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William B. Harrison Jr., chairman and CEO of J.P. Morgan Chase & Co. (JPM
), is under siege. Twenty months after the announcement of the $30 billion merger of two of America's greatest financial icons, his bank is wracked by bad loans, venture-capital losses, lousy markets, and a dearth of profitable mergers and initial public offerings. Critics charge that the September, 2000, megadeal was too expensive, poorly timed, and badly executed. But the slim, 6-foot, 4-inch, 58-year-old will have none of it. Everyone else, he calmly insists, has it all wrong. In fact, there's a "gap between perception and fact" about how the bank is doing.
Harrison's critics have a lot of grist. As the largest corporate lender in America, J.P. Morgan turned up in almost every bad loan on Wall Street. A deal not disclosed until December tripled its exposure to Enron Corp. to over $2 billion, startling the market. Losses of $1.3 billion in private equity caused the bank to miss earnings forecasts for four of the past five quarters. Returns on its $800 billion assets slumped to a paper-thin 0.24%, a sixth of the industry average, in 2001.
This year, the omens are bad. The bank faces a noxious cocktail of $10 billion in Japanese bank exposure, millions more in potential private-equity write-downs, and a $140 billion portfolio of standby credit lines that risk being activated by financially shaky companies. It is the target of Enron-related congressional probes and lawsuits. The company says the suits, which allege that it and other banks helped Enron to deceive investors, are without merit. Standard & Poor's has warned that it may downgrade the bank's credit rating if the situation gets much worse.
The bank's stock has suffered a real knock. At around $35, it has lost a third of its value since the merger and is now limping 25% behind other financial stocks. But Harrison stands to earn at least $16 million in merger-related bonuses if the stock recovers to $52, its price the day the deal closed. His top lieutenants will split $25 million more. And they have given themselves plenty of time to do it--until 2007, to be exact.
Some longtime investors can't stand the wait. "[Chase] was one of the original holdings in my fund in 1995," says Michael Holland, founder of private investment company Holland & Co. "I've been through some challenging times with them...but [in January] I sold stock and eliminated the idea of going back in" until there are changes at the top. "Management changes are possible," adds Prudential Securities Inc. analyst Michael Mayo. "The capital markets are weak. And mistakes have been made."
For now, the bank's board is backing Harrison, though they aren't writing him an open ticket. "We're comfortable with him and this platform...and we believe the bank is doing the right things," says board member Lawrence A. Bossidy, former CEO of Honeywell International Inc. "Still, I don't want to beat around the bush--if the economy recovers and the earnings don't, well, that's a negative."
Before the merger, Chase was doing fine. Sure, it had some rough corners. It wasn't a top mergers-and-acquisitions adviser, nor had it achieved national scope in consumer banking. But it did have an attractive roster of top-drawer clients, it had dodged problems in credit cards and tech financing that beset others, and management was at ease with the business the size it was.
The urge to bulk up came from Harrison. For years, he had argued for a push into investment banking that was initially fought by conservative commercial bankers. But as Sanford I. "Sandy" Weill swept to new heights after molding his Citigroup into a diversified financial conglomerate, the pressure built on Chase to follow suit. It had been eyeing J.P. Morgan & Co. for five years. But in the summer of 2000, when Goldman Sachs Group Inc. (GS
) and Germany's Deutsche Bank (DB
) appeared as serious suitors, Harrison pounced.
In retrospect, the whole concept of the merger was deeply flawed, critics say. Instead of snapping up a large, pure-play investment bank, Chase picked what was essentially another commercial bank. In 1999, J.P. Morgan and Chase each derived nearly 60% of its income from credit markets, lending portfolios, and trading. "It was a bit like stacking doughnuts," says a rival investment bank chief executive. "The holes are all in the same place."
Harrison, no stranger to mergers, rejects that view. A veteran who drove the successful transformation of plain-vanilla Chemical Bank into a global player, Chase Manhattan, he says: "When I look at the [J.P. Morgan] merger, I couldn't be happier." Despite market perceptions, commercial loan losses are well below those of major competitors. And, absent private equity losses, investment banking earned 15% on equity. "We are in a small group of wholesale investment banks that will be the leaders in the future," he adds.
