Last Man Standing

by Duff McDonald

  Lacking that much cash, Amaranth turned to JPMorgan Chase, the hedge fund’s clearing broker, and asked if the firm might return $2 billion of posted collateral so it could get the deal done. Steve Black and Bill Winters refused. When Goldman then backed out, Amaranth received a similar offer—“Give us cash and we’ll take over the trades”—from the Chicago-based hedge fund Citadel, to take the entire portfolio off its books. But the problem remained. JPMorgan Chase wouldn’t release the cash. The answer, in the end, was obvious. JPMorgan Chase and Citadel made a joint bid for the trades. (With JPMorgan Chase in on the deal, the question of releasing collateral somehow disappeared.) The company made about $725 million in profit on the positions, in part by turning around and selling many of those it had just purchased to Citadel. Risk magazine named JPMorgan Chase “Energy Derivatives House of the Year” in 2006, in large part because of its success on the Amaranth trade.

  Amaranth later sued JPMorgan Chase for more than $1 billion, accusing the company of abusing its position as the hedge fund’s prime broker to put the kibosh on the deals with Goldman and Citadel in favor of its own purchase. A number of counts in the complaint were thrown out—including allegations that Black and Winters spread rumors about Amaranth, thereby expediting its collapse—but the case was still alive in mid-2009. Critics suggested that Dimon, Black, and Winters saw the size of the potential profit on the deal, and plowed ahead regardless of the legal risk, knowing they could cover their legal costs with the profits in any event.

  Dimon, who considers the lawsuit “silly,” had no pity for the collapsed fund. “When you have outsize positions like they had in illiquid markets, that’s life,” he says matter-of-factly. “The Goldman deal would have let Goldman cherry-pick the pieces they wanted, leaving us with the rest. We weren’t going to be left with the highly toxic leveraged stuff while Goldman bought everything else at a huge discount. They also wanted us to release our collateral early. But we had no obligation to—and weren’t about to increase our exposure like that.” JPMorgan Chase had the upper hand, in other words, and it would be damned if it wasn’t going to use the situation to its advantage. Period. There is no “gentlemen’s club” discount in Jamie Dimon’s world.

  (Jamie Dimon, it almost goes without saying, is not the kind of man who finds all babies cute. “I never noticed babies until I had my own, and then I suddenly realized they were all around me,” he says. “But once mine weren’t babies anymore, I stopped noticing everybody else’s.” Nor are all companies—or countries—created equal. He has a special spot in his heart for his own family, his own company, and his own country. He doesn’t wish harm on anyone, but supplicants without a direct connection to him are best served by looking elsewhere for help.)

  The hurt feelings weren’t only at Amaranth. JPMorgan Chase’s top two energy traders, George “Beau” Taylor and Parker Drew, soon left the company in an apparent dispute over compensation and credit surrounding the Amaranth trades. (David Puth, the onetime head of the firm’s currency and commodity business, had left just a few months before. Black and Winters were continuing to clean house.)

  At the same time that the firm was celebrating its gains from Amaranth, the executive team was mourning the loss of one of its own. Joan Guggenheimer, who had been general counsel at Citigroup, Bank One, and JPMorgan Chase, died on July 30 after a lengthy battle with cancer. She had taken a leave of absence just three days before, and her death had a great impact on Dimon, who personally wrote a memo that concluded with the remark, “We were privileged to know her.” When a caller asked to speak to Dimon the evening of her death, one of Dimon’s daughters told him that her father was closeted in his music room, with Frank Sinatra blaring at top volume. “He is the only CEO I’ve ever met who cries,” says one executive.

  In October, Dimon signed off on the $460 million sales of 5.3 million square feet of excess real estate to Toronto-based Brookfield Asset Management. The company agreed to long-term leases as part of the deal, and the sale freed up capital it could use to continue investing in growth businesses. With the real estate market gone mad, Dimon wasn’t going to pass up a chance to let JPMorgan Chase take advantage of the insanity. This was another example of Dimon’s classic approach to waste-cutting. After arriving at JPMorgan Chase, he had made the team in charge of the company’s portfolio of real estate walk every single floor of every single major building the company owned and report back how much excess space was on hand. The team found 5.3 million square feet.

