Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe

by Tett, Gillian

  On graduation from Harvard in 1982, at the age of twenty-six, he was offered jobs at Goldman Sachs and Morgan Stanley, but he turned down those elite positions in favor of joining league with Sandy Weill. A friend of Dimon’s father, Weill was an aggressive, up-and-coming financier who was working at American Express. Dimon’s choice was an extraordinarily bold punt. Weill was a highly controversial figure on Wall Street and something of an outsider. But he was also forceful, entrepreneurial, and highly ambitious, qualities Dimon admired.

  When Weill was ousted from American Express a couple of years later, the two men embarked on an extraordinary acquisition spree. First, they teamed up to purchase Commercial Credit, a floundering consumer loan company, which they used as a vehicle for grabbing several other firms. Finally, in the late 1990s they implemented their biggest coup of all, acquiring Travelers Insurance to create the Citigroup conglomerate, just as the Glass-Steagall rules were being swept away.

  The streak was a stunning triumph, but their story took a Shakespearean turn. Outsiders often described their relationship as being like father and son, since it appeared emotionally intense. Journalists also tended to assume that it was Weill pushing through the deals. Dimon, though, vehemently disputed that Weill was a father figure. He regarded the older man as a manager, and not a very good one at that. He also insisted that he was as responsible as Weill for developing strategy, if not more so. His close friends at Citigroup, such as Steve Black, were apt to agree.

  As the 1990s wore on, the relationship between Weill and Dimon steadily deteriorated, marred by numerous fights. One such clash started in 1995 after Dimon refused to promote Weill’s daughter, Jessica Bibliowicz, who was working at Citigroup. Eventually the atmosphere soured so badly that Dimon left Citigroup. A sixteen-year partnership came to an abrupt end.

  For more than a year, Dimon hung in limbo, without a job. He disappeared from view to such an extent that some Wall Street commentators suggested that his career had been completely derailed. Then in 2000 he accepted the job of running ailing Bank One. It was one of the smartest strategic moves Dimon ever made.

  Bank One, like Chase Manhattan, was the unwieldy product of three Midwest banks that had been carelessly cobbled together during the 1990s merger mania. When Dimon arrived in Chicago, the company was almost bankrupt, weighed down with internet-related loans that were imploding and an exceedingly bloated cost structure. In short order, Dimon fired the old management, installed new bankers, including some from Citigroup, slashed expenses by 17 percent—$1.5 billion—and transformed the loan book. He also radically reorganized the retail banking operation to make it more customer-friendly. By 2003, the bank was reporting a $3.5 billion profit, up from a $511 million loss in 2000. The turnaround was sweet revenge. Then the fates played into his hands again.

  As the reverberations of the internet bust and the Enron and WorldCom scandals pounded Wall Street, Citigroup was hit hard, and Sandy Weill’s reputation was badly damaged. In October 2003, he resigned. Miles away from New York, in Chicago, Dimon was one of the few senior bankers who emerged from those years with a reputation that was not just intact but soaring. Harrison’s decision to reach out to Dimon and Bank One was an exceedingly canny move, analysts agreed. If anyone could restore the reputation and confidence of the damaged JPMorgan Chase brand, it was Dimon.

  The only question that was critically unclear was how Dimon would actually go about restoring the bank’s fortunes. Would he go head-to-head with the Citigroup behemoth he had been instrumental in creating? Or did he have something completely different up his sleeve?

  Shortly after arriving at JPMorgan Chase, Dimon flew across the Atlantic to become acquainted with the European operations of the bank, including the impressive derivatives empire Bill Winters had built. Winters was now the most senior remaining member of the old Hancock group.

