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About this book

This book tells the untold story of how JPMorgan became a universal bank in the 1980s-1990s and the events leading to it being acquired by Chase in 2000. It depicts the challenges Morgan’s leaders – Lew Preston and Dennis Weatherstone – confronted when the firm’s business model was disrupted by the developing country debt crisis and premier corporate borrowers increasingly accessing capital markets, up to its current management with Jamie Dimon. It depicts what happened to Morgan in the larger story of U.S. banking consolidation.

As Morgan sought to re-enter the world of securities and navigate around Glass-Steagall barriers, their overriding goal was to ensure it would remain a pre-eminent wholesale bank serving multinational corporations. Opportunities to grow through acquisition were presented and considered, including purchasing a stake in Citibank in the early 1990s. However, Preston and Weatherstone were reluctant to integrate areas unfamiliar to Morgan such as retail banking or to assimilate cultures that were disparate from the firm’s.

This first-hand account explores whether Morgan could have stayed independent had its leaders pursued the strategic plan that called for it to make targeted acquisitions in areas where it had well-established businesses. Instead, in the mid-1990s, it went from being the hunter to the hunted. Rival banks that had been burdened by bad loans to developing countries and commercial real estate capitalized on rising share prices during the tech boom to acquire other institutions. Meanwhile, Morgan’s profits and share price lagged, which left it vulnerable.

During this time, all of the leading financial institutions struggled to change their business models. In the end, no U.S. money center bank was able to become a universal bank on its own. What ensued was a growing concentration of financial assets in a handful of institutions that was the precursor to the 2008 financial crisis, which is explored further using Morgan as a lens, in a book that is sure to interest banking and Wall Street professionals and business readers alike.

Table of Contents

Frontmatter

Glory Days

Frontmatter

1. 23 Wall Street

Abstract
This book begins with my first impressions of the Morgan Guaranty Trust Company (which was later changed to JPMorgan) in 1977 when I interviewed for a position as an international economist. The bank was located at a historic site on 23 Wall Street, flanked on one side by Federal Hall, where George Washington was inaugurated as president, and other by the New York Stock Exchange. Once inside, I thought I was in a European museum. It was like no other bank I had ever seen. My interviews left me equally impressed by the caliber of the bank’s leaders.
Nicholas P. Sargen

2. A Private Club

Abstract
In The House of Morgan, Ron Chernow observes that the bank’s strategy was to make clients feel accepted into a private club. This chapter explains how the bank’s rank and file felt the same. This impression was planted on the first day when employees learned about the firm’s storied history and its guiding principle “First class business in a first class way.” This chapter discusses the role the International Economics Department headed by Rimmer de Vries played in keeping Morgan’s executives and government officials abreast of global developments. At the end of 1978, the bank announced that Lew Preston would become its next leader.
Nicholas P. Sargen

3. Preston in Charge

Abstract
Preston’s pedigree was similar to his predecessors, although as a former Marine he was less genteel. He had excellent credentials to run the bank with a background in both domestic lending and international banking and finance. As the head of Morgan’s London office in the mid-1960s, he was present during the origins of the Eurocurrency markets. He also forged a close partnership with Dennis Weatherstone, an astute currency trader. Preston brought Weatherstone to New York to head foreign exchange, the Treasury Division and eventually to become his successor. Preston was instrumental in expanding Morgan’s lending to sovereign borrowers during the 1970s along with Citibank, Chase and other money center banks.
Nicholas P. Sargen

4. Market Shocks

Abstract
When Preston assumed Morgan’s helm, his first task was to deal with a series of market shocks that proved especially challenging for financial institutions. They included the second oil shock after the Iranian Revolution in 1979 and the shift in US monetary policy under Paul Volcker whereby interest rates were allowed to rise to record levels to combat accelerating inflation. The International Economics Department assessed the implications of these developments for the global economy and for interest rates and exchange rates. Morgan Guaranty was able to cope with the market gyrations better than most financial institutions because of its coterie of highly seasoned traders. By early 1982, however, there were indications that record interest rates and a resurgent dollar were taking a toll on the US and global economies.
Nicholas P. Sargen

