Last Man Standing (29 page)

He also sought out people he refers to as “culture carriers”—those who might give him insight into the way the old JPMorgan Chase had worked, and where there was room for improvement. He took these people out, one-on-one, for a drink at the Helmsley Palace bar, the Lowell hotel, or the King Cole lounge in the St. Regis hotel, just to chat. One executive, who is gay, found Dimon’s forthrightness so disarming that he quickly came out to his new boss. “It took me five years to come out to my previous CEO and 10 years to come out to the one before him,” he recalls. “But Jamie Dimon has no bias. He’s only biased against dishonest, game-playing people.”

Dimon occasionally revealed his soft side. At a “town hall” meeting he held with secretaries in the company’s London office, one secretary
stuck up her hand. “Mr. Dimon,” she said. “Yesterday my boss had me work for three hours—half of my afternoon—researching and booking a cruise for his mother.” Thinking she’d just busted her boss, she waited for Dimon’s temper to flare. “For his mother?” asked Dimon. “Yes,” she replied. “Well, if it was for his
mother
, that’s OK.” Dimon’s reports are nearly unanimous in pointing out what they consider to be the sincere, warm man hiding behind his relentlessness. When he smiles, they say, he is actually smiling, and not offering up a crocodile smile, what the old hands of Wall Street refer to as “grin-fucking.”

He also won over most members of the JPMorgan Chase management team who hadn’t yet worked for him. “He’s really smart and cerebral, with an incredible capacity for retaining facts and information,” says the commercial bank head, Todd Maclin. “But he’s also really good with people. If you looked at our operating committee, what you have is a bunch of people that aren’t very much alike. But every single one of them will just go to the wall for the guy, and for very unique reasons. He’s got an extraordinary ability to connect with people, help them do what he wants them to do, and also feel good about working for him.”

Early on, Dimon made a valuable connection to Bill Winters, a lowkey J.P. Morgan veteran who ran the investment bank with Steve Black. Winters and Dimon had never met before the merger. Although J.P. Morgan had been viewed over the past half decade as a second-rate collection of talent, Winters was a standout. After the deal had been announced but before it was formally approved, he flew to Chicago to meet his new boss. Winters was blunt. “You have a reputation for not liking two things—complicated derivatives and proprietary risk-taking,” he told Dimon. “But I can tell you that’s a lot of what we do. So why would you want to merge with us?”

“It’s not that I don’t like derivatives,” Dimon replied. “It’s only when I don’t understand them. So I want to spend some time getting to know them.” Dimon meant what he said. He spent his first year at JPMorgan Chase understanding markets he hadn’t been exposed to, and became supportive of the company’s derivatives business. “Nor do I have a problem with risk,” Dimon continued. “But what I can’t stand is when proprietary
risk takers in a company have preferential access to the balance sheet and compensation in relation to other parts of the firm.”

Dimon explained to Winters that his problem with the Salomon arbitrage desk in 1998 was that Salomon’s traders did have preferential access to the company’s balance sheet and also got paid more, with the result that many of the firm’s smartest people wanted to work on that desk, siphoning intellectual capital away from the rest of the business. And when something went wrong for the prop desk, it did so catastrophically.

Winters promised Dimon that no such preferential access would be permitted. Dimon had made a strong impression on him, so much so that instead of looking for a new job, Winters decided to stick around. Black and Winters were named co-CEOs of the investment bank in March 2004, just over a month after Dimon’s arrival.

Dimon largely left the two men alone for the time being. The bank had suffered a large brain drain after the merger with Chase; according to one estimate, 80 of the top 100 people at the firm were gone within 18 months of the deal. But Black and Winters were rebuilding, and put together a revamped management team—hiring a trading standout, Matt Zames, from Credit Suisse; putting Carlos Hernandez in charge of equities; and moving the J.P. Morgan veteran Blythe Masters from the position of chief financial officer to overseeing commodities trading. They removed a number of management layers to enhance decision making and also revamped the company’s credit systems in the hope of more effectively controlling their exposures.

