The Devil's Casino (6 page)

Like Pettit, Moncreiffe rose swiftly—though he clashed with Fuld. “When you are a trader, and working for someone else who’s a trader, you are always going to come up against a different point of view,” says Moncreiffe. “Dick had good instincts and usually knew when to run for the hills when things were going wrong. He also had the requisite toughness to run a trading operation. We didn’t always see eye to eye. I used to tell him that in trading there’s many ways to skin the cat. I’ m not sure that he agreed with me.”

But Fuld and the other partners recognized Moncreiffe’s talent, and before long he was put in charge of trading the money markets side in London. One morning, he sold the entire London certificates of deposit position because he saw the market trading badly. “I remember the shock of colleagues,” he says. “They asked: ‘Why didn’t you get Dick’s permission?’ I replied, ‘What’s the point? By the time he wakes up it will be too late.’ I was right. But their reaction showed the fear he inspired.”

In fact Fuld was impressed by that move and Moncreiffe was brought to New York to manage money markets and U.S. Treasury trading. That’s when the Scotsman’s relationship with Pettit was cemented.

“When it came to management decisions, Dick listened to Chris, who was never afraid to speak his mind. Dick respected Chris. It made them a good team,” Moncreiffe says. The Scot became great friends with Pettit, whom he regarded as “such an inspiring person. Chris and I got along really well together. And I think Chris was all ready to dislike me. I think he thought, ‘Oh no! Perry’s going to be another one of these single-smartest-guy types.’ Chris had a thing against a ‘single smartest guy, ‘ because I think there was a tendency on the part of Lehman—maybe Dick and some other senior colleagues—to sort of say about new hires, ‘ Ah, this is the single smartest guy,’ and then you’d find out they had feet of clay.”

The two men found a lot to talk about, including Vietnam and Scottish and military history. One of Pettit’s historical heroes was the Scottish independence warrior King Robert the Bruce, and Moncreiffe was descended from that line.

Moncreiffe had arrived back in New York just in time to watch Lew Glucksman plot his coup while Pete Peterson went on being “Mr. Outside,” the public face of the firm. Glucksman was fed up of being talked down to and treated like a second-class citizen who had to be tolerated. Peterson thought he was doing Glucksman a great favor by making him co-
CEO
in May 1983. Of course, Glucksman didn’t see it that way. Glucksman thought he deserved more.

On July 13, 1983, Glucksman got to the office before Peterson, who was at a breakfast meeting, and, according to Ken Auletta, who chronicled the ouster of Peterson in
Greed and Glory on Wall Street
, began leaving “urgent” messages with Peterson’s executive assistant. When Peterson came in, he walked to Glucksman’s office, not expecting anything out of the ordinary. “I just thought it was one of our weekly meetings,” Peterson told Auletta.

But Glucksman was tense, and Peterson asked him what was on his mind.

“I’ve been giving a lot of thought to my life,” Glucksman said. “You know how important boats and cruising and ships are to me. Kind of in the same way I have satisfaction when I’ m in charge of a boat, I ‘m beginning to get the same feeling about Lehman.”

He was unhappy in his role and thought his abilities were under-utilized, that he, unlike Peterson (a cultured New York intellectual and gadabout, who published essays in the
New York Review of Books
and counted Henry Kissinger as a friend), didn’t have any “alternatives.”

“This is my whole life,” he said.

“Lew, let me see if I understand what you ‘re saying,” said Peterson. “Are you saying you want to run the business alone?”

Glucksman didn’t just agree with that summation; he told Peterson he wanted him gone by September 30. Everyone knew that Glucksman ran day-to-day operations of the firm, and Glucksman knew that he could count on the support of the board, if it came to a vote.

On July 26, 1983, a special meeting of the board was called, and the directors arrived at 2 P.M. not having a clue what was going on. By the end of the afternoon, Peterson had ceded completely.

Bob Genirs, a partner, recalls being summoned into the Lehman executive committee meeting where Glucksman made the announcement.

“Lew and Pete stood together while Lew said that Pete was stepping down, and then, to our astonishment, he asked Pete to leave so that ‘I can talk to my partners,’” remembers Genirs. “I thought, as I watched Peterson’s face, ‘We haven’t heard the last of this.’”

