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

It wasn’t Gregory’s spending habits that people inside Lehman found objectionable, though. He had a lot of money, and he obviously wasn’t the only one who liked to throw it around. What did seem somewhat odd was his portfolio of responsibilities. Even in his prime Gregory had never brought in big deals or made many hugely successful trades himself. His job was to be Fuld ’s unquestioning confidant, and as long as he was that, everything else was up to him. He loved being the in-house philosopher-king, an evangelist on the subject of workplace diversity and a devotee of the theories described in Malcolm Gladwell’s bestseller Blink . He gave out copies of the book and had even hired the author to lecture employees on trusting their instincts when making difficult decisions. In an industry based on analyzing raw data, Gregory was defiantly a gut man.

He was also an advocate of the Myers-Briggs Type Indicator, which used Jungian psychological principles to identify people as having one of sixteen distinct personality types. (A typical question was, “Do you prefer to focus on the outer world or on your own inner world?”) Gregory used Myers-Briggs results to help make personnel decisions. It was his conviction that individual expertise was overrated; if you had smart, talented people, you could plug them into any role, as sheer native talent and brains trumped experience. Gregory seemed to revel in moving people around, playing chess with their careers.

His greatest experiment to date had been naming Erin Callan to be the chief financial officer. He and Callan eventually became so inseparable in the office that many were convinced, though it was never substantiated, that the two were linked romantically. Around the time she was promoted to CFO, Callan separated from her husband, Michael Thompson, a former Lehman vice president who’d left the firm.

Gregory loved being a mentor to younger executives like Callan, and he was fully cognizant of his role in Fuld’s hierarchy: If there was a difficult conversation to have, he considered it his responsibility to handle it. In this regard, Gregory and Fuld were total opposites. While Fuld had a gruff, tough-guy exterior, he had soft spots; he could be quite sentimental and tended to struggle when faced with difficult decisions, especially those concerning personnel. Gregory, in contrast, was much more gregarious, a leader given to championing underlings and setting lofty goals for the firm. He gave generously to charities, especially those involving breast cancer, which Niki had survived, and he had spent a full year working to establish a mentoring program between Lehman and historically black Spelman College of Atlanta, a rare effort on Wall Street.

But when it came to judging the loyalty of Lehman employees, Gregory could be ruthless, given to angry, impetuous decisions. In the summer of 2006, Fuld had hosted a retreat for senior Lehman executives at his vacation home in Sun Valley, Idaho. Alex Kirk, who ran the global credit products group and had previously struck Gregory as a disloyal troublemaker, was due to make a presentation but was unable to make the trip because of an illness. Feeling better, Kirk decided to make the presentation via video feed, and when Gregory saw how well Kirk looked on the video, he was incensed. Kirk was clearly not sick, Gregory was convinced, and his failure to show up in person was nothing less than a personal insult to Fuld. “I want him fired,” he yelled. Kirk’s allies at the firm had to appeal to Bart McDade, Lehman’s head of equities, to intervene with Gregory and calm him down. Cooler heads eventually prevailed.

The Lehman deal maker who had prospered most under Fuld and Gregory was Mark Walsh, a socially timid workaholic who ran Lehman’s real estate operations. An Irish American native of Yonkers, New York, Walsh made his mark in the early 1990s when he bought commercial mortgages from Resolution Trust Corporation, the outfit established by the federal government to clean up the savings and loan debacle, and packaged them into securities. A lawyer by training, Walsh seemed immune to risk, which impressed Fuld and Gregory to no end. They gave Walsh free rein, and he used it to ram through deals much more quickly than the competition. After the developer Aby Rosen closed the $375 million acquisition of the Seagram Building in only four weeks, Walsh bragged to friends about how swiftly he had been able to execute the deal.

Each success bred hunger for more, leading to monstrous deals like Lehman’s partnership with SunCal Companies. A land speculator that bought property primarily outside Los Angeles, SunCal secured approvals for residential development and then sold them to home builders at a hefty markup. Lehman pumped $2 billion into what appeared to be its can’t-fail transactions. Walsh had virtually unlimited use of Lehman’s balance sheet and used it to turn the firm into an all-in, unhedged play on the U.S. real estate market, a giant REIT (real estate investment trust) with a little investment bank attached—a strategy that worked extraordinarily well right up until the moment that it didn’t.

At the very height of the market, Walsh concluded his last great deal, a joint transaction with Bank of America, committing $17.1 billion in debt plus $4.6 billion in bridge equity to finance the purchase of Archstone-Smith, a collection of premium apartment complexes and other high-end real estate. The properties were excellent, but the price was sky-high, based on projections that rents could be hiked substantially. Almost immediately, the proposition started to look dubious, especially when the credit markets seized up. But given a chance to back out of the deal, Fuld declined. The firm had made a commitment and it was going to stick with it. Gregory made a circuit to rally the troops. “This is going to be temporary,” he told Lehman colleagues. “We’re going to fight through this.”

As both Gregory and Fuld were fixed-income traders at heart, they weren’t entirely up to speed on how dramatically that world had changed since the 1980s. Both had started in commercial paper, probably the sleepiest, least risky part of the firm’s business. Fixed-income trading was nothing like Fuld and Gregory knew in their day: Banks were creating increasingly complex products many levels removed from the underlying asset. This entailed a much greater degree of risk, a reality that neither totally grasped and showed remarkably little interest in learning more about. While the firm did employ a well-regarded chief risk officer, Madelyn Antoncic, who had a PhD in economics and had worked at Goldman Sachs, her input was virtually nil. She was often asked to leave the room when issues concerning risk came up at executive committee meetings, and in late 2007, she was removed from the committee altogether.

In the presence of the trading executives, Gregory always tried to make an impression with his market savvy, to such a degree that it became a running joke. Traders eventually came to consider his tips as contrary indicators; if Gregory declared that a rally in oil prices had much further to go, for example, they’d short oil.

In recent years, though, a growing contingent of Lehman executives had begun to view Gregory as a menace. He just didn’t know enough about what was going on, they thought. The firm was making bigger bets than it would ever be good for and nobody in the executive office seemed to understand or care. To criticize the firm’s direction was to be branded a traitor and tossed out the door.