FINANCIAL TIMES (January 11, 2008)
Dimon’s team steers clear of turmoil

At this rate, Jamie Dimon may soon have to start being nice about JPMorgan Chase’s investment bank.

Since he arrived in 2004, Mr Dimon has often been disappointed with the investment bank’s performance. And JPMorgan’s chief executive has been characteristically unbuttoned in sharing that disappointment in public.

But JPMorgan’s fourth-quarter figures next week are expected to confirm that it has steered through the credit market turmoil much better than some of its rivals.

The figures will not be pretty, with analysts expecting heavy credit-related writedowns. But JPMorgan will have suffered much less damage than rivals such as Citigroup, Merrill Lynch, UBS and Morgan Stanley.

Bill Winters, co-chief executive of JPMorgan’s investment bank, says that is down to judgment, not luck. The bank did not have big exposures in the worst-hit areas “because we chose not to”.

For example, JPMorgan gave a pass to structured investment vehicles, the off-balance-sheet funds that have proved such a headache for rival Citigroup.

In 2003, when JPMorgan acquired Bank One, the Chicago-based bank run by Mr Dimon, it inherited a London-based SIV.

“We looked at it. We tried to work out why it was a good idea and couldn’t,” Mr Winters says. So in 2005, JPMorgan sold it to Standard Chartered, which is now being forced to unwind it.

JPMorgan’s relatively good performance during the credit squeeze has surprised many observers who presumed it would live up to its accident-prone reputation.

But Mr Winters, and his co-chief executive at the investment bank, Steve Black, say it has learnt from those past accidents.

The most important single choice JPMorgan made was not to be big in the business of selling collateralised debt obligations based on residential mortgage securities.

It would have been a natural thing for JPMorgan to do. One of the pioneers of structured credit in the 1990s, JPMorgan is a leader in parts of the CDO business. But in the mortgage-backed side, it was second division.

“We saw other firms doing massive business and we put pressure on our people to figure out where we were going wrong,” Mr Winters says.

“We ran the numbers every way we could. But when you factored in the riskiness of what you have to hold, we couldn’t figure out how you would make any money.”

FINANCIAL TIMES
Standing together at the top

Recent experience at Citigroup has shown that splitting the management of an investment bank between co-chief executives does not always run smoothly, David Wighton reports.

But insiders say Bill Winters and Steve Black have worked well together over the past three years running JPMorgan's investment bank.

Mr Black says the job is too big for one person.

"We run a very large and complicated institution that operates a risk business around the world. I'm glad to have a partner to run it with and I'm very glad it's Bill."

According to Mr Winters, it helps that the pair are "good friends and like each other".

But they continuously review the way things are working, and he says they have often discussed whether it would be better if one of them stood down.

Mr Black, 54, is based in New York while Mr Winters, 45, is in London.

Initially they carved up responsibilities largely regionally. But two years ago they rejigged things.

"Our people have a first port of call, but for the most part, we run everything together," says Mr Black.

Mr Winters says that vital to their effectiveness has been making clear that they stand together on anything important.

"Some people have tried to drive a wedge between us. They were asked to leave."

Other banks, such as Citigroup and Merrill, have suffered billions of dollars of losses on the senior tranches of CDOs they retained.

The generous yield provided by those tranches suggested they were much riskier than widely assumed. And so it proved.

Mr Winters says JPMorgan’s experience securitising corporate loans in the late 1990s underlined the danger of such assumptions.

The group later discovered the risks of holding too much of anything when Chase’s exposure to telecoms start-ups cost it dearly when the tech bubble burst.

Those losses, together with the costs of the group’s involvement with Enron and WorldCom, seriously hampered efforts to create a top-tier investment bank from the merger of Chase Manhattan and JPMorgan in 2000.

The banks lost talent after the bubble burst, then again in 2004 when heavy litigation payments slashed the bonus pool. Learning another lesson, the investment bank is expected to pay healthy bonuses for last year, in spite of the downturn.

Mr Winters, a JPMorgan veteran, and Mr Black, who had joined from Citibank shortly before the merger, were made co-chief executives in 2004. They have since changed most of the senior management on the markets side, overhauled the trading businesses in an attempt to reduce volatility and improve productivity, and invested in areas where the bank was weak.

These included commodities trading – which JPMorgan had exited in 1997 – and equities, where neither bank had been strong.

“We have built out most of the gaps we had. Right now, we are a top-three player across every asset class across the globe,” says Mr Black.

JPMorgan’s trading business lagged behind many of its rivals during the boom, which ended last summer, partly because value at risk was kept flat.

This was not because Mr Dimon does not like risk-taking, which Mr Winters insists is a myth, but because he wanted to concentrate on improving productivity of risk capital.

JPMorgan can claim to be the world’s leading corporate finance bank, generating investment banking revenue of $6bn last year, according to Dealogic, ahead of Goldman Sachs, Citi and Morgan Stanley.

Like other Wall Street banks it has been investing heavily outside the US. It remains underweight in Asia, where it generated 13 per cent of its revenue in the first nine months of 2007, though Mr Winters says it is “closing the gap quickly”.

But it is very strong in Europe and the Middle East, which accounted for 40 per cent of its revenue.

Its position in Europe has been bolstered by the tie-up with Cazenove in London in 2004, which has been much more successful than many sceptics predicted.

Mr Winters, who spent a long time courting Cazenove, was always confident but says “it worked a little better than we hoped”.

Mr Winters and Mr Black argue that the investment bank is well-placed to thrive in these more challenging times. It has an enviable client list, a strong brand, and thanks to Mr Dimon’s pursuit of a “fortress balance sheet”, it is part of a very well capitalised group. Some of its rivals are not in such a happy position.