Last Man Standing

by Duff McDonald

  As Fed chairman, Greenspan was not entirely laissez-faire. When the stock market went on a wild tear in 1996, he gave his famous “irrational exuberance” speech, which had a somewhat calming effect on investors’ excitement. But when it came to regulation, Greenspan pushed to give banks a great deal more latitude in their operations. He relaxed the limits on banks’ ability to own securities businesses (they had previously been allowed to earn no more than 25 percent of their total revenues from this source). Another arm of the government, the Comptroller of the Currency, decreed that banks might engage in securities underwriting and the sale of insurance if they did so through subsidiary companies.

  The end result: after more than 50 years, Greenspan effectively dismantled Glass-Steagall with assistance from Weill, President Bill Clinton, and Secretary of the Treasury Robert Rubin. (Clinton signed a bill in November 1999 that demolished any remnants of Glass-Steagall.) By the time Congress moved to formally repeal the act, it was as good as gone. Greenspan went further—joining forces with Rubin, he blocked an effort by the Commodities and Futures Trading Commission to impose greater regulations on the derivatives market. Among others, E. Gerald Corrigan, who’d been president of the Federal Reserve Bank of New York from 1985 through 1993, had raised alarms earlier in the decade about the headlong growth of the derivatives market, but Greenspan had sided with the industry and its argument that it was “self-policing.” The owner of Forbes magazine, Steve Forbes, later accused Greenspan of believing himself a “monetary philosopher king with Louis XIV ‘I am the state’ proclivities.”

  Banks started to make a flurry of big deals. In early 1997, Bankers Trust bought Alex Brown, becoming the first U.S. bank to acquire a securities firm, and Morgan Stanley merged with Dean Witter Discover & Co. in a $10 billion deal. Chemical Bank also bought rival Chase Manhattan, for $9.8 billion in 1996, but chose to keep the latter’s more prestigious name.

  It was under Greenspan’s auspices, then, that the Wall Street juggernaut, the creation of giant, financial supermarkets that offered every money-related product under the sun, began. The wholesale clearance of regulatory hurdles made it possible for firms to assemble themselves into conglomerates that were too big to fail, a paradoxical situation that led managers to ignore traditional risk controls and make audacious bets with their capital.

  Sandy Weill and Jamie Dimon were early and enthusiastic participants in this movement, a somewhat dubious legacy. On the one hand, banking CEOs can reasonably argue that they needed scale (and leverage) to squeeze sufficient profit from businesses that were largely based on low-margin commodity products. On the other hand, it is also clear that the deals that built these giants were like a party drug, blinding Wall Street to their long-term implications. Everybody wanted to seize the moment and grab a share of the fees, the associated risks be damned.

  Although both Weill and Dimon will, to this day, swear by the efficiencies and profit-making potential of mega-institutions, the truth is that the majority of the big-time deals did not work. Perhaps the theory is sound, but the practice is another story. A sprawling conglomerate in the wrong hands (see Chuck Prince at Citigroup) is a disaster waiting to happen.

  Greenspan also later came to be known for the “Greenspan put.” (A put option gives the buyer the right, but not the obligation, to sell an asset at a predetermined “strike” price. If prices rise, you don’t sell. If they fall, you sell at the strike price and minimize your losses.) With aggressive interest rate cuts in the event of any kind of crisis—the Mexican crisis, the Asian currency crisis, the Long-Term Capital Management crisis, the bursting of the Internet bubble, or 9/11—his Federal Reserve created the impression that investors essentially had a “put option” on asset prices, and in the process arguably encouraged excessive risk-taking. His successor Ben Bernanke continued the tradition, resulting in the notion of the “Bernanke put.” The financial crisis in 2007–2009 ended any thoughts that these puts actually existed. When it came to crunch time, there was no one on the other end of the theoretical contract, and investors watched their portfolios evaporate.

  • • •

  At this point, Weill and Dimon were bickering so much that many colleagues believed some kind of awful climax was inevitable. But in those heady years, personal friction could be overridden by pursuit of the next big deal. As it turned out, however, a major disappointment was on their immediate horizon.

