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One recent winter night, JPMorgan Chase & Co. (JPM
) pulled out the stops for a lavish bash at New York's American Museum of Natural History. Among the 200 or so guests were such luminaries as Senator Hillary Rodham Clinton (D-N.Y.) and Apple Computer Inc. (AAPL
) CEO Steven P. Jobs. It was as much a celebration of the bank as it was a fund-raiser for the Global Fund for Women. After years of consolidation, JPMorgan has amassed more than $1 trillion in assets, only the second U.S. bank ever to get so big. From the podium, Walter V. Shipley, 70, the long-retired chairman of Chase Manhattan Corp., asked rhetorically: "Who here even remembers what the market cap of Manufacturers Hanover was when it merged with Chemical Bank" -- the deal that set the ball rolling toward the creation of JPMorgan Chase 15 years later.
At the head table, banking brainiac Jamie Dimon blurted out the answer: $1.9 billion. It was classic Dimon. JPMorgan's president and chief operating officer is often first to the punch, knows his numbers cold, and is unabashed about making that loud and clear. He also has an uncanny knack of inadvertently upstaging the main event. Dimon spent more than 15 years at Citigroup (C
) and its predecessors as right hand to Sanford "Sandy" I. Weill and three years as CEO of Chicago's once-troubled Bank One Corp. The 49-year-old Dimon's obsession with detail and disdain for waste made him a corporate legend. General Electric Co. (GE
) had Neutron Jack Welch. JPMorgan has its Hatchet Man.
In the year since the $58.5 billion sale of Bank One to JPMorgan, the boy from Queens and CEO-in-waiting has gone about doing what he does best. By yearend, most of the 12,000 jobs to be cut -- about 7% of the workforce -- will be gone. A $5 billion outsourcing contract with IBM (IBM
) and executive perks such as country club memberships and first-class travel are already history. Yet melding the two banks -- each with a legacy of half-digested mergers and chaotic back-office systems -- is turning out to be trickier than expected. Since finalizing its merger last July 1, the bank has had two back-to-back quarters of weak earnings, caused by poor trading results, escalating merger costs, and rising wages, mostly in the investment bank."TONS OF IDEAS"
What's more, the immediate outlook looks grim. BusinessWeek has learned that this year's earnings will be much worse than the $3.06 per share Wall Street now expects after cutting its estimates by 21 cents in January. Part of the reason is rising legal costs: On Mar. 16, JPMorgan became the last bank to settle a class action over lending to WorldCom for $2 billion. Dimon is rebuilding reserves with $900 million, which will cut first quarter earnings. Two months ago, he had warned analysts that merger costs would rise yet again. Originally estimated at $3 billion, the costs were later revised upward to $4 billion. Then he said they'll balloon to $500 million more. Meantime, annual cost savings will reach only 70% of his $3 billion target by the end of the year. Still, he promised the bank will be in a "fabulous position" by 2006. Says Banc of America Securities (BAC
) analyst John E. McDonald: "What some investors saw as a one-to-two-year turnaround now looks more like a three-to-five-year story."
In a series of interviews, Dimon and his team of Citi and Bank One vets gave BusinessWeek an exclusive look at his ambitious growth plan. Primed with $1.1 billion of new spending, on top of $35.5 billion in annual operating expenses, it raises the bar on what he must achieve. That's because it will eat up over half of this year's cost savings. Dimon's strategy reflects three cardinal points of his long-held management philosophy. First, bolster the tech infrastructure to drive efficiency and innovation. Next, invest in businesses that capitalize on strengths, such as consumer finance, debt underwriting, and money management, and rein in those that don't, like auto leasing. Finally, generate more top-line revenue by selling customers a bunch of new products. Says Dimon, who will succeed William B. Harrison, Jr., 61, as CEO next spring: "We've got tons of ideas."
