When a red-faced AmEx finally spun off Lehman in 1994, the firm was undercapitalized and focused almost entirely on trading bonds. Stars like Stephen A. Schwarzman, the future CEO of Blackstone, had left the company. No one expected it to survive for long as an independent firm; it was just takeover bait for a much larger bank.
American Express CEO Harvey Golub anointed Fuld, who was Shearson Lehman’s top trader and had risen to be co-president and chief executive of the newly independent entity. Fuld had his work cut out for him. Lehman was reeling, with net revenue plunging by a third when the Shearson units were sold; investment banking was down by nearly the same amount. They were bailing water.
And the infighting continued. By 1996 Fuld pushed out Pettit when he made noises about increasing his status. (Pettit died three months later in a snowmobile accident.) For years, Fuld operated the firm alone, until he appointed Gregory and another colleague, Bradley Jack, to the role of co-COO in 2002. But Jack was quickly pushed out by Gregory, who had the confidence of Fuld, in part, because of his talent and, perhaps more important, because he appeared nonthreatening.
“You’re the best business fixer I have,” Fuld told him, vowing that with Gregory’s help he would do away with the backbiting that had nearly torn the firm apart in the 1980s. Fuld began by slashing payroll. By the end of 1996, the staff had shrunk by 20 percent, to around 7,500 employees. At the same time that he was downsizing, he was adopting a smoother management style. To his own surprise Fuld proved to be at good at massaging egos, wooing new talent, and, perhaps most shocking for a trader, schmoozing clients. As Fuld recast himself as the public face of the firm, Gregory became the chief operating officer: “Inside” to Fuld’s “Mr. Outside.” Yes, Fuld had become one of the “fucking bankers,” intently focused on one goal: boosting the newly public company’s stock price. Lehman shares were increasingly doled out to employees; eventually the workforce owned a third of the firm. “I want my employees to act like owners,” Fuld told his managers.
To encourage teamwork, he adopted a point system similar to the one that he used to reward his son, Richie, when he played hockey. Fuld taped his son’s games and would inform him, “You get one point for a goal, but two points for an assist.” He had some other choice paternal advice for his son that he also applied at Lehman: “If one of your teammates gets attacked, fight back like hell!” At Lehman, senior executives were compensated based on the performances of their team.
If you were loyal to Fuld, he was loyal to you. Almost everyone at Lehman had heard the story about his vacation with James Tisch, the chief executive of Loews, and his family. The group went hiking together in Bryce Canyon National Park in Utah. Nearly a mile down from the rim of the canyon, Tisch’s ten-year-old son, Ben, had an asthma attack and began panicking when he realized he had left his inhaler back on top of the canyon.
Fuld and Tisch took charge, helping the boy to make the hike back. “Ben, lead the way,” Fuld instructed, trying to build up the boy’s confidence.
Halfway up they encountered another hiker who looked at Ben and said, “My, aren’t we wheezy today.”
Fuld, without slowing, turned on him and shouted with a memorable ferocity: “Eat shit and die! Eat shit and die!”
Exhilarated by Fuld’s defense of him, Ben nearly ran up the rest of the way.
Perhaps Fuld’s greatest moment as a leader came after the 9/11 attacks. As the world was literally crumbling around him he instilled a spirit of camaraderie that helped keep the firm together. The day after the towers were hit, Fuld attended a meeting at the New York Stock Exchange to discuss when it should reopen. Asked if Lehman would be able to trade, he told the room, almost on the verge of tears, “We don’t even know who’s alive.”
In the final reckoning, Lehman lost only one employee. But the firm’s global headquarters at 3 World Financial Center was so severely damaged it was unusable. Fuld set up makeshift offices for his 6,500 employees at a Sheraton hotel on Seventh Avenue in Midtown; a few weeks later he personally negotiated a deal to buy a building from one of his archrivals, Morgan Stanley, which had never moved into its new headquarters. Within a month Lehman Brothers was up and running in a new location as if nothing at all had happened. But there was one casualty of the move: Fuld’s stuffed gorilla was lost in the shuffle and never replaced. Gregory later pointed out that both Fuld and the firm had outgrown it.
