Last Man Standing (33 page)

Investment bankers were well compensated for ignoring the risks.
Huge bonuses were paid from CDO deals, even though large pieces of these deals ended up sitting on the companies’ own balance sheets. It was a salesman’s nirvana. If no one wanted to buy the product you created, your own company would buy it from you, paying full commission.

Analysts responded by giving JPMorgan Chase what one insider calls “a world of shit for our fixed income revenues.” In 2006, the company was ranked nineteenth in asset-backed CDO issuance, well behind Citigroup, Merrill Lynch, Lehman Brothers, Bear Stearns, and UBS. Instead of wondering whether those other firms were being lazy with their own capital, chasing the so-called “carry trade” on CDOs, critics said that JPMorgan Chase was being too cautious. “One of the toughest jobs of the CEO is to look at all the stupid stuff other people are doing and to not do them,” says Bob Willumstad, Dimon’s longtime colleague at Travelers. “Maybe you’re the stupid one.”

But Dimon became more cautious yet. JPMorgan Chase had a reputation before he arrived for a tendency to get overexposed to Wall Street fads, such as telecom loans and technology private equity. He was determined not to repeat these mistakes by diving into the subprime and securitized debt fads. He remained vigilant about improving what he referred to as the “productivity” of the firm’s risk capital—more bang returned for every buck risked. He had already scaled back the firm’s proprietary trading activities in 2005, and he wasn’t about to reverse course and pile on risky assets less than a year later. “Everyone was trying to grow in products we didn’t want to grow in,” he later told a reporter. “So we let them have it.” Included among those products were so-called negative amortization and option adjustable-rate mortgages, which enticed undercapitalized home buyers to take on huge debts.

In October 2006, at a meeting with executives of the company’s retail bank, Dimon was told that subprime loans made by the retail bank were deteriorating dramatically. At the same time, the numbers showed an even greater deterioration among the loans made by competitors such as First Franklin (which Merrill Lynch had just bought) and Lehman Brothers. The credit card division, too, was seeing a decline in the quality of its own subprime lending. Dimon came to the conclusion
that it was time to
really
dial back the subprime exposure. He called Billy King, then chief of securitized products. “I’ve seen it before,” he told King. “This stuff could go up in smoke.” Within weeks, the bank sold more than $12 billion in subprime mortgages it had originated. Dimon’s intuitive grasp, which his friend Jeremy Paul had seen in high school, was serving him in his role as CEO—while his managers handled their own patches, he monitored the bigger picture and realized that something was amiss.

In moving his bank out of the way of the oncoming subprime train, Dimon proved to be an exception to the great economist John Maynard Keynes’s cynical observation that a “sound banker … is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” Dimon would not be ruined along with his fellows.

If there’s one thing that even Dimon’s supporters will criticize him for, it’s that he willfully circumvents traditional chains of command, thereby complicating his managers’ relations with their own subordinates. He might ask 10 people for the same piece of information, just so he gets it as soon as possible. But his meddling is tolerated because of the results. In fact, some people see the meddling as one of his more valuable assets. “All the great CEOs that I’ve ever seen have this characteristic,” says his longtime adviser Bill Campbell. “They spend a lot of time at 50,000 feet, they spend significant time—although hopefully not too much—on the ground, and not much time in between. The 50,000 feet stuff is obviously incredibly important in terms of strategy and all that sort of stuff. The ground stuff is really important too. It helps the people that are on the ground because they believe they have a leader that understands them, can talk to them, can touch them, and understands their problems. But it also throws the middle management off because they go, ‘God, he knows
that
.’ Or ‘He knows
her
.’ It’s very good for middle management to have a leader that’s kind of bipolar in that way.”

JPMorgan Chase’s head of strategy, Jay Mandelbaum, points out another unique trait that has allowed Dimon to excel in the role of chief executive. When making decisions, he is extremely adept at looking at
all the available information and quickly isolating the few issues that matter. “He won’t overanalyze a thing to death either,” says Mandelbaum. “At some point, you’ve got to go with your instincts.”

