Last Man Standing

by Duff McDonald

  He was sitting with his daughters at the kitchen table while they ate their bedtime snack when his phone rang at 8:30 P.M. It was Dimon. “Sheila called me,” he told Scharf. “We got the bid; we’re the winner.” The plan, he explained, was for the FDIC to seize WaMu after the close of business on Thursday, and immediately sell the deposit and loan portfolios to JPMorgan Chase.

  To careful observers of the ways and whims of the stock market, there was an unusual wrinkle to the plan. Usually—as was the case with Bear Stearns and on countless other occasions—regulators unveil their dramatic actions after the close on Friday so that the representative players will have the weekend to straighten out whatever they can before the opening bell Monday morning. In this case, however, Dimon had more urgent needs.

  Because of the uncertainty surrounding Secretary of the Treasury Hank Paulson’s three-page, $700 billion bank bailout plan—the market had plunged 778 points on Monday after the House had voted it down—Dimon told Bair he preferred doing the deal on Thursday, so that he could turn around and raise a substantial amount of capital in the equity market on Friday. He wanted to keep his company’s tier 1 capital ratio above 8 percent. To do that, he needed about $8 billion in fresh equity, and he didn’t want to risk seeing what the weekend—or the following Monday—might bring before obtaining it.

  “Jamie learned that from Sandy,” recalls Scharf. “When you decide you want to raise money, you don’t wait, you get it done. Jamie will think and think and think and make sure he’s doing the right thing, but once he wants to do it, he wants it done yesterday. Rumors of what TARP was going to be were all over the place. And he knows that markets can open and they can shut.” (The Troubled Asset Relief Program, TARP, was a plan in the works through which the government would buy assets and equity from banks to strengthen the financial sector. It would reach full flower just a few weeks later.) For her part, Bair was worried enough about the run on WaMu that she agreed to do the deal on Thursday, September 25.

  Dimon, Cavanagh, and Scharf spent Thursday on the phone rustling up money. They called 10 potential investors, and asked them—without revealing details—whether, if JPMorgan Chase was interested in raising a substantial amount of capital the next day, they would be buying. Nine investors pledged $7 billion, despite not knowing exactly what the news was.

  After the market closed on Thursday, the OTS and FDIC announced that WaMu was being seized in the largest bank failure in U.S. history, and its assets were being sold to JPMorgan Chase. (WaMu had $307 billion in assets. The runner-up, Continental Illinois, which failed in 1984, had just $40 billion.) At 9:00 P.M., Dimon, Cavanagh, and Scharf held a conference call and took analysts through a 21-page summary of the deal. Fifteen minutes later, Dimon sent an e-mail to the entire staff of WaMu, welcoming them into the JPMorgan Chase fold. Around midnight, Scharf boarded a jet for a flight to Seattle and a 7:00 A.M. meeting with WaMu’s CEO, Alan Fishman. (One of his messages: You’re out of a job.)

  (Remarkably, the staff of WaMu found out about the deal before Fishman, who’d been on a plane at the exact moment of the seizure and sale. Because of the importance of keeping the deal under wraps until it was announced, JPMorgan Chase staffers had worked with WaMu’s auditors to get access to WaMu’s internal network before the news broke. In the process, they secured a list of employee’s e-mail addresses without having to get them through WaMu’s top management. Within minutes of the deal, too, visitors to www.WaMu.com were greeted by a message from Chase welcoming customers to JPMorgan Chase. This too had been prepared on the sly.)

  The deal boosted JPMorgan Chase into first place in nationwide deposits, with $911 billion to Citigroup’s $804 billion and Bank of America’s $785 billion, and made it the second-largest bank in terms of assets, with $2.04 trillion to Citigroup’s $2.1 trillion. (At the end of the first quarter of 2009, JPMorgan Chase was still the second-largest bank, with $2.1 trillion in assets to Bank of America’s $2.3 trillion, with Citi slipping into third place.) The purchase also gave the company a foothold in both California (691 branches versus just three pre-deal) and Florida (274 and 13, respectively), and a total of more than 5,000 branches nationwide. What’s more, there were cross-selling opportunities, as WaMu had never been big in either wealth management or commercial banking, and JPMorgan Chase could integrate those offerings into its new branches. (History showed any optimism to be well placed. After acquiring the branches of Bank of New York, Chase retail bankers boosted in-branch credit card sales 20-fold and investment sales by 40 percent.)