For all his talk about change, however, Fuld did not so much overhaul Lehman’s corporate culture as tweak it. He instituted a subtler version of the paranoid, combative worldview propagated by Glucksman. The martial metaphors remained: “Every day is a battle,” Fuld barked at his executives. “You have to kill the enemy.” But traders and bankers were no longer at each other’s throats, and for a while, at least, Lehman was less riven by internal strife. “I tried to train investment bankers to understand the products they were selling,” Glucksman said long after Fuld had gone on to be CEO. “We were one of the first firms to put investment bankers on the trading floor—and Dick has gone far beyond where I was when I left the firm.”
Fuld eventually decided that Lehman was too conservative, too dependent on trading bonds and other debts; seeing the enormous profits that Goldman Sachs made by investing its own money, he wanted the firm to branch out. It fell on Gregory to execute the boss’s vision. Though he was not by nature a details guy or a risk manager, Gregory played a pivotal role in the firm’s increasingly aggressive bets, pushing Lehman into commercial real estate, mortgages, and leveraged lending. And in a galloping bull market, its profits and share price soared to unprecedented heights; Gregory was rewarded with $5 million in cash and $29 million in stock in 2007. (Fuld made a package worth $40 million that year.)
Gregory also handled Fuld’s less desirable conversations. Whenever a personnel matter called for discipline, the rebuke usually came from Gregory; the person on the receiving end invariably referred to the “new asshole” he had just been provided. Around the office, Gregory was known as “Darth Vader.” Though Fuld was unaware of it, Gregory’s heavy-handed tactics were regular fodder at the water cooler.
In 2005 Gregory made one of his harshest personnel decisions, one that would become legend within the firm. He inexplicably sidelined his protégé and longtime favorite, Robert Shafir, Lehman’s global head of equities, who had helped him build that business, for what seemed like no reason. Gregory, who said he’d find him another role at the firm, then kicked him off the firm’s executive committee. In case Shafir hadn’t gotten the message, Gregory then gave him an office right across from the conference room where the executive committee met, a cruel reminder of his diminished status. In the middle of all this, Shafir’s daughter was diagnosed with cystic fibrosis, and he took some time off, hoping that when he returned to the firm, Gregory might have a job for him.
But when Shafir failed to resign after a few months, Gregory called him into his office. “What do you think about moving to Asia?” he asked him after an awkward silence.
Shafir was dumbstruck. “Asia? You have to be kidding, Joe. You know about my kid, you know I can’t go to Asia.”
Shafir left the firm for Credit Suisse, perhaps the most notorious victim of what people inside Lehman referred to as a “Joeicide.”
Some of Gregory’s hiring decisions, meanwhile, struck people as highly unorthodox. In 2005, he took the firm’s head of fixed income, Bart McDade, who was an expert in the world of debt, and made him the head of equities, a business he knew very little about. In 2007, as the property bubble neared the breaking point, Gregory was asked repeatedly why so many of the executives he placed in the commercial real estate business had no background in that area. “People need broad experience,” Gregory explained. “It’s the power of the machine. It’s not the individual.”
Of all the individuals whom Gregory anointed, none was more controversial than Erin Callan, a striking blonde who favored Sex and the City-style stilettos. When he chose the forty-one-year-old Callan as the f
irm’s new chief financial officer in September 2007, Lehman insiders were stunned. Callan was obviously bright, but she knew precious little about the firm’s treasury operations and had no background in accounting whatsoever. Another woman at the firm, Ros Stephenson—perhaps the only Lehman banker besides Fuld who could get Kohlberg Kravis Roberts kingpin Henry Kravis on the phone—was furious about the appointment and took her complaint directly to Dick Fuld, who, as always, backed Gregory.
