The Devil's Casino (9 page)

By 1990, Jim Robinson had decided it was time for a change.

Shearson Lehman had started to lose money as the market turned sour at the end of 1989. The high-yield bond market started to crash and, in its wake, down came the equities and mergers and acquisitions deals.

Peter Cohen had also made what now looked like two bad missteps. A year earlier, in the fall of 1988, he and Robinson had stepped on their own feet when they bid unsuccessfully for the snack and tobacco conglomerate
RJR
Nabisco. In a battle that exemplified the excesses of the 1980s, they were beaten to the prize by buyout king Henry R. Kravis—events chronicled by Bryan Burrough and John Helyar in
Barbarians at the Gate
.

In the fall of 1988, F. Ross Johnson, a Canadian originally from Winnipeg, who was the president and
CEO
of
RJR
Nabisco, was looking to pull off a company buyout of
RJR
Nabisco and take the company private. Johnson first approached buyout specialist firm Kohlberg Kravis Roberts & Co. (
KKR
) about doing the deal, but he ultimately went with Shearson Lehman Hutton (
SLH
). They offered Nabisco shareholders $75 per share, or $17 billion. But a fierce bidding war between
KKR
and Shearson ensued, and in April 1989,
KKR
emerged victorious, taking control of
RJR
Nabisco with its bid of $109 per share, or $25 billion. It was a humiliating defeat for Cohen and Robinson. Johnson retired and all of a sudden both Cohen and Robinson looked vulnerable.

Then came another fiasco.

In 1988, Cohen had bought the upscale brokerage E.F. Hutton & Company—at a vast premium—for almost $1 billion, because he believed that Dean Witter’s
CEO
, Philip J. Purcell, was bidding low. (According to multiple sources, it was widely believed within Lehman at the time that Purcell was bidding merely to drive up the price.)

When Cohen called Ron Gallatin into his office and told him what he wanted to do, and how he wanted to do it, Gallatin said straight off that he wouldn’t get involved in something like that. Cohen asked him why, and Gallatin said: “Because it’s going to take us down.”

“What are you talking about?” Cohen responded, clearly annoyed. Gallatin privately thought Cohen was empire building, that he wanted E.F. Hutton for its size. He thought Cohen wanted to be bigger than Merrill Lynch, which had approximately 13,000 brokers.

“Your timetable does not allow for enough due diligence,” Gallatin said, “particularly given their [Hutton’s] tax shelter liability.” Gallatin was reminding Cohen that Hutton was being sued by almost every customer who had bought a tax shelter from the firm. Hutton had also recently (May 1985) pled guilty to 2,000 counts of mail and wire fraud, and agreed to pay a $2 million fine plus $750,000 for costs and $8 million in restitution to the victims of a so-called check-kiting scheme. Gallatin thought buying the brokerage was idiotic. “Hutton is falling on its ass, the markets aren’t in good shape, and you’ re out of your fucking mind,” he told Cohen.

Jim Vinci also came to the same conclusion. In late November he and Robert Druskin, the
CFO
at Shearson Lehman, met to try to get a handle on Hutton’s value. Vinci says they began with the book value and started subtracting liabilities. It took all day.

At the end, the number they were left staring at was a big, fat
zero
.

“After all the adjustments, there was no book value,” Vinci said. “I went home to my wife and told her I’d just wasted Thanksgiving.”

But Cohen went ahead with the acquisition. (He now says that Robinson had promised him a cash balance of $1 billion the following year to pay for it, but that Robinson failed to deliver—hence the implosion.)

Whatever the reason, Gallatin and Vinci were proven right. The deal went through, and again there was a clash of cultures. Hutton brokers left Shearson Lehman Hutton in droves. Hutton regarded itself as the superior brand, and thought of Lehman, in an unusual twist, as retrograde. By the early 1990s what had been a brokerage of over 13,000 employees was down to 9,000 and
SLH
was shutting down branches throughout the United States.

Hutton was the second nail in Cohen’s coffin.

In 1990, Robinson decided he wanted to streamline his American Express credit card business and separate it from the Shearson Lehman business, so he took a write-down of $1 billion on Amex.

