The Devil's Casino (17 page)

Fuld still hadn’t filled the
COO
spot vacated by Pettit. He just couldn’t trust anyone to get that close to him—not even Jack. “The board wanted him to have a line of succession,” recalls Karin Jack, “but it just wasn’t ever planned.”

This power vacuum was viewed as a weakness over at Goldman Sachs, Lehman’s archrival. Fuld may not have known it, but Goldman Sachs viewed Lehman as merely a yappy terrier, snapping at its heels.

“Lehman always thought they were fighting Goldman Sachs, but we never thought they were even in our league,” says a former member of Goldman’s executive committee. “We didn’t believe they had superior skill sets,” he continues. “Risk taking was their way to distinguish themselves. We were a bit resentful, because we thought that they were overly risked, whereas we thought we were very management focused and very risk management focused.” The Goldman guys also thought (not incorrectly) that Fuld ruled imperiously, that all the senior management people beneath him were mere court jesters telling him what they thought he wanted to hear.

In 1999, of all the senior management, only Cecil was ever a dissenting or even questioning voice; the rest were the equivalent of a sycophantic court, all jostling for power—led by Gregory, technically the head of equities, but also Fuld’s buffer, his field general.

Sometimes, according to senior staff, Gregory would almost kneel in meetings to look up at Fuld as he talked. When Fuld made speeches to New York managing directors, Gregory could be seen sitting in the front row, almost falling off his chair to pay attention. “It was both funny and sort of appalling to watch the degree to which Joe sucked up to Dick,” says one former senior executive.

Following the culling of both Pettit and the equities team, Gregory now had a reputation as a dangerous henchman. No one wanted to antagonize either him or Fuld. Gregory was notorious for being underhanded, for acting invisibly. “He’d stab you from the back, not the front,” says one person. One executive recalls that Gregory told him he was doing fantastically well just two weeks before firing him.

From then on there was an in -house motto: “You never want to be told you are doing well by Joe.” It was code for “You’ re fired.”

Not surprisingly, Gregory’s new role brought with it new nicknames. On top of “Joe the Wedge,” he was now also “Uncle Joe,” after the mass murderer Joseph Stalin, and “Darth Vader.” Gregory never saw himself as anything like these caricatures. Even as he grew rich and acquired a domestic staff of 30, a fleet of boats, multiple houses, and private planes, he still saw himself as “ordinary Joe.” “I’ m a man of the people,” he liked to say—and he told all incoming executives that Lehman men and women were
not
the sort of people who needed to check their bank balances regularly, insinuating that he never did that. In other words, though Lehmanites were bankers, they were not supposed to be interested in making money . . . at least not for themselves.

“Joe would be absolutely horrified if he realized how people came to view him,” says Bob Shapiro. “At bottom, Joe is an emotional man, who deeply wants to be liked.”

After Gregory, next in line to attend Lehman’s King Richard was Tom Russo, the general counsel, widely considered Fuld’s “intellectual shield.” Russo was Lehman’s public voice—before Congress, the Senate, and international financial panels. He loved to talk and share ideas, and he has a nascent passion for producing movies. Within Lehman, Russo was well-liked.

A few of the heirs apparent in the Fuld coterie came from outside the U.S. office. By 1999 Asia was headed up by Jasjit “Jesse” Bhattal, an immaculately dressed Indian who often sported a silk ascot. When the Asians videoconferenced in, many of the New Yorkers felt shabbily put together by comparison.

Bhattal was considered a huge step up in every way from his predecessor, Dan Tyree. Tyree weighed 350 pounds, spilled food on his clothes, and often slept through operating committee meetings. In the late 1990s, Fuld went with Tyree to a client lunch in Tokyo where local food—as in fish—was served. Tyree ordered a steak. He may as well have ordered an execution, since Fuld got rid of him as soon as he could.

Bhattal also won plaudits from his peers because he had a phobia about flying (which he never conquered), yet of all the Lehman executive committee members he probably flew the most. Watching him as the plane took off and landed, however, was a grueling experience, says someone who flew with him. “He’d grip the arms of the seat and hyperventilate noisily.” Yet they had to hand it Bhattal, he was courageous: He flew.