  Weill had correctly sniffed out the possibility that Greenspan might be amenable to a deal that was, on its face, a direct repudiation of Glass-Steagall: Travelers acquiring a commercial bank. The law did allow for such a possibility, provided the insurance operations were spun off within two to five years. But Weill had an audacious idea. He would try to buy J.P. Morgan. The bank was no longer a powerhouse, but its name still evoked a power and prestige that Travelers entirely lacked.

  His reading of Greenspan aside, Weill’s confidence also stemmed, in part, from the increasing acceptance of corporate America in the national psyche. In the early 1980s, corporate profits were just 3 percent of GDP. By the end of the next decade, they accounted for 10 percent. Business leaders were profiled glowingly and uncritically in Fortune and Business Week; Jack Welch of General Electric was a national treasure. Even Wall Street was enjoying a brief (though fleeting) period of public approval. The insider traders and junk bond kings of the 1980s had been forgotten. Wall Street titans were considered innovative geniuses; how could Congress justify preventing the smartest people in business from doing as they saw fit?

  Weill contacted J.P. Morgan’s head, Douglas “Sandy” Warner, and the two men apparently found enough common ground to put together two three-man teams, one each from J.P. Morgan and Smith Barney. (J.P. Morgan would effectively be merged with Smith Barney in the event of a deal.) For Weill, it would be another feather in his Travelers’ cap. For Warner, a deal might help establish J.P. Morgan as a full-blown investment bank with a more diversified set of businesses, particularly by adding Smith Barney’s brokerage force. Dimon was on Smith Barney’s three-man team, and gave his counterparts from J.P. Morgan a daylong presentation on Smith Barney’s brokerage capabilities. (One member of the Morgan team, Jes Staley, would eventually find himself working for Dimon, but not for another seven years.)

  Weill, thinking the merger discussions with Warner were farther along than they actually were, called Greenspan to see if he could give the green light for such a deal. Greenspan replied that he was “open to the logic” of such a combination. But negotiations stalled as Warner made two demands that Weill considered unthinkable. First, the 50-year-old Warner wanted a hefty $30 billion for his company. Second, he wanted the 64-year-old Weill to retire within 18 months of a deal. If Weill thought he might find a way to wiggle out of the retirement condition, the price was beyond ridiculous. Sandy Weill never overpaid for anything, not even for one of the most iconic brands in finance. The talks collapsed. According to journalist Roger Lowenstein, Weill later complained to a colleague that Morgan “would never sell to a Jew.”

  Despite the fact that the combination of Travelers and J.P. Morgan was not to be, Weill gained something valuable out of the flirtation—Greenspan’s implicit endorsement of such a deal—which eventually inspired him to come up with an even more ambitious idea. In the meantime, another deal came knocking in just a few weeks.

  • • •

  Wall Street is merciless. Companies that are the toast of the town on one day can become pariahs in an instant. So it was with Salomon Brothers in the late 1990s. The famous investor Warren Buffett had stepped in to take 20 percent of the company in the wake of a 1991 Treasury bond scandal that had cost Salomon’s chairman John Gutfreund his job—and the company $290 million in fines—but it was commonly understood that Buffett did not see himself as a long-term owner and had been seeking an “exit strategy” for some time. Salomon had become one of his most troubled investments, and he was ready to be done with it. Rumors of the company’s sale had been circulating since
1995.

  Buffett’s handpicked replacement for Gutfreund, Deryck Maughan, had succeeded in stabilizing Salomon, and a recent run of strong trading profits had Buffet thinking the time was right to sell. Maughan had been an adviser to the British treasury from 1969 to 1979 and had run Salomon’s Tokyo office from 1986 to 1991, after which time Buffett had tapped him for the CEO slot. Weill had brought Maughan on to the board of trustees of Carnegie Hall that same year, and the debonair Englishman reached out first to Weill when he decided to test the waters for a sale of Salomon in August 1997.

