Last Man Standing (47 page)

JPMorgan Chase held top three positions in most of its other businesses. In addition to strong positions in commercial banking, treasury services, and asset management, Chase was the nation’s largest credit card issuer in terms of outstanding loans and the top issuer of Visa cards in terms of total cards. (Critics who still insisted that Dimon only cuts costs needed only watch
American Idol
in 2009 to see Chase’s “Secret Agent Man” ads. In the midst of the what was surely the worst credit card downturn in history, the company was stepping up and buying some of the most expensive airtime on television to bolster the franchise.) The retail bank was third largest in terms of deposits, second in
home equity originations, third in mortgage originations, and first in auto loans. All the retail banking market shares had been fought for tooth and nail, but they also left the bank exposed to the roiling recession, and such large exposures took a huge bite out of the company’s earnings and continued to do so in 2009.

“What became clear to anybody in finance in 2008 was that JPMorgan Chase was now the dominant financial institution,” says Marc Lasry of Avenue Capital, a hedge fund. “We’re trying to do more business with them, because when you have more power, they can get more things done. They’re in a position now where they can choose who they want to do business with.”

By the end of the year, almost any firm lucky enough to still be in business found that its employees would rather be working for JPMorgan Chase. “We feel like we’ve become an employer of choice,” said the cohead of the investment bank, Bill Winters. “We are not doubling or tripling people’s compensation in order to attract them, nor moving them two or three rungs up the responsibility ladder.” (In May 2009, JPMorgan Chase also supplanted Goldman Sachs as college students’ top choice among banks they’d like to work for, a position Goldman had held for more than a decade.)

The company’s shares were also fast becoming the stock of choice for investors. In September, the mutual fund giant Fidelity boosted its holdings of JPMorgan Chase to $523 million while at the same time paring its stakes in Merrill Lynch, Wachovia, and Goldman Sachs. A tier 1 capital ratio of 10.9 percent at the end of the year reinforced Dimon’s commitment to the fortress balance sheet. In more carefree times, investors sought banks willing to take huge risks. Now, they were looking for banks that actually knew how to manage risks appropriately. And there were few of those. In mid-July 2009, investors valued JPMorgan Chase at $126 billion, versus just $81 billion for Bank of America and a paltry $15 billion for Citigroup.

By the summer, Dimon finally had a minute to catch his breath after the events of the past 15 months. Looking back over the deals for Bear Stearns and WaMu, he thought it premature that people were already calling WaMu a “home run.” “We’re not ready to call WaMu anything
yet,” he said. “But I think we’re pretty sure about Bear being at least a single by now. It should have been a double or a triple, but it was a single. Of course, the market environment got much worse after that deal.”

The cold-blooded competitor in Dimon then made an appearance. “Bear was never a home run, but WaMu will prove to be a great thing for the company over the long run. Will we be able to say that three years from now? At that point, you might very well be asking me, ‘How could you have done that in the midst of all those things that were going on?’ And I’m going to look at you and say, ‘Take your bets, friend. Take your bets.’”

The personal capital Dimon earned by deftly navigating through one of the biggest economic crises in history gave him an opportunity to express views on issues beyond banking. When interviewed by Charlie Rose in June 2008, Dimon identified himself as a deficit hawk, but also made clear his support for short-term fiscal stimulus and directed tax cuts. He called the United States hypocritical for embarking on a heedless spree: borrowing from foreigners and then, when it was cash-strapped, insisting that those same foreigners continue to finance it through purchases of Treasury bonds. He later ripped into the administration for requiring TARP recipients to dramatically reduce their hiring of foreign workers via H1-B visas, calling the move a “disgrace.”

He also suggested that in his role as CEO of JPMorgan Chase, he had a greater responsibility than just to his shareholders. “Anyone that I meet that doesn’t feel they have some obligation, my level of respect drops for them significantly,” he said.

