Online Extra: Dimon in the Rough

The legendary cost-cutter has his work cut out for him as he seeks to revamp JPMorgan, especially its investment bank

Of all the stories about the homecoming of banking hotshot Jamie Dimon, the one about the limos gets the most mileage. The "Master of Cost Control," Dimon was unleashing his signature style of cutbacks at New York's JPMorgan Chase (JPM ) -- focusing hard on its investment banking unit. Gone were the usual Wall Street banker perks, such as lavish expense accounts, free cell phones, and, in some cases, big offices. But it was the constant stream of limos waiting to spirit bankers home from their Park Avenue offices that had particularly raised Dimon's ire.

As the story goes, Dimon hopped into the back seat of the first limo and demanded of the driver the name of the executive who had hired the car. On down the line of limos Dimon went, furiously calling mortified bankers from his cell phone: "Too good for the subway? Why don't you try walking for a change?"

This oft-told tale has come to epitomize Dimon's combative, no-frills management style -- only he says it never happened. For sure, as JPMorgan's president and chief operating officer, Dimon has been deep into his stock-in-trade waste-management campaign since returning to his native New York a year ago -- and the investment bank has been high on his hit list. To streamline the entire company Dimon-style, all line managers must now generate thousands of internal profit-and-loss statements, for everything from individual retail branches to each corporate client that the investment bank serves.


  Dimon, who will become JPMorgan's CEO next spring, likens his relentless drilling into each business to peeling onions. He honed his skills by buying moribund businesses alongside Citigroup's (C ) Sanford Weill, and stripping them down to their most valuable core. Dimon is brutal on integration, says CreditSights' analyst David Hendler: "It's the thousand-mile march, and not everyone will survive."

Survival skills are pretty important for JPMorgan's highly paid investment bankers -- their ranks are thinning through attrition, layoffs, those jumping ship. Says an analyst on condition of anonymity: "I wouldn't want to be working there now. Jamie's a taskmaster." Third-quarter results were "terrible," Dimon said publicly, with the greatest blame going to poor fixed-income trading, where revenues slumped by 23%, to $1.1 billion, vs. the year-earlier period.

The persistent gossip on Wall Street has Dimon pitching fits behind the scenes. Down on the trading-room floor, he had supposedly fired people on the spot and put the kibosh on future risk taking. "He's here two months, and lo and behold he's supposedly down on the trade floor yelling at people," says Steve Black, co-CEO of JPMorgan's investment bank.


  Black and London-based co-CEO Bill Winters have trimmed the department by about 300 bankers since September, many of them from the upper managing director ranks. But Black says the story of Dimon's tirades is "pure fiction.... What do people think, that Jamie's managers are just a bunch of lap dogs? They obviously don't know Jamie's managers, or Jamie." Dimon, when asked about such incidents, throws up his hands in incredulity. "I get credit for things I don't do," he says.

He does, however, admit that the investment bank needs a lot of fixing. Among all his initiatives to help JPMorgan, the nation's No. 2 bank, gain traction, his plans for the corporate investment bank will likely take the longest to bear fruit.

But the turnaround there is central to JPMorgan's overall success: The investment bank generates 33% of total operating revenues and 48% of operating earnings. Last year, the investment bank was No. 4 in the U.S. initial public offerings market and increased its market share to 9% from 1%. It's No. 1 in credit and interest rate derivatives and syndicated lending, and No. 2 in global underwriting of investment-grade and high-yield debt. It ranked No. 3 in the worldwide merger and advisory business, advising on $422 billion worth of announced deals last year, according to Thomson Financial.

Nevertheless, surging salaries on top of a couple of rough quarters dampened last year's results. Although fees of $1.1 billion for the year represented a 29% increase (the largest increase in fees since 2000), operating earnings by the fourth quarter were down 18% from the year-ago period.


  Credit Suisse First Boston analyst Susan Roth figures that profits could fall further this year. For one thing, fixed-income trading -- from which the investment bank has obtained about half its revenues in the last couple of years -- is likely to be tougher. But the unit has a deeper-seated problem. Bear Sterns analyst David Hilder found that JPMorgan's investment bankers were roughly half as productive in their use of capital as rivals at Goldman Sachs (GS ) and Lehman Brothers. Had they performed as well, he figures, the investment bank's operating earnings would have been 22% higher.

So what's Dimon going to do? This year, he has earmarked $150 million out of a $1.1 billion spending plan for new hires and technology improvements. That money will build state-of-the-art trading platforms to generate more business in energy and commodities, where the investment bank pales in comparison to rivals. JPMorgan is forecasting that the investment could initially triple the investment bank's revenues from these lucrative sectors by almost $200 million this year.

Dimon also wants in on a piece of the booming hedge-fund industry, but he's not willing to invest the $300 million or so it'll take to attract their stock-trading business. Instead, he's incrementally adding onto his fixed-income business and constructing a specialized brokerage arm that can handle hedge-fund trades in both foreign exchange and commodities.


  Black and Winters will oversee an additional $1 billion in technology spending out of their own budget that will bolster the proprietary, or in-house, trading desk as well as develop a new computerized risk-management system. To boost the equities business, the investment bank hired a handful of applied math PhDs who are building complex models (built on algorithmic formulas) designed to generate ultrafast electronic trading for sophisticated investors such as pension-fund and endowment-fund managers.

The investment bank will mine for more business abroad this year, capitalizing on a new joint venture with one of Britain's oldest financial advisory firms, Cazenove Group. It may take time for Cazenove brokers to learn all the skills that the New Yorkers can teach them, say insiders. "Their lives will change for the better," says Winters. "While it's early days, we have generated a fantastic pipeline and completed several transactions that would not have been possible without the joint venture."

Black and Winters expect to build stronger partnerships with JPMorgan's commercial bank, Treasury, and securities-services units, as well as Chase Home Finance, generating potentially "hundreds of millions" in new revenues, says Black. For example, the investment bank now securitizes very little of the billions in loans generated by Chase Home Finance, one of the nation's largest originators, paying out lucrative fees to others when it could bring the effort in-house. Ditto for credit-card receivables, a business in which the newly merged bank is now ranked the largest player.

So far, Dimon and his team seem to have convinced Wall Street that they can surmount the obstacles at JPMorgan's investment bank and beyond. Mike Holton, fund manager of the $397 million T. Rowe Price Financial Services Fund, which counts JPMorgan among its top-10 holdings, agrees: "Jamie Dimon is motivated to succeed." Still, motivation is one thing and results, another.

By Mara Der Hovanesian in New York, with Stanley Reed in London

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