Last Man Standing (24 page)

Still, the city never entirely believed that the Dimons were there for the long haul. Jamie was dogged by questions regarding when he was going to move back to New York. In an interview with the
Chicago Sun-Times
, Dimon voiced frustration at not being taken at his word. “If I work here for 20 years, I die and they send my ashes back to New York, they’re going to say, ‘See, he wasn’t going to stay here.’”

There was at least one good reason to be suspicious. The Dimons somehow never got around to selling their Manhattan apartment. Both of Jamie’s brothers used it a bit during the family’s time in Chicago. At this point, Dimon was wealthy enough that he didn’t need to sell one house in order to buy another. But keeping a multimillion-dollar apartment
as a crash pad for your brothers doesn’t exactly fit the profile of a man known for fiscal prudence.

• • •

The first six months at Bank One were not easy. Dimon says he was surprised at the extent of the company’s problems, as well as the severity of the measures they called for. After he held his first conference call with analysts on April 5, three kept their “hold” ratings on the company’s stock, while another reiterated a “sell.” There were serious doubts about the safety of the company’s dividend in the face of a pronounced weakness in earnings.

(Despite the chaos in 2008 and 2009, Dimon still calls 2000 the toughest year he’s ever had professionally, by a wide margin. As the new boss with a reputation for aggressive cost-cutting techniques—read: layoffs—he was a man people hesitated to be around, for fear of slipping up. “I was pretty much alone that whole year,” he recalls. “Working seven days a week.”)

Dimon faced the company’s shareholders at its annual meeting on May 16. In previous years, some 100 to 150 people had attended the proceedings; but more than 500 piled into an auditorium in 2000 to see their new superstar CEO, while another 100 watched on monitors in adjacent rooms. When one shareholder complained that service had deteriorated to a point where it was nearly impossible to get a live person on the phone, Dimon offered his own number. (Nine years later, when he and other executives had been hauled in front of Congress to answer for the sins of their industry, Dimon was told of one congresswoman’s constituent who had complained to her about being mistreated at the hands of JPMorgan Chase. He offered his number once again.)

The complaints did not stop there. Questions were raised about the company’s recent sale of $2.15 billion in real estate loans to Household International, about increased interest rates, and about the increasingly troubled credit card unit First USA. Dimon responded that he hoped First USA would return 1.5 percent on assets in the next year—versus just 0.6 percent in the first quarter of 2000—and adjourned the meeting
after only 25 minutes. It wasn’t exactly the blockbuster performance that some observers had been hoping for.

Three months after Dimon’s arrival, the stock was back where it had been before he started, under $27 a share. Nineteen of 24 analysts who followed the company rated it a “hold” or a “sell.” Mike Mayo of Credit Suisse, long-considered the “ax” of the industry—the analyst with the most pull—maintained a “sell” he had initiated more than a year previously at $60. This was despite a note he had published after Dimon’s hiring: “Bank One got a home-run hitter in getting Jamie Dimon…. That’s a real coup for the company.”

Dimon let Wall Street know that Bank One would not be giving guidance on earnings until further notice. He then set about solving problems and did not issue bold pronouncements. There was a lot of sorting out to be done, and grumbling was inevitable. That summer,
Barron’s
talked of increasing pessimism among analysts about the bank’s prospects.

In his July call with analysts, Dimon established the guideposts by which the whole world could judge the company’s performance. He emphasized execution over grand strategic goals. He showed no inclination to go on an acquisition binge, preferring to focus on the most granular details—systems conversions, reporting structures, risk management, and financial controls. (“I always like to point out that I didn’t do a deal for four years in Chicago,” Dimon recalls. “Doing deals isn’t fun. The fun thing is actually building things.”) He also demonstrated the basic conservatism that he believes is the foundation of banking. Several years later, the companies that experimented with exciting but dangerous new concepts—Citigroup, which became obsessed with “operating leverage”; Merrill Lynch, which decided to hoard complex mortgage products—were the first to stumble when the credit bubble burst in 2007.

