A change of fortunes for J.P. Morgan CEO Jamie Dimon

By Dawn Kopecki
Bloomberg News
Saturday, November 6, 2010; 3:30 PM

Jamie Dimon wanted Washington Mutual and he wanted it bad.

The J.P. Morgan Chase chief executive was determined to expand on the West Coast, and Seattle-based WaMu, as it was called, was a prime target.

Dimon had a team of auditors poring over WaMu's books in March 2008, at the same moment the Treasury Department was pressing him to acquire struggling investment bank Bear Stearns.

While he initially couldn't make a deal for the Seattle lender, J.P. Morgan did buy WaMu in September 2008 after it was seized by the Federal Deposit Insurance Corp., which meant the assets came at a bargain price of $1.9 billion.

The 2,200 WaMu branches in California, Washington and 12 other states gave J.P. Morgan's consumer bank, Chase, a total of 5,410 branches - the second-biggest network in the nation. And it moved Chase to first from third in deposits, with $905 billion after the deal closed.

Dimon, 54, got what he wanted - and a lot that he didn't want. J.P. Morgan is now saddled with $74.8 billion in nonperforming home loans inherited from WaMu, a third of the $230.7 billion in mortgages on its books.

The WaMu losses are just one of the afflictions besetting the man who, in the midst of the recession two years ago, was dubbed the world's most powerful financial executive by the New York Times and labeled President Obama's "favorite banker." New York magazine called him "Good King Jamie," while a biography of Dimon by author Duff McDonald is titled "Last Man Standing."

Back in 2008, Douglas Ciocca, managing director of St. Louis- based asset manager Renaissance Financial, compared Dimon with J. Pierpont Morgan himself, who helped rescue the financial system in the crash of 1907.

"He's been a voice of reason throughout the industry pretty much throughout the financial crisis," Ciocca said.

A lot has gone wrong for Dimon since those halcyon days. Both the WaMu mortgages and J.P. Morgan's own home-equity loans are spilling red ink. Dimon's commodities-trading team, led by Blythe Masters, has suffered a big setback. Dimon complains that hundreds of millions of dollars in profit will be lost to the Obama administration's new financial regulations, which he fought unsuccessfully to derail.

Still more potential profits will be lost to the new Basel rules, which will increase capital requirements for banks worldwide beginning in 2013. The Basel Committee on Banking Supervision pushed back the date the capital rules would take effect because of the fragility of big banks in the United States and Europe.

In consumer banking - J.P. Morgan's biggest revenue source - the bank is pushing against a regulation limiting it to 10 percent of national deposits. With more than $2 trillion in total assets, J.P. Morgan is now the second-biggest U.S. financial institution by assets, after Bank of America.

It's the biggest U.S. credit card company, with $137.4 billion in outstanding loans, followed by Bank of America and Citigroup.

The latest bad news is that the Securities and Exchange Commission is investigating whether J.P. Morgan failed to tell investors that an Evanston, Ill.-based hedge fund called Magnetar Capital helped select subprime mortgages for a collateralized debt obligation, or CDO, that the bank created, a source said.

Magnetar later bet against the security, the person said. J.P. Morgan spokeswoman Kristin Lemkau said the company, "like other firms, has received inquiries from the SEC related to collateralized debt obligations. We are cooperating fully with these inquiries."

Overseas expansion

Dimon has ambitious plans for overseas expansion, yet is hemmed in by banks with big international franchises, especially in the BRICs: Brazil, Russia, India and China. Just a quarter of J.P. Morgan's total revenue comes from outside the United States, compared with more than half for Citigroup, said Anthony Polini, an analyst at investment bank Raymond James Financial. International business, however, accounted for 61.6 percent of J.P. Morgan's net income in 2009.

Dimon is likely to expand overseas through acquisitions, Polini said - the New York banker's approach since he linked up right out of Harvard Business School in 1982 with Sanford Weill and helped Weill build the financial conglomerate that became Citigroup.

Yet Dimon has made only one major acquisition since WaMu. He's been too busy putting out fires. In addition to the WaMu losses, Dimon has to deal with $113 billion in risky subprime, home-equity and adjustable-rate loans that J.P. Morgan originated.

In October, the bank temporarily halted foreclosures on thousands of houses when lawyers for homeowners said that J.P. Morgan, Bank of America, and other big banks had been "robo-signing" foreclosure documents without verifying their accuracy. J.P. Morgan temporarily stopped foreclosures in the 23 states where they are processed through the courts, later expanding the number to 41.

Bank of America, the nation's biggest mortgage holder, stopped selling off houses in all 50 states before reversing course.

Meanwhile, Dimon's standing in Washington has declined since he lobbied against parts of Obama's financial regulation law. Dimon wasn't included in the photo op when the bill was signed, and he was absent from a White House state dinner in May attended by Bank of America chief executive Brian T. Moynihan and other Wall Street leaders.

When a shareholder asked Dimon during J.P. Morgan's annual meeting in May whether he was still Obama's favorite banker, he said, "I heard he has a new one."

