Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

For some time, McGee and his team had been having deep misgivings about the way the firm was being managed. His unit, which advised corporate clients on mergers and stock offerings, had its best year ever in 2007, bringing in $3.9 billion in revenue, and yet the firm’s stock, which was used to pay a large portion of everyone’s bonuses, was being decimated by anxiety about what was happening on the other side of the house—namely, the firm’s investments in real estate assets. Even worse, the constant rumors and headlines about Lehman’s health were beginning to affect his team’s ability to sign up new clients, who were reasonably worried about hiring them. It had gotten so bad that some clients had asked to include a “key man” provision in their engagement letters that would guarantee that the banker assigned to them would continue working with them if Lehman was sold or went bankrupt.

McGee had expressed his anxiety to Fuld a month earlier when he asked to be given control over the firm’s capital-raising efforts, which up until that point were being overseen primarily by management on the thirty-first floor, who he felt were not professional deal makers. “You have an investment banking division that does this for a living,” McGee told Fuld. “This is crazy. I should leave if you don’t trust the investment bank to do this.” Fuld agreed, and McGee’s “troops”—Shafir and Whitman—had been included in the Korean junket.

But since that conversation, the firm’s situation had only worsened. They all knew that the announcement of the next big quarterly loss was only going to exacerbate the situation. Resentment was boiling up through the ranks, and it was no longer directed exclusively at Erin Callan, who, the bankers had concluded, was merely a symptom of a bigger problem.

The person they had now come to believe was responsible for many of Lehman’s troubles—the risky bets on corporate real estate, the constant reshuffling of executives into jobs they were ill equipped to handle—was Joe Gregory, the firm’s president and Fuld’s closest associate. McGee and Gregory had never gotten along very well to begin with; each was too headstrong for the other. And in recent months, Gregory had been discussing ways to push McGee aside, by assigning him to a new commodity trading business back in Houston, the prospect of which left McGee lukewarm.

The Sunday before preannouncing the earnings report, June 8, as everyone worked over the numbers on the thirty-first floor, McGee, in a golf shirt and khakis, slipped into Fuld’s office to review the investment bank’s earnings and projections. But just as McGee had finished his summary and was getting ready to leave, he said, “When we get through this, we need to have a serious conversation.”

“What about?” Fuld asked.

“About a change in senior management,” McGee blurted out.

“What?” Fuld said, distracted now from the numbers before him.

“Well, I guess we’re having that conversation now then,” McGee said, getting up to shut the door. Gregory’s office was just a few feet away.

When he took his seat again, he told Fuld precisely what he had meant: “You need to move on Joe.”

Fuld was dumbstruck. “Joe Gregory is off the table,” he said, raising his voice. “He’s been my partner for twenty-five years. It’s not fair. I couldn’t look at myself in the mirror.”

“Whether it is fair or not, you need to do something about Joe,” McGee replied. “You’ve not been well served by your COO. He’s in over his head. He’s not minding the store. He’s made some horrible personnel decisions, and he’s not watching your back on risk.”

Reminding McGee that, as a member of the executive committee, he was responsible for making key decisions along with everyone else, Fuld said, “The entire executive committee is the risk committee.”

McGee, realizing that he was not getting his point across, stated carefully, “You’re a wonderful leader, but when the books are written, your Achilles’ heel will be that you have a blind spot for weak people who are sycophants.”

Fuld barely heard the last part of McGee’s comment, as he had been thinking about Gregory. “I’m not doing it,” he finally said, ending the discussion.

McGee left the office, fairly certain that Gregory’s job was safer than his own.

After McGee departed, Fuld sat in his office, stunned; he couldn’t conceive of the firm without Gregory. But nothing that was happening was making any sense. The firm he had rebuilt with his own two hands was falling apart everywhere he looked.

Over at Neuberger Berman, Lehman’s asset-management arm, executives were in open revolt, trying to disentangle themselves from the mess at headquarters. Lehman had bought Neuberger in 2003, and as long as times were good, it had been a useful, relatively trouble-free contributor to the firm’s bottom line. But when Lehman stock started its swan dive, Neuberger employees panicked. They had become accustomed to the steady income generated by managing rich people’s money, but that was now in jeopardy, as a good portion of their bonuses were paid in stock.

A week earlier, on June 3, Judith Vale, who ran a $15 billion small-cap fund for Neuberger, fired off an e-mail to the Lehman executive committee (with the exception of Fuld), demanding that top Lehman managers forgo bonuses and make preparations to spin off Neuberger.

“Morale at NB is at a dangerously low level, largely because Lehman stock is a significant portion of our compensation, and as such, our comp is not tied to anything within our control,” Vale wrote. “Many believe that a substantial portion of the problems at Lehman are structural rather than merely cyclical in nature. The ‘old’ Neuberger franchise (which resides at 605 Third) is largely intact. However, this is a people business, and the continuing health of the franchise is dependent on retaining key producers and support personnel. Don’t slam bonuses of key producers and support personnel at NB because of management mistakes made elsewhere.”

George H. Walker IV, the head of Lehman’s investment management division and a cousin of President Bush, immediately sought to blunt Vale’s criticism.

“Sorry, team,” Walker wrote in an e-mail to everyone who’d received Vale’s missive. “The compensation issue she raises … is a particular issue for a small handful of people at Neuberger and hardly worth the EC’s [executive committee] time now. I’m embarrassed and I apologize.”

The correspondence was forwarded to Fuld, who wrote in reply, “Don’t worry—they are only people who think about their own pockets.” Did anyone in the firm still have any loyalty?

Although Joe Gregory’s title was still chief operations officer, in the opinion of many Lehman executives, he had spun off into the ether years earlier. Few seemed to flaunt their personal wealth as much as he did. The helicopter commute was just the start of it. He and his wife, Niki, bought a house in Bridgehampton for some $19 million, and even though it was completely decorated, they had it redone top to bottom with their own designer. He drove a Bentley and encouraged his wife to take shopping trips to Los Angeles via a private plane. But despite an extravagant lifestyle that was estimated to cost in excess of $15 million a year, he kept most of his net worth tied up in Lehman stock. To gain access to cash, he had pledged 751,000 Lehman shares in a margin account as of January 2008, which, based on where the shares were trading, would’ve allowed him to borrow roughly $40 million.