Book Review: The House of Dimon, by Patricia Crisafulli 10 comments
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The book The House of Dimon, by Patricia Crisafulli (John Wiley & Sons, Inc., 2009) is about Jamie Dimon, the current CEO and Chairman of JPMorgan Chase & Company (JPM). The author of the book, Patricia Crisafulli, has very little bad to say about Dimon, so this book is 218 pages of accolades for the man. It is easy to read and brings together events in the financial markets over the past 40 years that are helpful to review and reflect upon. There are also some lessons that we can take away from the narrative that might help us become better business people and better investors.
There is one characteristic of Dimon that the author identifies early on which I believe captures the essence of the man and his successes. Crisafulli claims that Dimon is a builder, and this is the one descriptive word that seems to run throughout his career. He got the opportunity to build early for upon graduation with an MBA from Harvard Business School he went to work directly for Sandy Weill rather than take a position on Wall Street with firms like Goldman Sachs, Morgan Stanley, or Lehman Brothers. Weill was a friend of the Dimon family and was someone from whom Dimon sought advice when weighing who to go to work for when he graduated. Dimon ended up working directly for Weill.
Dimon is very smart, very good with numbers, and is capable of very detailed work. His father and his grandfather were stockbrokers and he learned the financial business from the inside at a very early age. He is known for capturing the story that is embedded in the financial data of a firm. In 1982 he went to work for Weill at American Express (AXP) as his executive assistant and worked closely with Weill for the next 16 years, through the building up of the Commercial Credit Corporation in Baltimore, the acquisition of Primerica (which included Smith Barney), the acquisition of Travelers Insurance Co., the acquisition of Shearson, the acquisition of Salomon Brothers and the merger with Citicorp to make Citigroup. He not only put organizations together, he helped run them. What an experience, and Dimon shined through it all!
The thread that runs through all this history is that Dimon is a builder. But within the context of Dimon being a builder is the fact that he believes there are some basic fundamentals of building and running a company. One of his pet mantras is that you do the right thing for the right reasons. In this he reminds me of a golfer like Tiger Woods. Woods has solid fundamentals. He has worked extremely hard to build up the fundamentals of his golf swing so that he can repeat it over and over again, even under tremendous stress. Yes, Woods takes chances from time to time and yes, he can hit an awkward shot on his knees when his ball is under a pine tree. But, Woods does not build his game on taking risks or playing unusual shots. Woods builds his game on basic fundamentals that can be repeated time and time again. The ideal way to play a round of golf? Drive to the middle of the fairway, hit the ball on the green near the hole, make the putt. Boring, but effective!
This seems to me to be the way with Dimon. Dimon builds his companies based upon strong financial fundamentals. One of his key fundamentals is that you need to build an organization with a “Fortress Balance Sheet.” That is, the balance sheet of the organization you are leading must be able to withstand a worst case scenario in terms of the stress that might be put upon it. Therefore, the management of a bank must, on a regular basis, apply a stress test to the balance sheet to determine whether or not it can withstand things being really bad. Your foundation must be strong to support an aggressive approach to growth.
A second fundamental is that risk management requires strict discipline and oversight. You must be cognizant of what you are getting for the risk you are assuming. An example, attributed to Dimon, is a situation where you are earning an 18% return on equity using a modest amount of leverage. You are told that by increasing the leverage of the company you can increase your return to 21%. Dimon’s point is that an 18% return on equity puts you in the top tier of company performance for the industry and, therefore, it makes no sense to try and stretch to increase your return to the higher level based on financial engineering. It is just not worth it. And, if you are earning only 8% on equity, bumping your performance up to 11% with increased leverage does not make sense either. Relying on financial engineering to get you the higher return when you are under performing is the easy way to go for the higher return. And, how much credit do people give you if you do this? People still know that you are underperforming in your basic business and are just using “tricks” to produce the higher return. Wouldn’t it be better to build a better bank?
Another thing that comes through in the book is the lessons one can learn in doing a turnaround. After Dimon was “asked to resign” by Sandy Weill at Citigroup (C), he ended up at Bank One in Chicago. Bank One was a turnaround situation and, finally, Dimon was “on top”. It was not the first time that he was involved in a turnaround or in a restructuring, but this one was all his.
When one does a turnaround, one really comes to understand how necessary it is to “tell the truth” and not lie to yourself about how “good” things are. I have led two bank turnarounds and been a part of the leadership of a third, and one of the major things you learn in such situations is how much the old management “kidded” itself or “kidded” others about the condition the bank was in. Hiding things, from yourself or from others, means that you really don’t have to deal with the problem. If assets have a problem, you need to admit it. The faster you deal with a problem the better it is for your organization because acting quickly on problems saves you from having to deal with the problem at a later date when it has become much larger. This is why I am so much in favor of “mark to market” accounting for it forces bank managements to deal with problems.
