The Dealmaker and the Dynamo

At last J.P. Morgan's William Harrison has made a deal the market loves. Why? Because in buying Bank One, he's bringing Jamie Dimon back to the big show, where he belongs.

By Shawn Tully

January 26, 2004

[Continued, page 2]

Dimon first slashed expenses by 17%, or $1.5 billion. Over the next three years he dumped almost all the unprofitable credits. He transformed a crazy quilt of seven deposit systems into one superefficient platform. He badgered the credit card division to improve its customer service, which had been horrible. By sheer force of will, he transformed a $511 million loss in 2000 into $3.5 billion in profits for 2003.

Dimon's management style is a curious blend of ultraconservative principles and a hyperactive, intrusive, frequently improvisational drive to know and control just about everything. On the one hand, Dimon cherishes strong balance sheets and hates taking big risks. "He always manages for the worst, assuming a recession is just around the corner," says Linda Bammann, Bank One's chief risk officer. One of his first moves at Bank One was to install a sophisticated risk-management system. That system pushed the bank to diversify its risks by avoiding dangerously large exposures to individual industries or companies. The warning signals from the new risk procedures are one reason Bank One was able to pare loans to WorldCom and other tech companies by billions of dollars before the bubble burst. As a result, Bank One sidestepped the heavy credit losses that swamped competitors—including, ironically, J.P. Morgan Chase.

Even so, Dimon's management style is anything but by the book. Dimon manages by relentlessly collecting information. His goal is to talk to as many people as possible at every level of the organization. At headquarters only half his day is booked with meetings. The rest of the time he's walking the halls quizzing his executives and making phone calls around the company, grilling office managers, systems analysts, sales reps, and, yes, customers. For Dimon it's the best way to uncover hidden problems and learn the detailed mechanics of how every business runs.

This hierarchy hopping has a downside: Even executives who've worked with him for years get miffed that he goes around them. "God help you if you go on vacation," says Bammann. "He'll meet with your people and start changing things." But Dimon's vigilance has advantages. "At Travelers he understood the minutiae of every business, from how clearing works to underwriting asset-backed securities," marvels commercial business chief Jim Boshart. "It's the same at Bank One." No amount of fuzzy, feel-good talk, however polished, will fool Dimon. If the facts are bad, he usually knows already.

Still, Dimon inspires fierce loyalty in his lieutenants. He forges personal bonds with hundreds of people in every company he runs. "Everyone at Travelers felt they had a personal relationship with him," says Steve Black, a Travelers alumnus who's now chief of equities at J.P. Morgan Chase. Most of all, troops follow Dimon because he's an inspiring leader who prizes results, not politics. "He'll drive you crazy, but I'd trust him with my life," says Miller, whom Dimon hired at Primerica in 1991.

At J.P. Morgan, Dimon's biggest challenge will be managing his own nature. The impetuous Dimon must avoid fomenting infighting and a damaging culture clash. He has to get along with Harrison, who'll be his boss for the next two years. Although many of his Bank One lieutenants will have top jobs in the combined company, he also has to convince the best people at today's J.P. Morgan to stay—notably David Coulter, head of investment banking.

Fortunately for Dimon, the outlook for the basic businesses is promising, for two reasons. First, the new J.P. Morgan will become a big player in branch banking on the day the merger is completed—and a far stronger competitor in other consumer businesses where Bank One is strong, including credit cards. After the merger J.P. Morgan will rank as America's second-biggest credit card issuer, with $125 billion in balances, within striking distance of No. 1 Citigroup. In branch banking, today's J.P. Morgan is strong in only two states, New York and Texas; by adding Bank One's network, it will rank first in Arizona, Illinois, and Indiana, and reach the top five in nine other states. By swelling to 2,300 branches, J.P. Morgan will boast a U.S. network that's an amazing three times larger than Citi's.

Dimon wants to blanket the nation with branches. He states bluntly that he'll do more deals in retail: "I would love to fill in the gaps across the nation by buying more banks," he says. "Banking is like retailing," he adds. "If I'm big, I can give you more. Look at Wal-Mart. It's all about your sales per square foot, how many mortgages, credit cards, and car loans you can sell through the same branch."

