Last Man Standing (8 page)

Weill hadn’t invented this idea. It has been practiced and refined
over the course of centuries. As the Jewish-American financier Bernard Baruch once said, “Buy straw hats in winter.”

Another precept of Weill’s was to add little bells and whistles to his firm’s offerings, to make them more competitive. Since most financial products are commodities, the trick was to appeal to customers with something as simple as a more comprehensive account statement. If there was no way to offer a unique product, then having the lowest-cost delivery system was the only way to compete.

And a third and final one: don’t go chasing the flavor of the month unless you actually know its ingredients. Just because other people are making money in something, don’t be tempted to follow suit unless you understand the complexities involved and how they profit from it.

The stock market crash of October 1987 cut the price of Commercial Credit stock in half. Weill was initially shocked, along with most everybody else, but he quickly regained his nerve and exhorted his team not only to buy even more Commercial Credit stock on the cheap, but also to scour the financial landscape for an acquisition target. The crash of 1987 had not ushered in a serious recession; it had merely dealt the markets a psychological blow, so this was the perfect time to pick up a distressed asset.

It had also caused Weill to rethink his old modus operandi of consolidation within a single industry. When he took over Commercial Credit, he wrote in
The Real Deal
, he’d assumed that he’d merely buy more consumer finance companies in a drive toward consolidation. But the crash had decimated the valuations of whole swaths of financial services companies. “Wall Street firms were particularly slow to recover given that investor confidence remained shaken,” he wrote, “and before I knew it, I began to see chances for a return to the securities business.” The financial services conglomerate—or megabank concept—in other words, was not Weill’s goal from the get-go. It was merely the result of the man’s relentless opportunism. The company that would eventually become Citigroup was not a philosophical construction designed in a vacuum. It was an evolving organism that began to take shape in the midst of a crisis.

The first target was the brokerage EF Hutton. During his exile,
Weill had walked away from a deal for that firm after news of his interest had sent its stock soaring. Hutton was weakened by the crash, and Weill found its directors keen to discuss a merger. But he was to be denied again. Once word got out that Sandy Weill was on the scene, a bidding war ensued. Weill had offered $21 a share. But Peter Cohen at Shearson carried the day with a $29 bid.

It wouldn’t take Weill and Dimon too long to identify another target. Their tactical approach was one they replicated again and again. The negotiating team was small, usually made up of Weill, Dimon, their lawyer Kenneth Bialkin, and Arthur Zankel, a board member who was one of Weill’s oldest friends. Weill set the target, and then Dimon went after it and brought it in, identifying areas of promising growth as well as assets that could be sold off to shore up the company’s capital base after a deal.

One executive who worked at Commercial Credit recalls originally considering the reputations of the two—Weill as the maestro, Dimon as detail man—simplistic. He reconsidered that position, however, when on more than one occasion Weill asked in a meeting, “Jamie, where do we put the decimal point here?” Most colleagues marveled at how smoothly the two-man tag team seemed to work. When it came time to sell units or divisions, Dimon often delegated to John Fowler and Chuck Prince, but in making a buy, it was Dimon from beginning to end.

One inherent risk of being a serial acquirer was recognizing the threshold when the conglomerate becomes too complicated to manage properly. The objective was not just to sell stock to Wall Street. These companies sold real products to real customers, and if they failed to do that well, the whole thing would come apart at the seams. This is something Weill and Dimon eventually had to face, though not for quite some time.

• • •

The Commercial Credit crew worked harder over the next decade than most of its members ever had. For Dimon, that would hardly be a difficult mark to set, as it was his first real job. But for many of the others—Bob Lipp, Bob Willumstad, Marge Magner, Mary McDermott,
and the like—this was quite literally their second or third career, and they were pulling all-nighters as they hadn’t done since they were youngsters.

Weill motivated them with equity. But he demanded a commitment in return. Usually, 25 percent of any executive’s compensation was in stock that vested over a three-year period. In what insiders referred to as the “blood oath,” it was understood that no one was to sell those shares even after they’d vested. No one did so until the end of that decade. They were all in it together.

