Last Man Standing (37 page)

By one widely watched measure of financial stability—the amount of leverage on a company’s books—Dimon and his colleagues looked downright judicious compared with their freewheeling competitors. At the end of 2007, JPMorgan Chase’s balance sheet was leveraged 12.7 times, versus 19.2 times for Citigroup, 26.2 times for Goldman Sachs, 31.9 times for Merrill Lynch, and 33.5 times for Bear Stearns.

The new year brought two milestones for Dimon. The first was professional. On January 16, JPMorgan Chase eclipsed Citigroup in market capitalization. The event was widely remarked by Wall Street, though Dimon claims it meant nothing to him. “I don’t look at market capitalization as a measure of success,” he says. “You’ve never heard me say a word about it. You’ve never read it in a press release, and you’ve never heard Mike Cavanagh [the chief financial officer] talk about it. You’ve never heard anyone in this company say that size is good, and you never will. I don’t want to be big and stupid. I want to be really good at what we do. Stock price is almost irrelevant to me, although I will admit I was surprised.” (Although his argument is persuasive to some degree, it
strains belief that Dimon does not focus on both what the company does and where its stock price is trading. Not only is his net worth tied to the level of the company’s stock, but on Wall Street, stock price is the way the score is kept.)

The second milestone was a little more personal. Dimon cochaired the annual meeting of the World Economic Forum in Davos, Switzerland, in January. Wall Street had long known of Jamie Dimon, but the wider world had known him less. News reports also confirmed that Dimon had hired the former British prime minister Tony Blair as an adviser to the company. (Blair was being paid either $5 million or $1 million a year, depending on whom you believe. JPMorgan Chase had no comment on the issue.)

In the meantime, Barack Obama was catching up to Hillary Clinton in the polls for the Democratic nomination. As a board member of the Federal Reserve Bank of New York, Dimon was prohibited from making an outright endorsement, but his preference for Barack Obama was an open secret.

Although the bank had performed admirably in 2007, Dimon was concerned about weakening results in both the investment bank and the company’s loan portfolios. The price of a barrel of oil had hit $100 on January 3, the U.S. dollar was cratering, and the Fed once again cut rates three weeks later in an effort to stave off the recession that had become all but inevitable. After all their work to keep the company’s balance sheet strong, executives at JPMorgan Chase faced the likelihood that they might be the good house in the bad neighborhood, dragged down with the broader economy.

The turmoil had already claimed another victim. On January 8, the chairman and CEO of Bear Stearns, James Cayne, who had been at the firm since 1969, resigned from the CEO job, under pressure. (He held on to the title of chairman of the board.) Alan Schwartz, the company’s sole president since the firing of Warren Spector in August, replaced him. The market was becoming increasingly skittish regarding the viability of Bear Stearns. By mid-January, the price on credit insurance for $10 million of Bear’s debt had risen to 2.3 percent annually: $230,000—double that of Morgan Stanley and four times that of Deutsche Bank.

At JPMorgan Chase’s “investor day” in February, the mood was mixed. The company had record revenues and earnings in 2007, yes, but the economy was looking grim. Also, the company sat on $94 billion of home equity loans, and delinquencies were headed skyward. Losses on the home equity portfolio had surpassed Dimon’s stress-testing scenarios, and the CFO, Mike Cavanagh, said that in the future the company would be assuming a more conservative stance. He dropped a bomb on the audience by explaining that the firm could add as much as $450 million more to loan-loss reserves in the first quarter alone. “We did not see the magnitude of the housing crisis coming,” he admitted. Though it had sold off much of its subprime portfolio, the company still owned $15.5 billion worth, and more than 12 percent of those home owners had been delinquent for 30 days or more.

The company also shifted $4.9 billion of leveraged loans from “held for sale” to “held to maturity” on its balance sheet; this shift allowed it to delay taking losses on the loans. “We are going to be cold-blooded economic animals on [these loans],” Dimon told his investors. “If we don’t mind holding [them], we’re going to put [them] in the portfolio.” Cavanagh insisted that the company viewed the loans as good investments, but JPMorgan Chase nevertheless tacked on an additional $500 million to its loan-loss reserves. In 2008 alone, Cavanagh added, it had already determined to mark the leveraged loan book down another $800 million.

