Marc Shapiro

Duration: 1hr: 13Mins
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Uncorrected Transcript

Interview with:  Marc Shapiro
Interviewed by:  David Goldstein  
Date:  December 8, 2008



DG:      Today is December 8, 2008.  We are in the home of Marc Shapiro, being interviewed for the Houston Oral History Project.  My name is David Goldstein.  How are you today, Mr. Shapiro?

MS:      I am great, thank you.

DG:      Great.  Let’s begin at the beginning.  You are one of those rarities – someone who was actually born here.

MS:      Someone whose parents were born here.

DG:      Tell us about that.  Tell us about your earliest days.

MS:      My parents were both born in Houston.  On my mother’s side, they came here in the 1860s, and actually, one of my forbearers had the first drug store in Houston – Bergheim Drug Store at the corner of Congress and Main.  The building is actually still there.  My father’s father came here from Russia, but they were both born here, grew up in Houston.  Both went to Rice, met at Rice, and got married shortly thereafter.  I was born here in 1947, the youngest of 4 children, and other than going away to college and business school, and then later for a brief period of time to work, have spent most of my life in Houston.

DG:      Tell us about those early days.  What did you do when you were a kid?

MS:      I played a lot.  We had a home at the corner of Southmore and Chenevert, with a big side lot on it which is now occupied by an apartment building, I think.  So we had a great life growing up.  Walked to elementary school, MacGregor Elementary School, which was a few blocks away.  When I was in 5th grade, I transferred to Kincaid which necessitated a cross-town car trip of about 30 minutes, and then when I was in 9th grade, we moved to a new neighborhood called Meyerland and that is where my parents lived until I went away to college.

DG:      What were your subjects in school that you did well in?

MS:      I liked numbers and I did well in any of my math subjects.  I thought I would major in math mainly until I went to Harvard and I found out that there were a lot of really smart people in mathematics and so I switched to applied math which turned out to be economics, and then spent most of my career in economics or business-related matters.

DG:      What was Houston like?  You were born in 1947, so you grew up sort of in the 1950s.  What was Houston like in the 1950s?

MS:      A small town.  A friendly town.  You kind of knew a lot of people.  It was a long way to drive from where we lived to Kincaid.  There were no freeways.  What is now 610 was a two-lane road called Post Oak, and that is what we took out to Memorial, and then all the way down Memorial to cut through a neighborhood to get to Kincaid.  But I remember it as a very happy place to grow up.  Rice football was important.  I went to a lot of Rice football games which, at that time, was important and they sold out the stadium – over 70,000 people.  Southwest Conference football was important.  Houston baseball was important.  So I remember a lot of sports which were Minor League at the time but it seemed like it was Major League.  Major Leagues were far away.  So I think it was a great place to grow up and it is still a great place to live.

DG:      You describe it as a small town – it had a small town or literally a small town?

MS:      Well, it was literally a small town.  I guess in the 1940s, the population was about 300,000 people, I am guessing, 400,000 people.  When my parents were born, it was 50,000 people.  So it was a small town and, you know, it had a little bit of a small town feel.  It was a very distinct downtown.  Going downtown was a big treat – to the movies, a relatively small number of movie theaters mostly in downtown and that was a big deal to be able to go downtown.  We drove back then when we were 14 so I got a license and was able to drive to school but also to drive downtown and to date and do other things which kids do in a different way today.

cue point

DG:      Was that the hot spot?  Downtown?  That is where you went for fun?

MS:      Yes, there were a lot of kids that met at what is called the Braeswood Triangle which is in old Braeswood near Gramercy and Greenbriar, I guess.  So that was a congregating spot for a lot of my friends.  But in terms of activities to do, downtown was the place to do it.

DG:      Did you have favorite restaurants, favorite places to go?

MS:      Oh, I had a lot of favorite restaurants.  Valiants for pizza.  Weldon was a cafeteria we went to every week.  Elliott’s was a steak house.  Felix’s was the Mexican restaurant.  Prince’s was the hamburger place.  James Coney Island was the hotdog place.  And none of those restaurants survived under the same ownership.  James and Prince’s, I guess, are the only ones still operating.  But we did eat out a fair amount and those were kind of some of my favorite places.

DG:      So tell us about high school now.  You graduated from high school . . .

MS:      I graduated from Kincaid in 1965.  It was a small school.  My graduating class was 64 people.  I was on the debate team and we won a number of tournaments.  That was a big deal although I do not think we worked anywhere near as hard as they do on debate teams today.  My social life revolved less around school than it did around a high school fraternity called SAR where a lot of my friends were and we had intramural sports with that fraternity.  And then, I met my future wife when I was still in high school.  I was in 10th grade, she was in 9th grade.  And then, we started dating after that.  So I remember it as a great time.

DG:      And then you left Houston to attend Harvard University.  You mentioned that earlier.

MS:      I went to Harvard.  That is right.

DG:      How did that come about?

MS:      It was a little bit different than today where you take extended field trips.  I had never set foot at Harvard until I enrolled as a freshman in September.  My high school debate teacher, an English teacher – his name was Barry Moss and who taught at Kincaid for 40 years – became legendary.  When I got there, he had just started.  He had gone to Harvard Divinity School.  He recommended Harvard to me and I applied and got in.  It never occurred to me that we should go up and look at it.  We had been in New York and I guess we had gone by and looked at Yale, which I also applied to, but he liked Harvard and that sounded good to me and so that is where I went.

DG:      So you had been in Texas all your life and Houston all your life and you go up east.  How was the culture shock of Harvard?

