Kidder Peabody Co Case Study

A:

For Kidder, Peabody & Co., the 1980s ended on a very sour note. Its star banker, Marty Siegel, was at the center of the Ivan Boesky scandal that blew up in 1987. General Electric Co. (GE), parent company to Kidder Peabody, acquired the bank and was required to pay $26 million in fines as part of a settlement with then-U.S. Attorney Rudy Giuliani. Slowly, Kidder Peabody built itself back into profitability under the management of Si Cathcart and his successor Mike Carpenter.

Unfortunately for Kidder Peabody, the internal problems were not over. Joseph Jett was a bond trader on its government bond desk. His job was to make a profit from price differences in plain-vanilla government bonds and zero-coupon bonds. Jett's job involved stripping and/or reconstituting bonds in order to take advantage of arbitrage. Jett had discovered a glitch in Kidder's computer system; it would record profits on a forward reconstitution daily, even if the trades would be worthless upon settlement.

Kidding Nobody

Kidder Peabody's system was designed to tally profits while allowing time for trades to settle. By moving his trades forward again and again, Joseph Jett was able to keep profits building while delaying the final transaction that would necessarily cause a loss equal to the false profits. An upgrade of the system on the same faulty grounds allowed him to enter more false trades, which kept them floating longer. GE noticed Kidder's portfolio was becoming extremely heavy and overextended in bonds. GE told Kidder to reduce its stake, whereupon Jett's scam was revealed.

Around $350 million in false trades were made, and $8 million in performance bonuses on false trades were paid to Jett. Jett's bonuses made him the prime target of a SEC investigation. Interestingly, Jett denied concealing the trades and put the blame on Kidder Peabody management, stating that the company knowingly engaged in fraud in an attempt to wrest control of the firm back from GE. His most serious charges were overturned on appeal. Kidder Peabody untangled from GE when the parent company sold the investment bank to Paine Webber, presumably out of anger at having to deal with two high-profile trading scandals during the short time they owned it. (See also: The Biggest Stock Scams Of All Time.)

This question was answered by Andrew Beattie.

Kidder, Peabody & Co. was an American securities firm, established in Massachusetts in 1865. The company's operations included investment banking, brokerage, and trading.

The firm was sold to General Electric in 1986. Following heavy losses, it was subsequently sold to PaineWebber in 1994. After the acquisition by PaineWebber, the Kidder Peabody name was dropped, ending the firm's 130-year presence on Wall Street.[1] In November 2000, PaineWebber itself was merged with UBS AG.

History[edit]

Early history[edit]

Kidder, Peabody & Co. was established in April 1865 by Henry P. Kidder, Francis H. Peabody, and Oliver W. Peabody. The firm was formed via reorganization of its predecessor company, J.E. Thayer & Brother, where the three founders had previously worked as clerks.

Kidder, Peabody acted as a commercial bank, investment bank, and merchant bank. The firm had an active securities business, dealing in treasury bonds and municipal bonds, as well as corporate bonds and stocks. Kidder Peabody also actively traded and invested in securities for its own account.

In the aftermath of the 1929 stock market crash, Kidder Peabody was in a perilous situation. In 1931, Albert H. Gordon bought the struggling firm with financial backing from Stone & Webster. Since electric utilities were considered somewhat risky, Stone & Webster set up its own investment banking operation to finance their own projects through bond sales. Many of the utilities were municipally owned and Stone & Webster's investment banking unit served them in other offerings. Eventually, as fewer investment banking clients were engineering clients, there was an incentive to divest and merge the unit with another investment bank. Edwin Webster's father, Frank G. Webster, was a Senior Partner of Kidder Peabody, and Kidder had actively supported Charles A. Stone and Edwin as they started The Massachusetts Electrical Engineering Company, which later became Stone & Webster, in the 1890s.[2] Gordon helped rebuild Kidder Peabody by focusing on specific niche markets including utility finance and municipal bonds. Stone & Webster had thus become an integrated company which designed utility projects, built them, financed them, and operated them for municipalities.

In 1967, Kidder Peabody helped to arrange a deal whereby the USDA's Commodity Credit Corporation invested $21.8 million in the failing Lebanese Intra Bank, a cornerstone of the Lebanese banking industry.[3] This move likely contributed to preventing a major financial crisis in Lebanon from worsening.

