Why JPMorgan's Jamie Dimon Is Wall Street's Indispensable Man
Jamie Dimon is in the middle of a lovefest. In a conference room on the second floor of JPMorgan Chase’s Manhattan headquarters on May 10, the chairman and chief executive officer is fielding questions, town hall-style, from an audience of 300 of the bank’s administrative assistants. Nine hundred more are listening in by phone. One woman pipes up to ask: Would you ever go on the reality show Undercover Boss? “I would if I thought it would make us a better company,” Dimon says. Another wants to know: What do you look for in your leadership team? “Capability, character, and how they treat people,” he replies in his choppy, outer-borough accent. “Leaders can’t just happen to be good at something.” A third woman takes the floor. How do you stay focused on your job in the face of the negative attention the company’s received lately?
It’s a good question. On May 21, Dimon, 57, faces a shareholder vote on whether he should be allowed to remain the bank’s chairman after a year of federal investigations into whether it manipulated energy markets, inadequately guarded against money laundering, abused homeowners in foreclosure, facilitated Bernard Madoff’s Ponzi scheme, and misled the public about the “London Whale” fiasco, the worst trading loss in JPMorgan’s history. Dimon’s reply is unequivocal. “I’m like you,” he says, according to a colleague at the meeting. “I am so darn proud of this company.” The assembly bursts into applause.
Running the largest bank in the U.S. as it makes more money than ever surely helps Dimon cope. JPMorgan earned $21.3 billion last year—a record profit that the CEO’s allies say dismisses much, if not all, of the argument that he’s unfit to continue serving as both chairman and CEO. “The results speak for themselves—enough said,” says John Kessler, a JPMorgan board member until 2007. “I think he’s unapologetic, with the exception of the Whale trade,” says John Mack, Morgan Stanley’s CEO until the end of 2009. “If I had those numbers, I don’t know if I’d be apologetic either.” Two dozen of Dimon’s peers and colleagues echoed the sentiment in interviews.
The notion that profit conquers everything may be the oldest idea in capitalism, but its recent resurgence may say something about how and whether the financial system has changed since the crisis of 2008. Banks have resumed some of the practices that precipitated the meltdown, from wagering billions on credit derivatives to hiking bonuses.
Dimon declined to comment, but according to people who know him, he bristles at the suggestion that the bank’s bottom line matters above all, knowing that such a callous formulation would only anger regulators. More personally, the idea dirties his view of what banking, and his legacy, ought to be. Dimon is not just the biggest banker in America, overseeing $2.4 trillion in assets and 256,000 employees, more than the population of Orlando. He’s supposed to be the noblest, too, the one CEO who kept his bank secure and profitable through the crisis and who defended the industry’s honor during the populist outrage that followed.
Dimon’s stature and the variety and magnitude of problems facing the bank have elevated an otherwise routine corporate governance issue to the level of career referendum. “The vote and the debate right now about splitting the CEO and chairman have nothing to do with splitting the CEO and chairman,” says William Daley, JPMorgan’s Midwest chairman until 2011 and a former chief of staff to President Barack Obama. Instead, it’s as much about Dimon’s outsize persona as his performance. “In an unfortunate way, but that’s the way life is, it is all coming down to this vote around the guy who has been at the forefront of being a successful banker, running a bank that’s still making money and somebody who speaks his mind,” Daley says.
Others become more exasperated, finding the heat on Dimon silly or toxic or both. “They’re jealous,” former Bear Stearns CEO Jimmy Cayne says about Dimon’s critics, in a rare interview since JPMorgan bought the foundering investment bank in March 2008. “They’re looking at themselves as being unfortunate and being underpaid and being underappreciated, and if there’s a piñata out there to take a swipe at, who better than somebody who’s got everything that they don’t?”
In the years after the crisis, Wall Street cheered Dimon on as guardian of the profession’s honor and buster of regulators’ chops. In 2011 he popped up at a speech by Federal Reserve Chairman Ben Bernanke to suggest regulations were stifling job growth. “Has anyone bothered to study the cumulative effect of all these things?” he asked from the audience. “Is this holding us back?”
JPMorgan eclipsed Bank of America in the fall of 2011 to become the largest bank by assets. “We had record profits this year,” Dimon boasted to a roomful of analysts in February 2012. “We had record profits last year. I’ll be damned if we don’t have record profits at least in the next year or two or for a while now.” He upbraided the journalists in attendance for writing about banker pay when media outlets put a lot of revenue toward salaries, too. “You don’t even make any money,” he told them. “We make a lot of money.”
