Last Man Standing

by Duff McDonald

  JPMorgan Chase stock fell 15 percent in August as investors pondered whether its—or any bank’s—business model was the one to bet on in a market gone bonkers. The equity analyst Dick Bove put the concern succinctly: “Bill Harrison, J.P. Morgan’s CEO, repeatedly argued that the combination of a consumer finance bank with a capital markets company would be placing two contra-cyclical businesses together, defeating the cycle. Unfortunately, the first time this concept was tested, it did not work. Both cycles seem to be declining in tandem with each other. Moreover, by buying the failing Bear Stearns, J.P. Morgan may have accentuated the negative impact of the capital market downturn.”

  (In the midst of all those challenges, however, Dimon’s softer side once again made an appearance. When JPMorgan Chase’s vice chairman Jimmy Lee took his youngest daughter, Izzy, to Bermuda for a weekend of golf before she went off to college, the two arrived at their suite in the Mid Ocean Club to find a bottle of champagne and two glasses waiting for them. Alongside was a note that read, “There are two glasses here for a reason. She’s not too young to have a glass of champagne anymore. Have a great time with Izzy, Jamie.” Lee, who has spent a lifetime on Wall Street, was blown away. “I mean, what other Wall Street CEO does stuff like that?” he asks.)

  Dimon could not argue with the fact that the summer of 2008 was taking a toll. By that point, the company had eaten through all the equity of Bear Stearns and then some in its efforts to scale back the risk on its balance sheet. But he took issue with the suggestion that JPMorgan Chase was the wrong model for a large financial institution, especially when competing investment banks were scrambling to find steady sources of funding in a market that was woefully short on credit.

  What’s more, in a business centered on people and relationships, Dimon was sure he’d assembled the right team to navigate through the crisis. Fortune magazine agreed with that conclusion, and on September 2 ran a cover story titled “The Survivors.” The article was another in a lengthening list of stories that trumpeted JPMorgan Chase’s relative strengths amid weakening competition.

  In terms of the scale and complexity of their businesses, Black and Winters run an investment bank that’s bigger than Goldman Sachs, the credit card chief Gordon Smith runs a business that’s larger than American Express, and Jes Staley runs one of the largest asset management businesses on the planet. Other executives can make similar claims.

  The photo shoot for the story took place at The Cloister at Sea Island in Georgia during a management off-site. In 2004, a G8 summit meeting had been held at the resort, and The Cloister had kept the chair that President Bush had sat in during it. For one photo at the off-site—a photo that ultimately wasn’t used—the photographer asked Dimon to sit in this chair and the rest of the team to gather around him. Knowing the irritation that all the glowing, Dimon-centric media coverage caused his colleagues, he cracked wise. “OK, everyone,” he said when he sat down. “Look lovingly at me.”

  Such bonhomie masked a growing concern inside JPMorgan Chase that Dimon’s legend had, in fact, obscured the contributions of others. In the public eye, he was the firm, to a degree that was unusual even among the giant egos of Wall Street chieftains. What would happen to JPMorgan Chase when Dimon decided to leave? “The stock would drop 20 percent,” Bill Winters said in a Harvard Business School case study. “The myth of Jamie is the biggest misconception outside of JPMorgan Chase,” Steve Black added. “He’s as worried about it as anyone.” A number of executives have acknowledged that it could be frustrating to watch their boss get credit in the press for decisions they made and results they helped deliver.

  (Dimon does do his best to make sure his senior executives get the recognition they deserve. He pushes for stories in the media focused on them—not on him—and any time one of his team appears on the cover of a publication, he has the cover framed and sends the person two copies as gifts, one for the office and one for home. And at Sea Island, he refused to pose for any photos that were not group shots.)

  Lingering in the background of the summer’s turmoil were questions about the ability of Lehman Brothers to remain a going concern. Like Bear, Lehman had plunged headlong into the mortgage business over the previous decade, and also like Bear, the company was facing steep losses in its mortgage portfolio. After the Federal Reserve opened the discount window to investment banks in March, Lehman’s CEO, Dick Fuld, had told colleagues, “We have access to Fed funds. We can’t fail now.” Others, including an increasingly wary group of executives at JPMorgan Chase, weren’t so sure about that.