MS:      It was O.K., really.  Harvard is a very interesting place.  It has a name reputation but really, inside Harvard, it is a pretty easy place to get along.  There are a lot of different kinds of people.  It is not a very high-pressure place.  They do not fail anybody at Harvard so, you know, a lot of different people get along and everybody lives in a dorm.  So your social life is kind of set up.  I met a guy when I went up there with my roommate who, it was potluck, and we wound up rooming together for 4 years and we still remain friends today.  So I was able to get with a small group of people that I liked.  They had a lot of intramural sports, a lot of activities.  You went to the same library, you went to the same dining room, so it was kind of very easy to mix with people.  I had a group of 6 people that I liked that I roomed with actually for a number of years.  Two of them were from Boston, one from Washington, one from Denver, one from New York.  But I found, as I have found all my life, people are pretty much people wherever you go.  They may have different backgrounds and different cultures and so forth but most people are very nice when you get to know them.  So I found it easy to make friends.  Harvard is a wonderful institution.  It is a unique institution, I think, in the world, and it is an institution where you can do as much or as little of whatever it is you want to do.  I was lucky in . . . I liked economics.  I was able to associate with a number of award-winning economics professors, either in small classes or as thesis advisors, and I felt like I got a very good grounding in economics and in the social sciences in general.

DG:      Now, you left in the early 1960s.  You were at Harvard during the 1960s.  That, of course, was a decade of enormous change.  Were you aware?  Were you participating?

cue point

MS:      I was aware but not an active participant.  There was a great deal of turmoil at Harvard at the time.  I can recall in my sophomore year, coming back to my dorm room and being in the middle of . . . Secretary of Defense McNamara had been on campus and his car was surrounded by hundreds of students and it was a pretty bad situation.  I was trying to walk through to get to my room and wound up in a picture in Newsweek magazine which my parents were somewhat horrified by.  You know, I did not agree with a lot of what was being done but I also was not an active demonstrator against it.  I was more of an observer, I guess.  When the Harvard students took over the administration building, the best thing was that classes were suspended for 1 week and that was just fine with me, but I was not actively involved in the protests.

DG:      This trip of a Houston, Texas boy heading up east is something that is going to repeat itself later in your career but was there an identity to being a Texan when you went up to Harvard?  I mean, during those years, did Texas and did Houston have an image of a personality?

MS:      Well, you know, I think Texas is a unique place.  As one of my friends said, “You don’t see the state flag of any other state quite so often as you do of Texas,” and people do identify with a Texan, and I was proud of being from Texas so that was easy to do.  Our sophomore year, I think, we all took a car trip, came back, and everybody came back to Texas and spent some time here and really got to appreciate what Texas is all about.  So, yes, I love being from Texas.  At that point in time and then later when I went to New York, I do think there is a special identity associated with being from Texas.

DG:      How about Houston?  When you mentioned you were from Houston, did people have a preconceived notion about what that meant?

MS:      Cowboys.  Oil wells.  The Wild West.  Even then, there wasn’t a clear conception of what Houston is actually like, although I think maybe it was closer in the 1960s than it is today in terms of image and reality.  But yes, people are surprised to find out that there is real civilization here and culture here.  There wasn’t as much of it in the 1960s as there is today but people are always surprised when they actually come and find the real Houston.

DG:      When you went to Harvard, did you have a career path in mind then?  Did it develop while you were there?

MS:      I always knew that I wanted to go to business school.  Harvard had no undergraduate  business classes and I did not want to take any undergraduate business classes because I knew that I would go to business school and it was my opportunity to really learn as much as I could about as many subjects as possible.  So, at that time, you could go directly from college to business school.  In later years, the business schools kind of wanted you to sit out for some period of time.  But at that point in time, you could go straight through and that is what I did – I applied to Harvard and Stanford and got into those but I decided I had already had a lot of snow and a lot of cold and I wanted eventually to go back to Houston and that this was my chance to see what the west coast was like,  So I wound up going to Stanford Business School which also turned out to be a great choice for me.

DG:      What were those years like?

MS:      It was great.  We were just married.  We married right about the time that I graduated.  I had enrolled in an ROTC program at that time so I went away the first summer to Fort Benning which was not the best experience of my life, in Fort Benning, Georgia.  After I came back, we got in the car and drove the 2,000 miles to San Francisco which was a great car trip and wound up there.  Gerry (sp?) found a job to help support us and I wound up enrolling in business school which turned out really, for all the hype about it, not to be a very difficult proposition.  We had classes from 8 to 12, 4 days a week, and you could play golf on a great golf course for $1.50 a round and I wound up playing a lot of golf as well as getting a great education.

cue point

DG:      So when you were at business school, did your career path achieve some focus while you were there?  You knew what you wanted to do?

MS:      Yes, it did.  I was always drawn to finance because I liked numbers and I feel like I have a comparative advantage in numbers.   I am not very skilled at putting things together or figuring out how things should go together and so I always felt if I worked for an industrial company, I would be at a disadvantage because they made things and I did not know how to make things but a financial company, their backbone is numbers and that is what I understood.   When I was in my second year at Stanford, there was a competition -- it was a strategy course.  I called it a live case.  They picked a different company each year and asked teams of 4 people to come up with a 5-year plan for that company and they made available executives from that company for you to interview, you did your own research, you developed a presentation, you gave a presentation, and they picked the 2 best teams to give a presentation to the CEO of a company.  Well, the company that year was Citibank and the CEO was Walter Wriston, and our team wound up being one of the 2 best teams.  He came out to Stanford and we wound up giving a presentation on what Citibank should do.  I thought I knew more at that time than I found out later I really knew.  We gave this presentation. We went out to dinner with Wriston and his associates.  At some point later, they invited me back to New York to work on a consulting project.  I think it was probably part of a recruiting pitch but I wound up doing some work in Citibank.  Now, Citibank at the time was considered to be the best managed bank.  Banks really were not managed like we learned in business school you were supposed to be managed.  They did not have budgets.  They did not have cost accounting.  They did not have profit goals.  They were sort of run for the community good and people worried about the size of their deposits, and they really were not run like great businesses.  Walter Wriston, I think, was as influential as any person in changing that and espousing the belief that it should be run for the benefit of shareholders with a consistent growth in profits.  When I went to Citibank which was then reputed to be the best managed bank, I could discover that they had only put those processes in within the last few years and therefore, it seemed to me that if you went to any other bank in the country, especially in Houston, it was likely they were in a very rudimentary stage of doing the same thing.  So I determined early on that I wanted to work in the financial side of a bank.  I did not want to be a salesperson because I did not think sales was my strength.  I liked finance and I thought the greatest opportunity in a bank would be on the internal financial side of a bank.  And so, that is what I wanted to do.  When I graduated, I came back to Houston and interviewed exclusively, I think, with the banks in Houston for that opportunity.

