Last Man Standing

by Duff McDonald

  He also changed rules he found ridiculous. At an early executive meeting, he walked into the conference room with a cup of coffee in his hand. The old First Chicago building was decorated with a lot of white carpets, and one executive told their new boss that no coffee was allowed in the conference rooms. Dimon couldn’t believe his ears. “I looked at my coffee, I looked at him, and I said, ‘Well, it is now.’”

  This style took some getting used to for veteran Bank One executives. One compared speaking to Dimon to “drinking from a fire hose.” This is not an unusual reaction. His is a manner of speaking that must be experienced to be appreciated. Dimon is not, as the Greek historian Plutarch might have observed, the kind of man who saves his breath to cool his porridge.

  Dimon later said his most serious oversight during his first 18 months was that it took him precisely that long to realize that Bank One’s branches were open, on average, for two fewer hours than its local competitors. With $10 billion and 35,000 employees invested in the retail business, he couldn’t believe that he hadn’t noticed such a simple fact. But what bothered him even more was that no one had bothered to tell him. That, he said, was a sign that the company’s DNA was flawed.

  When he issued a diktat that the banks stay open for longer hours, he was told that the move would kill morale. “Tough,” he replied, “this is what we do.” His new colleagues came to realize that although Dimon was sincere about open and honest debate, he was also unafraid to draw it to a close and make an unpopular decision. “You need people who will argue and fight but at one point, say, we’re going to take the hill,” he told an audience in late 2008. “Some debates are chicken or steak. It becomes time to eat.”

  Dimon disdained the chronic hiring of consultants, and cut the practice back to the bare minimum. James Crown—whose family had a significant stake in Bank One—remembers one instance when an accounting consultant gave a “long-winded and pompous and hard-to-follow presentation” that left him thinking, “Maybe it’s just me. Maybe I’m the only one who didn’t get it.” But Dimon felt similarly. “That was a terrible presentation,” he told the assembled group after the presenters had left. “This is why I hate consultants.” He picked up the phone and called the partner who had just departed, leaving a message in which he said not to bother sending a bill, because the presentation had been a waste of time. A few minutes later, he called back and said, “The call I just made—I wasn’t kidding. I’m not paying for it.”

  He eventually tossed out consultants from Trammel Crow, which at one point had had 50 people working in Bank One’s offices. In 2002, he eliminated a $2 billion outsourcing deal with AT&T and IBM that McCoy had signed in 1998. Although he saw savings down the road, this move wasn’t a decision driven by short-term financial gains. Dimon considers information systems one of the core competencies of a financial services company, and he thought the function (and any associated information technology strategy) belonged in-house.

  (Dimon is vocal about his antipathy toward much of the consulting used by large corporations today, with the notable exception of McKinsey & Co. “It’s substitute management,” he says. “A Good Housekeeping seal of approval. It’s political, so if you make a decision you can say, ‘It’s not my fault, it’s their fault.’ I remember at Citigroup when we hired a consulting firm to do a study about how our capital was deployed. I thought, ‘What is wrong with us? Shouldn’t this be the job of management? Shouldn’t we understand capital?’ I do think consultants can become a disease for corporations, and I don’t say that lightly, because I really do believe it. We do still use smart people to do consulting for us. But it has to be with a very senior person and there is no phase two. By that, I mean at the end of the project, I have the brain and they have the money. I don’t need anyone to implement anything. That’s a joke. You can’t have outside people implement stuff inside companies. It doesn’t work. And by the way, if that’s going on, what the hell are your own people doing?”)

  Dimon knew how to play hardball with customers, too. He told nearly 1,000 corporate borrowers that Bank One would no longer serve them if they didn’t broaden their relationship with the bank beyond loans. Partly as a result, the corporate loan portfolio shrank by about $50 billion. He disliked lending money for rapidly depreciating assets like cars, and largely took Bank One out of the auto lease business. He took $4.4 billion in write-downs and loan loss provisions in 2000, and the company ended up posting a loss of $511 million for the year.

