Last Man Standing (9 page)

Drexel’s chief, Fred Joseph, forecast a loss in the company’s retail brokerage division of $40 million to $60 million in 1989 and decided by April that selling the business was better than watching it disintegrate. In different times, and with a different seller, the business might have fetched an eight-figure price. But Weill, smelling desperation, offered a paltry $4 million for 16 branch offices and about 500 brokers. On April 8, 1989, Joseph accepted the bid. While Zarb and Weill wined and dined Drexel’s top producers in the hope of keeping them on board, the task of closing the deal once again fell to Dimon.

Drexel’s collapse was, in and of itself, a big deal, especially considering the power the firm had wielded just months before. But there was also a growing sense that Drexel had helped much of Wall Street lose its way. Sure, the innovative use of junk bonds helped scrappy entrepreneurs like Ted Turner get their start. And although the much-chronicled junk-fueled takeover of RJR Nabisco by the private equity firm Kohlberg Kravis & Roberts provided high drama in the 1980s—trenchantly recounted in Bryan Burrough and John Helyar’s book
Barbarians at the Gate
—it seemed to many observers that such profligate use of debt forced proud companies to their knees and turned the august world of corporate finance into nothing more than a debased money grab. In 1970, there had been only 10 takeovers valued at more than $1 million. In 1986, there were 346. By late 1987, nonfinancial corporate debt stood at a record $1.8 trillion, and companies spent 50 cents of every dollar of earnings to pay off creditors. The economy, in other words, was leveraged to the hilt.

“As in the Jazz Age,” writes Ron Chernow in
The House of Morgan
, “much of the era’s financial prestidigitation seemed premised on an unspoken assumption of perpetual prosperity, an end to cyclical economic fluctuations, and a curious faith in the Federal Reserve Board’s ability to avert disaster.” (The cycles continue, with the great credit bubble of the new century being premised on the exact same notions. Dimon, a student of history, is constantly in disbelief at everyone else’s failure to learn from experience.)

The RJR deal, feasted on by nearly every major financier in New York, ultimately came to be seen, according to Chernow, as “the era’s crowning folly.” In October, the collapse of a $6.79 billion buyout of United Airlines sent the markets into a tailspin as investors concluded that without the junk bond market to fuel ever-greater buyouts, stock prices had lost a crucial leg of support. By the end of the year, the economy was headed into recession.

Britain’s Barclays Bank PLC started to feel the pinch earlier than many others, and in November decided to put its U.S.-based consumer loan division up for sale. After rapid-fire due diligence at Barclays’ offices in Charlotte, North Carolina, Primerica offered $1.35 billion in
cash for BarclaysAmerican/Financial. The deal not only broadened Primerica’s national distribution but also expanded its loan portfolio by 40 percent, to more than $5 billion.

Drexel finally filed for bankruptcy in February 1990. The capital markets were closed to it, and without access to credit—the lifeblood of a Wall Street firm—there was nothing left to do but shut the doors and clean out the desks. Fred Joseph’s last-ditch move—calling Gerald Corrigan, head of the Federal Reserve Bank in New York, to plead for emergency credit, which the Fed had historically made available only to commercial banks—was met with a definitive refusal. (Eighteen years later, when Jamie Dimon insisted that the Fed actually get some skin in the game if he was to save Bear Stearns from bankruptcy, New York Fed chief Tim Geithner was more accommodating.)

Corrigan’s decision wasn’t exactly surprising. Drexel had alienated almost every major firm on Wall Street with its arrogance during the junk bond boom, and had then exhausted the resources of regulators and the Securities and Exchange Commission in choosing to defend Milken for well over a year before finally caving.

The combination of Dimon’s shrewd number crunching and Weill’s vision and salesmanship kept Primerica stock strong even as the broader markets were getting pounded. The stock was up from $21 to $28. And a December 4 issue of
Business Week
proclaimed “The Return of Sandy Weill.” Weill was back. And this time, he’d brought a guy named Jamie Dimon along for the ride.