DG:      I read that you graduated at or near the top of your class at Stanford?

MS:      I did graduate first in my class at Stanford.

DG:      And so, I imagine you graduate first from Stanford Business School, you have your pick of jobs – did you consider any other offers?

MS:      Not really.  I really wanted to work in Houston and I really wanted to work in banking.  There were some other offers -- Citibank was one of them – and I thought about going to New York at the time but I had been there a little bit and I really wanted to come back to Houston and start a career.   And so, my father had banked with what became Texas Commerce Bank for a long time and he introduced me actually to John Cater (sp?).  John Cater was the first person that I met at the bank.  After I met John, I met Charles McMahon who was the chief financial officer at the time.  Fortunately for me, Ben Love had been a recent addition to the management team at Texas Commerce; he had no history in banking – he had run a manufacturing company and he could not understand why banks did not have budgets or cost accounting, and he was just in the process of putting it in.  And so, having somebody who was interested in that was very appealing to him and to Charles McMahon who was working for him.  So I came on and actually wound up my first job was running the budget for the bank which was then one location and one billion dollars in assets.  I talked to a couple of other banks but really the attraction at Texas Commerce was the greatest because of what they were trying to do.

cue point

DG:      I see.  So give us the chronology of your early work history.  You started there at Texas Commerce . . .

MS:      After I graduated business school in June of 1971, I had to go in the Army to fulfill my ROTC obligations.  I went to Fort Benjamin Harrison in Indianapolis and was there for about 3-4 months, and at that point in time, the Vietnam War was winding down.  And so, they were discharging more people than they were accepting.  They needed to reduce the size of the military and so they told me that my duties were through and I needed to go back and get out of the Army.  So, that was fine with me.  I went back to Houston and in January of 1972, I started at the bank as a budget officer for the bank.  It was then a public company but, again, restricted to one bank, one location.  A little bit after I got there, they found a loophole in the law, I guess.  While we could not branch in Texas, it turned out we could form a bank holding company that owned more than one bank and that got blessed by the Attorney General in early 1972.  And so, we started on a proposition of buying banks.  And over the next 10 years, we bought 40 banks and we started 40 banks.  We wound up with up over 80 locations.
I started as chief financial officer.  About 2-3 years after I was there, Charles McMahon, who I was working for left the bank and even though I was only 29, Ben decided that I should become the chief financial officer.  That did not seem remarkable to me at the time.  It does, in retrospect, that he was willing to put that much confidence in such a young person.  At that time, we were beginning to grow and actually over the 10 year period from 1972-1982, Texas Commerce became about the 25th largest bank in the country and among the top 50 banks. We had the fastest growth rate in earnings per share and the highest return on equity.  By 1982, there were only two triple A banks in the United States.  One was J.P. Morgan and one was Texas Commerce Bank.  At that time, as I said, I was chief financial officer and began to take on more responsibilities for investments and some other things.

DG:      That was a booming economy in Houston as a whole, so for the sake of historical perspective, what was that like in Houston, not just from the sake of Texas Commerce Bank but in the business community?

MS:      Well, it was a great boom.  The city was exploding.  Oil prices were going up.  The economy was strong.  Houston was, by far, the best economy in the country.  Texas was.  The real estate market was strong.  And, of course, as often happens, we confused being in the right place at the right time with being very smart so we thought we were very smart.  It turned out, of course, that we were not very smart, that we were very concentrated in oil and real estate.  The law made it difficult not to be concentrated in real estate.  We had tried to expand outside of our state but the law at that time really prevented us from expanding outside of the state.  And so, we were pretty much bound to what the state’s economy determined and that was oil and real estate.  Well, the oil boom stopped in 1983, 1984, and then we began to have some problems.  We survived that pretty well but then the real estate depression hit and we could not survive that.  So in 1986, we decided, really Ben and I, that we needed to look for a merger partner, that it was going to be a very difficult environment and that we would best serve our clients and our shareholders by having a strong partner, and our employees by having a strong partner where we could go through a difficult period.

DG:      If you can, from the boom to the bust period . . . 80 banks -- there must have been hundreds of thousands of customers . . . what was it like, do you think, for just the people in that era -- the businessmen that you dealt with, their employees.  I do not think we have anybody tell the story of that boom to bust period like maybe from the perspective of somebody who sees their accounts and how people deal with it.

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MS:      Well, there was a lot of shell shock.  People who had been successful all their lives really were ruined financially and had to come to grips with that, and the bank, which was a very conservative bank and had never had a loan loss in excess of $200,000 in the history of the bank up until 1982, all of a sudden was faced with the proposition of millions and eventually hundreds of millions of dollars of loan losses, so it was a total culture shock, and it was happening almost alone in Texas.  It was not a national phenomenon.  It was a boom to bust story in the oil states.  So there was very little sympathy, as you can imagine, from the rest of the country.  We Texans probably did not do a good job of being humble when things were going well and, as you might imagine, when things were not going well, there was a little bit of, well, they got their due.  It turned out, of course, later on that the real estate problem spread to the whole country.  But for many years, it was isolated in Texas.  And so, there was a real feeling of, you know, it just happened here and this great Houston optimism and drive was really tested.  I think most people were still able to maintain that drive.  I remember people, especially then, but I remember people like Ken Schnitzer who was a great developer who forcefully felt that we needed to go out and market the city which we had never really had to do before.  And so, he was the driving force in what eventually became the Greater Houston Partnership, having a marketing arm of the old Chamber of Commerce that was much more proactive in marketing.  So there were a lot of people who came forward and assumed leadership positions and helped the city move through it but I think it is also true that there were just a lot of difficult times.  I remember going to a bank in Midland which had a proud history – the First National Bank of Midland – as an independent bank and sitting with their board trying to come to grips with the fact that the bank was going to fail and people in the board room crying about the fact that it had been their daddy’s bank and they had been there forever and what could they do to save the bank?  So as we had those kinds of failures, as the difficulties spread, you know, it became a difficult place.  But I do not think Houstonians ever really lost a sense of optimism and sense that better days were ahead – we just knew that they were further and further ahead.

