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Burning Down His House


Fuld's mansion in Greenwich is one of the five residences he owns.   

Fuld, though, wondered if the problem was with Gelband, not the market. “You don’t want to take risk,” he said—a deep insult in the trader’s vernacular.

At the beginning of March 2007, Gregory took Gelband to lunch in the company dining room. The two had never been close, an ominous sign at Lehman. “When you had no chemistry with Joe, your time was going to be limited,” says one person close to him. Complicating Gelband’s life, Gregory agreed with Fuld on the market’s direction. “If Dick was rosy, Joe was rosier,” said one insider.

At lunch, Gregory pointedly told Gelband, according to a person briefed on the conversation, “you’re not moving. Either you make a change or I’m going to.”

Gelband soon left, an event that for many insiders marked an early sign of the Lehman crisis. “It upset a lot of people when Mike was fired,” said one senior Lehman official. Gregory brought in one replacement, then another for Gelband, the last of whom, Andrew Morton, left in September.

None of Gelband’s successors had deep experience in real estate. And later, Alex Kirk, who’d worked under Gelband and shared his bearish views, confronted Gregory about the hires. “What are you doing [putting these people in critical jobs]? These people are not experts,” Kirk told Gregory, according to people who heard accounts of the conversation.

Gregory disagreed. “No, people need broad experience,” he said. “It’s the power of the machine. It’s not the individual.”

After Morton was hired, Gregory told Kirk, “You can stay if you want, but there’s no place for you.” He got the message and left in February 2008, the culmination of what was sometimes referred to as “a Joe-icide.”

“Were there a lot of people in important positions without deep experience at a crucial time?” one senior executive later asked. “Absolutely.”

One person whom Gregory instinctively trusted was Erin Callan, a rising star in the banking division. “She’s one of the smartest people I ever met,” said a former colleague. “Clients loved her. People who worked for her loved her. She was very confident. Very team-oriented. But naïve.” To be sure, Callan had taken some of the country’s most prominent hedge funds public, clever deals, shrewdly executed. But when in September 2007 Gregory named the 41-year-old Callan CFO, making her one of the highest-ranking women on Wall Street, some were stunned. Gregory had long wanted to elevate women in the firm. But the move stirred resentment and alarm. “Joe plucked Erin out of obscurity,” complained one banker. Many believed she was out of her depth. Even Callan seemed surprised. “It came out of left field,” she told one colleague. Another quality that rankled some was what was seen as Callan’s love of attention. She appeared, to some, a sponge for credit.

It was a complicated moment to place another less-than-seasoned person, no matter how bright, into a top job, and perhaps that was especially true of the CFO job. The markets had crested and were beginning to break, and some at Lehman were deeply concerned about the firm’s exposure.

Still, the official view was, the firm is solid. We just need to get our story out. And Callan was to be the storyteller.

Callan’s predecessor had been capable and well regarded but, according to some, lacked gravitas and camera-presence. Callan was a different package: blonde, vivacious, intelligent, articulate, and fashionable. She was an instant business celebrity.

Callan soon faced a giant challenge to the Lehman narrative. On March 16, Bear had been rushed into the arms of JPMorgan Chase, a last-minute fire sale that narrowly saved it from bankruptcy. A lot of people thought Lehman was right behind it.

A couple of days later, Maria Bartiromo of CNBC asked Erin Callan, “Is Lehman next?”

“Categorically no,” said Callan—a statement that may well be the “Read My Lips” of the financial crisis.

Around the same time, Callan led Lehman’s first-quarter-earnings call with analysts. Citigroup and Merrill Lynch would both announce significant first-quarter losses—Merrill at $1.97 billion, Citigroup at $5.1 billion. Lehman coolly posted a profit of $489 million. It was smaller than usual, and included some “hard-to-repeat gains,” as The Wall Street Journal put it. Still, it was Lehman’s 55th consecutive profitable quarter.

One hedge-fund owner, David Einhorn, later asserted that Lehman had overvalued important assets, in effect fudging its books. In fact, many of Lehman’s losses were “back-loaded,” already lurking on its books. But that day, Callan’s confident, optimistic account prevailed. “The Street believed that Lehman must be better risk managers [than other banks],” one executive explained. Lehman’s stock price jumped 46 percent on the earnings report. Later, Callan walked down to the Lehman trading floor and got a standing ovation.


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