Knowing that Robinson wouldn’t be too sorry to see him go, Weill proposed to his boss that he buy Fireman’s Fund from the company. Though concerned about giving the impression that Weill had gotten the better of him, Robinson nevertheless allowed him to explore the possibility of a deal. At this point, Dimon suggested that Weill approach Warren Buffett. The two men met with Buffett briefly in New York and then flew to his Omaha headquarters to pitch the legend on the idea of funding a buyout.
Buffett was interested in their proposal—he offered to buy 20 percent or more of the unit if it was sold—and the pair left Omaha thinking an opportunity was at hand. In May 1985, Weill made his proposal to the board: American Express would keep 40 percent of the business, Warren Buffett would own 40 percent, and Weill would own 20 percent, pursuant to a number of conditions and guarantees. Weill had hired Morgan Stanley to represent him in the deal.
For reasons of its own—including a desire not to be embarrassed if Sandy Weill managed to take profit that could be theirs alone—the board rejected the idea. “It was a weird situation,” Dimon recalls. “Someone said at the time that American Express couldn’t do a deal if Sandy, Morgan Stanley, and Warren Buffett were on the other side. That’s part of the reason Sandy had offered to let them keep 40 percent, so if they thought it was a little cheap, they’d make it back on the back end. But I really hope that wasn’t the reason they didn’t do it, because that would be pretty stupid.”
The prospect of partnering with Warren Buffett was dead. Weill sensed that Robinson had outmaneuvered him. He’d given up his operational responsibilities, and was now being treated as an adversary by the board of the very company he worked for. He decided he had to resign, and he did on Monday, June 25, 1985. “Sandy never fit in there anyway,” recalls Alison Falls McElvery, one of his assistants at the time. “On the one hand, you had all these upstanding, pressed, and beautiful people like Jim Robinson who just reeked of money. And then you had Sandy who would yell down the hallway to ask someone how their weekend had been.” (This despite the fact that Weill had a greater net worth than Robinson.)
The question for the 29-year-old Dimon: should he go with Weill? Jim Robinson offered to keep Dimon on as a vice president in another role, and by that point he could have worked anywhere else he wanted, maybe even at Goldman. “It was a complex decision,” Dimon recalls. Many friends, including Stephen Burke and Andrall Pearson, president and chief operating officer of Pepsi, told Dimon this was his chance to cut bait, to admit that his gamble on Weill had not panned out. After all, he now had a wife, and a child just a few weeks old, to care for, and Weill wasn’t getting any younger. Dimon discussed the future with his Harvard buddy Peter Maglathlin that summer on vacation at the Kents’ summer house in Delaware’s Bethany Beach. “Is this guy washed up?” Maglathlin asked. “Does he even have another act?” “I have faith in Sandy,” Dimon replied. “Something’s going to happen.”
It was surely a mix of factors—loyalty, an appetite for adventure, a conviction that Sandy Weill had another run left in him—that led Dimon to ignore his friends’ advice and resign from American Express along with his boss. Weill offered to pay Dimon $100,000 a year to stay on as his assistant, although American Express covered the cost temporarily. McElvery decided to join Weill as well. Dimon remembers being reluctant to take money from Weill, despite the fact that Weill was by that point a very rich man. “I didn’t like it,” Dimon recalls. “We weren’t earning anything. I figured I could take money on the come for a while, and if we figured anything out, I could get paid then. I wasn’t particularly fond of the idea.”
• • •
New York City is chock-full of former Wall Street highfliers who have offices paid for by the companies they used to run but no actual job to speak of. They’re called elephants’ graveyards. At the time, American Express was large enough to have graveyards in several locations including offices in the Seagram Building at 52nd and Park. Weill chose that location, in no small part because The Four Seasons restaurant—home of the original “power lunch”—was on the building’s ground floor.
In his earlier heyday, Weill had promised John Loeb Sr. of Loeb Rhoades an office for life when Shearson bought Loeb Rhoades, an obligation American Express had taken on when it had subsequently purchased Shearson. It was Weill’s turn to go to the graveyard now, though, and in an ironic twist he found that American Express had put him in a suite with Loeb.
After settling into their offices in July 1985, Weill, Dimon, and McElvery expected new job opportunities to come pouring in. Letters of support did arrive, but there were no jobs to speak of. The two men often had lunch together at The Four Seasons—they called it the “company cafeteria”—and Weill’s taste for martinis led to afternoon naps on the couch in his office. He ate in The Four Seasons’ exclusive Grill Room so often that the restaurant assigned him a “negative reservation”—his table would be waiting for him unless he called to tell them he was not coming to lunch that day. Weill wore a suit to work every day, just in case a chance meeting might pop up. Dimon also took his non-job very seriously. “Jamie would sit on the floor and open up annual reports to see what we could do next,” McElvery recalls. “Once, we’d created our own merchant bank model, and Sandy hit some button on the WaNG computer and erased it before I had a chance to save it. Jamie nearly killed him.”
James Calvano, who’d been vice chairman of American Express Travel Related Services—he’d run Avis Rent-A-Car previously—lasted just six months more than Weill at the company, and was now in the same boat, looking for his next gig. While playing golf with Calvano one day, Weill asked him, “What do you want to do?” Calvano replied that he wanted to run a company. “Well, come with us,” Weill responded, “We’ll go find one.” Calvano was intrigued. “Who have you got?” he asked. “Me and Jamie,” was Weill’s unembarrassed response.