  In December, Dimon hired Stephen Cutler as the company’s new general counsel. Cutler had been the enforcement director of the Securities and Exchange Commission during the debacles at Enron and Worldcom, for which JPMorgan Chase had paid $4 billion in fines. Deal making aside, Dimon had just turned a potential adversary into an ally.

  • • •

  Dimon was part of two transitions at the end of 2006. One of them was a true changing of the guard: he took over from Bill Harrison as chairman of the board. Dimon was now totally in control of the third-largest bank, by assets, in the country—after Citigroup and Bank of America. The other was more symbolic, but no less poignant. In November, Dimon replaced Sandy Weill as a director of the Federal Reserve Bank of New York.

  In January, Dimon declared the merger with Bank One complete, and also reported a dramatic increase in return on equity, which had climbed from 8 percent in 2005 to 13 percent in 2006, driven in part by $3 billion in merger savings. Characteristically, he was unhappy with the results despite the improvement—the goal was a 20 percent return on equity. Still, in celebrating his taking on the chairman’s role, The Economist described him as Tenzing to Weill’s Hilary. Dimon was paid $63 million for his work in 2006: $27 million in salary and $36 million from exercising options. He was again named to the Time 100.

  That summer, Dimon and his family headed off for a vacation in the Caribbean with the Maglathlins and their three children. Dimon spent half an hour a day on the telephone and the rest of the day enjoying himself with everyone else. He brought his guitar along, but few were eager to hear him play. (“He’s OK,” says Peter Maglathlin. “Although he’ll tell you that he’s good.”)

  When Weill’s autobiography, The Real Deal, was released in October 2006, it contained what many considered a considerable degree of revisionism, particularly concerning his relationship with Dimon. (One longtime colleague refers to it as “the gospel according to Sandy.”) Dimon was enraged by a number of remarks Weill attributed to him, criticizing other executives at Travelers and Citigroup. Dimon maintains that he did not say many of these things, and that it was Weill himself who made many of the remarks. A number of people, including Frank Zarb, were hurt by quotes attributed to Dimon. And in more than a few cases in which Weill’s quotes were accurate, they were a breach of what Dimon considered strict confidence.

  Dimon claims that he has not read the book, but that he has heard enough from others to know he need not have bothered. “Honest criticisms are fine with me,” he says. “But he went too far.” Friends and colleagues noticed that Dimon basically stopped making an effort to remain friendly with Weill after the book’s release. While always respectful, he just doesn’t go out of his way anymore.

  • • •

  Although he rarely appears in the social pages, Dimon did attend the $3 million birthday fete that the private equity kingpin Stephen Schwarzman threw for himself at the Park Avenue Armory in February 2007. The bash was seized on as a symbol of the new gilded age—Rod Stewart was paid $1 million to play for half an hour—and the city’s financial elite turned out in full force to eat lobster and baked Alaska and drink 2004 Louis Jadot Chassagne-Montrachet. Along with Dimon were Goldman Sachs’s CEO Lloyd Blankfein, Merrill Lynch’s Stan O’Neal, Bear Stearns’ Jimmy Cayne, and Lazard’s Bruce Wasserstein.

  Sandy Weill retired as chairman of Citigroup in 2006. A retirement party was held in the Egyptian Room at the Metropolitan Museum, and the guest list included the former president Bill Clinton a
nd the Saudi prince Alwaleed. Dimon attended, but kept a low profile. Although a few dozen people spoke in tribute to Weill’s lengthy career, Dimon was not among them. He wore a regular business suit to the black tie event, and though he did greet people beside Weill for a bit, he left before the party got going. “You know what they say about cars that have been in a wreck?” muses one executive about the relationship between two men. “You can send them to the body shop, but they’re never going to be the same.” (Then again, maybe for Dimon it’s just a party thing. At a faux-retirement party in Armonk for Joe Plumeri when he left Shearson to work at A.L. Williams, Dimon showed up in shorts and running shoes. “He’s bright, but different,” observes a longtime colleague, “and loves to be viewed as a maverick.”)

  By 2007, the JPMorgan Chase brand had been largely refurbished, and strong numbers were posted by the investment bank. Not only was the unit bringing in record revenues; it also recorded a 30 percent return on equity in the first quarter. (It didn’t hurt that nearly every asset was rising in value in 2006.) Whatever Wall Street thought of him, Dimon’s stature inside the bank was also increasing. At one so-called “town hall” event in Columbus, Ohio, employees looking for pictures or autographs besieged him, and he took an hour to get out of the meeting after it had officially ended. “These events are now almost cultish,” says one insider.

