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Burning Down His House

Is Lehman CEO Dick Fuld the true villain in the collapse of Wall Street, or is he being sacrificed for the sins of his peers?

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Lehman Brothers chairman and CEO Dick Fuld after testifying before Congress on October 6.   

On June 11, Richard S. Fuld Jr., CEO of Lehman Brothers, sat down to lunch with a half-dozen of Lehman’s senior investment bankers. Since the fall of Bear Stearns in March, Fuld had been struggling to keep “the mother ship,” as Fuld liked to call his firm, from taking on water, but with little success. The stock was sinking quickly. In just a few months, Lehman had given back ten years of gains. Two days before the meeting, Lehman announced a second-quarter loss of $2.8 billion, its first negative quarter in fourteen years, causing the stock to plummet again, 21 percent in a couple of days. Fuld’s own people, their net worth evaporating, were losing confidence. Hugh Skip McGee, the global head of investment banking and for years a loyal Lehman employee, had requested the meeting. They gathered in Fuld’s private dining room on the 32nd floor of Lehman’s Seventh Avenue headquarters, a somber mahogany-paneled room, with a list of several demands, chief among them a change in leadership.“The board of directors is going to be under pressure,” said one banker. And then added, “It has to deliver a head to the street.”

At about five-eight, Fuld isn’t physically imposing. But he has intensely dark eyes and a deep, wide forehead that slopes so sharply it reminds some of a can opener. Those features, and a palpable inner intensity, give him an almost animalistic presence. “Through these little physical cues, he made it seem like [a situation] will lead to physical violence if you didn’t relent,” says one former executive.

“I’ve given you fourteen years of earnings. I have one bad quarter. This is how you respond?” Fuld shot back. The veins on his neck popped.

But the bankers pressed their case. Actually, they wanted two heads. They would spare Fuld the indignity of a coup, but they wanted him to fire Joe Gregory, Lehman’s president, and Erin Callan, Gregory’s protégée, whom he’d made CFO and who had been the public, sunny face of Lehman as it spiraled down. Firing Gregory would be personally devastating to Fuld, as the bankers knew. Over three decades at Lehman, the two had rarely sat more than a hundred feet from each other. Professionally, they were complements: Mr. Inside and Mr. Outside.

“If it’s not Joe, then it would be you,” said another banker. “And that would be a disaster.”

Fuld has a famously voracious appetite—senior executives sometimes ordered him a mid-morning plate of ribs. The joke was that he never gained weight; his intensity burned off the calories. That day, he hardly touched his food. At the end of the meal, he pushed out of his chair. Fuld had agreed to most of the bankers’ demands, but he had been careful not to make an explicit commitment to fire his oldest ally. He wanted to know whether there was any way he could let Gregory and Callan survive without the bankers blowing him up in public.

“What are you going to say when you leave this meeting?” Fuld asked.

“It’s not enough,” one of the bankers replied.

“I got it.”

The ax fell the next day.

Three months later, on September 15, Lehman filed for bankruptcy, the largest in history and a devastating blow to an already fragile financial system. Fuld became a symbol of failure, the face of arrogant, blindered, massively overleveraged Wall Street. Fuld is blamed for betting the farm on the way up, then stubbornly refusing to recognize the company’s dire straits on the way down. A few weeks after the bankruptcy, Congress summoned him to Washington for a deeply humiliating inquisition. “You’re the villain today,” one congressman told him. For Congress, he was little better than a looter, pocketing millions as his company collapsed—$480 million over half a dozen years, another congressman charged. If that wasn’t enough pain, three sets of prosecutors launched investigations of Fuld and Lehman, probing whether shareholders had been duped.

But Fuld is also, in some sense, a victim. He’d held on to 10 million shares of Lehman stock until the end and lost almost $1 billion—“He drank the Kool-Aid,” said one executive. And consensus grows that the Lehman fall was one of Treasury Secretary Henry Paulson’s and Fed chairman Ben Bernanke’s biggest mistakes, amplifying the crisis exponentially. These days, Fuld goes to his office in the Time & Life Building—he’s still nominally the CEO of Lehman—and talks on the phone to a few former colleagues, those he’d been close to for years, replaying the final months of the firm. They often work one another to the edge of rage trying to decipher “the mystery,” as Fuld still thinks of Lehman’s collapse. Why didn’t the government save Lehman the way it saved so many others, Bear Stearns and AIG and, just last week, Citigroup? Fuld and his allies can’t help but blame Paulson, whom he’d trusted and, until the end, viewed as an ally and even a friend. Yet Paulson, for reasons Fuld doesn’t yet understand, participated in making him the scapegoat. “He feels betrayed,” said one friend. At night, Fuld has trouble sleeping. Most of the time, he lives in Greenwich, Connecticut, in one of his five houses. He can wander through the twenty rooms, eight bedrooms, the poolhouse, tennis court, squash court. Mostly, he sits and replays Lehman’s calamitous end. “What could I have done differently?” he thinks. “In certain conversations, what should I have said, what could I have done?” How, he wonders, did it all go so disastrously wrong?


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