JPMorgan: defying attempts to end 'too big to fail'

Laura Noonan and Patrick Jenkins
Jamie Dimon, Chairman and CEO of JP Morgan Chase. 
Adam Jeffery | CNBC

A decade ago, Jeffrey Kindler, then chief executive of US drugs giant Pfizer, was plotting an audacious $68bn acquisition of rival Wyeth. But when the financial crisis hit and one of his lenders pulled out at short notice, the deal was thrown into doubt.

Driven by a mix of chutzpah and client loyalty, JPMorgan boss Jamie Dimon stepped in to plug the gap, telling his old college friend: "I got your back come hell or high water," according to a banker on the deal.

Mr. Dimon, who has led JPMorgan since 2005, insists that he is "[just] part of the army that supports" the investment bankers who he describes as the bank's "Navy Seals". But many in the industry — including rivals — say that this personal involvement in all aspects of the business from the Pfizer refinancing in 2008 to late-night conference calls where he makes clients feel good about how highly their business is prized, helps explain why JPMorgan survived the financial crisis better than any other US bank.

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"Wherever you go in the world, Jamie's just been there," says a head of a rival bank. "He's a real asset as CEO."

Among his recent destinations have been Saudi Arabia, to work with Saudi Aramco, and Italy, to advise the former government on its banking sector.

Mr. Dimon — a pushy, fast-talking New Yorker of Greek heritage — is not to everyone's taste. Some, including Elizabeth Warren, the Democratic Massachusetts senator, have criticized his arrogance, others his failure to hold on to potential successors and his vast pay packet, close to $30m last year.

Love or loath him, Mr. Dimon has made JPMorgan what it is today — one of the biggest banks in the world, with a market capitalization of $382bn and a breadth of influence that comes both from being America's largest high-street lender and from dominating global investment bank rankings.

"I should have bought JPMorgan," billionaire investor Warren Buffett said in a March interview. "Very obviously. I mean, it's a terrifically run operation."

Mr. Dimon, who will become the last surviving pre-crisis chief executive on Wall Street when Lloyd Blankfein steps down from Goldman Sachs this month, is seen as central to JPMorgan's success. "If [Dimon] hadn't been CEO," says the head of a rival investment bank, "JPMorgan would be pretty darned good, but not as good as it is today . . . I wouldn't want to be the one succeeding him."

Mr. Dimon has never been short of self-belief. But last week, as he reflected on the decade since the financial crisis, he struck an unusually modest note. "I don't want to be put on a pedestal. We did OK, but we also made mistakes," he told the Financial Times. "We always had a lot of capital, liquidity and hardly any unsecured short-term funding. That was key."

JPMorgan's ascendancy is partly attributed to the broader resurgence of Wall Street. The bank's four main rivals — Bank of America, Citigroup, Goldman Sachs and Morgan Stanley — have all prospered too, boosted by growth in the domestic economy, and more recently President Donald Trump's tax cuts and a new deregulatory mood.

"At the time of the crisis, one didn't imagine that the public policy intervention would make the banks . . . [even] stronger, 10 years later, than they were going into the crisis," says Bob Steel, the US undersecretary for domestic finance from October 2006 until July 2008.

Regulation may have crimped US banks' ability to make the same kind of profits they were racking up pre-2008 — even the best Wall Street returns on equity of around 14 percent are half the level generated a decade ago — but their share prices are nudging record levels, with JPMorgan at the top.

Their performance is in stark contrast to European rivals, which were slower to adjust to post-crisis regulation, emasculating their status as global competitors.

Luck, as well as judgment, has facilitated Mr. Dimon's supremacy. When he arrived at JPMorgan in 2004 — as chief executive in waiting following the takeover of Bank One, where he was the boss — the Wall Street giant had just cleaned itself up after the bruising dotcom bust. Things had got so bad that one contemporary of Mr. Dimon describes 2002 as a "near-death experience" for JPMorgan, after it sustained vast losses on collapsed energy group Enron and other highly leveraged borrowers.

Ashley Bacon, JPMorgan's chief risk officer, says "we always had a little bit more paranoia than others about tail outcomes. We were big stress testers."

Steve Black, the investment bank co-head in 2007, says JPMorgan's tiny portfolio of collateralized debt obligations — the mortgage bonds that wreaked global havoc in 2008 — was key: "Our goal [generally] was to be [ranked] top three in everything we did. We were number 15 or 16 in CDOs and we were very happy not to be higher. [Our] single best decision was not doing a bunch of stupid things that other people were doing."

But Mr. Dimon certainly made errors. He describes not ditching business generated by mortgage brokers — who set the terms on home loans and then came to the bank to underwrite them — as "the worst thing we missed". "I wanted to get out of it but was finally convinced to stay in. That decision cost us around $10bn," he says.

His most infamous error was the $6.2bn "London Whale" scandal in a JPMorgan unit in 2012. What was supposed to be a low-risk home for the cash and other reserves that JPMorgan needed to run its business had swelled to a value of about $350bn thanks to trading decisions that capitalized on the eurozone crisis. But the team, headed by a Dimon disciple, Ina Drew, ignored risk guidance and built up complex positions that triggered huge losses when they had to be unwound.

