Last Man Standing

by Duff McDonald

  The bank had instituted several rounds of credit changes that tightened underwriting standards in 2007 and 2008, but it was too late. At the end of 2008, JPMorgan Chase estimated that about $25.6 billion of its home equity portfolio was extended to households where borrowing exceeded household value, the so-called state of “negative equity.” The percentage of the portfolio where households were sitting on negative equity nearly doubled during the year, from 15 percent in January to 27 percent at the end of the year. Much of that negative equity came from California, Florida, Arizona, and Michigan.

  Along with its competitors, JPMorgan Chase got smashed by the housing collapse. Citigroup had written down about $101.8 billion in assets from the beginning of the crisis through May 2009, Bank of America about $56.6 billion, and JPMorgan Chase $41.1 billion. Wells Fargo, by comparison, had seen fit to write down only about $27.9 billion in assets at that point. Although he may have left a few competitors like Citigroup far behind, Dimon still had serious competition.

  Both Wall Street and the media fawned over the company’s risk management vis-à-vis that of its competitors, but little good can be said about its home equity business. As Bob Willumstad pointed out, on Wall Street, it can be very difficult not to do what everyone else is doing, even if it’s stupid, because the profits can be big before the reckoning. In this case, JPMorgan Chase was just as stupid as the rest of them. In discussing changes that had been made in 2008 to underwriting standards, the company announced that borrowers henceforth needed to prove their income—the so-called “stated income” clause had made borrowing during the boom a mere matter of walking into a bank and saying that, sure, you were doing just fine on $75,000 a year, but you needed that extra $25,000 home equity line “just in case.”

  The sheer size of some of the mistakes made by the JPMorgan Chase team just before the credit bubble burst bring to mind a lingering criticism of Jamie Dimon. A number of people close to him wonder whether he overcompensates for Sandy Weill’s penchant for eventually trashing his closest aides. Weill threw important people in his organization overboard all the time, or, more precisely, had someone else do it for him. “But Jamie,” says a longtime colleague, “just can’t do it. It’s a flat spot for him. I don’t think it’s because he doesn’t know. It’s because he doesn’t ever want it said of him that he’s just like Sandy, that he’ll just get rid of people.” (After having been at the ready to act as Weill’s enforcer in the early days, in other words, Dimon was in need of an enforcer of his own by 2009.)

  Jamie Dimon learned from Sandy Weill that although playing people off against each other might actually work to your own advantage, what it also does is create a dysfunctional environment that can destroy a company. He often talks of “mature” companies—the likes of Wal-Mart and Johnson & Johnson—and how it is no surprise that a lack of corporate intrigue tends to go hand in hand with long-term success. (It could be said that while many of his competitors were losing their focus, Dimon was running his business just like Wal-Mart itself. Given the giant retailer’s razor-thin margins, its obsessive focus on cost—on counting everything that can be counted—has helped it outrun competitors for years. Dimon’s philosophy is similar.)

  Still, instead of holding his most senior executives responsible for poor decisions, some say, Dimon often goes to the other extreme, taking personal responsibility for mistakes. On some level, that’s a noble and mature approach; on another, it avoids addressing specific mistakes made by specific people. The hardest-working man in banking needs to admit that it’s not always about him, that sometimes other people’s mistakes are just that—their mistakes and not his own. “There are a lot of people around here that feel that if he’s close to somebody they get more license than they should on both performance and behavior,” says one member of the firm’s operating committee.

  Granted, there is an alternative argument: that J.P. Morgan has managed to outperform most of its rivals precisely because of the stability in its management ranks. And when Dimon speaks fondly of his team, he means it. He relies extensively on the input and insight of top management, and rarely does things that he thinks will be a good idea all by himself. He actually trusts the people working for him, and trusts, too, that they can learn from their mistakes, as he has learned from his own.

