PROFILE Sir Denis Weatherstone : Knight of the round figures Outgoing chief of JP Morgan leaves the bank transformed. Larry Black is granted a rare interview

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The Independent Online
AS DISCREETLY as he took up the post five years ago, Sir Dennis Weatherstone stepped down last week as the chief executive of JP Morgan, observing the Morgan tradition of retiring just before turning 65. But as he packs his bags to return to Londo n after more than 23 years, he leaves behind an institution radically transformed, a blue-chip commercial bank that has followed its clients into new forms of finance rather than lose them.

"I think people now recognise that we had to change or perish," Sir Dennis explained in a rare interview. "There is no banking industry. The label means nothing." As corporate borrowers turned instead to public markets to raise their money, America's pre-eminent lender remade itself into one of the world's leading securities firms. Whereas interest on loans accounted for more than 60 per cent of its business a decade ago, three-quarters of its income - an impressive $4.5bn (£3bn) in 1993 - now takes theform of investment banking fees and trading profits. By last year JP Morgan was among the top half-dozen investment bankers, both in terms of US merger activity and in international deals and privatisations, making it a member of Wall Stree t's so-called "bulge bracket".

"I'd say our transition is 80 to 90 per cent complete," Sir Dennis said. "I feel quite comfortable leaving at this stage," he added, relaxing in an armchair in his Wall Street office, away from a looming portrait of the formidable John Pierpont Morgan. "In fact, I'm more than quite comfortable, I'm excited - I'm psyched."

He became a director of the Bank of England in November, and although he will continue to live in the Connecticut house he bought when he first arrived in the United States in 1971, Sir Dennis looks forward to returning to London, "where I learned whatever I learned about this business". There, he will become a powerful adviser to the Governor of the Bank of England. He was tipped in some quarters for the governorship itself when it fell vacant in 1993, though he refuses to comment on the rumours. "You know, I really like Eddie George," he said of the new Governor. "He was a big part of my decision to return. I'd like to do something constructive and useful."

That modest, understated style has been a hallmark of Sir Dennis's career. Born in Islington, north London, in 1930, he was evacuated to Bedfordshire during the war and credited his foster mother with instilling an ethic of discipline and hard work.

At 16, he followed two schoolboy friends into a clerking job with Guaranty Trust, which was later bought by JP Morgan. He studied for his banking qualifications at evening classes and, aged 18, he became the youngest to pass them.

After national service with the RAF in Egypt, Sir Dennis moved into foreign exchange and impressed his new masters when Morgan took over in 1959. When the London chief, Lewis Preston, went back to New York he took Sir Dennis with him.

Short and slightly built, Sir Dennis might be overlooked by the unwary at first sight. But his presence soon commands respect, and his strategic vision and market feel have proved an irresistible combination. Four years ago he was knighted, an unusual accolade for a Briton who has chosen to quit the UK for a long spell.

During his reign, JP Morgan pushed into emerging markets and championed the explosion in the use of derivatives, but managed to avoid serious loss of either money or reputation when the two markets experienced unexpected setbacks last year.

It was less fortunate on both counts with the collapse of the high-flying Spanish banking group Banesto, but investors in Morgan's Corsair fund are expected to make a respectable profit now that it is under the control of its one-time rival, Banco Santander.

Perhaps more significant, certainly in terms of the future of the securities industry, was Weatherstone's decision in mid-1993 to pass up a merger offer by the leading UK merchant banking group, SG Warburg - an earlier, less damaging version of the rejection Warburg suffered last month at the hands of JP Morgan's distant cousin, Morgan Stanley. Sir Dennis, who was named in November as a director of the Bank of England, refuses to comment on either the collapse of the merger talks or reports of Warburg'searlier overtures to JP Morgan.

But the bank apparently did take at least a look at forming a partnership with Britain's largest investment banking house - reportedly at Warburg's suggestion - and decided that the synergies just were not there. Like Morgan Stanley 18 months later, it found Warburg's UK business interesting and coveted its quoted investment unit, Mercury Asset Management, but discovered little else of mutual value. Warburg's small presence in the US was hardly congruent with JP Morgan's extensive European business, andthe overlap in London would have meant huge staff lay-offs.

Sir Dennis would say only that the failure of the Morgan Stanley talks at such a late stage "is clearly not a good thing for SG Warburg". But he went on to predict a spate of similar combinations in financial services, both cross-border and "internally" within geographic markets and between commercial and investment banks where laws allow it.

"There will be relatively few important global financial players, and some niche players," he said. "For those in between, it's going to be extremely difficult to compete with the big players.

"It takes a lot of capital and resources to be a truly global investment bank, and particularly to be one when business gets soft and business costs get high," he added. "This will push people to see if combinations can be done."

The reversal in US interest rates has meant that business has indeed become soft - for JP Morgan as well. The bank has warned that 1994's fourth-quarter profits will come in below expectations. The announcement prompted analysts to complain about the bank's continued heavy spending on technology and communications associated with its new securities businesses. Moody's Investors Service has also said it is reviewing JP Morgan's prized triple-A credit rating for a possible downgrade.

Sir Dennis concedes he is retiring after a "down year". "Of course I'd rather it wasn't," he says. But he notes that the first nine months of 1994 were the second best the bank has ever seen. And, as a pre-eminent commercial bank, its shift into securities businesses exposes it to new risks.

"I think the analysts said we are not yet the pre-eminent investment bank," noted Sir Dennis, "which we regard as rather nice, because of the implication that we are going to be. We have very good capital strength and very good asset quality and we're well diversified. But it seems disappointing, let's say, to find you're still put on credit watch."

One aspect of Morgan's operation that is consistently strong is its derivatives business. If the very low-profile Sir Dennis is known for anything outside the bank - where this clerk-turned-trader-turned manager has worked for the past 48 years - it is as a relentless defender of these financial instruments, both for hedging and speculative purposes. Two years before Procter & Gamble's lawsuit against Bankers Trust and the bankruptcy of Orange County in California, he chaired the "Group of 30"

banking industry panel that warned about their misuse.

The G30 report, published in the calm of a positive interest rate environment, is widely credited with having staved off recent initiatives to regulate the derivatives market more closely. The committee encouraged dealers to establish practices to educate customers and manage risk.

"I think recent events have shown up the importance of making sure clients understand products, not only when they're making money but when they lose it too," Sir Dennis pointed out. "Of course there are potential problems if deals are put together as a result of a conversation. Somebody not wanting to lose a transaction might not be making his points clearly enough. But you'll never hear suggestions that they give the money back when they made money because they didn't understand it."

Sir Dennis even cautioned about the risks of not using derivatives. As an example, he cited the huge foreign-exchange losses incurred by Japan's post office pension fund, which was barred from using derivatives to hedge its currency risks. The £9bn loss was revealed last September but was barely reported.

Sir Dennis remains a director of the bank (and of a host of top firms including General Motors and Merck), but has turned the reins at JP Morgan over to Douglas "Sandy" Warner, 48, a veteran Morgan banker who came up not through the trading side but through corporate finance.

Sir Dennis argued that the fact that Mr Warner was tagged as a banker did not mean he did not understand the market place. After all, he spent six years in London, and that, to Sir Dennis, counts for plenty.

"That is the greatest training ground in my view. I have to be careful what I say now," Sir Dennis admitted, "but I believe it. You can't run our London branch without being exposed to trading issues."

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