The Devil's Casino (32 page)

The official liquidators of the estate, the New York turnaround firm Alvarez & Marsal, reaped the biggest chunk of those fees, having billed more than $200 million for about a year’s worth of the services of 125 of its employees. In one eyebrow-raising development in June, it was widely reported that Alvarez & Marsal sold the rights to manage the firm’s deeply distressed real estate portfolio for $10 million to a group that included Mark Walsh.

As per the requirements of the Securities Investor Protection Corporation, a liquidation trustee, James Giddens, was appointed to investigate the assets and liabilities of the broker-dealer business now owned by Barclays.

In short order, Giddens set his sights on the $5 billion so-called “haircut” that the British bank had been rumored to have slipped through in its emergency takeover of the brokerage—a sum that had grown to $8.2 billion by the time Giddens officially sued Barclays to recover the ill-gotten “windfall” for creditors.

The court has deposed dozens of Barclays and Lehman executives in marathon sessions in its attempt to re-create what took place during the 36 hours between Bart McDade’s call to Bob Diamond on the evening before the filing and Barclays ‘ predawn September 16 agreement to buy the broker-dealer, but it is still far from clear how this particularly contentious subplot of the world’s biggest bankruptcy will conclude.

Then there is the report of an official bankruptcy examiner, the former federal prosecutor Anton Valukas, who was appointed in January 2009 at the motion of the Walt Disney Company to probe the bankruptcy on behalf of the creditors of other Lehman subsidiaries.

Exactly a year after that fateful Sunday when Lehman Brothers threw in the towel, Valukas appealed to the court for three more months to put together his report. He told the judge he had used the 2001 bankruptcy of Enron as a benchmark for estimating how much time he would need, predicting the task at hand would require reviewing 1.5 million pages. But by September 2009, he reported, he had reviewed 10 million pages and his work was nowhere near done. “If Enron was a mountain,” opined the
Wall Street Journal
, “Lehman is a mountain range.”

In October the
Journal
revealed what might be the Kilimanjaro of Valukas’s quest, a potential lawsuit accusing the Federal Reserve of leapfrogging ahead of other Lehman creditors when it was paid back in full for the cash Lehman borrowed through the discount window in the four days before the Chapter 11 filing.

When it filed for Chapter 11 protection, Lehman reported more than $600 billion in assets on its balance sheet, against $613 billion in liabilities. But as the market worsened, the values of many of those assets shrunk considerably—and the claims of Lehman’s creditors (predictably) ballooned.

By November, creditors had filed $824 billion in claims against the holding company, according to an
SEC
filing. “Some of the claim estimates are just flat-out silly,” Alvarez & Marsal chief executive Bryan Marsal told the judge at a hearing.

Amid all the wrangling, attention had turned away from the broader legal (and philosophical) question about Lehman: Had Callan, Gregory, or Fuld lied to investors, or had this simply been a massive case of incompetence?

As of December 2009, federal investigators had yet to bring criminal charges against anyone for the spectacular collapse of the world’s fourth-biggest investment bank. But all former Lehman employees were waiting anxiously for Valukas’s report, due in early 2010. “There’s not a ‘t’ he hasn’t crossed and an ‘ i’ he hasn’t dotted,” says Tom Hill. On February 8, 2010, Valukas filed his report under seal. The report was a mammoth 2,200 pages long. Valukas said in court filings that, if necessary, he would argue before a judge that all of the report should be made public, including many sections that interviewees had asked to be redacted. A date for Valukas to argue for the report’s unsealing was set for March 11, 2010.

To the astonishment of many, Joe Gregory brought a $232,999,549 civil suit against the Lehman estate, calculating that the terms of his employment contract said the firm owed him an annual salary of just over $3.1 million for the next 15 years and $700,000 per year for the following decade. Tom Russo sued for the less audacious sum of $17.3 million. Dick Fuld made no claim, nor did George Walker, Scott Freidheim, Erin Callan, Skip McGee, or Bart McDade. Gregory told people he sued because he had nothing to lose. Fuld disagreed: They’d all gotten rich but they’d lost the firm.

