Last Man Standing (14 page)

(In an amusing coincidence, two colleagues independently gave Dimon the book
All I Really Need to Know I Learned in Kindergarten
at this time.)

Several colleagues noticed that Dimon began to morph from being a “Sandy guy” to being a “Smith Barney guy” during this period. As a result, his and Weill’s public fighting continued even as Travelers was enjoying solid financial results. “I can still hear Jamie saying ‘But Sandy!’ with his arm up in a meeting,” recalled Marge Magner in a 2008 interview. “Without any fear. For the right reasons.”

As the tenth anniversary of the Commercial Credit takeover neared, Dimon’s frustration spilled into the open with greater frequency. “Sandy feels like he did all this by himself,” he told one colleague. A constant refrain from Dimon was, “What about us?”—and it was the source of ever-increasing tension between him and Weill. He could hardly contain his growing resentment.

By the late 1990s, Wall Street worshipped at the altar of Alan Greenspan, the chairman of the Federal Reserve. Greenspan, who had been given the nickname Maestro, had ushered in a new golden era. Weill knew the Maestro well. In the early 1970s, he’d hired the wonky economist to speak to Shearson’s research department, and they had engaged in long-running debates about the economy ever since.

Greenspan had taken over the Fed in 1987, succeeding Paul Volcker, who had crushed inflation in the early 1980s by dramatically boosting interest rates. The cost of that rise in interest rates, however, was plunging the economy into what was then the most severe recession since the 1930s. The early going was tough for Greenspan—the stock market crashed in the fall of 1987 and the national economy sputtered for most of the first half of the 1990s—but by the latter half of the decade, things were humming along.

A disciple of the objectivist philosopher Ayn Rand—author of
Atlas Shrugged
and
The Fountainhead
—Greenspan was a vocal, if often convoluted, proponent of free-market ideology and laissez-faire capitalism. Famous for his intentionally incomprehensible testimony in front of Congress—he was legendary for saying nothing in a complicated way—he was nevertheless widely trusted for his market acumen. Bankers particularly adored him. By relaxing the Glass-Steagall Act, he opened the door for banks to become major deal makers and create new financial empires.

Passed in 1933 in response to the crash of 1929, Glass-Steagall was intended to prevent deposit-taking banks from incurring too much risk. Specifically, they could no longer speculate in the stock market. Major firms, including the august House of Morgan, were cleaved into one of two kinds of entities: commercial banks and investment banks. Also, no nonbank company would thereafter be allowed to own a bank. The effect was to make banking an exceptionally dull business, like a utility.

The law held up for a long time, but by the 1980s, American banks considered themselves to be at a competitive disadvantage. Large foreign institutions were expanding, unhindered by such restrictions. For years, banks lobbied for the Glass-Steagall to be repealed, or at least defanged. According to Ron Chernow’s
The House of Morgan
, in 1984, when Greenspan himself had been a director of J.P. Morgan, he’d helped circulate a document prepared by the bank, titled “Rethinking Glass-Steagall.” Six years later, J.P. Morgan became the first bank to receive permission from the Federal Reserve to underwrite securities, managing a $30 million bond offering for the Savannah Electric and Power Company.

As Fed chairman, Greenspan was not entirely laissez-faire. When the stock market went on a wild tear in 1996, he gave his famous “irrational exuberance” speech, which had a somewhat calming effect on investors’ excitement. But when it came to regulation, Greenspan pushed to give banks a great deal more latitude in their operations. He relaxed the limits on banks’ ability to own securities businesses (they had previously been allowed to earn no more than 25 percent of their total revenues from this source). Another arm of the government, the Comptroller of the Currency, decreed that banks might engage in securities underwriting and the sale of insurance if they did so through subsidiary companies.

The end result: after more than 50 years, Greenspan effectively dismantled Glass-Steagall with assistance from Weill, President Bill Clinton, and Secretary of the Treasury Robert Rubin. (Clinton signed a bill in November 1999 that demolished any remnants of Glass-Steagall.) By the time Congress moved to formally repeal the act, it was as good as gone. Greenspan went further—joining forces with Rubin, he blocked
an effort by the Commodities and Futures Trading Commission to impose greater regulations on the derivatives market. Among others, E. Gerald Corrigan, who’d been president of the Federal Reserve Bank of New York from 1985 through 1993, had raised alarms earlier in the decade about the headlong growth of the derivatives market, but Greenspan had sided with the industry and its argument that it was “self-policing.” The owner of
Forbes
magazine, Steve Forbes, later accused Greenspan of believing himself a “monetary philosopher king with Louis XIV ‘I am the state’ proclivities.”

