Last Man Standing (18 page)

The Federal Reserve was second-guessed for intervening in the capital markets, but it did stick to its historical prohibition against lending to nonbanking institutions. The Fed didn’t bail out LTCM; the rest of Wall Street did. But it nevertheless crossed a line that had lingering ramifications a decade later, when Wall Street once again teetered on the edge. Orchestrating the bailout of LTCM was the original sin when it came to so-called moral hazard. The government had stepped in to facilitate the rescue of a bunch of capitalists gone mad. The next time that happened, Jamie Dimon would play a central role.

In retrospect, one can argue that by shutting Salomon’s fixed income arbitrage desk, Weill and Dimon shot themselves in the foot; the unit’s liquidation made it nearly impossible for LTCM to find buyers for many of the same positions in that summer’s turbulent markets. “Who,” points out Richard Bookstaber in
A Demon of Our Own Design
, “wants to buy the first $100 million of $10 billion of inventory knowing another $9.9 billion will follow?” In other words, in trying to trim its risk, Travelers just might have sent the
entire market
into a tailspin. Worse, once LTCM began begging for help, it was forced to open up its books to competitors, some of whom proceeded to ramp up their trading against the fund’s positions, further crippling the market.

Then again, the pervasiveness of LTCM was really a result of long-term creep, as the hedge fund had extended its tentacles into nearly every firm on Wall Street, setting up, with practically any dealer of note, derivatives contracts that came to total a staggering $1 trillion of exposure. That is, it was everybody’s fault for not paying attention soon enough to the possibility of a “fat-tail” event—the unlikeliest of outcomes that nevertheless do occur, usually with traumatic results.

(At the height of its power, LCTM had also demanded of its Wall Street patrons that it be required to post no collateral whatsoever on its trades. The competition for LTCM’s business was so intense that almost all its customers agreed to this stipulation. Warren Buffett did the same thing in 2008, and many of the same firms once again lined up to violate principles of fiscal prudence. Wall Street does not learn its lessons easily.)

“If Long-Term defaulted,” observes Lowenstein in
When Genius
Failed
, “all of the banks in the room would be left holding one side of a contract for which the other side no longer existed.” Excessive monetary liquidity had pushed LTCM to ever-greater risks, and when the market slammed into reverse, a classic liquidity crisis resulted—all sellers and no buyers. Dimon later admitted to
Fortune
magazine, “We simply missed it.” The result of that miss was a $1.33 billion fixed income trading loss in the third quarter of 1998 for Salomon Smith Barney. It might have been much worse: the bank had successfully dodged the Russian mess and had also pulled back from LTCM-related exposures earlier than it otherwise might have. Still, a $1.33 billion loss is a pretty convenient excuse if you’re looking to fire someone, and that is exactly what Sandy Weill was looking to do.

Regardless of what he felt as mistreatment at the hands of Sandy Weill, Dimon did not allow May 1998 to pass without making a magnanimous gesture. That year was his fifteenth wedding anniversary, and he gave his wife a full third of his net worth as a present. At dinner with both her and the children, he handed her a rolled-up stock certificate, saying, “You deserve this; it’s yours.” Whereas many of her friends still needed to go through their spouses to buy or do something, Judy Dimon was now free to do as she pleased. Long used to treating his wife as an equal, Dimon had (nearly) made her his financial equal as well.

(The Dimons give generously from their family foundation as well as from their personal accounts. Jamie also gives gifts above and beyond annual bonuses to the people with whom he works closely, including his driver. And just like Sandy Weill, he has tried to spread stock ownership through every company he’s run, from top to bottom, driven by a desire to see his colleagues get rich along with him.)

• • •

The events of the fall exacerbated the conflicts between the tri-CEOs at the corporate bank. By September, it became increasingly clear that Dimon and Maughan were unable to work together, let alone with Menezes, who had become relegated to a virtual sideshow. Maughan had begun deriding the setup as a “hydra,” and Dimon increasingly found decisions made by Maughan, Weill, and others around him to be
“stupid.” “It was a sorry spectacle,” Weill wrote in his autobiography. The men practically begged Weill and Reed to make a change, any change, just as long as it altered the status quo.

