Sandy Weill Built the Biggest Bank in the World Twice: Citigroup, the Firing of Jamie Dimon & the Law He Shattered

Steven Weinstock (00:00) Picture a five-star resort in the mountains of West Virginia, the Greenbrier, October 1998. There's a black-tie party going on, and every important executive from the biggest financial company ever created is in that room. They have every reason to celebrate. Just days earlier they closed the largest corporate merger in the history of the world: seventy billion dollars creating a company called Citigroup. These people, on paper, are richer and more powerful than they have ever been in their lives. And on the dance floor, two of the most senior men at that company get into a shoving match. One of them grabs the other, spins him around, and rips a button clean off his jacket. "Don't you ever turn your back on me while I'm talking." The only thing the other guy can think to say is, "You popped my button." The man who did the shoving is named Jamie Dimon. You've heard of him. Today he runs JPMorgan Chase, the most powerful bank in America. And within a few weeks of that night, at a quiet conference center north of New York City, Jamie Dimon is going to be fired by his own mentor, the man who had been like a second father to him for sixteen years, the man who'd helped build this entire empire brick by brick, deal by deal. That man is Sandy Weill. And I want to understand him, because here's the thing about Sandy Weill: he is arguably the greatest dealmaker in the history of American finance. He took a four-man brokerage firm and turned it into the biggest bank in the world. Twice he built an empire from almost nothing. And the same instincts that made him a legend also built a machine so big and so complicated it nearly took down the U.S. economy ten years later. So how does a kid from Brooklyn, whose only brokerage client for weeks was his own mother, end up here? Let's go back. Sandy Weill is born in 1933 in Bensonhurst, Brooklyn, to a Polish Jewish immigrant family. His dad, Max, runs a dressmaking business. Money's up and down, the marriage is rocky. At one point they ship young Sandy off to a military academy up the Hudson. He's short, a little chubby, gets picked on, not the obvious profile of a future master of the universe. He goes to Cornell, wants to be an Air Force pilot. That doesn't pan out, and in 1955, fresh out of school, newly married to a woman named Joan, who's going to be his partner for the next seventy years, he takes the lowliest job on Wall Street: a runner at Bear Stearns, thirty-five dollars a week, literally running paper documents between buildings in lower Manhattan. But he's watching. He watches the brokers, and he thinks, I can do that. He studies at night, he gets his license, and here's the first thing that tells you who Sandy Weill really is. Most brokers succeed by being backslappers, cold calling, working the phones. Sandy hated that. He liked reading companies' financial filings, digging into the numbers. So he's a terrible salesman at first. For weeks his only client is his mother, Etta. His only other client shows up because his wife Joan talks her ex-boyfriend into opening an account. I love that detail, because it tells you the guy who'd become the ultimate wheeler-dealer started out as an analyst who couldn't close. In 1960, Sandy and three friends pool about two hundred thousand dollars and start their own firm: Carter, Berlind, Potoma and Weill. Tiny, a research boutique. Wall Street half-mockingly calls them the Jewish DLJ. Now watch what happens over the next twenty years, because this is the pattern. The whole rest of the story is this pattern over and over, getting bigger each time. In 1967 they buy a small, respected investment firm that's in trouble. They fold it in, cut the excess, keep the good people. Then in 1970 they do something that makes the whole street sit up. There's an old prestigious brokerage called Hayden Stone, founded in 1892. Huge. It had done a hundred and thirteen million dollars in business in 1968, five times what it did in 1960. Booming. But it had a problem, and to understand the problem, you have to understand something about Wall Street in the late 1960s. The business grew so fast that the back office, the boring plumbing that actually settles trades and keeps track of who owns what, completely broke down. Firms were literally drowning in paperwork. Trades weren't clearing. It was called the back office crisis, and it killed a lot of firms. Hayden Stone was one of the dying. Now here's the beautiful part. Sandy's firm at that point had maybe eleven million dollars in revenue. Hayden Stone had done 113 million. This is a minnow looking at a whale. Everybody thought Sandy was nuts, but Sandy understood one thing better than almost anyone alive. He understood the back office, the boring plumbing. That was his obsession. He knew that Hayden Stone wasn't a bad business. It was a good business with a fixable operational problem. So he bought it from the creditors who by then basically controlled it, and he fixed the plumbing. Overnight, a nobody firm had a famous name: 28 branches, 