The House of Dimon
The JPMorgan Chase CEO became the go-to guy on Wall Street with the emergency acquisition of Bear Stearns--a surprising step for a man who is mostly an old-fashioned consumer banker.
By Lisa Kassenaar and Elizabeth Hester Bloomberg Markets June 2008
Jamie Dimon digs around in the blue-plastic recycling bin under his mahogany desk and pulls out a 41-page sheaf of papers marked "JPMorgan Chase & Co. Confidential."
The document is the chief executive officer's daily update on the integration of Bear Stearns Cos., the bank he bought in a weekend of dealmaking in mid-March. Dimon, 52, says he has more than 5,000 people working to combine the companies. Riffling through the pages of the Bear Stearns report, Dimon displays long columns of text and numbers detailing progress in dozens of areas, from risk analysis to research, to regulation. His people have figured out which of the roughly 700 computer applications the merged investment banks will use, he says. They've visited more than 60 Bear Stearns real estate sites. "This is like the 101st Airborne," Dimon says, grinning. "You've got the tanks, the planes, the supplies, the logistics, the choppers--when I talk about the ability to do a deal, this is what I mean."
No one doubts Dimon's ability to do a deal. He's been doing them since he was 26, when, not long out of Harvard Business School, he went to work for Sandy Weill, the man who built a dozen mergers and acquisitions into Citigroup Inc. While the Bear Stearns purchase was huge news on Wall Street and beyond, it was another target--one that got away--that more clearly captures Dimon's strategy at JPMorgan Chase. On the same weekend that more than 200 JPMorgan bankers were poring over Bear Stearns's books to prepare for the takeover, another JPMorgan team was 3,000 miles away in Seattle examining the books of Washington Mutual Inc., the largest savings and loan in the U.S., according to a person familiar with the situation. Though that transaction fell through, Dimon's determination to expand JPMorgan's consumer bank is not likely to flag.
In a Wall Street convulsed by crisis, it's Dimon, grandson of a Greek immigrant and son of a stockbroker, who has emerged as the closest thing modern finance has to a statesman. The paradox of Dimon's ascent to the rank of Wall Street legend is that he owes his status to the strength of his consumer business-- branch banking and credit cards--not to JPMorgan Chase's prowess as an underwriter or trader of securities.
"We call the company 'JPMorgan,' and people think of it in those terms," says Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors in Cincinnati, which oversees $16.7 billion, including JPMorgan shares. "But in reÔality, it's Chase--it's a retail franchise, and that's the strength of it." Dimon, who is chairman and CEO of JPMorgan Chase, is sticking to his consumer strategy even as his bank is being whipsawed by the collapse of the U.S. housing market. In this year's first quarter, JPMorgan set aside $2.5 billion to cover souring mortgage and home equity loans in its retail unit, which lost money in the period. The division's revenue rose 15 percent to $4.7 billion.
Dimon, who spent four years running Chicago consumer bank Bank One Corp., has a passion for bricks-and-mortar branches. He likes the steady stream of deposits from customers, who may also take credit cards or use asset management and commercial banking services. The money flowing in adds liquidity to the entire company.
"JPMorgan is still very interested in raising deposits the old-fashioned way," says Gary Townsend, founder of Chevy Chase, Maryland-based money management firm Hill-Townsend Capital LLC. "Dimon has access to federally insured deposits, and that's a huge advantage in the world that's developing. We've seen that other sources of funding can disappear very quickly."
Buying WaMu would have given Dimon 2,260 branches. The transaction stalled when WaMu announced that an investor group led by David Bonderman's TPG Inc. would inject $7 billion into the comÔpany, allowing it to remain independent. One more billion-dollar-plus purchase--Bear Stearns cost JPMorgan Chase $1.3 billion--would have been easy. Dimon's bank is one of the few not knocked off its feet by the subprime loan crisis and resulting worldwide credit squeeze. While JPMorgan had some exposure to toxic debt, the firm so far has been able to avoid the deep write-offs and executive turnover that have plagued other so-called universal banks--those that combine consumer and investment banking under one roof. Since the start of 2007, JPMorgan has written down $9.7 billion in mortgage-related debt and leveraged loans. The adjustment also includes provisions for future losses. That's a fraction of the $271 billion in writedowns that global financial institutions have reported as of April 18.
