Last Man Standing (45 page)

On September 8, rating agencies downgraded WaMu’s debt rating and sent its stock plummeting. Killinger—who had been at the company since 1983—was fired by his board. But it was too late to try such a cosmetic fix. Depositors began withdrawing their savings en masse. In 10 days, they withdrew $16.7 billion.

Regulators sent WaMu’s board an unambiguous message: sell the company or raise some capital, or we’re going to have to take you over. When WaMu, which retained Goldman Sachs and Morgan Stanley to pursue “strategic options,” came back to JPMorgan Chase hat in hand, it was met with a stiff arm reminiscent of the one it had given Scharf in April. “We got the call that said, ‘OK, now we’re ready,’” recalls Scharf.
“We told them we would go through the process, but we were also very clear with them. We said, ‘Don’t count on us to buy the company. We’ve been through this before.’”

Executives once again sat down with their WaMu counterparts, and found to their surprise that the WaMu team thought there was still some equity value in the company. “They believed their rosy numbers,” recalls Mike Cavanagh. “So at a point, we said, ‘This is not productive. We’ll do the data room stuff and all that, but we have no interest in buying the whole company.’”

On Monday, September 22—just a week after the failure of Lehman Brothers—executives met with regulators at JPMorgan Chase’s headquarters to talk about the process. Even though it seemed increasingly unlikely that WaMu could sell the entire firm, the regulators decided to run a dual-track process, and told JPMorgan Chase they were advising potential bidders to consider different options, from buying everything to buying just the deposits and mortgage portfolio.

Neither Sheila Bair nor Tim Geithner was at the meeting—and this meant, by implication, that Dimon didn’t need to be there, either. But he was, and he stayed almost the entire time. Rodgin Cohen of Simpson Thacher, there on behalf of WaMu, recalls the significance of Dimon’s presence. “This was not a meeting he needed to attend,” Cohen says. “And at the end of the day, money talks, but the fact that he was there clearly made an impression on the regulators. But what made even more of an impression was how conversant he was in the details. He was all over it.”

The JPMorgan Chase team decided to bid only for the assets of Washington Mutual, leaving behind $18 billion in liabilities. The team members’ calculations left them with a range of $1.7 billion to $2 billion, and all that was left was to put a final number on the contract. Someone noted that the number 8 was lucky in both Chinese and Japanese culture and suggested a bid of $1.888 billion. (A suggestion of $1.666 billion was rejected for obvious reasons.) Possibly a little slaphappy from their three-day work blitz, the team members agreed that $1.888 billion was an auspicious bid. At 6:30
P.M
. on September 24, Scharf submitted the contract and went home.

He was sitting with his daughters at the kitchen table while they ate their bedtime snack when his phone rang at 8:30
P.M
. It was Dimon. “Sheila called me,” he told Scharf. “We got the bid; we’re the winner.” The plan, he explained, was for the FDIC to seize WaMu after the close of business on Thursday, and immediately sell the deposit and loan portfolios to JPMorgan Chase.

To careful observers of the ways and whims of the stock market, there was an unusual wrinkle to the plan. Usually—as was the case with Bear Stearns and on countless other occasions—regulators unveil their dramatic actions after the close on
Friday
so that the representative players will have the weekend to straighten out whatever they can before the opening bell Monday morning. In this case, however, Dimon had more urgent needs.

Because of the uncertainty surrounding Secretary of the Treasury Hank Paulson’s three-page, $700 billion bank bailout plan—the market had plunged 778 points on Monday after the House had voted it down—Dimon told Bair he preferred doing the deal on Thursday, so that he could turn around and raise a substantial amount of capital in the equity market on Friday. He wanted to keep his company’s tier 1 capital ratio above 8 percent. To do that, he needed about $8 billion in fresh equity, and he didn’t want to risk seeing what the weekend—or the following Monday—might bring before obtaining it.

“Jamie learned that from Sandy,” recalls Scharf. “When you decide you want to raise money, you don’t wait, you get it done. Jamie will think and think and think and make sure he’s doing the right thing, but once he wants to do it, he wants it done yesterday. Rumors of what TARP was going to be were all over the place. And he knows that markets can open and they can shut.” (The Troubled Asset Relief Program, TARP, was a plan in the works through which the government would buy assets and equity from banks to strengthen the financial sector. It would reach full flower just a few weeks later.) For her part, Bair was worried enough about the run on WaMu that she agreed to do the deal on Thursday, September 25.