DG:      What were the mechanics of the bust?  The oil was high and then went low?  That means, it sort of anticipated that?  We see some of that now. What about in the real estate market?  What caused the collapse?  I am sure you could explain it for other Stanford MBAs but how about for us regular folks?

MS:      The real estate collapse was caused by 3 things.  First of all, there was a spec of the boom that was caused by easy lending on the part of S&Ls.  S&Ls, savings and loans, originally were created for the purpose of making residential mortgages.  When the market for so-called securitization or bundling of those loans and selling them to third parties arose, that was really a cheaper way of making mortgages and lowered the cost of capital, and it really left the S&Ls without a business purpose.  So they lobbied Congress for a change in their charter to where they could make more commercial real estate loans, and they did that.  And they did it without a great deal of experience and without a great deal of care, and in ways that, in hindsight, of course, were ridiculous.  A lot of it was on the proposition that all of this land was going to be turned into commercial land or high-rise land and when it turned out there was no demand for it, there was just no demand.  And so, the average price of real estate, of raw land in Houston that we held as collateral went down by 90%, from 1985 to 1990.  So one cause was overlending primarily on the part of S&Ls.  The second that happened was the tax law of 1986 which took away a lot of the advantages of real estate investing.  And so, before people would invest in real estate as a tax shelter, that went away and that also caused a great depreciation in real estate.  And then, the third element was the change in the outlook for oil prices which was climbing from $4 or $5 a barrel to $30 a barrel -- many people thought on its way to $100 a barrel, and then abruptly it went back below $10 a barrel.  So, the big employers that had been oil companies and oil services companies, they had to contract and that eliminated the need for housing and for commercial real estate.  So those 3 things coming together I think are what caused a perfect storm in real estate in the 1980s.

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DG:      When you talk to individuals who lived through that, it changed those people.  They would say, “I’ll never again do what I did then.”  How did it change the banking industry?  How did it change Texas Commerce other than the fact that you had to go out and seek a merger partner?

MS:      Well, I think the bankers that went through it certainly learned from it.  It is interesting because one of the people today at J.P. Morgan Chase that runs a national mill market and real estate business got his start in Texas in Austin doing workout loans.  And he took that with him to a very conservative view of real estate lending which has helped enormously J.P. Morgan as it is going through the current real estate crisis.  People that had not lived through I do not think have the same appreciation for how fast real estate values can change.  So it gave you an appreciation of that.  It gave you an appreciation of the dangers of borrowing money.  I saw so many of my friends ruined from debts that they had for either speculative investments or lifestyle investments, and it brought to me the notion that personally, I should not be in debt, and I think it brought that to a lot of people.  So it definitely led to a generation of more conservative lenders.  Unfortunately, human beings have a short memory span and we do seem doomed to repeat the mistakes of the past and we are currently living in that.  What we are living in today has different roots though.  I mean, the problem is we always fight the last war.  It never rolls out exactly the same.  It is having the same impact but it probably was not caused as much by speculative overlending, at least on a commercial side, as it was in the 1980s.

DG:      I see.  So, now picking up the narrative, you and Mr. Love decided you needed to find a merger a partner?  Was that a painful realization to come to?

MS:      It was a very difficult realization to come to.  We had a proud history.  Jesse Jones was one of the founders of our bank.  His picture hung on the wall.  We were, as I said, one of the two top banks in the United States, best performing bank, one of the highest-rated banks, and yet, we did recognize the reality that we were facing, and so it was a very difficult decision.  We were guided by a board that was comfortable making difficult decisions.  It was not easy because it was also illegal. The law at the time did not allow out-of-state mergers so we had to do two things:  we had to change the law and we had to find a merger partner.  I give Ben  a lot of credit for being one of the few people who could devote.  He worked with Walker Mischer who, at the time, was chairman of Allied Bank.  There was a special session of the Legislature.  As you know, the Texas Legislature only meets every 2 years and it was not meeting at the time that we were coming to this decision, but there was a special session called for some unrelated reason in the summer of 1986, and Ben and Walter Mischer working together were able to convince the state regulators and then ultimately the people in the state legislature that the law needed to be changed to allow for out-of-state mergers or else the Texas banking system would be doomed.  And they were successful in that effort and it was passed in the summer of 1986.  That brought us to the second step which was finding a merger partner.  We knew it had to be a large bank.  We were, at the time, about the 20th largest bank in the country but we knew that for somebody to take on the problems that we had, they would have to be significantly larger.  So that really limited us to the top 10 banks in the country.  We went down a list of the top 10 banks and who might be interested and who might not be.  We crossed off a few that we did not like and we did not think would be interested and then went to see the others.  Ben had good personal relationships with most of them.  We went to see them and we found ultimately that there were two that had an interest, a strong interest, and had the financial capacity to do it.   And those two were Chemical Bank and Chase Manhattan Bank which, at the time, of course, were separate banks.  So we started negotiating with both of them.  Ultimately, Chase decided that it did not want to go forward, that the risk was too great.  Chemical, on the other hand, was led by a man named Walter Shipley.  Walter had started his career as a correspondent banker in Texas and he had traveled every inch of the state.  He told me he would come to Texas, he would rent a car and he would drive around for 2 weeks seeing little banks and taking their overlines – the lines that they were too small to do by themselves that would ship off to New York, and Walter was the guy.  He had been involved in the work-out of the Astrodome loan which had fallen into default and he had done a lot of work on that issue.  So he knew Texas and he knew the people in Texas, he knew our bank.  As a matter of fact, Ben Love had tried to hire Walter Shipley to work for Texas Commerce at one time.  So he had confidence that Texas was going through a tough time but that this was a good economy and a good bank.  And so, we were able to reach an agreement with Walter in November of 1986.  I do remember we met up there and we were riding home.  I think it was maybe a week before Thanksgiving.  It was a difficult ride home, Ben having concluded that we had reached a handshake agreement to sell the bank.  A lot of bittersweet, mission-accomplished but, on the other hand, a great feeling of loss.

