Last Man Standing (42 page)

On March 17, 2008, Dimon spoke optimistically about what he saw as the coming end of the market’s crisis. His logic was straightforward.
Massive de-leveraging was going on at financial institutions, alongside massive capital raising. With no new production of securitized mortgage product, supply and demand had to come into balance at some point—hopefully in 2009. As a result, he suggested that the “financial side” of the market turmoil was probably already half over at that point. He couldn’t have been more wrong. The turmoil was just getting started.

In subsequent months, the deal with Bear was eclipsed by even bigger events—the failure of Lehman Brothers, the near-failure of AIG, and the takeover of Merrill Lynch by Bank of America. And that’s as it should have been. Bear Stearns, for all its bluster, was too small to matter in the grand scheme of things. Just over a year later, there was absolutely nothing left of the Bear Stearns name save for a small group of high-end brokers kept on at JPMorgan Chase. (By February 2009, Dimon hadn’t even found a spot for Bear in a warren of private dining rooms on the fiftieth floor of the company’s headquarters paying homage to predecessor companies such at Manufacturers Trust and the Bank of Manhattan. Bear Stearns executives didn’t seem to care much about history in any event. When JPMorgan Chase’s archivist Jean Elliott went to seek out Bear-related historical materials to add to the company’s extensive archives after the acquisition, she found nothing but a pile of annual reports.)

• • •

Reputations were made, destroyed, and burnished during that tumultuous week in March. Paulson, Bernanke, and Geithner received largely positive press, even if some observers questioned the long-term implications of the government’s role in the deal. They had managed to calm the market, had taken out a weak player, and had opened up the discount window at what seemed a critical moment. It all looked fairly smart at the time. All three were later roundly condemned for seemingly haphazard responses to the more dramatic events that came later.

Bear Stearns was neither the greatest deal of all time nor even Dimon’s greatest deal. Merging Bank One and JPMorgan Chase was a far more important event with greater ramifications for Dimon’s career. Was Bear even a good deal for JPMorgan Chase’s shareholders? Dimon
said at the time that it would be unfair to judge the deal until a year after the fact. “You cannot judge us on this deal today,” he said in May. “We are bearing an awful lot of risk. We are pushing as fast as we can to get it done.” Still, by the summer of 2009, it wasn’t looking as if it had been worth the effort, at least in terms of dollars and cents. An often overlooked fact is that in doing the deal, JPMorgan Chase paid two costs: the cost of the deal itself and the opportunity cost of deals it might otherwise have done. The latter is a theoretical issue, but it’s quite possible that the opportunity cost was large.

Here’s what the deal accomplished. It established Dimon as Wall Street’s banker of choice, and buffed JPMorgan Chase’s reputation to such a high shine that the firm was still benefiting a year later, even as its business continued to deteriorate along with the economy. “In the end, it was a tough deal,” recalls the head of asset management, Jes Staley. “With one exception. What it did for our reputation was worth every penny. It was unbelievable. Absolutely.”

The result of this enhanced reputation was tangible. The company had $400 billion in money market funds under management at the end of 2007. It took in
another
$200 billion in 2008 alone. Other divisions experienced similar gains. JPMorgan Chase’s commercial banking division, for example, saw 2008 net income surge 27 percent to $1.4 billion even as recession gripped the country.

As Bear had proved, reputation is everything on Wall Street. As Bear’s own standing was diminished, Jamie Dimon’s rose to towering heights. Bank of America’s CEO Ken Lewis hadn’t even merited a call when the governors of the Federal Reserve went looking for a rescuer. By calling Dimon, they signaled that they were looking for strong hands at a crucial time for the markets. But they were also making official what a growing number of people already knew. Almost a century after its heyday, JPMorgan Chase—and by extension Dimon himself—was once again the country’s bank of last resort.

In the immediate aftermath of the Bear deal, optimism surged about how federal authorities and the private sector had come together to protect the financial system. From its low on March 7, 2008, through May 2, the stock market rallied nearly 10 percent. So what if there was a little moral hazard here, a little government intervention there, the popular thinking went. Better a flawed system than a completely busted one.

