“It’s bad enough how you treat me,” he shouted. “But you’re not going to treat my wife like that!” On the verge of hitting him, Black threatened, “I will drop you where you stand.”
Dimon attempted to intervene, tracking down Maughan as he was about to leave the ballroom. “I want to ask you a simple question. Either you intended to snub Blackie’s wife or you didn’t. Which is it?”
Maughan said nothing and turned to walk away. Incensed, Dimon grabbed him and spun him around, popping a button on his jacket in the process.
“Don’t you ever turn your back on me while I’m talking!” he shouted.
When Weill learned of the incident, he judged it as inappropriate. A week later, he and his co-CEO, John Reed, summoned Dimon to the corporate compound in Armonk, New York, where they asked him to resign.
It proved to be both the worst and best thing that ever happened to Dimon. Just as Weill had done after leaving American Express, he took his time finding a new job, turning down a number of suitors—including, reportedly, the Internet retailer Amazon. Dimon knew little else outside of banking, and he waited for an opportunity in his field, finally accepting the top job at Bank One, a second-tier, hodgepodge operation based in Chicago. It was the launchpad he had been looking for, and he set out to streamline its operations and repair its balance sheet, to the point where he could engineer a deal with JP Morgan in 2004 that would put him in line to succeed William Harrison as CEO.
Once the proudest of Wall Street institutions, JP Morgan had fallen into the middle of the pack as its competitors had begun to outdo it. Dimon brought in his own team of expense cutters and integration experts, and went to work. Salaries for the bank’s managers were slashed. Gyms were ordered closed. Phone lines were ripped out of bathrooms. Daily fresh flowers were eliminated. Executives visibly tensed when Dimon pulled out of his breast pocket a handwritten piece of paper that served as his daily to-do list. One side was an inventory of matters that he needed to address that day; the other was for what he called “people who owe me stuff.”
By 2008 JP Morgan Chase was being hailed as just about everything that Citigroup—the bank Dimon helped build—was not. Unlike Citi, JP Morgan had used scale to its advantage, rooting out redundancies and cross-selling mortages to checking account customers and vice versa. Dimon, who was paranoid by his very nature, understood the intricacies of virtually every aspect of banking (unlike many of his CEO peers) and also reduced risk; profits were literally squeezed out of each part of the company. Most important, as the credit crisis began to spread, Dimon showed himself to be infinitely more prudent than his competitors. The bank used less leverage to boost returns and didn’t engage in anywhere near the same amount of off-balance-sheet gimmickry. So while other banks began to stumble severely after the market for subprime mortgages imploded, JP Morgan stayed strong and steady. Indeed, a month before the panic erupted over Bear Stearns, Dimon boasted of his firm’s “fortress balance sheet” at an investors’ conference. “A fortress balance sheet is [sic] also a lot of liquidity and that we can really stress it,” he said, adding that it “puts us in very good stead for the future.
“I don’t know if there are going to be opportunities. In my experience, it’s been environments like this that do create them, but they don’t necessarily create them right away.”
An opportunity came sooner than he expected.
On Thursday, March 13, Dimon, his wife, and their three daughters were celebrating his fifty-second birthday over dinner at the Greek restaurant Avra on East Forty-eighth Street. Dimon’s cell phone, the one he used only for family members and company emergencies, rang early in the meal, around 6:00 p.m. Annoyed, Dimon took the call.
“Jamie, we have a serious problem,” said Gary Parr, a banker at Lazard who was representing Bear Stearns. “Can you talk with Alan?”
Dimon, in shock, stepped out onto the sidewalk. Rumors had been swirling about Bear for weeks, but the call meant things were more serious than he realized. Within minutes, Alan Schwartz, the CEO of Bear Stearns, called back and told him the firm had run out of cash and needed help.
“How much?” a startled Dimon asked, trying to remain calm.
“It could be as much as $30 billion.”
Dimon whistled faintly in the night air—that was too much, far too much. Still, he offered to help Schwartz out, if he could. He immediately hung up and called Geithner. JP Morgan couldn’t come up with that much cash so quickly, Dimon told Geithner, but he was willing to be part of a solution.
The following day, Friday, March 14, the Federal Reserve funneled a loan through JP Morgan to Bear Stearns that would end its immediate liquidity concerns and give the firm twenty-eight days to work out a long-term deal for itself. Neither the Fed nor the Treasury, however, was willing to let the situation remain unsettled for that length of time, and over the weekend, they urged Dimon to do a takeover. After a team of three hundred people from JP Morgan installed themselves in Bear’s office, they brought their findings to Dimon and his executives.
By Sunday morning, Dimon had seen enough. He told Geithner that JP Morgan was going to pull out; the problems with Bear’s balance sheet ran so deep as to be practically unknowable. Geithner, however, would not accept his withdrawal and pressed him for terms that would make the deal palatable. They finally arrived at an agreement for a $30 billion loan against Bear’s dubious collateral, leaving JP Morgan on the hook for the first $1 billion in losses.
These final negotiations, not surprisingly, were of intense interest to the Senate Banking Committee. Had JP Morgan, realizing the leverage it had, driven an excessively hard bargain with the government, at taxpayer expense?