This history of shared power arrangements on Wall Street suggests that in their inability to get along, Dimon and Maughan were hardly unique. Jon Corzine and Hank Paulson were unable to do it at Goldman Sachs. Phil Purcell and John Mack likewise failed at Morgan Stanley Dean Witter. Before he died in 2008, Primerica’s founder Gerry Tsai told a reporter about one of the favorite maxims he’d learned from the president of Fidelity, Edward Johnson II: “Do it by yourself. Two men can’t play a violin.” And here was Dimon, who along with Weill had scooped up the detritus of Tsai’s career, facing nearly the same issue, except worse. He was being asked to play a violin as part of a trio.

Although Dimon quite possibly assumed that he would eventually work his way through this predicament and reclaim his position as Weill’s heir, he was definitely playing with a weaker hand now than in years past. In any event, he proved unable to compromise. When ordered to come up with a plan to share power, he, Maughan, and Menezes consistently reported back that they could come up with nothing of the sort. In other words, they were refusing to do their bosses’ bidding.

Dimon had a number of fundamental problems he had somehow failed to recognize. He and Weill had always proved capable of fighting their way to conclusions that worked to the advantage of the company, but in recent years Weill had acquired the dreaded CEO disease, which made him unable to hear anything but what he wanted to hear. Maughan easily grasped that, but Dimon couldn’t adjust to it. Worse, Sandy had other courtiers, including the general counsel Chuck Prince. (Mary McDermott, Weill’s longtime head of public relations, remembers Prince as “the quintessential ass-kisser” during this time.) Finally, Dimon’s constant nay-saying also hurt him in Reed’s eyes, especially considering the nonconfrontational ethos Reed had so meticulously instilled at Citicorp.

Trouble would come, but first, there was celebration. On September 23, the Federal Reserve approved the merger of Travelers and Citicorp, which closed on October 8. Although the combined Citigroup’s earnings fell 53 percent that quarter from the year before, the LTCM bailout
had seemingly staved off a market collapse. Their creation would live to fight another day.

But perhaps Dimon would not. During Sandy Weill’s annual apple picking day at his Greenwich estate that year, Frank Bisignano, head of operations and information technology for the corporate and investment bank, noticed that Dimon was forced to leave early, as he was flying somewhere that evening but had forgotten a pair of shoes. “Why doesn’t he just borrow a pair of dress shoes from Sandy?” Bisignano wondered. And then it hit him—because Sandy wouldn’t lend them if Dimon had asked. “This thing has reached DEFCON 5,” he realized.

At the moment of their greatest triumph, the 15-year partnership between Jamie Dimon and Sandy Weill collapsed in a way that almost nobody could have predicted. After repeatedly proving himself to be a man with judgment and intellect beyond his years, Dimon was shown the door for behaving like a petulant teenager. Not that it was entirely his fault. In the immediate aftermath of the merger of Citi and Travelers, Weill openly tested his protégé, as if all their years of working closely together had meant nothing. Perhaps if Dimon had been able to consider this a momentary phase in their relationship—as perhaps it was—he might have been able to restrain his worst instincts. But that’s not what happened.

Shortly after the merger closed, Sandy Weill and John Reed convened a management meeting in Armonk, New York. The topic was supposed to be about integrating the two companies, but the subject that dominated the proceedings was the same one they had been hung up on for months: how to split one job, the head of the corporate investment bank, among three men—Jamie Dimon, Deryck Maughan, and Victor Menezes. Weill handled it poorly. Like a scolding parent, he ordered the three men into a conference room and told them not to emerge until they had a solution. This worked out about as well as can be imagined. The only thing they managed to agree on was that a tri-head structure simply could not work.

On the weekend of October 24, 1998, the combined company held a five-day retreat for 150 top executives and their spouses at Greenbrier,
the luxury resort in White Sulphur Springs, West Virginia. There was serious business to be conducted—they were attempting the largest corporate integration in the history of financial services—but it was also intended to be a festive occasion, a celebration of the record-breaking deal. However, there was almost no good cheer among the Salomon Smith Barney crowd, and much of the event was marked by quarreling. At one meeting, Smith Barney’s capital markets chief Steve Black openly quarreled with Maughan about how best to manage the company’s corporate and investment bank unit. At this point, Dimon played the peacemaker, stepping in to quell heated emotions.