Dimon later said that despite the drama of all the mergers and acquisitions, it was Weill, not he, who was the deal junkie. “Sandy was always out hunting deals,” he recalls. “But I don’t love them. There’s the systems, the people, the balance sheets, the clashes … they’re very hard.” It’s not surprising that Dimon feels this way, given his inability to let the small stuff slide. Whereas Sandy Weill could easily switch his focus to the next part of his grand vision, Dimon always sweated the details. In that way, his job was much harder than Weill’s.

Still, Dimon stood out for his drive. “We all worked hard, but nobody worked as hard as Jamie,” recalls McDermott, Weill’s longtime communications chief. Not that he was without a slower gear. In Commercial Credit’s New York office on 55th Street between Park and Madison Avenues, when Weill packed his briefcase and headed home for the day, only a few minutes passed before the invariable, “Jamie says drinks at 5:00
P.M
.” Those on hand, secretaries included, piled into the library and had a drink.

• • •

In the 1960s, Shanghai-born Gerry Tsai was one of the most dynamic and powerful people on Wall Street, helping build the Fidelity Fund into a powerhouse. One of the common, if coarse, refrains among traders of that era was, “What’s the Chink buying?” Some 20 years later, the point was inverted, and it provided Weill and Dimon with their first big strike outside Baltimore. Tsai was a buyer no more, but a seller.

In the late 1980s, Tsai, like Weill, was on his second career. He had spent the previous several years assembling a motley collection of companies
into the shell of the old American Can Company. After selling the can business, he moved into retail (purchasing the likes of Finger-hut’s mail-order business and Musicland/Sam Goody record stores) as well as finance (A.L. Williams insurance and the brokerage house Smith Barney, Harris Upham & Co.). He’d lately renamed the whole operation Primerica, and had been considering trying to do what Weill had set his sights on: assembling a financial services conglomerate.

Tsai’s timing could not have been worse. He’d bought Smith Barney at the top of the market, in May 1987, for $750 million, and had leveraged Primerica to the hilt in the process. With the sharp drop-off in Wall Street business, the brokerage’s capital-intensive business was threatening to take all of Primerica down with it.

It was the kind of deal Weill couldn’t resist. Just like Hayden Stone, Smith Barney was a venerable Wall Street name that had stumbled, providing him with an opportunity to pick up a top brand at a discount. Another Chinese-American, John Hsu, Commercial Credit’s chief investment officer, made the first inroads with Tsai. Hsu made it clear that not only was Weill interested in Smith Barney; he might even be prepared to take on all of Primerica. Tsai initially demurred. But Primerica continued to struggle, and he hired Lazard Frères to explore ways to raise money, including the possible sale of the company itself.

Shortly thereafter, a package titled “Greenwich” arrived on Weill’s desk from the bankers at Lazard. Named for the Connecticut town where Primerica was based, it included the company’s complete financials. Weill forwarded a copy to Dimon in Baltimore and told him to read it on the train to New York. Sandy Weill was in the hunt again, and Jamie Dimon was right there beside him.

Over the next seven months, Dimon dug into Primerica’s businesses and financials until he was certain he understood every aspect of the exceedingly complex company. “Numbers leaped off the page and told Jamie whole stories,” recalls Mary McDermott. And there were a lot of stories to tell. Although Dimon remained chief financial officer of Commercial Credit, he largely ceded the running of that company to Lipp and Willumstad while he digested Primerica’s books.

The deal nearly came apart when Dimon discovered some $60 million
in severance agreements for Primerica’s executives in the event of a sale. Further due diligence revealed that amount to be $90 million. After raging about the excessiveness of it all, Weill engaged in a startling display of hypocrisy by agreeing to the majority of the payouts when Tsai threw in a $20 million private jet, a Gulfstream G4, as part of the sale.

Dimon eventually decided that a fair price was one share of Commercial Credit stock and $7 in cash for each share of Primerica, giving the deal a value of $1.7 billion. After a flurry of further negotiations and board presentations, the sale was announced on August 29, 1988.

Every single person involved on the Commercial Credit side would go on to give the 32-year-old Dimon primary credit for structuring the transaction. Although he eventually passed certain tasks on to others, he handled all the gory details, from determining write-downs and purchase accounting adjustments to formulating the financial projections to convincing investors and rating agencies that the newly merged Primerica would be a strong going concern.