For starters, he'll overhaul the retail bank -- from fresh paint to new ATMs. He'll also hire 1,000 salespeople and double, to 14, the number of offices in the Northeast catering strictly to affluent customers with up to $25 million in assets. He will go national, spreading his branch network beyond just 17 states. He'll also go global, opening eight private-bank offices abroad, including the bank's first ever in Japan, where regulatory failures led to Citi's private bank being closed. The investment bank, which Dimon admits "has a long way to go," will get new commodities and currency trading platforms partly to snag some of the $6 billion in fees hedge funds pay Wall Street annually. He's also expanding a nascent 401(k) administration business. "What is growth?" says Dimon, in his trademark staccato style. "It's better service, better products, more hours. Growth to me is every budget review. It's 1,000 small steps."
Small steps to Dimon, but a giant leap of faith for Wall Street. Some investors fear Dimon's cost-cutting will damage the bank's earning power before new revenues click in. He has sold off $30 billion of Treasury securities that raked in about $1 billion of income a year, along with $6 billion in mobile home and recreational vehicle loans. By selling off these portfolios and stashing away reserves far beyond what either regulators or the bank's own targets require, he is building a "fortress balance sheet" capable of weathering rising interest rates and tougher lending markets. Also, he added $3.7 billion to litigation reserves last year, which will be replenished by another $900 million after the bank settles the WorldCom class action.
Despite its size, JPMorgan has no retail brokerage, limited international reach, few dealings with the booming hedge-fund industry, and weak equity underwriting and merger advice businesses. Dimon doesn't intend to get into any business "just to say we're in it." All the same, some analysts worry that he'll get sidetracked into joining a bidding war for brokerages Morgan Stanley (MWD
) or Bear, Stearns & Co. (BSC
) should they be put in play, as some expect.
Although many JPMorgan staffers seem happy to have a young, dynamic banker in charge, rather than the courtly Harrison, some find Dimon's blunt, in-your-face management style grating. Last summer he cut programs that matched gifts to charities and 401(k) contributions for the highest paid execs, rankling them. "He's going down like cod liver oil," says one JPMorgan investment banker. Still, some suspect he cultivates a tough-guy image to keep people in line. Tattle about his antics, such as shouting at people or peremptorily firing traders, abounds. "If the rumors aren't true, he certainly doesn't do anything to quash them," says Richard X. Bove, analyst with Punk, Ziegel & Co.
The competitive pressure is unrelenting. Rivals such as Citi and Bank of America (BAC
) are ahead in going national. Regional players like Commerce Bancorp Inc. (CBH
)and Fifth Third Bancorp (FITB
) are snapping at Dimon's heels in his best markets, New York and Chicago. "They've got all these piranhas nibbling at their core business, and they haven't done anything about it for years," says CreditSights analyst David A. Hendler.
General business conditions won't help Dimon much, either. The move to higher interest rates won't be smooth: Mortgage and fixed-income trading -- which made up 20% of JPMorgan's $26 billion revenues last year -- will take a hit.
Despite the hurdles, many on Wall Street say Dimon can succeed. They argue that he delivered growth for Weill at Primerica, Smith Barney, Salomon Bros., and Travelers Group. Says Brad Hintz, analyst at Sanford C. Bernstein & Co.: "He has taken on a major challenge, but I'm making a bet that he has the tenacity and experience to win."
Dimon ran his own show for the first time at Bank One, the nation's sixth-largest bank. A lifelong New Yorker, he moved his wife and three then-school-age girls to the Windy City (he still commutes) in March, 2000. The bank had just reported a net loss of $511 million -- the result of a mishmash of previous mergers. Dimon lopped off $1.8 billion in costs and one-fifth of the workforce. Cutbacks, he insists, were not his only legacy. In 2003 the bank earned a record $3.5 billion, nabbing a net 434,000 new checking accounts, vs. 4,000 the year before. The same year credit-card sales leaped 83% and home equity loans 29%.EYE ON INTEGRATION
As he did at Bank One, Dimon is betting big on information technology. It will get the largest slug of extra cash, $600 million on top of an existing $6.5 billion tech budget. Simply stitching the two banks together is a huge task. Over the next 12 to 18 months, thousands of people will spend more than two million hours on 750 different projects just to complete the tech integration. Nine global help desks will be cut to 7, and 11 data centers and 22 U.S. corporate business hubs, including the New York headquarters, overhauled. "Consolidating systems is an extremely complex, expensive effort," says Dan Stull, managing director at compliance specialist Jefferson Wells Inc. (MAN
) in Seattle.