  Wall Street is a pressure cooker, and when the pressure started to get intense in 2007, the more insecure of its chief executives started firing everybody around them to make sure outsiders knew where they should place the blame. Such a strategy does enhance one’s short-term job security, but the problem with it is that when turnover gets too high, no one really knows what’s going on anymore. As proof of the point, before they themselves were dismissed, Bear’s Jimmy Cayne, Citigroup’s Chuck Prince, Merrill Lynch’s Stan O’Neal, and Lehman’s Dick Fuld had all participated in their own little orgies of firing. Dimon has resisted doing the same thing, and his firm is surely the better for it.

  • • •

  By December 2008, the Fed had taken 51 measures to address the market’s problems, including printing money as if there were no tomorrow. An astute market seer, Jim Grant, describes the Fed’s near-abandon at the printing press: “Frostbite victims tend not to dwell on the summertime perils of heatstroke.”

  With the rest of Wall Street still busy with cleaning out their Augean stables, Dimon and his team were busy picking up market share in almost every one of the bank’s businesses. JPMorgan Chase achieved an unprecedented milestone in 2008. Its investment bank sat atop every single one of the four most important league tables that rank banks by the amount of capital they help customers raise—debt; equity; loans; and debt, equity, and equity-related. The company also earned the most fees of any investment bank, with an 8.8 percent market share. For the full year, the investment bank also set revenue records in foreign exchange, commodities, credit, and emerging markets. But Dimon was anything but complacent. “I don’t think it’s a given we’re going to stay there,” he said.

  The company led a $60 billion global refinancing of the car finance company GMAC in June, the largest refinancing ever. It participated in two of the biggest deals of the year, the $23 billion purchase of Wrigley by privately held Mars and the $52 billion acquisition of Anheuser-Busch by the Belgian brewer InBev. (With the closing of the InBev deal in November, JPMorgan Chase was an almost inconceivable $100 billion ahead of its longtime rival Goldman Sachs in the mergers and acquisitions advisory rankings for the year.) Money poured into the company’s asset management and treasury services divisions, as clients and investors engaged in an unprecedented “flight to safety.”

  JPMorgan Chase held top three positions in most of its other businesses. In addition to strong positions in commercial banking, treasury services, and asset management, Chase was the nation’s largest credit card issuer in terms of outstanding loans and the top issuer of Visa cards in terms of total cards. (Critics who still insisted that Dimon only cuts costs needed only watch American Idol in 2009 to see Chase’s “Secret Agent Man” ads. In the midst of the what was surely the worst credit card downturn in history, the company was stepping up and buying some of the most expensive airtime on television to bolster the franchise.) The retail bank was third largest in terms of deposits, second in home equity originations, third in mortgage originations, and first in auto loans. All the retail banking market shares had been fought for tooth and nail, but they also left the bank exposed to the roiling recession, and such large exposures took a huge bite out of the company’s earnings and continued to do so in 2009.

  “What became clear to anybody in finance in 2008 was that JPMorgan Chase was now the dominant financial institution,” says Marc Lasry of Avenue Capital, a hedge fund. “We’re trying to do more business with them, because when you have more power, they can get more things done. They’re in a position now where they can choose who they want to do business with.”

  By the end of the year, almost any firm lucky enough to still be in business found that its
employees would rather be working for JPMorgan Chase. “We feel like we’ve become an employer of choice,” said the cohead of the investment bank, Bill Winters. “We are not doubling or tripling people’s compensation in order to attract them, nor moving them two or three rungs up the responsibility ladder.” (In May 2009, JPMorgan Chase also supplanted Goldman Sachs as college students’ top choice among banks they’d like to work for, a position Goldman had held for more than a decade.)

  The company’s shares were also fast becoming the stock of choice for investors. In September, the mutual fund giant Fidelity boosted its holdings of JPMorgan Chase to $523 million while at the same time paring its stakes in Merrill Lynch, Wachovia, and Goldman Sachs. A tier 1 capital ratio of 10.9 percent at the end of the year reinforced Dimon’s commitment to the fortress balance sheet. In more carefree times, investors sought banks willing to take huge risks. Now, they were looking for banks that actually knew how to manage risks appropriately. And there were few of those. In mid-July 2009, investors valued JPMorgan Chase at $126 billion, versus just $81 billion for Bank of America and a paltry $15 billion for Citigroup.