Merrill Lynch & Co. and Citigroup have each written down more than $30 billion. Citigroup CEO Vikram Pandit reported $14.9 billion in losses in the past two quarters and is now trying to slash costs across a bank that had ballooned to 375,000 people under his predecessor, Charles Prince, who resigned in November. The bank's stock fell 55 percent in the year ended on April 11.
Marcel ospel, chairman of UBS AG, is the latest bank executive to announce his departure; he said he would resign in April after the bank reported a loss of 12 billion Swiss francs ($11.9 billion) and $19 billion of new writedowns. The Zurich-based bank, whose shares fell by 44 percent in the year ended on April 11, is seeking shareholder approval to raise $15 billion to replenish its capital after a total of $38 billion in writedowns.
The theory behind JPMorgan Chase and other universal banks--that an agglomeration of consumer and investment banking, and sometimes insurance, is worth more than the sum of its parts--has for some observers been discredited by the crisis. "The model on Wall Street is broken," says Kenneth Moelis, the former head of UBS's investment bank, who now runs his own firm, Moelis & Co. "The vertically integrated model doesn't work." He says combining "smart investment bankers" with the "bureaucrats" of retail banking is a failed experiment. "When brains come up against bureaucracy, it's a massacre," he says.
Dimon is the steward of a universal bank that's steeped in history. One part, led by J. Pierpont Morgan and once known as the House of Morgan, grew to include Morgan Grenfell in London, Morgan & Cie. in Paris and Morgan Stanley in New York. J.P. Morgan, then 70, engineered a bailout of U.S. trust banks and the New York City government during the Panic of 1907--a financial breakdown that resulted in the creation of the Federal Reserve. (See "The Improviser," also in this issue.) Chase Manhattan Bank, run for 11 years by David Rockefeller, was the product of a 1955 merger between Chase National Bank, named after former Treasury Secretary Salmon Chase, and Manhattan Co., founded by New York lawyer Aaron Burr.
Dimon's office is on the eighth floor of the bank's Park Avenue headquarters, just across the street from the $1 billion Bear Stearns building. In one corner, a bronze-colored sculpture of the Statue of Liberty holds a torch that glows with an electric light. In the adjacent sitting room, a glass cabinet holds the wood-handled pistols used by Burr and Alexander Hamilton in the 1804 duel that killed Hamilton, the first U.S. secretary of the Treasury.
Dimon, who helped invent the universal banking model during his 16 years as an apprentice to Weill, now says that a company with too many types of products is too large to manage. He says that insurance, for instance, is an outlier for a bank. "You have to stay focused on where you can win," he says. "It all comes back to management sitting down and saying, 'Can we handle this?'" Dimon sold Chase Insurance Group, a life insurance division, to Protective Life Corp. for $1.2 billion in February 2006. Citigroup has also exited the insurance business.
"Jamie's just trying to do the Citi model--only smarter," Sorrentino says. "He's very much focused on cost. That's been his expertise. He didn't lose sight of the risk management, and he's growing the franchise at a point when his competitors really can't."
Dimon is a fanatic about details, says one former competitor, David Komansky. "Jamie has always had a full tank of gas," says Komansky, who ran Merrill Lynch from 1996 to 2002. "It's very much about having your oar in the water all the time, 24 hours a day, 7 days a week and dealing with hundreds and hundreds of unrelated issues every day. Jamie has clearly excelled at the management dimension of these jobs."
JPMorgan Chase, with 181,000 workers, is now the third-biggest U.S. financial institution by assets, after Citigroup and Bank of America Corp. It's the second-biggest U.S. consumer bank by deposits and the second-biggest U.S. credit card company. Profit in 2007 was $15.4 billion on a record $71.4 billion in revenue, up from $14.4 billion on revenue of $70 billion in '06. JPMorgan's stock has fared better than that of its peers. Its shares fell 10 percent in the year to April 17 compared with a 30 percent fall in the Standard & Poor's Financials Index. The stock rose 26 percent in the four trading days after the Bear Stearns deal.
Dimon largely steered clear of both collateralized debt obligations--packages of debt securities that bundle subprime mortgages, bonds and other loans--and so-called structured investment vehicles, which are off-balance-sheet funding pools that some banks filled with high-risk securities. HSBC Holdings Plc and Citigroup built up tens of billions in SIVs that they had to bring back onto their books late last year. SIVs with at least $31 billion of debt have defaulted since the credit turmoil started last year, according to data compiled by S&P as of Feb. 25.
