I have the honor to serve as the dean of the school of business. 2020 marks 100 years of purpose driven in education since our inception we believe in the power of partnerships to inform and change and i would very much like to thank the center for Global Security analysis. And survived n and the latest book j. P. Morgans fall and revival how the wave of consolidation changed americas premier bank. Im proud to say j. P. Morgan is the largest employer of the schools graduates and i know many of them are on today. A few ground rules first president and ceo of the museum of American Finance will introduce Nicholas Sergeant and th the fall and revival following the discussion david and i will facilitate audience questions and ask that you type your questions in the q and a section and the speaker will do the best to answer the questions. As a participant. They will be notified by the end of the week and before i turn over to david to introduce, i want to take a moment to remind everyone the school and museum of American Finance rely on your philanthropy for support, and i ask that you consider making a gift to both of the organizations. With that said, imoing to turn it over to david. It is great to be back with our friends as well as with the cfa. Nick sergeant has been living the history of the market since the 1970s when he started out at the u. S. Treasury and San Francisco Federal Reserve Salomon Brothers and j. P. Morgan private bank. Bank. From 2003 until recently he was the cio of western and southern and Port Washington advisors where he served as the chief economist. His background he received both his masters and his phd in economics from stanford. Hes written extensively on International Financial markets and had a front row seat to the many decades of changes that have happened in the banks and markets. We will hear about that as he is interviewed by the anger and executive producer now in its 17th year. Congratulations on that. Its a program that is seen nationwide and the pioneer in the business. Recognized with many accolades including the first ever Lifetime Achievement award and that was from the roundtable and money magazine accolades. Forget all that because my favorite accolade is that she is a valued and trusted member of the board of trustees with American Finance. Its my pleasure to turn it over. Thanks, david. That is my favorite honor as well and im thrilled to be here. Nick has written a terrific book j. P. Morgans fall and revival and i love the fact that its a fall and revival. It follows up and picks up on the classic so it is a muchneeded history. And im delighted to have you here so thank you so much for joining us. Thank you, and i appreciate what the museum of American Finance and the school are doing sponsoring. Over to you. Let me add a little bit to what david said in the introduction because you have had top economic and strategy positions from some major wall street firms as you noted. Before the merger and also another between 1995 and 2003. I want to ask you what compelled you to write this book. Why is the fall and revival of j. P. Morgan a story that needs to be told . The way i think of it the first stage of the journey is when i decided after 25 years on wall street to do something different. [inaudible] but they are completely different Corporate Cultures and what struck me over that 25 year stretch as morgan entered the securities world and other Investment Banks entered the world is the Corporate Cultures started to blend. The secretary at morgan when i went to the headquarters it just changed that much. They may be right about how the financial culture mashed. My former boss i shared it, also an author and said i like the idea but its too complex. Its got to be about more. I said thank you. We are now in the summer of 2018 and im with a reunion of former colleagues to celebrate the 70th birthday. You would have thought we just had a conversation the previous day or something. I hadnt seen some of these people in decades. Lets talk about the good old days at morgan and everybodys delighted under jp diamond, j. P. Morgan chase, but still you couldnt tell if only we didnt lose our independence and so what that did i realize i work at the firm and really didnt understand what happened so i spoke with colleagues but i also started doing research on the plans because i was away for 11 years and it went from being a bank to a combined bank and Investment Bank. Let me stop you there because when you talk about being with the alarm and how fond everyone who worked at the old morgan was of the culture lets go back to what j. P. Morgan represented. They were critical to the financial solvency of the country. They bailed out the u. S. Government and new york stock exchange. Its like they bailed out the world and various panics, one in zero five and one in 2007. That was chronicled in the book. But what was j. P. Morgans role when you got there the first time in 1978. What did it represent in finance when you got there in 78 . A Bank Examiner one time told me he said if anything goes wrong in the financial system, the fed places to calls. The first is to j. P. Morgans ceo and the second is citibank. So that had an impact on me. Who was in trouble, new york city. Who was leading the charge on getting funding from new york city, Pat Patterson the