  As much of a chiseler as he may be at heart, Dimon has continued to support JPMorgan Chase’s corporate art collection, which comprises some 37,000 pieces largely collected by David Rockefeller during his tenure at Chase. Though it’s not the largest corporate collection—both Deutsche Bank and Bank of America have larger ones—it is of extremely high quality, with a number of Warhols and Calders. Dimon’s own taste in art runs toward what might be called the patriotic. For a time, he kept in his office a four-foot maquette of the Statue of Liberty made in the same foundry in Paris as the original. He also has a copy of James Montgomery Flagg’s famous “I Want You” poster of Uncle Sam.

  With the history of the franchise in mind, Dimon also had the bank’s client dining rooms on the forty-ninth and fiftieth floors of 270 Park Avenue refurbished in 2007 and 2008. Spread across both floors are remarkable displays showcasing some of the company’s extensive collection of financial artifacts, including the first greenback ever printed in 1862, one of Carlos Baca’s famous paintings of J.P. Morgan himself, a snowy oil painting by Guy Carleton Wiggins, and a painting by Anton Schutz of the Bank of Manhattan’s original headquarters at 40 Wall Street. (The one gap left in that history is a portrait of Dimon himself—a tradition at JPMorgan Chase. To date he has refused to sit for one.)

  Even after he secured the additional title, Dimon’s style continued to be more that of a CEO than a chairman, as he remained engaged in most facets of the business. As always, he was intensely focused on where the company could improve. One of his favorite mantras is “More, better, faster, quicker, cheaper.”

  He’s been able to succeed with this approach in large part because of the tightness of his inner circle. Although Dimon is more than capable of hurting subordinates’ feelings—often in the very same way for a second or third time—he is not mean-spirited. And he will apologize. As a result, his top managers have a genuine affection for him, which has helped him keep a stable core, unlike many of his competitors. Citigroup in the Chuck Prince era was a notorious hornets’ nest. And it’s no secret that few colleagues liked Merrill Lynch’s Stan O’Neal.

  • • •

  By early 2007, it was no longer difficult to find a bear in or around Wall Street. Doomsaying commentators, including an economics professor at New York University, Nouriel Roubini, were imploring investors not to underestimate the obvious signs of weakness in subprime and how it could easily spill over into other areas. But Wall Street still found reasons not to take their concerns seriously. In January 2007, Michael Lewis wrote a column for Bloomberg News titled “Davos Is for Wimps, Ninnies, Pointless Skeptics,” lampooning Roubini, the private investor Steven Rattner, and Morgan Stanley’s economist Stephen Roach for daring to introduce pessimism at the annual global economic retreat in Switzerland. In bull markets, bears always get picked on.

  While Jamie Dimon and his colleagues were having doubts about the housing market, most investors were chuckling right alongside Lewis, happy to see their portfolios gaining. Investment bankers continued to book fees and mark huge gains from their mortgage-related underwriting and investments.

  Bear Stearns, the smallest of Wall Street’s major players, had turned in a record fourth quarter in 2006, the result of a decision to focus on mortgages above all else. Bear was full of what its former CEO Alan “Ace” Greenberg called PSDs—those who were poor, were smart, and had a desire to get rich. Forget appearances; making money for the firm was all that mattered. Do that, and you were handed the keys to the kingdom. And the way to make money at Bear in those days was in mortgages. The firm was the leading underwriter of U.S. mortgage-backed securities from 2004 to 2007.

  Ralph Cioffi was among Bear’s most successful mortgage men. A former bond salesman who had been with the firm since 1985, Cioffi had been made a hedge fund manager in 2003, when the firm gave him $10 million to invest in subprime mortgage-backed securities. He launched what was called the High-Grade Structured Credit Fund, and out of the gate, it was profitable for 40 straight months, a record almost too good to be true. (Cioffi’s comanager, Matthew Tannin, once compared the fund to a bank account.) Such success emboldened Cioffi to delve into even riskier strategies, and in 2006, the firm set up a second, more leveraged fund, the High-Grade Structured Enhanced Leveraged Fund.