Dimon, Cavanagh, and Scharf spent Thursday on the phone rustling up money. They called 10 potential investors, and asked them—
without revealing details—whether, if JPMorgan Chase was interested in raising a substantial amount of capital the next day, they would be buying. Nine investors pledged $7 billion, despite not knowing exactly what the news was.

After the market closed on Thursday, the OTS and FDIC announced that WaMu was being seized in the largest bank failure in U.S. history, and its assets were being sold to JPMorgan Chase. (WaMu had $307 billion in assets. The runner-up, Continental Illinois, which failed in 1984, had just $40 billion.) At 9:00
P.M
., Dimon, Cavanagh, and Scharf held a conference call and took analysts through a 21-page summary of the deal. Fifteen minutes later, Dimon sent an e-mail to the entire staff of WaMu, welcoming them into the JPMorgan Chase fold. Around midnight, Scharf boarded a jet for a flight to Seattle and a 7:00
A.M
. meeting with WaMu’s CEO, Alan Fishman. (One of his messages: You’re out of a job.)

(Remarkably, the staff of WaMu found out about the deal before Fishman, who’d been on a plane at the exact moment of the seizure and sale. Because of the importance of keeping the deal under wraps until it was announced, JPMorgan Chase staffers had worked with WaMu’s auditors to get access to WaMu’s internal network before the news broke. In the process, they secured a list of employee’s e-mail addresses without having to get them through WaMu’s top management. Within minutes of the deal, too, visitors to
www.WaMu.com
were greeted by a message from Chase welcoming customers to JPMorgan Chase. This too had been prepared on the sly.)

The deal boosted JPMorgan Chase into first place in nationwide deposits, with $911 billion to Citigroup’s $804 billion and Bank of America’s $785 billion, and made it the second-largest bank in terms of assets, with $2.04 trillion to Citigroup’s $2.1 trillion. (At the end of the first quarter of 2009, JPMorgan Chase was still the second-largest bank, with $2.1 trillion in assets to Bank of America’s $2.3 trillion, with Citi slipping into third place.) The purchase also gave the company a foothold in both California (691 branches versus just three pre-deal) and Florida (274 and 13, respectively), and a total of more than 5,000 branches nationwide. What’s more, there were cross-selling opportunities, as WaMu
had never been big in either wealth management or commercial banking, and JPMorgan Chase could integrate those offerings into its new branches. (History showed any optimism to be well placed. After acquiring the branches of Bank of New York, Chase retail bankers boosted in-branch credit card sales 20-fold and investment sales by 40 percent.)

The cost was a mere $1.9 billion plus $31 billion in write-downs against estimated future losses in WaMu’s loan portfolio. (The April prediction of $30 billion in losses, in other words, had been dead-on.) JPMorgan Chase’s employee roster jumped from 195,000 to 238,000.

Friday’s stock offering eventually reached $11.5 billion. Even though he had obtained an extremely cheap source of funding—WaMu’s $188 billion in deposits—Dimon tapped the equity market to bolster its equity ledger, calling it an “offensive” capital raise. “We are raising capital to do a deal, to buy something, to grow,” he said in an interview. “We are not raising capital to fill a hole.” (A finger in the eye to the likes of Merrill Lynch and Citigroup, no doubt.)

The
New York Daily News
encapsulated the reaction to the deal with the headline “JPMorgan CEO Jamie Dimon Eats Banks for Breakfast.” The
New York Times
went with “1-800-CALL-DIMON.”

The
Times
’s headline confirmed the success of a savvy public relations strategy Dimon has pursued for much of his career. Not only had he gone out of his way to make himself accessible to reporters; he spent an inordinate amount of time focused on his regulators and their concerns. Some people had wondered what the point of all the outreach was—What did it have to do with generating sustainable earnings growth? Was it just ego gratification?—but the deals with Bear Stearns and WaMu showed the value of a high profile and a carefully cultivated image as a man (and a company) of caution.