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DG:      It must have been difficult to go seek a partner and still keep your leverage in the deal.  _____ were you happy with the financial arrangement that was struck?

MS:      We were early and, of course, the great lesson in business is recognize reality and act early.  We were early.  People didn’t . . . we didn’t maybe even fully appreciate the extent of the problems.  We had had an offer actually. We had explored opportunities to merge with either of the two large Dallas banks – Republic or Interfirst – and we decided that did not make sense, that the difficulties we saw were much greater than that and that we needed to have a strong partner.  And if we could have a strong partner while our competitors were weak, that we would be at a tremendous advantage and that we would help our customers and help our employees and help our shareholders.  So we wanted to get at least book value for the bank which was $36 a share. We wound up with a very complex arrangement where we created . . . it was actually the first creation of the so-called “good bank/bad bank,” which now you hear a lot about in different circles.  We carved out $300 million of loans into a bad bank and we gave that to our shareholders as a separate piece of paper.  And actually, our shareholders received 5 different securities:  cash, some chemical stock, a class B chemical stock that was tied to the performance of Texas Commerce, the stock in this bad bank, and some preferred stock.  So, it was a complex arrangement but I think it totaled about $1 billion in value and it gave our shareholders something that nobody else in Texas of the large banks eventually was able to do because the rest of them, the large ones, did go broke.

DG:      Because Texans have such a strong sense of identity, was it particularly galling to have people own you from New York, from the north?  Would they have preferred to come . . .

MS:      We were lucky.  We were really lucky to have Walter Shipley.  I remember one of the meetings we had with Chase, walking out of the meeting where we had had very much of this “New Yorkers know what is best” mentality, an walking down the street with Ben and saying how depressed I was about the fact that they felt that they were in the center of the world and they looked down on everybody else.  And hoping that they would not have the best bid.  And, of course, it turned out they did not.  Walter Shipley is a wonderful person and he intuitively understood the pride the Texans had.  He resisted his own internal people – that they had to go in and make tremendous changes in the bank.  He did not change the name.  He recognized it was important the feeling of continuity, the feeling of the same management, that we knew our customers best, that we had gone through a difficult economic period but that we could get through it. And so, despite a tremendous amount of criticism, externally and internally, and especially as the problems accelerated beyond what either one of us expected, he was able to hold fast to the idea that we knew what we were doing and never had the notion that he was looking down on us or doing anything like that.  And for that, I give him an enormous amount of credit.

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DG:      That was fortuitous.  So continue the timeline then.  You said merger first and then you said you sold the bank. 

MS:      We always talked about it as a merger.  Actually, at the time, we were one-third of the company.  We were a big piece of the company.  They were twice as big as we were.  Later on, they went through many, many mergers in New York.  Manny Hanny, Chase, J.P. Morgan – where we became a much smaller piece of the total pie.  But initially, we were a big piece of it.  We had folks on the board.  Three of our directors were on the board.  Walter was on our board.  He would come down.  We kept our board.  It still continued to meet.  So we always referred to it as a merger.
It is interesting – one little historical footnote.  The same day that we merged, the Houston Chronicle was sold to the Hearst Corporation.  Houston Chronicle, of course, was founded by Jesse Jones just as the bank was.  So the two great legacies of Jesse Jones were sold to New York entities on the same day which I think is an interesting thing and both of them have worked out very well for the people in those institutions and I think for the state of Texas -- fortunately, both of them to owners who were very sensitive to Texas and to its needs.

DG:      So what was your role in this new entity?

MS:      I was, at the time, CFO still although I had responsibility for a lot of the operating parts of the bank, and Ben was going to retire.  So within about 6 months after the merger, he retired and I became the president of the bank.  I cannot recall . . . I think Walter became chairman and I became president but I was the senior person in Texas.  And so, that was a totally new role for me.  I had never been in sales.  I had never been in the customer side of the business.  I was always . . . I think at that time, I was running all of the operations and internal parts of the bank but not the customer side of the bank.  So becoming chairman was a totally different thing for me.  It put me in a much more public role.  It is what got me involved in a lot of different civic activities.  It got me involved with our customers.  It got me much more involved with people throughout the state and our banks.  And I found out, much to my surprise, that I really enjoyed it.  I did not know that I would, or I did not think I would be good at it but it turned out I really enjoyed it.  And from 10 years, from 1987 to 1997, I was CEO of the  Texas operation.

DG:      Talk about some of that community involvement.  A lot of what you did and continue to do is high profile, is very visible. There are also a lot of things you did that a lot of people do not know about behind the scenes.  What kind of things did you do?  What kind of things did you enjoy?  What are you particularly proud of?

MS:      Well, the first major project I got involved with was the Harris County Hospital district.  I was always interested in the medical field.  I thought the medical community was really the future of Houston.  Our medical center is a great asset.  Harris County Hospital District, of course, is the public part of that.  At the time, in the early 1980s, we had a very aging facility in the Ben Taub Hospital and a second one called the Jefferson Davis Hospital that were very old and dilapidated, and we needed to find a way to either restore them or replace them.  I was head of the Finance Committee and we came up with the first major use of floating rate bonds, municipal bonds, in large scale.  At that time, the so-called arbitrate rules were not in effect which meant that we could borrow money and invest the money and make the profit and keep it, which you cannot do today.

