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Zachary Karabell: How a Boring Bank Shaped the Rise of American Power

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What’s the secret to the staying power of one of America’s oldest continuously operating private partnership banks? 

An intense awareness of risk has been Brown Brothers Harriman’s guiding principle, according to Zachary Karabell, financial historian and former Wall Street executive, as he tells ThinkAdvisor in an interview.

“Shooting for the stars is all fine and good but carries the seeds of total disaster moonshot risk implosions” is the way he describes BBH’s conservative mindset.

His new book is “Inside Money: Brown Brothers Harriman and the American Way of Power” (Penguin, May 18).

Formerly head of global strategies at Envestnet and president of Fred Alger and Co., Karabell chose to write about the legendary BBH to tell the larger story of “how money made America and how America made the world and where we are now,” he says in the interview.

In the 1980s, when other investment banks, such as Goldman Sachs and JPMorgan, were going public, conservative BBH stuck to its last and stayed private, largely to retain its client-first model.

The firm was started in 1818 by the wealthy Alexander Brown and his sons. In 1931, Brown Brothers & Co. merged with Harriman Brothers & Co. 

Ever evolving, BBH launched a limited purpose broker-dealer subsidiary, Brown Brothers Harriman Investments, in 2016 to offer “interests in registered and private funds,” according to the firm’s Private Wealth Management 2020 Client Disclosure Document.

BBH, based in New York, produces revenue of nearly $2 billion and generates $500 million in profit, Karabell writes. The firm has 31 general partners, according to the disclosure.

This is the 13th book written by Karabell, who earned a doctorate at Harvard and was named one of the World Economic Forum’s “Global Leaders for Tomorrow.” He is the founder of the nonprofit news platform Progress Network at New America. 

BBH has three businesses: investment management, investment services including custody work and private banking. The latter’s clients are individuals, business owners, foundations and endowments, usually with a minimum of $10 million in investable assets, the firm’s disclosure states.

BBH, however, is mainly a business-to-business bank operating in “the unsexy corners of the financial world,” Karabell writes. 

Many years ago, though, it boldly ventured where no bank had gone before. In 1828, it underwrote the construction of the Baltimore and Ohio Railroad, which kicked off the railroad age. 

Three of its partners — Prescott Bush (George W. Bush’s grandfather), Robert Lovett and Averell Harriman — saw their push for public service and their political stars rise to prominence. Plus, the firm was essential to creating the framework of the United Nations, the Pentagon and the CIA.

When it launched its wealth management business in 1931, Brown Brothers set out to attract high-net-worth clients, especially celebrities. Some news it generated was regrettable, as evidenced by a headline in The Nation: “This is the Republic of Brown Brothers,” referring to the occupation of Nicaragua and the firm’s association with “economic imperialism” there in 1912 and for some years after. 

Further, in the 1800s, as a major cotton merchant, Brown Brothers benefited from slave labor, even though it was morally opposed to slavery, Karabell says.

ThinkAdvisor recently held a phone interview with Karabell. An earlier book he penned, “The Last Campaign,” won the Chicago Tribune’s Heartland Prize.

The author says that though “opaque and arcane,” BBH, while operating “in the less glamorous corners of the financial world, is essential to the smooth flow of money through the complicated webs of the financial system.”

Here are highlights of our interview:

THINKADVISOR: Why did you choose to write a book about Brown Brothers Harriman?

ZACHARY KARABELL: I was interested in a bigger story, and their story was a way of writing about the evolution of money in America from almost the founding of the country to the present. 

It was a good exoskeleton for a 200-year history of money and how money made America and how America made the world and where we are now.

“The history of Brown Brothers Harriman is the secret history of Wall Street,” you write. Why is it?

Because every day that they don’t appear in the papers is a good day — they don’t want to be in the news. That’s been their culture from the early 19th century to the present.

So it’s secret insofar as the partners have shunned the public spotlight, even though behind the scenes they’re intensively and powerfully influential.

How would you characterize the firm compared to, say, Goldman Sachs, JPMorgan or Morgan Stanley?

One of the big differences is that from the 1970s on, those firms didn’t stay private partnerships. But Brown Brothers has stayed private and remains a private partnership today. They have [about] three dozen partners and 5,000 employees.

How does it benefit them to stay private?

