Last Man Standing

by Duff McDonald

  And the first pass at a management structure reflected just that. The men also agreed that Dimon would be chief executive officer of Citigroup’s global corporate unit, which would include both Salomon Smith Barney and the company’s corporate banking business. Beneath him on the organizational chart were Victor Menezes of Citicorp, head of commercial banking, and Deryck Maughan, chief of Salomon Smith Barney. Satisfied with their work, Lipp, Reed, Collins, and Campbell flew back to New York while Weill and Dimon stayed behind for a meeting with a contingent of brokers. A draft announcement had even been written up, ready to be put through the company’s legal and public relations processes.

  There are two competing accounts of what happened next. Weill says that Maughan flatly refused to report to Dimon, and demanded a different arrangement. Langley says the opposite, that Maughan voiced no objection whatsoever. Weill’s version is probably the truth, as it seems unlikely that the proud Englishman would cede authority to Dimon without at least token opposition. Still in thrall to Maughan, Weill more likely than not agreed to a new arrangement without putting up much of a fight. On Tuesday of the week following the retreat in Bermuda, he told the reassembled group that he had rethought his original position, and that instead of having Maughan report to Dimon, the two men should be co-CEOs of the global corporate unit.

  To this day, Weill will argue that he brought Deryck Maughan over to Travelers in the Salomon deal in case something ever happened between him and Dimon that resulted in Dimon’s leaving the company. “I did it in case of a blowup with Jamie,” he said in an interview in his office in December 2008. “So there would be someone else who knew how to run that business.” But there was Weill, proposing a management structure that was itself very likely to precipitate the blowup. (Dimon’s supporters call the explanation revisionist thinking. “Deryck’s a nice guy,” says one. “But Deryck was not capable of running the company and Sandy knew that. So he’s full of shit when he says that.”)

  It wasn’t just Dimon who was baffled by the about-face. Reed, too, was curious as to why a co-CEO structure was necessary. Weill insisted that Maughan would quit. Reed reportedly replied, “Who gives a shit? Let him leave.” But Weill wouldn’t budge, and offered a mealymouthed litany of reasons why his hands were tied.

  “You guys are crazy,” Dimon said in a meeting with Weill and Reed. “It’s an outrage. It will destroy the company. I’m shocked you would even think about something like this. The day you announce it, the troops will be lining up ready to go to war. This will be trench warfare. And by the time you two figure it out, everybody will be so discredited, people won’t know what to do about it.” Sandy countered that he and Reed had agreed to be co-CEOs, to which Dimon responded that having co-CEOs over operating units was a different matter entirely.

  From there, things proceeded to get more complicated. Worried that if two former Travelers executives—Dimon and Maughan—were put in charge of the global corporate bank there would be disenchantment among the Citicorp crowd, Reed proposed a third structure: not co- but tri-CEOs, with Victor Menezes raised to equal rank with the others. Weill immediately agreed to Reed’s suggestion. When he saw Dimon about to explode, writes Monica Langley, he turned to him and said, point-blank, “Shut up.”

  Dimon was still named president of the combined company, a title implying that he was senior to his co-CEOs at the global corporate bank, a nod to the heir apparency all observers still believed existed. All except Weill, that is. Weill withheld the title of chief operating officer, repeating the ignominy forced on him when he joined American Express in 1981. Adding insult, the only senior executive who would report directly to Dimon was Heidi Miller, the CFO. The rest would report to Weill and Reed.

  Deep down, Dimon knew things had taken a very wrong turn. Despite Weill’s trying to sweet-talk him into believing that the title of president meant he was well positioned, Dimon saw the empty title for what it was. “I said, ‘I don’t have the job, I’m not on the board, but you’re going to give me a title?’ I should have realized it when he told me about the board. I should have left the company at that point. You’d think by then I might have figured it out, but I didn’t. I accepted that too, didn’t I? Sandy knows exactly how far he can go. I loved the company. It was my family. I couldn’t leave them. But Sandy doesn’t always think about just right or wrong; he thinks about his options down the road. The board decision was the sign, and I should have known better. But look, you live and learn.”