He showed a similar commitment in the office. When he was made head of Asia, he did not pretend to understand the trading business. His background was in banking. “He went and sat on the trading floor and basically never left until he’d understood it thoroughly,” says a New York-based colleague. “He was an inspiration to all of us.”

The other overseas member of the Fuld circle was a young, ambitious British banker, Jeremy Isaacs, who was appointed head of all Europe in 2000. He was only 36 at the time. He had never gone to university. Every time Fuld landed on the tarmac in London, Isaacs was there to greet him. During trips throughout Europe, he almost never left Fuld’s side—something some say Fuld would occasionally mock him for. “Jeremy, I don’t need you to babysit me,” he’d say as the Brit followed him into every meeting. Isaacs says, in fact, Fuld
asked
for him to be there.

As Isaac’s influence in the firm grew, so did his girth. In 2003 he imported a five-star chef into Lehman’s dining room in a penthouse in London’s Canary Wharf, the new home of Lehman London (which he had gotten British Prime Minister Gordon Brown to inaugurate). In no time the Lehman dining room was labeled the best corporate executive dining room in town, which was an in-house joke in New York, as was the fact that Isaacs’s London office was the only office in all of Lehman that was bigger than Dick Fuld’s. Isaacs points out that he did not design it himself. Rather, Fran Kittredge, the New York-based head of philanthropy had.

Isaacs’s weight gain became a cause for concern during a hike up Bald Mountain, at the Fulds’ summer retreat in Sun Valley.

“We were seriously concerned that he might not make it,” recalls a colleague.

Isaacs agreed. “It was a very unpleasant experience,” he says. He hired a boxing coach when he returned to London. “I still have the trainer,” he says. “Climbing up that hill gave me the kick I needed to get into shape.” Isaacs also bought himself a home next to Russian billionaire Roman Abramovich in Cap d ‘Antibes and had himself a custom-made E-Type Jaguar. Stevie Wonder sang at his 40th birthday party in London.

He liked his surroundings to meet certain standards. In 2006, Isaacs arrived at the annual World Economic Forum at Davos, Switzerland, and found that his hotel room fell well below his standards. He berated the Lehman corporate staff for their shoddy organization.

Behind Bhattal and Isaacs came an influx of new Lehmanites. The firm started an aggressive hiring campaign for the brightest and best as the stock price got higher. The firm recruited primarily from 11 well – known business schools: Chicago, Columbia, Wharton, Tuck, Fuqua, Stern,
UCLA
, Kellogg, Harvard, MIT’s Sloan, and Stanford.
MBA
candidates who joined the firm called the atmosphere one of “scrappy, friendly survivors.”

Another commented: “People have been through a lot together, and they are very loyal to each other.”

Another: “This place is as close to a meritocracy as it gets—I’ve been given more responsibility than I’d ever imagined.”

“It’s an aggressive firm that will let you take risk, if you can justify it,” wrote yet another.

In April 2000, the executive committee was arguing about emerging markets, especially about whether the firm should open an office in South Africa.

“I thought it was a very bad idea, because we were never going to make money in these [emerging markets] businesses,” Cecil recalls. “And banking’s argument was that to be a global player you’ve got to do it, and banking is very revenue -oriented, not profit -oriented. And so we’d been having this debate forever.”

The debate centered on the fact that trading in emerging markets necessarily meant taking on a lot of risk—four or five years of success could be followed by four or five years of loss. But that was the game. The problem was that every now and again a crisis (such as the Mexican peso fiasco, or the Russian default) would pop up and that risk might be enough to sink the entire firm. The debate, Cecil says, “came to a head in early 2000.”

First, Fuld decided they were going to get Lehman out of emerging markets. As head of equities, this task fell to Gregory. He brought all his traders and salespeople in emerging markets together, told them what the new protocol was, and fired them.

Then, just hours later, Fuld changed his mind. He called a meeting of the executive committee and said, “We ‘re going to stay in.” According to Cecil, an exasperated Gregory stood up and said, “I quit.”

He couldn’t believe Fuld would do this right after he ‘d executed a mass firing.