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 We were able to make about $80 million towards the contribution to building the hospitals which cost about $250 million from this borrowing at very low rates and investing the money at a higher rate until we needed the money.  However, that plan resulted in significant controversy because our debt was backed by an unconditional letter of credit from Texas Commerce Bank which, as I mentioned before, it was one of the two triple A banks in the country.  I woke up one Sunday morning to a front page article in what was then our morning newspaper, the Houston Post, about a major conflict of interest on the part of the chairman of the Finance Committee using his own bank to provide this letter of credit.  Never mind the fact that we made $80 million off of it.  It was a very brutal campaign on the part of the Post and a particular reporter to discredit me and to discredit the Hospital District.  It went on from there to a lot of allegations that the new hospital we were going to build was in a flood plane that was going to flood.  And lot of talk about that to the undying credit of County Judge John Lindsey.  He never bowed to any kind of pressure.  He backed the board of the Harris County Hospital District and said, “The board has done the right thing, they have done the ethical thing and we need to support them.  And so, in time, that kind of died down but it was sort of the first serious controversy or bad publicity that I was involved in.  A footnote to that is that while many buildings in Houston have flooded, including the Medical Center, the Lyndon Johnson Hospital has never flooded, which is the new hospital we built supposedly in the flood plane.
That was kind of an early project but after I became chairman of the bank, then I became involved in United Way; eventually became chairman of the United Way campaign drive.  I became involved in the Greater Houston Partnership and eventually became chairman of the Partnership.  And then, later on at some point, was on the boards of Baylor and other institutions.  And then, the other project that I loved was really building the Hobby Center.  The old Music Hall had been around since the 1940s.  It was a terrible place to watch a show.  I like Broadway shows.  It was awful.  The Theater Under the Stars, which was our resident theater company had been trying for some years to put together a plan to build a new theater.  They had tried to renovate the old one.  It did not work.  They tried to raise money to build it.  They could not do that.  And they finally came to me and said, “Can you help us raise the money?”  And so, I loved the project, I thought it would be great for Houston and I signed on to help raise the money which we eventually raised the $90 million to build the new Hobby Center which I think is a great addition to Houston.

DG:      Let’s go back to the narrative.  You merged with, were acquired by Chemical Bank.  When did it become Chase?

MS:      The narrative is this:  We merged in 1987.  In 1989, Chemical and Manufacturers Hanover Bank merged and retained the name of Chemical.  And then, in 1995, I believe it was, Chemical merged with Chase and even though Chemical was the acquirer, they took the name of Chase.  And the Chemical management survived, as the CEO, Walter Shipley, did but they took the name of Chase at that time.  Then in 2001 or 2000 – I am not sure which, I guess it was 2000 – we merged with J.P. Morgan and became J.P. Morgan Chase.

DG:      And how did each of those transactions affect you personally?

MS:      Well, I was CEO of the Texas bank and I was also . . . it varied, but I would say most of the time a 5 or 6 person executive committee for Chemical, so I was involved in the thought process on every one of them.  But with regard to the merger themselves, somebody said to me, “You are like Switzerland during the war.”  We were down here in Texas and the war was being fought in New York.  The fortunate part in all of that is that Walter Shipley retained his strong position. He actually gave up being CEO in the Manny Hanny merger for 2 years to John McGillicuddy but John was also very comfortable with Texas and looked at it as Walter’s responsibility anyway.

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  And then, Walter retained responsibility and so, you know, they went through a lot of merger activity up there but it did not really have any huge effect on us.  We kind of did our own thing and operated independently until about 1993 or 1994.  Maybe 1995.  Maybe at that point, our management team really came to the conclusion that we needed to change that, we needed to be a more integrate part of the whole; that the Chase name was a good name and that we would be better off if we adopted the Chase name, and that our people would have more opportunities if we were more integrated into Chase.  And so, we actually proposed to Walter that change and he accepted the notion that that was a good idea at that point in time.  So we began to divide up on a line of business so that the different parts of the bank in Texas would report to somebody in New York for that line of business, the retail line of business – the private bank, the commercial part of the business.  And it changed the job of the CEO here because it lost direct authority and it was more of a community outreach and an indirect responsibility.  In some ways, it became less interesting or less challenging but fortunately for me, in 1997, that is when Walter asked me to come to New York.  He had actually asked me to come to New York right after the merger.  The Chemical chief financial officer, who was a very young man, had had a brain aneurysm and could not come back to work.  He asked me at that time if I would move to New York and at that time, my children were young and I did not want to move to New York.  And I told him that.  And, again, to his credit, he accepted that.  But 10 years later, my kids were college and he said, “O.K., time is up and we need you to come up here and give us some help.”  So, in 1997, I went up to New York and became vice-chairman of what was then Chase Manhattan Bank for finance and risk management.

DG:      During those years when you were here, we talked about your community involvement.  What were the big issues of the day that affected the banking industry?  What were the big, newsworthy things looking back that occupied an inordinate amount of your time?

MS:      Well, for us, of course, and really, for some of the bankers . . . by that time, by the early 1990s, the real estate problems and the problems of merging market countries had affected the New York banks so they were in a great deal of difficulty, and the big issue of the day was really just getting through those problems and working with the regulators to get through those problems.  And then, for a long time, the big issue really was the repeal of the Glass-Steagall Act.  The Glass-Steagall Act was depression era law which separated commercial banking from investment banking.  Our belief was that in the way the economy and the financial products had evolved, it was important to put them back together again because we could better serve our clients that way.  The Federal  Reserve was in agreement with that and they, within the limits of the law, sort of approved certain loopholes that would enable us to begin a small investment banking presence.  But really, without repeal of the law, we could not do it in a big way, and for many years there, we worked to get the law repealed, and also to allow nationwide banking which, at the time, was also prohibited by depression era laws.  And so, I think those were the 2 major efforts at Chemical and at Chase that we had, was repealing Glass-Steagall and allowing nationwide banking, and both ultimately were successful.