Callan yearned to prove to her colleagues that she was a seasoned street fighter, just like Fuld. If anything, her path to the very top of the financial industry had been even more improbable than his. One of three daughters of a New York City police officer, she graduated from NYU Law School in 1990 and took a job working for the big Wall Street firm of Simpson Thacher & Bartlett as an associate in its tax department. Lehman Brothers was a major client.
After five years at Simpson, she took a chance one day and phoned her contact at Lehman: “Would it be weird for someone like me to work on Wall Street?” she asked.
No, it would not. Hired by Lehman, she caught a break early on when a change in the tax law sparked a boom in securities that were taxed as if they were debt. Callan, with her tax law expertise, became adept at structuring these complex investments for clients like General Mills. Savvy, confident, and a skillful pitchwoman, she quickly catapulted up the ranks, overseeing the firm’s global finance solutions and global finance analytic groups within a few years. Hedge funds were becoming top Wall Street clients, and in 2006 Callan was entrusted with the critical job of overseeing the firm’s investment banking relationships with them.
In this role, she solidified her reputation as a player by helping Fortress Investment Group become the first American manager of hedge funds and private-equity funds to go public; she later oversaw the initial public offering of another fund, the Och-Ziff Capital Management Group. For Lehman’s most important hedge fund client, Ken Griffin’s Citadel Investment Group, she orchestrated the sale of $500 million worth of five-year bonds, a groundbreaking offering by a hedge fund.
She soon caught the eye of Joe Gregory, an executive who believed strongly in the value of diversity. He recognized that the world was changing and that Lehman, as well as the rest of the financial community, could no longer be a sanctuary for white men only. Promoting someone who was young and smart—and a woman—would be good for Lehman and would reflect well on him. It didn’t hurt that Callan looked great on television.
On the night of March 17, in her apartment at the Time Warner Center, Erin Callan endlessly tossed and turned. The next day was going be the biggest of her career, a chance to single-handedly extinguish the flames threatening to engulf Lehman—and to prove her critics inside the firm wrong.
In just a few hours Callan would represent Lehman Brothers—to the market, to the world. She would run the crucial conference call detailing the firm’s quarterly results. Scores of financial analysts from around the nation would be listening in; many of them would be ready to shred Lehman at the slightest sign of weakness. After presenting Lehman’s numbers, there’d be questions, and given all that was going on, there’d probably be a few very tough ones that would force Callan to think on her feet. Her answers might literally make or break the firm.
Finally giving up on getting any sleep, she rolled out of bed and grabbed the Wall Street Journal outside her apartment door. The page-one story did nothing to alleviate her nerves; its headline read: “Lehman Finds Itself in Center of a Storm,” and it featured her as one of the main Lehman executives fighting back rumors about the firm’s failing health. But she liked the press.
Despite her fatigue, Callan was fired up, adrenaline coursing through her slender body. She dashed downstairs, coffee in hand, dressed in an elegant black suit picked out by her personal shopper at Bergdorf Goodman. She had blown her hair out for an appearance later that day on Closing Bell with Maria Bartiromo on CNBC.
She waited for her driver under the awning of the Time Warner Center. She was hoping her place there would be only temporary. With her new job title and expected income, she had been looking to upgrade and was in negotiations to buy her dream home: a 2,400-square-foot apartment on the thirty-first floor of 15 Central Park West, one of the most coveted addresses in New York City. The limestone building, designed by Robert A. M. Stern, was the new home to such storied financiers as Goldman Sachs’ Lloyd Blankfein, Citigroup’s legendary Sanford Weill, hedge fund maestro Daniel Loeb, and the rock star Sting. She was planning to borrow $5 million to pay for the $6.48 million space. As she entered the backseat of the company car, she reflected on how much was a stake this morning—including the new apartment she wanted.
In his office at Lehman, Dick Fuld steadied his nerves and got ready to watch Treasury secretary Paulson live on CNBC. He reached for the remote and turned up the volume. Matt Lauer of the Today show was conducting the interview, simulcast on both NBC and CNBC.
