I was fully prepared to be underwhelmed by Nicholas P. Sargen’s new book about the demise of the old JPMorgan, a forerunner of today’s JPMorgan Chase.
“JPMorgan’s Fall and Revival: How the Wave of Consolidation Changed America’s Premier Bank” sounded a little out of step. The narrative more or less ends in 2000, when Chase Manhattan agreed to buy JPMorgan. The “fall” that Sargen describes is the genesis of the largest U.S. bank, and the legendary fortress balance sheet that towers over the financial services industry.
But Sargen’s book is an engaging memoir, a brisk roundup of decades of banking history and a case study of management adjusting to change. Viewed through the lens of the author — a former economist and global markets strategist at the company — the story of “Morgan” is a sobering tale of smart, mostly ethical bankers who played their cards right, but still got bought.
The plain-vanilla commercial lender had a good diversification plan, avoided the missteps of rivals like Citibank and weathered several crises without a bailout. But two things management didn’t do sealed the company’s fate.
Sargen’s early days in the international economics research department of what was then called Morgan Guaranty Trust Co. are hard to imagine anymore. Officers wore suitcoats even on restroom breaks, computer screens were absent from desktops, and Sargen and his colleagues chowed on free, five-course meals each day “as a means of discouraging employees from drinking at lunch.”
The onset of oil shocks and runaway inflation in the late 1970s and Latin American debt crises in the early 1980s brought that private-club atmosphere to a close. Loans to so-called less developed countries were an important growth area for money center banks — especially Morgan, which had no retail banking operation and, like other commercial banks, was mostly barred from the securities business by the Glass-Steagall Act.
By the early '80s, debt service ratios exceeded 20% among many Latin American borrowers, but U.S. banks kept lending. By the end of 1982, banks had lent nearly $190 billion to Mexico, Brazil, Argentina and Venezuela.
Concerns about overexposure weren’t heeded; Sargen admits that he himself ignored warning signs from a risk model that he himself designed. “I had constructed a credible early warning system, but I lacked the courage of my convictions,” he writes.
U.S. banks were highly exposed when economic conditions became shaky and defaults loomed. “Morgan had loans outstanding to the four borrowers totaling $4.1 billion, representing most of its capital,” he writes.
Morgan worked with other lenders to negotiate stopgap measures with help from the federal government and the International Monetary Fund, though it eventually had to take a painful write-down. The bank came out in better shape than others, Sargen writes, but leaders took the incident as a wake-up call that the bank had to transform Morgan and find new, more diversified sources of income.
Competitive forces spurred diversification as well. Securities firms like Salomon Brothers were paying top dollar for talent and rolling out a range of lucrative new products, including leveraged buyout transactions to fund M&A. Large investment banks were leaner and meaner, with a return on equity of 24% in 1983, compared with 13% at the 10 largest bank holding companies.
But Glass-Steagall — the Depression-era law that separated commercial and investment banking — was still in effect in the United States.
The company seized on what it saw as a loophole in Glass-Steagall that banks should be “engaged principally” — but not exclusively — in the commercial banking business. It saw this as an avenue into the U.S. corporate bond business.
Eventually, Congress would eliminate Glass-Steagall in the Gramm-Leach-Bliley Act of 1999 — less than a year before Chase Manhattan would buy JPMorgan for $30.9 billion.
But despite maintaining a AAA credit rating during turbulent years and diversifying beyond traditional banking, Sargen says, Morgan made several critical errors.
First, it was too timid about M&A. Morgan’s overhaul plan had contemplated targeted acquisitions in areas where the company had expertise such as global custody, investment management and private banking. “These areas had more predictable earnings streams that could have been used to finance the expansion into investment banking and securities.”
Bank leadership also was focused on preserving the bank’s prized corporate culture that valued collegiality, prudence and a customer-first approach. Some younger bankers “viewed Morgan’s adherence to its culture as an impediment to change that was necessary,” Sargen writes.
That mindset and the opportunities missed put Morgan at a disadvantage when the forces of consolidation arrived in the late 20th century, spurred by a combination of market, deregulatory and technological forces.
There were 10 money-center banks at the start of the 1980s and only three — JPMorgan Chase, Bank of America and Citigroup — by the early 2000s; Wells Fargo joined the group later. And from 1988 to 1997, there were 140 large mergers by the standards of the time, Sargen says in citing a Federal Reserve study.
Still, Goldman Sachs and Morgan Stanley remain standing, and the old Morgan could have survived, too, the author suggests, if the bank had been willing to grow and welcome the internal changes that growth would bring.
Jamie Dimon, the chairman and CEO of JPMorgan Chase, deserves credit, Sargen writes, for building on the foundations of the six main business lines he inherited and “integrating diverse cultures into a productive whole.” The company entered the financial crisis with a strong balance sheet, he writes, and made opportunistic acquisitions of Bear Stearns and Washington Mutual that contributed to a tremendous increase in assets under management.
In some ways, Dimon fulfilled the vision of the Morgan-era CEOs by making JPMorgan a strong company that will remain strong for years to come.
However, Sargen says, “it remains to be seen whether Dimon’s successors will be equally adept in overseeing a large and highly complex organization.”