The company’s investment bank reported a 0.1 percent decline in profits in 2006, a year in which the likes of Goldman Sachs, Morgan Stanley, and Merrill Lynch reported 76 percent, 61 percent, and 44 percent increases in profit, respectively. Earnings at the top five independent investment banks, in fact, had tripled between 2002 and 2006, to more than $30 billion. And bonuses totaled $23.9 billion, more than $136,000 per employee. JPMorgan Chase’s historically volatile trading results had been tamed, but in other regards the analyst community was disappointed. “We entered 2007 thinking we were slipping,” recalls Winters. “We were missing a few things, that’s true; our commodity business was very small. But in retrospect it would become clear that we just weren’t booking a lot of revenues on business that would end up proving very expensive. If you could go back and take out of our competitors’ earnings what was later attributable to disasters, I think we probably did very well.”

• • •

While investors clamored for a big deal, Dimon actually shed assets, selling Brown & Co., the company’s deep discount brokerage business, to E*Trade for $1.6 billion, and selling its life insurance and annuity underwriting business to Protective Life Corporation. JPMorgan Chase did acquire 339 bank branches (and their associated commercial banking business) from the Bank of New York, but that wasn’t stuff to excite anyone.

“People are always saying I’m going to rush in somewhere and do a deal,” says a frustrated Dimon. “But that’s not me. We did a lot of small little buys and sells, usually driven by the outline of the business, until Bear Stearns. I certainly don’t need to do a deal that adds some seventh leg to our business unless it has some strategic imperative.”

On a call with analysts in May, he tried, once again, to make explicit his view of acquisition opportunities. “There are three things that have to make sense,” he said. “And they are not in order of importance. One
is the business logic. There should be clear business logic to it. The second is the price. Sometimes there is a price [at] which you cannot make it pay for shareholders. And the third is the ability to execute. [You have to be able to] see clearly getting done what you need to get done, whether it’s management or systems or marketing or culture or something like that. If those things make sense, you can then weigh and balance them. Meaning, if you have exceptional business logic and an easy ability to execute, you could pay a higher price. And conversely, if those things are a little more complex, you want a margin of error by getting a lower price.”

Of course, it doesn’t always take a splashy acquisition to make a pile of money. In the summer of 2006, Dimon, Black, and Winters made their most audacious play of the year when they snapped up a portfolio of disastrous bets on natural gas prices that had been made by Amaranth Advisors, a $9.2 billion hedge fund that was facing collapse if it couldn’t get the underwater trades off its books. On the weekend of September 16, Amaranth was desperately seeking a buyer for the trades. Goldman Sachs offered to do a deal for a portion of the total, but it demanded a $1.85 billion payment to relieve Amaranth of the positions.

Lacking that much cash, Amaranth turned to JPMorgan Chase, the hedge fund’s clearing broker, and asked if the firm might return $2 billion of posted collateral so it could get the deal done. Steve Black and Bill Winters refused. When Goldman then backed out, Amaranth received a similar offer—“Give us cash and we’ll take over the trades”—from the Chicago-based hedge fund Citadel, to take the entire portfolio off its books. But the problem remained. JPMorgan Chase wouldn’t release the cash. The answer, in the end, was obvious. JPMorgan Chase and Citadel made a joint bid for the trades. (With JPMorgan Chase in on the deal, the question of releasing collateral somehow disappeared.) The company made about $725 million in profit on the positions, in part by turning around and selling many of those it had just purchased to Citadel.
Risk
magazine named JPMorgan Chase “Energy Derivatives House of the Year” in 2006, in large part because of its success on the Amaranth trade.

Amaranth later sued JPMorgan Chase for more than $1 billion, accusing
the company of abusing its position as the hedge fund’s prime broker to put the kibosh on the deals with Goldman and Citadel in favor of its own purchase. A number of counts in the complaint were thrown out—including allegations that Black and Winters spread rumors about Amaranth, thereby expediting its collapse—but the case was still alive in mid-2009. Critics suggested that Dimon, Black, and Winters saw the size of the potential profit on the deal, and plowed ahead regardless of the legal risk, knowing they could cover their legal costs with the profits in any event.