5. Crisis Erupts

Abstract
The Less Developed Country (LDC) debt crisis surfaced in August 1982, when the largest Latin American borrowers—Mexico, Brazil and Argentina—depleted their foreign exchange reserves and could not service their interest payments. It came as a complete shock to the management of Morgan Guaranty, whose loans outstanding to these countries matched its capital. Preston first had to decide whether to listen to Rimmer de Vries who believed the debt crisis threatened the bank or the Latin American lending officers who believed it was a temporary liquidity problem. He subsequently sided with those who argued the problem would require a coordinated workout on the part of debtor countries, multinational banks and creditor governments.
Nicholas P. Sargen

6. Time to Say Goodbye

Abstract
As 1983 unfolded, Morgan’s management formulated a strategy called “managed lensing” that would guide bank lending to the LDC borrowers for the remainder of the decade. It favored a case-by-case approach to deal with problem countries rather than a formulaic solution that would apply to all countries. Morgan’s International Economic Department was responsible for projecting the funding requirements for the respective borrowers, and it helped map out the strategy of managed lending. Morgan also formed a partnership with Deutsche Bank to ensure that money center banks and regional banks would roll over exiting obligations of indebted countries and assign pro-rata shares for new money. When I left Morgan to join Salomon Brothers at the start of 1984, Morgan had weathered the storm better than its rivals partly because it was better capitalized.
Nicholas P. Sargen

Formulating the Plan

Frontmatter

7. Origins of Morgan’s Transformation

Abstract
Lew Preston realized early on that Morgan had to be transformed so it could compete not only with money center banks and foreign banks but also with investment banks. The big unknown was how Morgan could break into the investment banking and securities world when Glass-Steagall barriers stood in the way. The bank wound up using its securities unit in London, Morgan Guaranty Ltd., as the launch pad. Preston also had to assess how the competitive landscape in financial services was changing. The period from 1979 to 1994 has been called the most turbulent in US banking history since the Great Depression: The number of US banks consolidated steadily as smaller banks and thrifts had difficulty navigating swings in interest rates, and restrictions on interstate banking were alleviated. One event that helped to convince Morgan’s management to continue its quest was the collapse of Continental Bank in 1984.
Nicholas P. Sargen

8. Buy or Build?

Abstract
Once Morgan’s management committed to transform the firm, it had to develop a strategy to pull it off. There were two directions it could go. One was to gain expertise via acquisitions that regulators would sanction; the other was to build a capability in investment banking and securities organically. For Lew Preston the choice was clear. Morgan would primarily build these businesses organically. The reason: He wanted to preserve Morgan’s culture and the bank was involved in only one merger, that with the Guaranty Trust Co., in the post-war era. However, Preston was willing to consider targeted acquisitions that were good strategic fits provided the price was right. One challenge was whether Morgan could marry two prototypes—commercial bankers and investment bankers—without a culture clash. Another was Morgan’s compensation was considerably below investment banks.
Nicholas P. Sargen

9. Industry Shakeup

Abstract
When Morgan contemplated entering the securities business in the mid-1980s, the environment was favorable for both stocks and bonds. As investors flocked into financial assets, securities firms expanded their operations to meet growing customer demand. Conditions changed materially in the wake of the October 1987 stock market crash, which was accompanied by the downsizing of Wall Street firms. Amid this, the investment bank industry was contracting faster than new entrants were being created. In 1988, Preston shared his views about what was happening and the difficulty of mapping a strategy that called for Morgan to add to capacity while the investment banking industry was contracting.
Nicholas P. Sargen

10. Should Morgan Rescue Citi?

Abstract
One institution Morgan monitored closely in 1989 was Citibank for a special reason. Two years after Citi wrote off most of its Less Developed Country loans, it was embroiled in yet another crisis due to problems with commercial real estate and leveraged buyout transactions. By mid-1990, some observers viewed Citi as “technically insolvent.” One story that circulated for years was that Preston and Weatherstone could have acquired Citi for $10/share, but they passed. The popular rendition, however, is not accurate. The correct story is that Gerald Corrigan of the New York Fed approached them to take a 10% stake in Citi along with a mandate from the Fed to “fix” Citi’s capital shortfall. They passed because they were not interested in retail banking and viewed Citi as a distraction.
Nicholas P. Sargen

11. Preston’s Legacy

Abstract
This chapter assesses Lew Preston’s legacy during his tenure as Morgan’s chairman and CEO. When he stepped down as Morgan’s leader in 1990, Preston was widely regarded as the pre-eminent banker of the era along with Walter Wriston of Citibank. Yet little has been written about him, because he was “almost painfully reticent.” Also, because he was dyslexic, he disliked giving speeches. Preston was widely admired and respected as a decisive leader who oversaw the bank’s expansion globally and who steered it through unprecedented turbulence. Yet, some perceived he never recovered his panache after the Latin American debt crisis. One view is he instinctively knew Morgan’s business model had to change, but he was unsure how to proceed and did not want to make a mistake.
Nicholas P. Sargen