As he uttered the words, JPMorgan was in the process of losing a lot of money. The specific way it was lost—with risk piled on in a unit Dimon had personally encouraged to take more chances—was about to wreck his reputation as the most prudent, hands-on CEO in banking. In a London department whose ostensible purpose was to manage the bank’s risk, traders had instead built up a position in credit derivatives so large, and so difficult to unwind, that one of the traders became known as the London Whale.
The felicitous nickname, the reappearance of crisis-era gremlins, and five ill-advised words—Dimon dismissed the matter as a “complete tempest in a teapot”—combined to enrage the public and Congress. (He later said the remark was “stupid.”) Dimon was called to testify twice about how he, of all CEOs, had let a bank lose billions on derivatives. The subtext was clear: If Jamie Dimon can’t run a bank without stuff blowing up, can anyone? As the Whale losses accumulated throughout 2012, eventually reaching $6.2 billion, federal investigators piled on.
The litigation section of the bank’s quarterly filings now runs to almost 9,000 words, or 18 single-spaced pages. In January the Office of the Comptroller of the Currency (OCC) blasted JPMorgan’s anti-money-laundering controls, citing “critical deficiencies” in the way it monitors transactions, flags suspicious activity, and conducts basic due diligence on its customers. The bank agreed to pay $88.3 million in 2011 to settle claims it violated sanctions against Iran, Cuba, and the Sudan. Separately, Dimon continues to deal with fallout from the Ponzi scheme orchestrated by Madoff, who banked with JPMorgan for decades; Reuters reported in April that the OCC plans to issue a cease-and-desist order against the bank for failing to report suspicious activity, and the bank has tangled with the agency about what documents it must turn over.
Mortgages, which have become an important profit center for Dimon as the U.S. housing market improves, have been a constant source of negative headlines for the bank. Earlier this year, JPMorgan and 12 other mortgage servicers reached a $9.3 billion deal with regulators to settle allegations (without admitting or denying liability) that they ran roughshod over as many as 4.2 million homeowners whose properties were in some stage of foreclosure in 2009 or 2010.
The bank has also been battling the Federal Energy Regulatory Commission about whether its traders manipulated power markets. In November, FERC said it would suspend some of the bank’s energy trading rights for six months, accusing it of withholding information; in March, FERC notified JPMorgan that an enforcement action against the bank and specific employees was possible. Given how few individual bank executives across the industry were sanctioned for their role in the financial crisis, the inquiry could prove politically popular. All told, JPMorgan estimates its legal liabilities for hundreds of cases could run to $6 billion more than its reserves.
Meanwhile, elected officials and regulators have continued to show an insatiable appetite for Whale flesh. A report on what went wrong in London was published in March by U.S. Senate investigators; it showed that Dimon and other top executives knew about traders’ risky activities and specifically approved raising risk limits.
JPMorgan had “a trading operation that piled on risk, ignored limits on risk-taking, hid losses, dodged oversight, and misinformed the public,” Senator Carl Levin, a Democrat from Michigan, said in March. Amid general disregard for regulators and the investing public, Dimon was said to have told executives to stop sending daily investment bank data to the OCC “because he believed it was too much information to provide.” Other bank employees were quoted yelling at regulators and calling them “stupid.” The Federal Bureau of Investigation is probing whether criminal charges are warranted.
“Let me be perfectly clear,” Dimon wrote in a letter to shareholders about the Whale and foreclosures. “These problems were our fault, and it is our job to fix them.” Discussing the FERC and Madoff allegations, spokesperson Kristin Lemkau says JPMorgan disputes that its employees acted inappropriately; she adds that the bank has made progress on money-laundering issues and that the mortgage settlement has gotten more money to homeowners. “But in general, we know we need to do better,” she says.
The scrutiny has put Dimon under considerable pressure to clean house. London employees were fired. Half of the 14 people who served in 2010 with him on his operating committee, his cabinet of senior advisers, are gone; Ina Drew, the chief investment officer who oversaw the trades, resigned.
Dimon’s board, however, has remained relatively untouched, with just two new members since 2008, while other major banks have overhauled theirs since the crisis. Nine members of Bank of America’s 13-person board joined after 2008, including a former member of the Federal Reserve Board of Governors. At Citigroup, 9 of the 11 directors are new, including a former president of the Federal Reserve Bank of Philadelphia and a former CEO of the Bank of Hawaii. That person, Michael O’Neill, became Citi’s chairman and oversaw the abrupt departure in October of CEO Vikram Pandit.
Eliot Spitzer, the former governor of New York and a keen observer of power, would not be sorry if Dimon lost some of his. He thinks the chief executive and chairman roles should be split as a matter of principle. “The reason for that is we know that shareholder democracy doesn’t function in terms of a meaningful check on the CEO,” the former governor says. “Therefore, the only check that remains is the board. And if a board is, as we’ve seen far too often, dominated by the CEO himself or herself, that check also disappears.”