  The bankers in London were extremely curious to meet Dimon—and distinctly apprehensive, too. After three years of bitter infighting with the Chase side of the bank, the Heritage Morgan team there (as the former J.P. Morgan bankers were called) was deeply wary of anything in the vein of Chase. Some had decidedly low expectations of Dimon. “Not another retail banker from Hicksville, USA!” one muttered to colleagues before Dimon’s arrival. In the years before he had arrived at JPMorgan Chase, rumors circulated that suggested Dimon was no fan of investment banking. This was partly because back in the late 1990s, Dimon ran Salomon Smith Barney, the investment banking arm of Citigroup, and shut down the US proprietary trading desk. The furious Salomon bankers promptly concluded that Dimon hated traders. Dimon vociferously denied that, pointing out that he had chosen to merge with an investment bank when he and Weill were building up Citigroup. The rumors, though, made some J.P. Morgan bankers wary: they wondered what Dimon would do with their derivatives powerhouse.

  The London-based bankers had nervously prepared a briefing for Dimon about their successes and sent it to him in advance of his trip. By 2004, they had plenty of good news to highlight. Their derivatives business was rapidly expanding, as was their underwriting business. The bank was also in the process of forging a joint venture with Cazenove, the blue-blooded British investment bank, which promised to offer JPMorgan Chase a powerful platform for expanding its advisory and underwriting work in Europe.

  Tony Best, a former member of the old J.P. Morgan derivatives team, fully expected to spend the morning of Dimon’s arrival discussing the briefing he had sent him. Nobody ever dared to assume that a bank head would have had time to actually read a briefing, and the first part of such meetings was usually spent reviewing them. Dimon was different. “I’ve read the paper,” he announced abruptly, in his nasal Queens accent, and then asked highly specific questions that indicated he had indeed absorbed the details of the report. He made it a point of pride to always memorize as much of a preparatory paper as he could before a meeting. “You gotta do homework; I always do my homework,” Dimon liked to say.

  For almost an hour, Dimon debated the state of the European derivatives market with Best and others. It soon became clear that—contrary to the prior rumors—he knew the minutiae of complex finance. The brainstorming was intense. Then, at the end, the discussion took a completely unexpected turn. “Do you know what you are paying for these telephones?” he asked, pointing at the phone on the desk. They responded with baffled silence. Investment bankers dealing with the esoteric world of derivatives weren’t concerned with phone matters. “I will tell you!” Dimon declared. He loved posing aggressive, rhetorical questions to an audience, to keep them uneasily on their toes. “The average price of a phone in the London office right now is $22. I have checked and it should be $9. So, listen, I am going to call five vendors and get them to make me a better price. We gotta fix the plumbing first, and then we can worry about everything else!”

  Oh my god, some of the Heritage J.P. Morgan bankers thought. They had never experienced anything like Dimon before. In a sense, he seemed to be confirming their worst fears. Or was he? It was clear to Best that Dimon was phenomenally bright: not only had he memorized details about the British telephone system, but he also clearly understood the credit world, with its complex acronyms. “He’s not like any leader I have ever met before,” Best confessed to a colleague. The gossip about what Dimon would do with the bank grew intense.

  In reality, Dimon’s plans were both highly complex and exceedingly simple. Though almost none of the Heritage Morgan bankers realized it at the time, Dimon had arrived at JPMorgan Chase with an extensive knowledge of how the old J.P. Morgan worked. That stemmed from a little-known friendship Dimon had forged more than a decade earlier with former CEO Dennis Weatherstone. Back in the early 1990s, J.P. Morgan was a lead banker to Commercial Credit, the unruly financial group that Weill and Dimon had taken over as the first step on their road to creating Citigroup. As a result, Weatherstone had become acquainted with them, and he soon made a point of traveling to the bank’s headquarters down in Baltimore on a regular bas
is, a reflection of Weatherstone’s old-fashioned respect for client relationships.

  Weatherstone took a particular shine to Dimon, perhaps because he had also started out as something of an outsider. At one stage, Weatherstone even suggested to Weill that he should mentor Dimon, which Weill brushed off. Weatherstone, though, did act as an informal mentor, having long chats with Dimon. “I adored Dennis Weatherstone—absolutely adored him!” Dimon later recalled. “Sandy Weill never gave me a piece of advice at all; he just did not do mentoring. But I guess that Weatherstone was a mentor to me in a way, since he really took me under his wing.”