In Dimon's scheme of things, proprietary technology has a crucial role in boosting future revenues and profits. "Technology improves accuracy, efficiency, and speed, which are the cornerstones to improving client service," says Austin A. Adams, JPMorgan's chief information officer. Nowhere is that clearer than at the retail bank. Each salesperson at a Chase branch is backed by five support people, vs. two at former Bank One branches. Analysts say JPMorgan also spends $28,300 per employee, more than twice as much as rivals. Apart from saving hundreds of millions, souped-up software will help staff identify prospects for products. For example, it will highlight people with a bank account but no credit card and vice versa.
A makeover of the bank's most conspicuous public face, the retail branches, was long overdue. Chase sat idly by as the rest of the industry underwent a renaissance, sprucing up design, turning tellers into sales associates, and providing come-ons such as free child care and Starbucks coffee. Now, an extra $300 million will fund projects from retraining tellers to rebranding all of Bank One's nearly 2,000 branches under the Chase name starting this spring. Chase will open 175 new branches and hire 1,000 "personal bankers," who, unlike tellers, earn bonuses based on the number of products they sell. Purchases of smaller banks in fast-growing markets such as Florida, New Jersey, and California are also part of the plan, but will be funded separately.
The new troops will have more to sell as Dimon cranks up the bank's $800 billion wealth and asset management businesses. On Feb. 22, Bank One's funds, which were tainted in the mutual-fund scandal, quietly disappeared into a newly retitled JPM Funds, now the nation's fifth-largest fund group, with $200 billion under management. An extra $50 million will bankroll a national ad campaign and 150 new fund salespeople. The bank also plans to use its partnership with New York's Highbridge Capital Management -- a top-performing $7 billion hedge-fund company in which it bought a controlling interest last September -- to create sophisticated investments that aim to generate positive returns even when the stock market is down.
Renewed selling efforts won't be limited to individuals. While other banks and insurance companies are getting out of in-house money management, it is a big growth area for Dimon. Last year the assets that JPMorgan managed for institutions such as U.S. Bancorp (USB
) and Prudential Financial Inc. (PRU
) were up 80%, to $20 billion. The bank is gaining ground in the administration of 401(k) retirement plans, too. Dimon is funneling resources to a 2003 acquisition, Kansas City-based Retirement Plan Services. Last year accounts grew by 40%, with the addition of clients such as Sun Microsystems (SUNW
) and Southwest Airlines. (LUV
) Also, some 30,000 midsize companies on Bank One's client roster will be pitched investment banking and cash-management services they didn't have before. That alone could bring $850 million in revenues, because JPMorgan not only has many more relationships with such companies than commercial banks such as BofA but also more capital from which to offer them loans than the likes of Goldman, Sachs & Co. (GS
) or Lehman Brothers Inc. (LEH
Dimon insists he's not trying to reinvent the classic financial supermarket model that delivers all products to all people. Rather, he is taking rifle shots at businesses he believes have the most potential and he's investing in them even before cost savings are fully in the bag. That's going to make for a rough year for investors who will have to trust that his vision will work. Loyalists say there's nothing to worry about. They credit Dimon, not Weill, with identifying Citicorp as "the mother of all deals" long before its 1998 merger with Travelers. "The Sandy mythology is so large it often obscures the contributions that other people made," says Heidi G. Miller, formerly CFO at Citi and now head of JPMorgan's Treasury & Securities Services unit. Either way, Dimon is in no one's shadow at JPMorgan. Success -- or failure -- will be all his.
Corrections and Clarifications
"Jamie Dimon's grand design" (Finance, Mar. 28) should have specified that JPMorgan's international reach was limited in consumer banking; its investment bank operates in 50 countries. Also, while JPMorgan has many dealings with hedge funds, it does not operate a prime brokerage that caters specifically to them. In addition, it ranks third in global M&A, according to Thompson Financial.
By Mara Der Hovanesian, with Emily Thornton in New York, Stanley Reed in London, and Joseph Weber in Chicago