They’re always limited in the amount of risk they can take because it’s their money. They can do deals and bring in other people’s money, but they don’t have shareholder money. 

They can’t bet the farm — if the “farm” is shareholders. That changes the equation of risk. They’re a firm that’s intensively and intuitively aware of risk.

In the ever-changing financial services industry, how has BBH been able to survive for more than 200 years?

Two elements carried the firm through. One is the profound, ongoing awareness of risk and the knowledge that shooting for the stars is all fine and good but carries the seeds of total destruction and moonshot risk implosions. 

There’s always a chance that if you extend yourself too much, you’re not going to realize your dreams — you’ll realize your nightmares.

What’s the other element?

Their culture of public service: the idea that private companies can’t thrive endlessly unless the community in which they’re embedded is also thriving. 

So, for example, as a public service, they underwrote the construction of the Baltimore and Ohio Railroad in 1828, not because it was going to make them much money — initially, it lost more money than it made, in fact.

What were the highest points in the firm’s history?

The building of the B&O Railroad, the first steam-powered passenger railroad in the world. It ushered in the railroad age. 

The railroad was crucial to the growth of the United States and certainly the growth of the industrial world.

Another high point was the period of public service when [partners] Robert Lovett [defense secretary], Prescott Bush [U.S. senator] — George W. Bush’s grandfather — and Averell Harriman [undersecretary of state for political affairs and governor of New York] got into government with the belief that those with great power have a great responsibility to give back to society.

One more high point was their choice of not going public in the 1980s. Staying a partnership was partly from the perspective that you wouldn’t be able to serve your clients in the same way and that the culture of a public company ends up being much more about enriching the shareholders than about serving the clients. 

Their choice meant that they probably didn’t get as rich as they would have [had they gone public].

What was BBH’s lowest point?

The lowest point morally was their intertwinement with slavery. They were one of the largest cotton merchants in the 1830s-1840s and therefore benefited from slavery even though they were morally against it. 

It would be great to say they got out of physical cotton because they were so morally opposed to slavery, but that isn’t quite the case. It was more because they didn’t like the illiquidity of cotton and plantations than because they were full-throated abolitionists.

Any other low period?

Their involvement in the U.S. government’s taking over the government of Nicaragua in 1912 for the next seven or eight years. The path they charted as a way of controlling other societies in the name of economic growth and profit was certainly problematic.

You write that the partners shaped the international systems of today. How so?

Part of their public service mantra was to go into government, which they did in the 1930s, ’40s and ’50s. 

The world that benefits American investors today is a world they helped shape and create right after World War II.

This includes their creating the precursor to the World Trade Organization, the U.S. dollar as the global currency [of capitalism] and the Pentagon and CIA.

In 1931, during the Great Depression, the firm opened a “wealth management department.” It was spearheaded by Prescott Bush and attracted celebrity clients like Archibald MacLeish and Dorothy Parker. How significant is that part of their business today?

They have a thriving wealth management business and an active private investment business, though it’s not their main [pursuit]. 

They do investment research on select companies. They create products for their clients that you can’t just go out and buy.

Prescott Bush, who was a leading partner, wrote a brochure called “Scattered Wealth,” which talked about how things are constantly changing and to look at investment portfolios over three 10-year periods. 

What looked really good in one 10-year period was terrible in another decade-long period. This related to making assumptions, and remains a core idea in the way they manage wealth today.

The firm’s reputation was “fading somewhat in 1958,” you write. Why was that?

Mostly because of their culture. They weren’t part of the go-go ’60s, the Nifty-Fifties stocks or the beginning of the modern money industry, which in the late ’60s and the ’70s was more about star stock pickers.

And they weren’t really deal-makers in the sense of the conglomerate [trend] in the ’70s, where everybody was doing deals. It was the beginning of leveraged buyouts and junk bonds. They weren’t interested in that business.

What they ended up doing is much more behind-the-scenes, bank-to-bank business.

Did you get the firm’s cooperation in writing the book?

Their archives — 120 or 130 boxes of material — are open to the public at the New-York Historical Society. So they didn’t really need to cooperate, but they genially cooperated.

How did they react when you first told them you were writing a book about the firm?

With a certain amount of caution and concern. But when they realized I wasn’t interested in writing a hatchet job, they were a little more comfortable.