Winters focused primarily on the company’s credit and trading businesses out of the London office, while Black oversaw investment banking efforts from New York. The company made heavy investments in building out its energy trading capabilities as well as its mortgage-backed securities business. Co-CEOs tend to be a recipe for disaster in almost any industry, but Black and Winters struck a workable balance. They also told Dimon that if either of them appeared to be trying to stab the other in the back, he should fire them both.

One area that needed no rebuilding whatsoever was the company’s derivatives business. JPMorgan Chase had long held a dominant position
in all manner of derivatives—in 2004, the company was the top player in interest rate options, interest rate swaps, and credit and equity derivatives—and at the time of the merger it held $37 trillion in notional derivatives contracts, more than half the derivatives held by U.S. banks and trust companies. A lot has been made of this fact, but Dimon had by that point come around to the argument that derivatives were a good business for the firm, provided the risks and exposures were monitored rigorously.

For starters, the “notional” amounts were almost irrelevant numbers when collateralization and netting between JPMorgan Chase and its customers were accounted for. The company’s net derivatives receivables at the time were actually far smaller, at $66 billion. That was still a large number, but not an outsize one compared with the rest of the industry. Morgan Stanley, for example, held $67 billion in net receivables at the time, and Goldman Sachs $62 billion. Both had far smaller balance sheets, as well, so JPMorgan Chase was actually taking on less risk, relatively speaking. (Still, the assumptions used in getting to that $66 billion were fraught with possible risk. If the investment bank’s risk managers were off on that $37 trillion by just 1 percent, that’s the equivalent of $370 billion, or three times the value of the entire company in early 2009.)

Much had been made by that point about Warren Buffett’s letter to the shareholders of Berkshire Hathaway in 2002, in which he wrote, “In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” But as he also wrote in the letter, he agreed it was true that derivative securities allowed for dispersion of risk by market participants not inclined to shoulder it. Dimon saw both sides of the argument as well, and considered it a valuable business for his company to be in.

(Six years later, Berkshire Hathaway revealed substantial derivatives holdings on its own balance sheet, positions Buffett had personally established because of what he saw as mispricings in the market. “I’ll continue to say that used widely, derivatives pose systemic risk,” says Buffett. “But that doesn’t mean they’re evil. We’re holding $7 billion or $8 billion of cash attributable to ours. And I think these will work fine
for me and not so well for the other guy.” In his 2008 letter to shareholders, Dimon showed that his own position had not changed, either. “With proper management, systemic risks created by derivatives can be dramatically reduced without compromising the ability of companies to use them in managing their exposures,” he wrote.)

Never one to lack swagger, Steve Black had told anyone who would listen after the merger between J.P. Morgan and Chase that he was going to build world-class capabilities in parts of the business where they were deficient. He’d been convinced that many of the previous decade’s mergers had been nothing more than “stacking doughnuts”—the holes in the business that had existed before were still there. In 2001, Black boldly predicted JPMorgan Chase would take its equities underwriting business to the top five within three years and to the top three in five, a claim that was scoffed at on Wall Street. At the time, the firm didn’t even appear in the “league tables,” the year-end rankings of underwriters. But in 2003, it grabbed the number four position, up from eighth the previous year. And in 2004, it cracked the top three, ahead of schedule. Dimon knew to leave well enough alone.

Dimon charged into his work much the same way he had at Bank One in Chicago, with both elbows out. After he had been at the firm about a month, the new board of directors held a risk committee meeting. A number of division managers came before the board to make presentations about trading positions and other exposures; Dimon surprised most in attendance by showing that he was already familiar with most of their numbers. When one manager was unable to answer a particular question and said that he would report back to the board in a month, Dimon exploded: “No, I want to know tomorrow.” As the blood drained from the executive’s face, Bob Lipp thought, “Some of these people won’t last long.”

Lipp was right. Dimon swiftly removed managers who didn’t have the answers when he wanted them, and replaced them with people like John Hogan, a veteran from Chase Manhattan who took over as the firm’s chief risk officer in 2006.