  The cost was a mere $1.9 billion plus $31 billion in write-downs against estimated future losses in WaMu’s loan portfolio. (The April prediction of $30 billion in losses, in other words, had been dead-on.) JPMorgan Chase’s employee roster jumped from 195,000 to 238,000.

  Friday’s stock offering eventually reached $11.5 billion. Even though he had obtained an extremely cheap source of funding—WaMu’s $188 billion in deposits—Dimon tapped the equity market to bolster its equity ledger, calling it an “offensive” capital raise. “We are raising capital to do a deal, to buy something, to grow,” he said in an interview. “We are not raising capital to fill a hole.” (A finger in the eye to the likes of Merrill Lynch and Citigroup, no doubt.)

  The New York Daily News encapsulated the reaction to the deal with the headline “JPMorgan CEO Jamie Dimon Eats Banks for Breakfast.” The New York Times went with “1-800-CALL-DIMON.”

  The Times’s headline confirmed the success of a savvy public relations strategy Dimon has pursued for much of his career. Not only had he gone out of his way to make himself accessible to reporters; he spent an inordinate amount of time focused on his regulators and their concerns. Some people had wondered what the point of all the outreach was—What did it have to do with generating sustainable earnings growth? Was it just ego gratification?—but the deals with Bear Stearns and WaMu showed the value of a high profile and a carefully cultivated image as a man (and a company) of caution.

  “I once heard someone respond to the question of how one can be successful by saying, ‘You have to be in the right place at the right time,’” says analyst Mike Mayo, who moved to Calyon Securities in March 2009. “When asked how to do that, the response was ‘You have to be in a lot of places a lot of the time.’ Those two deals are where Jamie’s image—and that of JPMorgan Chase—translated into actual transactions. This is now the go-to bank when regulators pick up the phone. It would not surprise me in this environment if Jamie Dimon gets the first call in the next unusual situation we might find ourselves in.”

  By refusing to step up and buy the whole company, Dimon essentially wiped out WaMu’s common shareholders, including the private equity firm Texas Pacific Group (TPG), which got smoked for $1.35 billion on its April investment; TPG had somehow managed to unload $650 million of its exposure in the interim. Dimon also let the bondholders get wiped out. And he ended up buying something estimated to be worth $12 billion or so for just $1.9 billion. JPMorgan Chase’s stock rose 11 percent the next day, even though the capital raise diluted shareholders’ ownership.

  WaMu’s president, Steve Rotella, who had indicated in April that he did not want to work for Scharf or Dimon again, was granted his wish and was told he would be terminated. JPMorgan Chase made all the decisions about senior management within five days of the deal, a decisive move that helped stop deposit outflows in their tracks.

  There were no niceties tossed into the deal. Executive stock compensation lost in the bankruptcy was not replaced, and no executive was paid a change-in-control provision—a marked departure from the generous retention payments made to Bear Stearns executives in April. On December 1, JPMorgan Chase announced it was laying off 9,200 WaMu employees, about 21 percent of the total. (In February 2009, it laid off 2,800 more, as a result of continued declines in the value of WaMu’s mortgage portfolio.)

  Despite calling WaMu “a perfect fit,” Dimon nevertheless acknowledged that he was doubling down on the American consumer at
a volatile time. The company’s bank branches, mortgage, and credit card businesses would thereafter account for nearly half of JPMorgan Chase’s overall profits. “That’s the big risk,” he said. But he added that Scharf and the rest of the team had done their homework. They knew WaMu’s assets cold by state and by product and had run the numbers on worst-case scenarios for housing prices. “I’m making a bet that we won’t have a depression in this country,” he said. “If we do have one, the deal will have been a mistake. But that’s our job: to make those determinations and figure out what we think is right. It’s just like buying a new house. You may be wrong with your timing, and the price may go down. But what are you going to do? Spend your whole life worrying about being wrong? The price had a huge margin for error in it, but that doesn’t mean we won’t be wrong. I don’t know what’s going to happen to this economy.”