• • •

The new decade saw Dimon’s achievements continue to multiply. In March 1990, Weill made him an executive vice president (EVP) at Prim-erica. (This was in addition to his operating role at Smith Barney.) It was all coming together. With the arrival of his third and final daughter Kara Leigh on June 20, 1989, Dimon, now 34 years old, was not only taking on greater responsibility but making a lot more money. In 1989, he had earned $660,000, up from $594,348 in 1988. This was still well below Weill’s $1.54 million take, but Dimon was just slightly behind Bob Lipp—a man 17 years his senior—who had earned $810,000.

He was also closer personally to Sandy Weill than he’d ever been before. If a visitor dropped by Weill’s house in Greenwich on a Sunday morning, Dimon’s Volvo wagon was invariably parked in the driveway, the two men already hard at work by 7:00
A.M
. Three months after becoming EVP at Primerica, Dimon added the titles of executive vice president and chief administrative officer of Smith Barney.

Weill and Dimon weren’t all business. They were capable of pulling the occasional prank on each other. When Alison Falls McElvery was married in October 1990, she showed up at the church to find Dimon in a tuxedo. “Why are you wearing that?” she asked. “It’s not a black tie wedding.” “Sandy convinced me it was black tie yesterday, and Judy’s all done up in a fancy dress,” Dimon fumed.

Dimon took on an increasingly prominent role at presentations to investors and analysts. In one of the company’s first meetings with analysts and investors since taking over Primerica, Brian Posner, a portfolio manager at Fidelity, thought Dimon was talking too much and too aggressively. Fidelity had been making major purchases of Primerica’s stock, and Posner grew worried about whether this brash young executive had the knowledge to back up his big mouth. Posner thought he’d test the confident young CFO and said he’d like a brief on the company’s insurance subsidiary, A.L. Williams. “Let’s see if this guy actually knows anything about this,” Posner told a colleague. Twenty minutes later, Posner turned to the same colleague and said, “Wow, he wasn’t faking it.”

In 1990, while the economy shrank by 1.5 percent, Primerica’s stock continued to reach new heights, hitting an all-time high of $37. Primerica even briefly surpassed Citicorp in market value. Dimon jokingly mentioned to Weill the idea of going after that venerable institution. The two men laughed off the notion, but Dimon was inspired enough to muse out loud, “Wouldn’t that be the mother of all deals?”

Instead, Dimon did the only thing he could do: aim low. Rather than make a run at the entire company, he merely bought shares. When Citicorp hit $8.50 a share, he picked up $50 million worth for the Primerica investment portfolio. Dimon convinced everyone at the company that the stock would have $5 a share in dividends within five years,
and several Primerica executives loaded up on Citicorp for their own accounts—including Dimon, who bought some for each of his three daughters.

Around this same time, Fidelity’s Posner would occasionally join either Dimon or Bob Lipp after work for drinks at Lipp’s favorite hangout, the Drake hotel. The men had just one ground rule. They wouldn’t talk about each other’s companies. But Citicorp was always a topic of conversation. One evening, when Dimon and Posner were out along with another Fidelity portfolio manager, Citi’s stock hovered around $10 a share. Dimon was distraught. “God, I wish we could buy it! I wish we could buy it!” he said. “Now is the time to buy Citi!”

Weill soon got nervous about Dimon’s $50 million purchase, even as Citicorp stock was rising, and pestered Dimon to unload the position. After fighting his boss for months, he relented, selling the stake for a $30 million profit.

(Weill had more pressing concerns, however, when it was revealed that the founder of A.L. Williams, Art Williams, was being investigated about a “dirty tricks” campaign to drive a competitor out of business. Weill decided to throw Williams out of the company, causing tens of thousands of agents to quit in response. Investors drove Primerica stock down to $16.88, less than half its high of $37 that year.)

• • •

By September 1991, Weill decided to officially recognize what much of Wall Street had finally come to appreciate, that Jamie Dimon was a driving force at Primerica. Weill named Dimon, just 35 years old, president of the company, relinquishing the title to his protégé. Weill also named Bob Lipp and Frank Zarb vice chairmen.

“When Sandy told me, I almost fell off my chair,” Dimon told a reporter at the time. In a lengthy handwritten letter, Judy Dimon assured Weill that her husband would make him proud.

