Last Man Standing

by Duff McDonald

  In another, less widely noted, example of JPMorgan Chase flexing its muscles, in September the company briefly stopped doing business with Chicago’s Citadel Investment Group because of excessive poaching of JPMorgan Chase’s employees by Citadel. After it hired a sixth person, the cohead of the investment bank, Steve Black, called Citadel’s head, Ken Griffin, and told him that JPMorgan Chase no longer wanted anything to do with Citadel. One day later, when it appeared that the market didn’t buy the argument about poaching—concluding instead that Citadel might be in deep trouble and JPMorgan Chase was just the first to know—Black rescinded the no-business order, but said that it would be reinstated if Griffin made one more hire. “Steve and I thought, ‘Oh, God, this is not the right time for this,’” recalls Dimon. “It was intramural politics, but people were reading it the wrong way. It just wasn’t the right time to make a stink on our part.”

  Actions taken by Dimon and his investment bank coheads while both Goldman and Morgan Stanley were under pressure in September and October also suggest that the criticism from Lehman was unfair. After Morgan Stanley’s CEO John Mack called Dimon to complain that some of JPMorgan Chase’s new hires from Bear Stearns were telling his clients that Morgan Stanley was on the verge of collapse, Black and Winters sent a memo to employees instructing them that they were not to go after clients or employees of either Morgan Stanley or Goldman Sachs using a “predatory” sales pitch.

  “What is happening to the broker-deal model is not rational,” they wrote, “and not good for J.P. Morgan, the global financial system, or the country.” A memo is just a memo, but Dimon was in full agreement. “That’s not how you want to beat the competition,” he said. “We’re going to succeed because over an extended period of time, we built a good company, and not because one of our many competitors runs into a lamppost and is critically injured. That’s not fun. No one would wish that upon them. If they get a flat tire, that’s a different story. But there’s a difference between the two. Everybody’s got their own value system. In mine, I want to be buried with a little self-respect one day.”

  As with Lehman’s failure, the word on the Street was that Dimon had pushed Merrill into Bank of America’s arms with collateral calls. JPMorgan Chase’s chief risk officer, Barry Zubrow, had called Merrill’s Peter Kraus on September 12 to ask for an additional $5 billion in collateral from the bank. Again, executives defended the move as protecting their shareholders. “The money never arrived. Merrill complained, but they never even gave us anything,” recalls Dimon. “Our lines were open, and the CEOs of those firms knew they could complain if they wanted to.”

  Paulson called Dimon in early September and urged him to consider adding Morgan Stanley to his list of conquests for 2008—at a cost of literally zero—in the hope of averting a possible collapse of the highly respected investment bank. Hedge funds were pulling their money out of Morgan Stanley’s prime brokerage unit, and regulators were worried that another bank run might be in the offing. This time, Dimon balked. Taking over a company with so much overlap, he explained, would result in two or more years of internal bloodbaths, and would be likely to turn the company into a decidedly unpleasant place to work. Although he coveted the investment bank’s brokerage subsidiary, Dean Witter, it just wasn’t worth all this. “That’s too much pain and distraction to get a brokerage firm,” he told colleagues.

  Paulson was roundly criticized in the fall of 2008 for what seemed at best a finger-in-the-dyke strategy and at worst a policy that clearly favored the interests of his old firm, Goldman Sachs. The rescue of AIG, critics argued, was really a rescue of Goldman Sachs, which had large counterparty exposures with AIG. Goldman maintained at the time that its exposure was “immaterial,” but the controversy intensified in March 2009, when it was revealed that the firm was actually AIG’s largest counterparty, and had received $12.9 billion in payments on underwater credit default swaps from AIG that had essentially come from U.S. taxpayers. JPMorgan Chase, on the other hand, had kept its dealings with AIG at a much lower level, because of Dimon’s pervasive risk-management ethos.

