Schadenfreude – literally ‘damage joy’ – is one of those gloriously elegant German words that English takes several to capture, even then not quite managing it. But simply put, as you’ll already know, it means taking pleasure from the misfortune of others.
Earlier this year, it gained another definition: the overwhelming sentiment sweeping Wall St and the City when JP Morgan Chase, and its hitherto untouchable CEO, Jamie Dimon, finally messed up. Trading losses incurred by the giant bank’s chief investment office – standing at $5.8bn, with up to $1.6bn likely to be added to that total – had “shaken our company to the core,” he said.
More to the point, they had shaken the market’s confidence in a bank that, until then, appeared to have emerged from some of the most brutal financial conditions in decades with barely a scratch. Surely, if there was any bank this kind of disaster wasn’t supposed to happen to, it was JP Morgan, and if there was one chief executive whose furious pursuit of balance-sheet fortification should have prevented such losses, it was Dimon.
But it was, and he didn’t. Instead, Dimon was forced to issue a humbling apology, in front of Congress in Washington, for an issue he’d referred to as a “tempest in a teapot” just two months before. When reports emerged that several hedge funds were betting against colossal, price-distorting credit default swap positions held by JP Morgan trader Bruno Iksil (ostensibly as a hedge), Dimon dismissed them. “Obviously it’s a big portfolio, we’re a large company, and we try to run it”, he told analysts on a conference call. “It’s sophisticated, obviously complex things, but at the end of the day, our job is to invest that portfolio wisely and intelligently over a long period of time to earn income and to offset other exposures we have.”
Two months later, Dimon was testifying on Capitol Hill, one month after JP Morgan disclosed losses of $2bn (now known to be higher) as a result of these positions. “We made a mistake. I am absolutely responsible,” he said. “The buck stops with me.”
This, lest we forget, was a man who had previously received ringing endorsements not only from the media (in 2010 the New York Times bestowed on him the lofty title of ‘America’s Least Hated Banker’) and industry heavyweights like Warren Buffet, but from the president of the United States, too. “There are a lot of banks that are actually pretty well managed, JP Morgan being a good example” Barack Obama told ABC news the month after his inauguration. “Jamie Dimon, the CEO there, I don’t think should be punished for doing a pretty good job managing an enormous portfolio.”
How on earth did it all go so wrong?
THE VIEW FROM THE INSIDE
At this stage I should probably declare my own interests in the contemporarily parallel stories of Jamie Dimon and JP Morgan. In 2003, I joined the bank as a naïve summer intern in London, starting as a full-time graduate trainee the following year. Four years later, and barely less naïve, I left the firm having finally twigged that I would never make any kind of banker.
When I began my internship the company’s CEO was veteran banker William B Harrison. When I returned, almost a year later, JP Morgan had acquired Chicago’s Bank One in a move masterminded by Harrison and Bank One’s CEO, a certain Jamie Dimon, and the wheels were already in motion for his ascension to the JP Morgan throne.
I didn’t appreciate the significance of this at the time. After all, how was I, a science graduate from the New Forest who had somehow managed to fluke his way into an investment bank, supposed to know Dimon’s return from Chicago to Wall St heralded a sort of banking second coming for a man who had always been destined to be a Wall St legend?
“The main reason the deal is getting kudos is that it brings Jamie Dimon back where he belongs, to the big stage,” said an article in Fortune at the time. “He’s returning from the wilderness of regional banking to face the biggest challenge of his career: running an immense, complicated new creation, the hybrid of a giant investment and commercial bank. It’s a role Dimon was born to play.”
What I did notice, at least after Dimon replaced Harrison as JP Morgan CEO in 2005, was the palpable shift in momentum – there was a sense of optimism throughout the company, a feeling that this banking behemoth was being slowly manoeuvred into an upwards trajectory. On company conference calls and in memos Dimon talked incessantly, as he had before and has since (earning him plenty of ridicule in the light of recent events), of building a “fortress balance sheet”, creating a lean and ruthlessly efficient company that could withstand the worst shocks imaginable.
And as those first shocks came – by which point my time with the bank was almost done – JP Morgan was ready. When America’s fifth largest investment bank, Bear Stearns, started to wobble in March 2008, it was Jamie Dimon and JP Morgan who the Fed turned to for help, and who eventually acquired the dying bank for $2 a share.
In the years after the burgeoning credit crisis went full-blown in September 2008, bank after bank on Wall St and in the City took huge blows from which most have yet to fully recover. JP Morgan – until rocked by the activities of the man they took to calling ‘the London whale’ – survived relatively unscathed, and Jamie Dimon’s transition from hugely gifted banking tyro to king of Wall St appeared complete. His, if such a thing could ever exist, was a true Wall St coming-of-age story; a banking bildungsroman.
THE MAKING OF A WALL ST TITAN
Finance was the Dimon family game. His father was a broker, and his father’s father – who arrived in the US from Greece in the 1920s – was a broker too. Clearly it would be ridiculous to put the younger Dimon’s success down to nepotism, but it can’t have hurt that his father worked at an established Wall St firm. Nor can it have hurt, as it turned out, that his father was friendly with an influential Wall St deal maker called Sanford ‘Sandy’ Weill.