Dimon, who considers the lawsuit “silly,” had no pity for the collapsed fund. “When you have outsize positions like they had in illiquid markets, that’s life,” he says matter-of-factly. “The Goldman deal would have let Goldman cherry-pick the pieces they wanted, leaving us with the rest. We weren’t going to be left with the highly toxic leveraged stuff while Goldman bought everything else at a huge discount. They also wanted us to release our collateral early. But we had no obligation to—and weren’t about to increase our exposure like that.” JPMorgan Chase had the upper hand, in other words, and it would be damned if it wasn’t going to use the situation to its advantage. Period. There is no “gentlemen’s club” discount in Jamie Dimon’s world.

(Jamie Dimon, it almost goes without saying, is not the kind of man who finds all babies cute. “I never noticed babies until I had my own, and then I suddenly realized they were all around me,” he says. “But once mine weren’t babies anymore, I stopped noticing everybody else’s.” Nor are all companies—or countries—created equal. He has a special spot in his heart for his
own
family, his
own
company, and his
own
country. He doesn’t wish harm on anyone, but supplicants without a direct connection to him are best served by looking elsewhere for help.)

The hurt feelings weren’t only at Amaranth. JPMorgan Chase’s top two energy traders, George “Beau” Taylor and Parker Drew, soon left the company in an apparent dispute over compensation and credit surrounding the Amaranth trades. (David Puth, the onetime head of the firm’s currency and commodity business, had left just a few months before. Black and Winters were continuing to clean house.)

At the same time that the firm was celebrating its gains from Amaranth,
the executive team was mourning the loss of one of its own. Joan Guggenheimer, who had been general counsel at Citigroup, Bank One, and JPMorgan Chase, died on July 30 after a lengthy battle with cancer. She had taken a leave of absence just three days before, and her death had a great impact on Dimon, who personally wrote a memo that concluded with the remark, “We were privileged to know her.” When a caller asked to speak to Dimon the evening of her death, one of Dimon’s daughters told him that her father was closeted in his music room, with Frank Sinatra blaring at top volume. “He is the only CEO I’ve ever met who cries,” says one executive.

In October, Dimon signed off on the $460 million sales of 5.3 million square feet of excess real estate to Toronto-based Brookfield Asset Management. The company agreed to long-term leases as part of the deal, and the sale freed up capital it could use to continue investing in growth businesses. With the real estate market gone mad, Dimon wasn’t going to pass up a chance to let JPMorgan Chase take advantage of the insanity. This was another example of Dimon’s classic approach to waste-cutting. After arriving at JPMorgan Chase, he had made the team in charge of the company’s portfolio of real estate walk every single floor of every single major building the company owned and report back how much excess space was on hand. The team found 5.3 million square feet.

In December, Dimon hired Stephen Cutler as the company’s new general counsel. Cutler had been the enforcement director of the Securities and Exchange Commission during the debacles at Enron and Worldcom, for which JPMorgan Chase had paid $4 billion in fines. Deal making aside, Dimon had just turned a potential adversary into an ally.

• • •

Dimon was part of two transitions at the end of 2006. One of them was a true changing of the guard: he took over from Bill Harrison as chairman of the board. Dimon was now totally in control of the third-largest bank, by assets, in the country—after Citigroup and Bank of America. The other was more symbolic, but no less poignant. In November, Dimon replaced Sandy Weill as a director of the Federal Reserve Bank of New York.

In January, Dimon declared the merger with Bank One complete, and also reported a dramatic increase in return on equity, which had climbed from 8 percent in 2005 to 13 percent in 2006, driven in part by $3 billion in merger savings. Characteristically, he was unhappy with the results despite the improvement—the goal was a 20 percent return on equity. Still, in celebrating his taking on the chairman’s role,
The Economist
described him as Tenzing to Weill’s Hilary. Dimon was paid $63 million for his work in 2006: $27 million in salary and $36 million from exercising options. He was again named to the
Time
100.

That summer, Dimon and his family headed off for a vacation in the Caribbean with the Maglathlins and their three children. Dimon spent half an hour a day on the telephone and the rest of the day enjoying himself with everyone else. He brought his guitar along, but few were eager to hear him play. (“He’s OK,” says Peter Maglathlin. “Although he’ll tell you that he’s good.”)