The Devil's Casino (3 page)

“Never be fooled by Tom’s charm,” a colleague said. “He’s as tough as anyone when he wants to be.”

The last member of Fuld’s inner circle in attendance that night was Scott Freidheim, whom Fuld looked upon almost as a son. Freidheim, then 41, is the son of former Booz Allen & Hamilton vice chairman and former
CEO
of Chiquita Brands International, Cyrus Freidheim. Scott was yanked out of Lehman’s investment banking unit in 1996 and appointed managing director, office of the chairman. He quickly rose to the top echelons of the organization, which earned him as many enemies as friends.

Most of the executive committee was there: Hugh “Skip” McGee (the head of investment banking), Herbert “Bart” McDade
III
(head of equities), and Ted Janulis (mortgages). Also present were Steven Berkenfeld (chairman of the investment banking committee) and John Cecil, the small, earnest former McKinsey director who had risen to become the
CFO
of Lehman in the late 1990s and who, though he had left Lehman in 2000, was still being paid as a consultant. Also gathered were a large number of senior executives of NeubergerBerman, Lehman’s asset management division, commonly referred to as its “crown jewel.”

Months earlier Joe Gregory had taken Walker aside. “You know, you didn’t have to invite all these people,” he said. “Remember: These are just the people you work with. They are not your friends.”

Gregory was the only person at Lehman who had been at the firm longer than Fuld. Their careers began in the early 1970s when Lehman was one of the leading advisory mergers and acquisitions (M&A) houses on Wall Street, before it became a bond and mortgage shop.

Fuld and Gregory had fought in what became known as “the Great War” of 1983 and 1984, an epic battle for control of Lehman between their professional mentor, the bond trader Lewis “Lew” Glucksman, and Peter G. “Pete” Peterson, the former commerce secretary. A preening sophisticate who dominated luncheons with his prattle, Peterson was widely disliked by the relatively blue-collar traders for his patrician demeanor. Glucksman and his traders won the Great War and ousted Peterson, chiefly because by the mid-1980s the traders were making more money than the advisory bankers aligned with Peterson. But the fight cost the firm dearly. Top banking talent fled and revenues plummeted, making it vulnerable for a takeover by the newly merged entity of American Express Shearson in April 1984. Peterson hadn’t left without implanting a lethal sting. It was greatly in his financial interests to get Lehman sold. In fact, it was greatly in the interests of pretty much
all
the senior investment bankers to get it sold. This was precisely what happened, as detailed in a 1986 saga chronicled by Ken Auletta in
Greed and Glory on Wall Street
. Glucksman was offered a $15.6 million noncompete buyout fee (on 4,500 shares). He and most of the other partners took the money and ran.

And Gregory and Fuld began their ascents into the ruling elite of the new Lehman Brothers.

The firm was founded in 1850 by three cotton trader brothers—Henry, Emmanuel, and Mayer Lehman. The cotton business had evolved from trading and general merchandising into an exchange in lower Manhattan. With the post – Civil War expansion of trading in stocks and bonds, the firm prospered and expanded. The next great leap for Lehman Brothers occurred after World War II, under the reign of Bobbie Lehman, who had a Rolodex bursting with names like Whitney, Harriman, and most of the rest of New York’s ruling class. He decorated the walls of Lehman’s offices downtown at One William Street with works from his private art collection—paintings by Picasso and Cezanne, Botticelli and Rembrandt, El Greco and Matisse. He was a gentleman, and his great strength was that he knew how to unite the people who worked for him.

Andrew G.C. Sage II, a former employee, told Ken Auletta, “Bobbie was not much of an investment banker. He wouldn’t know a preferred stock from livestock, but he was a hell of a psychologist.” Under him, Lehman became the
gentleman’s
banking house.

“The partners at Lehman were all men of stature,” Felix Rohatyn, the banker who kept New York City from the throes of bankruptcy in the 1970s, told Auletta. “They were principals. You dealt with them as owners of a great house. You felt that if there was any such thing as a business aristocracy, and at the same time a highly profitable venture, that was it.”

