Last Man Standing

by Duff McDonald

  He also continued to surround himself with ex-colleagues. He hired Heidi Miller away from Priceline to be Bank One’s vice president of strategy and development in early 2002, and then lured Jay Mandelbaum from Citigroup to work in corporate strategy—the eighth executive he had snagged from his former firm. (By this point, the no-solicit portion of his separation agreement had expired.) Although Miller told an interviewer that Dimon “can be a pain in the ass,” she also said that working for him could be exciting. (Her tenure at Priceline.com had not been a success, so Miller was also probably happy to return to Dimon’s fold.) Within two months, Dimon promoted her to CFO, and moved Charlie Scharf over to run Bank One’s retail banking unit.

  There was one Citi veteran he tried but failed to hire during this time—Frank Bisignano, the chief administrative officer of Citigroup’s corporate and investment bank. Dimon had just about landed Bisignano when Weill, in a fit of competitive madness, offered Bisignano a pay package worth more than $15 million over the following two years. When Bisignano broke the news to Dimon that he had, sensibly, decided to stay put at Citigroup, Dimon responded, “I got it. I got it. But you’re going to end up working with me by the time we’re done.”

  By mid-2002, rumors were swirling about what company Dimon might be prepared to buy. Bear Stearns came up in an article in American Banker, and that rumor was at least partly on the mark. Dimon, Jim Boshart, and Charlie Scharf had spent some time speaking to Bear’s executives, including its copresidents, Alan Schwartz and Warren Spector; and its chief financial officer, Sam Molinaro. The problem: James Cayne, the egomaniacal head of Bear Stearns, told his board that he would take nothing short of a significant premium to Bear’s share price to accept an offer from Dimon.

  No matter that an offer hadn’t been made in the first place. “He wanted $100 a share,” recalls Dimon. “I said, ‘Jimmy, there’s no way we could pay a price like that.’ The logic of the price wasn’t even what the company was worth, by the way. It was based on some formula of what Jimmy would have made if he stayed there five more years. I told him a deal could make sense for both sides, but that the price couldn’t be remotely close to that. Keep in mind, too, that this is the same stock we ended up buying for $10 a share in 2008.”

  An article in Forbes in May (“Rough Cut Dimon”) rattled off a list of just about all the commercial banks Dimon might consider buying, including Commerce Bancshares, Fifth Third Bancorp, Golden State Bancorp, KeyCorp, National City, SouthTrust, and UnionBanCal. All Dimon would say was that he had his eyes open. “We have the capital, we have the management…. At some point, something will come along that makes sense for us.

  “People expected me to come in and start doing deals,” says Dimon. “But that’s not me. I’m different. You can’t start a war until you have an army, and we couldn’t even run our own business well. I said, ‘No, we’re going to get this thing fixed and from that strength, if something makes sense, we’ll do it.’ You have to earn the right to do a merger.” Dimon has consistently referred to his first few years at Bank One as “boot camp,” and he meant what he said. His army needed to get its basic skills in order before it would be ready to set out on some sort of conquest.

  Fortune threw in its two cents in July, with the article “The Jamie Dimon Show”—documenting a particularly showy performance for bank employees at which Dimon shouted, “What do I think of our competitors? I hate them! I want them to bleed!” For all his new maturity, Dimon was still capable of a burst of over-the-top enthusiasm. At a dinner organized in New York by Citigroup’s Bob Rubin in 2002, when all the talk was of Enron, David Swenson, head of the Yale endowment, mused about the need for reforms in research and structured products. Dimon responded angrily, telling Swenson, “Maybe someday you can run a big company yourself!” Rubin and the other guests were mortified. Jamie Dimon was still a hothead.

  In October, speculation surfaced about a possible deal with JPMorgan Chase. With Bank One’s shares surging and JPMorgan’s under pressure because of its overexposure to bad telecom loans, the idea had legs.

