Merger savings rose to $1.9 billion, and by the end of the year most of the targeted 12,000 layoffs were complete. In recognition of the power of technology to position the bank for the future, Dimon named the chief information officer, Austin Adams, to the firm’s 15-member operating committee. “Technology is to us what manufacturing is to General Motors,” he told a reporter, explaining that good information systems are a “moat” that protects a business from rivals.
Dimon finally managed to lure Frank Bisignano away from Citigroup. It wasn’t easy, as Bisignano had been running one of Citigroup’s largest business units, the global transaction services group; Dimon wanted him to take on a distinctly less glamorous role as chief administrative officer. Luckily for Dimon, Bisignano had always wanted to work with him again, and now that Dimon was back in New York, the time was finally right. “I’ll do whatever job you want me to do,” Bisignano told him. “As long as I have a voice, I’ll play whatever position you want.”
The slow disintegration of the Travelers culture at Citigroup was certainly on the minds of many who attended a reunion at Armonk that summer; Chuck Prince invited Dimon, Bob Druskin, John Fowler, Bob Lipp, and Joe Plumeri to join some old friends, including Willumstad and Weill, as well as new Citi employees such as the wealth management chief Todd Thomson and the chief financial officer Sallie Kraw-check. Dimon didn’t feel uncomfortable at all returning to the place where Weill had fired him seven years before. While the old hands were telling stories and cracking wise about their time together, neither Thomson nor Krawcheck seemed inclined to rib their boss, Prince, along with everyone else. The camaraderie and bonhomie that had once existed at Travelers was no more.
Earlier that year, in July, Dimon and Harrison had dinner at The Four Seasons, and Harrison said he would step down at the end of the year. And again, he was true to his word. On December 31, Dimon became CEO and president of JPMorgan Chase. At his first investors’ conference as CEO, his parents were sitting in the front row. “It was cute on one level,” recalls the analyst Meredith Whitney. “But also totally unorthodox.” (Shortly thereafter, Dimon eliminated any company spending at the Masters Golf Tournament in Augusta, Georgia, as he had done at Bank One. He’d had to wait at JPMorgan Chase, however, as Harrison was a member.)
Dimon wrote the letter to shareholders in the 2005 annual report, and it was as evocative of Warren Buffett as ever. (Todd Maclin says Dimon looks at writing this annual letter as the president does at writing the State of the Union address.) He stressed the need for “honesty,” “integrity and honor,” and doing “the right thing, not necessarily the easy or expedient thing.” This was writing for an audience, not just reporting results. And for good reason. Everyone was watching Jamie Dimon, waiting to see what he’d do now that he was completely in charge at JPMorgan Chase.
11. WINNING BY NOT LOSING
Friendly foreign ministers notwithstanding, Dimon inherited a company that had been losing its world-class cachet for decades. The merger with Chase Manhattan had done nothing to resuscitate it; in fact, it had the opposite effect. In The House of Morgan, the financial historian Ron Chernow writes that executives at J.P. Morgan had rejected entreaties from Chase as far back as 1953, out of fear that a merger would endanger the firm’s reputation for “haute banking.” Those fears proved valid.
This is not to say that Chase Manhattan had no pedigree of its own. Its earliest predecessor company actually predates J.P. Morgan & Company itself by nearly a century. After Alexander Hamilton founded the Bank of New York, the nascent state’s first commercial bank in 1784, he had the playing field to himself until 1799, when his political rival Aaron Burr founded the Bank of Manhattan. That bank’s predecessor, the Manhattan Company, had been one of the island’s first water companies; it used hollowed-out pine logs as its pipes. Burr took advantage of a legal loophole that allowed the company to invest its excess capital outside its primary business, and in the process founded the bank. Hamilton and Burr eventually settled their differences in a duel, and JPMorgan Chase owns the pistols they used. They’re displayed on the fiftieth floor of the Park Avenue headquarters and are worth an estimated $25 million.
