Last Man Standing (41 page)

Dimon gave a polished performance in front of the Senate, without a hint of the cockiness that he usually can’t hide when he is asked obvious questions. Watching the testimony on television, Mike Ingrisani, his high school English teacher, thought to himself, “No question that’s the Jamie I knew, albeit refined to the nth degree.”

Wall Street and the financial media focused on who had been the chief beneficiary of the government intervention—Bear Stearns or JPMorgan Chase itself. JPMorgan Chase was a huge lender to Bear and was also its clearing bank. A default by the investment bank would have cost it dearly, regardless of the response of the broader markets. If Bear’s demise had started a cascade of defaults, as some analysts had feared, JPMorgan Chase, the largest player in the $45 trillion market for credit default swaps, could have seen any number of trading partners go bust. So even if saving Bear had saved everyone, the thinking went, saving Bear may have saved JPMorgan Chase a lot more than most.

One senior executive calls the issue a matter of splitting hairs, and says the focus was on the good of everyone, even if everyone, by definition, included JPMorgan Chase. “Our issue wasn’t our exposure to Bear Stearns, which showed up in numerous press reports,” he says. “It was what we thought could happen to the markets. If Bear went out on Monday, we were pretty sure Lehman would be out on Tuesday and then the only question was which firm would be next.”

Executives from Dimon on down also lashed out at those who thought that the $29 billion conduit made the deal at all risk-free or easy for JPMorgan Chase. “We took on a shitload of risk,” says one senior executive. “The Fed took $29 billion. We took $371 billion. And people-wise, the cultures did not mix. We have risk meetings for days with Jamie, in which we go over everything: our positions, our exposure, and our response to potential crises. Their culture was all about hoarding information, hiding shit, and being dishonest. It’s kind of like some mid-career Goldman Sachs banker getting hired somewhere else—there’s invariably some turbo culture shock, because the Goldman ‘Moonie’ culture makes them unable to work at other places. And I’ll tell you where we screwed up the most. We were way too eager to treat it as a merger of equals. Goldman Sachs would have hired the top 500 to 1,000 people and fired the rest. We offered to hire half of them and pay them double until the deal closed, which was a waste of money in the end.”

A rumor also circulated that JPMorgan Chase had made a margin call on Bear—asking it to beef up collateral on various trades and exposures with the larger firm—at the exact moment the investment bank was unable to meet such a demand, thereby forcing it into submission. Dimon found the suggestion absurd. “Some people just don’t know what they’re talking about,” he says. “There may be some truth that we were tightening our lending standards, but so was everybody. And there’s no question it reduced certain people’s cash. But in this business, you
have to
tightly control counterparty exposure. There are standards you have to follow, for God’s sake.”

His response didn’t exactly put an end to the question whether a collateral call by JPMorgan Chase pushed Bear over the edge. But it suggested
that if it had been the case, well, that was a part of doing business on Wall Street. Jamie Dimon would not accept criticism for running his own company conservatively. (Highbridge Capital, the $27.8 billion hedge fund controlled by JPMorgan Chase, also pulled its assets out of Bear’s prime brokerage during that first chaotic week. But such a move can also be defended as a prudent one that put investors’ interests first.)

The most persistent question, however, was whether Bear’s demise was brought on by a cabal of short-sellers ganging up on the company and spreading false rumors in order to profit from a falling stock.
Vanity Fair
fingered the likes of Goldman Sachs, Citadel Investment Group (based in Chicago), and the secretive hedge fund SAC Capital Partners (based in Stamford, Connecticut) as coconspirators in such a scheme. (They all denied it.) Jimmy Cayne later threw the New York hedge fund Paulson & Co. and Hayman Capital (based in Dallas) into the mix. Even disinterested observers couldn’t help speculating on the possibility of a conspiracy. One old hand, the value investor Marty Whitman, wrote in a letter to shareholders that Bear was the victim of a “bear raid.”

Dimon later said that he didn’t know the truth of the matter, but that it was incumbent on the Securities and Exchange Commission to thoroughly investigate and make some determination, even if the determination was “We can’t tell.” “It’s wrong if people trafficked in rumor with malicious intent,” he says. “And for the SEC to say it’s hard to track a rumor isn’t sufficient.” In an interview with Charlie Rose, he added to the suspicion with the remark, “I would say where there’s smoke there’s fire.” He also offered a crowd-pleaser when asked about the original $2-a-share offer. “Buying a house and buying a house on fire are two different things.”