12. Preston Passes the Baton

Abstract
Soon after Preston addressed Morgan’s board in September 1989 about provisioning for $2 billion of its Less Developed Country loans, he announced he would step down as chairman and CEO. While the timing was a surprise, Preston’s choice of Dennis Weatherstone as his successor was a foregone conclusion, as they collaborated closely since the mid-1960s. Nor did it matter to Preston that Weatherstone’s pedigree was vastly different from previous Morgan leaders, and he paved the way for Weatherstone to advance by moving prominent people aside. Among the most important decisions Preston and Weatherstone made was the selection of Sandy Warner to become Morgan’s president and its eventual chairman and CEO.
Nicholas P. Sargen

Executing the Plan

Frontmatter

13. Taking Stock: Plans for the Early 1990s

Abstract
By mid-1990, five years had passed since Preston committed to transform the bank and three years since the launch of JPMorgan Securities. This provided an opportunity for senior management to assess progress that had been made. Few financial institutions at the time would do what Morgan was doing, increasing both capital spending and hiring when the economy was weak. The strategic plan that was formulated by the Corporate Planning unit called for Morgan to make targeted acquisitions in global custody, investment management and private banking. These areas would generate a steady earnings stream to finance the buildout into securities and investment banking. Morgan’s management, however, passed on opportunities to acquire State Street Bank and Northern Trust, which could have expanded its capabilities into mutual funds, the defined contribution space and wealth management.
Nicholas P. Sargen

14. Risk Management and Derivatives

Abstract
One area in which Morgan had considerable expertise was the application of risk management procedures. Weatherstone’s goal was to understand how vulnerable Morgan’s positions were to market fluctuations and how much capital the bank should hold. In 1989, a novel practice was introduced known as the “4:15” report that quantified the amount of risk the bank was running in its business lines at the end of each day. In 1992, Morgan launched a methodology called RiskMetrics to the marketplace. Morgan was also involved in the creation of financial derivatives that could be used to hedge against adverse price movements or to speculate on price swings. In 1994, the derivatives unit headed by Peter Hancock pioneered the development of credit default swaps, tradable instruments that financial institutions could deploy to reduce credit risks on loans. During the 2008 Financial Crisis, critics claimed this practice exacerbated the crisis. However, Morgan understood the risks and emerged in better shape than its rivals.
Nicholas P. Sargen

15. Strategic Challenges

Abstract
Shortly before Sandy Warner became CEO in 1995, senior management assessed progress in implementing the strategic plan. The encouraging news was Morgan’s securities businesses were gaining traction against some competitors. However, it lagged its aspirational competitors—Goldman, Morgan Stanley and Merrill Lynch—by a considerable degree and had its work cut out. The Corporate Planning unit produced a report that spelled out various metrics for assessing progress and shortcomings in various business lines. A decision was made to sell the third-party custody business, and progress on growing asset management and private banking left much to be desired. Another challenge was Morgan’s management information system was not fully transparent in assigning costs and revenues to respective business units, which hindered capital allocation.
Nicholas P. Sargen

16. A Chance Encounter

Abstract
While Morgan confronted strategic challenges, they were not readily apparent to me while I headed investments for Prudential Insurance’s global bond and currency unit from 1991 to 1994. International bond and currency markets were subject to massive swings then as European countries sought to pave the way for a single currency by 1999. The attack on the British pound and other high-yielding currencies in 1992 by hedge funds proved trying, but our business unit benefited when these currencies rebounded the following year. The environment in 1994 proved especially challenging for global portfolio managers when the US dollar weakened against key currencies even though the Fed raised interest rates markedly. Following a chance encounter in London with John Olds, who was about to become head of Morgan’s Private Bank, I accepted the opportunity to become global markets strategist for the Private Bank.
Nicholas P. Sargen