  As it had been with Bear, JPMorgan Chase was intertwined financially with Lehman Brothers, more than almost any other firm on Wall Street. Not only did it have counterparty risk on a number of trading positions; it was also Lehman’s clearing bank and Lehman’s so-called tri-party repo agent, meaning that JPMorgan Chase served as an intermediary between Lehman and a number of overnight lenders to the firm. The company was legally obligated to make sure those lenders were covered in terms of the collateral Lehman provided in exchange for its loans.

  Executives in J.P. Morgan’s investment bank first became antsy about Lehman’s collateral in June. The investment bank’s chief risk officer, John Hogan, called Lehman’s head of risk management, Chris O’Meara, and asked for $5 billion in additional collateral. Lehman dragged its feet, and not until August did it hand over a package of loans that it said was worth $5 billion. JPMorgan Chase’s executives disputed that valuation, and the debate was never actually resolved.

  By the time September rolled around, the JPMorgan Chase executives were even more nervous about Lehman’s collateral, and the company’s chief risk officer, Barry Zubrow, demanded another $5 billion. It was late in the day on Thursday, September 4, Zubrow recalled, and he was dressed and ready to head to the U.S. Open to watch a quarterfinal match between Andy Roddick and the Serbian Novak Djokovic. That $5 billion never made it to JPMorgan Chase.

  On Sunday, September 7, the government seized Fannie Mae and Freddie Mac, placing these giants—which held or guaranteed $5.4 trillion in mortgages—in conservatorship. Dimon was meeting with his operating committee in Washington when the news broke, and different groups of JPMorgan Chase’s executives had made calls on Secretary of the Treasury Hank Paulson and various leaders of the House and Senate. Dimon and Dick Fuld—Lehman’s CEO—had a brief conversation in which Dimon told Fuld that if the terms were cheap enough, his firm might be interested in providing funding by buying some preferred shares of Lehman. But he made no promises.

  On Tuesday, September 9, the investment bank’s co-CEO Steve Black—who was in Washington with Dimon—decided he needed to speak to Fuld as well. “Our intraday exposure was massive and we didn’t have enough collateral to support it,” Black recalls. “With what was going on in the markets, any rational human being would say, ‘Holy shit, that’s not right.’ So I called Dick and told him we needed more collateral to continue to be comfortable with Lehman. We even worked with them to create a mechanism so it didn’t have to come right out of their liquidity by agreeing to a three-day recall.” Black ultimately asked for another $5 billion, and after some haggling by Fuld, agreed to take $3 billion.

  Fuld was still largely in denial at this point, perhaps because the government had stepped in to help Bear, so why wouldn’t it do the same for Lehman if the situation came to that point? When Fuld spoke to Black on Tuesday, Black told him that one of his few remaining options looked to be to get a consortium of investors together to rescue the firm, as had been done for Long-Term Capital Management. But the Federal Reserve would need to get involved in herding those cats, and Black suggested that Fuld should be getting those conversations going as soon as possible. Fuld replied that such a move would be terrible for Lehman’s shareholders, and he didn’t see how he could go ahead with it. “Dick, no one is going to help you keep Lehman Brothers in business just to be good guys,” Black said. “They’re going to help you because it’s in their own self-interest. For that to
happen, your shareholders are going to have to pay the ultimate price.”

  “So then why should I do it?” asked Fuld. “I didn’t say you should do it,” Black replied. “But I’m telling you if you’re getting close to the brink, that’s what you should be thinking about.” Fuld told Black that he had been talking to Citigroup’s CEO, Vikram Pandit, about a possible investment from Citi, and that Citi had a team coming over to comb through Lehman’s books that night. Did Black want to send his own team? “I’ll send some people over,” Black replied, “but I don’t think there’s going to be anything we can do for you.” That evening the head of investment banking, Doug Braunstein, and the risk chief, John Hogan, went to Lehman and came back confirming Black’s inclination. There was nothing JPMorgan Chase would—or could—do.

  Fuld told Black that he had decided to “preannounce” the company’s third-quarter results the next day, including the fact that the investment bank forecast a $4 billion loss in the quarter. Black was flabbergasted. “They had nothing to say,” he recalls. “They had no plan. They got on the call and said that they didn’t need any new capital, but it was obvious that they did. And they had some plan to spin off their real estate holdings, but that wasn’t until February, and people needed to hear some good news right then and there. That was the beginning of the end.” The next day, credit default swaps on the company’s debt went for $800,000, higher than those of Bear Stearns right before its demise.