Banks started to make a flurry of big deals. In early 1997, Bankers Trust bought Alex Brown, becoming the first U.S. bank to acquire a securities firm, and Morgan Stanley merged with Dean Witter Discover & Co. in a $10 billion deal. Chemical Bank also bought rival Chase Manhattan, for $9.8 billion in 1996, but chose to keep the latter’s more prestigious name.

It was under Greenspan’s auspices, then, that the Wall Street juggernaut, the creation of giant, financial supermarkets that offered every money-related product under the sun, began. The wholesale clearance of regulatory hurdles made it possible for firms to assemble themselves into conglomerates that were too big to fail, a paradoxical situation that led managers to ignore traditional risk controls and make audacious bets with their capital.

Sandy Weill and Jamie Dimon were early and enthusiastic participants in this movement, a somewhat dubious legacy. On the one hand, banking CEOs can reasonably argue that they needed scale (and leverage) to squeeze sufficient profit from businesses that were largely based on low-margin commodity products. On the other hand, it is also clear that the deals that built these giants were like a party drug, blinding Wall Street to their long-term implications. Everybody wanted to seize the moment and grab a share of the fees, the associated risks be damned.

Although both Weill and Dimon will, to this day, swear by the efficiencies and profit-making potential of mega-institutions, the truth is that the majority of the big-time deals did not work. Perhaps the theory is sound, but the practice is another story. A sprawling conglomerate in
the wrong hands (see Chuck Prince at Citigroup) is a disaster waiting to happen.

Greenspan also later came to be known for the “Greenspan put.” (A put option gives the buyer the right, but not the obligation, to sell an asset at a predetermined “strike” price. If prices rise, you don’t sell. If they fall, you sell at the strike price and minimize your losses.) With aggressive interest rate cuts in the event of any kind of crisis—the Mexican crisis, the Asian currency crisis, the Long-Term Capital Management crisis, the bursting of the Internet bubble, or 9/11—his Federal Reserve created the impression that investors essentially had a “put option” on asset prices, and in the process arguably encouraged excessive risk-taking. His successor Ben Bernanke continued the tradition, resulting in the notion of the “Bernanke put.” The financial crisis in 2007–2009 ended any thoughts that these puts actually existed. When it came to crunch time, there was no one on the other end of the theoretical contract, and investors watched their portfolios evaporate.

• • •

At this point, Weill and Dimon were bickering so much that many colleagues believed some kind of awful climax was inevitable. But in those heady years, personal friction could be overridden by pursuit of the next big deal. As it turned out, however, a major disappointment was on their immediate horizon.

Weill had correctly sniffed out the possibility that Greenspan might be amenable to a deal that was, on its face, a direct repudiation of Glass-Steagall: Travelers acquiring a commercial bank. The law did allow for such a possibility, provided the insurance operations were spun off within two to five years. But Weill had an audacious idea. He would try to buy J.P. Morgan. The bank was no longer a powerhouse, but its name still evoked a power and prestige that Travelers entirely lacked.

His reading of Greenspan aside, Weill’s confidence also stemmed, in part, from the increasing acceptance of corporate America in the national psyche. In the early 1980s, corporate profits were just 3 percent of GDP. By the end of the next decade, they accounted for 10 percent. Business leaders were profiled glowingly and uncritically in
Fortune
and
Business Week
; Jack Welch of General Electric was a national treasure. Even Wall Street was enjoying a brief (though fleeting) period of public approval. The insider traders and junk bond kings of the 1980s had been forgotten. Wall Street titans were considered innovative geniuses; how could Congress justify preventing the smartest people in business from doing as they saw fit?