  Cioffi told investors that the leverage wasn’t dangerous, because he was buying only supersafe securities, rated triple-A and double-A by the credit-rating agencies. According to William Cohan, author of House of Cards, Cioffi was lying. It wasn’t just 6 percent of the funds that were invested in subprime mortgages; it was more like 60 percent. And the leverage was devastatingly high. The first fund was leveraged about 35 to one, and the second at a breathtaking 100 to one. At that level, a drop of 1 percent wipes out all the equity.

  When the housing market stalled, as it did in late 2006 and early 2007, that’s exactly what happened. Housing prices were not yet in free fall, but some securities had slipped to about 95 percent of their value by the spring. Cioffi took a huge paper loss and was unable to meet margin calls from his overnight lenders. (This is the lesson of leverage. If you pay only $1 for $100 worth of securities while borrowing the other $99, and those securities lose $5 in value, you’re not only out your original $1. You now owe $4 just to get back to breakeven. Multiply those numbers by several hundred million, and you can appreciate the pickle Cioffi found himself in.)

  In a move as brazen as it was cynical, Cioffi decided that the way out of the mess was to find a few patsies to take the toxic securities off his hands. In May, he put together a plan to create a company named Ever-quest Financial, and prepped it for an initial public offering. What would Everquest do? Overpay for Cioffi’s underwater securities. (The name of the company—“Everquest”—was classic Wall Street, both portentous and meaningless.)

  Unfortunately for Cioffi, a number of reporters at both the Wall Street Journal and Business Week sniffed out the scheme by early June, and he was forced to abort it. A total of $4 billion in securities had to be liquidated to satisfy redemptions and margin calls by the funds’ creditors.

  By this point, those creditors, including Merrill Lynch and JPMorgan Chase, were threatening to pull the plug and send both funds into default. In an attempt to head off the crisis, the copresident of Bear Stearns, Warren Spector, convened a meeting of the firm’s lenders, including Merrill Lynch, JPMorgan Chase, Goldman Sachs, and Bank of America, at the company’s offices at 383 Madison Avenue. The gist of his message was that everything would be OK; Cioffi was an expert in such things, and just needed some breathing room to put the funds back on a solid footing. John Hogan, chief risk officer for
JPMorgan Chase’s investment bank, attended. Hogan asked a question. Was Bear Stearns prepared to provide a capital infusion to help the funds meet their margin calls? When he was told the answer was no, he left the meeting and returned to the JPMorgan Chase headquarters.

  After being debriefed by Hogan, Steve Black picked up the phone and called Spector. “You guys are out of your mind if you think we’re not going to put you into default,” Black told him. Spector replied that Black and Hogan did not understand the business, and that JPMorgan Chase was the only bank that was giving Bear Stearns a hard time about the loans. “I don’t believe you,” Black replied. “Don’t call us again.” And that was it. The call was over.

  Black, who’d been a fraternity brother of Spector’s copresident, Alan Schwartz, at Duke University, then called his old college buddy. “I don’t want to speak to Spector again,” Black said. “And just so you know, we’re going to default you.” That evening at 5:30, JPMorgan Chase sent a messenger with a default notice across the street to the Bear Stearns offices. (Security guards at Bear turned the man away, saying the office was closed for the evening. The next morning, at 6:00, the default notice was delivered.)

  Merrill Lynch responded even more aggressively. In a public rebuke to Bear, the firm, which had exposure totaling $1.46 billion, seized $400 million in collateral and threatened to sell it; such a sale would push prices of the fund’s remaining holdings down farther. JPMorgan Chase did the same, but less publicly. The firm ultimately sold $400 million of its collateral back to Cioffi for cash. (In its contracts with Bear Stearns, JPMorgan Chase had what was referred to as a “no dispute clause”: Bear had no right to dispute the pricing of the collateral held by JPMorgan Chase. “That served us well,” recalls Black. “We didn’t have to waste a lot of time arguing about the value of collateral.”) The combined efforts of its creditors ultimately forced Bear’s hand, and on June 23, the investment bank injected $3.2 billion of its own money into Cioffi’s funds, an eye-opening event for anyone not yet cognizant of the weakness in the U.S. subprime mortgage space. The funds eventually collapsed entirely in July.