Spitzer sees Dimon’s manifest skills, those that make allies swoon, as beside the point. “Even if the leader is spectacular, we want checks on power,” he says. “We might accept that Thomas Jefferson was a remarkable president, but that doesn’t mean we repeal checks and balances.” Jefferson, who loathed private banks so much that he called them “more dangerous than standing armies,” might agree.
Neil Barofsky, who served as inspector general of the 2008 bank bailout known as the Troubled Asset Relief Program, says America’s banking system has to be based on more than the headlong pursuit of earnings. “Yes, the company has record profits, but it also has a record amount of problems and misconduct,” he says. “It seems pretty obvious from the misconduct at the bank that it has an oversight problem and needs to do something significant about it. The status quo should be unacceptable.”
While Dimon’s fellow directors halved his 2012 pay in January, they don’t seem interested in changing his titles. They told shareholders in the bank’s annual proxy statement to vote against splitting his roles.
Dimon’s backers can’t fathom why anyone would want to. To many, the record $21.3 billion in profit that JPMorgan earned means Dimon had a flat-out fantastic year in 2012, regardless of how many times the bank was slapped by regulators or harassed by the press. Dick Kovacevich, a former Wells Fargo chairman and CEO, says another big mistake under Dimon is “less likely than the Cubs winning the World Series.” He says he bought more than $1 million in JPMorgan stock after the Whale loss brought down its price. “I can see anger and angst,” he says. “I don’t think it’s a rational response.”
Critics are “focusing on the negatives,” says Fayez Sarofim, whose eponymous Houston-based investment firm is one of JPMorgan’s 100 largest shareholders and who believes good results outweigh mistakes. “Everybody wants to stir the pot, and I don’t think it’s a wise decision.”
Alan Fishman, CEO of Washington Mutual in the weeks leading up to its record-setting 2008 collapse and purchase by JPMorgan, says the firm’s regulatory woes are beside the point. “To run a bank that’s as big and complex as the bank is without making mistakes of any sort is impossible, impossible for anybody,” he says.
JPMorgan’s financial success is the result of moves Dimon has been making for years. In 2012, half of profits came from retail banking. The unit earned $10.6 billion last year, while Bank of America’s comparable divisions posted a loss. Dimon has added branches while rivals cut back. The retail division includes credit and debit cards; Dimon has aggressively gone after American Express’s market share among upscale consumers, represented at an extreme by a Palladium Card made of trace amounts of the precious metal and 23-karat gold. The focus has paid off as wealthy customers lead the economic recovery and spenders default on fewer loans.
The investment bank division is doing nearly as well, contributing more than a third of the company’s profits and finishing on top of a key Wall Street league table for the fifth year in a row. This year, JPMorgan is second among mergers-and-acquisitions advisers, notably consulting on Warren Buffett’s $23 billion purchase of H.J. Heinz. On their own, the retail and investment banking divisions would rank among the 100 largest publicly traded companies in the U.S. by revenue. Dimon’s fixed-income trading desk, ranked seventh in 2006, is now the biggest in the world. At the end of 2012 the bank had bought and sold 100 times more credit derivatives than Wells Fargo. Against management feats such as these, a one-off $6 billion loss and a handful of federal inquiries might seem like footnotes.
Dimon “would have about as strong a claim to being the premier banker of the era as anybody,” says Phil Gramm, the former Republican senator from Texas who co-authored the 1999 legislation that ended Depression-era restrictions on banking and helped usher in financial supermarkets. “If I were going to set up the Gramm Galactic Bank tomorrow and I were looking for a CEO, I would certainly want to look at Jamie Dimon.”
Admiring rivals have been known to call Dimon “the sun god.” That cosmic aura has real use, says Kathryn Wylde, who served on the Federal Reserve Bank of New York’s board with Dimon until his term ended last year. “There’s no doubt that it helped the bank, because so much of that business is built on confidence.” The intrusion of shareholders, in the form of a vote on Dimon’s dual roles, she adds, is “indefensible if the company is performing well.”
Other Wall Street elites are mystified by the anti-Dimon movement. “It seems to me sort of spiteful and narrow, and I also think it is appallingly bad corporate governance to take away from the board the right to determine the structure of their senior management,” says John Biggs, a JPMorgan board member until 2007. “Why should shareholders, who’ve been rewarded handsomely by what’s happened under Dimon, why should they come and say, ‘Well, we know better than you’?” Cayne, of the defunct Bear Stearns, calls critics “basically uninformed.” He says: “They’re likely to have an awful lot of bad things to say about either him, or Ronald Reagan, or anybody.”