DG:      What is going on in your hometown here in Houston during that time? 

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MS:      Well, Houston was recovering.  It took a long time.  It really took from 1985 or 1986 until 1992 or 1993 before Houston began to grow again.  The decline probably stopped in 1988 or 1989 but before it really began to grow again was the early 1990s.  From an economy wise, from a place to live, of course, it was a great place to live.  By that time, we had Major League sports teams, we had Major League cultural facilities, and Houston has always been a great place to live because it is an easy place to live.  You can do so many things so easily, it is a friendly place, it accepts people from outside readily, and we were just working on improving the community, working on greater tolerance within the community, and working on building up the economic strength of it.  And slowly, it began to return to the more positive growth rates that it had enjoyed for most of its life.

DG:      Difficult to talk about that time in  Houston without talking about some of the other calamities that we faced as a city.  The bank was involved in Enron’s business dealings.  Can you share that story with us to the extent that you care to?

MS:      Sure.  Actually, it wasn’t so much the Houston bank, it was the New York bank.  The New York bank was a trading partner with Enron on a lot of activities that Enron had and because I knew Ken Lay and had worked with  him on a number of civic projects, it was one customer that I was a little bit more involved with than others because of that relationship.  To some extent, as a risk manager, I was always concerned about Enron and its growth in terms of the speed of its growth and was concerned that we keep our exposure down which we did, we thought we did.  But it turned out that exposures these days can take a number of unexpected turns.  One of the activities that we had with Enron was a trading activity dealing in what is called interest rates and oil commodity swaps on tieing down the price of oil.  When the problems started, when the problems came to light, it was  a question of whether those were truly trades or whether they were really financing for Enron.  The trades were insured by various insurance companies because we did not want to take Enron risk, but the insurance companies decided they did not want to pay and that they had to find a loophole and the loophole they found was some sort of fishy question of whether they were really disguised finances.  They worked with some of the trial lawyers and they worked with some members of Congress to give the bank a lot of bad publicity around these so-called “hidden loans,” hidden from the view of stockholders and full disclosure.  That was a difficult period because the bank had a lot of publicity associated with it and because I had some association with Enron, in fact, working to try to save it at the end of the day, unsuccessfully.  It was a difficult period for me.  The bank ultimately settled its litigation with the insurance companies for about 50 cents on the dollar and ultimately settled its litigation with various bond holders and shareholders for billions of dollars.  It was a difficult chapter and I think it put Houston in a bad light because Enron came to epitomize Houston to some extent the way Wall Street epitomizes New York today.  Again, it is something that only time can cure and I think we have worked through those difficult days to where today, not many people totally recall all the details including me.  But it was a difficult period.  Even though I was living in New York at the time, I was very much involved in the problem.

DG:      How did that experience change us as a city and particularly the banking industry locally?

MS:      Well, I think it is like a lot of places.  When you are doing well, when Enron was doing well and people were well paid, they sometimes seem to get extravagant in their living habits, just as we did in the 1970s when oil was booming, people lived to excess.  It gets cured when things go bust.  And so, again, I think at that point in time, a whole oil trading and electricity trading business had grown up and Houston was the center of it and people were prospering and doing very well, and then the business collapsed.  And so, you had not only Enron but a lot of other companies that were in similar businesses that also collapsed and the people that were making a lot of money, all of a sudden were not.  And so, again, it induced a certain amount of self-restraint on lifestyle, I think, that is not dissimilar to what we are going through today in the current economic difficulties coming down from a period of very strong economic growth.

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DG:      We talked about some of the calamities.  When you look back on your time at the bank and the time serving the local community, what are you particularly proud of?  What stands out in your mind as accomplishments?

MS:      I am proud of several things.  I am proud that the bank has been able to work through all of these difficulties and prosper today where we are, by far, the leading bank in town with very large market shares across most of our businesses.  I am proud that we are able to take care of our clients and that our clients have been able to prosper and that we have relationships with many of those clients that go back for over 50 years.  I am proud that we were able to reach out and have been continuously able to reach out to the minority communities and be seen as a friend of the minority community, and I think that is the way we are regarded today.  I am mostly proud of the people.  I think we have an unusually good assortment of people that today form the backbone of the banking industry throughout the city and, in many ways, throughout the state.  People that were trained at Texas Commerce.  I think we attracted good people and I think we motivated good people and I still have a close association with many of those people who I think are unusually good people.  One of the things you conclude after you work in a business for a long time is that what you remember really are the people and the associations with those people are what I will value and remember.

DG:      I do not want to put you on the spot where you might forget somebody that you mean to mention but can you name some names of some people that might not be as well known that have served their communities or our city particularly well in your dealings with them?

MS:      People in the bank or people outside the bank?

DG:      People outside the bank.  The community.  You worked with a lot of nonprofits.  Yu worked with a lot of people who came through the bank, business leaders, civic-minded people, local community leaders.

MS:      Well, you know, you meet so many great people.  I think of people like Anna Babbin who runs the United Way today and ran the Girl Scouts in Houston for a long time.  People like Angela Blanchard who run neighborhood centers.  People like Quinton Mease who was chairman of the board of the Hospital District when I served on it.  People like Bill Lawson who I think has done more for community relations in Houston than almost any other individual by the force of his personality.  There are a lot of extraordinary people in Houston who do not get much attention and yet, who do great things for our city, and I think that is one of our incredible strengths is the number of people that we have like that.  They are almost too numerous to mention but I think as you go through life and encounter these people, you feel how lucky we are as a city to have them.

DG:      This is December of 2008.  What are you doing currently?  What keeps you busy?  What is your current role at the bank and what else are you doing?