A banker named John Thompson founded the Chase National Bank in 1877. He named his firm after Salmon P. Chase, who’d been President Lincoln’s secretary of the treasury as well as chief justice of the United States. Chase came to be called “the Rockefeller bank” because of its extensive ties to industrialist John D. Rockefeller. His grandson David joined the firm in 1946 and eventually took over as CEO. In 1955, after being spurned by J.P. Morgan, he and the chairman, John J. McCloy, merged Chase with the Bank of Manhattan, creating Chase Manhattan. In 1960, Rockefeller oversaw the construction of the bank’s downtown headquarters at One Chase Manhattan Plaza (technically, Liberty Street). At the time, it had the largest bank vault in the world.
Chemical Bank swallowed Chase Manhattan in 1996. Chemical had been on an acquisition tear of its own under the leadership of Walter V. Shipley, purchasing Texas Commerce Bank in 1986 and Manufacturer’s Hanover in 1991. (As with Chase, its roots predate that of J.P. Morgan & Company; it was founded in 1823 as a producer of chemicals including camphor and saltpeter.) Bob Lipp later served as a historical bridge between the Commercial Credit crowd and those he’d worked with at Chemical in the 1980s.
J.P. Morgan & Company had its roots in the “gilded age” of American finance. Founded in 1871 by J. Pierpont Morgan and the Philadelphia banker Anthony Drexel, the bank dominated the country’s burgeoning railroad industry, and soon became the most influential and powerful bank to corporate interests in the country. It went on to save the U.S. Treasury with an infusion of gold in 1893 and then save the New York Stock Exchange—and New York City itself—with an eleventh-hour deal that put an end to the financial panic of 1907 by assembling a syndicate to purchase $30 million in bonds from the city. At the company’s offices at 23 Wall Street at the corner of Broad and Wall (also known as “The Corner”), J.P. Morgan himself was more monarch than banker. According to Chernow, the creation of the Federal Reserve in 1913 was in part motivated by a desire to free the government from reliance on the House of Morgan. Nevertheless, just two years later, in 1915, the company made the largest international loan—$500 million—to the allies in World War I.
Never the largest bank in total assets, J.P. Morgan & Company distinguished itself by its influence and reputation as the lender of last resort. It was also the bastion of “first class banking in a first class way”—epitomizing the notion that bankers were not mere moneygrubbers but gentlemen.
By the time Dimon arrived, however, gentleman banking was an anachronism, and the institution seemed to have a much greater history than it did a future. JPMorgan Chase trailed both Citigroup and Bank of America in retail banking, and its investment bank was an also-ran to Goldman Sachs, Merrill Lynch, and Morgan Stanley. (The last of these, it bears noting, was the securities business spun off from J.P. Morgan & Company in 1935, following the passage of Glass-Steagall.)
“There is no way in which Dimon can sit back and say, ‘I want to be as good as Goldman Sachs in investment banking,’” wrote Euroweek at the time. “Except, of course, in his dreams.” Indeed, when Dimon took the reins of JPMorgan Chase, few expected him to restore the company to anywhere near its former dominance. His job was more widely seen as fixing a busted institution. In January, the Wall Street Journal ran an illustration of him carrying a ladder, hammer, and blueprints. It didn’t seem possible at the time that he might achieve the former by doing the latter.
• • •
The fuel of Wall Street is part hope, part reality. The market is driven not just by what’s actually happening but also by expectations of what might happen. When it comes to the future unknown, one of Wall Street’s favorite parlor games since Dimon first took over at Bank One is: What will Jamie buy next?
As 2005 came to a close, with the transfer of power from Harrison, the game began anew. In October, Fortune sugge
sted Dimon had “the urge to merge” despite the fact that he told the magazine just the opposite. “I would be extremely reluctant to do a deal with our current stock price,” he said. “Our people aren’t ready either. We need our 101st Airborne to do an acquisition, and they’re still on the ground putting together the mergers we’ve already done.”
Despite repeated denials, the chatter continued. Rumors centered on Bear Stearns and Morgan Stanley, either of which would plug gaps in JPMorgan Chase’s portfolio—both had substantial brokerage units as well as prominent prime brokerage businesses that serviced hedge funds.