Still, the timing of the deal was awful. It closed early in 2001, the worst year in a decade for investment banks. Suddenly, M&A, IPOs, and the underwriting deals that the enlarged bank was counting on to strengthen its position dried up. It wasn't the first time Harrison was out of luck. In September, 1999, he paid $1.3 billion for San Francisco tech banker Hambrecht & Quist, a leader in Silicon Valley deals--six months before the tech bubble burst.
The execution of the J.P. Morgan merger wasn't much to write home about, either. Unlike a steel mill or auto maker, a bank's assets are people, not plants. But after paying top dollar for J.P. Morgan (3.5 times its book value), Harrison let its people walk. Defections started as soon as the deal closed--despite hefty retention bonuses that could have yielded executives princely sums. Within a year, 25 top former J.P. Morgan executives had left, and Chairman Douglas A. "Sandy" Warner III quit at the end of 2001. "We would have liked some of them to stay," says Harrison. "But I don't think it has cut into the core of what we're about."
By contrast, Citibank's (C
) 1998 merger with Travelers Group happened just as the market for equities, corporate debt, and trading boomed. The profits softened criticism about the bloody battles between top executives, which culminated with former Citibank CEO John Reed's departure. Later, when investment banking hit turbulence, Weill boosted his consumer business by buying Associates First Capital Corp. The subprime lender helped Citi ride out the storm and post a 6% increase in earnings in 2001, vs. a 70% slump at J.P. Morgan.
No other bank has replicated Citi's success. Changes in the banking landscape may make J.P. Morgan's chances of success more remote. There are signs its huge lending platform isn't necessarily the best springboard to making money or winning business in the future. Because of their losses, smaller banks and investors such as insurance companies are less willing to buy syndicated loans from giant banks. "We're going to shy away from them," says Randall E. Howard, Baton Rouge (La.)-based Hibernia National Bank's chief commercial banking officer. As a result, it will be harder for big banks to make jumbo loans. Besides, corporate CFOs say competition for deals is so stiff that they don't need to be loyal to any one lender.
Harrison swears that J.P. Morgan's mix of lending clout and investment banking prowess will pay off when the economy recovers. He aims to push the bank up the rankings to the top five in equity issues and merger advice by 2003 and to the top three in all categories by 2005. The bank has improved but is still out of the top five in some lines of business. "We've gained market share in all areas," Harrison says. "That suggests to me that clients like our business model."
All the same, he's making significant changes in his strategy. To stop the rot in lending, Harrison has pared the amount of corporate loans that J.P. Morgan holds by 10%, and he is attempting to stanch venture-capital losses by slashing the amount it invests. But the biggest shift is a renewed embrace of consumer banking. Following Citi's playbook, Harrison says that he wants 50% of earnings to come from consumer banking, up from about 35% now. Last year, earnings from the sector actually fell 5%, to $1.68 billion. At Citi, where they account for nearly 60% of earnings, they rose 20%.
Executives from Harrison on down admit when pressed that they're not quite sure how they're going to hit the 50% target. The bank has the second-largest mortgage shop in the country and is the fourth-largest credit-card lender. In March, it bought $8 billion in credit-card accounts from Providian Financial Corp. (PVN
), a distressed West Coast subprime lender. But executives aren't sure that lending more to consumers with poor credit is the way to go. The bank has retail branches in just three states but can't seem to figure out whether to expand or sit tight. "Over the long term, we're not sure what the winning retail model is going to look like," says Vice-Chairman David A. Coulter. "We're not standing still, we're being aggressive." He has formed a committee of 50 execs to hammer out a growth strategy by June.
Setting up committees sits well with Harrison. He places great emphasis on teamwork and has a reserved, Southern-gent style that's unique on Wall Street. "He's not a passive guy," says Stephen A. Schwarzman, co-founder of the Blackstone Group buyout firm. "He just likes to let the people who work for him shine."
Hard times have forced the low-key North Carolina native into a spotlight that he has generally shunned. Known as an empathetic listener who's short on small talk, he quietly worked his way up the executive ranks by showing a flair for diplomacy rather than knock-your-socks-off charisma. When he was named CEO by his predecessor, Walter Shipley, in 1999, some expressed surprise. "Bill Who?" asked a cheeky New York Post item. Shipley says he chose Harrison because of his ability to think strategically.