'Do the right thing'

Dimon, a Queens, N.Y., native, is well known for his refusal to mince words. When he dresses down subordinates, politicians or the media, he uses profanity liberally, according to people who have heard him. In June, students at Syracuse University protested when he was invited to give the school's commencement address.

He went ahead with the speech and congratulated them for speaking their minds.

"Throughout my life and throughout this crisis, I've seen many people embarrass themselves by failing to stand up, being mealy-mouthed and acting like lemmings by simply going along with the pack," he told the graduates. "Along the way, you're going to face a lot of pressure - pressure to go along, to get along, to toe the line. Have the fortitude to do the right thing, not the easy thing. Don't be somebody's lap dog or sycophant."

Dimon anticipated that his crown was likely to be knocked askew. In 2009, he told attendees at a meeting, "I know exactly what the headline will say when I make a mistake: 'Dimon Loses Luster,' " according to two people who heard the comments.

Yet Dimon's bank is still the brightest star in a dim firmament. J.P. Morgan remains the strongest big bank in the nation. It's the only major bank to have turned a profit in every quarter since the crisis erupted in late 2007. The bank has generated $29.9 billion in net income since taking over Bear Stearns in March 2008 - an acquisition that has been a huge boon to J.P. Morgan's investment banking franchise.

While J.P. Morgan's stock lost 14.9 percent in the three years ended Oct. 11, investors did far worse buying the shares of its competitors. Citigroup shares were down 91.3 percent in the same three years, while Bank of America's return was minus 74.9 percent and Wells Fargo's fell 29.4 percent.

"Revenue headwinds such as slow loan growth, slim profit margins and higher regulatory costs should continue to hammer bank revenue not only next year but for the decade," said Mike Mayo, an analyst at Credit Agricole Securities USA. "We think 2011 will be indicative of a year in a decade for banks that has the worst revenue growth since the Depression."

A crisis hits home

The debacle in the housing market is still the biggest headache for U.S. banks. Payments on some 8 million U.S. mortgages were delinquent in late September, and almost 7 million of those may end up in foreclosure, says Laurie Goodman, a senior managing director at Amherst Securities Group.

In total, Goodman estimates that 11.5 million houses could be repossessed by banks during the next five years.

Dimon says he doesn't expect profits to be dented much by the foreclosure scandal.

"It will cost us some money to go back and make sure it's done right," he told analysts on the Oct. 13 earnings conference call. "It will delay some foreclosures. But the whole mortgage issue costs us so much money now, to me it will be incremental."

While third-quarter profit rose 23 percent from 2009 to $4.42 billion, the bank generated 11 percent less revenue, at $23.8 billion. The profit included $1.5 billion it took out of its reserves against bad credit card loans.

"Investors are still trying to figure out where revenue is going to come from when they stop being able to release reserves," says Jason Tyler, a senior vice president at Ariel Investments. "That's not clear yet."

The company set aside $34.5 billion in reserves against potential losses on its mortgage, credit card and auto loans in 2009, up from $20.4 billion the year before.

"It is just going to take a little bit of time before the mortgage losses are run off and things normalize," Dimon told investors in September.

Brian Battle, vice president of trading at Performance Trust Capital Partners in Chicago, says the bank's foreclosure flaws are just becoming apparent.

"That can be a big long-term problem, very expensive," he says. "The whole can of worms is wide open."

When J.P. Morgan acquired Bear Stearns and WaMu, Dimon "had the strongest balance sheet in the industry," says Robert Willumstad, a former Citigroup chief operating officer who has known Dimon since they both worked at Baltimore-based Commercial Credit in the 1980s.

Dimon's surpassing skill is his ability to hold down costs, efficiently integrate new acquisitions and minimize risk, Willumstad says. During four years as chief executive of Chicago-based Bank One, from 2000 to 2004, Dimon engineered a dramatic turnaround that took the bank from a $511 million loss in 2000 to a $3.5 billion profit in 2003.

When Bank One merged with J.P. Morgan in 2004 in a $58 billion deal, chief executive William Harrison named Dimon president and chief operating officer. Dimon overhauled management, shuttered lagging businesses and instituted monthly management reviews in local branches.

Dimon was named J.P. Morgan chief executive Dec. 31, 2005. He largely avoided investing in the subprime housing loans that crippled Bear Stearns and Merrill Lynch, at least until he bought WaMu. Since 2006, J.P. Morgan has generated $59.7 billion in profit at a compounded annual growth rate of 22 percent.

Guarding against losses

The Dodd-Frank Act requires banks to move derivatives trading to separately capitalized subsidiaries, which Dimon is in the process of doing at what he says is a cost of $1 billion in lost revenue. Standard derivatives must be traded on exchanges, rather than over the counter.

"It's an operational nightmare," Dimon said on a July conference call with analysts, of the bill's restrictions on derivatives trading. "In my opinion, it's highly ill-conceived, doesn't reduce risk at all."

Dimon said he is looking for ways to pass on all the extra regulatory costs to consumers and corporate clients. Fewer borrowers will get loans and credit cards, he said. He estimates that the passing on costs will reduce the bank's retail customer base by about 5 percent.

As Dimon put it to investors at a Sept. 14 conference hosted by Barclays Capital in New York: "We are going to earn it all back, whatever the number is."

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