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Burning Down His House

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About a month later, on April 12, Fuld had dinner with Treasury Secretary Paulson, who’d run Goldman Sachs until June 2006. There was, as one Lehman insider reported, “no love lost between them.” Yet the dinner went well. Immediately after, Fuld excitedly e-mailed his legal director, Tom Russo, “We have [a] huge brand with Treasury.” At the time, Paulson seemed mainly worried about the fate of Merrill Lynch.

Less than two months after that cheerful dinner, on June 9, Lehman reported second-quarter earnings—a $2.8 billion loss. At the same time, Lehman said it was raising $6 billion in new capital from blue-chip investors, which suggested not only that important people believed in Lehman’s future but that its balance sheet now looked stronger. (It turned down Warren Buffett—who was trying to extract a 10 percent guaranteed return, similar to the deal he made with Goldman three months later, for a group of investors who would only take 7 percent, though not with anywhere near the Buffett cachet.)

“Senior management believed that if we announced our earnings and our capital raise simultaneously, then the market wouldn’t freak out,” said one executive close to the situation. But they’d misread the market’s skittish state. “The problem was that not many people were dealing with the outside world. Dick didn’t talk to outside, Joe didn’t, the heads of businesses didn’t,” the executive said. “So no one had had a sense of how bad the news would be received.”

Lehman’s stock was down 54 percent for the year.

In the weeks that followed, Fuld spoke frequently to Paulson about his predicament. “Treasury wanted to be helpful,” according to a person briefed by Fuld. “But there were limits.”

People saw Erin Callan as out of her depth. Even Callan seemed surprised at the promotion. “It came out of left field,” she said.

For months, Fuld had been searching for a strategic partner, but some wondered if he wasn’t also in denial, still acting as if his fierce will could shape reality. “There would be times that Dick thought that by force of personality he could prevail,” said one former associate. For Fuld, problems—no matter how large—yielded to effort.

Fuld was still cautiously optimistic. He canceled his vacation to get back to work, but he seemed convinced that the market would soon come to its senses. “The feeling was we can’t have a loss the third quarter,” said one senior executive. “And the feeling at the top was we probably wouldn’t.”

To many employees, Fuld, even at 62, was the most intimidating person they’d ever known. “When he said something, you did it,” recalled one. And now he urged people into battle. He got on the public-address system and spoke to traders. He even handed out some plastic swords. They were in a fight, he wanted them to know, but they’d emerge stronger. And most believed, as one said, “some of our best work was done with our back against the wall.”

They’d been through crises before. Many recalled 1998, another year the firm faced down the enemy. That year, when the giant hedge fund Long-Term Capital Management failed, rumors spread that Lehman was on the verge of failing, too, due to its supposed exposure. Fuld boarded a company plane and visited large investors one by one. Fuld also pushed back at the pernicious rumors. A famous story, perhaps apocryphal, that had wide currency at Lehman was that, in the midst of the Long-Term crisis, Fuld encountered John Thain, then Goldman’s CFO. Goldman was thought to be a motor of the rumor mill.

“How’s it going?” asked Thain innocuously.

“Not so well,” Fuld said. “People are spreading nasty rumors.”

“I can’t imagine that,” Thain was supposed to have said.

Fuld paused. “When I find out who it is, I’m going to reach down his throat and tear out his heart,” he told Thain and gave him one of his brutal stares.

The rumors trailed off, especially after the SEC threatened to investigate the rumormongers. “Dick bought us time,” says one executive-committee member. It was the type of action-hero effort people came to expect of Fuld. “Dick saved the firm so many times,” as one investment banker puts it.

This summer, though, the reliable us-against-them mentality seemed to create blind spots. There was a disconnect to the outside world, and the risk was substantial. “The environment had become so insular,” said one former executive. Fuld okayed decisions, but Gregory packaged material so that the choice was obvious. And the executive committee offered no counterweight. “Dick used it to buttress his personality,” says one cynic.

In truth, the relentless optimism, both inside and out, was probably doing as much harm as good. On June 9, the day of the disastrous earnings announcement, McGee forwarded Fuld an e-mail from a former Lehman executive who’d left for a hedge fund: “Senior managers have to be much less arrogant and internally admit that some major mistakes have been made,” the e-mail read. “[They] can’t continue to say, ‘We are great and the market doesn’t understand.’ ”


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