As Dimon sees it, the exotic securities that brought so many other banks low are doomed. "A lot of these products will never be done again," Dimon says. "Whether or not the regulators say it, the market is going to say it."
JPMorgan Chase did trip itself up when it built a $95 billion portfolio of home equity credit lines. A growing number of those loans may fail in the coming months. The bank reported a 50 percent drop in earnings for the first quarter. Net income was $2.4 billion. The bank said it would set aside $1.1 billion to cover soured home equity loans. That's part of a total of $5.1 billion in writedowns and provisions for the quarter.
JPMorgan's investment bank lost $87 million in the first quarter as fees fell 30 percent to $1.2 billion, the bank said. The division wrote down $1.2 billion of mortgage-related securities, $1.1 billion of leveraged loans and $266 million of CDOs. Investment banking revenue dropped by more than half to $3 billion.
A U.S. recession will mean more pain ahead for the bank as home values continue to drop, unemployment rises and consumers have a tougher time making payments on all types of loans. "When you talk about the financial crisis, I do think that we are more than halfway through it," Dimon says. "The recession is the far more important issue going forward."
Dimon keeps track of his bank's business by scribbling on a sheet of paper in his coat's breast pocket. The notes are divided into two columns: one for "things I owe people" and the other for "things people owe me," according to people who've worked with Dimon. "He carries it until he's used every square centimeter and the paper is old and crinkled," says Michael Welborn, the former head of retail banking at Bank One, which Dimon ran before he merged it into JPMorgan Chase. "He is unbelievable at grasping details and the big picture at the same time."
Dimon spent his early years in Jackson Heights, in the New York borough of Queens, then a largely Greek-American community. By the time he was a teenager, his father, Ted, had prospered as a broker and the family--including Dimon's two brothers, one his fraternal twin--moved to Park Avenue.
Dimon attended a private high school in Manhattan and went on to study psychology and economics at Tufts University in Medford, Massachusetts. He completed a Master of Business Administration at Harvard Business School in Boston in 1982. Soon after, he went to work for Weill, a family friend.
Weill by that time was already a master of mergers. He had just sold his brokerage, Shearson Loeb Rhoades, which he had built up through a series of acquisitions, to American Express Co. He rose to president of American Express in 1983 and then quit the company in 1985 after a conflict with Chairman James D. Robinson. In 1986, Weill took over Commercial Credit, a small Baltimore-based consumer finance company, and, with Dimon along for the ride, began a second ascent.
For the next 12 years, Weill and Dimon worked together buying companies, including Travelers Insurance, bond dealer Salomon Brothers Inc. and retail broker Smith Barney. On April 6, 1998, they announced an $80 billion merger with Citicorp, creating the world's biggest financial services firm. Months later, in a dispute over how to manage the newly formed financial behemoth, Weill and Co-CEO John Reed fired Dimon. He'd been named president just a month earlier.
For Dimon, then 42, his dismissal was a shock. He took 18 months off. Then, in early 2000, he accepted a job as CEO of Bank One, the fifth-largest U.S. bank by assets, and moved his wife and three daughters to Chicago. To telegraph his dedication to the task, he bought more than $50 million of Bank One stock when he walked in the door. Dimon spent four years reorganizing the bank and sharply cutting costs. In 2004, after a short courtship, JPMorgan Chase took over Bank One in a $58 billion transaction.
Welborn, 56, says that when he worked for Dimon, he rarely saw him take a break. While other executives may relax by reading about sports, "Jamie would read a 10K," he says. "It's related to his doggedness to get stuff done." The JPMorgan Chase CEO is known to let his frustrations show with a blast of temper, Welborn and other former employees say. At Bank One, Welborn recalls being dressed down several times. "Generally, within a few days, I would get a bottle of wine," he says.
Dimon spent much of the past three years streamlining a bank he says he wants defined by efficiency, stable sources of revenue and risk management that protects assets, a concept he refers to as his "fortress balance sheet." That balance sheet now lists $1.6 trillion in assets. The company's Tier 1 capital ratio, which gauges a bank's ability to absorb losses, was 8.4 percent in 2007 compared with a 7.2 percent average for the bank's peers. The bank keeps an average of $20 billion-$50 billion available in overnight investments. On April 16, JPMorgan Chase sold $6 billion in hybrid securities to add to its capital base.
