How Chase fuelled a feud at JPMorgan

The success of Chase’s past merger ventures seemed to bode well for its link-up with JP Morgan. But those deals of the early 1990s had brought together commercial banks and didn’t have to reckon with integrating culturally alien investment bankers. On the execution front, the merger has proved messy, with blood-letting among JP Morganites in New York being matched by Chase losses in Europe. Beyond this – in itself enough to worry shareholders – there are concerns that underperforming JP Morgan was not the ideal medium for Chase’s equity market aspirations and that the deal was ill-timed, damaging Chase’s well-deserved reputation for clever risk-management skills in choppy markets.

Sandy Warner and Bill Harrison

Walking along Wall Street, Clayton Rose bumped into a former colleague. It was the day in September last year that Chase and JP Morgan announced their $35 billion merger. Rose, JP Morgan's global investment banking head, was offered congratulations. "Well, we'll see," was all he could muster in reply.
He wasn't alone in his doubts. Many of his colleagues shared this latent resentment at being taken over by what they saw as the commercial bankers from Chase.
A year later, most of the senior executives from the old JP are no longer with the bank. Former CEO Sandy Warner, head of investment banking Clayton Rose and head of asset management Ramon De Oliveira are just three examples, and only two of Morgan's executives sit on the combined bank's board.
Some of the biggest revenue producers have also left, and the two businesses Chase lacked and allegedly bought Morgan for - equities and M&A - are both run by Chase executives.
Two separate factors have helped to obscure these post-merger developments. First, this has been the year where a big balance sheet and a big presence in loans and bonds has been crucial to bank profitability, and JPMorgan Chase has a formidable presence across the board.
It now stands second in underwriting US investment-grade debt, is a major market maker and trader, has one of the largest plain-vanilla derivatives flow businesses, is making steady progress in high-yield debt, and has a solid presence in asset-backed securities. Chase still has its formidable loans business, which is based on the principle of reducing risk by distributing at least 90% of its deals to other players, whether banks or investors, and from JP Morgan came one of the top equity derivatives businesses on the street, a big money-spinner for the firm run by Morganite John Corrie.
The increasingly dismal state of the markets over the past 18 months is the second factor, and has wrecked several assumptions about the merger, not least that it would be a boon to earnings. "One plus one equals much more than two in revenues," Chase CEO Bill Harrison said at the time of the merger. "This is about revenue growth, not cost cutting."
The downturn has changed all that. At the time of the merger the bank expected to be able to cut $1.5 billion over two to three years, which in terms of employees meant roughly 3,000 people. To date, the bank has already cut $2.4 billion on costs, and 6,000 investment-banking staff, plus 1,500 from asset management and private banking, have already been fired or left the company.
Two fiefdoms emerge
Compared with Merrill Lynch's plan announced last month to cut up to 10,000 jobs, the redundancies don't look that bad. But it has exacerbated merger tensions. Two fiefdoms have emerged. In the US, Chase bankers are firmly in command, whereas JPMorgan has won out in the European businesses run from London.
In New York, some of those involved perceive a clear preference for Chase personnel. "From my perspective," says a former New York-based JP Morgan banker who left earlier this year, "if a Chase guy deserved to be in charge of a business, he was put in charge. But if a JPMorgan banker was the best choice, it would become a co-head situation with a Chase manager."

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Some of the conflicts were always going to be straight-up fights for supremacy between teams, such as in emerging markets. Miguel Guttierez, JPMorgan's co-head of credit and rates markets for emerging markets, resigned in September to leave Chase live wire Jorge Jasson in sole command. At the same time, Rachel Hines, JP Morgan's head of debt origination for Latin America, resigned. She had hoped for a larger role, possibly as global head of emerging markets capital markets - a job that went to Chase's Moctar Fall.
An area in the US that particularly highlights the gulf between Chase and JP Morgan is fixed-income derivatives. Towards the end of 1998 there was a meeting at JP Morgan's London headquarters on Victoria Embankment. Most of the heads of business of JP Morgan's fixed-income division were present, with the rest taking part by phone. It was a regular occurrence, a chance for the team to catch up on developments and throw new ideas around. Overall head Bill Winters was chairing the meeting, and started to ask his staff to suggest ways in which they could expand their business.
One of the first to be asked was the head of derivatives trading, who was one of those joining by phone from his office in New York. His response was simple. "We agree with whatever Rob says," referring to Robert Rossman, then head of the fixed-income derivatives marketing team.
It had been five years since JP Morgan started to build an integrated derivatives team, and took until 1998 to get to the point where the traders and salesmen were of one mind, and where the traders were willing to take the lead from those who spoke to clients. And it was unique. That explained why JP Morgan had the best corporate derivatives solutions group on the street, and why the division was one of the most profitable, if not the most profitable, in the bank.
So Winters turned to Rossman, who had flown over from New York to be at the meeting, for his ideas. "If we really want to expand our business, we should buy Chase," he said, according to those familiar with the conversation. "We've been through our client list."
In theory what was proposed made a great fit: not only could Chase offer a large client base - roughly 5,000 corporates - it also didn't have much overlap with JP Morgan. Chase concentrated on plain-vanilla derivatives, and on flow business as one of the largest inter-bank players. In fact, analysts and investors recall Chase executives' aversion to more exotic products, although Don Layton, co-CEO of the investment bank, claimed at the time of the merger that "it's not that we avoided these businesses. We built off our strengths, and these just happened to be in the flow business."
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