500 brokers, 50,000 customer accounts. And that is the Sandy Weill playbook, fully formed in 1970. Find a good business with a fixable problem that scares everyone else off. Buy it cheap. Rip out the wasteful costs. Keep the moneymakers. Now you're bigger. Use bigger to buy the next one. And he just runs it, again and again. He buys a firm called Shearson in 1974 and does something clever: Shearson's a classier name than his, so he takes their name. Then in 1979 he buys Loeb Rhoades and the whole thing becomes Shearson Loeb Rhoades, the second-biggest brokerage in America, behind only Merrill Lynch. In twenty years he had gone from four guys and $200,000 to a Wall Street giant, entirely by buying troubled companies and stitching them together. So it's 1981, Sandy's on top, and he does something that surprises people. He sells. He sells the whole thing to American Express for about $930 million in stock. Personally, he pockets around $30 million. Why sell when you're winning? Because Sandy could see the future, and the future was scale. He figured a wave of consolidation was coming, and that even a big brokerage would need the balance sheet of a giant behind it. American Express was a giant. The card, the travelers' checks, this trusted global brand. And there was something else: Sandy became president of American Express. Number two, and in the back of his mind he thought, maybe someday number one. It didn't happen, and this is the first great turning point of his life. American Express was run by a man named James Robinson III. Think old money, smooth, Atlanta banking aristocracy. And then there's Sandy: blunt, emotional, cigar-chomping, son of a Brooklyn dressmaker. The press called them an odd couple, and they were. Robinson never gave Sandy real power, and Sandy got restless. He tried to buy one of Amex's own troubled units, an insurance company called Fireman's Fund, basically to have something of his own to run again. They said no. And in 1985, at fifty-two years old, one of the most successful men on Wall Street quit with no company, no title, and no obvious next act. He also walked away with a young assistant who'd been at his side since 1982, a guy his own father had introduced him to, a guy whose mom had handed Sandy her son's grad school thesis, a thesis about one of Sandy's own mergers. Sandy read it, was impressed, and hired the kid. And Sandy loved to tell the story: after a week he was telling me how he could do things better. That kid was Jamie Dimon. Remember that name. Here's what I find genuinely remarkable about Sandy Weill. He's fifty-two, he's rich, he could play golf for the rest of his life. Instead, he goes hunting for a company, any company, that he can use to start the whole machine over again. And in 1986 he finds it, and it's almost insultingly humble: a consumer lender in Baltimore called Commercial Credit. It made small loans to regular people. Its parent company, a computer maker called Control Data, was a mess and wanted to dump it. The business had wandered into all kinds of dumb stuff, leasing in Israel, loans in Latin America, and was losing its way. But underneath the junk, the core business, lending to ordinary Americans, actually made money. Same as Hayden Stone: a good business with a fixable problem. So Sandy takes over, and here's the part I want real estate people to hear. He puts in seven million dollars of his own money, his own cash, and Jamie Dimon, 30 years old, becomes the chief financial officer and scrapes together four hundred twenty-five thousand dollars of his own, which, as Dimon put it, "was a lot more money than I had, I'll tell you that." That's alignment. When the boss and the CFO have their own net worth riding on it, they don't manage like employees, they manage like owners. And that was Sandy's religion. He paid his executives less in cash and loaded them up with stock, and then made them promise not to sell it. Inside the company, they literally called it the Blood Oath. Then he does the thing he always does. He cuts. He exits the Israeli leasing, the Latin American loans, all the diversions. He and Dimon move down to Baltimore, work like dogs, strip out the waste, and within about a year they roughly triple the operating profits. The Baltimore castoff nobody wanted was now a cash machine and a launch pad. And now the machine really goes. Watch how fast this happens. 1988: Commercial Credit buys a bigger company, Primerica, for about one point five billion dollars. Why? Primerica owned a brokerage called Smith Barney, and Smith Barney was Sandy's ticket back into the business he loved. He's back on Wall Street. 1992 and 1993: there's a famous old insurance company called Travelers, you know, the red umbrella logo. Travelers is in deep trouble. Why? Two reasons that should sound familiar to any real estate investor. One, it had made a pile of bad commercial real estate investments that went sour. And two, Hurricane Andrew had just smashed into Florida in 1992 and cost the insurance industry something like fifteen and a half billion dollars, the worst disaster the country had seen up to that point. Travelers is hurting. So Sandy does what Sandy does. He buys the wreck. First a chunk, then the whole thing, for around four billion dollars. He immediately sells off the scary part, the health insurance business, and keeps the rest. And he keeps that red umbrella, because Sandy understood brands. He renames the whole empire Travelers Group. 