After Glucksman ousted Peterson, the market nose-dived for a brief period. Unfortunately this happened at precisely the same moment Glucksman got long in the bond market—and the firm lost a ton of money Quite suddenly, Lehman was vulnerable. Unfortunately for Glucksman, this played into Peterson’s hands.

Moncreiffe explains: “Peterson’s severance package contained a clause that stated that if Lehman was sold within a specified number of years, he would get an uplift on his equity—as would all the partners, most of whom were bankers, not traders. Most of the bankers had a vested interest in Lehman getting sold at any price. They thought if it doesn’t get sold, they’ re not going to get a premium on the equity that they’ve got in the business. He [Lew] will redistribute their shares to his constituency and they’ ll get taken out at asset value. It is an example, in a sense, of absolute power being perhaps a negative thing.”

On May 11, 1984, Lehman Brothers Kuhn Loeb was absorbed into Shearson, a retail brokerage firm acquired in 1981 by American Express, for $360 million. American Express was then run by James D. Robinson
III
. It had luminaries like Kissinger, President Gerald Ford, and Vernon Jordan on its board. Shearson was the second-largest retail sales force in the country, run by Sanford I. “Sandy” Weill, who left almost immediately after the deal was done and was supplanted by his deputy, Peter A. Cohen, a brash-talking, dark-haired cigar smoker.

Peterson made $6 million from the transaction ($12 million today); Glucksman, $15.6 million ($32 million today); Peter Solomon, $7.8 million ($16 million today); Jim Boshart, $6.2 million ($13 million today); Ron Gallatin, $6 million ($12 million today).

But before the merger could be completed, each Lehman partner who owned over 800 shares was asked to sign a noncompete clause. (According to Cohen, there was a secret list with the 53 names Shearson American Express thought they needed. “We didn’t really care if the others didn’t sign,” he says.) Fuld held out until his mentor, Glucksman, capitulated. Then he agreed, with a handful of other senior Lehman bankers, to join the newly merged firm. Fuld then got a signing fee of $7.6 million.

Robinson’s reason for buying an investment bank was to create the first financial supermarket. He had a credit card business with American Express, and he had a brokerage to sell it (Shearman); and—the third essential ingredient—he now had an investment bank to stake his ground on Wall Street. But most of Lehman’s most famous bankers left as soon as the merger was completed. Most of them went on to richer pastures. Peterson and Steve Schwarzman (who left six months into the merger, meaning he never signed a noncompete clause) founded the private equity firm Blackstone Group.

The most senior Lehman partners left in the new firm (nicknamed Slamex) included Shel Gordon, Peter Solomon, Bob Rubin (who left soon after Schwarzman), and Dick Fuld. One by one, except for Fuld, they left. Peter Solomon was the last to go, in 1989. “I saw how the new business was shaking out, how capital markets were rising and supplanting the advisory business, and I realized it just wasn’t my area of expertise,” Solomon later said. “I didn’t want my reputation dependent on people I really didn’t know, trading securities I didn’t fully understand, in time zones I rarely visited.” He started his own firm, Peter J. Solomon Company, the first independent investment bank on Wall Street.

By 1990, Fuld, who had been a low-key partner in the old Lehman, was the most senior person left in the newly merged entity. He was made a senior vice chairman and a board member, and was placed on the planning group of the new firm. He was nominally in charge of commercial paper, government, mortgage, and money market securities. According to Robert “Bob” Shapiro, the senior trader on the
LCPI
desk, some of the surviving Lehmanites sympathized with Fuld over his capitulation to the takeover.

“He was boxed in, and I think we all knew it. He had a lot of money at stake,” says Shapiro.

One person who did not agree with what Fuld had done, however, was his best friend, Jim Boshart. Boshart was leaving out of loyalty to Lew, and he thought the firm had just been murdered.

He thought Fuld should have made a similar stand, so they had some angry exchanges. Their friendship never fully recovered.

Others agreed with Boshart. “They thought, quite frankly, that Dick had sold out,” says Moncreiffe. “No one thought much of what he’d done.”

At first it did not occur to Moncreiffe that the merger would directly involve him. He had expanded the government securities trading operation and then run the mortgage -backed securities trading desk. But because he wasn’t that close to Fuld, he thought he was “no longer a key player” on the trading side by the time the Shearson American Express takeover happened in 1984.