Fuld hustled Gregory out of the room and the two men huddled in Fuld’s office.

A few days later Fuld swung by Cecil’s office and told him what had transpired. He then said that he wanted to “bring Joe upstairs with us. He will think differently. He will think about the business differently. I am going to make him chief administrative officer and you will be chief financial officer.”

Cecil was surprised. At that time, he was both
CAO
and
CFO
. Cecil says Fuld told him, “You will still be the CFO—basically the two of you will be able to get things done and have your way with the rest of the executive committee, because you’ re the two most powerful personalities on the committee.”

Cecil believed that Gregory was tired of running a business and had asked for the job and that Fuld, who hated infighting at the top, thought he could defer “senior staff management” onto Gregory. Cecil also realized he was being demoted, though Fuld—perhaps shrewdly—pretended not to notice.

“It’ ll be great; you’ll be the
CFO
,” he kept saying to a baffled Cecil.

“But I am
already
the
CFO
,” retorted Cecil.

“I told him that Joe and I don’t often see eye to eye,” Cecil recalls, “and he said, ‘When we bring Joe up here, he ‘ll kind of adopt our point of view.’”

“He thought that bringing somebody up to corporate was kind of a cure-all—all of a sudden you think differently; you think about what’s right for the firm, all the time,” says Cecil. “It was hard on me, obviously, because I was giving up a big part of my responsibilities, which Dick just couldn’t get. He kept saying to me, ‘But you’ re going to be the
CFO
, and that’s a huge job!’ And I kept saying, ‘But I
am
the
CFO
.’

“I said to Dick at one point that I thought this move was going to make life even more difficult for me, and I was tired and frustrated. And so I said that if he made Joe and me co-presidents, I’d do it, because then I still had to battle it out with Joe but at least I could turn around and tell the [executive committee] what to do. Dick basically said no, partly because I think he was very skittish about what had happened with Chris—he didn’t want to be walled off from the organization again. He said no, and so I said, ‘I quit.’”

Fuld acted as though this conversation had never happened. He kept appearing in Cecil’s office, even after Cecil’s notice had been given in April 2000, to the point that Cecil moved his office to a different floor in the building in June 2000. He hung around only at Fuld ‘s request to make a smooth transition. David Goldfarb, the former controller, was eventually made
CFO
. Unlike Cecil, Goldfarb talked often and loudly.

“Goldfarb rubbed a lot people the wrong way,” says a colleague. “He was very vocal and very critical of everyone else’s divisions, which, of course, the division heads didn’t like. They viewed him as just an overopinionated accountant. He had never run a division.”

Fuld, however, liked the fact that Goldfarb didn’t care if he undermined division heads in front of them. It was refreshing around that table to hear from someone not paralyzed with a fear of saying the wrong thing.

On Wall Street, they pay you so much that they own you. You know? So it’s different. They have your soul. You gave it to them for the money.

—Karin (Mrs. Bradley) Jack

L
ehman senior executives were expected to have wives. And, if possible, they were supposed to be happy with them—or at least pretend to be. One of the things that troubled Dick Fuld—openly—about Scott Freidheim, the young banker who was appointed managing director, office of the chairman, in 1996 and then became global head of strategy in 2005, was that he waited until he was 42 to get married. Fuld wanted all his executives to be as settled domestically as he was.

He hated to see signs of marital discord. During the annual Lehman retreat at the Fulds’ ranch in Sun Valley, it wasn’t uncommon for Dick to pull one of his guests aside and ask him numerous questions about his home life to make sure everything was all right.

“Are you all having trouble?” he asked Bradley Jack, after overhearing an argument between Jack and his wife Karin. “He
really
wanted to know,” recalls Karin. “He didn’t think Brad and I looked happy enough. It really worried him.” (Brad Jack concurred with Karin’s recollection.)

No one ever heard the Fulds argue—although Karin Jack says she heard Dick berate Kathy when she was 10 minutes late bringing the wives back from an expedition in Sun Valley. This was a rare occurrence. Within his own family, Dick had a rule. He told his children, “Disagree with me all you want in private. But never air your domestic grievances in public.” The Fulds were, publicly at least, one of the happiest couples on the planet.