  Ever the conservative, Dimon boosted the company’s allowance for credit losses to 2.4 percent, up from 1.4 percent in 1999. While Bank One’s tier 1 capital ratio—the most-watched measure of a bank’s balance sheet strength—slipped from 7.7 percent to 7.3 percent that year, Dimon had it back at 10 percent by the end of 2003.

  He also introduced what he referred to as “waste-cutting” initiatives, his preferred term for cost-cutting. Employees were paid $1,000 for money-saving ideas. He cut executive perks to the bone, including country club memberships, car services, auto leases, supplemental pension programs, matching gift grants, and even magazine subscriptions. A story in Money magazine in 2002 reported that the number of newspaper subscriptions paid for by the company incensed him, and that he told one executive, “You’re a businessman. Pay for your own Wall Street Journal.” This was yet another “Weillism” that dated from Commercial Credit. But Dimon also did things that Weill never would have done, such as cutting the company’s annual entertainment junket at the Masters Golf tournament because of the famous golf club’s refusal to admit women. (At Bank One and later at JPMorgan Chase, he also cut funding for the Boy Scouts because of that organization’s ban on gay scouts.)

  He assured executives that getting rid of these entitlements would eventually make them all better off when the company started to do well again. It was a brave move, one that risked more defections than Dimon could handle in the short term. But it had the desired effect of disrupting the company’s complacent culture. “Leaders emerged,” Dimon said in late 2008. “Although some people hate your guts for the rest of your life.” He also restructured the bank’s options so that they expired in six years instead of 10—a classic Dimon move. If you wanted to be part of his team, the message went, you needed to be invested in the here and now.

  The first annual report that Dimon wrote at Bank One, in February 2001 (for the year 2000), was a laundry list of problems identified and solutions implemented. Writing about the need for a fortress balance sheet, the necessity of keeping risks reasonable relative to capital deployed, and the benefits of performance-based compensation, he also laid out a grab bag of management philosophies that made him sound like the Warren Buffett of banking.

  “Problems don’t age well; denying or hiding them guarantees that they will get worse” was one. “Bureaucracy, silos, and politics are the bane of large corporations; they must be combated vigorously and continually” was another. And then an example of a heresy with regard to the modern religion of excessive executive compensation: “This company cannot and will not pay the senior people more when the company does worse.”

  Buffett himself wrote Dimon a note congratulating him on the letter, and saying it was “just about the best I’ve ever witnessed.” To this day, Dimon keeps a framed copy of that note in his office.

  “Jamie writes a great letter,” says Buffett. “He writes it like he would write it to me if I owned 100 percent of the bank. It’s a very sensible and literate letter from a manager to his owners. You can’t find many like that. You particularly don’t find them in financial services.”

  • • •

  Back at Citigroup, there was high drama in the executive suite. On February 27, 2000, the company’s board met to consider the long-term leadership of the company. Reed asked the board to force both he and Weill to retire—as per the agreement he claimed the two men had made—and to choose a new CEO to run the firm. Weill denied having made such a deal, and pushed for Reed to be shown the door. Bob Rubin, who
had been brought on board by Weill, backed—guess who?—Weill. After eight hours of debate, Weill was appointed sole CEO of the firm.

  The next day, Citigroup announced that Reed would retire in April; he was the latest of Weill’s “partners” to be liquidated. Weill himself committed to retire in two years. Because Jamie Dimon was still nominally a free agent at this point, speculation erupted that he might return to the company he had helped build. But Dimon’s deal just a month later with Bank One scotched that possibility.

  Although relations between Dimon and Weill had thawed since their reconciliation at The Four Seasons, the two families had yet to bury the hatchet. But the two men soon showed that they could swallow their pride when it came to important women in their lives.

  Over drinks in New York one day in late 2000, Weill told his erstwhile protégé that Joan missed Themis. The next night at dinner, Langley writes, Dimon’s mother told her son that she, too, missed Joan. Dimon decided to call Joan the next day and urge a rapprochement. The two women soon exchanged letters, followed these with lunch, and then had a double date with their husbands, just like old times. Except that it wasn’t, really. Yes, they were back on speaking terms, but the family-like closeness they once shared would never be resumed.