When giving a speech at the Yale CEO Summit in December 2008—at which he was the recipient of a Legend in Leadership award—he took a strong position on the energy crisis and the United States’ lack of preparedness. “Shame on us,” he said. “This is our third energy crisis. And we still don’t have the fortitude as a nation to do anything about it. We are going to earn a fourth. This is not just a financial issue. This is a geopolitical issue. We are arming people who want to kill us. That’s what we’re doing. What the hell is wrong with us? I find that offensive, because our kids are going to pay for that.”

This type of remark does not come without cost. JPMorgan Chase has valuable customers all over the Middle East—the company had just opened its Riyadh, Saudi Arabia, office in late 2008. But Dimon has always been clear about where his priorities lie. When talking of the most important things in his life, he once said, “My family, humanity, my country, and the world. And way down here is J.P. Morgan.”

Despite growing criticism of derivative securities and the financial, if not societal, devastation they can allegedly cause, Dimon and his team—particularly Bill Winters, who helped create modern credit derivatives—refused to back away from their involvement in the market, a market one analyst estimated as $1
quadrillion
in size. “People say derivatives caused our recent problems, but that’s just not true,” Dimon says. “A lot of those derivatives guaranteed mortgage product. But it was the
mortgages
themselves that were the problem, and those filtered through into SIVs, CDOs, and then into the insurance companies who guaranteed them. Derivatives didn’t cause the problem, mortgages did.” (Still, it should be pointed out that derivatives can magnify the problem, in much the same way as leverage. Regulators do keep an eye on banks’ leverage, but derivatives exposures have reached colossal proportions. Witness JPMorgan Chase’s $81
trillion
as of March 2009 in notional outstandings.)

In large part, he’s right. The problems at companies like AIG have been described so many times as a result of “highly complex derivatives,” which their users “did not understand,” that it has become received wisdom to perceive derivatives themselves as the issue. But this reasoning is almost entirely wrong. The users understood
precisely
what the risks were, but they made the wrong bet—that housing prices wouldn’t plunge across the board, everywhere. There were a lot of people who took the bet; they just didn’t match AIG’s level of recklessness.

There have been some suggestions that the interplay between a company’s bonds and its credit default swaps actually exacerbated problems—George Soros wrote convincingly about this phenomenon in the
New York Times
—but that phenomenon was arguably on the margin of a much larger problem: abandonment of risk management controls in pursuit of higher profits. When it came time for the first big
test of credit default swaps—in the aftermath of Lehman Brothers’ bankruptcy—the settlement of those contracts took place without incident on October 21, 2008.

Dimon has endorsed the creation of a central clearinghouse so derivatives exposures can be more closely monitored. But he considers the bank’s CDS business a valuable franchise and doesn’t consider it JPMorgan Chase’s problem if other investors hurt themselves by mishandling them. (Pointing to a healthy lobbying budget on this score, critics argue that even though he’s said the right thing publicly, Dimon and his team are actually stonewalling derivatives reform in order to protect the outsize margins the business generates.) He has also called for a systematic regulator that can anticipate problems in the system rather than merely respond to them. Even though Dimon, as a college student, wrote that admiring letter to Milton Friedman, the king of the laissez-faire economists, he also values the lessons of John Maynard Keynes and Keynes’s argument in favor of adult supervision in the markets.

In October 2008, Blackstone’s chief, Steve Schwarzman, embarked on a campaign to have so-called “mark to market” accounting rules changed. The rules, he (and others) complained, meant that companies with deteriorating asset values were constantly forced to mark down their balance sheet values; this entailed having to raise capital by selling more assets, which put further downward pressure on those asset values, which … a vicious circle. (When prices were rising, no one had a problem constantly marking up asset values, but that’s another story.)

Nearly alone among the major banks’ CEOs, Dimon did not try to blame the industry’s problems on accounting standards. “A lot of those mark-to-market losses will end up being real losses,” he said. “They are real losses that are simply being recognized in the market before they’re being recognized in expected cash flows.” In April 2009, however, regulators buckled under industry pressure, relaxing mark-to-market rules that affected banks. Shortly thereafter, JPMorgan Chase, Citigroup, Bank of America, and Goldman Sachs all announced surprisingly strong quarters. But whereas Dimon made clear during the company’s conference call that the accounting change had no effect whatsoever on earnings, Bank of America and Citigroup did no such thing.