Finally, way past the finish line, the blinkers came off Dick Fuld. Lehman may have gone down, but he was still a Lehman man; and for Lehman men, the kind of men he believed in, it was never too late to do the “right thing.” It would not have occurred to him to sue the estate for money. That Gregory would . . . well, finally, Fuld saw the great weakness, the insecurity, and the greed in the man he’d made his number two. He still took Gregory’s calls, but he told close friends that he was furious.

When it no longer mattered, Fuld had finally become “the Gorilla.”

I kept the photographs of my family in my bathroom, so first thing in the morning and last thing at night I just looked at them. It was the only way to keep going: to remind oneself of what really matters.

—Tom Russo

A
t its finest, Lehman Brothers was the best of Dick Fuld and Chris Pettit. In the old days, with Fuld battling upstairs, fighting with Peter Cohen, and with Pettit running the troops, the duo was unstoppable. Fuld knew that he’d hear what was going on with the troops from Pettit, who really knew everybody and everything.

Back then, the spoils of money or the trappings of ego hadn’t yet begun to rot away Lehman’s “one firm” culture. The Ponderosa Boys were all friends with large and generous hearts and jaunty Go -Get-‘ Em! dispositions. They slept only with their wives. They were honest.

Someone close to Steve Carlson says Lehman became a culture of liars right after the Mexican crisis. “It was then that basically the job became about ‘What are we going to spin today to hide our real difficulties? ‘ That’s when things started to slide.”

Not long after, Carlson left.

In 2006 Lara Pettit was fired from Lehman, she believed, without cause. She was seven months pregnant and had just bought a new house, and she was shocked. Eventually she worked out a severance package with the firm. She asked Joe Gregory if he had known anything about her termination.

“Absolutely not,” he had replied. Months later Lara discovered Gregory had known.

Martha Dillman decided to leave Maine and come back to work as a research consultant for the New York-based company Credit Sites. She and Lara were still speaking, but they were not as friendly as they once were.

Mary Anne Pettit moved on with her life; she no longer gets the monthly check she had received as part of Chris Pettit’s pension. She is now just another of 64,000 creditors who have filed claims with the Lehman estate, many of whom have, ironically, found the protracted bankruptcy process to be something of a Lehman family reunion.

Because it was easier to file in groups, Craig Schiffer recently found himself reminiscing with Peter Cohen. Peter Solomon spoke to Dick Fuld and found himself in the same group. The ending of Lehman brought them all back together, to memories of the good times—and the bad. They remembered that for a while they ‘d lived through something they really thought was unique and worth fighting for.

“You had to live it to get it,” Schiffer says, “but for a while Lehman just wasn’t like anywhere else on the Street.”

Only a few of the big names were missing. Lew Glucksman passed away in 2003. At his memorial service in New York, Jim Boshart told how Glucksman had once looked at a dark-haired newcomer whose only role it seemed was to videotape the Monday morning meeting.

“What’s your name?” Glucksman had asked the young man.

“Dick Fuld,” the man had replied.

“Well, Dick Fuld,” said Glucksman, “either you can start working directly for me—or there’s the door.” That’s how it had all begun.

Steve Lessing is thriving at Barclays, where that famous Rolodex is now proving as useful to Bob Diamond as it had been to Dick Fuld.

Skip McGee helped Barclays kick ass in his first year. Barclays made profits of PS3 billion in its first quarter of 2009, an 8 percent increase.

George Walker held NeubergerBerman steady. By the end of 2009, assets under management had risen from $158 billion in June to $173 billion. Clients and employees had remained loyal. Walker was holding the ship steady. “We are going to be very boring for a while,” he said.

In 2009 Peregrine Moncreiffe was living in Jersey, Channel Islands, with his wife, the artist Miranda Fox Pitt, and their six children. He was running a hedge fund. “I can’t believe this would have happened if Chris Pettit had still been at Lehman,” he said.

Scott Freidheim moved to Chicago, where he works as an executive vice president for the billionaire hedge fund manager Eddie Lampert, helping with his latest turnaround project, the revamp of Sears Holdings, which owns the retail chains Sears and Kmart. Ironically, just before Lehman’s September earnings McDade and Fuld had planned to promote him. They wanted to make a structural change so that the firm was run by subcommittees comprised of executive committee members. There’d be one for risk, capital new initiative investments, advancement, and so forth. Freidheim would have been in charge of each one.