Dimon was his usual self—confident, vaguely dismissive, a little funny—and spent time after the presentation joshing with his lieutenants about the fact that Charlie Scharf’s presentation had sent the company’s stock down the most during the morning. (The sessions are broadcast over the Internet, and investors react to the presentations in real time.) During cocktails after the full day schedule, his penchant for analysis was again on display. He suggested to Steve Black, cohead of the investment bank, that they chart the day’s presentations to see who inspired the market and who did not.

Earlier in the day, Dimon had voiced irritation with what he considered the overdone concern among investors about the state of the markets. “This is not the first crisis that ever happened,” he told the assembled
crowd. “We shouldn’t be all atwitter over this stuff. Life goes on. Recovery will come … for most.” He was right in suggesting that some would not recover. A few weeks later, the first major victim of the financial crisis was knocking on his door, begging for help.

• • •

The first week of March seemed quiet on the surface, but chaos reigned inside Bear Stearns. Even though the company was on track to report solid earnings in its first quarter, trading partners were increasingly skeptical that it was a reliable counterparty. Not only did Bear have its own substantial mortgage exposure; it was also a significant lender to a few hedge funds—Carlyle Capital, Peloton Partners, and Thornburg Mortgage—that were also looking wobbly because of their own bad mortgage bets.

When the end came for Bear Stearns, it came hard and fast. By March 5, the annual cost of credit insurance on $10 million worth of Bear bonds had risen to $350,000 and was heading higher. On March 6, the Dutch firm Rabobank told Bear’s executives that it would not roll over a $500 million loan coming due the next week. At the same time, Moody’s downgraded a number of mortgage-backed securities issued by Bear. The company’s stock slipped to $62.30—less than half its October levels. On March 7, the cost of credit insurance rose to $458,000. By the next Monday, March 10, the cost was $626,000.

Remarkably, as Bear teetered on the edge, a key member of its leadership for some reason concluded that being out of town was acceptable. Alan Schwartz, then CEO, was in Palm Beach at the luxurious Breakers resort for the company’s annual media conference, a confab at which he mingled with Time Warner’s Jeff Bewkes, Disney’s Robert Iger, News Corp’s Rupert Murdoch, and Viacom’s Sumner Redstone. He chose not to rush back to New York to take charge.

Schwartz issued a press release on March 10 claiming that the company’s “balance sheet, liquidity, and capital [remained] strong.” The company was sitting on $18 billion of cash, he told investors and counterparties; there was nothing to be concerned about. Not true. The firm was dangerously leveraged, with just $11.1 billion in tangible equity
backstopping $395 billion in assets. Worse, trading partners were now leaving in droves.

On Tuesday, March 11, the Federal Reserve made an unprecedented move—it decided to open its discount window to investment banks for the first time, allowing them to borrow up to $200 billion in Treasury securities in exchange for any mortgage-backed collateral the banks might provide. The hitch: the program would not commence until March 27. Charlie Gasparino suggested on CNBC that the Fed’s moves were clearly aimed at helping Bear. The only question was whether that help would come in time. Another Dutch bank, ING, told Bear it was withdrawing $500 million of financing. Rabobank, which had already done the same, signaled that it would also not renew a $2 billion loan coming due the next week. Adage Capital, a hedge fund, removed its money from Bear’s prime brokerage arm that day, and other hedge funds were making noises about doing likewise. Fidelity Investments, which had been an overnight lender to Bear to the tune of $6 billion a day, pulled its funding during the week. Federated Investors, into Bear for $4.5 billion a night, also reneged.

William Cohan suggests in
House of Cards
that the “dirty little secret” of Wall Street firms was just how much they relied on such overnight “repo” funding. He was right. Although there was always the risk that a firm might lose its access to short-term funds instantaneously—and thus be left unable to repay its obligations—this hadn’t happened to any major firm in memory, and the risk was therefore essentially ignored. Until it couldn’t be.

That same day, the chief of the New York Fed, Tim Geithner, and the Fed’s chairman, Ben Bernanke, hosted a luncheon in the Washington Room at the New York Fed on 33 Liberty Street. The CEOs of most of the top Wall Street firms were in attendance—Lloyd Blankfein of Goldman Sachs; Ken Chenault of American Express; Dimon; Dick Fuld of Lehman Brothers; Bob Rubin, chairman of the executive committee at Citigroup; and John Thain of Merrill Lynch. A few kingpins of private equity and hedge funds were also there, including Ken Griffin of Citadel Investment Group, Bruce Kovner of Caxton Associates, and Steve Schwarzman of the Blackstone Group. There was no one
representing Bear Stearns in the room; Schwartz had not even been invited.

