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Burning Down His House

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Later that week, McGee requested the showdown that stripped Fuld of his lieutenants, and pushed him from the center of power.

After the meeting with the bankers, Gregory walked into Fuld’s office, a modern CEO’s suite with library, shower, and breathtaking views of the Hudson. “It’s not your fault,” Fuld told his ally and friend of 30 years. “This is a market condition. Everyone is going through this.”

“It’s the right thing.” Gregory said, according to people briefed on the conversation. “Everyone wants a head.”

“This is very, very painful,” Fuld told Gregory. “I don’t want to do it.”

Later that day, Gregory went to Callan, “We’re going to go.”

Gregory sat her down. She’d already realized that she could no longer sell the Lehman story. “I’m sorry for ruining your career,” Gregory told her.

At first, Callan was just sad—she’d loved Lehman as much as Fuld—but then she felt humiliated. Partly she blamed those who’d pushed her forward, Gregory and ultimately Fuld. “At the end, when she was being laughed at, Dick let them machine-gun her,” said one of her admirers. “He removed the body.”

On June 12, having pushed out Gregory, Fuld named a new president, Herbert “Bart” McDade, the investment bankers’ choice. (“If Bart wasn’t made president, a lot of people were going to leave,” said one investment banker.)

Fuld put the best face on the change. “Bart has been my partner of 25 years and has proven himself to be the firm’s best operator,” he told analysts. But with McDade’s appointment, Fuld’s control diminished. As if to make the point, in one of his first acts later that month, McDade brought back Gelband and Kirk. “I’m here because of Bart,” Gelband pointedly told Fuld.

If Gregory was Mr. Instinct, McDade was all about analysis. Go to him for a decision, and he wanted endless details and then insisted on thinking about it. McDade brought in a battalion of other analysts, and they didn’t like what they saw. Once McDade’s team got a look at the books, they were shocked.

Fuld was still ostensibly at the helm, but as one executive put it, “The fabric of what Dick built was visibly cracking.” Fuld told McDade, “We’re not together.” McDade didn’t have the time to worry about teamwork, and that seemed to set Fuld on edge. Some took it as a sign that Fuld worried McDade would toss him out, as Glucksman had tossed out his boss. A coup, though, had already taken place. “You need one guy in charge,” said one person close to the process. And increasingly that was McDade. “Bart worked with his kitchen cabinet. He worked with them on all issues,” said one Fuld loyalist. Decisions still flowed through Fuld, but increasingly it was a struggle. Those who’d once been in Fuld’s inner circle now felt like outsiders.

To add to the insult, some on McDade’s team felt Fuld was only getting in the way. McDade was respectful and kept Fuld in the loop. But explaining everything to Fuld only slowed the process. “He wasn’t a very sophisticated thinker,” was the view of some of McDade’s team.

By July, short-sellers—who bet on a stock falling and thus put downward pressure on the stock—were closing in on the mother ship, just as they had circled Bear Stearns, which had been rescued at a risk of $29 billion in taxpayer funds. By August, Fuld was desperate to find a buyer. “We contacted virtually every financial institution in the world with the interest and capacity to a deal,” says a person close to the process.

After the bankruptcy, Paulson insinuated that Fuld had not searched hard enough for a buyer, but the truth was that he spent his summer in desperate talks. There was little interest, though. Lehman’s crown jewel was its real-estate businesses, and real estate was where all the problems were. The search for a buyer was not only frantic but humiliating. Fuld told Bank of America, one potential buyer, “I think I can do a lot if I remain CEO, but it’s not a condition,” recalled one who was involved in the process. “Near the end, it was said in calls precisely. ‘We have two priorities, that the Lehman name and brand survive and that as many employees as possible be saved,’ ” said a Fuld intimate. It was a carefully crafted script. In conversations with buyers, Fuld added, “You notice our priority isn’t price.”

Through the summer, Fuld phoned Paulson, sometimes more than once a day. He still counted Paulson a supporter who could save Lehman, though privately the Treasury secretary seemed perplexed by the volume of calls.

Then on September 9, JPMorgan Chase co-chief of investment banking Steven Black spoke to Fuld by phone. Chase brokered the funds that Lehman needed to operate day-to-day. Black told Fuld that JPMorgan needed $5 billion in extra collateral, and in cash. If not, everyone at Lehman understood, JPMorgan would not open for business for Lehman the next day, essentially freezing its accounts. And if that happened, it was over. JPMorgan had clients whose interests it had to defend. Still, as one executive close to Fuld said, “Jamie Dimon [JPMorgan’s CEO] was doing whatever was in his own personal interest. He knew the consequence was a huge blow to us, and he didn’t give a shit.”


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