"In [this unit], risk management was sometimes run on more of a federated model; there was no strong center to determine risk management best practice, and to force a certain type of discussion," says Mr Bacon. "A more centralized risk model should have been forced."

Mr. Dimon is clearly still stung by the incident. "If I'd asked some basic questions earlier, I would have caught it but I didn't," he says.

The judgment of others is far harsher. The whale affair was "100 percent Jamie's fault", says one former colleague. Ms. Drew, he says, was "running the biggest hedge fund in the world" and enjoyed the support of Mr. Dimon "because she did what he wanted her to do — create additional earnings." Executives insist that the Whale could not occur again, such has been the boost to checks and balances.

Despite the scandal Mr. Dimon has evolved into the industry's elder statesman and chief lobbyist, including a 2011 rant against the "anti-American" rules from the Basel Committee, which imposed higher capital requirements on the biggest banks, almost all of them American.

Mr. Dimon does not think his noisy lobbying has influenced post-crisis regulation. Indeed the chief executive of another bank says his efforts have been counterproductive: "His interventions on the regulatory debate have been a negative. It has made regulators more nervous of hubristic banks."

But both the new rules that followed the crisis and the deregulatory initiatives that have accompanied Trump's presidency have favored JPMorgan and its rivals.

"Post-crisis, in the environment of the new regulation, scale has been the name of the game," says Daniel Pinto, JPMorgan's investment bank chief, acknowledging the irony that policymakers who were concerned about the risks of too-big-to-fail banks have helped enlarge them. "When you think about the amount of capital, liquidity, the increase in the control environment, compliance, risk — all the things we have to do — [then] the more you put through the pipes, the [cheaper] it is."

More than any of his rivals Mr. Dimon has been opportunistic. The bank bulked up during the crisis by taking over the collapsing Bear Stearns and Washington Mutual. The chief executive says he would not do the Bear Stearns deal again, due to the penalties later imposed for pre-acquisition misdemeanors. The bank has never released a tally of fines but analysts at Autonomous put it at $5.9bn.

On the other hand, it paid just $1.5bn for Bear Stearns, only $250,000 above the value of its building at 383 Madison Avenue, according to Autonomous.

"[Bear Stearns] is the deal that validated JPMorgan's reputation for strength," says Mike Mayo, a veteran Wall Street analyst, now with Wells Fargo. "It gave them more scale, more capital markets and it's one of the reasons JPMorgan is a first, rather than second, tier investment bank."

Washington Mutual, a large retail bank, brought another $8.4bn of fines to the house of Dimon according to Autonomous. All the same, says JPMorgan's retail chief Gordon Smith: "WaMu was a very good acquisition." In the decade since the deal JPMorgan's profits from WaMu, which gave the group a network of branches in states from Florida to California, have been "many times more" than the cost of the deal and its fines.

Organic growth has also played a part. Mr. Smith, a newcomer to the business in 2007 who was running the bank's cards business, says Mr. Dimon supported a $1bn expansion plan even as the crisis bit. Since then the cards business has gained 7.5 percentage points of market share to rank it number one in the US.

"They switched from defense to offence before anyone else," says one Citigroup executive.

The result is a behemoth of a bank. With assets of $2.6tn and more than a quarter of a million staff, only China's Big Four lender and HSBC are larger.

But as geopolitical concerns mount, and equity markets wobble close to record highs, the bursting of bubbles in asset classes from shares to real estate pose a risk to any bank — JPMorgan perhaps more than most. "There's a lot of risk on the balance sheet," says one rival, pointing to its appetite for lending to the likes of HNA, the Chinese conglomerate that is frantically shrinking only months after going on a $50bn leveraged acquisitions spree. "They've ridden the wave in equity finance, prime brokerage, corporate lending." From here, adds the banker, there is only one way to go.

Mr Pinto admits that the long-running boom will end within two or three years. "After a long period of growth, we'll have a recession," he says. "But I don't see any areas that have red hot leverage or vulnerabilities . . . Asset prices [will] correct and people who own them will lose money. But it won't be a crisis, just a correction."

Mr. Bacon says the biggest risk facing JPMorgan and banks in general is "some form of unforeseen operational failure from within or without", such as a cyber attack or a conduct issue.

The bank manages cyber risk with the help of an $11bn annual technology budget. "It's not about having the biggest technology spend on Wall Street," says Marianne Lake, JPMorgan's finance chief, countering suggestions of profligacy. "It's about identifying what is strategically important to our clients."

Perhaps the biggest risk is Mr. Dimon himself. "JPMorgan is massively dependent on him," says a rival banker, "He's killed successors and the board is not doing its job ensuring there's a big, strong deep bench to take over."

Mr. Dimon, a 62-year-old father of three and grandfather of three, has said little about his plans beyond a retirement, that he says is five years away. Those close to him say neither a run for the presidency, which has been rumored, nor a New York mayoral race appeal to him.

Potential successors include Ms. Lake, Mr. Smith, who runs JPMorgan's biggest division, and Mr. Pinto, the Argentine head of the world's biggest investment bank. "There's no Jamie lookalike," says one senior executive at the bank not linked with the job, "but there are other ways to do it."

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