The Devil's Casino (2 page)

But were they?

There’s a reason “The Modern History ” was never finished; the individual contributions—like journal entries—make it clear what happened to the project. And former
CFO
John Cecil confirmed my suspicions.

As Joe Gregory poured through the “diaries,” he realized that there were two major problems. One was that the portrait being painted of Dick Fuld, the leader of the firm, was negative—he was not the great general that Gregory wanted him to be, but a man who either was invisible or needed to be told what to do by a stronger subordinate. The second was that the accounts were so different from one another that they could scarcely be said to represent a united front, the “one firm” ethos.

So the project was abandoned, waiting until someone wanted to write a history of the way things had actually been at Lehman, without concern for the egos, or the agendas.

The irony was that had Gregory really thought about why his project had failed, he might have understood the firm’s inherent problems, and realized that a cacophony of opinions at the top was something not to be ignored, but embraced. Had he interpreted the material differently, Lehman might still be alive.

Despite appearances and the endlessly self-perpetuated myth of being a mighty gorilla, Dick Fuld was never truly synonymous with Lehman (never mind that it was a public securities house, and therefore owned by its shareholders and not by him).

No, the hopes—and heart and spirit—of modern Lehman lived and died with two men with huge presences, both of whom served as Dick Fuld’s number twos, his confidants, his presidents, his victims.

Lehman was made great and almost brought down twice in the past thirty years, thanks to these two men. Dick Fuld was pretty much a lieutenant to each, which is why in some ways the second half of this book reads like an echo of the first. Some men refuse to learn from the past.

The first Lehman president is buried in Farmingdale, Long Island. He was 51 when he died in 1997. T. Christopher “Chris” Pettit stood six feet two inches and had dark hair and piercing brown eyes; when he spoke both male and female hearts melted. Prior to joining Lehman, he graduated from West Point and was an Army Ranger in Vietnam.

On a tip from a friend, in 1977 Pettit applied for and got a job with Lehman Commercial Paper Inc. (
LCPI
), the commercial paper trading unit of the investment house Lehman Brothers. With his extraordinary leadership skills, Pettit rose with almost unprecedented speed to be head of sales, effectively Fuld’s number two within
LCPI
.

LCPI
at the time was run by Lewis “Lew” Glucksman, an obese giant of a bond trader who ran Lehman’s capital markets division; Glucksman had ousted Peter G. Peterson, the urbane former secretary of commerce, as the chairman of Lehman Brothers in 1983. Glucksman had argued that since he made the most money, he should run the business. He won that argument.

Fuld was one of Glucksman’s proteges. He operated the way Glucksman had: tyrannically. The men were similar, though they looked nothing alike. Fuld, who is five feet eleven inches and has dark eyes, was a fit squash player, in contrast to his slovenly mentor. Both men said little in the office, but were notorious for shouting insults and expletives.

In 1984 when Shearson American Express acquired Lehman and Glucksman was bought out of the business, Fuld rose to run Lehman’s fixed income division. Pettit was his complementary number two. Pettit was the man on the ground, in the trenches with his soldiers. He could be tough, but he was respected. Pettit was the man the traders really worked for, the leader they revered. Pettit would go to Lehman parties and give speeches that left everyone ready to put down their cocktails and head straight back to the office.

For 10 or so years, while Lehman was merged with Shearson and American Express, Fuld reigned largely unseen. He was “neither a leader nor a dazzling intellect,” one former trader says.

After Lehman was spun out of American Express and became a public company in 1994, the only person who could threaten Fuld’s place as head of the new investment bank, Lehman Brothers, was Pettit. And as long as Pettit had the loyalty of the troops, there was nothing Fuld could do about his rival.

Until, that is, his rival, for the first time in his life, made himself vulnerable. Pettit was struggling to manage his private life at that time; he had a dying sibling and a dying marriage. He was also having an affair. None of this ought to have mattered in the workplace, but his three best friends ensured that it did. Their names were Joseph “Joe” Gregory, Stephen “Steve” Lessing, and Thomas “Tom” Tucker. All worked for Lehman. In fact, together, they ruled Lehman, at least the fixed income division that was essentially the new independent Lehman. All had carpooled together since the 1970s from Huntington, Long Island, until fights over compensation drove them apart.