Tom Russo moved to the law firm of Patton Boggs. In 2009 he taught a course, “Background to a Dream,” at Columbia Business School on the lessons learned from Lehman. In 2010 it was announced he’d be the new legal counsel for
AIG
.

David Goldfarb stayed at Lehman Brothers Holdings, working with the estate. He was paid a low six-figure salary but hoped the estate would reward him for all the money he had not taken out.

After staying on to ensure an orderly transition, Bart McDade and Alex Kirk quietly left BarCap in November 2008. (Bob Diamond already had trusted lieutenants in Jerry del Messier and Rich Ricci.) For them, it was time to start fresh and build businesses of their own. The two formed River Birch, a private investment management company, in September 2009. In December, it was announced that McDade was helping to launch a cash equities arm for Evercore Partners, a private equity firm run by the former Lehman partner (and former deputy Treasury secretary under Bill Clinton) Roger Altman. (Evercore also hired Mark Burton, a former vice chairman at Lehman, in July 2009.)

Mike Gelband went to Fortress Financial Group, a private equity firm. John Cecil founded a consultancy called Eagle Knolls; Jeremy Isaacs started his own business,
JRJ
Ventures, with Roger Nagioff and Jesse Bhattal.

Ian Lowitt stayed at Barclays.

Mike Odrich joined the liquidators Alvarez & Marsal to build a private equity business there.

Hank Paulson spent a year decompressing and writing his memoirs about the fall of 2008. He also spent some time fishing with his younger brother Richard, who had worked as a fixed income salesman (selling mortgages) at Lehman for over a decade and was “wiped out” by the bankruptcy, according to Hank.

Richard told me that he feels Hank acted heroically under the circumstances. Over time he hopes the story of Hank Paulson will be revised to what he believes it should be, and that the criticism will be left behind. To cheer Hank up, Richard recommended his brother read
Masters and Commanders
by the British historian Andrew Roberts, a book that reconstructs strategic debates and conversations between Roosevelt, Churchill, Marshall, and Lord Alanbrooke during World War II.

Tom Tucker and Steve Lessing talk often, and despite their different careers have remained close. Lessing had bought Finnegan’s as a memorial to his friends from the old neighborhood. The picture of Fiver, put there by Chris Pettit, and Rusty Pettit, and Tom Tucker back in the 1970s just before they joined Lehman, still hangs above the bar.

As for Chris Pettit—he ‘s never far from the minds of those who know the real Lehman story. When I began my book, Tucker told me that he’d visited a psychic, Jim Fargiano, on Long Island, who had put him in touch with his best friend. In a surreal experiment, I called Fargiano, who is based on a dirt road in Quogue, and found myself unexpectedly conducting an interview with Pettit’s spirit.

Fargiano told me he could see Pettit looking down on me and my notebooks and that he “wanted to thank me for the time I was giving Tommy,” and to make sure “Tommy knew he was off the hook.”

What, I asked, did Pettit’s spirit have to say about Joe Gregory? The spirit wrote a word, according to Fargiano:

“Deceived.”

Dick Fuld?

“Covers his tracks better.”

Fargiano said Pettit talked a lot about wishing he could have traded in his suit for a T-shirt and jeans; he also kept talking about “being in too deep, not able to get out” and “creative accounting.”

I asked about love. Fargiano said Pettit had lost his love a while ago.

“What about your girlfriend?” I asked.

The spirit laughed: “Bright kid. Bit self-absorbed, but she was so young—anyone would have been tempted,” and returned to the theme of drowning in things going wrong, and not being able to get out. He used the word
targeted
repeatedly.

Fargiano told me he could see Pettit. He was outside, where he’d always wanted to be—never trussed up in a suit.

And then I said good-bye—to Fargiano and, feeling somewhat foolish, to Chris Pettit.

Dwelling again on the whole lurid tale, I picked up an old copy of
Watership Down
and came upon a passage wherein Fiver, who has visionary powers, urges his fellow rabbits to run, knowing that men are coming to kill them:

That’s where we have to get to.”

bq.

Maybe, I thought, that is where Chris Pettit finally is.

I
lost count of the hours of interviews done for this book when my tape recorder--an old-fashioned AA-battery-charged machine that was the size of a pack of Ultra cigarettes--stopped working. By that point I was on tape 106; each of the tapes had 180 minutes of interviews on them. And I was still only one -quarter of the way through.