chair man and a ceo who served in that capacity. So if you say what fascinated me im going to work for a bank coming to the assistance of the Financial Institutions and the government. And the culture again. When i think of j. P. Morgan, im thinking the son of greek immigrants, it was a different environment it was rock solid financially, true fiduciary. They put the interest of the client first, the premier bank or the Bluechip Companies and also trusted advisors to wealthy families. Thats what i think about it as. But theres another dimension to it that you were just describing. Its described as a special place. The bankers to the government to the elite and the branches around new york city. So, that was the history. What i found on the first day you were given a history of the j. P. Morgan and the first thing you learn is the first classed business in a firstclass way and again that was important to me. I want to make sure that im in an institution with high standards of integrity. A. I might add if you look at j. P. Morgan chase website today there is a tremendous amount. Theres a lot about the history of j. P. Morgan going back as well and they have a different motto but its close. So, talk about again, the developing country crisis. There was an iconic leader who wanted to go international. One of the reasons im sure you went there to begin with, but what needed to change or what was changing when you got there . First of all, two things. Even before i arrived on the scene and the bank had offices in paris or london going back to the time of the founding. But in the 70s when we had the first oil shock, all of a sudden you had many developing countries especially latin america that were running deficits on their International Grades and you have been the money center banks, morgan, city, chase, chemical, demand for loans in the u. S. They had a problem in the london office. They wanted the leader to be global so the long story is the president and his colleague who come from humble roots like me but with Horatio Alger eventually becomes the president s successor, they were instrumental in turning morgan into the Foreign Exchange and the like and in the early 80s we had the second shock when eran, when we have the invasion and all of a sudden they continue. When we made it through the first crisis, so it is a long story to cut through the chase. Morgan was going along with everybody else. I still recall. Lets go on a little vacation, cape cod. All of a sudden i read mexico had a foreignexchange reserve and argentina. I came back over labor day. We were supposed to be away a few weeks. Came back and the direct quote is ive never seen dennis so scared in all my life. What do you mean . He knows that the bank has more loans. So i will stop there. That caught a lot of people by surprise what happened in those developing countries. What did they do something that they wouldnt have done in the older days, did they take risks they normally wouldnt have done, was it a mistake or was that just where the business was and you are in a situation where all of your competitors are putting in money and you earn much more in the way of the spread than you did lending to corporations or anywhere else. So, you have to do it for competitive reasons. So that was the problem. I think that this would come back to haunt the revered leader. But in this situation where you allow the capital to match so it wasnt that you made the loans. That was the mistake. If you can say how did morgan come out of it, morgan did have the strongest Balance Sheet and preston sprung into action and said we are in a crisis. We have got to keep the system together. They came up with a strategy called lending and then the Banking System would go belly up. We have to keep everybody running so basically morgan was calling the shots along with city and then worked with Deutsche Banks ceo to make sure that the european institutions would keep it going. So the bottom line is preston stepped in once again to save the system, morgan emerged in better shape but i would argue that it changed the decisionmaking. He became more tentative as he had to contemplate because the countries and the multinational corporations are tapping into the commercial paper market. The Business Model has to be changed. He knew that. So that was the catalyst that you write about in the book. Explain how the Business Model was changed first of all, again so we are clear i mentioned morgan was a wholesale bank. It basically means it doesnt make consumer loans. Thats called Retail Banking so how does morgan fund itself, basically it locked into the Capital Markets so they were adept at that. But morgan then to the extent that it was to the elite corporations and now theres a situation we can raise money cheaper. The business changed a lot. What he decides to do basically he says we have to reinvent ourselves to make us more valuable to our corporate clients. We have to get into the underwriting business and Investment Banking business. Great. Why dont we just merge with all of the stamping. We have the glasssteagall that says you cant do that. Wasnt repealed until 93. So basically they started building out the securities platform in london and that is how it was gaining the expertise. Point number two, you say they need more customers. Do you want