1993, same year, this one's personal. Remember American Express, the company that froze him out? Well, Amex was now losing money hand over fist in Shearson, the very brokerage Sandy had built and sold them. They want out. So Sandy buys his own company back, over coffee in the Amex president's apartment, for about one billion dollars. He got to buy back his baby from the people who'd pushed him aside, at their moment of weakness. He later said that deal changed everything. I bet it did. In 1997 he buys Salomon Brothers, the legendary bond house, for about nine billion dollars. Salomon was strong exactly where Sandy's Smith Barney was weak: bonds, investment banking, global reach. They fit together like puzzle pieces. So now step back and look at what Sandy Weill has assembled: consumer lending, a giant insurance company, one of the great brokerages, a powerhouse investment bank, all under one roof. He is once again one of the most powerful men in American finance. And he's still not done. Early 1998, Sandy gets about twenty of his top people in a room and asks the question he always asks: who do we buy next? And somebody says Citicorp. Citibank was the biggest bank in America, global in one hundred countries, the biggest credit card issuer on Earth. And Sandy later wrote that when the name came up, the whole room lit up. Citicorp, he said, stuck out like a strategic home run. So he goes to Citicorp's boss, a brilliant, cerebral guy named John Reed, about as different from Sandy as you can get. And one spring evening they have dinner at a Travelers conference center in a little town called Armonk, and they sketch out a merger. Not a takeover, a merger of equals: fifty-fifty, both men co-CEO, each with a veto over the other. They even gave the companies secret code names in the board documents. Travelers was Jupiter. Citicorp was Saturn. A Sunday morning phone call seals it, and on April 6, 1998, they announced it: a seventy billion dollar merger, the biggest in history. They call it Citigroup. Citi from Citicorp, Group from Travelers Group, red umbrella on top. There was just one small problem. It was illegal. Let me explain, because this is important and it's actually simple. Back in 1933, after the Great Crash and the Depression, Congress passed a law called the Glass-Steagall Act. The idea was to keep the risky stuff away from the safe stuff. On one side, boring commercial banking: taking your deposits, making loans. On the other, risky securities and investment banking. And insurance was its own separate world. The law said one company couldn't do all three, because if the casino side blows up, you don't want it taking down the bank that's holding grandma's savings. Well, Citigroup was a bank, a securities firm, and an insurance company, all in one. That was exactly, precisely what Glass-Steagall didn't allow. So how did Sandy do a deal that broke the law? He bet that he could get the law changed. He got a temporary two-year OK from the Federal Reserve, and then he and Reed and the whole industry lobbied Congress hard. And in November 1999, Congress passed, and President Clinton signed, a new law that repealed the old barriers. Citigroup was now legal. Sandy Weill had more or less single-handedly ended a law that had stood for sixty-six years. He was so proud he reportedly hung a plaque in his office calling himself the man who shattered Glass-Steagall. So we're back to where we started, the top of the world, and weeks after the triumph, the Dimon firing. What happened? Part of it was two proud men under the unbelievable stress of merging two giant companies, jockeying over who'd run what. Part of it was that famous shoving match at the Greenbrier. And part of it, the part everyone whispers about, involves Sandy's daughter, Jessica, who worked at the company. Sandy wanted Jamie to promote her. Jamie didn't think that was the right call, and he didn't. She eventually left, and you do not get between Sandy Weill and his family. So a few weeks after the merger closed, Sandy and John Reed sit Jamie down at Armonk and ask him to resign. And Dimon, who everyone assumed would run this company someday, just says, "Okay." Sandy asks if he wants to know why. And Dimon says, "Nope, I'm sure you thought it through." He knew it was already decided. He goes home and tells his three young daughters he was fired, and the reactions are so human it hurts. The youngest asks, "Are we going to be homeless?" The middle one asks, "Can I still go to college?" And the oldest one, hearing Dad doesn't need it anymore, asks, "Can I have your cell phone?" Dimon later said the whole thing "hit my net worth, not my self-worth." Here's the kicker. Jamie Dimon goes off, runs a bank in Chicago, sells it to JPMorgan, and by 2006 he's running JPMorgan Chase. And he steers it through the 2008 