Guy Posts

Malcolm Gladwell makes the case in Outliers that a great opportunity plays a larger role in a person’s extraordinary success than an extraordinary talent. Gladwell would likely take one look at this graph and add Jamie Dimon to the list of people blessed by having the right skill set, in the right place, and most importantly, at the right time.

However, this characterization would only be partially correct. Dimon and his mentor Sandy Weill took a risk by entering the world of consumer credit, “the bottom of the financial ladder,” according to Duff McDonald, author of Last Man Standing, “the people with the least money… when their peers were all trying to grab a piece of the increasingly frenetic action in stocks and bonds on Wall Street.”

Their risk proved to be the right one, and they had a plan to capitalize: “run the business conservatively, building fortress balance sheets that gave the wherewithal to make acquisitions during downturns, when assets were cheap.” Dimon and Weill grew their financial conglomerate (eventually becoming Travelers Insurance) so well that they began setting their sights on Citibank. “Wouldn’t that be the mother of all deals?” Dimon says in 1990, along with, “God, I wish we could buy it! I wish we could buy it! Now is the time to buy Citi!”

Nevertheless, the consolidation of these two financial behemoths required the blessing of the federal government and a relaxing of Glass-Steagall regulations. Weill lobbied Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin and got the approval he needed in 1993; Glass-Steagall was waived, and the merger between Travelers, an insurance company and Citibank, a commercial bank created a financial monster unseen since the 1930s.

Still raging is the debate over the consequences of tossing Glass-Steagall to the wind. To many, Glass-Steagall erected a brick wall between depositors’ cash and investment bankers’ appetite for risk. By removing that brick wall, depositors’ cash became fuel for heightened risk taking and speculation. There’s no ducking the fact that Dimon and Weill “were early and enthusiastic participants in this movement, a somewhat dubious legacy. On the one hand, banking CEOs can reasonably argue that they needed scale (and leverage) to squeeze out sufficinet profit from businesses that were largely based on low-margin commodity products. On the other hand, it is also clear that the deals that built these giants were like a party drug, blinding Wall Street to their long-term implications. Everybody wanted to seize the moment and grab a share of the fees, the associated risks be damned.”

On the behavior that Dimon participated in, Paul Barrett from the New York times would have preferred McDonald to be more critical:

Dimon indisputably sensed before many others the dangers inherent in fraudulent home loans and the toxic securities Wall Street confected from them. But that’s not the same as being a virtuous banker. Dimon’s minions engaged in many of the deplorable practices that destabilized the financial system. They just stopped sooner and protected their bank from the fallout more effectively. JPMorgan under Dimon’s leadership allowed home buyers to borrow without having to prove their income. The bank did business with sleazy mortgage brokers who would lend to anyone with a heartbeat. These habits ended only in 2008, when it was too late. McDonald lauds Dimon for cleverly unloading huge volumes of the toxic subprime mort­gages JPMorgan originated. But that’s like praising a corporate polluter for trucking his poisonous sludge into the next state. It doesn’t solve the problem; it merely moves it elsewhere.

From Barrett’s critique, I stare at the phrase “solve the problem,” and wonder whether the problem he speaks of is ultimately moot. As Niall Ferguson notes in the Ascent of Money, “poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions, with the absence of banks, not their presence.”

A bank’s primary function is to lend money to those who require it (a risk assuming event), while managing risk appropriately to ensure a timely payout of their obligations. McDonald hones in on Dimon’s penchant for risk management and makes it the focus of his book. While Barrett criticizes McDonald for being seemingly “deaf to the odd notes” of Dimon’s character, I commend McDonald for not portraying Dimon through a thick lens of post crash anti-Wall St. sensationalism. There is much wisdom to learn from Dimon’s approach to risk and operations management on both a personal and corporate level. In Dimon’s words:

• “Don’t go chasing the flavor of the month unless you actually know its ingredients. Just because other people are making money in something, don’t be tempted to follow suit unless you understand the complexities involved and how they profit from it.”
• “Don’t do anything stupid… And don’t waste money. Let everybody else waste money and do stupid things; then we’ll buy them.”
• “It’s not that I don’t like derivatives…It’s only when I don’t understand them. So I want to spend some time getting to know them.”
• “You don’t run a business hoping you don’t have a recession.”

Prudence and risk awareness— true risk awareness— sets Dimon apart. As Warren Buffet notes, “the CEO of any of these firms has to be the chief risk officer… Somebody at the top has to be thinking about that stuff every day. Jamie is the kind of guy you want to have running an institution like that. You have to have somebody that’s got real fear in them of what can happen in markets. They have to know financial history. You can’t evaluate risk in sigmas.”

Just as a medical doctor dedicates a decade to schooling and training, society’s collective interest lies in studying the techniques and traits that are needed to manage systemically important institutions. In a world of increasing financial complexity, we need more Jamie Dimons, not less.