The deal aside, JPMorgan Chase wasn’t exactly a fount of good news in April 2008. With the economy suffering its biggest loss of jobs in five years, the bank suffered along with the competition. The company announced a 20 percent sequential drop in first-quarter net income, to $2.4 billion. It marked down $2.6 billion in leveraged loans and mortgages, and quadrupled its credit loss provision to $4.42 billion from $1.01 billion. Return on equity nosedived to 8 percent, down from 17 percent in 2007.

The company’s closely watched tier 1 capital ratio stood at 8.3 percent, however, well above that of its rivals. “We are prepared to manage through this down part of the economic cycle, given the strength of our liquidity, credit reserves, capital and operating margins, and to successfully position our company well for the future,” said Dimon. Unlike most of his competitors, Dimon had not needed to go hat in hand to foreign sovereign wealth funds for a capital infusion, and the message was that he wouldn’t have to. He had, however, taken advantage of a relative respite in the market’s turmoil to issue $6 billion in preferred stock in an opportunity timed sale. JPMorgan Chase also knocked out Citigroup as Wall Street’s top underwriter in the first quarter of 2008.

Cayne had regained some of his bearings by the time of the final shareholder vote on the deal on May 29. After the meeting, in which 84 percent of shares voted for the deal (no huge achievement, given JPMorgan Chase’s nearly 50 percent ownership), he made a brief speech. “The company that is taking us over, or is merging with us, is a first-class company,” he said, to the audience. After the meeting, Dimon called Cayne from Positano, Italy, to make sure the vote had gone through. They talked for just one minute.

In contrast to the wakelike atmosphere of the meeting at Bear, JPMorgan Chase’s annual meeting a few weeks previously had a jubilant feel. Wall Street, for all its pretense to sophistication and complexity, is largely a zero-sum game—someone loses, someone wins.

In a comic moment at the meeting, Evelyn Davis, an eccentric gadfly shareholder who has exasperated CEOs for decades, stood up and said, “Jamie, you look strikingly handsome.” The crowd laughed and Dimon cracked a smile. “We are fortunate to have Mr. Dimon,” Davis continued, “who is the Dudamel”—she was referring to the conductor Gustavo Dudamel—“of bankers in this country.” Looking flummoxed, Dimon replied, “I hope that was a compliment.”

• • •

Despite the fact that he was playing the highest-stakes game in the world, Dimon had never seemed more at ease. When his old college buddy James Long called him on the afternoon of Sunday, March 16, to
catch up, Dimon called Long back a few hours later. “We’re just yak-king for a few minutes, and then he says, ‘I have to go. We’re in this negotiation.’ I asked him what negotiation, and he wouldn’t tell me. I even brought up Bear Stearns’ predicament and he gave me thoughtful answers without telling me anything. A few hours later, I see the news of the deal. It was pretty comical.” Likewise, Dimon’s longtime friend Laurie Maglathlin called him on the night of March 13 to wish him a happy birthday. After a few minutes, he said, “Laur, I have to go. I’m really busy right now.” The next day, the Bear conduit was announced.

The company had said it planned to try to keep about half of Bear’s people. It didn’t come close to that. By February 2009, 10,000 of the 14,000 people employed by Bear before the deal had either left the firm or been laid off. Dimon extended offers to many executives to stay, but in some areas he made almost none at all. Of Bear’s leveraged lending group, for example, only three of 100 people received offers. In asset management, when Bear Stearns brokers demanded the same kind of revenue split they had negotiated with the previous management, they were told in no uncertain terms what they could do with their demands. “They had $28 billion in assets under management when we bought them,” recalls a senior JPMorgan Chase executive. “And we had $1.2 trillion. Theirs was such an ‘I’m for me’ culture that they all thought they would keep their revenue share. We told them, ‘We just bought you. The answer is no. So you either come into our compensation structure or we’ll shut you down.’ And we ended up shutting about 90 percent of it down.”