Dimon, looking almost regal with his silver hair and immaculately pressed white cuffs peeking out from his suit jacket, sounded neither apologetic nor defensive as he described the events leading up to the Bear deal. “This wasn’t a negotiating posture,” he stated calmly. “It was the plain truth.” In Dimon’s telling, the truth of the matter was clear—he and Geithner were the good guys who had saved the day, and against considerable odds. “One thing I can say with confidence,” he told the committee members. “If the private and public parties before you today had not acted in a remarkable collaboration to prevent the fall of Bear Stearns, we would all be facing a far more dire set of challenges.”
In the end, the day’s testimony produced no smoking guns, no legendary exchanges, no heroic moments. But it introduced to the American public a cast of characters it would come to know very well over the next six months, and it provided a rare glimpse into the small circle of players that sits atop the world of high finance, wobbly though it may have been at the time. The senators were a long way from being able to make up their minds about the Bear deal—how necessary had it really been? And had it really fixed a problem, or merely postponed a greater reckoning?
Of all the members of the Banking Committee, Bunning, with his strong free-markets bias, was the most critical—and perhaps the most prescient. “I am very troubled by the failure of Bear Stearns,” he said, “and I do not like the idea of the Fed getting involved in a bailout of that company…. That is socialism, at least that’s what I was taught.
“And what’s going to happen,” he added ominously, “if a Merrill or a Lehman or someone like that is next?”
CHAPTER FOUR
On the oppressively humid evening of Friday, April 11, 2008, Dick Fuld strode up the steps of the Treasury Building, passing the ten-foot-tall bronze statue of Alexander Hamilton that looms over the south entrance. He had come at the personal invitation of Hank Paulson for a private dinner to mark the end of a G7 summit and the beginning of the annual spring meetings of the International Monetary Fund and the World Bank. The guest list featured a group of the most influential economic policy makers and thinkers, including ten Wall Street CEOs and a number of the world’s leading finance ministers and central bankers, including Jean-Claude Trichet, president of the European Central Bank.
&n
bsp; Fuld was feeling fairly optimistic—certainly less despairing than he had been earlier. Lehman’s announcement two weeks before that it would raise $4 billion had stabilized the stock, at least for the moment. The entire market was rallying, buoyed by comments from Lloyd Blankfein, CEO of Goldman Sachs, who had emphatically declared at his firm’s annual meeting that the worst of the credit crisis was likely over. “We’re closer to the end than the beginning,” he said.
That was not to say that the gloom in the financial community had completely lifted. Just that morning Fuld had attended a contentious meeting in downtown Manhattan with Tim Geithner at the New York Fed, imploring him to do something about the short-sellers, who he was convinced were just catching their breath. Erik Sirri, the head of the SEC’s Division of Trading and Markets, repeatedly pressed Fuld for proof of any illegal activity, pleading, “Just give me something, a name, anything.” Fuld, who considered Sirri—a former Harvard Business School professor—to be a free-market zealot with no real world experience, told him he had nothing concrete. He just knew what he knew.
Tonight, as Fuld was ushered across the checkered squares of black and white marble of the Treasury hallways, he tried to clear his mind and prepared to enjoy himself.
The dinner was being held in the Treasury Cash Room, so named because until the mid-1970s, it was where the public went to exchange U.S. government notes and bonds for cash. Opened in 1869, the room was intended to foster confidence in the new federal paper currency—the “greenback”—that had been introduced during the Civil War. Today, nearly a century and a half later, that confidence was in short supply.
Fuld had been looking forward to the dinner all week, eager for a chance to talk with Paulson face-to-face. Over the past few weeks, they had spoken several times by phone, but given all that was at stake, meeting in person was essential. It would give Fuld a chance to impress upon the secretary the seriousness of his efforts and to gauge where Lehman really stood with Washington.
Amid the procession of financiers slowly filing into the Cash Room, Fuld noticed an old friend in the corner, John Mack, CEO of Morgan Stanley, one of the few people in the room who understood exactly what Fuld was going through. Of all the CEOs on the Street, Fuld felt closest to Mack; they were the longest-running leaders of the major firms, and they would occasionally dine together with their spouses.
There were also a number of other men in the room whom Fuld stopped to shake hands with but didn’t know well—though little did he suspect they would soon become major figures in his life. One was an American banker named Bob Diamond, who ran Barclays Capital, the investment banking arm of the British financial behemoth. Fuld had spoken with him a handful of times, usually seeking donations for his favorite charities. Diamond was polite but noticeably cool as Fuld greeted him, perhaps because Fuld had once invited him over for a casual coffee, unaware that he was based in London, not New York—a little slight that Diamond had never forgotten. Fuld also briefly paid his respects to Diamond’s regulators, Alistair Darling, the head of Britain’s Treasury, and Mervyn King, the governor of the Bank of England. High finance was in general a very small world, though at this particular moment, none of them realized just how small it had become.
As he made his way through the crowd, Fuld kept an eye out for Paulson, whom he hoped to buttonhole before the dinner began. But it was Paulson, wearing a blue suit that seemed one size too big for him, who spotted Fuld first. “You guys are really working hard over there,” Paulson told him, grasping his hand. “The capital raise was the right thing to do.”