“I once heard someone respond to the question of how one can be successful by saying, ‘You have to be in the right place at the right time,’” says analyst Mike Mayo, who moved to Calyon Securities in March 2009. “When asked how to do
that
, the response was ‘You have to be in a lot of places a lot of the time.’ Those two deals are where Jamie’s image—and that of JPMorgan Chase—translated into actual transactions. This is now the go-to bank when regulators pick up the phone. It would not
surprise me in this environment if Jamie Dimon gets the first call in the next unusual situation we might find ourselves in.”

By refusing to step up and buy the whole company, Dimon essentially wiped out WaMu’s common shareholders, including the private equity firm Texas Pacific Group (TPG), which got smoked for $1.35 billion on its April investment; TPG had somehow managed to unload $650 million of its exposure in the interim. Dimon also let the bondholders get wiped out. And he ended up buying something estimated to be worth $12 billion or so for just $1.9 billion. JPMorgan Chase’s stock rose 11 percent the next day, even though the capital raise diluted shareholders’ ownership.

WaMu’s president, Steve Rotella, who had indicated in April that he did not want to work for Scharf or Dimon again, was granted his wish and was told he would be terminated. JPMorgan Chase made all the decisions about senior management within five days of the deal, a decisive move that helped stop deposit outflows in their tracks.

There were no niceties tossed into the deal. Executive stock compensation lost in the bankruptcy was not replaced, and no executive was paid a change-in-control provision—a marked departure from the generous retention payments made to Bear Stearns executives in April. On December 1, JPMorgan Chase announced it was laying off 9,200 WaMu employees, about 21 percent of the total. (In February 2009, it laid off 2,800 more, as a result of continued declines in the value of WaMu’s mortgage portfolio.)

Despite calling WaMu “a perfect fit,” Dimon nevertheless acknowledged that he was doubling down on the American consumer at a volatile time. The company’s bank branches, mortgage, and credit card businesses would thereafter account for nearly half of JPMorgan Chase’s overall profits. “That’s the big risk,” he said. But he added that Scharf and the rest of the team had done their homework. They knew WaMu’s assets cold by state and by product and had run the numbers on worst-case scenarios for housing prices. “I’m making a bet that we won’t have a depression in this country,” he said. “If we do have one, the deal will have been a mistake. But that’s our job: to make those determinations and figure out what we think is right. It’s just like buying a new house.
You may be wrong with your timing, and the price may go down. But what are you going to do? Spend your whole life worrying about being wrong? The price had a huge margin for error in it, but that doesn’t mean we won’t be wrong. I don’t know what’s going to happen to this economy.”

At a more granular level, Dimon’s logic was as follows. Even if the company were to be faced in 2010 with a $10 billion charge due to WaMu’s mortgage portfolio, the acquired assets would still be earning $2 billion a year. Seen in that light, the company might end up getting nothing out of the deal in the first four or five years, but in the fifth year it would start pulling down about $3 billion in earnings. “In that case, it will still have been a good deal,” he said. “But there’s no doubt it’s very scary in the meantime. People underestimate how scary that one decision is.”

It was such a scary decision, in fact, that JPMorgan Chase was the
only
bank that ended up bidding on WaMu. Wells Fargo didn’t show up. Citigroup didn’t show up. Neither did Wachovia. It that light, the $1.888 billion bid was arguably a little high. Dimon had no regrets. “Sure, it might have been nice to spend only a million dollars on the thing, but we didn’t spend a lot of time wondering what the cover bid needed to be. We just figured out the most we’d be willing to spend, and that turned out to be about $2 billion,” he said. “It would have been lucky to have lowballed, yes. But I’d rather have the company.” When Sandler O’Neill’s analyst Jeff Harte asked Dimon whether he knew how much better JPMorgan Chase’s bid had been than that of the runner-up, Dimon had replied, “We don’t know, and we don’t care.” Cavanagh was a little more forthright on the issue. “The FDIC did a good job of running an auction,” he laughed.

Dimon later received a letter containing white powder and a note that read, “Steal tens of thousands of people’s money and not expect reprercussions [
sic
]. It’s payback time. What you just breathed in will kill you within 10 days. Thank xxx and the FDIC for your demise.” More than 50 copies of the letter had been sent to multiple Chase bank branches, the FDIC, and the OTS. Dimon’s letter also contained a reference
to the “McVeighing of your corporate headquarters within six months.” All were postmarked Amarillo, Texas.