Despite reports in mid-April that Dimon had extended an offer to Alan Schwartz to come over to JPMorgan Chase as a nonexecutive vice chairman, Dimon had done nothing of the sort. Dimon took only six people from senior management at Bear Stearns—the former CEO Ace Greenberg, as well as Peter Cherasia, Jeff Mayer, Mike Nierenberg, Craig Overlander, and Jeff Urwin. And three of those six have since left the firm. (Some top earners refused jobs. Shelley Bergman, Bear’s star stockbroker, took $1 billion of client assets with him to Morgan Stanley.)

There was internal grumbling at JPMorgan Chase when its investment bank laid off thousands of its own staffers shortly after the deal,
while hiring new ones from Bear. “They laid off their own people,” says an executive who left the company in 2002. “Why would you fire a single person on your own team? The morale hit was not insignificant.”

Despite job-saving offers, many Bear employees chafed at the notion of working for JPMorgan Chase. Those with other options walked right out the door. Bear Stearns was an entrepreneurial place, and that fact ultimately caused its downfall. JPMorgan Chase was viewed as a widget factory, where everything fit into its own little box. That’s the smart way to run an organization with $2 trillion in assets, but it’s not a recipe for fun, if fun is what you’re looking for in a job. There are a number of longtime JPMorgan Chase employees who say that since Dimon arrived in 2004, he has made the place even less fun. His response? “So what?”

Dimon told Charlie Rose that it was unlikely JPMorgan Chase would be in the market for another 48-hour deal any time soon. “If I took a phone call like that again and called up the team and said, ‘We have to go do this again,’ I think they’d shoot me.”

Steve Black, who shouldered the largest part of the negotiations along with Bill Winters, probably would. Prior to this deal, he had always answered the question as to whether JPMorgan Chase would do a deal with an investment bank simply, “Over my dead body.” Continuing, he would argue, “There is so much overlap that combining the revenue streams would be like adding ‘1 + 1’ to come up with 1.2. You also have to effectively pay for the company twice because of the amount you have to shell out to convince the people you want to come on board.” In retrospect, he says, “There are four reasons Bear worked. First, it wasn’t a real full-scale wholesale investment bank. It had bits and pieces, but it wasn’t like trying to merge with Goldman Sachs or Morgan Stanley. Second, they had some things we didn’t have, like prime brokerage and the commodities businesses. Third, given the price we paid, we could pay people to stick around without it costing double in the end. And fourth, those payments weren’t too onerous, as the market for people was itself under pressure at the time. That’s why we have an opportunity to create some value here.”

Perhaps. But it will take longer than JPMorgan Chase had hoped. It
had estimated that the cost of the deal would be about half of Bear’s book equity, but the cost turned out to be all of that and more. Instead of a cost of $6 billion to “de-risk” the balance sheet, by November 2008 the total was closer to $15 billion. (Remarkably, one source of significant loss was a “macro” hedge Bear Stearns had against most of the deteriorating positions on its books. When the deal was announced, most markets rallied—equities, fixed income, mortgages—sending the value of the hedge plummeting.) The margin of error Cavanagh had spoken so confidently about was too small. Although Dimon still projected getting $1 billion to $1.5 billion in annual earnings out of legacy Bear Stearns businesses by the end of 2009, the deal’s economics didn’t look so good anymore.

To say that the deal was not costly would be a mild understatement. “We were selling into the worst market environment
ever
, and it cost us a lot more than we would have wanted,” says Black. A sore spot among JPMorgan Chase executives is just how much of that pain should have been taken by Bear Stearns
before
the deal and not by JPMorgan Chase afterward.

On the other hand, some parts of the deal have worked out exactly as planned. There was the building, for one. And even though the prime services unit continued to hemorrhage clients in the wake of the deal, getting a foothold in the business positioned JPMorgan Chase to vacuum up business when Lehman Brothers failed in September 2008 and both Goldman Sachs and Morgan Staneley were on the ropes. By the end of the year, customer balances were back to peak premerger levels. In the first quarter of 2009, JPMorgan Chase snagged the second spot in prime brokerage market share with nearly 20 percent, up from precisely zero the previous year.

Winters would do it again, but differently. “Had we had a crystal ball about the market, we would have been much more aggressive in terms of moving the risk out earlier. We would have sought a greater backstop from the U.S. government. And we would have been more aggressive when it came to cutting costs. We tried to approach it as a merger, and we were too gentle.”