Winters Shows JPMorgan Path to Safety, Dimon Shows Him the Door

By Elizabeth Hester, Matthew Leising and James Sterngold

Oct. 7 (Bloomberg) -- William Winters told a former colleague in London six months ago that JPMorgan Chase & Co. shunned the structured products and off-balance sheet vehicles that crippled global markets because they didn’t make financial sense.

“I remember him explaining that they’d looked at these for years and couldn’t understand how the economics worked,” said John Fullerton, a JPMorgan executive who was one of six people assigned to untangle derivative trades that led to the demise of Long-Term Capital Management LP in 1998. “Despite the tremendous pressure all around them to do it, they didn’t do it because the math didn’t work.”

JPMorgan endured the financial crisis without a quarterly loss, and now the investment bank previously run by Winters, 48, and co-head Steven Black, 57, is having a record year. Winters’s reward: Getting ousted last week by his boss, Chief Executive Officer Jamie Dimon.

Winters, who has lived in London since 1992, is out of work for the first time since he joined New York-based JPMorgan in 1983. He may not have much trouble landing a new post -- provided banks that must cope with government-imposed pay limits can afford him. He made more than $40 million combined for 2006 and 2007.

“Every CEO is going through that calculus of, ‘Is this guy better than my guy? Is he a good acquisition for us in terms of where we want to go?’” said Charles Murphy, a former Credit Suisse Group AG banker who is now a professor of finance at New York University’s Stern School of Business.

Fielding Phone Calls

Last week, Dimon named James ‘Jes’ Staley, previously head of asset management, as the investment bank’s sole CEO. Black will become the investment bank’s executive chairman until the end of 2010.

It was Black’s indication he wanted to step back from the business and pressure from the board on succession planning that prompted the change, people with knowledge of the discussions said last week. Dimon concluded that he didn’t want Winters to lead it on his own, the people said, speaking anonymously because the talks were private. Staley’s new job signals he’s one of the board’s top picks to succeed Dimon, a person briefed on the management decision said last week.

“Bill’s departure is a clear loss for JPM, and given Morgan’s scale and complexity, it’s not a plus for the stability of the financial system,” Fullerton said. “You’ve got such a complex mix of risk in one institution that it matters who’s there.”

Looking Ahead

Winters has been fielding phone calls from people interested in talking about what he wants to do next, a person familiar with his thinking said. He remains on JPMorgan’s payroll until January, giving him time to consider opportunities, the person said.

His strength is in understanding and managing risk and the more technical side of markets, say people who know him. Adrian “Buzz” Doherty, another ex-JPMorgan colleague, said Winters was early to move to computer-based analysis and used those tools to advise clients on buyouts. He cited KKR & Co.’s $250 million acquisition of a stake in Union Texas Petroleum Holdings in 1985. KKR reaped $1.1 billion over the course of its investment in the company, a spokeswoman said.

“He was very often a step ahead of people who had many more years of experience,” said Doherty, now an executive vice president at private-equity firm Ridgewood Energy Corp. in Ridgewood, New Jersey.

Winters grew up in Greenwich, Connecticut. He studied international relations at Colgate University, graduating from the liberal arts college in Hamilton, New York, in 1983.

Croatian Beer-Bottling

After spending a semester abroad in Croatia, Winters took a year off from school to live there. He worked in a beer-bottling plant and met the Croatian woman who would become his wife.

Winters’s first job at JPMorgan was as a banker to oil and gas companies. Four years later, he joined the swaps department, which worked on developing derivatives related to energy, currency and debt products.

He wasn’t always in top form as he came up in the derivatives unit. Winters stumbled on his first cross-currency foreign exchange deal by reversing what to buy and sell, according to Stephen Sinacore, his colleague at the time.

“He broke into a sweat because he bought dollars instead of selling dollars,” said Sinacore, who left JPMorgan in 1998 and later co-founded investment management firm Atrevida Partners LLC in Rye, New York. “I think he thought he was going to get fired.”