  Others saw favoritism when Paulson allowed Lehman to fail and then seemed to bend over backward to keep both Goldman and Morgan Stanley from the same fate. “It seems a little more than coincidental that we were the only ones they let go,” says a former Lehman executive. “Paulson turned the decision to let us fail into this weak-kneed ‘My hands were tied’ excuse. That’s bullshit. They were changing the rules every day, and they could have done it again. Also, Dick Fuld did suggest to him that we change Lehman into a bank holding company. And Paulson said no. I guess there are slightly different rules for Goldman Sachs and Morgan Stanley than for Lehman Brothers.” The New York Times echoed this sentiment when it suggested in September that regulatory decisions regarding Bear and AIG were motivated by a desire to help JPMorgan Chase and Goldman Sachs avoid big losses on their respective exposures. Dick Fuld, it seemed, had too few friends.

  Despite the scorn heaped on Paulson after Lehman’s failure, Dimon thinks that Paulson had no choice. “There was no way that anyone in the Federal government was going to go in front of the United States Congress to ask for an investment bank to be bailed out,” he recalls. “It just wasn’t politically feasible, so I don’t know why anyone questions him at all on the matter. It would have been far better to have them take it over and have an orderly unwind, but they didn’t have the right to do that.”

  Dimon compared Paulson’s task in the fall of 2008 to a game of Whack-a-Mole, with crises popping up left and right. “It’s hard to make policy on the run,” he said. “I think there have been plenty of mistakes. But I think that in general, and really I’m thinking of Bernanke, Geithner, and Paulson, here … in general they acted quickly, boldly, and bravely. They changed their course of action when one wasn’t working. Could you and I sit down and say, ‘Well, A would’ve been better than B and better than C?’ Absolutely. But you’re not up there in the ring. It’s pretty easy to say to the guy, ‘Hey, don’t let him hit you like that!’”

  Ever a student of history, Dimon sent Paulson a note including a citation from a speech Theodore Roosevelt made in Paris in 1910: “It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”

  On October 9, the Dow Jones closed below 8,600 for the first time since May 2003. The market was increasingly short of patience. The bailout of Bear Stearns caused a rally that had lasted five months. But the nationalization of Fannie Mae and Freddie Mac resulted in just one day of gains. And the relief following the $700 billion bailout endured for just one day as well. “The policy response cannot contain the contagion,” the analyst Brad Hintz wrote.

  Five years of stock market gains had been wiped out in less than a year. And the tallies for the third quarter were ugly. Through the end of September, Citigroup had taken $55 billion in write-downs on troubled assets, UBS had taken $44 billion, and Bank of America $21.2 billion. JPMorgan Chase’s total: $18.8 billion. Not a small number by any means, but a good sight better than the competition’s.

  • • •

  The purchase of the assets and deposits of Seattle-based Washington Mutual—WaMu—in September 2008 was about as perfect a “Jamie Dimon acquisition” as one could imagine. WaMu, which called itself “the bank of everyday people” and had the tagline “Whoo-Hoo!” had seen three straight quarters of losses totaling $6.1 billion and in mid-September fell vi
ctim to a good old-fashioned run on the bank. In swooping in to pick up its assets, Dimon showed all the traits investors had come to expect from him: patience (the swooping came after more than a year of stalking the firm), speed, ruthlessness, and a bon mot or two.

  In July, Deustche Bank’s analyst Mike Mayo had asked Dimon a question during a conference call: “You’ve been waiting your whole life for this environment … so what is the impediment to you pursuing a merger right now in the retail banking side?” Dimon’s reply: “Nothing is impeding us. But it’s just not up to us.” JPMorgan Chase was a buyer, but a buyer still needs a seller for a deal to get done.

  Well before Bear Stearns came along, Dimon and his team had been eyeing WaMu and coveting its footprint in both California and Florida, two states where Chase’s presence was negligible. (On Dimon’s one-pager of potential acquisitions, WaMu sat in the upper left-hand quadrant—a desirable target that had a strong strategic fit, if it could be picked off at the right price.) The retail chief, Charlie Scharf, had put together a report (“Project West”) on a possible combination for a management retreat in the spring of 2007. “We always looked at it and we always came up with the same conclusion,” Scharf told the New York Times. “At the right price, this is No. 1. At the wrong price, this could be terrible.”