But there would be no deals, and Wall Street turned its attention elsewhere, particularly to the booming housing market. Lenders all over the country were throwing money at homebuyers, and underwriting standards were in free fall. From just $492.6 billion in issuance in 1996, the mortgage market had grown to $3.1 trillion in 2003. Between 2001 and 2007, $15 trillion in mortgages was issued. If it seemed as though every other person was a real estate agent or a mortgage broker in 2005, that’s because they were. Just a few years after the dot-com debacle, America had embarked on yet another gold rush, but this time it wasn’t just in California—it was everywhere. Refinancings had climbed from just $14 billion in 1995 to nearly $250 billion by 2005. As Daniel Gross suggests in his book Dumb Money, “Houses were the new tech stocks, valued not so much for the income they could produce as for their rapid growth potential.”
In January 2006, Alan Greenspan stepped down as chairman of the Federal Reserve. He was given a send-off befitting a heroic general. Never mind that at the tail end of his 18-year tenure, an asset bubble of historic proportions was looking as if it would pop any minute. That was a problem for later. President George W. Bush appointed the Fed governor Ben Bernanke to be Greenspan’s replacement. One of Bernanke’s first significant moves was to lift the restrictions on Citigroup that prevented it from making further acquisitions until it had upgraded its “compliance culture.” He also actively resisted the regulation of hedge funds in May 2006, saying it would “stifle innovation.”
Wall Street extracted profits from the housing boom largely through securitization—firms bought all the mortgages they could get their hands on and then bundled them into packages of bonds that they sold to investors. As the most successful version of financial alchemy in history, securitization also planted the seeds of the housing market’s eventual implosion, by removing any reason for a lender to care about whether the borrower would be able to repay the loan, as the lender would have sold the loan off into the secondary market anyway. But it took time before that problem would become manifest. Buoyed by rising home prices—by 2006, 86 percent of refinancings included homeowners borrowing even more money than they had previously owed—Americans spent widely, boosting the stock market in the process. By mid-2006, stocks had climbed more than 50 percent from the market bottom in 2002. It was a self-reinforcing cycle of borrowing and consumption.
Many of JPMorgan Chase’s competitors were focused on growth for the sake of growth, and the market was rewarding them for it. Citigroup, which had yet to find its footing since its scandals earlier in the decade, found its new motivating principle in a concept known as “operating leverage”—the ability to grow revenues faster than expenses, thereby increasing profits. This concept is sound in theory—profitable growth is the goal of any manager—but CEO Chuck Prince’s obsession with the notion led Citigroup to start growing its balance sheet indiscriminately, with managers piling on new assets that earned the bank even the slightest of “spreads,” or profit. In rising markets, such a strategy can seem brilliant. But if capital should become scarce and your debt can’t be rolled over, the results can be disastrous.
Although JPMorgan Chase was in the game on several fronts—it aggressively grew its mortgage business, its home equity lending, and its leveraged loan book (in which it syndicated giant loans to finance private equity deals)—Dimon remained preoccupied with preparing the bank for a time when the froth came to an end. “You don’t run a business hoping you don’t have a recession,” he liked to say; and he spent countless hours on scenario planning, with an emphasis on bear-market possibilities. He remade the company’s information systems so that he could get the reports he needed when he needed them. This allowed him to make rapid strategic decisions, and also gave him another way to hold his people accountable. At Citigroup, accountability was in short supply, but at JPMorgan Chase, it was getting more abundant. “What you could see was a consistency to performance, rather than someone chasing the flavor of the month,” recalls Marge Magner, Dimon’s former colleague at Travelers. “That, and a respect for the balance sheet that’s unwavering.”
In nearly all respects, the paths of JPMorgan Chase and Citigroup diverged. In 2005, Chuck Prince effectively forced out both Magner and Willumstad. A short time later, they launched Brysam Global Partners, a private equity firm that would invest in retail financial services companies. Their biggest seed investor was Jamie Dimon, via JPMorgan Chase. Firing people is one thing; driving them into the arms of your closest competitor is another. When he retired from an active role at JPMorgan Chase in 2008, Bob Lipp joined Magner and Willumstad at Brysam.