But suddenly, just before the deal was done, Moncreiffe and Pettit, the two most junior Lehman partners (who were barely on any of the senior partners’ radars) were asked to sign noncompetes. To the dismay of the other partners, they refused. Why? They believed that they needed to protect
LCPI
, the little unit that employed 454 people and might be broken up unless they kept it together.
LCPI
drew its success from its loyalty and team spirit. Pettit and Moncreiffe were not going to allow it to be dismembered in the takeover. “We believed in truth, justice, and the American way,” says Moncreiffe with a smile.

Initially Robinson had felt he didn’t need noncompetes from Pettit and Moncreiffe, since together they had only a thousand
LBKL
shares. Neither was on his list of 53 essential partners. But then the American Express board noticed just how profitable
LCPI
had been before the meltdown of the past six months, and there was a sudden panic.

Moncreiffe says, “Chris and I agreed that we would refuse to sign unless we could protect every single person in LCPI—secretaries and back-office people included. We had to be kept together; we had to be paid as a unit. It ‘s no good paying us extra to sign a noncompete.

What we need is a viable business going forward. We insisted that we get a bonus pool based on profits. We also secured a guarantees pool for the first year because of the business disruption because of the takeover.”

Moncreiffe says Cohen summoned him and Pettit to a meeting with his deputy, Jeff Lane, and Herb Freiman (the executive in charge of all capital markets for Shearson), and asked for their signatures. Moncreiffe says the meeting became “quite heated” as they “outlined the incompatibilities that needed to be bridged.”

After the meeting, Pettit called a conference at 6.30 P.M. Moncreiffe says Fuld was there, but said very little.

“It was vintage Chris to do this. . . . [It] didn’t matter that Dick was his boss, nor that Lew was his boss . . . he was going to call this meeting.”

Pettit later described the scene in a dramatic video that was taped for Bob Genirs’s farewell on April 1, 1993:

Because we’d make that the option—”You either take our demands or we’re gone.”

So as that idea was being formed that afternoon, we sort of stopped the meeting and looked at Bob [Genirs], and Bob was sitting—there was a long couch in the office, a very long couch—he was sitting there with the other fellas. And I said, “Bob, you’ re the longest-term partner, one of the longest-term partners at Lehman, certainly the longest-term partner in this room. You have your whole financial security at risk, what you promised your family you would get out of this business. And if they fire us, or we have to quit, you ‘re going to lose all that. So, why don’t you leave [the room] now before we make a decision—which we’re probably going to make—and if it works, you’ re with us, and if it doesn’t, you can go on.” So the room got quiet, and we fully expected Bob to get up and say, “Okay, guys, I’ ll step out now.” But we looked over and . . . he was shaking his head back and forth, sort of looking at the floor. And all of a sudden, he looks up, and he goes, “I’ m with you guys. I want to be part of this. Put my name on the list.” And we spent about two seconds trying to say, “Bob you don’t wanna do that,” but it was pretty clear that Bob wanted to do that. And those of us who were there will never forget that.

Pettit also privately told Steve Lessing that he should feel free to leave with no ill will. Lessing was by the far the youngest of the Ponderosa Boys. His father-in-law was Andrew J. Melton Jr., the former chairman of Dean Witter Reynolds. He could start over. But Lessing did not leave. In fact, he set up a meeting between Pettit and Melton. The two met and Melton made it clear that Dean Witter might be prepared to take all of
LCPI
, which gave Pettit some leverage.

“When we held that meeting we really did feel we could lose everything,” remembers Moncreiffe.

Yet everyone was prepared to follow Pettit. “The Captain” had put his livelihood on the line for them.

When Glucksman heard about the insurrection his proteges were cooking up, he was livid. He had made his own peace with the deal. After all, he was taking $15.6 million for standing down. Someone close to Pettit remembers Glucksman screaming at him: “You’ re going to fail! You’ re scum!”

“Chris was so disheartened,” says this person. “He was always respectful of rank, and Lew Glucksman was older. I mean, Chris still called people like that ‘sir. ‘ But Chris thought he was doing the right thing, sticking with the people of Lehman. And that is why he didn’t leave.”

Pettit told that video camera that Moncreiffe called him at 10 the night before they were due to deliver their ultimatum to Robinson and asked him, “What do you think’s going to happen?”