  At the end of 2007, WaMu was the six-largest depositary institution in the country. But along with that ranking came a problem it shared with a number of its peers: major exposure to the subprime market. In early 2008, WaMu was setting up to report a disastrous quarter, and realized it needed to raise some capital. “We had done lots of work on WaMu and we thought, given all the stuff that we were hearing, that we’d get a phone call from them,” recalls Scharf. That call came in early March, while a group of JPMorgan Chase executives were in Deer Valley, Utah, at the banker Jimmy Lee’s annual private bigwig retreat.

  The auction rate securities market had been faltering at the time, and a number of executives were preparing to sit down and talk about the bank’s exposures when Dimon’s phone rang. It was Kerry Killinger, the CEO of WaMu. Killinger told Dimon that his bank was evaluating capital-raising options and had decided it might also scope out possible merger partners. Was Dimon interested? “Yes, we are,” he told Killinger. He then handed the reins to Charlie Scharf and Mike Cavanagh.

  The next week, JPMorgan Chase executives sat down at the offices of law firm Simpson Thacher & Bartlett to view a brief presentation by WaMu’s management. Talks continued thereafter, and soon plans were made for Scharf, the chief financial officer Mike Cavanagh, the chief administrative officer Frank Bisignano, and the head of strategy Jay Mandelbaum to head out to Seattle for further discussions on Sunday, March 16. When the Bear Stearns deal came out of nowhere, that team shrank to just Scharf and Mandelbaum, as Cavanagh and Bisignano were tied up.

  Scharf eventually decided he was ready to start negotiating a transaction that would be part cash, part stock, and he informed the Office of Thrift Supervision (OTS), which oversaw WaMu, about the possibility of a deal. It soon became obvious, however, that the WaMu executives were not negotiating in good faith. In addition to denying Scharf’s team access to important financial data, they also forced a ridiculous daisy chain of calls between the two banks and the OTS in which Killinger’s team played nice with the regulators and then did the opposite with JPMorgan Chase. “It’s always like that, though,” says the commercial bank chief, Todd Maclin. “Whoever you’re trying to buy, anybody on the other side is going to withhold as much information and try to hide the ball, and you can either decide to play or not.”

  Part of the problem, it seemed, was Steve Rotella, the president of WaMu, who had run the mortgage business at Chase Home Finance before the Bank One deal. Neither Dimon nor Scharf had ever thought much of Rotella’s talents, and when he decamped for WaMu in December 2004, they hadn’t been sorry to see him go. Moreover, Rotella was not interested in working for Scharf—or Dimon—again, and he told Scharf so over dinner in March. “No one here wants to do this with you guys,” he said. “If we can get some private equity money and get through this turmoil, that’s what we want to do. We think we deserve another bat at the plate.” Another stumbling block was that Kerry Killinger, the firm’s CEO, would be out of a job if he sold to JPMorgan Chase. And he clearly didn’t want to be out of a job.

  Although Dimon had left the investment bank quite alone when he arrived at JPMorgan Chase, he and Scharf had thoroughly revamped the primary mortgage business. Nearly the entire management team left the firm—some voluntarily and some not. Rotella had been shoved out when Dimon was trying to create an end-to-end mortgage assembly line, from origination to securitization. He and several of his colleagues went to Washington Mutual. And here were Dimon and Scharf, knocking on their door. It was no wonder they were received poorly.

  WaMu ultimately spurned a $7 billion offer—roughly $8 per share—from JPMorgan Chase in early April in favor of a capital infusion from a consortium of private equity firms, most notably Texas Pacific Group, which put in $2 billion. There’s also the issue of regulators’ own self-interest. The weakest portion of a patchwork quilt of regulation, OTS had seen two of the biggest thrifts crater in the past year—Countrywide and IndyMac—and if WaMu went away as well, there might be no more need at all for the government branch. What regulator would regulate itself out of existence?

