Last Man Standing (46 page)

When federal authorities told JPMorgan Chase they had looked into the matter but had not found many leads, the chief administrative officer, Frank Bisignano, took matters into his own hands. “We’re going to nail this guy,” he told Dimon. JPMorgan Chase has a significant security apparatus, including former Secret Service professionals, CIA veterans, and all manner of hacker types, to help protect its $2 trillion in assets. The bank’s crack security and investigations team first looked for Internet addresses that had searched its website for a list of Chase branches. They found one in Albuquerque, New Mexico, about 300 miles from Amarillo.

The problem was that the address belonged to the free Wi-Fi network at a local community college, so just about anybody could have used it. Given the clear reference to WaMu in the letter, the investigators looked into former WaMu shareholders living in Albuquerque. That is how they discovered 47-year-old Richard Leon Goyette (aka Michael Jurek), who also happened to have taken a class at the community college. Bisignano handed Goyette’s data over to the Feds, and Goyette was arrested and charged with several crimes in February 2009. In June of that year, he was convicted and sentenced to nearly four years in prison.

After WaMu, the Street was aflutter with acquisition envy. Citigroup tried to get in on the action, cutting a deal just four days later to buy the banking operations of Wachovia for $2.2 billion. As with Merrill and Lehman, Wall Street’s chattering class found cause to blame Dimon for Wachovia’s predicament as well. In buying WaMu, Dimon’s team had assumed that about 25 percent of WaMu’s so-called option ARM mortgages would default. Wachovia had projected that only 12 percent would do so, and so was suddenly faced with a massive writedown.

The Citigroup deal also came with government assistance. Citi’s CEO, Vikram Pandit, earned plaudits for stopping a run on Wachovia, but was subsequently embarrassed when Wells Fargo swooped in with a $15.4 billion offer to buy the whole company. That deal, in addition to
Bank of America’s $50 billion purchase of Merrill Lynch on September 15, secured Dimon’s reputation as a master negotiator. Whereas he paid pennies on the dollar for WaMu, Wells Fargo paid real money for Wachovia. And Dimon bought Bear Stearns for a song—with a government backstop—compared with Bank of America’s ill-considered and unsupported grab of Merrill.

The notion of Dimon as the government’s banker of choice also won more credence when it emerged that Sheila Bair, the chairwoman of the FDIC, was possibly double-dealing in the Wachovia contretemps. She had publicly supported Citigroup in its squabble with Wells Fargo, but Wachovia’s chief, Bob Steel, later said that in private she had been urging him to cut a deal with Wells Fargo. Dimon had received far more solicitous treatment when she teed up the WaMu deal for JPMorgan Chase.

On October 13, 2008, Secretary of the Treasury Paulson summoned the CEOs of leading firms—Dimon, Lloyd Blankfein, Ken Lewis, John Mack, Vikram Pandit, John Thain, and Dick Kovacevich from Wells Fargo—to a meeting. The chief of the Fed, Ben Bernanke; the president of the New York Fed, Timothy Geithner; and Sheila Bair were also in attendance.

It didn’t take long. Paulson explained to the assembled group that the public had lost faith in the country’s banking system, and that he was using his authorization under TARP to buy $250 billion worth of preferred shares in the nation’s largest banks. The hope was that such a large injection of capital would calm fears that the banking edifice itself was on the verge of collapse. Geithner then proceeded to delineate the various allocations, the largest of which went to JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, each of which received $25 billion. The banks would have to pay a dividend of 5 percent annually for five years and then 9 percent thereafter.

A number of banks, particularly Citigroup, desperately needed the money, but Dimon was in a bind. He didn’t need the money but was being asked to take it “for the good of the system,” and also put up with the many strings attached to it, including restrictions on executive compensation. Dimon decided he wouldn’t stand in the way of the greater
good, agreeing to take the money without complaint. (Before he did that, however, he stood up, grabbed the term sheet, and began to walk to the door. “Where are you going?” he was asked. “To send this to my partners,” Dimon replied. The majority of the other executives then decided they should do the same.) Wells Fargo’s CEO, Kovacevich, was more recalcitrant than Dimon, protesting briefly before accepting the inevitable. Like the deal with Bear Stearns, this was not the kind of thing even the proudest of CEOs wanted to try to refuse.

