Last Man Standing (6 page)

It wasn’t only Commercial Credit’s customer base that made its business markedly different from that of most banks. Whereas typical banks borrowed money over short periods and lent it over long ones—making them extremely vulnerable to rising interest rates—Commercial Credit lent over short periods while borrowing at long. The advantage of this model was that the company didn’t have to worry about a credit crunch. Its disadvantage was that if rates fell and Commercial Credit was already locked into long-term borrowings, it was vulnerable to being unable to reinvest those borrowings at their longterm
cost of capital. In any event, it was a markedly different beast from a neighborhood branch banking business.

Not long after the issue of
Fortune
with Loomis’s article in it hit the newsstands, Weill received a call from Bob Volland, the treasurer at Commercial Credit. Control Data, a disk drive maker, had bought Volland’s company in 1968 ostensibly as a way to finance computer sales. By the 1980s, however, Control Data was ailing, and that caused complications for Commercial Credit. As a subsidiary of a failing parent, it found itself unable to tap the commercial paper market for its overnight borrowing, and had to rely on more expensive bank loans.

Ownership by Control Data, in other words, was putting Commercial Credit at a distinct competitive disadvantage. When the parent also began borrowing heavily from its subsidiary, Volland feared the worst—that his company might be dismantled to save Control Data from extinction. Worse, the company’s bank lines were due to expire that September, and it seemed unlikely that they would be renewed. The model was supposed to be immune to short-term credit issues, but the model didn’t account for ownership by a floundering parent company. A cash crunch was on its way.

“I didn’t know Jamie Dimon from a hole-in-the-wall,” recalls Vol-land. “But I called them up after I read that article and told them that while I wouldn’t give them any inside information, I had an opportunity for them.” Weill invited Volland up to New York. When Volland and Paul Burner, the company’s assistant treasurer, walked into Weill’s office in the Seagram Building, they were greeted by Weill, Dimon, and Greg Fitz-Gerald, the former treasurer of American Express and chief financial officer of Merrill Lynch who’d been kicking around ideas with the pair. Volland briefed the men on the opportunity he saw for someone who could pry Commercial Credit loose from Control Data.

Weill’s first response shocked Volland. Weill said that he had looked at the company while he was at American Express—Control Data had hired Goldman Sachs to shop the unit in 1985—and concluded that it was “a piece of crap.” Volland didn’t believe that Weill had a full grasp of the issues, and continued to press his case, identifying underperforming assets that could be sold, including one unit that even leased cars to
ex-convicts (“Cars for Cons”). His persistence paid off. After two hours of discussion, Weill and Dimon wanted to take the next step. Over the next few weeks, Volland and Dimon spoke several times, as Dimon burrowed through the Control Data’s financials, trying to get a sense of Commercial Credit’s stand-alone opportunity.

Helping Dimon with this due diligence, Weill’s assistant McElvery remarked that the company was effectively a loan-sharking operation—customers paid exceedingly high rates to borrow money. Weill and Dimon were indignant, and told her that they considered the business one of helping the little guy. Her own mother chastised her for looking down on the enterprise. “Don’t knock these people,” she told McElvery. “They lent me the money to buy my first refrigerator.”

As Monica Langley points out in
Tearing Down the Walls
, it was Dimon’s legwork that made them decide to make a move. His most important finding was that although Commercial Credit had just a 4 percent return on equity—versus 15 percent for comparable finance companies—there were enough assets they could sell and costs that could be slashed to consider the 4 percent mark an attraction rather than a deterrent. The stock market likes nothing more than improved operations and balance sheets, and Commercial Credit offered plenty of room for improvement. It could be their launching pad to greater things.

The next step was to approach Control Data itself. Weill called a friend, the hotshot Morgan Stanley investment banker Bob Greenhill, and asked him to contact Bob Price, chairman of Control Data, to see if Price was amenable to a conversation. He was, and Weill, Dimon, and Greenhill flew out to Minneapolis to meet him. (Weill had enormous respect for Greenhill’s judgment, his performance in a crunch, and his ability to keep his eye on the negotiating ball. Morgan Stanley also had a reputation for doing more than expected, delivering much higher-quality analysis than other investment banks.)