A third-generation banker, Harrison grew up in Rocky Mount, N.C., a cotton and tobacco town where his grandfather founded Peoples' Bank & Trust in 1931. He was a basketball star at Lynchburg's private Virginia Episcopal School, good enough to win a scholarship to play under legendary University of North Carolina coach Dean Smith. But he sat on the Tar Heel bench most of his first year and then surrendered his scholarship.
After earning a bachelor's degree in economics, he joined Chemical in 1967. His big break came in his mid-30s when Shipley, then head of the bank's European operations, plucked him from an assignment supervising the bank's branches in Westchester County, N.Y., with a staff of a dozen, and moved him to London to run all corporate lending, with a staff 1,500. Despite their closeness over the years, Harrison and Shipley never dined at each other's homes or even played a game of tennis together. These days, Harrison much prefers to garden at home in Greenwich, Conn., rather than attend New York society bashes with other Wall Streeters.
Harrison's low-profile public persona shapes his collegial management style. "The big, complex global institutions of the future will be run by people that can build great teams," he says. "These businesses are too complex for one person to think that they can understand, run, and manage everything themselves."
Such sentiments lead outside critics to claim that no one's really running the show at J.P. Morgan. "This is a company run by committee, rather than by a Sandy Weill and a bunch of entrepreneurs," says Doug Kass, managing partner of hedge fund Seabreeze Partners in Palm Beach, Fla. J.P. Morgan executives, of course, balk at that characterization. And it's disputed even by the bank's crustiest board members. "There's this notion out there that these guys sit around holding hands, then take a vote and see how it turns out," says Exxon Mobil Corp. CEO Lee R. Raymond, who has been on J.P. Morgan's board for a decade. "I don't think that's how the bank runs." Harrison is "a lot tougher than people think," adds Bossidy.
Toughness, however, isn't much in evidence when he's handling the forceful personalities who populate J.P. Morgan's executive suites. Frequent clashes between the co-heads of investment banking, Donald H. Layton and Geoffrey T. Boisi--who, insiders say, have completely different ideas about how their unit should be run--turned off fellow J.P. Morgan executives. "One day, I realized I'm too old for that sh--," says one well-respected ex-J.P. Morgan executive who walked away from millions in retention bonuses.
Welding the barons into a team was always going to be hard. Most came aboard in one of the many mergers that transformed the original Chemical Bank into today's J.P. Morgan Chase (below). The result: a bunch of top executives with impressive resumes but something to prove. Marc J. Shapiro, head of risk management, joined Chemical when it bought his nearly bankrupt Texas Commerce Bank in 1993. Boisi and Coulter arrived when Chase bought Beacon Group, a merger advisory firm, in 2000. As CEO of Bank of America Corp. (BAC
), Coulter had built a strong West Coast franchise, then sold it to NationsBank Corp.'s Hugh L. McColl Jr., who promptly booted him out. Layton, described by colleagues as the "ultimate survivor," started out as a trader at Manufacturers Hanover Trust Co. and commands respect for his numbers-focused, blunt style. Boisi, a quintessential '80s investment banker, negotiated Getty Oil's buyout by Texaco, among other deals, and clawed his way to a Goldman Sachs partnership at the precocious age of 31. He left after losing the top job to Robert E. Rubin, who now works with Sandy Weill; peers say Boisi has been trying to best his old firm ever since.
Boisi's arrival, in particular, intensified tensions inside the bank. He was made head of investment banking, displacing James B. "Jimmy" Lee, the bank's corporate-lending rainmaker for nearly a decade. Lee ran the investment bank with military precision. "He would tell people, `This is our mission--we're going to take that hill,"' says one veteran Chase banker. Although Lee, who now heads client relationships for the bank, loyally said he wanted the change at the time, his troops still haven't fully accepted what happened.
As if he didn't have enough Alpha males around him, Harrison hired management legend Jack Welch as a consultant in November. He set up a boot camp, modeled on GE's famous Crotonville (N.Y.) campus, just across the street from the bank's Park Avenue headquarters. In groups of 100, executives attend intensive three-day sessions that include speeches by Harrison, Lee, Welch, and such outside guests as former New York Mayor Rudy Giuliani and Yankees manager Joe Torre.