The meeting was over by 4:00
P.M
., and by 6:30
P.M
. each of the CEOs had signed a term sheet. Among other things, they had signed away their ability to offer so-called golden parachutes in any new contracts, as well as the tax deductibility of executives’ compensation above $500,000. Dimon rarely criticized either the Bush administration’s or the Obama administration’s bailout efforts, but he repeated, on several occasions, that as far as TARP money went, “We didn’t ask for it, didn’t want it, and we didn’t need it.” The market took the news of the bailout badly, falling nearly 8 percent on October 15.

• • •

Despite the growing consensus that Dimon was the banker of the moment and JPMorgan Chase the bank, 2008 ultimately proved another tough year for the company in absolute terms. It was still suffering for past mistakes—overextending in leveraged loans and allowing loan underwriting standards to deteriorate significantly—and was also paying the price for being a bank at a time when banking was not a good business to be in. “You can’t outrun the economy,” Dimon’s former colleague Bob Willumstad observed. “It’s the nature of the business.”

And the economy was running pretty fast. The negative feedback loop of global de-leveraging continued unabated, with a savage interplay between the financial markets and the real economy. Loan defaults spiked across the board, from large companies to individual credit card holders. Despite JPMorgan Chase’s relative balance sheet strength, investors couldn’t help being a little concerned about skeletons lurking in its closet. Things were so touchy by late November that when Dimon was reported to be in the Middle East, rumors spread that he was soliciting
capital from oil-rich Arabs. He was not; rather, he was celebrating the official opening of the company’s Riyadh office.

Full-year results were nothing to brag about. Dimon did not brag. When he received an award at Yale on December 10, he told the audience, “I feel like I’m riding a bronco and holding on for dear life most of the time.” The same day, he told CNBC that the company “could very well post a sizable loss for the fourth quarter.” The stock fell 11 percent in response, dragging the entire market down 2 percent along with it.

(Judy Dimon found an iron-and-marble sculpture of tiny men literally jumping through hoops and sent copies of it to some senior executives as a holiday present. In one accompanying handwritten note, she christened 2008 “The Year of Jumping through Hoops” and hoped that 2009 would be “The Year of Landing on One’s Feet.”)

Despite leading the league tables, the company’s investment bank saw revenue drop 33 percent in 2008 while nonperforming loans jumped 233 percent to $1.8 billion. The investment bank marked down its mortgage and leveraged loans $10 billion during the year. Similar pressures hit the retail financial services franchise; credit costs climbed 274 percent to $9.5 billion during the year. The company’s home lending portfolio, including home equity and both prime and subprime mortgages, was a $328 billion leaning tower of Pisa by the end of the year; of that amount, 36 percent, or $117 billion, had already been deemed “credit-impaired.”

The bank had instituted several rounds of credit changes that tightened underwriting standards in 2007 and 2008, but it was too late. At the end of 2008, JPMorgan Chase estimated that about $25.6 billion of its home equity portfolio was extended to households where borrowing exceeded household value, the so-called state of “negative equity.” The percentage of the portfolio where households were sitting on negative equity nearly doubled during the year, from 15 percent in January to 27 percent at the end of the year. Much of that negative equity came from California, Florida, Arizona, and Michigan.

Along with its competitors, JPMorgan Chase got smashed by the housing collapse. Citigroup had written down about $101.8 billion in assets from the beginning of the crisis through May 2009, Bank of America about $56.6 billion, and JPMorgan Chase $41.1 billion. Wells
Fargo, by comparison, had seen fit to write down only about $27.9 billion in assets at that point. Although he may have left a few competitors like Citigroup far behind, Dimon still had serious competition.

Both Wall Street and the media fawned over the company’s risk management vis-à-vis that of its competitors, but little good can be said about its home equity business. As Bob Willumstad pointed out, on Wall Street, it can be very difficult not to do what everyone else is doing, even if it’s stupid, because the profits can be big before the reckoning. In this case, JPMorgan Chase was just as stupid as the rest of them. In discussing changes that had been made in 2008 to underwriting standards, the company announced that borrowers henceforth needed to prove their income—the so-called “stated income” clause had made borrowing during the boom a mere matter of walking into a bank and saying that, sure, you were doing just fine on $75,000 a year, but you needed that extra $25,000 home equity line “just in case.”