The company Dimon took over from CEO Bill Harrison resulted from the merger of Chase Manhattan Corp., Chemical Banking Corp., J.P. Morgan & Co. and Bank One. Those companies had not been thoroughly integrated, Dimon has said. Bank officials say they've saved $3 billion a year in costs through such measures as combining computer systems and eliminating perks for senior executives. "Wasting money is a terrible thing," Dimon says. "I want to build better data centers. I want to pay you more if you deserve it. Big companies waste so much money."
JPMorgan Chase is split into six divisions: retail financial services, credit cards, investment banking, commercial banking, treasury and securities services and asset management. Dimon says he sees the units as gears in a single banking machine, offering different product extensions for individuals, small businesses or larger companies as they grow, yet all part of a single bank.
Dimon says branch banking is critical to his mission, which includes adding a million new customers and 4 million new credit cards next year. Retail outlets, on Main Streets and in shopping malls across America, promote the Chase and JPMorgan brands and attract all types of clients, he says. He's prepared to build the network through a recession, saying the U.S. population will grow regardless of what the economy does. "The recession doesn't mean there won't be 3 million more Americans next year," he says. "They need houses, cars, food, debit cards, checking accounts."
Chase bank, through which the company sells retail services, ended 2007 with 3,152 branches in 17 states, up 20 percent from two years earlier. The company's automated teller network rose 26 percent to 9,186 ATMs in the two years ended in December.
Chase deposits jumped 8.4 percent last year to $218 billion, and the number of checking accounts rose 8 percent to 10.8 million.
Dimon sees no reason to stop selling mortgages and home equity loans--even in the midst of a housing slump. On April 16, he said U.S. home sales may fall another 7-9 percent this year. "If we lose a lot of money in home equity, then our profits will be down," he says. "But why should my profits be down and me not add a million new customers? Then I'm being stupid." The bank offers mortgages directly through branches and over the Internet, and through third-party brokers. In 2007, total market share jumped to 11 percent from 6 percent.
Origination rose 33 percent to $159.4 billion. The growth came even though the company tightened its lending standards. Among other criteria, some maximum loans in states including Arizona and Florida dropped to 60 percent of a property's assessed value.
JPMorgan Chase's investment bank has suffered with the rest of Wall Street amid the global credit market freeze. Return on equity, a measure of how profitably a company invests its capital, came in at 26 percent in the first half of last year--then dropped to 4 percent in the second half. Dimon aims for an average ROE of 20 percent in the division through all types of markets, he said in a letter to shareholders published in March. In 2008 as of April 14, JPMorgan ranked first in bond underwriting, fourth in equity underwriting and sixth in advising on announced mergers and acquisitions, according to Bloomberg data.
JPMorgan Chase chose to largely stay out of packaging securities from subprime debt because Dimon says it wasn't worth the risk. Yet the bank is the world's biggest counterparty on credit derivatives, including credit-default swaps, among commercial banks, with $7.97 trillion in notional credit derivatives outstanding, according to the Office of the Comptroller of the Currency. Derivatives are financial instruments whose value is based on that of another security. CDSs, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Dimon says his bank can handle the CDS volume, which is almost fully backed by collateral. The most the bank could lose if all of its CDS values went to zero with no recovery, bank officials say, is $22 billion. Brian Yelvington, a strategist at CreditSights Inc. in New York, says the danger for institutions like JPMorgan Chase is that they might have too much exposure to a single corporation. "As corporations go, so go the banks," Yelvington says. "Banks are stressed when corporations and consumers are stressed."
Dimon says he's perpetually concerned about risk. He recalls a conversation about the scandal at French bank Société Générale SA in which an employee was accused of losing $7 billion through unauthorized trades. "Somebody asked me after SocGen whether 'in the back of your mind, you worry about these things,'" he recounts. "I said, 'Hell, in the back of my mind? It's right here,'" he says, jabbing his finger between his eyebrows.
With the acquisition of Bear Stearns, Dimon picks up more fixed-income and energy trading and a prime brokerage to serve hedge funds and large institutional clients. The prime brokerage may bring in $700 million a year, judging by the Bear unit's 2007 revenue of $1.2 billion.
It was Bear Stearns that touched off the credit crisis in July 2007, when two CDO-packed hedge funds it operated went bankrupt. In early March, the bank ran out of money after its creditors refused to extend new loans and its customers fled to other firms.