In the 70s, R&D and finance[edit]

Kidder Peabody was among the first Wall street firms to start and dedicate an entire department to financial research and development. In the Late 1970s, it hired Yale Professor John Geanakoplos to start an R&D department to research and analyse the connection between finance and mathematics. Gradually the department grew to contain 75 prominent academics, and continued to function till Kidder Peabody's closure.[4]

Kidder and the 1980s insider trading scandal[edit]

Gordon served as Kidder's chairman until selling it to General Electric in 1986. Soon after the GE purchase, a skein of insider trading scandals, which came to define the Street of the 1980s and were depicted in the James B. Stewart bestseller Den of Thieves, swept Wall Street. The firm was implicated when former Kidder Peabody executive and merger specialist Martin Siegel—who had since become head of mergers and acquisitions at Drexel Burnham Lambert—admitted to trading on inside information. Siegel also implicated Richard Wigton, Kidder's chief arbitrageur. Wigton was the only executive handcuffed in his office as part of the trading scandal, an act that was later depicted in the movie Wall Street.

With Rudy Giuliani, then the United States Attorney for the Southern District of New York, threatening to indict the firm, GE conducted an internal investigation concluding that Kidder executives had not done enough to prevent the improper sharing of information. In response, GE fired Kidder chairman Ralph DeNunzio and two other senior executives and stopped trading for its own account.

1994 bond trading scandal[edit]

Kidder Peabody was later involved in a trading scandal related to false profits booked over the course of 1990–1994. Joseph Jett, a trader on the government bond desk, was found to have systematically exploited a flaw in Kidder's computer systems, generating large false profits. When the fraud was discovered, it was determined that Jett had lost 75 million dollars over the four years instead of the apparent profit of 275 million dollars over the same period. The SEC later concluded Jett had committed securities fraud and banned him from the industry.

In the rush of bad press coverage following the disclosure of the overstated profits, General Electric sold Kidder Peabody's assets to PaineWebber for $670 million in October 1994, closing the transaction in January 1995.

September 11, 2001 terrorist attacks[edit]

On September 11, the former offices of Kidder Peabody (which were occupied by PaineWebber, as they had assumed the lease as part of the acquisition in 1994) were among many businesses impacted by the terrorist attacks. The company had offices on the 101st Floor of One World Trade Center, also known as the North Tower. Two PaineWebber employees lost their lives.

Associated people[edit]

This section needs expansion. You can help by adding to it.(October 2010)

  • Prince Abbas Hilmi, Vice President of Kidder, Peabody & Co. / Executive Director of Kidder, Peabody International Investments (1986–1989)[5]
  • Lloyd B. Waring, Vice President of Kidder, Peabody & Co.[6]
  • Lana Del Rey's paternal grandfather, Robert England Grant, Sr. (Brown '48, Harvard MBA '50) was a Kidder, Peabody & Co. investment banker, later vice president at Plough, Inc and Textron, and venture capitalist.[7]
  • Christian Gerhartsreiter, serial impostor, was briefly employed at Kidder, Peabody & Co. under the alias "Christopher C. Crowe" in the late 1980s.[8]

See also[edit]

References[edit]

  1. ^Kidder Peabody Name To Vanish -- Venerable Presence Fades After 129 Years. The Wall Street Journal, January 18, 1995
  2. ^"Stone & Webster 1889-1989 A Century of Integrity and Service" by David Neal Keller,p.20 ISBN 0-9623677-0-2
  3. ^New York Times, Oct 12, 1967.
  4. ^Geanakoplos, John. "Financial Theory lecture ECON 251 (Devlivered April 2011)". www.yale.com. Yale University. Retrieved 19 May 2017. 
  5. ^"Prince Abbas Hilmi". Egyptian Investment Management Association. Archived from the original on 2008-10-12. Retrieved 2010-10-09. 
  6. ^"Lloyd Waring, GOP fund-raiser, former investment banker; at 95". The Boston Globe. November 5, 1997. 
  7. ^"Obituaries: Mr. Robert England Grant, Sr". Lake Placid News. October 31, 2014. Archived from the original on March 9, 2015. Retrieved March 7, 2015.  
  8. ^The Man in the Rockefeller Suit; Vanity Fair, January 2009.

External links[edit]

Francis H. Peabody, co-founder of Kidder Peabody c. 1908
Oliver Peabody, co-founder of Kidder Peabody c. 1908
Kidder Peabody's offices on Devonshire Street in Boston c. 1908

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