  Bank One’s business was stabilizing. By 2003, the company was on a single technology platform with a single brand. First USA was again profitable, but it was no longer called First USA. It was all Bank One now. Bank One was now a partner of the likes of Amazon, Avon, Disney, and Starbucks. That year, the company added 434,000 new checking accounts, versus just 4,000 the previous year. Dimon had even eliminated the fees for using a live teller. Credit card sales surged 83 percent, and home equity loans 29 percent. The bank earned $3.5 billion, its best year to date. Dimon had also diversified the company’s business, boosting non-lending revenue to 64 percent of the company’s large corporate banking business, up from 45 percent in 2000. The company’s tier 1 capital ratio, a widely watched measure of strength, was 10 percent, up from 7.3 percent in 2000. Dimon had delivered on his promise of a fortress balance sheet.

  Not that there weren’t missteps. The bank took a $100 million hit in 2002 for making the wrong call on hedging interest rates. And a credit card partnership left the company dangerously exposed to the bankruptcy of United Airlines in 2002–2003; Dimon was forced to lend $600 million to the faltering airline, the first time that the bank had ever lent to a bankrupt company. (Dimon tapped his new friend Greg Brenneman—who had by that point left Continental Airlines to start his own private equity firm—for advice on handling the United Airlines exposure. He also spent a lot of time on the phone with JPMorgan Chase’s Jimmy Lee. Dimon had finally become a CEO, but he was not afraid to ask others for input.) When United came out of bankruptcy, the bank was repaid in full.

  • • •

  As solid as Bank One’s business had become, Wall Street saw something else entirely: a ticking clock. Dimon had often said that until the company’s systems were integrated, there was no sense in talking about acquisitions. But now, the integration was done. And still no deals. By May 2003, the “Dimon effect” was waning. An article in Barron’s reported that investors were getting antsy, waiting for Dimon to make a move.

  That summer, Citigroup announced that its longtime general counsel, Chuck Prince, was taking over the role of CEO from Sandy Weill. Dimon’s chances of ever getting that job seemed increasingly remote, but it hardly mattered. Given the rot that was already being revealed within the far-flung Citi empire, it no longer seemed like an enviable position, despite Dimon’s known reputation as a “mess manager,” a boss who actually liked to clean up other people’s mistakes.

  With Bank One, Dimon proved he could take a wounded beast and nurse it back to health. He could get his arms around a complex business, reset expectations, make sure that the financial statements reflected the fundamentals, and hire and focus good people. What his critics never stopped pointing out, however, was that he still hadn’t proved he was anything more than a cost-cutting zealot. “The blueprint for turning around a company is to make an assessment, stabilize it, get rid of excesses, and grow it,” Tom McCandless, a bank analyst at Deutsche Bank, later wrote. “He got all the way up to the last step.” From 2000 through 2003, Bank One’s revenues rose just 17 percent while those at San Francisco-based Wells Fargo jumped 44 percent. Dimon’s defenders say that’s ignoring the obvious, including the significant in-branch improvements. Branch revenue rose by $600 million in two years while he was there, despite the fact that he shut down a number of underper-forming branches and dropped a number of low-margin products.

  Dimon was sensitive to this criticism. In his 2000 annual report, he’d written, “No company has ever had much of a future by cutting costs alone. Success is measured by top- and bottom-line growth.” He was in no way opposed to growth, spending hundreds of millions of dollars to open dozens of new branches, but he was obviously more effective at removing excess costs than at adding new revenues. Return on equity, a measure of operating efficiency, climbed from a negative 2.1 percent in 2000 to 15.6 percent in 2003. Even so, more than half the analysts who followed the company still
rated it a “hold” or a “sell.”

  Still, the stock did well, climbing 59 percent in Dimon’s four years there, nearly triple the growth of the S&P 500. More than anything else, Dimon proved himself up to the task of being number one. Some CEOs are prone to boast of their achievements, but Dimon is programmed the other way, talking of what work remains unfinished, of the challenges that still loom. This tendency is known as “managing expectations” on Wall Street, and Dimon showed at Bank One that he knew how not to disappoint people. Having promised $2.2 billion in annual cost savings at Bank One, he delivered $3 billion by the time he was done.