MS:      I continue to work part-time with the bank, mostly with the private bank and introducing them to clients and clients to the private bank and working with our clients.  I am on 4 corporate boards, so that is a time-consuming activity, but most of my time is spent with nonprofit boards and particularly focused on the Medical Center.  So I just completed a term as Chairman of the Board of Visitors of M.D. Anderson which I think is one of the great institutions in Houston.  I am on the board of Rice University.  I am on the board of Baylor College of Medicine which, I think, is probably the most important institution in the city.  It is the largest research institution in the state of Texas and is at the forefront of genetic research that will be the key to future medical advances.  Baylor is going through a difficult period right now and that is taking a lot of my time right at the present time.  So really, it is those activities in the medical community where I am spending most of my time.

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DG:      In your time at the bank, going through the transition from a relatively small single location bank with a proud Houston history, as Houston is, I guess, with Jesse Jones, to being part of this national bank right out of New York international focus, do you think you were able to keep the Texas flavor of the local bank? Was it difficult?  I am sure it was important to some of the people here that cultural shift especially when you went to the vertical reporting scheme of reporting by department by function.   Was it difficult?  Was it important to you?

MS:      Yes, it was important to me.  I think we have always had a great deal of pride in the bank.  Even when we were going through difficult times, there was a belief strongly held that we were the best bank and had the best people, and one of the striking things to me when I went to New York with Chemical was that people did not believe that.  They did not have the confidence of the bank.  It bothered me a great deal.  And when they would go to Texas, when my associates in New York would go to Texas, they would come back and remark on the incredible pride that people in Texas felt in the bank.  I do think that that is a legacy that we have tried to maintain and maintain successfully.  Even though we are divided by line of business, even though many of the traditions of the bank are not what they once were, I think people still feel a close relationship with the bank and our employees do and with one another, and I think they still feel proud of what the bank does.  It is different no doubt than it was many  years ago but I still think there is a connection with the Texas part of the bank that most of our people still feel.

DG:      So Houston still has its bank.

MS:      It has its bank.  I never accepted the argument that when you merged, you lost the sort of hometown identity.  I always felt that if the bank was smart, it would keep that hometown identity, it would keep that leadership in the local community, and it has always been my experience that the successful banks do that. I believe Houston was better off because we made the decision to merge with a strong bank and that we did not have to fail.  I am not sure we would have failed, in any event, but I know we would have gone through a period where we would have had a great deal of difficulty concentrating on our problems and not focusing on the good clients who needed money to expand.  I felt that we were much better for the community for us to do what we did than to stay a weak, small, independent bank.

DG:      These are difficult financial times, economic times for our country now.  Having lived through this story before -- you mentioned earlier about how we learned from our history – from your perspective, just for the sake of looking back on this years from now, what is going on now and are you optimistic about the future and Houston’s short-term, long-term future?

MS:      I am optimistic about the future.  I have always been optimistic about Houston and I think we will get through this period.  This is a difficult period.  Probably in some ways, more difficult than what we have lived through before.  It is not focused on Houston.  In fact, Houston probably is better off than 90% of the country, but it is global in scale and it is unprecedented in scale in terms of the difficulties of credit and the shutdown in the housing part of the economy and in the falloff  and in consumer confidence.  We have said for 20 years that we do not save enough money in this country and that we spend more than we earn.  We are now reverting to saving money.  In the long run, that is going to be a good thing.  In the short run, it is a very, very difficult adjustment process and the only cure for that adjustment process, in addition to all the actions that the government is taking, is time.  It just takes time and it will take a lot of time to work through this.  But at the end of the day, we will work through it with a stronger economy, with a stronger savings rate, with some of the excesses ground out of the economy and we will go forward in a much better way than what has happened over the last few years.

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DG:      Your work history gives you a unique perspective on what is unique about Houston, what makes Houston, Houston, especially from an outside perspective.  Does this city have a unique spirit?  Does it have a unique personality?  And if so, what do you think that is?

MS:      Well, I think a couple of things are unique about Houston.  Number one, it is more accepting of outsiders than almost any city I know and everyone who comes here tells me the same thing.  If you come here and you are willing to work, you can find lots of activities in Houston and leadership positions in Houston.  It is not a question of you have to have been born here or your parents were born here.   And I think that has always distinguished Houston and is true today.  Secondly, I think Houston does have a positive can-do spirit.  I think that has been demonstrated time and time again by the projects we have achieved, by the Ship Channel, by the Space Center, by the Texas Medical Center, and I think that is still the attitude today.  It is a positive, “lets get it done.”  In many parts of the country, it is a cynical, “Why can’t we get it done?”  Here it is, “Let’s overcome the problems and get it done.”  And I think that is the enduring spirit of Houston that I love and that will also hold the city in good stead for a long time to come.

DG:      To wrap up, you helped build a major financial institution that touches the lives of hundreds of thousands; you helped guide the city through difficult transitions in terms of its race relations, in terms of building communities, through a couple of financial storms – looking back it, you may not be, by no means, done; you still have a lot of work ahead of you, but what gives you the most satisfaction in terms of accomplishment?

MS:      Well, it is hard to single out any one thing.  I think that having the opportunity to play a role in the city, in the growth of the city and in the maturing of the city into one that is very tolerant of diversity and welcomes diversity, I think certainly would be, to me, the most significant thing that I have been involved in.  The bank was part of that and having the bank be successful is a lot of my life’s work, but the bank enabled me to do a lot of those things in the community and gave me standing to do things I the community that I could not have done otherwise.  And as often said, the more you put into something, you more you get out of it and working in the community, I think I have received  tremendous amount of satisfaction and from seeing the growth of this community as a tolerant place to live that welcomes all people.

DG:      Is there anything I should have asked you that I was not smart enough to ask you?

MS:      Oh, I will probably think of a million things but for now, I think we are good.

DG:      Thank you very much for your time.

MS:      Thank you.