On March 18, Lehman Brothers, widely considered the next weakest firm on the Street, announced first-quarter results that were better than expected, boosting its shares 32 percent that morning. Lehman had posted strong results in a few businesses, such as mergers and acquisitions advice and equities, but it also wrote down $1.8 billion of mortgage-related assets. Analyst Mike Mayo (now at Deutsche Bank), a man not known for his sunny forecasts, declared, “Lehman is not Bear.” In a piece in late April,
The Economist
magazine said, “That Lehman did not implode is thanks, in part, to the Federal Reserve’s decision to lend directly to securities firms for the first time.”

Bank executives tried to see past the crisis. Morgan Stanley’s CEO, John Mack, told shareholders that the subprime crisis was in the eighth or ninth inning. Goldman Sachs’s CEO, Lloyd Blankfein, ventured the opinion that the markets were in the third quarter of the game. Dimon himself was optimistic that the credit crunch might be easing, but he was still disturbed by the weakening economy: “I told my investment banking friends, ‘Lucky for you, you’re probably through a big part of
your pain. It’s continuing for some of us with real credit exposures to consumers.’”

Although Dimon was right on that last point, all three were wrong about the credit crunch. By the summer, Lehman and Merrill were fighting for their lives. Lehman Brothers got in a pitched public battle with the hedge fund manager David Einhorn, who aggressively shorted the company’s shares, convinced that its accounting couldn’t be trusted. He was also convinced that the bank was cooking its books. A $2.8 billion second-quarter loss at Lehman—the company’s first quarterly deficit in 14 years—thoroughly spooked the market, and by the end of the month the Dow Jones was in bear market territory. The rest of the summer was just one piece of bad news after another. In July, the government seized IndyMac Bank; this was the second-largest bank failure in U.S. history. Regulators also had to reissue a warning to Citigroup that pursuing any major acquisitions would be unwise in its current state.

The price of oil had gone sky-high—it reached $147 a barrel in July—and short sellers were chasing Merrill and Lehman like bloodhounds after a fugitive. John Thain, Merrill’s CEO, had turned into the second coming of Citigroup’s Chuck Prince, a man who could be counted on to say one thing and then do precisely the opposite. On April 10, Thain said that the company’s cash reserve was “sufficient for the foreseeable future.” Twelve days later, Merrill Lynch raised $9.5 billion through an issuance of debt and preferred stock. In May, he said, “We have no present intention of raising any more capital.” On July 29, Merrill Lynch tapped the capital markets once again, to the tune of $8.5 billion. On July 18, he said, “I don’t think we want to do dumb things. We have been pretty balanced in terms of what we sold, and at what prices we sold them. We have not liquidated stuff at any prices we could get.” Ten days later it emerged that Merrill had unloaded $30.6 billion of super-senior ABS CDO product into the market at 22 cents on the dollar. (In retrospect, it is amazing that Merrill made so many moves to shore up its finances yet still found itself insolvent come the fall.)

August, normally a slow month for financial companies, took a toll on JPMorgan Chase. On August 14, the company announced that it was buying back $3 billion in auction-rate securities from investors in a settlement
with regulators over whether the company’s salespeople had misled their customers about attendant risks. For Dimon, who had a reputation for integrity, this was a bitter pill. (As his predecessor John Pierpont Morgan had said about a banker’s reputation at the Pujo hearings in front of the House Banking and Currency Committee in 1912, “[It] is his most valuable possession; it is the result of years of faith and honorable dealing and, while it may be quickly lost, once lost cannot be restored for a long time, if ever.”) At the end of the month, the company announced that holdings of preferred stock in the mortgage giants Fannie Mae and Freddie Mac had lost about half their value, resulting in a $600 million write-down. On September 3, Dimon shut down a division that sold derivative securities to municipalities amid a government investigation into questionable sales practices there as well.

JPMorgan Chase stock fell 15 percent in August as investors pondered whether its—or any bank’s—business model was the one to bet on in a market gone bonkers. The equity analyst Dick Bove put the concern succinctly: “Bill Harrison, J.P. Morgan’s CEO, repeatedly argued that the combination of a consumer finance bank with a capital markets company would be placing two contra-cyclical businesses together, defeating the cycle. Unfortunately, the first time this concept was tested, it did not work. Both cycles seem to be declining in tandem with each other. Moreover, by buying the failing Bear Stearns, J.P. Morgan may have accentuated the negative impact of the capital market downturn.”