  Weill held tightly to his new throne. In 2001, he was named to a three-year term on the board of directors of the Federal Reserve Bank of New York. But the subject of Jamie Dimon remained a sore spot. In 2001, when Thomas Hanley, an analyst at Friedman, Billings and Ramsey, postulated that Citigroup might buy Bank One to bring Dimon back as Weill’s successor, Weill was not amused. He told his board that they were not to consider anything of the sort.

  • • •

  Making his new job at Bank One that much harder was the fact that Dimon was working in the midst of an economic bust. In April 2000, less than a month into his tenure, the Internet bubble popped. A sharp falloff in business investment followed, slowing economic growth by half a percentage point. Still, the economy shrank by only 0.03 percent during the ensuing recession. That’s because the Federal Reserve hastily cut interest rates from 3.5 percent to 1 percent to revive the economy, a move that is now commonly seen as one of the major contributors to the credit bubble that finally exploded in 2008. But back then, the dot-com fallout, combined with the 9/11 terrorist attack, had most observers lauding the Fed’s chief, Alan Greenspan, for his actions.

  At Bank One, though, financial results rebounded—the company posted net income of $2.6 billion during 2001, versus its loss of $511 million the year before. Dimon’s moves had impressed the market, which now expected a transformative deal. Known alternatively as the “Jamie premium” and the “Dimon effect,” the sheer force of Dimon’s reputation added value to the company.

  The analyst Mike Mayo later called Dimon the “$7 billion dollar man,” his estimate of the effect of Dimon’s personal popularity on the company’s value. But could it be sustained? Some analysts speculated that the continuing problems at First USA might make the stock a “value trap”—one that appears cheap but is actually indicative of a company that’s falling apart.

  Consolidation in financial services continued apace. In January 2001, Chase Manhattan bought J.P. Morgan for $28 billion. In April, Wachovia purchased First Union for $13 billion. Dimon played small ball by comparison; his only significant deal of the year was a completely unexciting purchase of $6.2 billion in credit card receivables from Wachovia. In June, he closed Wingspan.com, the company’s sputtering Internet banking unit.

  The September 11 attacks affected Dimon as much as any American. He established a disaster relief fund at the Bank One Foundation, promising to match all employees’ contributions up to a total of $1 million.

  Then, in December 2001, came Enron’s bankruptcy, which spurred a new wave of popular resentment against the financial community, picking off big firms one by one. In 2002, investigators concluded that JPMorgan Chase’s bankers had gotten into bed with Enron, helping the shysters in Houston to disguise about $2.6 billion in loans through the use of off-balance-sheet entities. In July 2003, the company paid a $135 million fine to settle charges of aiding and abetting Enron’s scams. Citigroup confronted its own Enron in June 2002, with the collapse of WorldCom and the subsequent revelations that Citigroup’s analyst Jack Grubman and Sandy Weill had exchanged a series of messages implying that Grubman would maintain a “buy” rating on WorldCom, despite his reservations, if Weill helped get Grubman’s children into the prestigious 92nd Street Y nursery school on New York’s upper east side. In Wall Street parlance, Grubman had breached the “Chinese Wall.”

  Weill denied making any such deal with Grubman, and in September he sacrificed Mike Carpenter on the altar of WorldCom. The tabloids weren’t accepting any of Weill’s denials, however, and continued to have a field day with the 92nd Street Y story—the first of a number of cracks in the foundation of Weill’s reputation. Despite the arrival of a hagiography about Weill—King of Capital—in May 2002, and the fact that Chief Executive magazine, purveyor of puff pieces for the narcissistic CEO, named him “CEO of the Year” in July 2002, the more august Wall Street Journal ran a story in October 2002 suggesting that his interests had “diverged” from Citigroup’s and criticizing him for lax oversight.

  Dimon, incidentally, had negotiated Grubman’s $20 million-a-year contract in tandem with Steve Black and Deryck Maughan before leaving the firm. They had been nervous about a partnership offer Goldman Sachs had been dangling in front of Grubman, and they had decided to keep him despite the ridiculous pay package and the possibility of abuse. But both Black and Dimon insist that the “Chinese Wall” remained un-breached during their tenures at Salomon Smith Barney, and that things got fuzzy only after they left. (Their protestations notwithstanding, Salomon Smith Barney was no paragon of high-minded principles in the 1990s. As was true of every investment bank at the time, the company’s research analysts got cozier with their investment banking counterparts than one might wish.)