The analysts were, incidentally, right to be worried about the company’s dividend and earnings. Dimon concluded that the dividend needed to be cut in half. Such moves are obviously wildly unpopular with shareholders, especially those who own a lot of stock, and Dimon
took grief for it. But there was no question in his mind that it had to be done. “We need the capital, we’re paying out too much, I’m not confident things are going to get better anytime soon,” he told one large shareholder, with his customary bluntness. “We’re going to cut it. It’s the right thing to do.” He went ahead and did so on July 19, freeing up some $1 billion in annual cash. (He did the same thing in 2009 at JPMorgan Chase in an effort to preserve capital in the midst of continued market turmoil. By then, the market knew enough to trust Dimon, and the stock rallied in response.)

Bank One’s problems, it turned out, ran a lot deeper than the credit card fiasco at First USA. With seven different deposit systems and five different loan systems, reconciliation problems emerged week after week. Corporate and middle market credit underwriting were disasters. The company had taken on too much credit risk, and wasn’t earning nearly enough on the capital it had deployed. From 2000 through 2003, the company wrote off some $15 billion in bad loans.

To cut costs, Dimon did as was feared and laid off 12,000 employees. He also spent hundreds of millions of dollars to merge the computer systems, a move that quickly paid for itself. He introduced more than 2,000 new profit-and-loss statements, including one for each of the company’s 1,800 bank branches, and initiated a program in which retail employees could share profits if their branch hit its own targets. He installed a rigorous new risk-management system that was aimed at helping the company avoid excessive credit exposure in any particular industry, a decision that helped the bank fare better than many of its competitors in the technology and telecom meltdown of 2000.

Dimon turned the bank upside down, not only slashing expenses but also installing new incentive structures. Branch manager compensation was overhauled. Previously, all branch managers had received bonuses ranging from 5 percent to 12 percent of their salary. Henceforth, the top 10 percent of branch managers were to receive a bonus equal to 100 percent of their salary; the next 10 percent received 50 percent; the next 10 percent received 30 percent; and the bottom 30 percent would receive no bonus at all. This was an old trick Dimon had learned from Weill in his days at Commercial Credit. He also made a number of what
he called “battlefield promotions” during the first year, promoting people before he would have in more normal circumstances because he felt he had no choice.

He and his senior team turned McCoy’s old office into what was nicknamed the “Lava Lounge.” They furnished it with old couches from bank branches and, yes, a bunch of lava lamps. This is where they brainstormed plans to change the culture of the institution. No issue was too small for their attention. When Judy told Dimon of a flickering Bank One ATM screen at a Walgreen’s in Chicago, Dimon called the company’s outside service vendor himself. When he was told that the problem had been “monitored” for six months, he fired the vendor on the spot.

He also changed rules he found ridiculous. At an early executive meeting, he walked into the conference room with a cup of coffee in his hand. The old First Chicago building was decorated with a lot of white carpets, and one executive told their new boss that no coffee was allowed in the conference rooms. Dimon couldn’t believe his ears. “I looked at my coffee, I looked at him, and I said, ‘Well, it is now.’”

This style took some getting used to for veteran Bank One executives. One compared speaking to Dimon to “drinking from a fire hose.” This is not an unusual reaction. His is a manner of speaking that must be experienced to be appreciated. Dimon is not, as the Greek historian Plutarch might have observed, the kind of man who saves his breath to cool his porridge.

Dimon later said his most serious oversight during his first 18 months was that it took him precisely that long to realize that Bank One’s branches were open, on average, for two fewer hours than its local competitors. With $10 billion and 35,000 employees invested in the retail business, he couldn’t believe that he hadn’t noticed such a simple fact. But what bothered him even more was that no one had bothered to tell him. That, he said, was a sign that the company’s DNA was flawed.

When he issued a diktat that the banks stay open for longer hours, he was told that the move would kill morale. “Tough,” he replied, “this is what we do.” His new colleagues came to realize that although Dimon was sincere about open and honest debate, he was also unafraid to draw
it to a close and make an unpopular decision. “You need people who will argue and fight but at one point, say, we’re going to take the hill,” he told an audience in late 2008. “Some debates are chicken or steak. It becomes time to eat.”