Joe Califano, who sat on Primerica’s board at the time and who stayed on after the deal, met Dimon for the first time when Dimon made a presentation about the finances and projections of the merged company. Afterward, Califano, who had worked as secretary of Health, Education, and Welfare under President Carter, walked over to Dimon. “That’s the most perceptive and sophisticated and clear presentation I have ever seen,” he said.

Later, when the Primerica team talked to Shearson Lehman about selling Fingerhut to that company’s merchant bank, Dimon faced a man named Jay Fishman across the negotiating table. “He and I went at it several times,” Dimon recalls. “A week after the deal broke down I called him up and said, ‘I know we fought a lot, but I really came to admire and trust you during the process. Want to talk about coming over here?’ He told me I’d got him at exactly the right time. So we hired him.”

As all this was going on—the negotiations were secret—Dimon’s grandfather Panos died. Dimon had managed to visit him on his deathbed beforehand and make Panos an “insider” in the first big transition of his career. He said that they were taking over Primerica, and that he
was being made CFO as part of the bargain. Panos teared up in response. But even in his weakened state, Panos remained a broker to his core. During one hospital visit, he insisted that the young man needed to buy Exxon stock, immediately. “He never stopped, right up to the very end,” recalls Dimon.

• • •

Weill quickly made a series of executive changes at the top of Primerica. The president of Smith Barney, George Vonder Linden, had survived its purchase by Primerica in 1987 and might have thought he could do it again. But Weill found Vonder Linden’s excessive concern about maintaining Smith Barney partners’ high compensation irritating.

When Vonder Linden asked Weill to stay away from a President’s Council meeting of top-performing brokers in October at The Inn at Spanish Bay in Pebble Beach until the second day, Weill ignored the request and showed up on day one. He then became enraged when he learned he was not on the agenda as a speaker. Vonder Linden was soon out the door, and Weill’s old friend Frank Zarb was brought in to run Smith Barney. Zarb, who’d been on the board at Commercial Credit, was a banker at Lazard at that point, but Weill persuaded him to jump ship and join Primerica.

Weill also hired the former cohead of Lehman Brothers, Lewis Glucksman, as vice chairman to run the company’s capital markets business under Zarb. Dimon continued his jack-of-all-trades approach at Primerica, keeping his role at the parent company while also immersing himself in operational issues—tracking expenses; improving technology processes—at Smith Barney. Zarb tasked Dimon with overhauling the company’s financial management and control functions, a job he took to with relish. In the end, Dimon got his hands in pretty much every part of Smith Barney’s business, from capital calculations to performance elements to the trimming of expenses.

As a result of this change in responsibility, Dimon and his wife and two children—a second daughter, Laura, had been born on June 16, 1987—moved back to New York at the end of 1988, settling in an apartment at 211 East 70th Street. As New York addresses go, this was
not
one that mattered. There was still a long way to go. Dimon took an office in Smith Barney’s longtime building at 1345 Avenue of the Americas. (In later years, the couple’s children attended Spence, New York’s exclusive all-girls’ school.)

It was during this time that Dimon met Steve Black, who was shortly named Glucksman’s deputy in the capital markets group. “Blackie” had been at Smith Barney since 1974—long before Gerry Tsai had shown up in 1987—and unlike his old boss, Vonder Linden, he had managed to stick around through the latest transition. Considered a loose cannon, Black found a friend in Dimon, another loose one himself.

To the outside world, Sandy Weill was a banking tycoon and Jamie Dimon was … who? When the
New York Time
’s reporter Robert Cole met with Weill and Tsai on August 29 to discuss the merger, Dimon sat in on the discussions. At one point, when Dimon tried to jump into the conversation, Cole cut the young man off. “I’m sure you’re smart,” he said. “But I already have two geniuses here to answer my questions. I don’t need to hear from the junior genius as well.”

• • •

The following year was one of wrenching change in the financial markets. Michael Milken, the junk bond king at Drexel Burnham Lambert, was engulfed in an insider trading scandal, and would soon be indicted on racketeering charges. It was a stunning reversal of fortune for the firm, which in 1986 had been the most profitable investment bank on Wall Street. An era of swashbuckling buyouts and takeovers was coming to a shattering close.