  Still, once the two men were gone, some internal discussion revolved around the idea of having the research department report to the investment bank, a discussion Dimon says never would have happened if he had still been around. Weill also attended a number of meetings between Grubman and the firms he covered, another no-no that Dimon says he would not have considered.

  The Citigroup board began considering a future beyond Weill, and pressed him on his retirement plans. In The Real Deal, Weill is surprisingly forthright about his reaction to hearing rumors than Dimon had put out feelers about a return to the firm, either on his own or through a merger with Bank One—rumors Dimon himself emphatically denies. “I adamantly opposed [it],” Weill wrote, “and reminded the succession committee that he had long ago burned his bridges.”

  Interesting words, coming from the man who lit the match that set those bridges on fire, but not very surprising. “With Sandy, you don’t return,” mused Frank Zarb in 2008. “People who leave Sandy Weill are never invited back. I mean, look at the history. Try to find another one, other than me.” It’s also hard to see which bridges Dimon himself had burned, save the one between him and Weill. Dimon is a friend of and friendly with the majority of his former colleagues, one exception being his old boss.

  Later, the emergence at Credit Suisse First Boston of the so-called “friends of Frank”—a list of more than 300 people and institutions who received preferential allocations of pre-IPO shares in hot technology companies from the hotshot banker Frank Quattrone—evoked a similar mini-scandal from the 1920s, when such a list of “preferred” friends came to light at J.P. Morgan and Company. The practice was known as “spinning,” and the investigation ensnared Citigroup as well. Quattrone was ultimately cleared of any actual crimes in federal appeals court in New York, but the extralegal conclusion was inescapable: Wall Street remained a rigged game.

  Throughout 2002 and 2003, New York’s attorney general, Eliot Spitzer, and his crusading investigators were knocking on nearly every d
oor on Wall Street. Merrill Lynch, for its part, paid a $100 million fine to shake the monkey of Henry Blodget and his duplicitous Internet ratings off its back. Citigroup paid a $300 million fine in April 2003. In all, 10 investment banks paid $1.4 billion in fines to the state to remove the threat of public trials.

  Dimon remained largely silent on most of the scandals, save for a few public pronouncements decrying laxness in the United States’ rules for disclosure and accounting. When Bank One’s name came up in the mutual fund trading scandal in 2003, Dimon removed the head of mutual funds, Mark Beeson, and then called Spitzer himself and apologized, against the advice of his counsel. Dimon told the attorney general that if anyone at Bank One stonewalled him, he should let Dimon know personally. In 2004, Spitzer allowed the bank to pay a fine of $100 million to settle all charges. Dimon’s distance from New York certainly didn’t hurt. And so, unlike most of his peers, his reputation suffered nary a scratch during the period. As Arthur Levitt, former chairman of the SEC, later told Fortune, “Jamie Dimon is the un-Enron.”

  • • •

  By 2002, Bank One was on firmer footing, and Dimon was back in the hunt. “A weak economy creates opportunities for strong companies,” he wrote in the 2001 annual report. “I believe we are in a position to take advantage of emerging opportunities.” By the end of the year, $1.5 billion had been slashed from the company’s cost base. He continued to write down poorly performing assets, taking $5.81 billion in charges for the year. Dimon had refused a bonus for his work in 2000, but he accepted $3 million in 2001. Along with a restricted stock award and options, his pay package came to $18.1 million.

  Those who knew him well also saw an emerging personal maturity. Dimon had always been highly regarded for his intelligence and drive, and had served as CEO of one business or another at Travelers, but he had always been the number two person. Sandy was the one going out and spending time with other CEOs. Sandy was the one coming up with the strategic vision. Of course, he would throw 10 ideas against the wall and Jamie would be the one to tell him which ones were smart. But that’s very different from doing it all yourself. At Bank One, Dimon learned what it is to be a real boss.