New Sub Nt 5.606% 1/15/2044 A3 / A $111.87 4.83%
94974BGE4 Wells Fargo Co MTN Be Fr 4.65% (Subordinated) 11/04/2044 A3 / A $98.54 4.74%
94974BGK0 Wells Fargo Co MTN Be Fr 3.9% 5/01/2045 A2 / A+ $92.50 4.35%
48125V5F3 JP Morgan Chase Bank NA Call 4%, Mnthly Cpn, Cont Call 09/21/22@Par 09/21/2037 A3 / A $95.00 4.35%
46625HJZ4 JP Morgan Chase & Co Sub Glbl Nt 4.125% 12/15/2026 Baa1/A- $99.63 4.16%
94974BGL8 Wells Fargo Co MTN Be Fr 4.3% (Subordinated) 7/27/2027 A3 / A $101.94 4.09%
94986RNT4 Wells Fargo & Co Fr 3.25%, Survivor Option, Mnthly Cpn, Call 03/20/18@Par 3/02/2028 A2 / A+ $98.60 3.38%
06406HDA4 Bank New York MTN Bk Ent Fr 3%, Cont Call 01/24/25@Par 2/24/2025 A1 / A+ $96.89 3.38%
06406HCX5 Bank New York MTN Bk Ent Fr 3.25%, Cont Call 08/11/24@Par 09/11/2024 A1 / A+ $100.05 3.24%

August 27, 2015: Comparison chart of Wells Fargo, J.P. Morgan Chase & Bank of New York bonds. Senior debt credit ratings are placed in bold, prices over par are also placed in bold.

Different bond investors have different objectives. Some investors would rule all of these issues out. First of all investors are uncertain about the near future of interest rates. Some investors would not buy corporate bonds priced above par.

Some bond investors primarily look for bonds that yield over 5% annually. Some of the bonds, in the list above, mature in the 2040s and most likely $1,000 in the 2040s will have considerably less purchasing power than $1,000 today. Several investors would not consider these bonds, especially now, though several of the same investors might consider Wells Fargo, J.P. Morgan Chase and Bank of New York stock. It is, perhaps, a good idea to understand a company's debt situation when considering equity.

Additionally, note some of these bonds are callable and some of the lots are not. Two of the lots are listed as having monthly coupons. Investors should always double-check corporate bonds' official announcements to verify listed characteristics. Bonds listed on the secondary market sometimes contain typos and clerical errors, which may be important to investors.

Some investors add some subordinate debt to a bond ladder with more senior debt. Each investor has different preferences on credit quality balance, with the ultimate goal being: Avoiding companies with risk of default. Still some investors do not believe any funds should be allocated to bonds; some lean towards a 60% equity / 40% income (bond) allocation.

The Bottom Line

Banking is not an easy business. This is sometimes caused by executives or employees who stretch or jump the boundaries of good business. For instance J.P. Morgan Chase paid a $110M settlement in 2012, for implementing a system of collecting many more overdraft fees than customers incurred. By moving charges around and deducting large purchases before smaller purchases. When the fact is, such maneuvers cause customers to pick a different bank.

Historically, quality and more importantly: Trust, resulted in bigger business, than those who cheated and stole. They found temporary success, however, it resulted in temporary business. When the businesses that retain customers over the long-term, did so by building and maintaing trust (this is not to say they were or are perfect in this regard.) Though some, like Wells Fargo and J.P. Morgan Chase (and to a lesser degree Bank of New York) became veritable fortresses. To an extent this is done by adhering to sound business principle.

The world of loans can be profitable, however there is very clear risk. Though, in the financial sector, when a loan is not paid on time: Interest collects. So, there is a business model to generate profit.

As the rest of the economy rebounded from the '08 & '09 downturn, banks slowly recovered; with J.P. Morgan Chase and Wells Fargo improving more than Citigroup and Bank of America. Competition is strong, with smaller banks performing particularly well in the past couple years. Some with nearly equal extraordinary histories, going back to the early 1800s.

A strong history does not necessarily foreshadow a strong future. What does is that quality of not failing. Many investors know all too well, some businesses looked like good investments; however, failed. This is why businesses and investors: Allocate. Rather than trying to predict and guess.

One additional take-away, is perhaps illustrated best by the contempt between the Anti-Federalists and Federalists (also geographically between the Potomac area and New England) illustrated by Thomas Jefferson and John Adams, who simply did not speak to each other; rather than the level of contempt Burr had for Hamilton. When Burr, at that point in July 1804, had more power; resulting from the actions of the Federalists. Coupled with the broad power, that also resulted, from the Anti-Federalists: It was the exchange between both sides, that affected the building of the Union Hamilton believed in. Burr let his politics get in the way of the objective fact, that Hamilton (though imperfect) produced nearly infinite value.

Disclaimer: This article is not a recommendation to buy or sell. Mark Quarter Investment News authors hold Wells Fargo and Bank of New York stock and / or have exposure to Wells Fargo, J.P. Morgan Chase and Bank of New York stock & bonds through funds. Please consult a qualified financial adviser to determine proper allocations, if any to investments.


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