  By the summer, Dimon finally had a minute to catch his breath after the events of the past 15 months. Looking back over the deals for Bear Stearns and WaMu, he thought it premature that people were already calling WaMu a “home run.” “We’re not ready to call WaMu anything yet,” he said. “But I think we’re pretty sure about Bear being at least a single by now. It should have been a double or a triple, but it was a single. Of course, the market environment got much worse after that deal.”

  The cold-blooded competitor in Dimon then made an appearance. “Bear was never a home run, but WaMu will prove to be a great thing for the company over the long run. Will we be able to say that three years from now? At that point, you might very well be asking me, ‘How could you have done that in the midst of all those things that were going on?’ And I’m going to look at you and say, ‘Take your bets, friend. Take your bets.’”

  14. WILL GIANTS STILL WALK THE EARTH?

  The personal capital Dimon earned by deftly navigating through one of the biggest economic crises in history gave him an opportunity to express views on issues beyond banking. When interviewed by Charlie Rose in June 2008, Dimon identified himself as a deficit hawk, but also made clear his support for short-term fiscal stimulus and directed tax cuts. He called the United States hypocritical for embarking on a heedless spree: borrowing from foreigners and then, when it was cash-strapped, insisting that those same foreigners continue to finance it through purchases of Treasury bonds. He later ripped into the administration for requiring TARP recipients to dramatically reduce their hiring of foreign workers via H1-B visas, calling the move a “disgrace.”

  He also suggested that in his role as CEO of JPMorgan Chase, he had a greater responsibility than just to his shareholders. “Anyone that I meet that doesn’t feel they have some obligation, my level of respect drops for them significantly,” he said.

  When giving a speech at the Yale CEO Summit in December 2008—at which he was the recipient of a Legend in Leadership award—he took a strong position on the energy crisis and the United States’ lack of preparedness. “Shame on us,” he said. “This is our third energy crisis. And we still don’t have the fortitude as a nation to do anything about it. We are going to earn a fourth. This is not just a financial issue. This is a geopolitical issue. We are arming people who want to kill us. That’s what we’re doing. What the hell is wrong with us? I find that offensive, because our kids are going to pay for that.”

  This type of remark does not come without cost. JPMorgan Chase has valuable customers all over the Middle East—the company had just opened its Riyadh, Saudi Arabia, office in late 2008. But Dimon has always been clear about where his priorities lie. When talking of the most important things in his life, he once said, “My family, humanity, my country, and the world. And way down here is J.P. Morgan.”

  Despite growing criticism of derivative securities and the financial, if not societal, devastation they can allegedly cause, Dimon and his team—particularly Bill Winters, who helped create modern credit derivatives—refused to back away from their involvement in the market, a market one analyst estimated as $1 quadrillion in size. “People say derivatives caused our recent problems, but that’s just not true,” Dimon says. “A lot of those derivatives guaranteed mortgage product. But it was the mortgages themselves that were the problem, and those filtered through into SIVs, CDOs, and then into the insurance companies who guaranteed them. Derivatives didn’t cause the problem, mortgages did.” (Still, it should be pointed out that derivatives can magnify the problem, in much the same way as leverage. Regulators do keep an eye on banks’ leverage, but derivatives exposures have reached colossal proportions. Witness JPMorgan Chase’s $81 trillion as of March 2009 in notional outstandings.)

  In large part, he’s right. The problems at companies like AIG have been described so many times as a result of “highly complex derivatives,” which their users “did not understand,” that it has become received wisdom to perceive derivatives themselves as the issue. But this reasoning is almost entirely wrong. The users understood precisely what the risks were, but they made the wrong bet—that housing prices wouldn’t plunge across the board, everywhere. There were a lot of people who took the bet; they just didn’t match AIG’s level of recklessness.