to go retail. No, not going to happen. This firm in its entire history never looked at the market. They had one merger with guaranteed trust companies and it didnt go after guaranteed trust. It said will you take us over. That was their experience. So you are not going to do retail. So, the bottom line was what was unique that i talked about his morgan says we are going to get into securities and Investment Banking and do it from scratch. Let me ask you just to go back to the retail piece, at one point there was an opportunity to buy citibank and in your business you said it was a mistake which would have given them a Retail Business as well. Did you think them not getting into the business was a mistake early on . I would say they should have been opened to it but i argued actually that not taking a major stake given the opportunity and have some managerial oversight this was 1991. The reason i wanted to investigate and say what could we have done differently, we had a chance of getting a major stake in the principal competitors. When i looked into it though what i realized is first of all again, why do they do it and i think that there are two reasons. Morgan simply felt that its management we dont have any experience in this and now we are going to get involved. But the second one is go back to Corporate Culture. Morgan and city were polar opposite cultures and their whole Business Strategy was completely different. So, my conclusion they were worried they might not be able to control what was happening in citibank. So, in the book i tried to argue that it wasnt a mistake but i do argue that they had other opportunities that when they were required to go into Retail Banking and i believe those were the missed opportunities and it could have expanded their presence in the global custody. This could have beefed up morgan for the expansion in the securities. Do you think again in the early days and this would be under blue press and also dennis weatherstone, that they basically sacrificed some Business Opportunities in order to preserve the culture. In the backdrop of all of this was, you know, there was a tremendous amount of change and turmoil in the Banking Industry. There were mergers happening left and right and as you said, they wanted to build businesses from scratch. Was that the reason and was that a mistake . It was going independent. Were those days over . That is the question i struggle with. My take is that they would say that they were worried about the loss of the culture and the rankandfile. So the question is was it an excuse and i have a friend of mine from a private bank i was telling him this and he said to me the problem was the culture. Those of us that grew up in the regime he grew up in a completely different era saying morgan is behind the times. So, i love the culture and still wish today that it could be there. What is changed when you went back there in 1995, how had the culture changed . What were the challenges they faced if we were going to do it from scratch and not acquire outside expertise the first thing is to take the bankers that are good at assessing the credit risk we have to teach them to understand Capital Markets and securities transactions when i was at morgan nobody wanted to leave morgan. All they are doing is getting more money. The first time they are basically saying we are moving in a different direction. Being escorted out the door. Number two this is what you see in all Investment Banks. We want to get more active in the securities. In the old system ahead of j. P. Morgan securities if you give them a differential that isnt going to create a problem, they will start to send 100,000 or whatever and that was again the issue you went from people saying i dont care about money to the guy sitting next to me made of more than i did so those were the three types of challenges. 1995 to 2003 when you were there was the handwriting on the wall that a merger had to happen and of course chase took over acquired. I actually read the article about it dated september 14th. Was the handwriting on the wall . Absolutely not. The indication is how did i end up getting back to morgan after managing their global fund. The elevator door opens and the person that headed asiapacific low and behold keeps telling me we are looking for strategies and i was at that stage i was an optimist. There were little tremors. In the equities they announce that today we will have to announce layoffs. We discussed could this change the Corporate Culture and the answer was possibly. But we really do not have control. So, the thing is that is the first symbol morgan is at the top. Its in the best shape. If you go 1890 to 1994 i would say the competition from city and chase they had been hurt by commercial Real Estate Lending in the early 90s and all of a sudden they are getting through that. So now you start to face more serious competition whether the tech boom is taking place and morgan gets off to a slow start understanding the implication in the policy change so the competition starts to move ahead. If you said to me are you going to be acquired, i wouldnt have said anything maybe by 1999 the discussions are taking place with morgan and Goldman Sachs and theres even an interesting column where morgan says we are not interested in retail. So, what is happening