“We think [the business] should be prepared for adverse times,” Dimon told analysts in a conference call. “In fact, we think if you’re strong in adverse times that that puts you in the position where you actually can do more interesting things, either hire people or buy other companies that are having a tough time.” Dimon and his team were constantly modeling what might happen if there were 10 percent unemployment, for example, or a 10 percent move in currency exchange rates. “Run your business knowing it might be sunny, it might be stormy, or in fact it might be a hurricane,” he said. “And be honest about how bad a hurricane might be.” The goal was not only to earn high returns at the top of the cycle but also to avoid giving them back at the bottom.
The media responded to the message, at least in part. In April, Fortune magazine’s authority on Dimon, Shawn Tully, wrote a cover story headlined “The Toughest Guy on Wall Street” that extolled the virtues of a certain kind of anal micromanagement. In the article Steve Black pointed out, “He jumps into the decision-making process. If you just want to run your business on your own and report results, you won’t like working for Jamie.” (Inside JPMorgan Chase, there were snickers at the suggestion that Dimon was really all that tough. “My secretary wouldn’t stop giggling about it,” he recalls.) Time magazine followed up by putting him on its 2006 “Time 100” list of the world’s most influential people.
(On balance, the coverage of Dimon in the press over the years has been overwhelmingly positive—the Wall Street Journal has called him “reliably quotable.” That’s due in large part to the fact that reporters find his candor refreshing. “When I talk to the press, I may not answer all their questions,” he says, “but I’m accessible. I may tell them that something is none of their business or that it’s privileged information. But one thing I don’t do is lie to them.”)
Analysts and investors, however, weren’t quite so jazzed by the company’s cautious tilt. The chief financial officer, Mike Cavanagh, recalls being harangued by investors demanding a reason why they should bother with JPMorgan Chase stock when they could own “best-in-class” competitors like Goldman Sachs in investment banking or American Express in credit cards—companies that were two to three times as leveraged as JPMorgan Chase. And analysts were losing interest in merely watching costs go down. They craved big news, like an acquisition or significant gains in market share. “He told us to expect big progress in 2005,” the CIBC analyst Meredith Whitney told Fortune. “Now we won’t see major improvements until 2007.”
JPMorgan Chase’s quarterly calls became known for their regularity. The presentations to investors, used during quarterly conference calls, have been largely the same since the beginning of 2006, right down to the fonts and colors used to highlight the company’s results. Mike Cavanagh, who prese
nts the company’s financial results along with Dimon, admits that little effort is put into making them entertaining. “The routine is nice and boring,” he says. “The information isn’t boring but the way we go about it is painfully monotonous, even to me. We set up the presentation so people can compare profits brutally to natural competitors in each of our businesses. It causes us to need to fall on our sword when it’s obvious that the numbers say so. We’re not trying to figure out how to tell the story differently every three months.”
Still, the company’s stock was stuck in neutral, while other firms’ stocks were on the move. From the beginning of 2005 through mid-2006, JPMorgan Chase shares rose just 7.7 percent, while Goldman’s had rocketed 44.6 percent. Shares of Morgan Stanley were up 13.8 percent, while Wells Fargo—which could claim no “Dimon effect”—had edged out JPMorgan Chase with a 7.9 percent gain. Wall Street was bored with Jamie Dimon.
• • •
By the fall of 2006, the U.S. housing and mortgage markets had gone off the rails, but Wall Street seemed not to notice or care, shrugging off some analysts’ warnings of impending disaster. The bull market in real estate had essentially unshackled itself from the underlying reality. No one wanted to hear the bad news, so few did.
Much of Wall Street, in fact, doubled down just as the real estate market was reaching its peak. In September 2006, Merrill Lynch paid $1.3 billion to buy the subprime lender First Franklin Financial. A month before, Morgan Stanley had spent $706 million for Saxon Capital, another subprime lender. Subprime loans had risen from $145 billion annually in 2001 to $625 billion in 2005, accounting for 20 percent of all issuance. Wall Street was paying little attention to where loans came from—firms just wanted the raw material for their mortgage securitization assembly lines.
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