The firm’s stellar reputation survived Bobbie’s death in 1969. Many of its M&A bankers in the 1970s and early 1980s are still famous, still the icons of their profession. Their ranks included Eric Gleacher, Stephen A. Schwarzman, Peter Solomon, J. Tomlinson “Tom” Hill, Robert Rubin, Roger Altman, and a young Steve Rattner; they all achieved great success—and wealth—after leaving Lehman Brothers. It was infighting—typical in the firm’s last half-century—that brought Lehman low enough to be bought by Shearson American Express in 1983. And through that strange marriage (“Shearson taking over Lehman is like McDonald’s taking over ‘ 21,’ ” a Lehmanite told Bryan Burrough and John Helyar for their 1990 book,
Barbarians at the Gate
), Lehman stewed. And schemed. Its Lehman Commercial Paper Inc. (
LCPI
) unit grew to eclipse Shearson’s own department, and provided enough momentum for Lehman Brothers to finally spin out once again, its egos intact.

As for Fuld and Gregory? It had taken immense grit, courage, and a warlike mentality to restore the burnish to the once golden brand. They had defied the naysayers who believed that a tiny bond shop would never survive the Mexican peso crisis of 1994; and they did the same again through the Russian crisis of 1998. They had weathered rumor, had survived scandal, and had even ousted their longtime colleague, T. Christopher Pettit, to preside over a fully fledged global investment bank.

Since Lehman, in their hands, had gone public and had grown from 8,500 employees to 28,000, the stock price had risen by a factor of 16. The partners were all rich. In 2007, Fuld was named
CEO
of the Year by
Institutional Investor
magazine in the Brokers and Asset Managers category. The bank was once again competitive, once again a respected force on Wall Street. They weren’t now going to let it go down just because of an asset and housing crisis. They had survived 9/11, when their three floors of offices in the World Trade Center had been destroyed and their headquarters in the nearby World Financial Center badly damaged. They’d been through far worse.

And so, on this evening, for the sake of the well-liked George Walker, Lehman’s top management tried to have a good time, tried to forget about their troubles. They chatted, they danced, they drank.

Gregory and Fuld slipped away early. This was not unusual—Fuld had never been much of a party guy. He was famous for showing up at in-house cocktail parties for ten minutes and then leaving to be with his family. “We’ re going to be fine,” Fuld told a stranger who approached him just before he left the party. And if worse came to worst, he believed, the U.S. government wouldn’t let Lehman fail.

We’re going to be fine
.

You had this senior group of guys; there was Dick, obviously,

but also the four guys in the carpool who started to run the

businesses: Joe, Tommy, Stevie and Chris. They ran Lehman. They
were
Lehman.

—Craig Schiffer, founding partner at Sevara Partners,

LLC
, and former Global Head of Equity

Derivatives at Lehman Brothers

T
he five men who would forge the culture of the new Lehman Brothers, the
post-Shearson
Lehman, could not have been more -A- different from the polished Lehman partners of the 1970s. They were street fighters, traders who had no time for the condescension of snobbish bankers who wore fancy suits but made less money than they did.

Lehman’s resurgence was led by Dick Fuld—and four men known as “the Ponderosa Boys.” This was a now badly outdated reference to
Bonanza
, the popular TV series in the early 1960s about an intrepid rancher and his sons, each of them born to a different wife. Lehman’s Ponderosa Boys were T. Christopher “Chris” Pettit, Joseph M. “Joe” Gregory, Thomas “Tommy” Tucker, and Stephen “Stevie” Lessing. Each morning at 5 A.M. they’d meet at Lessing’s house in Laurel Hollow, on Long Island’s north shore, for the 45-minute drive in to Wall Street.

They took turns driving. Chris was the tallest and oldest of the group, the clear leader. Tommy was his sidekick and confidant—his blond, good-looking best friend since kindergarten. Stevie was the youngest—and the chubbiest—but he exuded charm. He’d married well and it showed. Joe was the wild card. A man as nervous as he was voluble, lithe, with long hair, huge glasses, and rope bracelets, Joe looked completely out of place on Wall Street, and in that carpool. He looked like he ought to have been in a rock band, not a bank. He looked like Barry Gibb.

Dick Fuld was the son of upper-middle-class parents from Harrison, New York, a posh bedroom community north of Manhattan. His father, Richard, ran a company that wrote short-term loans for textile companies. Growing up, Richie, as he was known then, wanted to go into the Air Force.