Joe Gregory persuaded Tucker and Lessing to go to Fuld and essentially ask for Pettit’s resignation in March 1996. Fuld knew that with Tucker, Lessing, and Gregory behind him, he finally controlled the firm; he demoted Pettit to head of client relations. The episode is still called the Ides of March by senior Lehman executives because the demotion occurred on March 15, the day Julius Caesar was killed by his former friends in 44 B.C.

Six months later, Pettit resigned. Three months after that, he was dead.

With Pettit gone, Fuld was able to tighten his grip on the firm. He took elocution lessons, and evolved into the leader he had never before been. Lehman’s stock soared over the next ten years as it evolved into an investment bank. The stock price rose to $86, and Fuld was the hottest
CEO
in town, featured in a 2006 issue of
Fortune
magazine as the man who had transformed the “notoriously fractious” firm into a “super-hot machine.” The chief banger of the drums, the man urging the firm to take more risk, was the man who had orchestrated the ousting of Pettit—and had replaced him: Joe Gregory, the second Lehman President.

But inside Lehman’s headquarters at 745 Seventh Avenue, people worried that dangerous corners were being cut in Fuld’s haste to beat what he perceived as the enemy: Goldman Sachs. On June 9, 2008, Lehman reported its second-quarter loss of $2.8 billion, the company’s first quarterly loss since going public in 1994. The stock fell 9 percent that day. Yet for months, Erin Callan, the new
CFO
and a Gregory “pet,” had been telling the market that Lehman had plenty of capital—that the company was in good shape.

On June 12, Lehman announced that Joe Gregory was out. When he left, he took Callan down with him, but the damage they had done was irreversible. Disaster loomed.

For a while Dick Fuld could not see where he had gone wrong. As he later testified before Congress about the fall of Lehman, “I wake up every single night thinking, ‘What could I have done differently? What could I have said? What should I have done? ‘ And I have searched myself every single night. And I come back to this: At the time I made those decisions, I made those decisions with the information that I had. I can look right at you and say, this is a pain that will stay with me for the rest of my life. . . .”

This was before he learned that Gregory, who had cashed several hundred million out of Lehman, asked for a further $233 million from the Lehman estate after the company had been declared bankrupt plus, according to filings, another employee benefit plan for $700,000 per year for 25 years at the firm and a further $2.4 million per year for 15 years.

Fuld, who had asked for nothing when the end came, was reportedly horrified. He, like a handful of others, had deluded himself into thinking that Gregory was a good guy; Gregory was the guy who told young Lehman managing directors he didn’t want to hire people “who regularly checked their bank balances.” Yet Gregory was, in the words of his former friend and carpooler, Steve Lessing, “a phony.”

So, no, this is not yet one more book about the crash of 2008. Rather it is a parable about the foibles of men, the corrosive influence of money, and the dangers of hubris.

“One firm” was the Lehman Brothers mantra, and most people thought Fuld had dreamed up the slogan. But he hadn’t.

That was the handiwork of Lew Glucksman, who used to stand in his office by the trading floor and snap a single pencil in front of his employees. He would then hold a group of pencils together and say, “Watch: When they are together, I can’t break them.”

The man who embodied that slogan best was not Fuld. It was Chris Pettit, who once, in a sly tribute to Glucksman and the camaraderie Pettit had instilled at Lehman Brothers, handed out pencils with all the senior executives’ names on them as party favors. He was the man who once staked his career and his lifesavings to protect the jobs of the traders, back-office workers, and secretaries in his unit. He was Lehman Brothers at its best. Yet now he is all but forgotten, nearly erased from the public record by a culture of ruthless avarice.

Character is destiny.

—Heraclitus

I just remember the nights. George would come in from the office at what seemed like 4 A.M. every single night. I don’t know how he got through those months. I don’t know how any of them did. It was crazy.