Although Price and Weill realized they might be able to help each other out, the discussions proceeded slowly at first. Control Data explored every alternative, including raising money in the bond market to buy some time. By September, however, they were back to the negotiating table.

Weill and Dimon considered an outright purchase. The problem was that it would require a leveraged buyout, leaving the company under an unmanageably heavy debt load. They next talked of a spin-off of the unit by means of an initial public offering. But that idea posed its own complications as well. The investment bank First Boston had roped Control Data into a unique kind of bond offering that stipulated the company would be required to make a tender offer for outstanding bonds if it sold stock in Commercial Credit. Most spin-offs sold about 20 percent of a subsidiary’s stock to the public. But such a portion wouldn’t raise enough money for Control Data to tender for the high-yield bonds.

All these problems led to an audacious idea. Perhaps, the deal makers wondered, the combination of Sandy Weill’s reputation and pedigreed Morgan Stanley running the transaction might enable them to spin off
80 percent
of the company. It would be a blockbuster, and it proved to be the only feasible option. Bob Price and Sandy Weill agreed to give it a shot.

Weill once again tried to enlist Buffett as a coinvestor in the Commercial Credit deal. But Dimon knew better. “Sandy, Warren’s not going to like this deal,” he told his boss. “Why not?” Weill barked in response. “Because Warren doesn’t do turnarounds,” said Dimon. “This company is a hodgepodge of crap. He doesn’t care that you’re running it. He won’t care that you’re investing in it. He’s just not going to do it.” The two men had breakfast with Buffett in the Oak Room of New York’s Plaza Hotel, and within three minutes Buffett said, “I’m not going to do it. Let’s invest in the rest of breakfast.”

On September 12, 1986, Control Data announced that Sandy Weill was being appointed as chairman and CEO of Commercial Credit and that the company hoped to sell a majority of the unit to investors as soon as possible. Weill accepted a $500,000 salary, with the proviso that his management team would own 10 percent of the new company through a combination of outright stock purchases and options grants.

In some ways, it was a remarkably counterintuitive move on Weill’s part. As McElvery had pointed out, he was aiming for the bottom of the financial ladder, the people with the
least
money. Bankers tend to prefer the opposite. What’s more, he and Dimon were effectively putting their
eggs in the consumer finance basket when their peers were all trying to grab a piece of the increasingly frenetic action in stocks and bonds on Wall Street. But this focus on the unfashionable was also classic Weill. Commercial Credit was a distressed asset in an otherwise healthy industry, with bloated costs and a messy balance sheet—just the kind of company he could sink his teeth into.

And what of Bob Volland, the man who brought them the opportunity of a lifetime? Weill and Dimon had jokingly referred to him as “Deep Throat” during their initial investigations, but they cut him out the loop soon thereafter. “Bob Volland was a rogue employee regardless of the goodness of his intentions,” Weill wrote in his 2006 autobiography,
The Real Deal: My Life in Business and Philanthropy
. Weill’s public relations chief, Mary McDermott, thinks the issue for Sandy was a simple one: “Why would you trust someone who brought you stolen goods?”

Volland was of the opinion that the men were applying a ridiculous double standard. Realizing that Dimon didn’t trust him, he decided to have it out with the younger man. Dimon told him that he thought Vol-land had violated a managerial code by making his original call to Weill. “There wasn’t one bit of private information discussed on that call,” Volland responded. “I could have had the same conversation with you.” Dimon’s response: “You never should have done it anyway.” To which Volland could only reply, “Well, if that’s the case, then
you
never should have done what you did. But you sure wanted the rewards, didn’t you?”

• • •

Weill and Dimon descended on Baltimore to pretty up the company before the initial public offering, which they hoped would be just a few weeks away. Weill also launched into hiring fresh troops. He’d already spoken to his American Express pal Jim Calvano in late summer, cryptically suggesting that Calvano “meet me in Baltimore.” “What’s in Baltimore?” asked Calvano. “I can’t tell you,” Weill responded. “But what are we going to do?” Calvano queried. “We’ll have lunch. I’ve found a place with great crab cakes,” Weill said. Calvano eventually signed on as senior vice president of consumer financial services.