Dimon disdained the chronic hiring of consultants, and cut the practice back to the bare minimum. James Crown—whose family had a significant stake in Bank One—remembers one instance when an accounting consultant gave a “long-winded and pompous and hard-to-follow presentation” that left him thinking, “Maybe it’s just me. Maybe I’m the only one who didn’t get it.” But Dimon felt similarly. “That was a terrible presentation,” he told the assembled group after the presenters had left. “This is why I hate consultants.” He picked up the phone and called the partner who had just departed, leaving a message in which he said not to bother sending a bill, because the presentation had been a waste of time. A few minutes later, he called back and said, “The call I just made—I wasn’t kidding. I’m not paying for it.”

He eventually tossed out consultants from Trammel Crow, which at one point had had 50 people working in Bank One’s offices. In 2002, he eliminated a $2 billion outsourcing deal with AT&T and IBM that McCoy had signed in 1998. Although he saw savings down the road, this move wasn’t a decision driven by short-term financial gains. Dimon considers information systems one of the core competencies of a financial services company, and he thought the function (and any associated information technology strategy) belonged in-house.

(Dimon is vocal about his antipathy toward much of the consulting used by large corporations today, with the notable exception of McKinsey & Co. “It’s substitute management,” he says. “A Good Housekeeping seal of approval. It’s political, so if you make a decision you can say, ‘It’s not my fault, it’s their fault.’ I remember at Citigroup when we hired a consulting firm to do a study about how our capital was deployed. I thought, ‘What is wrong with us? Shouldn’t this be the job of management? Shouldn’t we understand capital?’ I do think consultants can become a disease for corporations, and I don’t say that lightly, because I really do believe it. We do still use smart people to do consulting for us. But it has to be with a very senior person and there is no phase two. By
that, I mean at the end of the project, I have the brain and they have the money. I don’t need anyone to
implement
anything. That’s a joke. You can’t have outside people implement stuff inside companies. It doesn’t work. And by the way, if that’s going on, what the hell are your own people doing?”)

Dimon knew how to play hardball with customers, too. He told nearly 1,000 corporate borrowers that Bank One would no longer serve them if they didn’t broaden their relationship with the bank beyond loans. Partly as a result, the corporate loan portfolio shrank by about $50 billion. He disliked lending money for rapidly depreciating assets like cars, and largely took Bank One out of the auto lease business. He took $4.4 billion in write-downs and loan loss provisions in 2000, and the company ended up posting a loss of $511 million for the year.

Ever the conservative, Dimon boosted the company’s allowance for credit losses to 2.4 percent, up from 1.4 percent in 1999. While Bank One’s tier 1 capital ratio—the most-watched measure of a bank’s balance sheet strength—slipped from 7.7 percent to 7.3 percent that year, Dimon had it back at 10 percent by the end of 2003.

He also introduced what he referred to as “waste-cutting” initiatives, his preferred term for cost-cutting. Employees were paid $1,000 for money-saving ideas. He cut executive perks to the bone, including country club memberships, car services, auto leases, supplemental pension programs, matching gift grants, and even magazine subscriptions. A story in
Money
magazine in 2002 reported that the number of newspaper subscriptions paid for by the company incensed him, and that he told one executive, “You’re a businessman. Pay for your own
Wall Street Journal
.” This was yet another “Weillism” that dated from Commercial Credit. But Dimon also did things that Weill never would have done, such as cutting the company’s annual entertainment junket at the Masters Golf tournament because of the famous golf club’s refusal to admit women. (At Bank One and later at JPMorgan Chase, he also cut funding for the Boy Scouts because of that organization’s ban on gay scouts.)

He assured executives that getting rid of these entitlements would eventually make them all better off when the company started to do well again. It was a brave move, one that risked more defections than Dimon
could handle in the short term. But it had the desired effect of disrupting the company’s complacent culture. “Leaders emerged,” Dimon said in late 2008. “Although some people hate your guts for the rest of your life.” He also restructured the bank’s options so that they expired in six years instead of 10—a classic Dimon move. If you wanted to be part of his team, the message went, you needed to be invested in the here and now.