As the spotlight on Dimon’s vote has become hotter during the past month, Yale University’s Jeffrey Sonnenfeld and Aiyesha Dey of the University of Minnesota’s Carlson School of Management have separately warned that splitting CEO and chairman roles can hurt, not help, companies. Professor Matthew Semadeni of Indiana University at Bloomington’s Kelley School of Business and a colleague looked at 309 companies that made the split. They wrote in this magazine last fall: “Low-performing firms benefit from a separation event, while high-performing firms suffer.” The vote is being pushed by pension funds and shareholder advisory firms including Institutional Shareholder Services, Glass Lewis, and CalPERS.
Within the bank and among its defenders, the vote is regarded as a nuisance at best and an affront at worst. Good governance means letting directors make decisions, the thinking goes. Shareholders are there to enjoy record profits, not to mess with one of Dimon’s titles—especially if there is a risk he would then hand back his other title, too.
It’s hard to imagine who would take Dimon’s place. Born in 1956 as the grandson and son of stockbrokers, he grew up in New York, first in Queens, then on Park Avenue, and arrived at Harvard Business School primed to become a financial star. As an undergraduate at Tufts University, he wrote a paper on a deal between the Shearson Hammill and Hayden Stone brokerages, one of umpteen mergers put together by the restless financier Sandy Weill. Weill happened to be a Dimon family friend, and when Dimon graduated in 1982 he became his assistant at American Express.
When AmEx pushed out Weill in 1985, the protégé left with him. The two quickly dealt themselves back into the game, taking over and rehabilitating a small Baltimore lender the following year. Like the mergers-and-acquisitions spree that followed, there was something about Dimon and Weill’s own collaboration that was greater than the sum of its parts—with Weill as the old-school, backslapping dealmaker who never saw two financial-services firms he didn’t want to put together, and Dimon as the intense, next-generation operations hotshot who beat the balance sheets into line. Dimon became chairman and CEO of Smith Barney just before his 40th birthday. In 1998, Weill and Dimon’s deal frenzy climaxed in an historic merger with Citicorp: They had built the largest financial-services conglomerate on earth. And Dimon was universally understood to be the next in line to run it.
Then he was fired. Dimon had clashed with Weill’s daughter over her role at the company as well as with executives who had arrived with the larger mergers, but Dimon’s primary sin had been crowding the Citi throne. He spent more than a year out of action. “Investors are asking two questions,” bank analyst Sallie Krawcheck said at the time, in 1998. “ ‘What should I do with my Citigroup shares, and where is Jamie going next so that I can buy the stock?’ ”
Bank One, an also-ran to Citi based in Chicago, hired Dimon in March 2000 as its CEO—and chairman. This time there would be no pulling the rug out from under him as he sought to remake the bank in his image, i.e., as a brutally efficient, upwardly marriageable financial powerhouse. By 2004, Dimon was in a position to seal a $58 billion merger with JPMorgan. The disinherited prince of Wall Street was back.
When the financial crisis hit, JPMorgan had enough capital to withstand the storm. And the Dimon legend had taken on an important new dimension: the sober risk manager, skeptical of the easy profits other banks were amassing in subprime mortgages, repeating the phrase “fortress balance sheet” like a mantra. Dimon and JPMorgan were practically the only ones to emerge with their reputations enhanced. Shareholders trusted him, and he delivered.
A Dimon departure, though unlikely, would almost certainly be expensive for shareholders, at least in the short term, no matter how worried they are about the principles of governance. By the isolated metrics of the balance sheet, Dimon should be CEO, chairman of the board, and maybe even chief marketing officer, too. Critics, though, may be raising questions less about the man himself and more about the abilities of any individual to control an institution that, far from being isolated, is systemically crucial. That’s why the conversation has weight.
A blowup in an office in London or some irregularities in the California energy market aren’t proof that Dimon isn’t paying attention, or that he’s lost a step, or that he needs a boss. What they may prove is that not even the perfect banker can prevent enough of his quarter-million employees from making bad decisions. The world has learned what happens when too many smart people make too many bad decisions at a major financial institution, and it can get very expensive. The discussion, then, might not really be about ability, but about the concentration of power—in a person, an institution, and an industry.
Dimon, of course, could capitulate, though there’s no indication he will. “As a politician, one would say, ‘Oh, Jamie, end the f- - -ing fight. Just cave. Give it up. Who cares? It doesn’t mean anything. You can roll Lee Raymond,’ ” says Daley. Raymond, the former ExxonMobil boss, is the 74-year-old lead director of the bank and considered most likely to become chairman if Dimon isn’t. “If I was to give him that advice, he’d look at me and say, ‘What are you, f- - -ing crazy?’ You know? ‘That’s not the right thing to do.’ ”
Daley laughs. “Jamie doesn’t buy that. That pisses Jamie off. That pisses him off big-time. Because that’s a sign of weakness.”