According to Duff McDonald’s 2009 biography of Dimon, Last Man Standing, when Dimon was in university (at Tufts near Boston), he wrote a paper on the benefits of integrating an efficient company with an inefficient one, using the merger of Hayden Stone, Weill’s company (and the ‘efficient’ company in Dimon’s analysis), and Shearson Hammill, the brokerage where Dimon’s father worked and his grandfather had before him. Weill saw the paper and was sufficiently impressed to offer Dimon a summer job.
Evidently it went well for both parties, because when Dimon completed his MBA at Harvard Business School several years later – graduating as a ‘Baker scholar’ for finishing in the top 5% of his class – he turned down job offers from Goldman Sachs, Lehman Brothers and Morgan Stanley to join Weill, now president at American Express (it had swallowed up Shearson a year earlier, in 1981, for $1bn), as his assistant.
But Weill’s ongoing disputes with the American Express board saw him become increasingly marginalised, and in 1985 he resigned. Dimon, aged 29, made the difficult and undeniably risky decision to go with him, and together they began looking for a struggling company to turnaround and use as a platform on which to build their empire.
They found that company one year later in Commercial Credit, a Baltimore-based lender to individuals on low incomes that its owner, a computer-parts maker called Control Data Corporation, was keen to offload. Weill negotiated a spin-off deal in which Control Data sold most of the company (82%) to the public, and additional funds were raised through a Commercial Credit share issue and Weill and Dimon’s own cash. The pair didn’t look back, and immediately began transforming the lender into a far leaner, more productive beast.
Within two years, the revived Commercial Credit was in a position to buy Primerica Corporation – a slightly sprawling financial services firm that included brokerage Smith Barney – for $1.5bn. In 1991, when he was just 35 years old, Dimon was made the company’s president. Less formally, his relentless, cut-happy enthusiasm earned him the nickname ‘The Lawnmower’ from Weill’s secretary, Alison Falls McElvery.
Deal after deal followed, and Weill and his protégé’s stars rose proportionally. In 1992 and 1993 the company bought insurer Travelers, eventually renaming the new conglomerate Travelers Group. They bought Shearson back from American Express, too, and merged it with Smith Barney, later (in 1998) adding Salomon Brothers. Weill even made an ultimately doomed play to acquire JP Morgan. Dimon, meanwhile, was honing his management style; as McDonald recounts in Last Man Standing, Dimon once told Joe Plumeri, Smith Barney Shearson’s president (and now CEO of insurance broker Willis), “Don’t do anything stupid. And don’t waste any money. Let everybody else waste money and do stupid things; then we’ll buy them.”
But the big deal – the game changer for both men – came when Weill started negotiating an audacious move to merge Travelers Group with Citicorp in a deal that would create one of the world’s largest financial institutions: Citigroup. In April 1998, the deal was finalised and announced.
The deal turned out to be the making of Dimon, though not, perhaps, in the way he had imagined. His relationship with Weill began to sour as a catalogue of issues – including Weill’s failure to name Dimon on Citigroup’s board, ongoing disputes over Dimon’s position at the new company, and post-merger teething problems not helped by the fallout from the collapse of hedge fund LTCM – took their toll. Following a bizarre confrontation with fellow executives at a company offsite, Dimon was asked to resign, and he did.
Dimon, though, saw his departure from Citigroup for what it was: an opportunity to build a company in his own image, with no one to answer to but himself. When he reemerged in 2000, over a year later, it was as CEO of Chicago’s Bank One – a move away from the Street he was supposedly destined to rule, but to head-up America’s fifth largest bank all the same.
In 2000, when the bank posted a loss of $511m, Dimon embarked on a programme of cost-cutting and streamlining (shaving-off $1.5bn of costs). His conviction and ruthlessness were vindicated: by 2003 annual profits had risen to $3.5bn and the share price had rocketed. Coincidentally, that same year Dimon’s old mentor, Sandy Weill, was replaced as CEO of Citigroup by Chuck Prince, an old hand who had already been at Commerical Credit when Weill took it over.
The following year Dimon was back where he belonged – on Wall St.
EATING HIS OWN COOKING
Even now, it’s hard to speculate on the long-term damage the activities of JP Morgan’s CIO have wreaked upon the firm, but what seems immediately clear is that Dimon’s hard-earned position as one of the industry’s chief weapons against new banking regulation has weakened.
Perhaps more importantly, the viability of the colossal, multi-service megabanks created by the likes of Weill and Dimon has been called into question again. “I’m wondering if the firm as a whole has reached some sort of tipping point in terms of size or complexity that makes it more difficult to manage,” asked veteran Wall St bank analyst Mike Mayo on a July conference call. “No,” came Dimon’s curt reply.
Inevitably, there were calls for Dimon to follow his disgraced contemporary Bob Diamond, formerly of Barclays, in heading for the exit, whether jumped or pushed. But, Dimon is still in the job, and while that remains the case his track record suggests he will do everything within his power to make the JP Morgan fortress impregnable once again.
He’s certainly bullish. In July, he waded into the market and bought 500,000 shares of JP Morgan stock with his own money, at $34.22-a-share: a total of $17.1m. Dimon has form in this area; the day before he was announced as Bank One CEO he bought two million of the bank’s shares for a total of $57m, telling the board he was an advocate, according to McDonald, of “eating his own cooking”.
And we all know how that worked out.
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