The new J.P. Morgan's second pillar, investment banking, also looks solid—finally. Between 2000 and 2002, J.P. Morgan Chase served as practically a textbook case of how to destroy shareholder value by making dumb mistakes. While Dimon mined gold from a weak franchise, Harrison looked as if he was trashing a potentially excellent one. For starters, he vastly overpaid for a string of acquisitions at the top of the market, culminating with Chase's $34 billion purchase of J.P. Morgan in late 2000.

Chase paid that huge price to become a player in investment banking, where J.P. Morgan had a significant presence. But three months after the merger closed, the capital markets tanked, and profits followed. To make matters worse, J.P. Morgan's huge venture capital arm made big bets on technology just before the crash.

The recklessness was even worse in lending. J.P. Morgan tried to drum up investment-banking business by granting cheap loans to telecom and energy companies, a rogue's gallery that ranged from Enron to a telecom disaster called Genuity. Most infamously, J.P. Morgan reaped giant fees by loaning hundreds of millions to Enron and disguising the loans as purchases of energy assets. Harrison didn't help matters by insisting for months that J.P. Morgan's conduct had been exemplary. Ultimately the bank paid a fine of $135 million to the SEC for its role in the Enron fraud.

But Harrison has engineered a comeback. Profits jumped from $1.7 billion in 2002 to $6.7 billion last year, an increase of 300%, while the stock has risen from $15 in late 2002 to $40. In the past J.P. Morgan was a power in derivatives and debt, but a weakling in investment banking. That's changing fast. As corporate customers move to one-stop shopping for everything from IPOs to cash management to lines of credit, J.P. Morgan's investment-banking business has been the happy beneficiary. This year it ranked fourth in global equity underwriting, up from 14th in 2001.

Driving the comeback is investment-banking chief David Coulter, 56. In the late 1990s Coulter was CEO of BankAmerica, which he sold to NationsBank in 1999 to create Bank of America, staying briefly as president and heir apparent to Hugh McColl. After the mercurial McColl fired Coulter, Harrison lured him to J.P. Morgan.

According to Harrison, Coulter was never a potential successor: "David is too close in age to become CEO after me," says Harrison, who is 60. "He's here to work with people he likes and build the investment-banking business."

A benchmark for Dimon's success is whether he's able to keep Coulter and other star J.P. Morgan managers. They've been accustomed to running their own businesses with minimal interference, and Dimon's damn-the-organization-chart approach could well antagonize them. To keep managers like Coulter, Dimon must exercise restraint, something he's not used to. Indeed, the management structure, as outlined in the merger agreement, is somewhat awkward. Coulter will report directly to CEO Harrison, while Dimon will run the entire retail business. So Dimon will have no authority over corporate banking, a field he knows a lot about from Citi, until he becomes CEO in 2006.

Still, both men insist that their relationship will work. For one thing, both managers are hawks on risk. "David and I think the same way about risk management," says Dimon. Says Coulter: "I never thought about leaving."

Dimon faces a second big issue. Though it now manages its risks far better than in the past, J.P. Morgan still depends heavily on proprietary trading, derivatives, and other volatile businesses. Count on Dimon to carefully assess whether the rewards of those businesses compensate for their risks—if he finds that J.P. Morgan is still taking too much risk, he'll sacrifice short-term profits for long-term stability. That will undoubtedly create turmoil—and could be bad news for shareholders until Dimon boosts earnings in retail banking and other sectors to pick up the slack.

Given Dimon's record, it's highly probable that he will squeeze maximum performance from the bigger, stronger business combinations forged by the merger. The questions are, How long will it take, and how much disruption will Dimon cause in getting there? Dimon insists that he'll take a kinder, gentler approach at the new J.P. Morgan. "I've gotten along with people at Travelers, Smith Barney, everywhere, and they were all different," he insists. "After the merger I won't say, 'I want A, B, or C.' I will try it their way. I'll put out ideas and let them work it."

The J.P. Morgan/Bank One deal is Dimon's first since he left Weill's side. And who was the first to call and congratulate him? It was Sandy Weill, who reminded Dimon that they had tried to buy J.P. Morgan years ago. "On the phone Sandy said to me either 'You finally got J.P. Morgan' or 'We finally got J.P. Morgan,' " recalls Dimon. "I'm not sure. But if he said 'we,' I should have said, 'Whaddya mean we?' "

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