Meanwhile, Shearson Lehman, which was worth $400 million, was bleeding $60 million a month and Robinson had to recapitalize it with $1 billion. Given those cash flow problems, he didn’t see why he needed to pay Lehman people their bonanza bonuses.

The job of schooling him fell to Gallatin, who patiently explained the situation at Robinson’s lavish penthouse apartment in the Museum Towers (near the Metropolitan Museum) one night in late fall (bonus conversation time).

“It was my job to help Jim explain to his board that even if Shearson Lehman had lost $650 million, they had no choice but to pay Lehman bonuses on what they’d made,” says Gallatin.

The two men sat in Robinson’s spacious living room, tired but eager to find a resolution. Robinson, who was from Atlanta, looked at Gallatin and said, in a charming Southern drawl that belied his exasperation, “What are you talking about, paying a bonus? You lost money.”

“I said to him, ‘No, Jim, Lehman
made
money.’
They
, Shearson, had lost money. We went back and forth—and he’s one of the nicest gentlemen you’ ll meet in your life—but eventually I said, ‘ Fine, you don’t want to pay the bonuses. But I’m going to go down in the elevator now.’

“And he looks at me and he says, ‘
What
are you doing? ‘ It was one o’clock in the morning. He says, ‘Of course you’ re going to go down the elevator. You’ re not going to walk down the stairs.’ I said, ‘Jim, you don’t get it. I’ m going down in the elevator.’ He may think the capital of the firm was the balance sheet, but the real capital of the firm is the people. And if he wasn’t going to make the bonuses, tomorrow the key Lehman people are going to [go] down the elevator.”

Meaning that Robinson would be encouraging his best people to leave if he didn’t pay up.

Lehman employees got their bonuses paid that year.

On January 30, 1990, Robinson forced Peter Cohen to resign and replaced him with Howard L. Clark Jr., or “H,” whose father, Howard Sr., had been Robinson’s predecessor at American Express. Cohen had lost his power in part because of the
RJR
Nabisco and E.F. Hutton deals, and was undermined further by impressions that followed the gratuitous purchase of a $25 million ski lodge and conference center in Colorado. “There were just excesses,” Lessing later wrote of Cohen and his cronies: “They took their eye off the ball. We kept working and taking on more power. Eventually we ended up running both firms.”

The Lehmanites did not hide their joy at Cohen’s firing. They made a satirical short film, which was shown at the 1991 holiday party at the Museum of Natural History. Entitled “The History of Lehman Brothers, Part One,” the film mocked Cohen using the tune from “If I Only Had a Brain” from
The Wizard of Oz
. The lyrics went like this:

I could while away the hours

Conversing in the towers

Consulting with the lame.

bq.

And my head I’d be scratching

While my schemes they’d be hatching

If I only had a brain.

I smoke a big cigar

My deals are quite bizarre.

So what if
KKR
took
RJR

We got first cap

So it was crap.

Oh some day I’ ll find a way, sir

To make this business pay, sir

And though it sounds insane

With the stuff I’ ll be struttin’

I could give back E.F. Hutton

If I only had a brain.

At the end of the video
LCPI
traders dance and sing Billy Joel’s “We Didn’t Start the Fire.”

“H” Clark immediately saw the extraordinary energy and spirit that bonded
LCPI
and tried to utilize the passion so that it had a more constructive purpose. He had reorganized Shearson Lehman’s management, starting with the elevation of Fuld, who became co-
CEO
of Lehman with Tom Hill. Chris Pettit was their
COO
. Lehman Brothers was also allowed to officially be called “Lehman” again, since “H” recognized that it now had superior brand recognition to Shearson.

The three Lehman leaders immediately got to work on their plans to dominate Shearson and then consume it. One of their first tasks was to reduce overhead. But they weren’t going to have Lehman’s bonus pool reduced in the process. One senior employee recalls a meeting convened to restructure the overall bonus pool, already tilted heavily toward Lehman’s side.

The man representing Amex was in charge of the retail business, Jonathan S. Linen. Opposing him were Hill, Fuld, and Pettit.

Fuld remained quiet for most of the negotiation, allowing Pettit and Hill to divide and conquer. “They sort of sliced [Linen] up,” says someone in the room. John Cecil, the McKinsey consultant hired in 1990, recalled that Pettit and Hill “came out of the meeting with the bonuses skewed [in their favor] even more than before.”