  The JPMorgan Chase team took defeat in stride. “There is a 50-50 chance that this bank is going to come back to us,” Dimon told his executive committee. Dimon and his team saw the quality of JPMorgan Chase’s own loan portfolio beginning to deteriorate, and they figured WaMu might eventually face up to $30 billion in losses. Little did they know that the firm would fail just five months later. This time, the phone call to Dimon came from Sheila Bair, chair of the Federal Deposit Insurance Corporation, on Friday, September 19. She was calling a number of banks, including Dimon’s, letting them know to keep their pencils sharp and their models up-to-date, because the opportunity to buy WaMu out of receivership might happen sooner than they thought.

  “The fact that it came back around in that amount of time was kind of shocking,” recalls the chief financial officer, Mike Cavanagh. He is right in the sense that five months is not a long time. But those five months—from April to September 2008—were far from normal. The financial markets had been buffeted by crisis after crisis, from the near-insolvency of the government-backed lenders Fannie Mae and Freddie Mac to Lehman’s collapse. By September, WaMu was at the top of every regulator’s list of disasters waiting to happen. If the company had gone into receivership with no buyer, it would have swallowed up about half of the FDIC’s funds for insured deposits.

  On September 8, rating agencies downgraded WaMu’s debt rating and sent its stock plummeting. Killinger—who had been at the company since 1983—was fired by his board. But it was too late to try such a cosmetic fix. Depositors began withdrawing their savings en masse. In 10 days, they withdrew $16.7 billion.

  Regulators sent WaMu’s board an unambiguous message: sell the company or raise some capital, or we’re going to have to take you over. When WaMu, which retained Goldman Sachs and Morgan Stanley to pursue “strategic options,” came back to JPMorgan Chase hat in hand, it was met with a stiff arm reminiscent of the one it had given Scharf in April. “We got the call that said, ‘OK, now we’re ready,’” recalls Scharf. “We told them we would go through the process, but we were also very clear with them. We said, ‘Don’t count on us to buy the company. We’ve been through this before.’”

  Executives once again sat down with their WaMu counterparts, and found to their surprise that the WaMu team thought there was still some equity value in the company. “They believed their rosy numbers,” recalls Mike Cavanagh. “So at a point, we said, ‘This is not productive. We’ll do the data room stuff and all that, but we have no interest in buying the whole company.’”

  On Monday, September 22—just a week after the failure of Lehman Brothers—exe
cutives met with regulators at JPMorgan Chase’s headquarters to talk about the process. Even though it seemed increasingly unlikely that WaMu could sell the entire firm, the regulators decided to run a dual-track process, and told JPMorgan Chase they were advising potential bidders to consider different options, from buying everything to buying just the deposits and mortgage portfolio.

  Neither Sheila Bair nor Tim Geithner was at the meeting—and this meant, by implication, that Dimon didn’t need to be there, either. But he was, and he stayed almost the entire time. Rodgin Cohen of Simpson Thacher, there on behalf of WaMu, recalls the significance of Dimon’s presence. “This was not a meeting he needed to attend,” Cohen says. “And at the end of the day, money talks, but the fact that he was there clearly made an impression on the regulators. But what made even more of an impression was how conversant he was in the details. He was all over it.”

  The JPMorgan Chase team decided to bid only for the assets of Washington Mutual, leaving behind $18 billion in liabilities. The team members’ calculations left them with a range of $1.7 billion to $2 billion, and all that was left was to put a final number on the contract. Someone noted that the number 8 was lucky in both Chinese and Japanese culture and suggested a bid of $1.888 billion. (A suggestion of $1.666 billion was rejected for obvious reasons.) Possibly a little slaphappy from their three-day work blitz, the team members agreed that $1.888 billion was an auspicious bid. At 6:30 P.M. on September 24, Scharf submitted the contract and went home.