  On paper, the deal made a lot of sense. For starters, Salomon’s international operations could complement Smith Barney’s more domestic franchise. Although Salomon didn’t offer much in the way of investment banking, the combination of the two firms’ fledgling efforts would make them stronger than they might otherwise have been. And Salomon’s position as the market’s strongest player in bond trading would be a perfect addition to Smith Barney’s relative strength in equities.

  On the other hand, such a deal violated a number of Weill’s cherished precepts regarding acquisitions. In the first place, he would be buying a company on an upswing—a more characteristic approach would have been to buy when Buffett had bought, not when Buffett was looking to sell. Most glaring, though, was the notion that Weill was even considering buying a firm with a penchant for letting its traders make outsize bets with the firm’s capital.

  Weill and Dimon loved brokers for the stability and profitability they provided. But traders were something else entirely. A heavy reliance on trading profits was antithetical to everything these two cost-conscious micromanagers stood for. Robert Greenhill might spend $10 million on an overrated investment banker, sure. But an unsupervised trader could lose $100 million in a single day. A botched risk arbitrage trade had recently cost Salomon just that.

  Salomon, in fact, was a big player in the emerging realm of derivatives trading, and it was difficult, if not impossible, to get a real fix on the attendant risks of that business. Some months earlier, in fact, Weill himself had referred to Salomon’s trading outfit as a “casino,” and now here he was thinking of buying that casino outright. (Sandy Weill, it can be argued, was somewhat cavalier in his choice of Salomon as the investment bank that would take Travelers to the next level. Building a top-tier investment bank is more difficult than merely making a turnkey purchase.)

  Finally, there was the issue of culture. Salomon’s “Big Swinging Dicks” had been lampooned in Tom Wolfe’s popular 1987 book Bonfire of the Vanities (in which Wolfe coined the term “Masters of the Universe”) and in Michael Lewis’s 1989 insider account Liar’s Poker. Both books had painted a culture in which the client was viewed more as prey than partner, and the Treasury bond scandal had revealed a moral vacuum at the top levels of the firm. Weill and Dimon had only recently rid themselves of the overweening personalities of Greenhill and Lessin. In Salomon, they were quite possibly buying an entire firm of such characters.

  But Sandy Weill was nothing if not an opportunist, and spurred in part by the failure of the J.P. Morgan deal, he pressed ahead in his quest for Salomon, figuring he could solve the in-house problems once he got his hands on the firm. After a few weeks of due diligence, he pushed the board and audit committees toward a deal. Dimon, the board member Joe Wright recalled, was inclined toward the deal as well, although by his very nature he was more focused on the risks they’d be taking. And there was no question that this was a departure from their plain vanilla heritage. Plain vanilla is just fine with Jamie Dimon. A business doesn’t have to be sexy to get him excited; it just needs to be reliable, profitable, and growing.

  Good times make for good results, Dimon knew, even if a company wasn’t on the perfect path. But if the good times were to end, Salomon’s enormous risks posed a threat to Travelers’ overall health. Awareness of any potential downside was one of Dimon’s most ingrained character traits, and although he eventually came around to the merits of the deal, he obsessed over its risks much more than Weill. This is not to say that Dimon was risk averse. But he was a numbers man to the core, and he needed to able to calculate as best he could what the risk was before he could be comfortable taking it on.

  Warren Buffett liked the idea of a deal with Travelers. Maughan had been a sensible choice to run Salomon because in 1991 he’d been in the firm’s Tokyo office and was untainted by the trading scandal. But Maughan was incapable of the powerful leadership that Buffett sensed Weill and Dimon could provide. Salomon, rife with fiefdoms, had resisted Maughan’s efforts at wholesale change; a principled attempt on his part to tie compensation more closely to performance had blown up in his face. But both Weill and Dimon were by that point legendary for their intolerance of fiefdoms, and Buffett saw an opportunity to finally put the place right.

  After just a month of negotiations, a deal was struck. On September 24, 1997, it was announced that Travelers was buying Salomon Brothers for $9 billion. The market read it as a good deal for Buffett and Salomon, sending Salomon’s shares up several points. But the judgment was different when it came to Travelers. Investors wondered whether Weill and Dimon understood the kinds of risks they were taking on with the fast-and-loose culture of Salomon. Travelers fell 4 percent.