By that, Weill meant he would have meetings with people, then return to the office and offload any research about a prospective opportunity on Dimon, whose desk was littered with prospectuses and financial statements. Buried in the numbers for 12 to 14 hours a day, Dimon grew especially fond of Warren Buffett’s missives out of his Omaha-based Berkshire Hathaway. “He was smitten whenever anything came out from Berkshire Hathaway,” recalls McElvery. “He would say, ‘You have to read this! It’s the greatest annual report I’ve ever read! He’s brilliant!’”
One meeting that stuck in Dimon’s mind was with Ivan Boesky, then the reigning practitioner of “risk arbitrage” on Wall Street. His specialty was betting on whether proposed mergers would come to fruition or failure, and he was one of Wall Street’s flashiest players. “I remember thinking he was a little paranoid,” recalls Dimon. “Because in his office he had this phone bank from which he could listen into any one of his employees’ phone calls. It looked like a cockpit. And he had cameras in every room. It was totally bizarre.”
The first exciting possibility for Weill and Dimon came in late fall 1985, when Warren Hellman, the former president of Lehman Brothers who had moved to San Francisco, alerted Weill to a possible opportunity. BankAmerica, one of the country’s most prestigious commercial banking franchises, was bedeviled by a rash of underperforming loans, its stock was in free fall, and the company’s management team was under fire. It was possible, Hellman told him, that the board might consider wholesale change at the top.
After meeting with Hellman in San Francisco, Weill and Dimon crunched the numbers and determined that if Weill could arrange a $1 billion capital infusion—plus $10 million of his own money—he could reasonably propose to BankAmerica’s board that they install him as CEO. Weill even swallowed his pride and asked Jim Robinson and Peter Cohen if they wanted in on the deal by providing a commitment letter for the $1 billion. (Cohen was by this point a true Wall Street macher. He’d bought Lehman Brothers Kuhn Loeb the previous year for $380 million. It didn’t bother him, as Bryan Burrough and John Helyar pointed out in Barbarians at the Gate, that one critic
of the deal—Lehman’s in-house chef—mused, “Shearson taking over Lehman is like McDonald’s taking over 21.” He had emerged from Sandy’s shadow once and for all.)
Around this same time, Mike Holland, the former CEO of both Salomon Asset Management and First Boston Asset Management, who was now running money for himself and some friends out of his own office in the Seagram Building, read an article in which Weill complained that no one called him for lunch anymore. And so Holland picked up the phone and invited him to lunch.
The two men agreed to meet—at The Four Seasons, naturally—and upon sitting down, Weill began talking about his plans for a potential takeover of BankAmerica. Holland was friendly with Bill Wyant, a leading analyst of commercial banks at the time, and he proposed to bring the two men together in Weill’s office. When Holland and Wyant walked into Weill’s office, they found that they were to be questioned by both Weill and Dimon.
“Who’s this young pup?” Holland thought to himself. Wyant tried to convince Weill that the deal didn’t make sense, that the bank’s balance sheet didn’t provide the solidity to do with it what Weill was hoping. Dimon countered that the banking analyst didn’t know what he was talking about. “Sandy let that little whelp go on as if he were some sort of senior statesman, didn’t he?” Holland said to Wyant when the two men departed.
BankAmerica’s board rejected Weill’s entreaties not once but twice. It was back to the drawing board. Adding insult to injury, it turned out that Joan Weill’s psychiatrist had engaged in insider trading of Bank America’s stock after she told him about her husband’s attempted power grab at the firm.
In May 1986, while he and Dimon were still casting about for something that they could sink their teeth into, Fortune’s Carol Loomis wrote an article with a tongue-in-cheek headline in the form of a classified ad: “Sanford Weill, 53, Exp’d Mgr, Gd Refs.” It was praise and critique rolled into one, because despite his “Gd Refs,” Weill still lacked meaningful employment. His second career had taken on a distinct whiff of failure by this point, and Jamie Dimon couldn’t help wondering what life might have been like had he taken that job offer at Goldman. “I was looking into the abyss a little bit, pretty much a kid who was not getting experience nor making money in the meantime,” recalls Dimon. “Of course I thought I might have made a mistake.”
Having stuck by Weill through his trials at American Express and in the empty days that followed, Dimon certainly knew that his position at Sandy’s side would be inviolate if a big deal ever did come to pass. But that was starting to seem like one big “if.”
3. THE SUBPRIME OF HIS LIFE
When he graduated from Harvard Business School, Jamie Dimon could never have imagined that within four years, he’d be working for a bottom-of-the-barrel lending operation in a financial backwater—and that he’d be thrilled to have the chance. But that’s how it played out.
Sandy Weill and Jamie Dimon found their next gig at a decidedly unglamorous operation called Commercial Credit, a Baltimore-based lender to a huge but overlooked sector of the population: the 45 million people who shopped at Wal-Mart, with household income between $15,000 and $45,000. These were people that financial services companies generally tried not to do business with. (In the popular lexicon of 2008–2009, one would call Commercial Credit a subprime lender. It was a business to be shunned in the 1980s, but the pell-mell pursuit of these very customers some 20 years later would be one of the proximate causes of the financial crisis.)
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 exp
ected, 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.”
Last Man Standing Page 4