The Exchanges

Q What, okay, two questions. One, what would have happened if it, if it, if it went down? Two, afterwards, did you think it was over?

A No. Uh, so we already had, so that was March. Uh, you know, what happened with Lehman, it was an uncontrolled failure. There was money locked up everywhere. People panicked. They started pulling money up everything. That would have happened with Bayer. So it did stop that, and I would have thought that it gave other people other time to clean up their act. So literally six months later, I would have thought some of these other firms were much, had more liquidity, more capital, and were a little bit more prepared for what might be happening. We already had the stress in the system Was, you saw it already. It was going to mount. It wasn't going to go away. There were tremendous losses coming. Uh, uh, so we bought it and, you know, it probably did help. In hindsight, it didn't stop, you know, it didn't stop the crisis from unfolding. We bought it, and then like a couple, like a week later, we changed to 10 dollars a share. It had been at one 20. And the way to think of it is, it was three hundred billion of assets and a twelve billion dollar book, tangible book value. We wrote off the whole tangible book value in the, when we bought the company to pay, we had to liquidate the loans. We had a hedge stuff. We had severance costs, lawsuit costs, and we basically used all that. So we paid, we paid a billion dollars for a company that had been worth, uh, twenty billion dollars recently…

AI assessment note: “No. Uh, so we already had... what happened with Lehman... That would have happened”

Q So this fortress balance sheet strategy and raising this equity capital and, you know, having additional margin of safety and conservative accounting, in retrospect, it seems like the obvious right strategy for running a large financial institution. Why wasn't everyone else copying it? Have people changed and does everyone else run their banks like this now?

A I think people, the people are more conservative today. I think regulators are more conservative today. But again, I go back to people get involved in aggressive accounting. Uh, they don't look at stressing their own bank in a real way. Uh, you know, you saw people take too much interest rate risk, too much credit exposure, too much optionality risk, and, and, or, or sometimes it's new products. So if you look at the financial services, very often it's the new products that blow up. It takes a while. They haven't been through a cycle. And you, you had that with equities way back in 1929. You had it with options. You had it with Equity derivatives, you had it with mortgages, you had it with Ginny, even Ginny Mays at one point blew up, even though they're government guaranteed.

AI assessment note: “I think people, the people are more conservative today. I think regulators are more conservative”

Q When you got to bank one, I think this is where you first started putting into practice the culture around risk. What was the risk culture at BankOne, and how did you change it?

A Yeah, I, you know, I've always been very risk conscious. And risk conscious does not mean getting rid of risk. It means properly pricing it and understanding the potential outcomes. Uh, uh, and so when I got there, you know, I just started meeting people and going through. I quickly realized that BankOne had more U.S. corporate credit risk Than Citibank did. And they, the way they accounted for it was unbelievably aggressive. And, you know, so they had less capital, less reserves, less this. They, they were calling these things profitable. They were basically losing money. And, you know, loans in a lot of business, you got to be very careful about the credit business. And once I found out that, I kind of panicked a little bit. And I went through every single loan in the books. I marked them all down, put up more reserves, told the board, Uh, about it, and then wanted to earn more revenues per dollar of risk. So, for example, in the middle market business, we had for every loan NII, we had like 80 cents and 20 cents.

AI assessment note: “I marked them all down, put up more reserves, told the board”

Q to start analyzing JP Morgan's financials, you kind of see this one thing that jumps right out at you Which is the efficiency ratio. For every dollar that you make compared to your competitors, you get to keep 15 cents more of that dollar as profit. It's not hard to see how that compounds and how that allows reinvestments, and why is your efficiency ratio so much better than competitors?

A It's, it is literally continuously investing, and gaining business at the margin, and not stopping, and not stop starting, and the thing is, the thing about margins too is that we, we have that margin while investing a lot. It's much easier to have that margin and just, you know, we can cut billions of dollars of marketing out tomorrow. We can stop opening branches and save a billion dollars next year. We could do a lot of things. Your margins will go up. Your growth will go down. Your long-term margins will probably get worse. Uh, so we kind of look right through the cycle, and we look at the actual economics that we do, not the accounting of what we do. Uh, and you know, we have, you know, we've built it over time. You know, we have great people and great products, and there, there's some secret sauce I'm not gonna tell you about. We do Investor Day, and we tell everyone everything, and I'm sitting there watching my, I never do presentations, I'm watching them do the presentations, I'm saying, oh god, we're just giving away too many secrets here, but

AI assessment note: “It's, it is literally continuously investing, and gaining business at the margin”

Q But, but, but, before we get into what you do next, what was the model that you and Sandy built at Citigroup?

A Okay. First of all, I am thrilled to be here. I want to congratulate these guys for building the acquired. It's a, it's a great, intelligent addition to what we need to learn in society, and so, I would say it wasn't quite the model, because if you look at what we did at Commercial Credit Primeric, which then Travelers and Mergers, we were a financial conglomerate. We bought lots of companies and lots of different businesses. We fixed them up, we turned around, we made money, and then we merged it with Citibank, which obviously was a huge bank. And, ah, you know, my view is I was, we should skinny it down and kind of shed the parts that aren't that important to the rest of the company, and keep the things that strategically belong together together. It was one of my small disagreements with Sandy about the future of the company. And so, um, but it was big, it was making a lot of money, it was quite successful at the time, ah, and then I got fired.

AI assessment note: “we were a financial conglomerate. We bought lots of companies and lots of different businesses.”

Q When did you first hear about the Fortress balance sheet?

A I've been talking, I go way back to Primerica. I used to talk about that. You're gonna be able to survive the tough times. Probably the 19 nineties. And like I said, I grew up my father and I went through those market things. I remember how hard it was on people on Wall Street. Uh, but, but the Fortress balance sheet is, That you run a company serving clients well, you have good margins, good liquidity, good capital. I'm as conservative an accountant as you can find. I don't upfront profits when I can spread them over time. And accounting, you know, of course, accountants hate it when I say this, you can drive a truck through accounting rules. And accounting itself, you know, that certain things are considered expenses, but they're good. They're an investment for the future, but they're called an expense. And then revenues, you know, if I make bad loans, they are bad revenues. They will kill you. But for a while, they look pretty good. So it's all those things, margins, clients, you know, in the banking business, the character, the clients you have will reflect on your bank. So the first thing is who are you doing business with? How are you doing business? And, uh, you know, and also making sure your compensation plans aren't paying people for stuff which is stupid or unethical. And, you know, uh, and you always have to review these things to make sure you have them right becau…

AI assessment note: “I go way back to Primerica. I used to talk about that... Probably the 19 nineties.”