Weill contacted J.P. Morgan’s head, Douglas “Sandy” Warner, and the two men apparently found enough common ground to put together two three-man teams, one each from J.P. Morgan and Smith Barney. (J.P. Morgan would effectively be merged with Smith Barney in the event of a deal.) For Weill, it would be another feather in his Travelers’ cap. For Warner, a deal might help establish J.P. Morgan as a full-blown investment bank with a more diversified set of businesses, particularly by adding Smith Barney’s brokerage force. Dimon was on Smith Barney’s three-man team, and gave his counterparts from J.P. Morgan a daylong presentation on Smith Barney’s brokerage capabilities. (One member of the Morgan team, Jes Staley, would eventually find himself working for Dimon, but not for another seven years.)

Weill, thinking the merger discussions with Warner were farther along than they actually were, called Greenspan to see if he could give the green light for such a deal. Greenspan replied that he was “open to the logic” of such a combination. But negotiations stalled as Warner made two demands that Weill considered unthinkable. First, the 50-year-old Warner wanted a hefty $30 billion for his company. Second, he wanted the 64-year-old Weill to retire within 18 months of a deal. If Weill thought he might find a way to wiggle out of the retirement condition, the price was beyond ridiculous. Sandy Weill never overpaid for anything, not even for one of the most iconic brands in finance. The talks collapsed. According to journalist Roger Lowenstein, Weill later complained to a colleague that Morgan “would never sell to a Jew.”

Despite the fact that the combination of Travelers and J.P. Morgan was not to be, Weill gained something valuable out of the flirtation—Greenspan’s implicit endorsement of such a deal—which eventually inspired him to come up with an even more ambitious idea. In the meantime, another deal came knocking in just a few weeks.

• • •

Wall Street is merciless. Companies that are the toast of the town on one day can become pariahs in an instant. So it was with Salomon Brothers in the late 1990s. The famous investor Warren Buffett had stepped in to take 20 percent of the company in the wake of a 1991 Treasury bond scandal that had cost Salomon’s chairman John Gutfreund his job—and the company $290 million in fines—but it was commonly understood that Buffett did not see himself as a long-term owner and had been seeking an “exit strategy” for some time. Salomon had become one of his most troubled investments, and he was ready to be done with it. Rumors of the company’s sale had been circulating since 1995.

Buffett’s handpicked replacement for Gutfreund, Deryck Maughan, had succeeded in stabilizing Salomon, and a recent run of strong trading profits had Buffet thinking the time was right to sell. Maughan had been an adviser to the British treasury from 1969 to 1979 and had run Salomon’s Tokyo office from 1986 to 1991, after which time Buffett had tapped him for the CEO slot. Weill had brought Maughan on to the board of trustees of Carnegie Hall that same year, and the debonair Englishman reached out first to Weill when he decided to test the waters for a sale of Salomon in August 1997.

On paper, the deal made a lot of sense. For starters, Salomon’s international operations could complement Smith Barney’s more domestic franchise. Although Salomon didn’t offer much in the way of investment banking, the combination of the two firms’ fledgling efforts would make them stronger than they might otherwise have been. And Salomon’s position as the market’s strongest player in bond trading would be a perfect addition to Smith Barney’s relative strength in equities.

On the other hand, such a deal violated a number of Weill’s cherished precepts regarding acquisitions. In the first place, he would be buying a company on an upswing—a more characteristic approach would have been to buy when Buffett had bought,
not
when Buffett was looking to sell. Most glaring, though, was the notion that Weill was even considering buying a firm with a penchant for letting its traders make outsize bets with the firm’s capital.

Weill and Dimon loved brokers for the stability and profitability they provided. But
traders
were something else entirely. A heavy reliance on trading profits was antithetical to everything these two cost-conscious micromanagers stood for. Robert Greenhill might spend $10 million on an overrated investment banker, sure. But an unsupervised trader could lose
$100 million
in a single day. A botched risk arbitrage trade had recently cost Salomon just that.

Salomon, in fact, was a big player in the emerging realm of derivatives trading, and it was difficult, if not impossible, to get a real fix on the attendant risks of that business. Some months earlier, in fact, Weill himself had referred to Salomon’s trading outfit as a “casino,” and now here he was thinking of buying that casino outright. (Sandy Weill, it can be argued, was somewhat cavalier in his choice of Salomon as the investment bank that would take Travelers to the next level. Building a top-tier investment bank is more difficult than merely making a turnkey purchase.)