During presentations by various business heads, Weill recalls being struck by the difference between a polished presentation by Maughan and an “incoherent” one by Dimon, including “a strange analogy with the Peloponnesian War.” Weill felt that Dimon’s apparent lack of preparation was insulting and that as a result Dimon seemed anything but “presidential.” Dimon’s memory about the quality of his presentation is hazy, but the suggestion that his career could be judged on one presentation at an executive retreat rankles. “Maybe I didn’t give a good presentation,” he says. “But do you think it’s acceptable to judge a 15-year career on one presentation?”

Rather than take command of the deteriorating situation and pull everyone together, Weill seemed to purposefully dial up the tension. At a group dinner, he asked those attending to name the persons who would succeed them in their roles at Citigroup. Neither Dimon nor Maughan mentioned the other; and, even more pointedly, Weill himself didn’t offer an answer. Steve Black showed the most visible signs of the growing unease. Dimon had long ago told Black that he planned to embrace the Salomon people come hell or high water, because he wanted to make the merger work. In turn, Dimon had asked Maughan to “put his arms around Steve and make him comfortable.” Instead of doing that, Maughan did the opposite, once inviting Black out for dinner only to tell him that he didn’t give a damn about Black’s future, that the only people who mattered were Dimon and Maughan. Black, Maughan made clear, was a fool for hanging around. Then, during a black-tie ball on Saturday, October 24, Dimon and his wife, Judy, sat with Steve Black and his
wife, Debbie. In a gesture that could have moved things in another direction entirely, Black turned to Debbie and told her that as a peace overture he was going to ask Maughan’s wife, Va, to dance. The couple went over together to where the Maughans were dancing, and he politely cut in. Maughan, however, failed to return the gesture, leaving Debbie Black standing alone on the dance floor. Embarrassed, she began to cry.

As if that weren’t sufficiently “high school,” the situation quickly degenerated further. After comforting his wife, Black lost his temper, marching over to Maughan—who is not a small man, standing about six foot three—and seized him by the flesh of his arm. “You fucking asshole,” he said. “You can do whatever you want with me, but if you ever do something like that to my wife again, I will drop you where you stand.” Expecting a fight, Black was surprised when Maughan simply turned and walked away.

Black had momentarily forgotten who wore the pants in the Maughan family. Moments later, an enraged Va Maughan—a healthy Hawaiian with Samoan ancestry who was nearly as large as her husband—came steaming across the dance floor headed right for him. Sticking her finger in his chest, she said, “Don’t you ever talk to my husband like that again. You can’t talk to my husband like that.”

At this point, Dimon tuned in. “What was that all about?” he asked Black after Va Maughan had retreated. After hearing Black’s side of the story, Dimon himself became enraged and went off to find Maughan. “Deryck,” he said, upon tracking Maughan down, “if you snubbed her by accident, explain it. If you did it on purpose, that’s a whole different thing.” Once again, Maughan responded by turning away, at which point Dimon grabbed him and spun him around, tearing a button from his jacket in the process. “Don’t you ever turn your back on me while I’m talking!” he shouted.

“You popped my button!” was all Maughan offered in reply.

Weill writes that he and his wife, Joan, had been sitting in the bar with Bob Lipp and Jay Fishman and their wives when the Maughans entered and explained what had just happened. Va Maughan said to Sandy, “This is no way for people to behave. How are you going to react
to this? If this company doesn’t think this sort of stuff is important, it may not be the kind of place at which we want to work.” (Va Maughan did not work at Citigroup, but she apparently thought she did.)

Nobody came out of the night’s events looking good—not Black, not Dimon, not Maughan. And all three paid a steep price. (Judy Dimon looks back on the entire weekend as something of an out-of-body experience, the kind of thing you can’t bring yourself to believe is actually happening.)

Later that evening, Weill had Bob Lipp, Jay Fishman, and Mike Carpenter come back to his cabin to review the incident. The question was one nobody had ever dared consider before, let alone verbalize. Was it time for Dimon to go? Lipp, who’d worked with Dimon and Weill the longest, tried to defend his friend, to no avail. He was outnumbered. Weill was sick of Dimon. Fishman, once a Dimon acolyte, had never forgiven him for making Miller CFO. And Mike Carpenter, though no enemy of Dimon’s, had only recently joined the company.