On the morning of Wednesday, March 12, Schwartz appeared on CNBC in an effort to deflect growing concerns about the company. “Some people could speculate that Bear Stearns might have problems, since we’re a significant player in the mortgage business,” he said to the anchor, David Faber. “None of those concerns are true.” If this was not an outright lie, it was surely a twist of the truth. The previous day three banks—Credit Suisse, Deutsche Bank, and Goldman Sachs—had all received numerous “novation” requests from investors seeking to have someone take over Bear’s side of various derivatives trades.

Schwartz returned to New York on the afternoon of March 12. That evening, he called the banker Gary Parr, of Lazard, who was watching Patrick Stewart in a performance of
Macbeth
in Brooklyn. Parr left at intermission and met the Bear executives at their offices to discuss their “strategic options”—Wall Street’s code for a fire sale. Schwartz also called H. Rodgin Cohen, the chairman of the law firm Sullivan & Cromwell. After a brief discussion, according to the
Wall Street Journal
, Cohen dialed Tim Geithner and asked if there was any way the Fed might accelerate the timing of the opening of the discount window. “I’ve been around long enough to sense a very serious problem,” Geithner told him. “If he’s worried, Alan needs to call me.”

Schwartz did call Geithner the next day to brief him, but maintained that he hoped to find a solution without the Fed’s help. He was kidding himself. By this point things were moving so quickly that there was little for him and his colleagues to do but watch the money stream out the door. That morning, the hedge fund Renaissance Technologies took $5 billion out of Bear’s prime brokerage arm. In the afternoon, another hedge fund, D.E. Shaw & Co., did the same thing.

At the day’s end, Bear had just $5.9 billion of cash on hand, and the company’s stock price was plummeting. Gary Parr was working the phones, trying to find what he called a “validating” investor—an outsider who could lend credence to the idea that Bear was still viable. One of the first people on his list was Jamie Dimon.

At the same time that Alan Schwartz’s world was falling apart,
Jamie Dimon was settling into his comfort zone. While JPMorgan Chase had chased market share during the credit boom—by loosening loan covenants or adjusting pricing downward along with the rest of the herd—their relatively disciplined approach had left Dimon and his operating committee in position to pick off a weakened competitor or two if the turmoil continued. In January, JPMorgan Chase had bought $4.3 billion in reverse mortgages from the struggling U.K. bank Northern Rock at a steep discount. “We are one of the few people that everyone knows are open for business and ready to work on some of these things,” Bill Winters said at the time.

On the afternoon of March 13, in fact, a number of executives, including the chief financial officer Mike Cavanagh and Charlie Scharf, sat in an eighth-floor conference room at 270 Park Avenue, getting ready to go to Seattle the following Monday. Washington Mutual, the Seattle-based bank, had run aground because of its own subprime mortgage troubles and had put itself up for sale. There was also the possibility that one of the Ohio-based banks might be on the block, and Dimon intended to bid aggressively for at least one of the two.

Around 6:00
P.M
., Dimon stuck his head through the doorway of the conference room. It was his fifty-second birthday, and he was heading out for dinner with his wife, his parents, and his eldest daughter, Julia. The celebration was to be at Avra, a Greek restaurant that was a favorite of his parents. “I got another call from someone who wants us to consider buying their company,” Dimon said, almost in passing. To no one’s real surprise, the caller had been Gary Parr, on behalf of Bear Stearns. “But it didn’t have a tone of
‘This is going to happen in the next 12 hours,’
” recalls Cavanagh. “It was more like we should spend some time to see if something would make sense between the two companies. All by itself, given the environment, it wasn’t a strange or alarming bit of information.”

An hour later, during dinner, Dimon’s cell phone rang. It was Parr, asking him if he had a moment to speak to Alan Schwartz. As Dimon walked outside to the sidewalk, the CEO of Bear Stearns cut to the chase. “We really need help,” Schwartz said. “How much?” Dimon replied.
“As much as $30 billion,” was Schwartz’s response. “Well, the answer to that one is easy,” said Dimon. “No.”