—Nancy Dorn Walker

B
y nightfall on Saturday, June 7, 2008, the Manhattan streets were still radiating heat, an unwelcome harbinger of a long, stifling summer. At the Skylight Studio, a sprawling private event space in SoHo, George Herbert Walker, a 39-year-old second cousin of then President George Walker Bush, and at the time head of Lehman’s Investment Management division, was celebrating his marriage to Nancy Dorn, 31, a pretty blonde hedge fund analyst from Texas. The couple—who had exchanged their vows at New York’s City Hall a few weeks earlier and had already celebrated with family down in Texas—ate Southern food, danced to the overwrought musical stylings of a suitably ironic wedding singer, and drank margaritas with 400 of their friends. It was, however, a celebration tempered by the first signs that Lehman Brothers was about to come crashing down.

The newlyweds had planned for their party to be casual and low-key—cushions on the floor and a buffet. Dorn wore a strapless Missoni dress that was asymmetrical and calf length. Walker—tall, bespectacled, a “cuddly bear,” some friends said—rather typically and charmingly cannot recall what he wore that night.

The last thing the couple wanted was to be perceived as grandiose. In fact, Walker had instructed their friend, party planner Bronson van Wyck, “Just make sure we don’t make it into Page Six,” the gossip page of the
New York Post
. The public outrage over the $3 million extravaganza hosted by Blackstone Group CEO Stephen A. Schwarzman for his 60th birthday on February 13, 2007, was still echoing throughout New York City. The star-studded, 500-guest event held at the Park Avenue Armory, featuring performances by Rod Stewart (who was paid $1 million) and Patti LaBelle (who sang “Happy Birthday”), had been an ill-timed disaster of self -congratulation: Blackstone’s stock had fallen steadily ever after and was then teetering at $18 per share, nearly half of its value a year earlier. And now,
all
of Wall Street was suddenly standing on the edge of a precipice, and everyone—especially those in attendance at the Walkers’ party—were acutely aware of it. “We wanted people to come and go when they wanted to, and not force them to sit down for a formal dinner,” Dorn said. The band—a Neil Diamond cover band, Super Diamond—was chosen by Walker in order to keep the mood light.

Just months earlier, on March 17, Bear Stearns had imploded, and was scooped up by JPMorgan Chase, which paid $2 per share (that was eventually elevated to $10 per share with the aid of a $29 billion government nonrecourse loan); the rescue operation had stunned the financial market. Worried eyes were now staring at the next domino in Wall Street’s Big Five: Lehman Brothers. Walker had moved to the bank only two years before from the larger, more capitalized (and therefore safer) Goldman Sachs.

Since March, most of Lehman’s senior management had been working nights and weekends, furiously trying to shore up their balance sheets. That weekend, many of the guests at the Walkers’ “second wedding” had come directly from the Lehman offices on 745 Seventh Avenue at 50th Street. Most, like David Goldfarb, Lehman’s global head of Strategic Partnerships, Principal Investing, and Risk, had met their wives at the office and had simply grabbed their jackets from the backs of their chairs before heading hurriedly, their minds elsewhere, out the door. Even Walker hadn’t been home much recently; on the day of the wedding party, Nancy Dorn had gone to a movie by herself. The June earnings were due in two days. As the new 41 -year-old CFO, Erin Callan, worked on them (she did not attend the party), her colleagues knew they’d be announcing Lehman’s first losses since spinning off from American Express--$2.8 billion. They were deeply concerned.

“Everyone was stressed that night—we felt badly for George,” Goldfarb said. “We were more tired than downbeat. No one at that time had any inkling that we would go down. We just knew we had a lot of work to do.” Despite the tumult, nearly all the core senior management team of Lehman came to the party. Longtime chairman and
CEO
Dick Fuld was there with his wife of nearly thirty years, Kathy, 56, then the vice chair of the Museum of Modern Art. Sticking close to them were Joe Gregory, Lehman’s president, and his second wife, Niki, a beautiful Greek-born brunette. Then there was the urbane, silver-haired Tom Russo, Lehman’s chief legal officer. Famous for his charm and eloquence, he was nicknamed “the Mayor of Davos” because, as one colleague put it, “he arrives first and leaves last” at the annual financial powerhouse conference in Switzerland. Beneath his twinkling eyes is a steel core—after Lehman Brothers collapsed, in late September, Russo would offer his consolation to Lehman Europe by way of a terse telephone call, in which he told them: “You’ re on your own.”