Betsy Schaper, a media publicist who grew up across the street from him, remembers that he was doted on by his parents and was a local heartthrob. “Everyone wanted to date Richie,” she recalled. He was good-looking, straightforward, masculine.

Dick excelled in athletics at Wilbraham & Monson Academy, a boarding school in Massachusetts—but otherwise left little impression on the faculty there. “If you’d asked me back then, ‘ Is this a man with burning ambition?’ I would have said absolutely not,” said Schaper.

Fuld next studied at the University of Colorado, and his legacy there had nothing to do with his efforts in the classroom. He stood out mostly for the reckless passion he brought to parties, and for the fierce loyalty he showed his friends, and demanded in return.

Even then, he had grit, and didn’t back down. There is an oft-repeated story of the time he was expelled from his college Reserve Officers’ Training Corps (
ROTC
). One officer delighted in tormenting Fuld during weekly inspections about the shine on his shoes. This officer would step on Fuld ‘s shoes and then send him back to his dorm to shine them again. During one such inspection, Fuld returned from a second round of shoe polishing to find the officer tormenting a fellow cadet in a similar fashion, even stomping on the young man’s foot until he dropped to the floor in pain.

“Hey, asshole,” Fuld said. “Why don’t you pick on someone your own size?”

“Are you talking to me?” the officer asked, astonished.

“Yes,” Fuld said, and the two men started fighting.

After they were separated, Fuld was summoned by his commanding officer. “Do you want to know my side of the story?” Fuld asked.

“No,” came the answer. “There’s only one side to the story.”

With that, Fuld was kicked out of the program for insubordination, thus ending what he had hoped would be a career in the Air Force.

He graduated in 1969, with a degree in international business.

Later that year, Lehman partner Herman Kahn told Paul Newmark, then a senior vice president and treasurer of Lehman Commercial Paper Inc. (
LCPI
), that the grandson of one of his clients was coming to work at the firm. Newmark was not surprised—such friendly inbreeding had been common practice at Lehman Brothers for a long time.

“
My son, my cousin, my
. . . you know. Anyone who was a relative could get a job at Lehman Brothers,” Newmark says. “People at Lehman said Dick Fuld’s grandfather was an important man. No one was going to turn down his grandson. And anyway, Dick’s father had accounts at Lehman. That’s how he got the interview.”

Fuld got the job, and was sent to
LCPI
, which was run by the infamously intimidating head trader Lew Glucksman.

Glucksman would hurl objects across his office when he was in a bad mood, which was quite often. Newmark once saw him rip the shirt off his back in anger—and, on another occasion, throw a 20-pound adding machine. An ex-Naval officer and the son of a lamp manufacturer, Glucksman was increasingly riled by the fact that his unit was generating more than half the firm’s profits, but his traders were openly derided by the investment bankers—a well-born, well-educated, and well-groomed elite comprising most of the firm’s 77 partners, and led by
CEO
Peter G. Peterson. The bankers looked down on the traders and never paid them as well as they paid their fellow bankers. But as the capital markets grew, so did trading instruments and the opportunity for Glucksman’s division to make even more money, which only increased the tension within the firm.

Glucksman quickly took a liking to Fuld. “Dick was a very bright guy,” recalls Newmark. “If you were a good trader working for Lew Glucksman, you had it made.

“Lew loved people who would sit with him from 6:30 in the morning till 10:00 at night,” Newmark says. Glucksman’s home life had almost entirely evaporated following a divorce, so “people who were willing to spend 14, 15 hours” with him “were the ones who . . . went to the top.” Fuld rose quickly under his mentor.

Fuld and Glucksman were in many ways alike. Both were taciturn, ruthlessly competitive men who swore loudly, and often, in and out of the office. Both thought the most effective tool for managing a trading floor was fear. Both were swift, instinctive traders—never hampered by details.

According to a Lehman partner, in those early days when Fuld participated in the morning traders ‘ meeting, “everyone would say what they wanted to say, and Dick would say, ‘I like it. Buy it.’ So everyone would go back to their desks and buy
everything
, you know? Basically, everybody did what Dick said—they made money because Dick was right often enough.” Almost no one dared cross Fuld and take an alternative view, because if they lost money on a trade he hadn’t sanctioned, there was “hell to pay,” according to this trader.