behind the scenes but was there a catalyst for the merger or was it just again this kind of lagging performance and recognition that in order to continue that it needed another Strong Partner and to diversify . I think it was the latter. They are observing and i want to be clear morgan made this managers directors meeting in 2000. Weve come a long way and we are in the red zone. We are close but we havent crossed the goal. You have to be at the top three. If you are at the top five or ten. Underwriting securities. This is where the rankandfile realized we are going to have a new plan thats going to get us into the Wealth Management has never before. For the first time in history to attract customers. Anybody that has been waiting so when this happened i still remember it took about and made the mistake never take a vote so the managing directors said to do you think the strategy is going to work and overwhelmingly said no. Management i think was shocked with the answer. Afterwards those of us in the room we knew we were thinking at what we were not discussing it. Oif by the time of that meeting the rumors were that it was either going to be Deutsche Bank or chase so i was pleased. What is interesting again going back to the New York Times article in september 2000 is chase the acquisition could sharply accelerate that process there was a capability in the securities and Investment Banking and the network was predominantly retail so its the idea where you can do one stop shopping. Its a nice concept. Id never seen it work so could they pull it off. Basically my story is who is the real management team. Go back and i didnt even realize this myself in the bank in new york in 1980 and 1990, [inaudible] they were good at acquisitions. So thats how you create j. P. Morgan chase. So that was the idea. How did it start off it didnt start off well. The merging of the Corporate Cultures. Remember morgan doesnt want to be acquired by anyone. Those morgan people are arrogant [inaudible] theres a little bit of truth to both sides. Cant we all get along. But the bottom line is they thought the acquisitions were easy and the situation. It wasnt until jamie diamond comes in that all of a sudden he turns it around. But im going to give William Harrison who was a ceo at the time some credit as well because he saw the opportunity there. When jamie came in in 2003, things were already progressing. And i will say that they honored him a couple of years ago as an outstanding financial leader which he was, but jamie came in with the acquisition of the bank number one and so explain the revival of how he orchestrated that and how do you describe his success . First of all the thing he had going for him he didnt have that hangup over culture. We prefaced this with weve got to get the job done. So, based on this i would have wanted the opportunity to interview him but i didnt because of covid. What i did read is heres my take and i talked with friends that said here is what makes them different and they said to go back to the first question what was the role of the ceo in the good old days just make sure the bank continues to be a well oiled machine until preston had real issues. Now you go and say with jamie diamond, hes a strategic thinker. He understands what happened in the industry. But hes also very analytic. Morgan never had that combined Strategic Orientation but i honestly think that really in the end, i read the annual report when he took over and basically the message was there is a risk out there and the firm that is going to do the best we have a fortress and strong capabilities some of that was due to the acquisition but my argument is when the financial crisis hit remember they got into deep problems and all of a sudden you had corporations and individual safety. J. P. Morgan chase was the winner of the energy prize. Im looking at the watch and i know that david and donna are going to have some queions so whenever they want to chime in i have lots more to talk about. The questions are fantastic. Feel free to chime in and thank you, make. The fst question comes from tom herman. If you could haventerviewed j. P. Morgan what would you have asked that you could not learn from the Archival Research and i would add what would you have toldim from the researc i is a great question. The people that were in the room, you know, i wouldave said here is my hypothesis and morgan was served by its inrent conseatism and thats why it emerged from the developing country debt crisis. But in some states when you know you have to make changes, were you too conservative. And perhaps in hindsight would you have considered making not the big acquisition but the target. I would like to hear their answer to it rather than the hypothesis. Tom herman is a former colleague of mine at the wall street journal, so thanks for that excellent question. Im looking, Corporate Culture matters a lot to me. Maybe im old fashion and i know that it does to you, but i was looking again at what j. P. Morgan chase was saying. Versus what j. P. Morgan junior said i think that according to your book where the motto came from the firstclass business and that in a firstclass way so what they are saying it j. P. Morgan chase now is similar but this is what they say its a new twist. Never expect to be the best in class every year at every