In This Corner! The Contender

Jamie Dimon, the new CEO of J.P. Morgan Chase is taking a shot at the title of world's most important banker and trying to whip a sprawling financial conglomerate into shape.

By Shawn Tully

April 7, 2006

[Continued, page 2]

Dimon's strategy for J.P. Morgan is deceptively simple: boost revenues at a healthy pace while keeping a lid on costs. "If the market is convinced you'll keep the cost line flat and that you have the disciplines to raise revenues faster than your competitors, your stock price can rise in double digits," says Dimon. "But you have to do both."

In pursuit of those goals, he doesn't get bogged down in a search for consensus or worry about hurt feelings. At a meeting early last year, Todd Maclin, head of J.P. Morgan's commercial bank, complained to Dimon that the investment bankers were hoarding hundreds of so-called middle-market firms--those with annual sales of $500 million to $2 billion--on their "prospects" list, keeping the commercial bankers from approaching them.

Dimon dropped everything and convened the top executives of the investment bank. "Are you calling on this company?" he demanded. "How often? How much business are you doing with them?" When it became clear that many prospects were being neglected, Dimon started reassigning them to the commercial bank. "The room was filled with hollering and yelling," says Maclin. But Dimon was adamant. "You're protecting clients you don't do business with," he said.

That was only half the battle. Dimon wanted Maclin's crew to have strong incentives to steer business to the investment bank. Maclin and his investment-banking counterpart, Douglas Braunstein, worked out an arrangement: The commercial bank gets 25% to 50% of the fees from M&A, debt, and equity deals involving their clients. The system is a success. Last year the investment bank sold almost $500 million in services to middle-market customers, twice as much as two years ago.

It's a prime example of how Dimon thinks a financial supermarket should work. Having a mix of businesses, he believes, has two advantages. It adds stability to earnings--consistent profits from branch banking, say, help smooth out swings in trading--and it should also lift sales, if you make sure that different divisions feed one another.

Dimon has already revamped J.P. Morgan's retail-branch system to encourage greater selling of mortgages, credit cards, and other products. When he arrived, branch personnel got the same pay for pushing products as for dozing behind their desks; 50% of branch managers received bonuses of $8,000 to $18,000. Today, under the watchful eye of retail-banking head Scharf--who instituted a similar plan for Dimon at Bank One--the firm pays big bucks to stars and fires laggards.

Branch managers are ranked based on how much they raise both profit and revenues; the top group gets bonuses as high as $65,000, and the lowest quintile zip. Salespeople in the branches can do even better, collecting "points" for selling credit cards, mortgages, and other products. Last year the biggest point-gatherer pocketed a $145,000 bonus. If you don't make your quota, you're out.

Dimon is bringing that kind of rigor to every corner of the firm. In the old J.P. Morgan, big units combined their results, so it was difficult for top management to figure out which ones were really making money. "Strong businesses were subsidizing weak ones, but the numbers didn't jump out at you," says CFO Cavanagh. "With the results mashed together, it was easy for managers to hide."

The hiding game is over. Right after the merger, Dimon split J.P. Morgan into six major profit centers--investment banking, retail, and cards are the three biggest--with dozens of units that must report like separate companies. Each month, division heads send Dimon 50-page books packed with data, from the ratio of overhead to sales on every product to BlackBerry bills per employee. Then Dimon goes over the reports in grueling sessions that last hours.

"He'll ask, 'Why do we have three times as many HR people in Europe as in Asia?'" says private-banking chief Staley. "'Are we doing something better in Asia?'" Last year the exercise led Dimon to have the communications and marketing department replace expatriates with local hires in its overseas offices, saving more than $100,000 per post.

Transforming the bank's technology is another pillar of Dimon's plan. When he arrived, J.P. Morgan was saddled with mismatched computer systems inherited from Chase, Chemical, and Texas Commerce. Lots of expensive software and interfaces were needed for the different systems to talk to one another, making J.P. Morgan's costs per transaction among the highest in the industry.

The computer confusion also hampered the bank's ability to market more products to existing customers. Sitting with a client, a branch banker couldn't call up much more than a checking history. Nothing popped up about whether the customer qualified for a mortgage or credit card.

On a Saturday in mid-February 2004, a month after the Bank One deal was announced, Dimon brought together the top IT people. He dazzled them with his grasp of protocols and software costs, then told the managers to choose a single platform in any area where multiple systems were in place. "If you don't do it in six weeks," he warned, "I'll make all the choices myself."

The IT managers met the deadline. Now, for example, J.P. Morgan has just one system for credit cards. The new platform, called TSYS, has helped bring down the bank's annual cost of processing statements to $52 per customer from $80. That makes J.P. Morgan one of the most efficient operators in the industry.