Dimon first heard Bear Stearns's cry for help on Thursday, March 13, as he sat in a Greek restaurant celebrating his 52nd birthday with his family. Alan Schwartz, an M&A banker promoted to Bear Stearns CEO just two months earlier, made the call, telling Dimon he was facing a run on his bank. He needed help to avoid filing for bankruptcy the following day. The Federal Reserve and U.S. Treasury Department knew of Bear's cash crunch.
By 9:30 the next morning, when the New York Stock Exchange opened, JPMorgan Chase and the Fed had agreed to fund Bear for up to 28 days. The arrangement was historic--the largest-ever intervention by the central bank to keep a Wall Street firm afloat. Yet Bear needed a more permanent solution. For the next two days, JPMorgan's bankers worked through a rapid-fire analysis of its potential new partner. They slept in the office.
On Sunday afternoon, after Dimon insisted the Fed backstop $29 billion of outstanding risk, the two companies announced that JPMorgan Chase would buy Bear Stearns for $2 a share, or about $270 million. The price was lifted a week later to $10 a share to smooth passage of the deal with stockholders, who owned a third of the stock and were faced with seeing their savings wiped out. On Jan. 17, 2007, Bear Stearns had traded at $171 a share.
"What happened to me over that 10-day period, I will probably never go through again in my life," Dimon says. The pressure was enormous--on bankers, regulators, U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke--to strike a compromise and prevent what Bernanke said could be a "chaotic unwinding" of the financial system, Dimon says. "It was about being on the precipice," he says. "You felt it on the phone calls in the middle of the night. What do you do? The catastrophic risk has very high odds, even if it is 15 percent. You don't want to test that."
Working out how JPMorgan Chase could buy Bear Stearns "was like a deal in reverse," Dimon says. "To me, it was much more about the downside, the risk. I do believe this, though, that it was an obligation to our country that JPMorgan had."
Still, Dimon wasn't about to put his bank on the line. He was set to walk away unless the Fed agreed to protect JPMorgan Chase against further big writedowns on Bear's mortgage-backed debt. "We are in the business of risk, and we don't mind taking it," he says. "The real point for me when you take risk is that you always talk about risk-return and whether you can handle all the potential outcomes. We would not and could not have done it on any basis without the Fed's help."
As the deal came together, JPMorgan Chase executives also discussed whether buying Bear Stearns would get in the way of other expansion plans. "The answer was 'not really,'" Dimon says. "Most of the heavy lifting is being done in the investment bank, so that army is fully occupied." The retail side of the bank, meanwhile, hasn't stopped hunting for acquisitions.
In the U.S., the bank is looking to expand in the West, the Southeast, including Florida, and in the mid-Atlantic region, Charles Scharf, CEO of retail financial services, told Bloomberg News in December.
The chase brand is particularly weak in the West--a problem the acquisition of Washington Mutual's branches in California, Oregon and Washington state would have solved. The company, which has $151.7 billion in retail deposits, would also have brought with it a bucket of trouble. It lost $1.1 billion in the first quarter and plans to set aside another $3.5 billion to cover $1.4 billion in uncollectible mortgages and other loans.
"If Dimon wasn't successful with Washington Mutual, then he and his team are out there looking at other franchises that may need some management depth and capital to get them through," says Peter Kovalski, a portfolio manager at Purchase, New York-based Alpine Woods Capital Investors LLC, which oversees $12 billion.
JPMorgan Chase may also be interested in buying Atlanta-based SunTrust Banks Inc.; Winston-Salem, North Carolina-based BB&T Corp.; or PNC Financial Services Group Inc. in Pittsburgh, says CreditSights Inc. analyst David Hendler.
Whatever JPMorgan Chase acquires, the target is certain to get the same army-of-occuÔpation treatment that's underway with Bear Stearns. Dimon has succeeded in keeping his bank out of serious trouble by paying attention to every detail, UBS analyst Glenn Schorr says. "He's the de facto CFO and head of every business," he says. "He knows the numbers cold; he knows the metrics that matter." And what matters to the list-keeping Dimon--when he's not busy rescuing a fallen rival on a high-stakes, high-adrenalin weekend--is quietly minimizing his risks in investment banking and adding branches and retail customers, one by one.
Lisa Kassenaar is a senior writer at Bloomberg News in New York. firstname.lastname@example.org
Elizabeth Hester covers banking in New York. email@example.com