  On Friday, September 12, Jane Buyers-Russo, head of JPMorgan Chase’s investment banking team that covered financial institutions, called Lehman’s treasurer Paolo Tonucci and told him that JPMorgan Chase no longer felt comfortable lending to Lehman Brothers on an unsecured basis and that the company wanted the $5 billion Zubrow had requested, and wanted it now. Other customers, lenders, and trading partners were doing exactly the same thing, and by the end of the day, Lehman was facing exactly the same problem Bear had run into six months before. If it didn’t find an investor willing to give it a substantial infusion of cash over the weekend, it was likely to fail.

  That night, Lehman’s bankers huddled with their advisers at Lazard. The next morning, Wall Street’s chieftains were once again summoned to the Federal Reserve Bank of New York, and Dimon, Steve Black, and Barry Zubrow all participated in all-day meetings on both Saturday and Sunday with Goldman’s Lloyd Blankfein, Morgan Stanley’s John Mack, and Merrill’s John Thain. The goal was to either find a buyer for Lehman or concoct a solution that would soften the blow of a bankruptcy. “There will be no bailout for Lehman,” Paulson told the CEOs. “The only possible way out is a private-sector solution.”

  A logical buyer of Lehman was someone who wanted a major investment bank and didn’t have one. With Bear Stearns, JPMorgan Chase had two investment banks, and so there was no interest whatsoever coming out of 270 Park Avenue. “For us, the close-down would have been astronomical,” said Dimon, referring to the mass layoffs and shuttering of duplicate facilities such a deal would have necessitated. Although no one officially acknowledged that both Britain’s Barclays PLC and Bank of America were taking a very serious look at buying Lehman, Dimon, like everyone in the room, knew the scuttlebutt. What Paulson and Geithner asked the assembled group to consider was another solution in case no deal came to pass. Could the banks put together a financing facility, for example, or a loss-bearing facility of some sort that would allow Lehman to continue functioning?

  The meeting was nearly a reprise of the meetings about Long-Term Capital Management a decade previously. Three people were at both meetings—Dimon, John Thain (then representing Goldman Sachs), and Morgan Stanley’s chief, John Mack. The difference for Dimon was that in 1998, he was there as Sandy Weill’s emissary. In 2008, he was his own man.

  At one point, there was talk of a $70 billion financing package. At another, every CEO in the room was asked how much pain his company could bear if forced to eat a portion of Lehman’s losses. “Any one of us would have put in $500 million or some number like that, just to stop the event from happening,” recalls Dimon. “We knew it was going to be painful for the Street and for the world. The problem was, even if we’d gotten to some number, it wouldn’t have been big enough to stop it from happening. Because it was unwinding. People were pulling their money out.” Fortune later reported that Dimon chastised two reluctant participants, Bank of New York and BNP-Paribas: “You’re either in the club or you’re not. And if you’re not you’d better be prepared to tell the secretary why not.” Fortune reported that when John Mack later suggested letting Merrill fail as well, Dimon is said to have replied, “John, if we do that, how many hours do you think it would be before Fidelity would call you up and tell you it was no longer willing to roll your paper?”

  Bank of America eventually pulled out of the running for Lehman when it snapped up Merrill Lynch in a $50 billion deal that ended a 94-year run for the investment bank. The sole remaining buyer, Barclays, ran into regulatory headwinds and was forced to end its pursuit of Lehman on Sunday, September 14.

  Dimon called a board meeting that evening, and told the members that Lehman’s end was near. “We think we are going to be fine, in terms of our bank,” he told his directors, according to the author of Fool’s Gold, Gillan Tett. “But it’s going to be very, very ugly for others. Worse than anything that any of us have seen in our lives.” Shortly after midnight, the 158-year-old Lehman—which had been founded as a dry goods store and cotton trader in Montgomery, Alabama—filed for bankruptcy. “As long as I am alive this firm will never be sold,” Fuld had said in 2007. “And if it is sold after I die, I will reach back from the grave and prevent it.” He was right. It was not sold—it went bust. The world’s stock markets crashed as a result. The Dow Jones fell by 504 points on Monday, September 15. (Barclays later bought a number of Lehman’s assets, but not the entire firm.)