  Things then proceeded according to Weill’s grand plan. At a meeting with Alan Greenspan, chairman of the Federal Reserve, and other Fed officials later in April, Weill was given a “positive response” to the merger. Although Weill continued to push to have Glass-Steagall changed, Citigroup was given two years to divest itself of the Travelers insurance unit.

  On May 6, Weill and Reed unveiled the new management structure to the public. In addition to the arrangement at the global corporate bank, Bob Lipp and Bill Campbell would run the company’s consumer business, and the Travelers veteran Tom Jones would run asset management.

  • • •

  Perhaps if the markets had stayed calm, all the players within Citigroup might have been able to maintain their composure as they struggled to complete not one but two mergers—the Citicorp deal as well as the still unfinished Salomon integration. But the summer of 1998 proved anything but calm.

  Salomon’s fixed income arbitrage group, which used quantitative modeling to profit from temporary pricing anomalies between similar securities, had long been the company’s crown jewel. But in the spring of 1998, it began suffering increasingly frequent losses as the markets remained skittish and relatively illiquid. By the end of April, in fact, it had already lost $200 million for the year.

  Although Salomon had for years delivered outsize profits on its arbitrage bets, Dimon and Weill began to sense that maybe the jig was up. With a number of defections from Salomon, most prominently John Meriwether and his team at the powerful hedge fund Long-Term Capital Management, other firms were using similar if not identical strategies, with the inevitable result that the arbitrage opportunity was shrinking. This, in turn, meant that the risk-return trade-off on the unit’s big bets was heading in the wrong direction.

  The arbitrage group’s members had also done a surprisingly poor job of ingratiating themselves with their new bosses. In his insightful indictment of financial innovation, A Demon of Our Own Design, Richard Bookstaber recalls a series of meetings in which the heads of Salomon’s proprietary trading—Rob Stavis, Costas Kaplanis, and Sugar Myojin—were tasked with making Weill, Dimon, and Travelers’ CFO Heidi Miller comfortable with their strategies and positions. At the end of a meeting in the anteroom between Weill and Dimon’s offices on the thirty-ninth floor of the Greenwich Street building, Stavis for some reason took it upon himself to demand that everyone—Sandy Weill and Jamie Dimon included—return the presentation books he’d used, given the proprietary nature of the information within. Dimon turned and threw his on the table with a dismissive shrug. But Weill ignored the request and walked out of the room. The Salomon swashbucklers weren’t dealing with Deryck Maughan anymore; they were dealing with Sandy Weill and Jamie Dimon.

  Their new masters weren’t sure they even trusted the group. At the turn of the year, for example, both Weill and Dimon were getting nervous about Russia—its lawlessness, its nuclear threat, and the prospect that it might default on its debt. But their exhortations to draw down Salomon’s Russian exposure never seemed to be put into action. In a meeting with the arbitrageurs in June, recalls Bookstaber, Dimon was more forthright. Holding his hand up, thumb and forefinger nearly touching, he barked, “By our next meeting, I want our Russia exposure down to this.” (His instructions were followed, and it proved a prescient decision. In July, Russia nearly defaulted, saved only by a $22.6 billion bailout organized by Secretary of the Treasury Bob Rubin, and on August 17, Russia actually defaulted on its domestic ruble debt.)

  The last
straw came soon thereafter, when the fact emerged during a risk management meeting that the unit had somehow found itself with an outright bet on the direction of the yen worth $1 billion. Dimon had previously told the group it was forbidden to make outright bets, and was to restrict itself to relative value trades—buying one security while selling short a similar one simultaneously—and he was understandably furious. At this point, the group’s fate was sealed. The group members were completely ignoring their boss’s orders, or they were incompetent. Either way, they had lost the faith of Travelers’ top management.

  On the Monday of the July Fourth weekend, Dimon summoned the arbitrage group and informed its members that it was being disbanded. According to Bookstaber, Dimon was succinct. “The following will be released to the press in five minutes,” he said, before reading a press release announcing the group’s dissolution. Members of the unit had one month to decide if they wanted to stay on at the company or take a severance package. And then he left. The headline of a column by Floyd Norris of the New York Times put it simply: “They Bought Salomon, Then They Killed It.”