Dimon went after “waste-cutting” with his usual zeal, shutting down 15 corporate gyms in the United States and Europe, removing
fresh flowers from the company’s offices, and ending all use of executive coaches. (“We have to be clear that managing is the job of managers, not outsiders,” he deadpanned regarding the last move.) When he found out that a preponderance of high-level executives at JPMorgan Chase had their own chiefs of staff, he terminated the practice. Any consulting projects that cost more than $100,000 had to be personally approved by Dimon. Consulting costs plummeted. Staffers came to respond to certain queries by saying, “That’s going to be a Jamie decision.”

He gutted executives’ benefits, eliminating country club memberships, first-class airline travel, 401(k) matching, severance plans, golden parachutes, deferred compensation, and change of control provisions. Performance would thereafter be rewarded solely with generous stock grants and options. Higher-paid employees were told that their health insurance premiums would be increased in order to subsidize those of lower-paid ones. He also instituted a “blood oath” similar to one he’d participated in at Commercial Credit so many years before. Members of the company’s executive committee were required to hold on to 75 percent of their restricted stock awards, even after they vested. Just as the rumors had flown at Smith Barney about toilet paper, rumors flew about Dimon at JPMorgan Chase. Did he really go down to the street and ask the drivers of parked Lincoln town cars in front of the building what executives had called for them? No. But in the view of many, this was the kind of thing their new leader was entirely capable of doing.

(One thing about Dimon that was no myth: when he said “casual dress,” he meant it. The first off-site meeting of the company’s operating committee after his arrival was in Nantucket. For the two-day retreat, executives had been advised to dress “casually.” When the team showed up in “office casual”—khakis and collared shirts—they were surprised to find Dimon wearing vintage tennis shorts that barely covered his thighs, and sneakers with no socks.)

In an attempt to make divisional managers more responsible for their bottom line, Dimon also pushed expenses that had somehow made their way into the “corporate” division back down to the units themselves. If there’s anything Dimon hates, it’s unallocated expenses. Sitting
down with divisional managers in the summer of 2004, he explained that the profit and loss statements would need to be redone so that the results would better reflect the reality of their business. “OK, but we can’t do it for the 2005 budget, so we’ll do it for the 2006 budget,” one executive suggested. “Oh, no,” Dimon replied. “We’re going to do it right now. We’re going to get in this room and do it ourselves.”

JPMorgan Chase had been a longtime sponsor of the U.S. Open tennis tournament in New York City, and senior employees had long enjoyed the perks of taking clients to the company’s box at Arthur Ashe Stadium. But they didn’t account for the cost of these tickets in their divisional results. Dimon recognized the sponsorship as a valuable piece of branding for the company but also thought that individual units should “pay” for tickets out of their own budget, rather than have corporate simply cover the entire cost. As a result of this and other initiatives, corporate’s share of expenses plummeted from $5.3 billion in 2005 to just $1.1 billion in 2006. In 2008, a manager had to be prepared to take a $2,400 hit to his or her budget for a single U.S. Open ticket, making an invitation to a client a far more serious consideration than it had been in years past.

Dimon didn’t stop there. After finding out that regional bank managers at Chase made five times as much as their new colleagues from Bank One, Dimon slashed compensation at hundreds of staff positions by as much as 50 percent over the next two years. He also took aim at the company’s large outsourcing contracts, just as he had done at Bank One. In 2005, he canceled a $5 billion contract in which IBM was managing computer systems—in the process nullifying the largest outsourcing contract in history. “We want patriots, not mercenaries,” he told
Fortune
magazine.

Around the same time, Dimon gathered the firm’s top information technology people and told them they had six weeks to decide on a single computer system, covering the company’s retail deposit platform, general ledger, credit card processing, and customer identification systems. He told them that if they didn’t make the choice, he’d do it for them. In early summer, he cut matching programs for charitable gifts.
These moves did not endear him to his spoiled colleagues. “He’s going down like cod liver oil,” one banker told
Business Week
magazine. Another told
Euroweek
, “The news that Jamie is flying in is similar to being told that Ivan the Terrible is coming for tea.”