  At a more granular level, Dimon’s logic was as follows. Even if the company were to be faced in 2010 with a $10 billion charge due to WaMu’s mortgage portfolio, the acquired assets would still be earning $2 billion a year. Seen in that light, the company might end up getting nothing out of the deal in the first four or five years, but in the fifth year it would start pulling down about $3 billion in earnings. “In that case, it will still have been a good deal,” he said. “But there’s no doubt it’s very scary in the meantime. People underestimate how scary that one decision is.”

  It was such a scary decision, in fact, that JPMorgan Chase was the only bank that ended up bidding on WaMu. Wells Fargo didn’t show up. Citigroup didn’t show up. Neither did Wachovia. It that light, the $1.888 billion bid was arguably a little high. Dimon had no regrets. “Sure, it might have been nice to spend only a million dollars on the thing, but we didn’t spend a lot of time wondering what the cover bid needed to be. We just figured out the most we’d be willing to spend, and that turned out to be about $2 billion,” he said. “It would have been lucky to have lowballed, yes. But I’d rather have the company.” When Sandler O’Neill’s analyst Jeff Harte asked Dimon whether he knew how much better JPMorgan Chase’s bid had been than that of the runner-up, Dimon had replied, “We don’t know, and we don’t care.” Cavanagh was a little more forthright on the issue. “The FDIC did a good job of running an auction,” he laughed.

  Dimon later received a letter containing white powder and a note that read, “Steal tens of thousands of people’s money and not expect reprercussions [sic]. It’s payback time. What you just breathed in will kill you within 10 days. Thank xxx and the FDIC for your demise.” More than 50 copies of the letter had been sent to multiple Chase bank branches, the FDIC, and the OTS. Dimon’s letter also contained a reference to the “McVeighing of your corporate headquarters within six months.” All were postmarked Amarillo, Texas.

  When federal authorities told JPMorgan Chase they had looked into the matter but had not found many leads, the chief administrative officer, Frank Bisignano, took matters into his own hands. “We’re going to nail this guy,” he told Dimon. JPMorgan Chase has a significant security apparatus, including former Secret Service professionals, CIA veterans, and all manner of hacker types, to help protect its $2 trillion in assets. The bank’s crack security and investigations team first looked for Internet addresses that had searched its website for a list of Chase branches. They found one in Albuquerque, New Mexico, about 300 miles from Amarillo.

  The problem was that the address belonged to the free Wi-Fi network at a local community college, so just about anybody could have used it. Given the clear reference to WaMu in the letter, the investigators looked into former WaMu shareholders living in Albuquerque. That is how they discovered 47-year-old Richard Leon Goyette (aka Michael Jurek), who also happened to have taken a class at the community college. Bisignano handed Goyette’s data over to the Feds, and Goyette was arrested and charged with several crimes in February 2009. In June of that year, he was convicted and sentenced to nearly four years in prison.

  After WaMu, the Street was aflutter with acquisition envy. Citigroup tried to get in on the action, cutting a deal just four days later to buy the banking operations of Wachovia for $2.2 billion. As with Merrill and Lehman, Wall Street’s chattering class found cause to blame Dimon for Wachovia’s predicament as well. In buying WaMu, Dimon’s team had assumed that about 25 percent of WaMu’s so-called option ARM mortgages would default. Wachovia had projected that only 12 percent would do so, and so was suddenly faced with a massive writedown.

  The Citigroup deal also came with government assistance. Citi’s CEO, Vikram Pandit, earned plaudits for stopping a run on Wachovia, but was subsequently embarrassed when Wells Fargo swooped in with a $15.4 billion offer to buy the whole company. That deal, in addition to Bank of America’s $50 billion purchase of Merrill Lynch on September 15, secured Dimon’s reputation as a master negotiator. Whereas he paid pennies on the dollar for WaMu, Wells Fargo paid real money for Wachovia. And Dimon bought Bear Stearns for a song—with a government backstop—compared with Bank of America’s ill-considered and unsupported grab of Merrill.

  The notion of Dimon as the government’s banker of choice also won more credence when it emerged that Sheila Bair, the chairwoman of the FDIC, was possibly double-dealing in the Wachovia contretemps. She had publicly supported Citigroup in its squabble with Wells Fargo, but Wachovia’s chief, Bob Steel, later said that in private she had been urging him to cut a deal with Wells Fargo. Dimon had received far more solicitous treatment when she teed up the WaMu deal for JPMorgan Chase.