  During the course of those conversations, Dimon gained respect for the values Weatherstone stood for. “They were a good, ethical lot at the old J.P. Morgan. They really believed in trying to do the right thing, in trying to serve clients,” Dimon recalled. However, by the mid-1990s, Dimon was also increasingly unimpressed with the commercial results of the bank. He appreciated the bank’s impressive history and formidable franchise, but he also thought the bank was dangerously arrogant and insular. Subsequently he also became highly critical of the way the merger with Chase had been carried out, generating so much dysfunctional infighting. “My first impression of [JPMorgan Chase] was that it was completely undisciplined—there was a lot of politics,” Dimon recalled. “There was not a lot of good there, apart from the investment bank, which had some great embedded businesses. But that was also just really undisciplined. No discipline at all.”

  In Dimon’s eyes, that lack of discipline was nothing short of a cardinal sin. It was a stance born from a more profound set of attitudes towards the craft of banking. Contrary to his reputation, Dimon had not arrived at JPMorgan Chase ignorant of how the inner details of high finance worked. He had an extremely curious mind that was exceptionally good at absorbing data, with near-photographic powers of recall. He took it as a point of pride to spend time each month studying new topics. “I love studying reports, new ideas, just love it! You gotta keep challenging yourself,” he liked to say. Along the way, that mind had enabled him to grasp a vast amount of information about how advanced market instruments worked.

  When he arrived at Salomon Brothers in the late 1990s, he spent hours sitting on the trading desk, analyzing the bank’s positions. The Salomon Brothers traders initially tried to fob him off by giving him trading records that were presented with such extreme complexity that they were extremely hard to follow. Dimon, though, waded through the data and eventually concluded that the books held only ten rather similar strategies. When he arrived at JPMorgan Chase he repeated the exercise, determined to get his head round the numbers; he was convinced that much of the complexity in the derivatives world was not just misleading but unnecessary. “People think I don’t understand this stuff, because I don’t have a trading background. But I understand it better than they think.”

  Yet in one sense, Dimon was very different from the men and women who worked in the world of high finance: precisely because he had not built his career in that sphere, he was not overly impressed by the complexities or potential of high finance. He wasn’t antagonistic towards financial innovation, but he wasn’t reverential either. He believed that the only way to run a bank effectively was to regard it as a business—nothing more or less. The old J.P. Morgan bankers might have believed they were part of a quasi-noble financial guild, while the young derivatives Turks of the late twentieth century were driven by a belief that they were building a brave, new cyber finance world. Dimon took a purely pragmatic approach. To him, bankers were neither noble or Masters of the Universe. They were just businesspeople doing a job, pushing money around the economy as efficiently and effectively as they could. The point of a bank was simply to do that business.

  “Banking is a bit like running a small retail store,” Dimon sometimes said; he liked the analogy since he considered it to be one “that even my grandmother can understand.” “You gotta work out what kind of stuff your customers want. Then you gotta get the stock in, and sell it as quickly as you can, making a profit. If you get it wrong about the inventory, then you make a loss. That applies to trading bonds, or derivatives, or a retail store. It’s all about business.

  “And,” he would add, “you gotta have good bookkeeping. You can’t have side books and back books, or whatever kinda books—you have to know where you stand with all your stock. I have always said that we have got to only have one set of books at JPMorgan Chase and be accurate and comprehensive.”

  This no-nonsense approach shaped every aspect of Dimon’s strategy. Like any small shopkeeper who needs to keep track of his stock, Dimon was obsessed with knowing every detail of his bank’s inventory. He wanted to know exactly how money was—or was not—moving through the bank, and he spent hours examining the IT systems and the trading books. Yet, like a small shopkeeper, Dimon also knew the critical importance of keeping staff and clients happy. He found it hard to tolerate bureaucracy or formality, and preferred to operate with a brash, informal, in-your-face air. “I always say to people: ‘Get to the point!’ ‘Say it upfront!’ I hate all this messing about,” he liked to say. On a whim, he would wander around the corridors, bouncing up to staff to pepper them with questions about their businesses and their deals, and then he’d ask about their families as well. He would also mentally file the details away, to be brought out at a later date. He showed little respect for traditional hierarchies. At other banks, investment bankers usually commanded far more status than retail bankers, and both were set well above the lowly “back office” staff involved in the logistics of running the bank. Dimon was acutely aware that all the bank’s groups were crucial for moving his financial “stock” around and making it pay. “How complex do you think it is to run a credit card business?” he sometimes liked to challenge his listeners, when the subject of financial innovation came up. “Let me tell you—it’s friggin’ complex! Getting to grips with credit cards is one of the most complicated challenges you get in banking.”