  The chattering classes were convinced that Dimon would snap up another company in short order. In 2001, he had told a reporter that he “would like to be back in a position where we can be predator, not prey. You have to earn the right, and we’re not quite there yet.” By the summer of 2003, Wall Street was telling him that he was there. Then in October, Bank of America agreed to buy FleetBoston for $48.2 billion—a 43 percent premium to that bank’s value the day of the announcement. Investors were experiencing another one of their periodic convulsions of enthusiasm, in which a 43 percent premium could be negotiated with a straight face. (Why not 40 percent?)

  The pile-on began. Big deals were all over the news, but Jamie Dimon stayed on the sidelines. “Big Bank Merger Dulls Dimon’s Edge,” a story in Crain’s Chicago Business suggested. He had a twofold problem on his hands. If Dimon was going to be a buyer, the price of any potential acquisition had just skyrocketed beyond anything a guy with his sense of value could contemplate. If he’d thought of being a seller, there was now one less major buyer in the market. Did Dimon lack Weill’s signature gift, the ability to sniff out opportunity and pounce on it? That question would be answered soon enough.

  10. THE RETURN

  If asked to predict Jamie Dimon’s next dance partner, not many would have suggested William B. Harrison, Jr., the CEO of JPMorgan Chase. Harrison and Dimon were a study in opposites—an old-style gentleman banker and a brash young CEO who didn’t much stand on ceremony.

  Harrison and Dimon had first met when Commercial Credit had been a client of Harrison’s at Chemical Bank. Harrison had even been to Baltimore. Although they had run across each other from time to time in the intervening years, they didn’t get to know each other well until Dimon took over Bank One and their paths started to cross at industry events.

  A native of Rocky Mount, North Carolina, and a onetime high school basketball star (he also played for Dean Smith at the University of North Carolina), Harrison was a third-generation banker who’d worked his way up the ranks at Chemical Bank under Walter V. Shipley. Starting in 1987, when Chemical bought Texas Commerce Bancshares for $1.2 billion, Shipley had been a driving force in the industry’s consolidation, purchasing Manufacturers Hanover in 1991 for $2 billion and then Chase Manhattan for $10 billion in 1995. Shipley held on to the CEO slot at the combined bank until 1999, when he ceded the role to Harrison.

  While trying to put his own stamp on Chase, Harrison was widely criticized for overpaying in a flurry of acquisitions at the top of the bull market of the late 1990s. His timing was lousy. He snapped up the technology investment bank Hambrecht & Quist in September 1999, just a few months before the technology bubble burst, paying an overblown $1.4 billion. He followed that with the $7.7 billion acquisition of the London-based merchant bank Robert Fleming Holdings in April 2000, and then paid $500 million in July for the mergers and acquisitions boutique Beacon Group. With the last deal, he committed one of the cardinal sins of the M&A game—buying an entire company to secure the services of a single individual. In this case, it was Beacon Group’s senior partner, Geoffrey Boisi, a former Goldman Sachs hotshot. Boisi stuck around for just two years, making the deal exceedingly expensive in retrospect.

  But one hire turned out to be quite savvy. In mid-2000, Harrison secured the services of Steve Black, who had been out of the job market for 18 months, to run Chase’s burgeoning equities business.

  Harrison wasn’t done. He kept making deals. In September 2000, he and Douglas “Sandy” Warner, CEO of J.P. Morgan, shocked the industry by announcing a $34 billion union of their respective companies. The deal evoked memories of Shearson and Lehman, a marriage of high and low finance. Chase Manhattan had a powerful consumer brand, but it paled beside the century-old prestige of J.P. Morgan, which catered to ultra-wealthy individuals and corporate chieftains.

  In doing all this, Warner and Harrison were playing catch-up to Weill, who was setting the agenda for the entire industry. Size was everything, the thinking went, and the two men figured they could compete better in a potentially problematic marriage than on their own. Warner was named chairman of the combined firm; Harrison would be president and CEO.

  Like many colossal deals, the merger of J.P. Morgan and Chase struggled to live up to its potential. Integration was painfully slow, and management couldn’t figure out how to run the thing effectively as a single entity. The firm’s private equity unit got crushed at the end of the 1990s bubble. Too many telecom loans led to more pain, and trading results were erratic. The company’s 2001 return on equity was a puny 0.24 percent. By 2002 the stock was trading for 70 percent of its book value, a pitifully low ratio at the time. Then it got worse. The Enron debacle had cost the firm $135 million in fines in July 2003, but there was an even greater cost. The once august institution was now just another Wall Street firm on the make.