  Lehman’s failure set off a chain reaction. Reserve Primary Fund, a $64 billion money market fund that had been heavily invested in Lehman’s debt, broke the buck—its net asset value fell below the crucial level of $1 per share—and nearly collapsed, sparking mass withdrawals. About $500 billion was withdrawn from money market funds in the two weeks that followed Lehman’s collapse. On Tuesday, September 16, the government chose to rescue the insurance giant AIG with an $85 billion loan, just one day after Lehman had been deprived of such largesse. (By April 2009, the total amount thrown at AIG was $162.5 billion and climbing.) The firm was later mocked on Saturday Night Live for sending executives on a swank retreat just days after receiving the bailout funds. The next day, the Dow fell another 499 points. Investors, it seemed, were losing their last vestiges of faith in the system.

  On Friday, September 19, Hank Paulson and the Fed’s chief, Ben Bernanke, floated a bailout proposal to Congress that was not rejected out of hand. But the next day, Paulson sent a three-page document to the House of Representatives asking for hundreds of billions of dollars, with little or no detail as to how those funds might be spent. On Monday, Congress rejected the flimsy plan, sending the Dow Jones down another 778 points. That same day, Goldman Sachs and Morgan Stan-ley—the last two investment banks—found themselves the object of some very unwanted attention, and decided the time was ripe to convert to bank holding companies in order to secure permanent access to Fed funding in times of stress.

  With Goldman and Morgan Stanley choosing, in effect, to become banks, the era of investment banking had come to an end. Of the five major investment banks, three were now gone (Bear, Lehman, and Merrill) and two had thrown in the towel (Goldman and Morgan Stanley). An era of unregulated excess appeared to have come to a close.

  Despite all its collateral calls, JPMorgan Chase ended up undercollateralized after Lehman’s failure. (Lehman turned over $8 billion worth of securities in the final analysis.) Still, Wall Street churned with chatter about how Jamie Dimon had sent Lehman over the edge. Steve Fishman of New York magazine later reported that Fuld told an associate, “They drained us of cash. They fucked us
.” Another of Lehman’s executives laid the blame squarely on Dimon himself. “Jamie Dimon was doing whatever was in his own personal interest. He knew the consequence [of the collateral calls] was a huge blow to us, and he didn’t give a shit.”

  “That’s not true,” says Dimon. “I spoke to Dick periodically over those last couple of weeks, and not once did he complain. You have to keep in mind that everyone and their mother was raising collateral on other people. And some of our collateral calls weren’t even for us—they were for investors that we represented. If Dick had ever called Steve Black or me and said, ‘Hey, this is unfair,’ or ‘Give us a little more time,’ we absolutely would have considered it.”

  Other executives at JPMorgan Chase are less circumspect. “They didn’t go bankrupt because of us,” said one. “They went bankrupt because they did nothing for six months, and then did a fucked-up conference call. And then they try to blame David Einhorn, the Fed, and us. It’s pathetic.”

  Neither Dimon nor Black thinks Fuld actually said what New York had reported. “We didn’t force everything that we could have,” says Steve Black. “We could have stopped financing them, but we worked with them. The idea that we put Lehman out of business is just absolute horseshit.”

  With the perspective of time, former Lehman executives acknowledge this. One investment banker who was subsequently hired by Nomura Holdings in London expressed the tangled emotions surrounding the demise of the firm. “On the one hand, you could say J.P. Morgan was protecting their interests,” he said. “But on the other hand, they were fully aware of the implications of what they were doing and you might say they bit off their nose to spite their face. By doing what they did, they knew they were forcing us into a bankruptcy or someone else’s hands. One way or another, they were taking out a competitor. But I bet they never thought we’d go bankrupt. I don’t think anybody had any indication that Paulson would let us go. My sense is that there’s not a lot of animosity toward Dimon, though. Maybe he was a dick for doing it. Maybe he made a mistake. But would anybody else have made a different decision? I don’t think they would have. They had fiduciary duties and they had the opportunity to step on the throat of a competitor. This isn’t Little League, so you do it if you can.”