Instead, he became part of a team charged with devising products to sell into the then-fledgling market for credit derivatives.

‘A Sense of Mission’

“There was this sense that we had found this fantastic technology which we really believed in and we wanted to take to every part of the market we could,” Winters said, according to “Fool’s Gold,” the 2009 book by Financial Times journalist Gillian Tett. “There was a sense of mission.”

While JPMorgan avoided the riskiest derivative products, the bank ranked first among U.S. commercial banks with $80 trillion in notional value of over-the-counter derivative contracts at the end of the second quarter, according to the Office of the Comptroller of the Currency. JPMorgan was also first in revenue from derivative and cash trading, with $1.9 billion in the second quarter, the OCC said Sept. 25.

Winters moved to London in 1992 as head of European swaps and added fixed income to his responsibilities when the divisions were merged in 1995. After adding basic rates and currencies globally to his job description in 1997, he was named head of global markets in 1999.

Merger

A year later, after the merger of J.P. Morgan & Co. and Chase Manhattan Corp., Winters was demoted to co-head of the fixed-income department. He shared the job with Don Wilson from Chase Manhattan.

In March 2004, Winters and Black were named co-heads of the investment bank, a move that surprised some JPMorgan bankers because sharing the top job tended to spark distrust and infighting, according to Tett’s book. Winters was also an unusual choice because he preferred to shun the spotlight, unlike Dimon, according to the book.

In one of Winters’s first deals as co-CEO, in November 2004, he forged a joint venture with Cazenove Group Plc, at the time the U.K’s oldest independent stockbroker. The unit, called JPMorgan Cazenove, helped deepen JPMorgan’s client relationships and boost the firm’s European business, bankers said at the time.

JPMorgan Cazenove Holdings has been profitable every year since it began operations in 2005, even as markets crumbled in 2007 and 2008.

Avoiding Risk

Winters also helped JPMorgan avoid structured investment vehicles, the off-balance sheet entities that borrowed money in the asset-backed commercial paper market to buy longer-dated bonds. As rivals piled into the business in the late 1990s, JPMorgan resisted because it couldn’t get the right return to justify putting capital at risk, said a person familiar with the matter.

JPMorgan’s decision meant the firm didn’t have to bail out the funds at the end of 2007, as the market for asset-backed securities dried up. Citigroup Inc. took over seven ailing funds and assumed $58 billion in debt to avoid forced asset sales in December 2007. HSBC Holdings Plc, Societe General SA and WestLB AG all were forced to bail out the so-called SIVs to avert fire sales of assets.

“That took a lot of bravery to stand up in a market that was growing, where people were making money, to step back and say, ‘We’re not going to do that,’” Sinacore said.

Leadership

The leadership of Winters and Black was further tested during JPMorgan’s takeover of ailing investment bank Bear Stearns Cos. in March 2008. The duo and a team of more than 400 people worked around the clock to determine whether the acquisition was even feasible.

JPMorgan decided it could be done only if the Fed assumed $30 billion of Bear Stearns assets, helping create a floor for the market, a person familiar with the deal said. The acquisition added businesses including an equity prime brokerage and tested the integration skills of Black and Winters.

“We’ve done almost the unheard-of on Wall Street, which is have a really good partnership and running a great business for more than five years,” Black said in an interview last week. “I have no doubt that he’ll end up going off and doing something where he ends up running his own show and he’ll have every opportunity to do that given how rare a talent he is.”

Executives close to Winters say he likes living in London and it would take a compelling opportunity for him to return to the U.S. While he’s managed a profitable business that includes complex financial instruments, he lacks experience in areas such as consumer banking or asset management.

“He was never a quitter,” said William Demchak, the senior vice chairman at PNC Financial Services Group Inc. who helped build JPMorgan’s derivatives business with Winters. “He could have walked away a long time ago, but he stuck around to make the bank better.”

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Matthew Leising in New York at mleising@bloomberg.net; James Sterngold in New York at Jsterngold2@bloomberg.net.