business. But we really compare with our best in class its never quite as perfect. Is that another reason for success in this very imperfect world where you are in a global world and theres tremendous competition and turbulence from the regulated industries and shadow Banking System so you tell me is that a better motto for today . The way that i think about it is the Banking Industry in the 1980s there were 14,500 commercial banks. Where are we at the time of the merger and then to add wells fargo we have six Financial Institutions so goldman and morgan stanley. The six largest institutions hold 60 that raises two questions. Question number one, are they too big to fail. I would argue that is still a challenge. I feel they were both rocksolid and one of the advantages that it has today that is a great question, nick. What is the metric im trying to look at in the compliance violation and the like. Of course it didnt come through the financial crisis with the toxic security loans. But even on this i have to say go back to j. P. Morgan and theres many of the attributes and strong Balance Sheet, capable people. But even the great j. P. Morgan has been cut off with violation its related to trading but they would say you cant be on top of everything. And i understand that. When i joined j. P. Morgan there was nothing more compliant. This goes back to the code of morgan. Basically j. P. Morgan junior said a banker is as good as his trust. If you dont have that, nobody wants to deal with it. They are referencing how if something went wrong in the market the fed would talk more first to j. P. Morgan ceo and that was still happening in 2008. But based on your understanding of history now that the fed has found the magic money tree and is offering the funds directly to the corporate money market funds and maybe even wanting a digital currency, should we still think of j. P. Morgan and its peers as systemically important institutions . Very good question. To me i think its too good points theres too much risk so he believes that its wise and it really is whether its too big to fail or too big to manage. So the counter message in that brookings study we are competing globally. Youve got to have a few. From that perspective [inaudible] but you really have to do a job of regulating the banks. So, i in the end i hate to admit it what is the word in the Public Policy response. But one of the parts of that question as far as does the fed need to call j. P. Morgan chase anymore . The answer to that, of course. I would argue today j. P. Morgan is the most Influential Bank in the world. This was the fall. The one thing i would say actually i had a chip on my shoulder and again i could see who is getting the first call i think it was Goldman Sachs. For the officials that were in the administration. Basically to say when they speculate the future of j. P. Morgan i would say theyve done a marvelous job, but what will it be like after its a Strong Management Team with no way to manage that. I will leave it at that. That to me is the big unknown. David. We have a couple of questions. I will read one on the same topic about going away in 2008 and 2009 that brought back that question should there be a separation between commercial banking and Investment Banking . There is really no Investment Bank left so i think that its become a moot point. What i will say going back to the vision he would talk to him all the time and would be lobbying him to make an exception for us. We are not a retail we are a wholesale, so. If you are a retail bank the retail banks stopped the securities that the investment underwrote and that is if you liked the reason for separation so preston is saying to volker we are just dealing with corporations. It shouldnt apply so that is what the division would have looked like. A question from charlie drive is reflecting on the fact j. P. Morgan was the leader in the investing for Corporate Pension funds in the 70s and had a significant share of the Pension Management business but it was hurt when the nifty 50 grew up. Did they ever recover and was it retraced. Do you know Charlie Dreyfus . A fabulous track record. You really do ask great questions. Here is my take on it. You are absolutely correct that the mistake it made was being too concentrated and then they got hurt. What they actually did they went and said okay we made a mistake there. Brought in a whole manuscript team and became the new gospel of them a modern portfolio and because we all know on the management business we have people, process and performance. They still commanded the defined engine space basically institutional. But they completely missed out on defining the contribution because they didnt have a big mutual compound. So you go and say today theyve built that up and that was one of the things that caused them to lose standing. Im going to close it. Its been a phenomenal hour thank you and sorry that we couldnt get to all of the questions. Again a special thank you to donna and i will be back this thursday at the same time when larry will be in a conversation on his latest book about brookshire hathaway. Thank you everyone. Supposed to be out mid month but you can preorder on amazon. I cant wait to get my hands on a copy. Looking forward to it. Thank you
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