  The same mentality shaped Dimon’s attitude towards risk. He didn’t view himself as particularly risk-averse. On the contrary, his career showed he could make bold bets, starting with his decision to join with Weill rather than go to Goldman Sachs. However, Dimon believed strongly that risks must be properly managed, and he went about the task with the same obsessive attention to detail that a small-business owner must pay to cash flow. Indeed, Dimon shared Dennis Weatherstone’s fascination with measuring and monitoring risk, and when he spoke about risk management, he often expressed sentiments that Hancock and other former J.P. Morgan bankers might have voiced. He was no fan of leaving the task to a dedicated risk department. One of his favorite phrases was “fortress balance sheet,” shorthand for the idea that a bank should always maintain a large reserve of spare capital in order to cope with unforeseen shocks. “We have got to have a fortress balance sheet!” he repeatedly drilled into his staff. “No one has the right to not assume that the business cycle will turn! Every five years or so, you have got to assume that something bad will happen.”

  Within weeks of his arrival at JPMorgan Chase, Dimon started putting his ideas into action. True to his word, he forced the London office to cut a new deal with its telephone suppliers. But that was just the start. As Dimon swept through the bank, peering into corners, he initiated a blitz of cost-cutting measures, and news of them spread through the organization at lightning speed. He declared that employees must start buying their own cell phones and banned the bank from paying for golf club memberships. As the measures spread, wild rumors swept through the bank about what else Dimon planned to do. One (false) story claimed that Dimon was monitoring which bankers were booking taxis and then running up bills by leaving them waiting idle. It was even whispered that Dimon was tracking the size of the hamburgers in the staff canteen, with a view to cutting those too.

  Many of those stories were fallacious (Dimon never inspected the hamburgers). But they served his aims. As the stories spread, they evoked so much fear that
bankers started cutting costs preemptively. In the first year, the bank’s operating committee—its most senior management group—implemented $3 billion of cost savings. That was reinvested elsewhere. The Chase retail bank branches were refurbished. The investment bank started recruiting staff to fill the gaps created by the exodus of former J.P. Morgan employees. Some $1.5 billion was spent on data centers and another $1 billion on technology at the investment bank.

  The technology program was particularly close to Dimon’s heart. On his first trip to London, he made an unusual detour. Instead of heading first to the headquarters in the City of London, near the Barbican, he went straight to Bournemouth, a seaside town a hundred miles south of London, to the headquarters of the bank’s UK IT operations. There he convened a town hall and spent a couple of hours discussing the bank’s IT infrastructure.

  The British IT specialists were astonished. In most banks, the support staff were either patronized or completely ignored. Dimon was convinced, though, that there was no chance of making the merger at JPMorgan Chase work better if he couldn’t streamline the IT sector. Dimon was convinced that the infrastructure issues were far too important to outsource. Before his appointment, Harrison had struck a massive $5 billion IT outsourcing deal with IBM, one of the largest of its kind in the financial industry. By mid-September, Dimon had scrapped the contract and brought IT back in-house, where he could keep it right under his nose.

  He also reorganized the human infrastructure. In the four years before Dimon had arrived, managers who worked for the separate parts of the JPMorgan Chase empire rarely interacted face-to-face; most cross-department communication was conducted by phone or email (or, all too often, not conducted at all). Soon after his arrival, Dimon created a new, dedicated managing directors’ dining room, to force the different department heads to meet face-to-face, over lunch several times a week. “You have to talk to people, look ’em in the eye!” he explained.