Tuesday, September 28, 2010

Jamie Dimon's "Halo" Effect

It never fails to amaze me how many people ascribe unique managerial powers and skill to Jamie Dimon, despite any significant evidence that he's ever been anything but a cost-cutter trained at Sandy Weill's knee.

In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.

"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.

Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."


Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.

That BofA and Citi are the worst two performers is no particular surprise, is it? While it's not crystal clear from the chart, one can deduce that Goldman and Chase performed roughly the same, while Wells Fargo and the S&P500 did a little worse.

Much of Chase's milder value loss during the recent financial crisis stemmed, as I've written in prior posts, from it's simply being slower and less agile in getting into the mortgage-backed game in the first place. Thus, the bank's traditional stodginess and slow execution accidentally saved it from becoming another Citigroup or BofA. It was an error of omission, not commission.

Regarding the acquisition of various wrecked investment and commercial banks, I think Broughton wrongly gives Sullivan a pass on incomplete understanding of the situations.

Bear Stearns was the smallest of the publicly-traded investment banks, and Chase only rescued it with assurances of loss guarantees from the government. Maybe that counts as Dimon's skill, maybe not. At that point, with mortgage-backed instruments having caused tens of billions of write-offs on bank balance sheets beginning in late 2007, only an idiot would not have required such guarantees when agreeing to purchase a bushel full of them by way of taking over the failed Bear Stearns. It surely wasn't rocket science.

By the way, Lewis did the same thing with Merrill Lynch, even to the point of trying to walk away from the deal, only to be basically blackmailed by the Treasury and Fed.

Regarding Chase's WaMu takeover, it is positioned as more brilliant than it actually was. As a commercial bank, WaMu's dissolution was a relatively straightforward event. The FDIC handles these routinely, albeit on a smaller scale. But a bank like WaMu was, in comparison with Bear Stearns, a fairly simple 'acquisition.' Chase simply took over the deposits and branches, negotiating with the FDIC on various aspects of the assets. But it was a known business.

I see the difference between Lewis and Dimon as more a matter of different types of flaws. Dimon has never been a big-picture guy. Yes, he is probably very astute on details, because that's what his mentor, Sandy Weill, focused on as he acquired his string of brokerages to build Shearson Lehman. But every large-scale concept Weill pursued exploded in loss. Particularly....Citigroup. Nobody would ever accuse Dimon of having new, innovative strategic concepts, or implementing any successfully.

Lewis, on the other hand, evidently thought strategic acquisitions came with the executive suite he inherited from Hugh McColl. The missing acquisition mistake in the review, and perhaps the book, is BofA's purchase of the wreckages of Countrywide. As a mortgage bank, Countrywide's demise didn't really threaten the financial system, so Lewis' overpayment for it was a self-inflicted wound. There was no pressure for any bank to 'rescue' the troubled mortgage lender. It wasn't seen as a key financial institution in the fabric of the US economy.

The Merrill Lynch acquisition was more complex than Chase's of Bear Stearns. I see Lewis' mistake, again, as one of scope, rather than detail. And, frankly, both Lewis and Dimon, already heading firms that were among the largest five commercial banks in the US, did not really need any of these acquisitions to remain so. Consolidation is the dominant trend in the sector, but these two firms were already pretty much impervious, absent tremendous operating losses, to losing their positions as financial utilities, whether they bought any of the failed investment and commercial banks, or not.

Wells' successful digestion of Wachovia remains uncertain. Wachovia had unwisely overpaid for Golden West, which helped destroy the North Carolina bank.

To me, viewing the last five years of performances of these institutions, the lesson is that only the most and least aggressive two firms came out on top. Goldman maneuvered through the crisis, while Chase more or less hunkered down, with a few distressed asset purchases relying on government guarantees.

Perhaps the better lesson from Lewis' and Dimon's behaviors is that it's better not to operate beyond your capabilities in the first place. That doesn't mean Dimon is a better overall manager, but, in this case, that his particular skills in micro-management and small-picture thinking happened to dovetail with the brief era. The sort of skills, come to think of it, which are all one probably needs to oversee a lumbering, slow-growth, unexciting financial utility.

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