Bank One, Take Two

Jamie Dimon's big changes have restored profitability. Now, he's trying to turn the Chicago bank into a nationwide powerhouse

Fired from his post as Citigroup president in 1998, spurned by Sanford I. Weill, his longtime mentor there, and unsure about where to go next, James Dimon did what any frustrated 42-year-old New Yorker would do: He took up boxing. "Mind, body, and soul, you can't think about anything else," Dimon says. "Your whole world is what is in front of your hands and your face. I loved it."

Eighteen months ago, Dimon stepped out of the ring and took up another all-consuming challenge: turning around Bank One Corp. (ONE ), the badly managed, financially struggling bank based in Chicago. Bank One, now the nation's sixth-largest in terms of assets, is the result of a 1998 merger between First Chicago NBD Corp. and Banc One, a deal between two companies with different--and antagonistic--cultures. Dimon has put an end to that tension, mostly by letting go of senior executives from both sides, while also making the $270 billion bank profitable again. Even Nancy A. Bush of Ryan, Beck & Co., one of Bank One's many critics on Wall Street, says: "It clearly is a better bank now."

For Dimon, who sank nearly $60 million, almost half his personal fortune, into Bank One stock, better is hardly enough. To thrive in the eat-or-be-eaten financial services arena, he knows the bank has to expand. And shareholders are becoming increasingly impatient that it hasn't done so. Investors have pushed the company's stock down from $39 in June to about $33 now, about $5 more than the price before Dimon joined on Mar. 27, 2000. "I like Jamie. He's a good manager. But, you know, this is a tough nut to crack," says David Dreman, chairman and chief investment officer of Dreman Value Management LLC, which has pared its stake in Bank One by 14% since April, to 5.9 million shares.

PLASTIC WOES. Dimon hopes that he can turn the economic slowdown to Bank One's advantage by buying distressed banks and other financial outfits, perhaps by yearend, he tells BusinessWeek. This is familiar territory for Dimon: He helped Weill build the Citigroup (C ) empire over 16 years. "We're getting closer and closer," says Dimon. "We will be on the acquisition trail in a prudent way."

Prudence will certainly be called for. As at most other banks, war worries are weakening customers and unsettling investors. Between the first quarter of 2000, when Dimon joined, and the third quarter of 2001, nonperforming loans jumped from $1.6 billion to $3.1 billion and they'll probably keep climbing as business distress deepens. Likewise, anxious consumers seem sure to spend less in coming months, making the lack of growth in the bank's long-troubled $66.8 billion credit-card unit, First USA, more nettlesome--especially since nearly one-third of Bank One's earnings historically have come from there. By contrast, at Citigroup, which runs the nation's biggest credit-card business, plastic accounts for less than 23% of profits. For Bank One, earnings overall in the third quarter hit $754 million, up from $581 million in the same quarter a year ago.

But Bank One's gloomy short-term prospects ignore the overhaul that Dimon has engineered. His top-to-bottom recasting and cost-cutting has put Bank One into the kind of fighting trim that could get it through tough times. By reducing the company's staff by about 8,000, to 75,800, Dimon has slashed its annual expense base from $10.6 billion to $9.2 billion, and further layoffs should bring that to $9 billion or less by yearend. Dimon has been able to close a costly call center that was helping handle the huge number of First USA customer complaints: Dissatisfaction levels with credit cards have fallen from 26% in late 1999 to just 16%. And he has made it a priority to mesh no fewer than six computer systems so that customers in Detroit, for instance, can easily cash checks in Dallas. Aside from the obvious consumer benefits, the move should lop another $200 million annually off costs by the end of 2002. Most important, Dimon has bulked up reserves so he can better absorb loan losses. Bank One has set aside $4.5 billion, or 2.73% of its loans outstanding, giving it a bigger cushion than most of its rivals.

Such moves will go far to shore up Bank One's profitability--which bank executives figure could still be preserved if prospects for the economy turn far darker. Even the most gloomy analysts expect the company will earn $2.8 billion this year, compared with a loss of $511 million last year. And if times worsen, Bank One should still earn some $2.9 billion next year, says Prudential Securities analyst Michael Mayo, who since May, 1999, has advised investors to sell the bank's stock. "Jamie Dimon is an uptick for the firm," says Mayo, "but we still believe he inherited a much weaker franchise than he or anyone else could have predicted."

SECOND CHANCE. Actually, this Harvard Business School graduate knew exactly what he was getting into. After being fired by Weill--both say they clashed amid the strain of merging Travelers and Citicorp--Dimon mulled over several possibilities. He rebuffed overtures for senior positions at (AMZN ), Home Depot (HD ), and Barclay's (BCS ). Bank One's chief appeal: As a 14-state banking "platform," it gives him a second chance to build a national financial powerhouse. Weill, now reconciled with Dimon, is confident his former protégé will succeed. Says the Citigroup chief executive: "I'm a big fan."

Dimon is following a road map similar to the one he and Weill sketched out in the mid-1980s when he was Weill's right-hand man and chief number-cruncher. They started by fixing Commercial Credit, a troubled $4 billion-a-year insurer and lender, and then buying Primerica Financial Services Group (including Smith Barney), Shearson Lehman Brothers (LEH ), Travelers, and finally Citicorp. Dimon, hoping to do much the same at Bank One, is betting that distress sales in the coming year could help him. "The best companies will be predators in bad times," says Dimon. "But you don't want to be the biggest and dumbest. You want to be the biggest and most respected."

For all his ambition, though, Dimon is cautious. Robert I. Lipp, who also helped build Citigroup, says it was Dimon who labored over the due diligence when Weill & Co. made acquisitions: He "was the one who made sure people didn't get carried away," says Lipp. Indeed, Dimon--who spits out hurried bits of sentences and whose office has on display "No Whining" signs and a four-star general's helmet--has made only one purchase so far. In July, he bought $6.2 billion in credit-card receivables from Wachovia Corp. (WB ), cementing First USA's position as the nation's third-biggest credit-card operation. Now, he says, he's looking at middle-market banks, other credit-card portfolios, and asset-management firms.

As Dimon learned working cheek-by-jowl with Weill, a cohesive team is crucial, and he says the senior management is finally jelling: "It's exponentially becoming more fun--because of the people." Dimon quickly replaced top executives who couldn't put up with the long hours and close cooperation he required, and he shook up the responsibilities of others. Among those he wooed to Bank One is the chief financial officer, Charles W. Scharf, who left Citigroup.

Dimon has deliberately upended some of the bank's old practices. Before, top executives were paid handsomely whether the bank thrived or not. Now their pay turns on how well the whole company does. And Dimon has instilled accountability all the way down to the local branches, setting up profit-and-loss statements for each and doling out hefty bonuses for top performers. Says director John R. Hall, a former acting chairman of Bank One who recruited Dimon: "Jamie has brought his own culture to the bank."

Dimon's business savvy has been years in the making and has brought with it some odd moments. As a teenager, he worked summers for his dad, Ted, a New York stockbroker. Years later, Dimon indirectly oversaw his father at Salomon Smith Barney. "He would never admit I was his boss," laughs Dimon. "But no broker would ever admit you're their boss."

During his years with Weill, Dimon learned plenty of management lessons: Solve problems quickly. Demand profitability fast. Be bold. At Bank One, he has followed two of those maxims to good effect. Now, after a year and a half of laying the groundwork, he has to be bold. Or learn to be content as No. 6.

By Joseph Weber in Chicago

    Before it's here, it's on the Bloomberg Terminal.