The trio was always looking for ways to subvert their putative masters. Their job was made easier, says one senior Lehman executive from that era, because “H” Clark was seen as easy to manipulate. “There was a joke that he was called ‘H,’ unlike his father, who was called ‘ Howard,’ because he had one-sixth of his father’s brains,” said one former senior Lehman leader.

“H” conducted the search for Lehman’s
CFO
on his own. It took several months, and when he finally sent down a potential candidate, Richard B. Stewart Jr., Cecil thought he was weak and told Clark so. Clark seemed surprised. “But Dick and Tom love him,” he said.

Cecil says he went to see the Lehman co-heads and told them he thought Stewart was weak.

“Of course he is,” Cecil says that Hill responded. “We want to control him.” (Hill says this never happened.)

Hill and Pettit were clearly the leaders of the transformation of Lehman from 1990 to 1994. “Dick didn’t have that much of a role,” says a former colleague. “That was Chris. Except for banking—Tom, even when he was co-head, really was the head of banking. And so, as long as they were there, there wasn’t much for Fuld to do.

“And he was certainly not very visible to the organization. The bankers wouldn’t see him going out to see banking clients. Nobody in the organization would see Dick running things.”

When they did see Fuld working, he didn’t exactly dazzle.

One person recalls a meeting at the Plaza Hotel in Manhattan, in which Clark had asked Fuld and the other senior managers to stand up for a few minutes and describe their respective parts of the business.

“Dick stood up there, and it was the most awkward meeting I ‘ve ever seen in my life. He’d say a sentence—[long pause]—and then he’d say—[long pause]—a sentence and then he’d say—[long pause]—a word. It was unbelievable.”

Around that time, Jim Vinci was asked to help Fuld with his speech for the year-end meeting at New York’s American Museum of Natural History. Vinci gave him a draft of the speech, and Fuld went through it and began inserting the word
clearly
every chance he could get. According to a source who was present for the conversation between the two men, Vinci said, “Dick, you can’t say ‘clearly’ that often. As a matter of fact, you can’t say it at all.” Vinci finally closed the door to Fuld’s office and said, “Look, you need a coach. You need someone to help you.”

Fuld took Vinci’s advice. He attended courses at Dale Carnegie Training, a training center founded by the author of
How to Win Friends and Influence People
to assist in “bringing out the best” in business leaders.

He never forgot Vinci’s help. Many years later, in October 2007, Lehman Brothers had an alumni cocktails event at the Four Seasons restaurant in midtown Manhattan. Fuld began by giving a speech, and later, in front of four or five former managing directors, put his arm around Vinci and said, “Gentlemen, I want to introduce you to the first person who told me no, that I can’t do something.”

Vinci says he smiled, and thought to himself, “Yeah, and probably the last.”

While Fuld worked on his public speaking skills, it was becoming clearer and clearer to many that Jim Robinson wanted out of the banking business. Word went around the Lehman offices that Gallatin, who negotiated all of Lehman’s compensation, had been described to the American Express board by Robinson as a “man who enters revolving doors after me and somehow reaches the other side first.” The board was not exactly thrilled to hear this from their
CEO
. Befuddlement doesn’t wear as well as bespoke suits.

On January 25, 1993, American Express fired Robinson and replaced him with Harvey Golub, a man one senior Lehman person described as “a crazy guy, with a bizarre sense of humor and difficult to deal with.” Golub, nicknamed “Ego Harv,” was known to have installed a car wash at his house in Minnesota.

When he moved to New York, Golub quickly established a reputation for micromanaging, which did not go down well with the Lehmanites. Golub and Hill immediately tangled over Lehman’s compensation agreement, which Golub wanted torn up.

“I’ m not asking—I am telling you what to do,” Golub told Fuld, Hill, and Pettit. Hill threatened to take the matter to the Amex board, where he knew he had a supporter in John “Jack” Byrne, the insurance industry executive. Hill pointed out to Golub that he and Fuld would lose all credibility with their staff if they reneged on the compensation program.

Golub backed down—but it seemed that Hill was a marked man from then on. According to someone close to Fuld, Golub had intended to rid himself of Hill (whom he viewed as a Robinson loyalist) from the start, and after the disagreement over compensation he was looking for any excuse.