  There have been some suggestions that the interplay between a company’s bonds and its credit default swaps actually exacerbated problems—George Soros wrote convincingly about this phenomenon in the New York Times—but that phenomenon was arguably on the margin of a much larger problem: abandonment of risk management controls in pursuit of higher profits. When it came time for the first big test of credit default swaps—in the aftermath of Lehman Brothers’ bankruptcy—the settlement of those contracts took place without incident on October 21, 2008.

  Dimon has endorsed the creation of a central clearinghouse so derivatives exposures can be more closely monitored. But he considers the bank’s CDS business a valuable franchise and doesn’t consider it JPMorgan Chase’s problem if other investors hurt themselves by mishandling them. (Pointing to a healthy lobbying budget on this score, critics argue that even though he’s said the right thing publicly, Dimon and his team are actually stonewalling derivatives reform in order to protect the outsize margins the business generates.) He has also called for a systematic regulator that can anticipate problems in the system rather than merely respond to them. Even though Dimon, as a college student, wrote that admiring letter to Milton Friedman, the king of the laissez-faire economists, he also values the lessons of John Maynard Keynes and Keynes’s argument in favor of adult supervision in the markets.

  In October 2008, Blackstone’s chief, Steve Schwarzman, embarked on a campaign to have so-called “mark to market” accounting rules changed. The rules, he (and others) complained, meant that companies with deteriorating asset values were constantly forced to mark down their balance sheet values; this entailed having to raise capital by selling more assets, which put further downward pressure on those asset values, which … a vicious circle. (When prices were rising, no one had a problem constantly marking up asset values, but that’s another story.)

  Nearly alone among the major banks’ CEOs, Dimon did not try to blame the industry’s problems on accounting standards. “A lot of those mark-to-market losses will end up being real losses,” he said. “They are real losses that are simply being recognized in the market before they’re being recognized in expected cash flows.” In April 2009, however, regulators buckled under industry pressure, relaxing mark-to-market rules that affected banks. Shortly thereafter, JPMorgan Chase, Citigroup, Bank of America, and Goldman Sachs all announced surprisingly strong quarters. But whereas Dimon made clear during the company’s conference call that the accounting change had no effect whatsoever on earnings, Bank of America and Citigroup did no such thing.

  At a panel discussion at the New Yor
k Stock Exchange hosted by the Wall Street Journal, Dimon took aim at the Securities and Exchange Commission, charging that it had no idea that Bear Stearns was on the verge of failure in March 2008. (The chairman of SEC, Christopher Cox, had asserted as recently as the week before Bear failed that he and his colleagues were comfortable with Bear’s capital cushion.) “We have a Byzantine, balkanized system where our laws are closer to the Civil War than today,” Dimon complained. In response to a question about whether the crisis was abating, he responded, “No one really knows. Clearly we’re in the panic stage of unreasonable behavior. [But] the governments of the world will eventually win.”

  Dimon tried to dampen public anger at JPMorgan Chase with a series of full-page ads in major newspapers including the New York Times, the Wall Street Journal, the Washington Post, and USA Today that highlighted JPMorgan Chase’s efforts to keep credit flowing to consumers and businesses that needed it. “Your House Is Your Home,” the first one, which ran on November 11, 2008, said. “We Want to Keep It That Way.”

  He also got out ahead of the debate over foreclosures by announcing a moratorium on foreclosures of owner-occupied homes that applies not only to the $350 billion of mortgages the company actually owns but also the $1.5 trillion worth that it services on behalf of others. (In a 2009 speech at the Chamber of Commerce, Dimon addressed the question whether JPMorgan Chase even had the right to adjust mortgages it only serviced. Holders of mortgage-backed securities who were inclined to complain about the decision, he said, would just have to “get over it.”)