  On October 13, 2008, Secretary of the Treasury Paulson summoned the CEOs of leading firms—Dimon, Lloyd Blankfein, Ken Lewis, John Mack, Vikram Pandit, John Thain, and Dick Kovacevich from Wells Fargo—to a meeting. The chief of the Fed, Ben Bernanke; the president of the New York Fed, Timothy Geithner; and Sheila Bair were also in attendance.

  It didn’t take long. Paulson explained to the assembled group that the public had lost faith in the country’s banking system, and that he was using his authorization under TARP to buy $250 billion worth of preferred shares in the nation’s largest banks. The hope was that such a large injection of capital would calm fears that the banking edifice itself was on the verge of collapse. Geithner then proceeded to delineate the various allocations, the largest of which went to JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, each of which received $25 billion. The banks would have to pay a dividend of 5 percent annually for five years and then 9 percent thereafter.

  A number of banks, particularly Citigroup, desperately needed the money, but Dimon was in a bind. He didn’t need the money but was being asked to take it “for the good of the system,” and also put up with the many strings attached to it, including restrictions on executive compensation. Dimon decided he wouldn’t stand in the way of the greater good, agreeing to take the money without complaint. (Before he did that, however, he stood up, grabbed the term sheet, and began to walk to the door. “Where are you going?” he was asked. “To send this to my partners,” Dimon replied. The majority of the other executives then decided they should do the same.) Wells Fargo’s CEO, Kovacevich, was more recalcitrant than Dimon, protesting briefly before accepting the inevitable. Like the deal with Bear Stearns, this was not the kind of thing even the proudest of CEOs wanted to try to refuse.

  The meeting was over by 4:00 P.M., and by 6:30 P.M. each of the CEOs had signed a term sheet. Among other things, they had signed away their ability to offer so-called golden parachutes in any new contracts, as well as the tax deductibility of executives’ compensation above $500,000. Dimon rarely criticized either the Bush administration’s or the Obama administration’s bailout efforts, but he repeated, on several occasions, that as far as TARP money went, “We didn’t ask for it, didn’t want it, and we didn’t need it.” The market took the news of the bailout badly, falling nearly 8 percent on October 15.

  • • •

  Despite the growing consensus that Dimon was the banker of the moment and JPMorgan Chase the bank, 2008 ultimately pr
oved another tough year for the company in absolute terms. It was still suffering for past mistakes—overextending in leveraged loans and allowing loan underwriting standards to deteriorate significantly—and was also paying the price for being a bank at a time when banking was not a good business to be in. “You can’t outrun the economy,” Dimon’s former colleague Bob Willumstad observed. “It’s the nature of the business.”

  And the economy was running pretty fast. The negative feedback loop of global de-leveraging continued unabated, with a savage interplay between the financial markets and the real economy. Loan defaults spiked across the board, from large companies to individual credit card holders. Despite JPMorgan Chase’s relative balance sheet strength, investors couldn’t help being a little concerned about skeletons lurking in its closet. Things were so touchy by late November that when Dimon was reported to be in the Middle East, rumors spread that he was soliciting capital from oil-rich Arabs. He was not; rather, he was celebrating the official opening of the company’s Riyadh office.

  Full-year results were nothing to brag about. Dimon did not brag. When he received an award at Yale on December 10, he told the audience, “I feel like I’m riding a bronco and holding on for dear life most of the time.” The same day, he told CNBC that the company “could very well post a sizable loss for the fourth quarter.” The stock fell 11 percent in response, dragging the entire market down 2 percent along with it.

  (Judy Dimon found an iron-and-marble sculpture of tiny men literally jumping through hoops and sent copies of it to some senior executives as a holiday present. In one accompanying handwritten note, she christened 2008 “The Year of Jumping through Hoops” and hoped that 2009 would be “The Year of Landing on One’s Feet.”)

  Despite leading the league tables, the company’s investment bank saw revenue drop 33 percent in 2008 while nonperforming loans jumped 233 percent to $1.8 billion. The investment bank marked down its mortgage and leveraged loans $10 billion during the year. Similar pressures hit the retail financial services franchise; credit costs climbed 274 percent to $9.5 billion during the year. The company’s home lending portfolio, including home equity and both prime and subprime mortgages, was a $328 billion leaning tower of Pisa by the end of the year; of that amount, 36 percent, or $117 billion, had already been deemed “credit-impaired.”