Dimon learned this lesson in his work with Weill and applied it very effectively when he got to Bank One. This knowledge was also applied to the merging of JPMorgan Chase with Bank One. A strong institution is one in which the people who work there tell each other the truth and get at problems as they are arising, and not after the problems have been around for awhile. Troubled institutions, in my mind, are ones in which people do not have a great respect for the truth.
One of the ways a leader can signal to those inside the organization that the truth needs to be told is to tell “the truth” to those outside the organization. Dimon subscribes to this approach in that he and the organization must be open and transparent to the investment community. If there is bad news about charge offs or about underperforming loans, then get the information out. To Dimon, full and timely disclosure is the name of the game. In my own experience the “investment community” must be educated in an effort like this for it is not what they expect. Dimon has acted in this way in the past and the financial community now expects it from him. This is good in itself, but more importantly, it re-enforces the overall culture of the bank: if the truth is going to be told to the investment community in a timely manner, shouldn’t the truth be forthcoming in a timely manner within the organization?
These are good fundamentals and Jamie Dimon seems to live by them. So far, his career has been one of almost continuous upward success. It is encouraging to see a person live and act with strong principles and perform at the highest level. In this respect, the story Ms. Crisafulli tells is a valuable one.
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This article has 10 comments:
All you have to do is look at JP Morgan's Balance Sheet. With a (miraculously rising?) current ratio of 1.08 and an indiscernible mix of debt, I don't trust Dimon and Co. at all.
The next wave of credit problems is coming, and without the consistent and directed strategical planning of our money masters, JPM wouldn't survive the next wave - Along with every other highly leveraged megabank.
What strikes me is that this is the description of somebody whose entire career was devoted to the build up of C and JPM, which are at the root cause of the current crisis, one of he largest failures in financial history, Nevertheless, somebody found time to write a eulogy to the individual and SA devotes a whole article to praise the book...
So, let's see. James Dimon, according to Crisafulli, is the guy who has had key roles at AmeEx, Citbank, and now JP Morgan, and is:
- a great leader
- good with numbers
- risk averse
- pursues a culture of honesty and transparency
- tackles problems early.
So, what went wrong?
If Dimon has even half the qualities attributed to him, then there are five possible reasons why he (and the other Wall St tycoons) failed so drastically:
(a) the crisis was unforseeable
(b) it's all a plot
(c) bounded rationality: he got distracted by all the CEO hoop-la, trusted Greenspan et al, and took his eyes off the core issues
(d) competitive pressures left no alternative but to dance to the music
(e) moral hazard: we're heading over the cliff but the government wants us to keep pumping this garbage and will rescue us; meantime let's make $$$.
We know (a) isn't true and I don't believe (b). Personally, I suspect a mixture of (c), (d), and (e).
And who was Paulson's right hand man in the Bear takedown, making sure he ground those sob's into the ground with his $2 a share bid that Treasury and the FED were all to pleased to take? Of course, no harm no foul for Paulson, former CEO of GS, he had two swell partners in Jamie and poor naive Ken Lewis, and now JPM and GS basically own the markets. What a surprise. And how's that working out for the rest of us?
On a related note, I tend to tune out criticisms of articles or books that start, "I haven't read it, but...".
He took the smart decision to cut back on certain profitable business areas, maybe because he felt he owned the downside, but had inherited the upside, but this proved correct. The other thing he did was make the risk departments front and centre - they would make the decision rather than rubber stamp the ego fueled deals of the big swinging dicks.
The thing I find most refreshing about the man is he speaks plainly, rather than the pseudo-babble that comes out of the mouths of most CEOs, which we have come to realize is because they do not really understand what they are talking about. He wants management that manages the business rather than manages their own compensation, which seems to be what most of the senior figures at places like ML, Lehmann, Bear etc did. How far forward has he taken JPM? I am not sure that is a valid question given the nature of the crisis, but the firm is basically in the same place as before - it is strong and stable and he does understand how the business will be affected if employment deteriorates, real estate continues to worsen. Too many other bank CEOs simply relied upon a mathematical model (which they didn't understand) that said they were ok in 99% of all situations, he wanted to make sure people knew what do to if we entered the 1%, which we did.
As a final point, I would say that good leaders are ones who learn from their mistakes, rather than dismiss these things are unknowable. Dimon will admit he made some mistakes earlier in his career, and he was honest enough to properly analyse them and therefore, he would question if things seemed to good to be true.
en.wikipedia.org/wiki/...
On Jul 11 02:50 AM MMMPARSLEY1 wrote:
> I find this article chafes my spirit rather uncomfortably.
>
> All you have to do is look at JP Morgan's Balance Sheet. With a (miraculously
> rising?) current ratio of 1.08 and an indiscernible mix of debt,
> I don't trust Dimon and Co. at all.
>
> The next wave of credit problems is coming, and without the consistent
> and directed strategical planning of our money masters, JPM wouldn't
> survive the next wave - Along with every other highly leveraged megabank.