  Fifty-nine years old at the start of 2003, Harrison began to focus on identifying a capable successor. In assembling a platform that gave JPMorgan Chase a shot at future greatness, he’d been criticized for both the timing and the expense of his moves. But he’d built the platform nonetheless, and was ready to spend more time relaxing at his Greenwich estate. The board of the company was ready for a change as well. The problem was that Harrison didn’t feel any internal candidates were strong enough to run the company. The job required both vast technical skills and leadership skills. To succeed in banking tended to mean specializing in one particular area, and that left most talented executives knowing very little about the rest of the business. But there was an outsider who seemed to have all the right ingredients.

  • • •

  Harrison and Dimon began informal talks in January 2003. Then in May, Dimon called to say he was in New York and would love to meet Harrison. The two men had lunch in Harrison’s dining room at JPMorgan Chase, and then did so again in July. After that, things started to get serious, and secrecy became a concern. They began meeting in a suite that JPMorgan Chase kept at the Waldorf-Astoria on Park Avenue. Dimon also joined Harrison one night at Harrison’s home in Greenwich.

  As a matter of course, Dimon has always kept a one-page piece of paper that includes companies his firm might buy, merge with, or sell to, developed with the help of his management team and shared with the board. “You have to be careful, though,” he says. “I’ve seen too many boards or management when their own businesses are doing poorly, they start to bullshit about M&A. People just fall into that. So we separate it. We review our businesses and what we’re doing well organically. That kind of growth will get you a higher value for your shareholders, by the way. M&A is risky and tough, so the discipline is different. You really need to think about the landscape, to ask yourself what’s changing.” In any event, at the time, JPMorgan Chase stood out as having the strongest business logic with Bank One. (FleetBoston had been number one in a theoretical merger of equals before it was sold.)

  In this era of intense consolidation, the two CEOs spent a lot of time discussing “what ifs” about the future of industry. The fit between the companies seemed solid on paper. JPMorgan Chase could expand its branch banking business in the process, reducing its dependency on its volatile trading and investment banking franchises. And Bank One would be transformed from a regional player into an international powerhouse, the second-largest bank in the country after Citigroup. Dimon and Harrison also predicted $2.2 billion in co
st savings, in part from some 10,000 layoffs.

  Harrison knew by May that this was a deal he wanted to do. He just needed to bring Dimon around. After all his overpaying, Harrison was convinced that the market would pummel his stock if he paid a big premium, so he began by insisting that JPMorgan Chase pay no more than the market price for Bank One shares. Dimon countered with a demand for 35 percent on top. Someone was going to have to give a lot if the negotiations were to have any chance of success.

  When the deal between Bank of America and FleetBoston, with its 43 percent premium, was announced, it appeared that Harrison would be forced to give more in the negotiations. But he dug in his heels; he knew this was the last big deal of his career, and he would be damned if he was going to solidify a reputation for being an easy mark. Besides, JPMorgan Chase was enjoying a resurgence—profits jumped from $1.7 billion in 2002 to $6.7 billion in 2003, with the investment bank under David Coulter given much of the credit. Coulter had joined the firm in 2000, when Harrison purchased The Beacon Group. For what it’s worth, he was considered the top in-house candidate for CEO, but Dimon beat him to it.

  Dimon later told a group of Bank One employees that upon hearing of the Fleet deal, he’d called Harrison and said, “Bill, at 40 percent, I’ll drive your car.” Harrison’s response: “At 15 percent, you could be president.”

  Before the Bank of America deal, Harrison felt he’d been making headway in convincing Dimon that anything close to a 30 percent premium would result in stock market carnage, which wouldn’t have been good for either of them. But Dimon’s overriding duty at this point was to Bank One’s shareholders, who would rightly howl if they suspected he was accepting too little from JPMorgan Chase in exchange for advancing his own career. So he pushed for a 20 to 25 percent premium.