The sheer size of some of the mistakes made by the JPMorgan Chase team just before the credit bubble burst bring to mind a lingering criticism of Jamie Dimon. A number of people close to him wonder whether he overcompensates for Sandy Weill’s penchant for eventually trashing his closest aides. Weill threw important people in his organization overboard all the time, or, more precisely, had someone else do it for him. “But Jamie,” says a longtime colleague, “just can’t do it. It’s a flat spot for him. I don’t think it’s because he doesn’t know. It’s because he doesn’t ever want it said of him that he’s just like Sandy, that he’ll just get rid of people.” (After having been at the ready to act as Weill’s enforcer in the early days, in other words, Dimon was in need of an enforcer of his own by 2009.)

Jamie Dimon learned from Sandy Weill that although playing people off against each other might actually work to your own advantage, what it also does is create a dysfunctional environment that can destroy a company. He often talks of “mature” companies—the likes of Wal-Mart and Johnson & Johnson—and how it is no surprise that a lack of corporate intrigue tends to go hand in hand with long-term success. (It could be said that while many of his competitors were losing their focus, Dimon was running his business just like Wal-Mart itself. Given the
giant retailer’s razor-thin margins, its obsessive focus on cost—on counting everything that can be counted—has helped it outrun competitors for years. Dimon’s philosophy is similar.)

Still, instead of holding his most senior executives responsible for poor decisions, some say, Dimon often goes to the other extreme, taking personal responsibility for mistakes. On some level, that’s a noble and mature approach; on another, it avoids addressing specific mistakes made by specific people. The hardest-working man in banking needs to admit that it’s not always about him, that sometimes other people’s mistakes are just that—their mistakes and not his own. “There are a lot of people around here that feel that if he’s close to somebody they get more license than they should on both performance and behavior,” says one member of the firm’s operating committee.

Granted, there is an alternative argument: that J.P. Morgan has managed to outperform most of its rivals precisely because of the stability in its management ranks. And when Dimon speaks fondly of his team, he means it. He relies extensively on the input and insight of top management, and rarely does things that he thinks will be a good idea all by himself. He actually trusts the people working for him, and trusts, too, that they can learn from their mistakes, as he has learned from his own.

Wall Street is a pressure cooker, and when the pressure started to get intense in 2007, the more insecure of its chief executives started firing everybody around them to make sure outsiders knew where they should place the blame. Such a strategy does enhance one’s short-term job security, but the problem with it is that when turnover gets too high, no one really knows what’s going on anymore. As proof of the point, before they themselves were dismissed, Bear’s Jimmy Cayne, Citigroup’s Chuck Prince, Merrill Lynch’s Stan O’Neal, and Lehman’s Dick Fuld had all participated in their own little orgies of firing. Dimon has resisted doing the same thing, and his firm is surely the better for it.

• • •

By December 2008, the Fed had taken 51 measures to address the market’s problems, including printing money as if there were no tomorrow.
An astute market seer, Jim Grant, describes the Fed’s near-abandon at the printing press: “Frostbite victims tend not to dwell on the summertime perils of heatstroke.”

With the rest of Wall Street still busy with cleaning out their Augean stables, Dimon and his team were busy picking up market share in almost every one of the bank’s businesses. JPMorgan Chase achieved an unprecedented milestone in 2008. Its investment bank sat atop every single one of the four most important league tables that rank banks by the amount of capital they help customers raise—debt; equity; loans; and debt, equity, and equity-related. The company also earned the most fees of any investment bank, with an 8.8 percent market share. For the full year, the investment bank also set revenue records in foreign exchange, commodities, credit, and emerging markets. But Dimon was anything but complacent. “I don’t think it’s a given we’re going to stay there,” he said.

The company led a $60 billion global refinancing of the car finance company GMAC in June, the largest refinancing ever. It participated in two of the biggest deals of the year, the $23 billion purchase of Wrigley by privately held Mars and the $52 billion acquisition of Anheuser-Busch by the Belgian brewer InBev. (With the closing of the InBev deal in November, JPMorgan Chase was an almost inconceivable $100 billion ahead of its longtime rival Goldman Sachs in the mergers and acquisitions advisory rankings for the year.) Money poured into the company’s asset management and treasury services divisions, as clients and investors engaged in an unprecedented “flight to safety.”