Investment banking: Will JPMorgan Europe melt after Winters?


Hamish Risk
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Co-head was glue that held businesses together; Risk management hole needs to be filled

Bill Winters: Employees say he was the glue that held the various businesses together

Bill Winters: Employees say he was the glue that held the various businesses together

Only when his feet hit the pavement outside JPMorgan’s London headquarters on London Wall did the applause from the sixth floor begin to die down. For the many hundreds who had gathered to give him a rousing send-off, Bill Winters was their man.

More crucially however, he was not chief executive Jamie Dimon’s man. In announcing his first official succession plan since becoming chief executive, Dimon removed Winters, his most senior executive outside the US, from the position of co-head of JPMorgan’s investment bank, its most profitable unit.

In his place he appointed Jes Staley, a 30-year Morgan veteran, who had spent the previous nine years managing the firm’s asset management division. Winters’ co-head and close friend Steve Black was appointed to the position of executive chairman of the investment bank, a role that will involve him organizing the transition of Staley into his new role. Black will then leave that position at the end of 2010. The reshuffle means that Staley will become the most likely to succeed Dimon should he step down as chief executive, although he hasn’t given any indication when that will be. Staley is just a year his junior.

Most keen JPMorgan observers surmise that Dimon didn’t view Winters as a viable successor because he didn’t have the breadth of experience required to run the global financial services organization Dimon is reshaping in his own mould. Winters was fundamentally a financial markets and derivatives banker, although he successfully integrated JPMorgan’s 2004 joint venture with the investment bank and stockbroker Cazenove. He was also, and perhaps most importantly, the firm’s most experienced risk manager.

Despite his supposed lack of retail banking experience, those who worked for him said he had strong ambitions to become a bank chief executive at some stage in his career. When media reports earlier this year suggested that he had rebuffed an approach to become chief executive of Royal Bank of Scotland, many concluded he had his eye on the JPMorgan prize. Former employees also say Winters was one of the few senior executives that stood up to Dimon’s sometimes dogmatic and blunt management style. That might have counted against him in the end, although there’s nothing to suggest the two had fallen out.

As the farewell he received would suggest, Winters was a highly respected man manager, and former employees say he understood market risk better than his peers. Based in London for most of his 26-year Morgan career, he had been one of the pioneers of the credit derivatives industry, as part of the now well-publicized "Morgan mafia", a small team of young JPMorgan bankers who developed the use of credit default swaps in the 1990s, and who transformed the way banks used their balance sheets and managed credit risk. Although the credit derivatives experiment turned sour, its significance in modern finance cannot be underestimated, both for good reasons and bad.

Much of that innovation, including at JPMorgan, took place in London, where the bank became a university for the institutions that followed it in building large credit trading franchises over the past decade. Winters built on that when he became co-head of the investment bank in 2004, and further integrated the European business into a full-service investment bank. Employees say he was the glue that held the various businesses together.

Therefore it shouldn’t be surprising that loyalties run deep in London for Winters. Employees recall how, as a large leaving card circulated the trading floor on the day of his departure, some of his staff stapled their business cards to it and signed off with ‘See you soon Bill’. Dimon was quick to allay any concerns in the following weeks, dispatching Staley to London, and then following himself to speak with staff.

To shareholders, though, the Winters story might represent nothing more than a sideshow. JPMorgan continues to make quarterly profits, unlike some of its major rivals, with its most recent quarter beating market expectations, while the stock price has tripled since March. If it rises another 19%, it will be trading at the pre-crisis levels of May 2007. Shareholders might conclude that Dimon has merely exercised good corporate governance. But that would miss a crucial point.

If the banking industry has learnt anything about the financial crisis, it’s the folly of market risk management, which can at best be debilitating and, at worst, catastrophic. It’s hard to know what Winters’ contribution was in veering JPMorgan away from the rocks that scraped and damaged many of its rivals but shareholders should ask if there is a good replacement for him. Dimon’s self-titled "fortress balance sheet" model, which revolves around stable income streams, secure funding and ready access to short-term liquidity, is, he hopes, the best form of risk management. Now all eyes will be on what the ambitious Winters does next. Should he form his own fortress, Dimon could well have a mutiny on his hands.