In the branches (all of which now carry the Chase brand), computers are now sales tools; the screens prompt bankers to offer customers every Chase product they qualify for but don't have, from home-equity loans to financial planning. One example of the new culture at work: Chase increased the number of credit card accounts opened in the branches by 55% in 2005.

In cleaning up the computer mess, Dimon displayed another tenet of his philosophy: Keep a firm grip on IT. Last year he canceled IBM's seven-year contract to manage J.P. Morgan's computer systems. IT isn't a sideline, he believes, but rather an essential skill the firm should totally control.

"When you're outsourcing it's almost impossible to do the integration, because people don't care that much," he says. "We want patriots, not mercenaries." And of course, he also hates paying the markup for having outsiders do the work.

Cutting costs isn't just about saving money--for Dimon it means freeing up capital to seed new growth. Retail banking is a case in point. When Dimon arrived, the bank employed five people and spent some $750,000 per branch in back-office costs, compared with two employees and $250,000 at Bank One. Consolidating the computer systems helped cut that down--as did eliminating nearly 2,000 support jobs in New York City. Now Chase is approaching Bank One's efficiency.

But Dimon has also spent heavily to upgrade dowdy branch facilities and to take on competition. Dimon and Scharf fired back at New York-area invaders like Bank of America and Wachovia, blitzing the Big Apple with fresh TV, radio, and billboard ads. Chase installed 270 ATMs in heavily trafficked Duane Reade drugstores, the first such arrangement by any bank with a big retailer in New York.

Across the U.S., Chase hired 3,000 new salespeople. Despite the new spending on advertising, systems, and the opening of 150 new branches, Chase managed to raise operating earnings at the retail bank 8% in 2005, to $3.4 billion.

One area that Dimon has not yet tamed is J.P. Morgan's wildly inconsistent trading operation. By its nature, proprietary trading--where firms bet their own capital on the direction of stock prices or interest rates--is risky. J.P. Morgan's problem is that it both makes less money and suffers from far more volatility than rivals like Goldman Sachs and Morgan Stanley.

And while J.P. Morgan's investment bank is raking in fee income (its take tops all rivals but Citi), the division lives and dies on trading. In the fourth quarter of 2005, for example, when the proprietary traders lost several hundred million dollars betting that both oil prices and interest rates would jump, profits at the investment bank slumped 29% from the previous quarter.

Still, Dimon embraces trading, for a simple reason: It's extremely profitable, despite the swings. So he's instituting stricter controls and spreading risks by diversifying beyond fixed-income and derivatives trading into energy and mortgage-backed securities--two fields where competitors were cleaning up. Last year J.P. Morgan hired a crack energy team from Morgan Stanley and recruited mortgage traders from all over Wall Street. Dimon is promising far smoother trading results in 2006. "We'll have less volatility, and we'll get paid more for the swings we do have," he says.

While Dimon would seem to be moving at lightning speed, things are actually going more slowly than he'd hoped. Getting J.P. Morgan's house in order has "probably taken longer than I thought," he says. "We had to increase spending in a lot of areas more than I initially said we would." Ultimately, he expects that spending to lead to greater profits and a higher stock price.

And a higher stock price is important, because even as Dimon lasers in on operations, dealmaking is never far from his mind. Harrison and board member Bob Lipp are out hunting for prospective partners. J.P. Morgan needs to expand its retail-branch footprint in California and Florida, the two big domestic markets from which it's absent. There are a number of banks Dimon could buy to fill those gaps, including SunTrust, Wachovia, and Washington Mutual.

But his grand dream, according to those close to him, is to create a worldwide retail network that rivals Citigroup's--so he also wants to ride the growth wave of the future, Asia. An ideal merger partner would be HSBC, which boasts interests in retail networks spanning from Mumbai to Shanghai. It's that quest that gives added urgency to fixing J.P. Morgan's operational problems and boosting its stock price. It's only when you accomplish those things, says Dimon, that "you earn the right to do a deal."

An extraordinary reunion took place last summer. Citigroup CEO Chuck Prince invited a dozen current and former colleagues, including Sandy Weill and Dimon, to dinner. They gathered in a renovated mansion on the grounds of Citi's Greenwich, Conn., retreat, a place many of them had been coming to since the late 1980s when Commercial Credit bought it. Back then, the building was a ramshackle relic with leaky plumbing and worn furniture, decorated in a style they called "early frat house."

For Dimon, the evening was a replay of good times--lavish dinners lubricated with rare wines from the mansion's hidden cellar--and bad: Seven years earlier, Weill had summoned Dimon to another building at the retreat to fire him. The mood was light, though, as the group joked and reminisced about the old days at the "frat house."

"You finally fixed it up," Dimon said, admiring the sumptuous renovations. Of course, Dimon is deep into a renovation of his own. What was unspoken that evening is that he wants nothing more than to vanquish the very people with whom he was swapping memories. And that's one Jamie story that remains to be told.

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