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The Not-So-Secret Reason Wells Fargo and JPMorgan Chase Obliterated Bank of America and Citigroup

By John Maxfield - Feb 9, 2015 at 7:52AM

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The orderly transition of leadership at Wells Fargo and JPMorgan Chase has allowed them to surge ahead of Bank of America and Citigroup.

Great banks have a number of things in common, but above all, they recognize the importance of an orderly succession of the chief executive officer, as well as the process of grooming the next generation of leaders. No bank exemplifies the power of this better than Wells Fargo (WFC 0.49%), which has acquired the reputation for not only cultivating a deep and well-groomed bench of future leaders for itself, but also for filling senior executive positions at its competitors.

In the mid-1980s, virtually the entire management team of Bank of America (BAC 1.28%), including its CEO, was recruited from Wells Fargo after irresponsible growth and lax credit policies led Bank of America to the brink of failure. It was a temporary tonic, as Bank of America was later swallowed by North Carolina-based NationsBank, which then launched the institution on the overly acquisitive path, which culminated in the bank's second brush with death in 2008.

More lasting was Wells Fargo's influence on arguably the best big bank in America, US Bancorp (USB 0.49%), formed by the acquisition of Minneapolis-based US Bancorp by Milwaukee-based Firstar fifteen years ago. At the time, the two banks were run by brothers Jerry and John Grundhofer, both of whom worked at Wells Fargo when legendary CEO Carl Reichardt held the reins. It was Reichardt who instilled the now-notorious "Wells' way," consisting of low expenses and prudent risk management, which continues to fuel the remarkable success of both institutions today.

Why did the "Wells' way" take hold at US Bancorp but not at Bank of America? The answer is that both Wells Fargo and US Bancorp have always emphasized the orderly succession of their leaders. By doing so, they've allowed for a seamless transmission of culture from one generation to the next.

Bank of America's history couldn't be more dissimilar. After the NationsBank "merger," Bank of America's CEO succumbed to a power struggle with NationsBank's CEO Hugh McColl, who went on to instill the destructive acquisitions-obsessed culture that pushed Bank of America to the brink in 2008.

And the power struggles at Bank of America didn't stop there. In the depths of the financial crisis, a contingent of Boston-based directors inherited via Bank of America's 2005 merger with FleetBoston Financial forced McColl's successor, Ken Lewis, to resign following the bank's acquisition of Countrywide Financial. The board went on to install the former FleetBoston executive Brian Moynihan at top -- who, not coincidentally, had nearly been forced out by Lewis earlier that year.

A similar series of events unfolded at Citigroup (C 1.21%) after the company emerged from the 1998 merger of Sandy Weill-led Travelers Group to John Reed-led Citicorp. While Weill and Reed had originally agreed to co-lead the company, the accord soon broke down. As Duff McDonald recounts in Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase:

On February 27, 2000, the company's board met to consider the long-term leadership of the company. Reed asked the board to force both he and Weill to retire -- as per the agreement he claimed the two men had made -- and to choose a new CEO to run the firm. Weill denied having made such a deal, and pushed for Reed to be shown the door. Bob Rubin, who had been brought on board by Weill, backed -- guess who? -- Weill. After eight hours of debate, Weill was appointed sole CEO of the firm.

Perhaps even more injurious than this, however, was Weill's culling of the ranks below him in the lead-up to the merger. Among those shown the door was Weill's longtime protégé, Jamie Dimon, who had worked with the dealmaker since graduating from Harvard Business School in 1982.

Dimon, now the CEO of JPMorgan Chase (JPM 0.90%), is one of our generation's greatest bankers. Under his stewardship, JPMorgan not only avoided the excesses of Citigroup and Bank of America prior to the financial crisis, but was even in a strong enough position to acquire both Bear Stearns and Washington Mutual at the nadir of the crisis in 2008 -- albeit, at the behest of the federal government. It was a magisterial feat reminiscent of the eponymous J.P. Morgan's role in the Panic of 1907.

For its part, Citigroup was left with Chuck Prince, whose leadership acumen was immortalized by his tacit admission in July 2007 that Citigroup was not only headed toward a cliff, but accelerating along the way. "When the music stops, in terms of liquidity, things will be complicated," Prince said in an interview with the Financial Times. "But as long as the music is playing, you've got to get up and dance."

Prince was right about one thing: There wouldn't be enough chairs for everyone when the music stopped. But what he failed to realize was that he would be one of the people left standing. Five months later, he resigned.

The divergent paths of Citigroup and JPMorgan during and after the crisis speak volumes about the importance of the orderly transition of great leadership. Dimon went on to be the CEO of Chicago-based Bank One, which was acquired by JPMorgan Chase in 2004. It's widely assumed that the deal was done in no small part to secure a successor for William Harrison, the then-chairman and CEO of JPMorgan, who was preparing to retire. Harrison dutifully did so a year-and-a-half later, clearing the way for Dimon to take the helm.

By contrast, Citigroup has cycled through two CEOs since Prince's departure. The first, Vikram Pandit, was a former hedge fund manager -- i.e., precisely the type of person who shouldn't be leading a federally insured depositary institution. And the second, a traditional banker, has done little to inspire confidence in the $1.9 trillion conglomerate.

It's for this reason that Richard Bookstaber, author of A Demon of Our Own Design, has called Weill's decision to fire Dimon one of the single most costly business decisions in history:

If somebody were to list the most costly single business decisions in the history of time, one would be the purchase of AOL by Time Warner. That destroyed more value than anything else. Another thing was Sandy firing Jamie. I can't envision that Citi would be in the problem it was in right now if Jamie had stayed there. That probably cost $200 to $300 billion. It's pretty amazing.

Make no mistake about it: The significance of prescient leaders like Dimon or Reichardt, or the Grundhofer brothers, or the string of successors at Wells Fargo and US Bancorp can't be emphasized enough when it comes to running safe and profitable banks. And equally important is the willingness of one generation of leaders to instill the principles of sound management on the next.

Ego and avarice will always play a role in the corporate suite. But if these traits impede the orderly transition from one generation to the next, then there's no reason for investors to stand idly by and suffer the consequences.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
$52.09 (1.21%) $0.62
Bank of America Corporation Stock Quote
Bank of America Corporation
$33.92 (1.28%) $0.43
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
$115.38 (0.90%) $1.03
Wells Fargo & Company Stock Quote
Wells Fargo & Company
$43.40 (0.49%) $0.21
U.S. Bancorp Stock Quote
U.S. Bancorp
$47.18 (0.49%) $0.23

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