The ’97 Barbaresco was not supposed to be opened for this. Stashed under a desk on the third floor of Lehman Brothers’ Seventh Avenue headquarters, the bottle awaited an appropriate victory. Like food, wine pairs well with vast sums of money.
But on Friday, September 12, as Lehman’s stock flatlined at $3.65 per share, the Trader knew it was time to uncork the Santo Stefano. He was in his late thirties, at the prime of his earning potential, a standout in one of Lehman’s profitable trading divisions. When the stock price had fallen below $20 a share in July, the Trader knew things were bad but took solace in the prospect of one more bonus cycle. Things are bad; things will be bad for a while. We’ll hunker down and survive, he had thought then.
But the fact that the Trader’s desk met its targets in August meant nothing at Lehman, where cascading losses from a few epic bets on commercial real estate triggered a firmwide meltdown. As one recently laid-off Lehman staffer said, in characteristic Wall Street vernacular, “These assholes on another floor completely dropped our pants.”
Around 5:30 p.m. on Friday, as the reality sank in, the Trader assembled his staff. With the weekend looming, this would likely be the last time they would gather at Lehman as a team. The eight colleagues, friends really, stood around glowing Bloomberg terminals as the $700 Barbaresco was poured into paper cups. A crowd formed. Champagne was brought out. What they didn’t know was that upstairs, Lehman lawyers and bankers were negotiating with counterparts at Barclays, Bank of America, and the Fed, piecing together a deal. After a few minutes, the Trader was called over to open the books for the counterparties. He brushed his teeth, scrubbing the scent of wine from his breath. Leaving work at nine that evening, the Trader knew that Lehman Brothers, as he’d known it, was at an end. The culture would change, inevitably. But at that moment, he couldn’t conceive of the firm’s actually going bankrupt.
The Trader had come to Lehman only a year ago, after being recruited from a rival firm. He’d studied physics as a grad student, then come to Wall Street as the tech bubble and the aggressive gentrification of the Giuliani years remade Manhattan into a banker’s playground, a place where a $2 million salary could seem like the norm.
Like many on Wall Street, the Trader’s career was moving along briskly. By 2006, he had settled into a new $2 million house in Connecticut with a pool, and kept a pied-à-terre in Manhattan. With two young children, he had private-school tuition to cover. He had recently completed a home renovation, and now there was talk of a new porch with a built-in stainless-steel barbecue. The Trader estimated that he was two years from making enough money to retire and never have to work again.
But by Saturday, September 13, Lehman Brothers teetered on the precipice of bankruptcy after Barclays and Bank of America walked away from a deal. The Trader was certain of little, except that he was a lot poorer. The unvested stock from his previous year’s bonus, once worth $3 million, was now reduced to a scant $6,000. And on Wall Street, self-worth and net worth can amount to the same thing. “The hardest thing in my mind is to have your compensation cut,” a veteran Wall Street executive says. “It’s almost like you’re a bad person.”
At a dinner party in Darien that evening, the conversation was a mix of denial and panic. An executive from UBS lamented what the Lehman meltdown would mean for Wall Street. “This is going to be a disaster,” the executive said. The executive’s wife nervously tried to steer the topic toward lighter subjects. She kept talking about summer vacation. And then she turned to the Trader and asked, “What do you do?”
The collapse of the world’s most powerful wealth-creating engine required everyone to take stock of their financials. One Lehman executive in Rye Brook, fretting about paying off a Hamptons summer house and a ski chalet in Vermont, panicked on Monday morning and laid off her nanny, who had been with the Westchester family for nine years. “The nanny called me crying,” says Marla Sanders, who runs Advance Nannies and staffs Lehman homes. “One of the children she had brought home from the hospital.” Sanders knows more cuts for her clients are on the way. “They’re going to have to sell homes. The question is, will the homes sell? They’re cutting some of the children’s activities out, dance class, acting class. Are they going to have flowers delivered every day to their homes? I don’t think so!”
Of course, this is one of the meanings of moral hazard, that term that’s been used so much in recent months. At this level, it’s not a tragedy so much as the end of a specific vision of the American good life, one that’s helped to define the city and its suburbs for more than a decade.
Pain was relative. “One of my managers, he’s a guy who is a little bit older,” one low-level Lehman staffer said on September 16. “He has an $800,000 mortgage, a wife who can’t work, and two kids. That gives you a little perspective.”
On Friday, September 12, the Wall Street Journal reported that Lehman’s former president, Joe Gregory, who was demoted along with former CFO Erin Callan in a management shake-up in June, was listing his Bridgehampton house on Surfside Drive for $32.5 million. The collapse of Lehman’s stock is a blow to Gregory’s lifestyle. He reportedly used to travel by helicopter to midtown from his $3.5 million mansion in Huntington, which was recently renovated, according to a Sotheby’s broker. According to one source, Gregory’s financial adviser was in negotiations with Lehman’s attorneys at Simpson Thacher & Bartlett, working to avert his filing for bankruptcy, after he borrowed money against his Lehman stock to pay for the renovation. “He owes a lot of money for it. They called the margin loan” late last week, the source said. (Gregory and attorneys didn’t return calls for comment.)