The initial results may not be what Harrison was hoping for. In interviews about management style, executives invariably quote Welch. They preface answers with "As Jack says..." and few quote Harrison or even mention him unless they're asked. As bank executives tell it, Harrison emphasizes what they call "the soft stuff"--management coaches, 360-degree reviews, discussing problems until everyone is singing in harmony. Trouble is, Harrison has to be more than a choirmaster, he needs his managers to make their numbers. "This team has to deliver," says Welch, adding, "and I have the full confidence that they can do it."
Harrison has a fight ahead. But, he says, the difficulties and unrelenting criticism from outside have galvanized the bank and made him more determined than ever to deliver. But grit alone won't solve all the bank's problems.
Already, J.P. Morgan's involvement with Enron has landed it in hot water with investors. Now, it must run a gauntlet of civil litigation and congressional flak. The bank was instrumental in helping set up some off-balance-sheet partnerships that got Enron tax breaks. Attorneys for Enron investors named the bank, along with others, in a suit filed on Apr. 8 that hopes to recoup $25 billion. The House Energy & Commerce Committee has vowed to hold the banks responsible J.P. Morgan execs are adamant that they did nothing wrong. "Helping clients with tax-advantaged financing is not illegal, and it's not immoral," says Shapiro.
Critics are not so sure. Even if the deals were legal, outrage over Enron's collapse won't spare the bank, they say. "Enron is a very large exposure for J.P. Morgan in terms of civil litigation," says Robert Tracy, an analyst at Apogee Research Inc. "Look at the kind of political lynch mob that has been created."
The bank may also have problems ramping up investment banking. Consider Cendant Corp. CFO Kevin M. Sheehan, who may well be every investment banker's nightmare. He picked an underwriter for a recent bond deal by calling six investment bankers and telling them he wanted a bid in 20 minutes. "There's absolutely no correlation at all" between who lends to the company and who does its bond deals, Sheehan says. Instead, he just picks on price. J.P. Morgan won the bond deal, he notes, but that doesn't mean they'll win the next one. "It just gets them in the door," he says.
Not helping matters, J.P. Morgan's private equity unit isn't out of the woods yet. Run by Jeffrey C. Walker, a longtime Chemical banker, the portfolio cost the bank $1.3 billion in write-downs last year after winning 25% of its earnings in 2000. The bank says it is reducing its commitment by trying to persuade outsiders to invest. Even so, it will still be carrying losses. Investments in cellular outfit Triton PCS Holdings Inc. alone may cost it $300 million to $400 million this year, analysts say.
Because J.P. Morgan is such a large lender, its name is bound to crop up in lots more horror stories about bankruptcies, which tend to peak well after a rebound. The bank still owns $8 billion in telecom loans. And it's the largest holder of backup credit lines. The corporate equivalent of a credit card, such financing is rarely used until a company is in trouble. On Apr. 9, Nortel Networks Corp. was just the latest client to activate its $1.7 billion line, of which the bank provided part.
Bank officials insist J.P. Morgan actually holds less risk than the markets think because it syndicates most loans it makes. Its write-offs are just 0.87% of its loan book, vs. 1.15% and 1.19% at Citigroup and Bank of America, respectively. Top executives love the statistic, but the market gives them no credit for it. "I don't own J.P. Morgan now because I think there is a lot of headline risk" from bad news, says Anton V. Schutz, fund manager for Burnham Financial Services Fund. Execs counter that such concerns are overblown by the media. "It's not headline risk that we worry about," says Shapiro. "It's the risk of reckless headlines."
But the pressure is on. "Bill is going to be judged a success or a failure by how well this merger lives up to its original promises," says Reilly Tierney, an analyst at Fox-Pitt Kelton Inc. After spending 30 years working his way to the top, Harrison is being asked to prove himself all over again. The market's message to the besieged banker is simple: Let's see some results.
Corrections and Clarifications
"The besieged banker" (Cover Story, Apr. 22) should have said that Chemical Bank purchased Texas Commerce Bank in 1987.
By Heather Timmons, with Emily Thornton and Mara Der Hovanesian, in New York