Playing Defense

Frontmatter

17. 9 W 57

Abstract
When I returned to Morgan at the beginning of 1995, a lot had changed in the eleven years I was away. The magnificent lobby at 23 Wall was gone, and the new headquarters at 60 Wall Street was like many other financial institutions. The Private Bank was located at 9 West 57th Street, and I looked forward to working in midtown. My boss, Susan Bell, headed SDI which stood for Self-Directed Investors. Susan explained that it was the newcomer to the Private Bank which offered brokerage services via JPMorgan Securities. Morgan used the term because brokerage carried the connotation of being a business in which salespeople would take advantage of clients. In a memo to officers of the Private Bank, John Olds shared his vision of the Private Bank which embraced a “buy-side” perspective to managing clients’ assets.
Nicholas P. Sargen

18. Technology and the New Economy

Abstract
Investor optimism reined in the mid-1990s as the US economy accelerated amid a revolution in technology. As these developments unfolded, the term “The New Economy” became increasingly popular. Tech stocks fueled a powerful market rally that continued through the remainder of the decade. Securities firms such as Goldman Sachs, Merrill Lynch and Morgan Stanley benefited from a high volume of initial public offerings (IPOs) and dot-com stocks. During the boom the role of equity analysts on Wall Street changed as they were turned into marketers. True to its colors, Morgan did not want to play that game, but this made it more difficult to gain market share. During this period the largest banks engaged in a series of mega-mergers, one of the most prominent being Chemical Bank’s acquisition of Chase Manhattan in 1995.
Nicholas P. Sargen

19. Three Ring Circus

Abstract
The stock market surge continued in 1997, but optimism within the Private Bank faded amid an exodus of MBAs who had been recruited from leading business schools. More surprising were announcements that John Olds and Susan Bell would retire, which caused many to wonder if they had been unable to convince Sandy Warner of the Private Bank’s potential. Meanwhile, the stock market shrugged off the financial crisis that spread from Thailand to other Asian countries in the second half of 1997. These developments occurred as the wave of consolidations in financial services continued unabated that culminated in the merger between Citibank and Travelers Group in 1998, which preceded the repeal of Glass-Steagall a year later. The year ended with Long Term Capital Management having to be bailed out by a consortium of banks and the Fed easing monetary policy.
Nicholas P. Sargen

20. Market Frenzy

Abstract
What ensued over the eighteen months following the rescue of Long Term Capital Management made the market rise of the previous three years look tame. Investor optimism was fueled by developments in technology that were linked to the turn of the millennium, commonly referred to as Y2K. Investors latched onto the idea that businesses needed to replace software systems that were not programmed to handle dates beginning with the year 2000. Amid this, the volume of M&A activity continued at a record pace, as many companies and financial institutions used their rising share prices as currency to pay for acquisitions. Morgan became increasingly vulnerable because its share price lagged its rivals. Behind the scenes, Goldman Sachs approached Sandy Warner about a possible merger between the two institutions after Goldman went public in May of 1999. However, Hank Paulson ultimately pulled the plug on the deal.
Nicholas P. Sargen

21. The Managing Directors’ 2000 Convocation

Abstract
As Morgan’s managing directors gathered for the January 2000 convocation in the Millennium Hotel, the attendees anticipated it would have special importance. The reason: Morgan’s share price had lagged its main competitors and Sandy Warner and other senior managers would give their assessment of what was required to get Morgan back on track. Warner indicated that Morgan had made considerable progress on several fronts, but it had not become a bulge bracket firm in equities where the lions’ share of money was made. Management presented a plan to expand Morgan’s customer base to include high net worth households and the mass affluent. However, when the offering failed to garner many prospects, it soon became apparent the foray was Dead on Arrival (D.O.A.) By summer, word was out that Morgan was in play. On September 14, an announcement was made that Chase would acquire Morgan for an all-stock deal valued at just under $31 billion.
Nicholas P. Sargen

22. Why Morgan Matters

Abstract
This chapter begins with a brief retrospective of what happened to Morgan from the late 1970s to early 2000s. It considers whether Morgan could have stayed independent had it followed the plan of making selective acquisitions. It also views what happened in the context of the transformation in the financial services industry in which the number of money center banks shrank from ten to three—JPMorgan Chase, Bank of America and Citibank. The consolidation in financial services would prove to be a precursor to the 2008 Global Financial Crisis, and this chapter considers whether the largest institutions today are “Too Big to Fail” or “Too Big to Manage.” This book concludes with an assessment of JPMorgan’s revival under Jamie Dimon and the prospects for it remaining a premier financial institution in the future.
Nicholas P. Sargen

Backmatter

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