  Dimon offers a nuanced explanation of the decision to close the unit down. He and others realized, he says, that the firm was duplicating trades in different business units. One trade on the government bond desk—so-called “on the run versus off the run Treasuries”—was replicated by the proprietary traders. Likewise in mortgages. Likewise in municipal bond arbitrage. And the proprietary desk was taking far larger gambles with the duplicate trades. “You get the guys in the other businesses that are working 60-hour weeks and the guys on the prop desk working 35 hour weeks,” he recalls. “But who got preferential access to our balance sheet? The guys in arbitrage. Who got to use the shorts? Who got to use the hard-to-borrows? Who got the cheap financing? But it was the same trade over here. The other flaw was that the prop desk was motivated by the structure of their compensation deals to maximize their bets. Thank God we closed it. We lost more than $700 million, but it could have been multiples of that.”

  (Contrary to the image of Dimon as a perpetual cost-cutter, at the same time that he was reeling in the fixed income derivatives exposure, he was aggressively investing in building out Salomon Smith Barney’s equity derivatives business. According to Bob DiFazio, cohead of the company’s equities business, the business went from virtually zero revenues in the beginning of 1998 to a $400 million annual run rate shortly thereafter. Though Dimon wasn’t around to enjoy the fruits of his labor, the unit was up to a $1 billion run rate by late 1999.)

  The unwinding of the fixed income unit’s positions contributed to the market’s instability that summer, especially at Long-Term Capital Management (LTCM), which, having been founded by Salomon veterans, had on its books many of the same positions that Salomon was now vigorously selling. In fact, Dimon recalls, the Salomon arbitrage unit had only 10 material trading strategies it played around with. “With all the bullshit around it, there were just 10 trades,” he recalls. “And they were the same 10 trades that LTCM had.” (LTCM, in fact, was jokingly referred to by the Travelers crowd as “Salomon North.”)

  Long-Term Capital Management wasn’t just any old hedge fund. Through the magic of leverage, it had turned $5 billion of capital into a $100 billion giant, and its sudden shakiness posed a threat to the entire market.

  John Meriwether, the head of LTCM, called Dimon on August 25, proposing that instead of continuing to sell its positions, Dimon might continue combining the remnants of Salomon’s arbitrage group with LTCM. He was rebuffed, in part because Sandy Weill wasn’t partnering with any hedge funds, let alone the teetering LTCM. The result was ironic. By avoiding doing business with LTCM, for fear of the hedge fund’s instability, Weill and Dimon destabilized the entire market, endangering their own firm in the process. All of Wall Street was about to find out what traders meant by the well-known maxim that relative value funds “eat like chickens and shit like elephants.”

  • • •

  Dimon and Maughan, who had been openly hostile before the summer, were now engaged in full-scale warfare. Salomon was getting destroyed in the bond markets, and Dimon criticized Maughan at every turn. Although he himself had long enjoyed a special status as Sandy’s favorite, Dimon disparaged Maughan’s apparent attempts to ingratiate himself with both Weill and Reed.

  Dimon also avoided Weill as much as possible during this time, choosing to stay primarily in his downtown office at Salomon Smith Barney in Tribeca, instead of the Citigroup Center headquarters in mid-town. When Weill showed up in the Salomon Smith Barney offices, Dimon showed his resentment of Weill’s presence. Maughan, on the other hand, was often found hanging around Weill’s office in the Citigroup building, even though he had no role in the corporate group. “Maughan jumped in Weill’s back pocket from the get-go,” recalls one staffer.

  According to Weill, Reed also began to see Dimon in an increasingly negative light. Reed had once viewed Dimon as more of an intellectual peer than Weill—going so far as to invite Dimon and Judy to his home for dinner, as well as giving the younger man books and inviting him on a business trip—but now he began to be increasingly put off by Dimon’s “constant carping.”

  In late August, when concerns over LTCM were on the front burner, Weill was worried that the company’s exposure to hedge funds might put the merger—which had yet to close—in jeopardy. Weill demanded a meeting at Salomon Smith Barney to review the company’s lending to various hedge funds. He wanted to reduce the number the company did business with from 500 to just 20. After originally trying to avoid a meeting altogether, Dimon reluctantly agreed to one in his own office, which was attended by Weill; Travelers’ senior vice president of global development, Todd Thomson; and Salomon Smith Barney’s fixed income head, Tom Maheras, and its chief risk officer, Dave Bushnell.