  Buffett wrote a note, which was included in the press release for the deal, praising Weill for showing “genius in creating huge value for his shareholders,” a fact many observers pointed to while second-guessing the rationale for the deal itself. It was known that Weill disliked arbitrage. So what was he doing buying a firm that lived and breathed on just that? Did he just want to do a deal with Buffett, to show he was now operating in the highest spheres of financial deal making? He’d been denied the chance more than 10 years before with the Fireman’s Fund, and it appeared that he wasn’t going to let the opportunity pass him by again. “Sandy spent nine billion dollars to get a piece of paper from Warren Buffett saying what a great investor he was,” an insider later told the journalist Roger Lowenstein. “He was running around showing it to people like a kid in a candy store.”

  Still, the deal did push Travelers a little higher up the Wall Street food chain, at least in terms of market value. By October, the company’s market value was $55 billion, far exceeding that of Merrill Lynch ($24 billion) and even Morgan Stanley Dean Witter ($44 billion). The deal also vaulted Smith Barney up in the investment banking league tables. But the announcement of the deal did nothing to bridge the widening chasm between Dimon and Weill. When the two men joined a few Salomon executives at The Four Seasons for celebratory drinks after the announcement, they were at each other’s throat within minutes.

  • • •

  As if he needed another one, Jamie Dimon also had a new bone to pick with his boss. Although he’d been effectively running Smith Barney by himself since Greenhill’s departure, the Salomon deal brought Deryck Maughan along with it, and Weill told Dimon that he had decided to make Maughan a co-CEO of the unit alongside Dimon.

  Dimon was enraged. He reminded Weill that in previous negotiations with Salomon, Weill had indicated that Dimon would have complete control. But now, with the deal done, Weill refused to budge on the matter. Weill later wrote that he considered the co-CEO arrangement an insurance policy against his deteriorating relationship with Dimon. He may actually believe that. But from Dimon’s perspective, it looked more like another way that Weill, after elevating him to the level of a near-equal, seemed intent on undermining him and limiting his power.

  (When Travelers had flirted with the idea of buying Salomon the previous year, Weill had told associates that he would fire Maughan if the deal was completed. To view Maughan now as the answer to his problems was a stunning about-face.)

  Dimon was not the only one who thought he was caught in a Groundhog Day nightmare. The financial press jumped on the issue, asking Maughan on the day of the announcement how he thought the power sharing would work out. “We will agree,” responded Maughan, diplomatically. “For the sake of the firm,
we are obligated to find agreement.”

  This was not a situation that could be dealt with privately. In October, Business Week published a story titled “How Long Can These Two Tango?” Both men dutifully gave the answers that were expected of them. “We want to operate as a team,” said Maughan. “The idea of partnership is not foreign to us.” Dimon chipped in with a perfunctory, “There’s plenty of work for both of us to do here.”

  Within Travelers, there was a long-running joke about Sandy Weill’s fickleness. If you walked by Weill’s office and saw a new face, you might be moved to ask, “Who’s that?” The answer: “That’s Sandy’s new best friend.” For a long time, that had been Dimon, but Weill kept finding new supplicants. There had been Greenhill and now there was Maughan. But while Greenhill’s talents as a deal maker were unimpeachable, Deryck Maughan was something else entirely—a product of a culture whose values and priorities were the antithesis of Travelers’. Forget whether or not Dimon could get along with Maughan. Could Dimon even trust him?

  Weill might have been impressed by Maughan’s European polish, but there were aspects of his personality—and his wife’s—that did not portend well for his relationship with the no-nonsense Dimon. A scathing 1995 piece by Suzanna Andrews in New York magazine made the case that Maughan had been in over his head at Salomon yet had a tendency to say things like, “I am the hardest-working man at Salomon Brothers.” Most top executives also thought he put politics ahead of the interests of the firm, a conclusion arrived at after he seemingly forced the star trader John Meriwether out of Salomon—Meriwether had gone on to found Wall Street’s hottest hedge fund at the time, Long-Term Capital Management. A stream of talented partners had also left during Maughan’s tenure.