And some around the city met the crisis with a kind of glee. “What do you think just happened to the lifestyles of all the guys who girls want to meet?” one hedge-fund analyst wondered. “This is the best time ever to maintain ten girlfriends. You could be an African tribal leader!”
“Wall Street is like the auto industry in the seventies, which had a product that exploded on impact.”
In the days after the fall of Lehman, Craigslist attracted several posts from people who said they were Lehman employees, becoming a kind of clearinghouse for the detritus of the Wall Street male ego. On September 17, one banker put his East 91st Street apartment up for rent and with it, his bachelorhood. (“I can no longer afford my apartment seeing as Lehman Brothers felt the need to steal my money and my soul … I am moving in with my girlfriend.”) Another headline read, “Should I leave my fiancé? … I guess I already know the answer. My boyfriend … rather fiancé, is/was employed by Lehman Brothers,” the posting stated. “In less than a week we went from being millionaires to just having a couple of 100K … I suppose this means it’s over. I am who I am. I personally blame all this on [Lehman CEO] Dick Fuld. I blame him for ruining my happiness.”
Riding the Metro-North into Grand Central on Monday morning, September 15, the Trader stood out in his jeans and T-shirt among the rows of suits. A few passengers on the early-morning banker train were similarly dressed, and it was clear to all the commuters to what office guys in jeans, but reading the Journal, were headed.
Like Bear Stearns, Lehman’s culture was built on fierce loyalty to the firm. Senior staffers were granted bonuses that would be paid with 50 percent or more in Lehman stock, which they couldn’t unload for five years. In July, Dick Fuld approved a move to guarantee staffers a part of their bonuses midyear. But the plan backfired when staffers learned that they’d be assured only 20 percent of their previous year’s bonus and would receive restricted stock at $21 per share (“Great, so you basically shorted my own compensation,” one Lehman staffer groused).
At the Seventh Avenue headquarters, the Trader watched it all unfold like a nightmare. Managers instructed the staff not to trade. The company blocked outgoing e-mails with attachments. A colleague frantically called human resources to find out if his wife, who was due to give birth any day now, would be covered by Lehman’s benefits plan. With no instructions from the top, the Trader took his colleagues down to a lunch at Pastis. The next day at around 3:30 in the afternoon, Bart McDade, Lehman’s president and COO, roamed the trading floor with Barclays president Robert Diamond, who traveled from London to inspect his new prize. The men told staffers they had agreed to a deal for Barclays to acquire Lehman. They had set aside a bonus pool for this year, and it would be paid 75 percent in cash.
Even if the Barclays deal would save many jobs, staffers were outraged at Fuld. Since Friday, September 12, Fuld’s domineering presence had all but disappeared from Lehman’s headquarters, and he was assigned a security detail. “They are sneaking him in and out of this place,” a senior Lehman staffer said. “They wouldn’t let him near this deal. It was for his own safety.” Asked what Fuld could do at this point to make it up to his company, the Trader said, “Stand naked in Times Square while I Tase you.”
Lehman staffers in London felt particularly stung. Barclays acquisition includes only Lehman’s New York operations, meaning that the employees at Canary Wharf are going to be jettisoned. On the morning of September 17, one London managing director sent a terse e-mail to Lehman’s president, and cc’d the entire London office. The message—subject line: “To Tom, Michael and Bart: The Email that Never Came”—complained bitterly that New York never expressed gratitude for London’s efforts even while they were thrown under the bus.
Then, just before 10 p.m. on September 16, Fuld finally sent a memo to the staff. “I know that this has been very painful on all of you both personally and financially,” he wrote. “For this, I feel horrible.”
It was the apology the staffers had sought for days.
On September 17, word filtered through the office that Barclays would keep people on for only several months as they figured out whom they wanted to retain. One staffer remarked that he was glad he had decided not to enroll his kid in private school. “It’s sinking in how much money people have and what they can afford going forward,” the Trader said.
On Saturday, September 13, the Trader took his 8-year-old son to his first Yankees game, against Tampa Bay. “My 8-year-old is asking me questions about the economy. And I’m thinking, You should really think about baseball,” the Trader said.
The Trader paid for great seats. They sat fieldside in the languid summer afternoon, six rows from the Yankees dugout. When the Yankees took the field, the Trader’s son erupted in cheers.
“Jeter! Jeter! Jeter!” he yelled, but the players jogged out to the field, with scarcely a glance toward the stands.
“Daddy, why doesn’t he answer?” the son asked.
And suddenly, the Trader boiled with anger. He had done his part, put in the sixteen-hour days to buy his kid the best seats in the stadium. Lehman, and the career he signed up for, was disappearing in front of his eyes. Yet the Yankees were losing, and Derek Jeter was still going to take home his $21 million, and he couldn’t even bother to show some gratitude. It was a fantasy world, out of touch.
“Those guys have the easiest job,” the Trader thought, “when it’s clear they don’t care. Fuck, in my next life I want to be a baseball player.”
• James J. Cramer on Post-Crisis Wall Street
• The Greed & Fear Guru Surveys the Future
• Why Merrill Was Blessed and Lehman Was Damned
• How a Smaller Wall Street Will Change Us
• Could Morgan Stanley’s Fate Be Different?
• How Financial Firms Are Like Naughty Kids