  While the other four sat at a conference table in his office, Dimon purposely stayed behind his desk, a move one participant interpreted as “an obvious ‘fuck you’” to Weill. Maheras led the group through a number of the firm’s exposures, but when he declined to address the specific LTCM exposure—probably at Dimon’s behest—Weill went ballistic, and appropriately so. With much of Wall Street exposed to LTCM, the fund’s failure could prove catastrophic. “But Jamie was so caught up in the idea that Sandy was in his shorts, he couldn’t have made a sensible judgment,” remembers the participant. (Dimon’s supporters say that this wasn’t the case—that Weill didn’t even understand the details and was just being difficult.)

  It was then clear to most that the professional marriage had reached the breaking point. Each man had his own list of 50 or so grievances about the other. Dimon was warned by several colleagues, including Bill Campbell, Bob Lipp, and Arthur Zankel, that he needed to tone it down, that he was dancing too close to the edge. Dimon told all three men that he would make an effort to dial back his behavior, but he proved unable to do so in the end.

  Making matters worse, the company’s missteps were piling up. Despite its early selling, Salomon was taking a beating with the rest of the market, and had experienced about $360 million in trading losses through August. Travelers stock stood at just $30, about 40 percent below the price on the day the Citigroup deal was announced.

  • • •

  In the short term, however, Weill and Dimon’s personal issues took a backseat to the crisis brewing at LTCM. John Meriwether, who just a few months before had been one of Wall Street’s favorite clients—doling out fees of more than $100 million annually—couldn’t find a shoulder to cry on. As Roger Lowenstein points out in his riveting account of LTCM’s fall, When Genius Failed, “When you need money, Wall Street is a heartless place.”

  In a series of meetings at the Federal Reserve Bank of New York—meetings eerily foreshadowing those that would accompany the failure of both Bear Stearns and Lehman Brothers a decade later—Wall Street’s top bankers tried to find a way to save LTCM, or at least save themselves in the ensuing market carnage. Weill attended one meeting,
but Dimon and Maughan were the company’s representatives in the final hours.

  On September 23, 1998, 14 banks agreed to a capital infusion of $3.625 billion to keep LTCM from collapsing. All of Wall Street, it seemed, was on the hook—Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, UBS, Société Générale, Lehman Brothers, and Paribas—save for one glaring exception: Bear Stearns. Phil Purcell, then head of Morgan Stanley, is said to have blurted out, “It is not acceptable that a major Wall Street firm isn’t participating.” Merrill Lynch’s chief, Herb Allison, agreed with this sentiment, asking Jimmy Cayne, the macho head of Bear Stearns, “What the fuck are you doing?” Cayne responded bluntly, “When did we become partners?”

  The Federal Reserve was second-guessed for intervening in the capital markets, but it did stick to its historical prohibition against lending to nonbanking institutions. The Fed didn’t bail out LTCM; the rest of Wall Street did. But it nevertheless crossed a line that had lingering ramifications a decade later, when Wall Street once again teetered on the edge. Orchestrating the bailout of LTCM was the original sin when it came to so-called moral hazard. The government had stepped in to facilitate the rescue of a bunch of capitalists gone mad. The next time that happened, Jamie Dimon would play a central role.

  In retrospect, one can argue that by shutting Salomon’s fixed income arbitrage desk, Weill and Dimon shot themselves in the foot; the unit’s liquidation made it nearly impossible for LTCM to find buyers for many of the same positions in that summer’s turbulent markets. “Who,” points out Richard Bookstaber in A Demon of Our Own Design, “wants to buy the first $100 million of $10 billion of inventory knowing another $9.9 billion will follow?” In other words, in trying to trim its risk, Travelers just might have sent the entire market into a tailspin. Worse, once LTCM began begging for help, it was forced to open up its books to competitors, some of whom proceeded to ramp up their trading against the fund’s positions, further crippling the market.