financial crisis better than anyone on Wall Street, becoming the most respected banker in America. He ends up eclipsing the very empire Sandy built. And years later, Sandy admits it: firing Jamie was one of his biggest mistakes. "I wish Jamie and I had been able to work out our issues. It was a very good relationship." The problem, he said, was simple: "Jamie thought he was ready to run the company, and he probably was, but the only problem was I wasn't ready to retire." Because Sandy didn't like to let go. He fought a two-year power struggle with his co-CEO John Reed, and in 2000 the board made them pick one. Sandy, who sat on every important board and foundation in New York, had the votes. Every single director sided with him. Reed was out. Sandy stood alone at the top. But even Sandy had to leave eventually. In 2003 he handed the CEO job to a loyal lawyer named Chuck Prince. And in 2006 he retired as chairman. Standing ovations, a big banner reading "Thank you, Sandy." A real hero's exit. And then came the reckoning. Under Prince, Citigroup dove headfirst into subprime mortgages and those complicated mortgage securities. Prince famously said, "As long as the music's playing, you've got to get up and dance." Well, the music stopped. In 2008, Citigroup stock collapsed from around fifty-seven dollars to under four dollars, and the U.S. government had to lend forty-five billion dollars of taxpayer money, and guarantees on three hundred billion dollars more, to keep the company alive. The bank that Sandy built had become the ultimate too big to fail. Now, and this is important, to be fair: the specific bets that blew up happened after Sandy left management. He didn't make those subprime trades. But he built the machine. He built the thing that got so big and so complicated that maybe nobody safely could run it. And notice what caused the near-death: real estate. Mortgage risk. The same thing that had crippled Travelers, which was the wreck Sandy bought cheap in the first place. Real estate created his opportunities, and real estate nearly destroyed his creation. And then the twist. In July 2012, Sandy Weill, the man who shattered Glass-Steagall, the man with the plaque, goes on live television and says the big banks should be broken up. Split the risky stuff from the safe stuff. Nothing should be too big to fail. "There should be no such thing as off balance sheet." The architect, at the end, questioning the building. So who was Sandy Weill? Great businessman or dangerous empire builder? I think the honest answer is he was both, and it was the exact same person. The relentless drive to acquire, the worship of scale, the cost-cutting discipline, the faith that bigger is always better, those instincts made him one of the greatest wealth creators in history and built a machine that needed a taxpayer rescue. You can't separate them. They're the same guy. But here's why his story is gold for anybody building anything, especially in real estate. Because strip away the Wall Street jargon, and Sandy Weill ran a playbook you can run on apartment buildings. One, buy the distressed asset with good bones. Sandy never bought healthy, expensive companies. He bought good businesses with fixable problems that scared everyone else off. The mismanaged building in the great location, that's a Sandy Weill deal. Two, costs are where you make your money. Sandy's genius wasn't glamorous. It was the back office. Buy the property management company, merge the operations, kill the duplicate overhead, get bigger so your cost per unit drops. That is economies of scale, and it's the whole game. Three, use each deal as the platform for the next one. Improve the asset, raise its value, refinance or recapitalize, and use that to fund the next acquisition. Sandy did it with balance sheets; you can do it with buildings. One deal creates the platform for the next. That's how four guys with two hundred thousand dollars become the biggest bank in the world. Four, make your operators owners. The Blood Oath. When the people running your properties have real skin in the game, they stop acting like employees. Five, buy when others are forced to sell. Sandy bought in downturns, from creditors, from desperate parent companies, after hurricanes. The distressed seller is the disciplined buyer's best friend. And six, the warning, the one Sandy learned the hard way and admitted at the end: respect the balance sheet. The roll-up that made you can unmake you if the leverage and the hidden risks get bigger than the equity holding it all up. Complexity is a risk. Size is a risk. Too big to fail is just another way of saying too big to control. A kid from Brooklyn, whose only client was his mother, built the biggest financial company on Earth twice by buying what nobody else wanted and fixing it. That's the inspiring part. And he built it so big that it nearly broke. That's the cautionary part. Both are true. And if you can hold both of those in your head at the same time, you've understood Sandy Weill, and you've learned something you can use on your very next deal. I'm Steven Weinstock, this is The Wealth Clock. I'll see you next time.