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The Heist

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Dimon crossing the street from JPMorgan to Bear Stearns last week to meet with employees.  

And that’s where the Jamie Dimon story gets quite boring, at least for a while. He returned to New York at a time when risk aversion had fallen out of favor on Wall Street. Major financial institutions, in hot pursuit of higher returns, were riding a wave of financial engineering. Dimon took a more cautious approach, focusing on the regular spadework of banking, which included renovating old branches and opening a slew of new ones. Citibank, which once dominated the Manhattan streetscape, now has just half as many branches as Chase. Dimon kept up the pressure on cost-cutting by doing things like slashing the number of software applications used by the bank.

Meanwhile, Dimon avoided easy-money gimmicks like so-called structured investment vehicles, or SIVs, one of the black holes of the current credit crisis. SIVs are deceptively simple in concept: A fund is set up that borrows using short-term securities at low interest rates, and then uses that money to buy longer-term securities with higher interest rates. For a while, Wall Street was in love with SIVs, because profits could be manufactured without putting any of the company’s capital at risk. All you needed was easy access to short-term credit.

Then, last summer, the credit markets seized up, and the banks had no way to fund their obligations without dipping into their own capital. Citi had to take $58 billion of SIVs onto its balance sheet, crippling the company.

JPMorgan lost nothing in the SIV debacle. After conferring with Bill Winters and Steve Black, JPMorgan Chase’s co-heads of investment banking, in 2005, Dimon agreed to sell the single SIV the bank had on its books. Why? “Because no matter what kind of equity we might have had to commit toward it, we still considered it an unacceptable return,” Winters told me in late February.

Here another of Dimon’s most referenced character traits—his tendency toward micromanagement—came into play. Did deposed Citigroup chairman Chuck Prince (who got the job that would have been Dimon’s) have conversations with his bankers about whether Citigroup was overexposed to SIVs? If he did, he obviously made the wrong call.

Dimon also steered the bank mostly clear of CDOs, or collateralized debt obligations, another fancy bit of financial gimcrackery that purported to turn risky investments into safe ones, as if by magic. CDOs were one of Merrill Lynch’s great profit centers—in 2007, the firm underwrote $31 billion worth of them, compared with just $4 billion for JPMorgan, and then made the fateful decision to hold on to some of the highest-yielding (and riskiest) portions thereof. You can think of these Wall Street firms as drug dealers who forgot the cardinal rule of the trade: Don’t start taking the junk yourself.

While these faddish schemes came and went, Dimon’s obsession with what he refers to as a “fortress balance sheet” did not let him follow his reckless competitors. This took conviction. “One of the toughest jobs as CEO is to look at all the stupid things other people are doing and to not do them—because maybe you’re the stupid one,” says Bob Willumstad, the former president and COO of Citigroup. Under Dimon, JPMorgan was a plodder, methodically increasing its profits, adding to credit reserves, and expanding market share in a number of different businesses. But as recently as the middle of last year, Dimon had sort of been forgotten. Many analysts lost interest in JPMorgan. Word got around that although he was a skilled cost-cutter, Dimon lacked the imagination to grow the business from within, and that he would soon have no choice but to start hungrily acquiring companies like he had done with Weill. Wall Street always needs a story, and Dimon didn’t have one that people wanted to hear.

Then came the credit crunch, a consequence, most economists agree, of dangerously lax lending standards across the board. JPMorgan took its blows—given the climate, no bank was immune. The company’s mortgage-related, structured-credit, and leveraged-lending write-downs totaled $2.9 billion from the summer through late February, which sounds like a lot until you look at the competition: $22 billion for Merrill Lynch, $20.4 billion for Citigroup, $18.7 billion at UBS, and $10.1 billion at Morgan Stanley.

And along with everyone else, JPMorgan is not in the clear yet. At a shareholder meeting I attended in February, chief financial officer Mike Cavanagh warned that the company already foresaw an additional $450 million in home-equity losses in 2008, a number that will surely grow by the time JPMorgan reports its first-quarter results. Much deeper losses are likely, and there is concern about its portfolio of “leveraged loans”—those made to finance private-equity deals over the past five years. As of the end of January, JPMorgan was sitting on $26.4 billion in loans that it would’ve liked to pass into the secondary market, if only that market still existed.


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