Although he was making Dimon one of the youngest presidents of any Fortune 500 company, as well as one of the most powerful men on Wall Street, Weill was also adamant that this was not succession planning. “When somebody does something very, very well, they’re going to
be rewarded,” he said. “[But] I don’t feel very old, either.” Analysts understood the point, even if they didn’t entirely believe it. Fifteen years later, Weill gave it a different spin. ‘Whatever gossipmongers might have said,” he wrote in his autobiography
The Real Deal
, “I assumed at the time that Jamie stood first in line to succeed me eventually.”

Weill had a peculiar style of mentoring. He regularly rewarded Dimon, but at the same time he often found subtle ways to impede the young man’s progress by forcing power-sharing arrangements on Dimon at every turn. After making Dimon chief administrative officer (CAO) of Smith Barney in April 1991, for example, Weill then hired Bob Druskin away from Shearson Lehman, where he had been CFO, to be co-CAO with Dimon. The contradictory signals would eventually drive Dimon out of his mind, but in the early part of the decade, he still held his boss on a pedestal, and took what he was given without much complaint.

Not long afterward, both Dimon and Lipp were named directors of Primerica, another step up the ladder for Dimon. Weill later claimed that he elevated Dimon against the advice of a number of board directors who thought he was advancing the younger man too quickly. Several of Dimon’s colleagues would agree. “The man was extremely sharp,” recalls one. “He could do five sets of computations in his head. But given his mandate from the get-go, he had few interpersonal skills. He never had to learn them. Most of us have to go through the ranks and learn some humility, but he never had to. He was dictating to everybody from day one.”

Still, Dimon was widely regarded as the man who made things happen when they needed to happen. If there were costs that had to be cut, Dimon was the man for the job. The company needed higher credit ratings? Dimon figured out how to get them. What he brought to the table was the basic ability to understand the underlying drivers of any business—the two or three things that
really
mattered—far more quickly than his peers. And through an admittedly aggressive and unyielding Socratic process, he got information out of the people that he needed to in order to make decisions about those drivers.

He was also Weill’s enforcer. Widely known to be a bit of a coward
on sensitive personnel issues, Weill gladly left the tough stuff to Dimon. “Sandy would yell and scream but at the end of the day it was Jamie who pulled the trigger,” says a longtime colleague. Dimon didn’t take perverse pleasure in firing people himself, but he certainly wasn’t afraid of it, particularly if he was convinced that it was for the good of the company. If there’s one thing he could not stand, it was weak links, and he never had a problem severing them.

Deals were happening all over the financial industry during this time, including the $2 billion purchase of Manufacturers Hanover by Chemical Bank. Weill explored buying Kidder Peabody from General Electric but shied away from Jack Welch’s $1 billion price tag after Dimon saw the firm’s fixed income operations and advised against a deal. He concluded that the traders at Kidder had too much power and were twisting the arms of their operations colleagues to take excessive risks. When a scandal involving Kidder’s government bond trader Joseph Jett erupted in 1994, forcing the firm to reverse $340 million in phantom profits Jett had booked, Welch sold Kidder to PaineWebber for just $670 million. “Sandy forgot to thank me for that,” Dimon laughs.

• • •

It’s a well-known maxim that one of the hardest things about running a business is to maintain the ability to say no and thereby save limited resources for the best opportunities. Over time, most companies simply lose their discipline. But Dimon kept Primerica focused. His ability to make quick decisions became legendary during this period, and his underlings came to appreciate it. It saved them incredible amounts of time.

Because of its own inability to say no, the Travelers Corp., the Hartford-based insurance company, came on bended knee to Sandy Weill in late 1992. Founded in 1864, Travelers was in trouble not because of its insurance business, but because it had made bad bets in real estate. Travelers offered so-called guaranteed investment contracts (GICs) that acted like annuities and had specific maturity dates. The company had taken the proceeds from those sales and invested them in mortgages. When those mortgages came due, the real estate market was a shambles, and Travelers faced a rash of defaults. The problem: an obligation
on one side—the GICs—and a default on the other. It was not a good position to be in. The company was close to insolvency. (Travelers’ one-way bet on real estate prices could stand as a mini precursor of the troubles of insurance giant AIG in the 2007–2009 financial crisis. The executives of AIG also convinced themselves that real estate prices would not fall, a bad bet that resulted in AIG’s requiring $180 billion in bailout monies in 2008–2009. They might have served themselves better by studying Travelers’ own travails.)