“Thanks,” Fuld said. “We’re trying.”
Paulson also expressed his gratitude for the “thoughtful” dialogue that had been initiated among Tom Russo, Lehman’s general counsel, and Rick Rieder, who ran Lehman’s global principal strategies group, with Paulson’s deputy, Bob Steel, and Senator Judd Gregg. Russo had been advocating a plan in which the government would create a special facility—what Russo called a “good bank” proposal—to help provide additional liquidity to Wall Street firms by creating a backstop for their most toxic assets, but he had met resistance. It would simply look too much like another bailout, and Washington wasn’t ready for that—not yet.
“I am worried about a lot of things,” Paulson now told Fuld, singling out a new IMF report estimating that mortgage- and real estate–related write-downs could total $945 billion in the next two years. He said he was also anxious about the staggering amount of leverage—the amount of debt to equity—that investment banks were still using to juice their returns. That only added enormous risk to the system, he complained.
The numbers in that area were indeed worrisome. Lehman Brothers was leveraged 30.7 to 1; Merrill Lynch was only slightly better, at 26.9 to 1. Paulson knew that Merrill, like Lehman, was awash in bad assets, and mentioned the challenges that Merrill’s new CEO, John Thain (who had been Paulson’s former number two at Goldman), was facing with his own balance sheet. But leverage and Merrill’s problems weren’t Fuld’s primary concern at the moment; he was still irked by the short-sellers and once again pressed Paulson to do something about them. If they could be contained, it would give Lehman and the other firms a chance to find their footing and get their balance sheets in order. But if the shorts were allowed to keep hammering away, the overall situation was only going to get a lot uglier.
As a former CEO himself, Paulson could understand Fuld’s frustration. Short-sellers cared only about their own profits and gave little thought to their impact on the system. “I’m sympathetic,” Paulson said. “If there are bad actors, we’ll put them out of business.”
But Paulson was also concerned that Fuld was using the short-sellers as an excuse to avoid addressing the genuine problems at Lehman. “You know, the capital raise, as good as it was, is just one thing,” Paulson told him. “It’s not going to end there.” He reminded him that the pool of potential buyers for Lehman was not a large one.
“Look, Dick,” he continued. “There aren’t a lot of people out there saying, ‘I have to have an investment banking franchise.’ You have to start thinking about your options.”
It was a not-so-subtle hint to start thinking about selling the entire firm. Although the conversation agitated Fuld slightly, they’d had similar discussions before, so he took Paulson’s advice in stride.
The group took their seats, and as each of the speakers rose to talk, the perilous state of the economy became ever clearer. The credit crisis wasn’t just a U.S. problem; it had spread globally. Mario Draghi, Italy’s central bank governor and a former partner at Goldman Sachs, spoke candidly of his worries about global money-market funds. Jean-Claude Trichet told the audience that they needed to come up with common requirements for capital ratios—the amount of money a firm needed to keep on hand compared to the amount it could lend—and, more important, leverage and liquidity standards, which he thought was a much more telling indicator of a firm’s ability to withstand a “run on the bank.”
That night, after Fuld had finally found his car and driver outside the Treasury Building, he thumbed out an e-mail on his BlackBerry to Russo. “Just finished the Paulson dinner,” Fuld wrote at 9:52 p.m.
A few takeaways//
1-we have huge brand with treasury
2-loved our capital raise
3-really appreciate u + Reiders work onm [sic] ideas
4-they want to kill the bad HFnds [hedge funds]+ heavily regulate the rest
5-they want all G7 countries to embrace
Mtm stnds [Mark-to-market standards]
Cap stnds
Lev + liquidity stnds
6-HP [Hank Paulson] has a worried view of ML [Merrill Lynch]
All in all worthwhile.
Dick
On the following Tuesday, April 15, Neel Kashkari and Phillip Swagel hurried down past the guard house of the Treasury Building to where Hank Paulson and Bob Steel were waiting for them in the secretary’s black Suburban. The group was due at the Federal Reserve in Fo
ggy Bottom at 3:00 p.m.—in ten minutes—and was running late.
The two men made something of an odd couple. Kashkari, dark with a bald dome, still dressed like the investment banker he had recently been, while Swagel, pale with dark hair and glasses, looked more like a wonky government official. A former academic, he had kept fit and seemed younger than his thirty-four-year-old colleague, even though he was eight years older.
Paulson had invited his young advisers to a meeting with Ben Bernanke so that they could present a confidential memo that the two of them had authored—a memo that had far-reaching implications for the nation’s increasingly unsteady financial system.
At Paulson’s request, they had done nothing less than to formulate a plan for what to do in the event of a total financial meltdown, outlining the steps that the Treasury Department might have to take and the new powers it would require to stave off another Great Depression. They had given the proposal the provocative title “Break the Glass: Bank Recapitalization Plan.” Like a fire alarm enclosed in glass, it was intended to be used only in an emergency, though with each passing day, it appeared more and more likely that the proposal was no mere drill.