The former Merrill Lynch chief financial officer Greg Fitz-Gerald
also joined the team, as an executive vice president and the senior financial staffer at the company. Dimon was given the titles of senior vice president and chief financial officer, which meant he was technically subordinate to Fitz-Gerald. Regardless, it was a big step up from the title of “assistant” at American Express, and given Fitz-Gerald’s experience, it was an arrangement that made sense. But Dimon began to chafe against it almost immediately.

While planning the road show in anticipation of the initial public offering in October—a show in which the team visited 18 cities—Dimon sulked when Fitz-Gerald made the presentation to possible investors. Weill, noticing this, gave Dimon a share of the presentations himself. In doing so, however, he may have inadvertently fed Dimon’s growing sense of his own importance. He also set a clear precedent: when it came to his protégé, the normal rules did not apply. “Jamie was in a hurry to run right through Greg, but he ended up having to be a little patient,” Weill recalls. Instead of stopping Dimon, however, Weill stepped back and watched him do just that.

Weill negotiated a discounted share price of $18 for his executive team to buy stakes in Commercial Credit. Dimon put up $425,000—borrowing some from his parents—and when the shares debuted on October 29 at $20.50 apiece, he was already profiting from a job he had yet to really start. At the time, it ranked as the third-largest initial public offering ever, raising $850 million and valuing the entire company just shy of $1 billion. Dimon also received the second-largest number of stock options in the company, after Weill, a reward for having stuck by Weill through a difficult time.

The day after the company went public, Weill, Dimon, and FitzGerald held their first meeting with Commercial Credit’s managers in Baltimore. The first announcement was that Chuck Prince, Commercial Credit’s general counsel, would be made a senior vice president. The second was that the company was going to lay off 10 percent of its staff, or 125 people, the next day, a move that would save Commercial Credit $5 million annually. Weill explained that he wanted the list done by the morning, and those laid off were to leave the building upon being informed of their fate.

Bob Volland realized he’d made a terrible mistake and pleaded with Weill not to institute such harsh measures. Commercial Credit wasn’t some Wall Street firm with trade secrets the fired employees might steal; it was unnecessary to throw anybody out the door. Weill was unmoved. Volland tried another tack. Many employees commuted to Baltimore by bus in the morning, he said, and they’d be stranded with nowhere to go until the rush hour buses went in the other direction. Weill told him to hire cabs.

The Sandy Weill era at Commercial Credit had begun.

• • •

Weill’s next hire shocked the staid banking world of New York. Bob Lipp, one of three presidents of Chemical Bank—he’d worked there since the 1940s—agreed to become the executive vice president in charge of consumer financial services at Commercial Credit. It wasn’t just a major step down in prestige. He took a 50 percent pay cut as well. Weill considered Lipp his proof to the markets that he was serious about transforming Commercial Credit.

Lipp had realized that his upward rise at Chemical was over—the company’s chairman, Walter V. Shipley, was only two years older than he—and he also knew a potential gravy train when he saw one. After a career in the bureaucratic confines of one of the country’s largest banks, he was seduced by Weill’s salesmanship and decided to throw his lot in with the entrepreneur. It wasn’t their first dalliance, either; Lipp had been ready to join Weill if the BankAmerica deal had gone through. “The thing that actually put me over the edge was Sandy’s attention to the personal stuff,” recalls Lipp. “I really liked the guy.”

Lipp brought his lieutenants at Chemical, Bob Willumstad and Marge Magner, with him to Commercial Credit. “Sandy had a reputation of being a great entrepreneur, of creating a lot of wealth,” recalls Willumstad. “And he offered the opportunity for people to get really engaged in something. Although I must admit, I wondered for months whether I’d made the right decision.” So, too, did most of the new recruits at one point or another, especially when they found out that the
company would be covered by the Philadelphia bureau of the
Wall Street Journal
instead of out of New York.

Dimon and Lipp took to each other out of the gate. The intense working experience in Baltimore laid the foundations for a relationship that has endured for more than two decades. “Bob was—and is—the velvet fist,” says Dimon. “He’s also so smart, but he didn’t wear it on his chest. And he taught me one of the most important things in my career, which is not to rest on your laurels. He would emphasize the negatives. But only when it came to the business. He always made it fun. He’d say things like, ‘Hey, let’s go to Kentucky and go to that place where we had those fabulous pies!’ I’ve learned a tremendous amount from him.”