“I don’t want to make too much of words,” Lauer began, “but I would like to talk to you about the president’s words that he used on Monday after meeting with you. He said. ‘Secretary Paulson gave me an update, and it’s clear that we’re in challenging times.’”
Paulson, looking sleep deprived, was standing in the White House pressroom, straining to listen to the question coming through in his right ear.
Lauer continued: “I want to contrast that to what Alan Greenspan wrote in an article recently,” he said. A photo of Greenspan flashed on the screen accompanying his quote: “The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War.”
“Doesn’t ‘we’re in challenging times’ seem like the understatement of the year?” Lauer asked, in his polite but persistent style.
Paulson stammered for a moment, then recovered and continued with what he clearly hoped was a soothing message. “Matt, there’s turbulence in our capital markets, and it’s been going on since August. We’re all over it, we’re looking for ways to work our way through it. I’ve got great confidence in our markets, they’re resilient, they’re flexible, but this has taken some time and we’re focused on it.”
Fuld waited with growing impatience for Lauer to ask about the implications of the Bear Stearns bailout. “The Fed took some extraordinary steps over the weekend to deal with the Bear Stearns situation,” Lauer finally said. “It has some people asking: ‘Does the Fed react more strongly to what’s happening on Wall Street than they do to what’s happening to people in pain across the country, the so-called people who live on Main Street?’”
An exasperated Fuld thought Lauer’s question was just another example of the popular media’s tendency to frame complex financial issues in terms of class warfare, pitting Wall Street—and Paulson, Goldman’s former CEO—against the nation’s soccer moms, the Today show’s audience.
Paulson paused as he searched for his words. “Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders, so I don’t think that they think that they’ve been bailed out here.” He was obviously trying to send a message: The Bush administration isn’t in the business of bailouts. Period.
Then Lauer, quoting from the front page of the Wall Street Journal, asked, “‘Has the government set a precedent for propping up failing financial institutions at a time when its more traditional tools don’t appear to be working?’ In other words, they’re saying, is this now the wave of the future, Mr. Secretary? That financial institutions that get in trouble in the future turn to the government to get bailed out?”
It was a particularly poignant question; only nights before Paulson had railed on a conference call with all the Wall Street’s CEOs about “moral hazard”—that woolly economic term that describes what happens when risk-takers are shielded from the consequences of failure; they might take ever-greater risks.
“Well, again, as I said, I don’t believe the Bear Stearns shareholders feel they’ve been
bailed out right now,” Paulson repeated. “The focus is clearly, all of our focus is on what’s best for the American people and how to minimize the impact of the disruption in the capital markets.”
When she sat down at her desk Callan turned on her Bloomberg terminal and waited for Goldman Sachs to announce its results for the quarter, which the market would take as a rough barometer of the shape of things to come. If Goldman did well, it could give Lehman an added boost.
When Goldman’s numbers popped up on her screen, she was delighted. They were solid: $1.5 billion in profits. Down from $3.2 billion, but who wasn’t down from a year ago? Goldman handily beat expectations. So far, so good.
That morning, Lehman Brothers had already sent out a press release summarizing its first-quarter results. As Callan knew, of course, the numbers were confidence inspiring. The firm was reporting earnings of $489 million, or 81 cents per share, off 57 percent from the previous quarter but higher than analyst forecasts.
The first news-service dispatches on the earnings release were positive. “Lehman kind of confounded the doomsayers with these numbers,” Michael Holland, of Holland & Company, the private investment firm, told Reuters. Michael Hecht, an analyst with Banc of America Securities, called the quarterly results “all in all solid.”
At 10:00 a.m., a half hour after the market opened, Callan entered the boardroom on the thirty-first floor. Though Lehman’s results were already calming market fears, a great deal was still riding on her performance. Surely everyone listening in would ask the same questions: How was Lehman different from Bear Stearns? How strong was its liquidity position? How was it valuing its real estate portfolio? Could investors really believe Lehman’s “marks” (the way the firm valued its assets)? Or was Lehman playing “mark-to-make-believe”?
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