(In the midst of all those challenges, however, Dimon’s softer side once again made an appearance. When JPMorgan Chase’s vice chairman Jimmy Lee took his youngest daughter, Izzy, to Bermuda for a weekend of golf before she went off to college, the two arrived at their suite in the Mid Ocean Club to find a bottle of champagne and two glasses waiting for them. Alongside was a note that read, “There are two glasses here for a reason. She’s not too young to have a glass of champagne anymore. Have a great time with Izzy, Jamie.” Lee, who has spent a lifetime on Wall Street, was blown away. “I mean, what other Wall Street CEO does stuff like that?” he asks.)

Dimon could not argue with the fact that the summer of 2008 was
taking a toll. By that point, the company had eaten through all the equity of Bear Stearns and then some in its efforts to scale back the risk on its balance sheet. But he took issue with the suggestion that JPMorgan Chase was the wrong model for a large financial institution, especially when competing investment banks were scrambling to find steady sources of funding in a market that was woefully short on credit.

What’s more, in a business centered on people and relationships, Dimon was sure he’d assembled the right team to navigate through the crisis.
Fortune
magazine agreed with that conclusion, and on September 2 ran a cover story titled “The Survivors.” The article was another in a lengthening list of stories that trumpeted JPMorgan Chase’s relative strengths amid weakening competition.

In terms of the scale and complexity of their businesses, Black and Winters run an investment bank that’s bigger than Goldman Sachs, the credit card chief Gordon Smith runs a business that’s larger than American Express, and Jes Staley runs one of the largest asset management businesses on the planet. Other executives can make similar claims.

The photo shoot for the story took place at The Cloister at Sea Island in Georgia during a management off-site. In 2004, a G8 summit meeting had been held at the resort, and The Cloister had kept the chair that President Bush had sat in during it. For one photo at the off-site—a photo that ultimately wasn’t used—the photographer asked Dimon to sit in this chair and the rest of the team to gather around him. Knowing the irritation that all the glowing, Dimon-centric media coverage caused his colleagues, he cracked wise. “OK, everyone,” he said when he sat down. “Look lovingly at me.”

Such bonhomie masked a growing concern inside JPMorgan Chase that Dimon’s legend had, in fact, obscured the contributions of others. In the public eye, he
was
the firm, to a degree that was unusual even among the giant egos of Wall Street chieftains. What would happen to JPMorgan Chase when Dimon decided to leave? “The stock would drop 20 percent,” Bill Winters said in a Harvard Business School case study. “The myth of Jamie is the biggest misconception outside of JPMorgan Chase,” Steve Black added. “He’s as worried about it as anyone.” A number of executives have acknowledged that it could be frustrating
to watch their boss get credit in the press for decisions
they
made and results
they
helped deliver.

(Dimon does do his best to make sure his senior executives get the recognition they deserve. He pushes for stories in the media focused on them—not on him—and any time one of his team appears on the cover of a publication, he has the cover framed and sends the person two copies as gifts, one for the office and one for home. And at Sea Island, he refused to pose for any photos that were not group shots.)

Lingering in the background of the summer’s turmoil were questions about the ability of Lehman Brothers to remain a going concern. Like Bear, Lehman had plunged headlong into the mortgage business over the previous decade, and also like Bear, the company was facing steep losses in its mortgage portfolio. After the Federal Reserve opened the discount window to investment banks in March, Lehman’s CEO, Dick Fuld, had told colleagues, “We have access to Fed funds. We can’t fail now.” Others, including an increasingly wary group of executives at JPMorgan Chase, weren’t so sure about that.

As it had been with Bear, JPMorgan Chase was intertwined financially with Lehman Brothers, more than almost any other firm on Wall Street. Not only did it have counterparty risk on a number of trading positions; it was also Lehman’s clearing bank and Lehman’s so-called tri-party repo agent, meaning that JPMorgan Chase served as an intermediary between Lehman and a number of overnight lenders to the firm. The company was legally obligated to make sure those lenders were covered in terms of the collateral Lehman provided in exchange for its loans.