At a panel discussion at the New York Stock Exchange hosted by the
Wall Street Journal
, Dimon took aim at the Securities and Exchange Commission, charging that it had no idea that Bear Stearns was on the verge of failure in March 2008. (The chairman of SEC, Christopher Cox, had asserted as recently as the week before Bear failed that he and his colleagues were comfortable with Bear’s capital cushion.) “We have a Byzantine, balkanized system where our laws are closer to the Civil War than today,” Dimon complained. In response to a question about whether the crisis was abating, he responded, “No one really knows. Clearly we’re in the panic stage of unreasonable behavior. [But] the governments of the world will eventually win.”

Dimon tried to dampen public anger at JPMorgan Chase with a series of full-page ads in major newspapers including the
New York Times
, the
Wall Street Journal
, the
Washington Post
, and
USA Today
that highlighted JPMorgan Chase’s efforts to keep credit flowing to consumers and businesses that needed it. “Your House Is Your Home,” the first one, which ran on November 11, 2008, said. “We Want to Keep It That Way.”

He also got out ahead of the debate over foreclosures by announcing a moratorium on foreclosures of owner-occupied homes that applies not only to the $350 billion of mortgages the company actually owns but also the $1.5
trillion
worth that it services on behalf of others. (In a 2009 speech at the Chamber of Commerce, Dimon addressed the question whether JPMorgan Chase even had the right to adjust mortgages it only serviced. Holders of mortgage-backed securities who were inclined to complain about the decision, he said, would just have to “get over it.”)

On February 12, 2009, Dimon sent a letter to Representative Barney Frank, chairman of the House Services Committee, in which he pledged that JPMorgan Chase was extending the moratorium through March 2009 while the administration worked on its own $50 billion plan for the housing market. At that point, the company claimed to have already prevented 250,000 foreclosures through a borrower-outreach program that had been in effect since late 2007, and said it was seeking to do the same for 400,000 more home owners.

At a time when nearly everyone in Washington was calling for Wall
Streeters’ scalps, Dimon was out ahead of the Beltway crowd, dwarfing its efforts in this area at least. In doing so, he was demonstrating a combination of business skills and public relations savvy that are the required complement of someone looking to run a giant global company.

• • •

Whenever the subject of a possible second career for Dimon in politics comes up—the media were practically demanding it in the fall of 2008—those who know him best cite a number of automatic disqualifiers. The first is his mouth (while he no longer uses the f-word quite as much as he did when he was younger, it’s still prominent in his vocabulary). The second is his congenital inability to suffer fools gladly. Those close to him have noticed a mellowing with age, but his temper still flares up. All you have to do is offend his sense of fairness. When the
New York Times
’s columnist Joe Nocera obtained a pass code, called into an employees-only JPMorgan Chase conference call, and asserted in a subsequent article that the company planned to use the federal government’s $25 billion capital injection to buy weakened competitors, Dimon was irate.

“First, I don’t think it’s right to sneak onto an internal phone call like that,” he said. “Second, we hadn’t even received the TARP money yet. Third, the person he quoted wasn’t even in a position to know what we were going to do with the money. And fourth, that employee even said something that essentially contradicted Nocera’s point. He said we were going to try to grow our business. Wouldn’t that be lending? Because that’s what business we’re in, the lending business.” JPMorgan Chase complained to the
Times
about Nocera’s sneakiness.

Dimon also insisted that the bank
was
increasing lending, at least certain kinds of lending. The second advertisement in the company’s series “The Way Forward”—which ran on November 20—said, “Our Business Is Lending. And That’s Exactly What We’re Doing.” By late fall, JPMorgan Chase had $60 billion in the interbank loan market, increased its commercial loan balances by 18 percent through the year’s end, and also increased both student loans and credit card loans. He also repeated, whenever given the chance, that in the era after World War II,
banks had accounted for 60 percent of lending in the economy, but by the turn of the twenty-first century that portion had fallen to just 20 percent. The rest was provided by Wall Street and the so-called “shadow banking” industry, which includes hedge funds, money market funds, and creators of securitized debt.