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

1. Some senior managers have to be much less arrogant and internally admit that some major mistakes have been made. Can’t continue to say “We are great and the market doesn’t understand.”

2. Some changes at senior management need to happen very soon. People are not and WILL not understand that nobody pays for that mess and that it is “business as usual.”

Fuld read the note somberly and wrote back to McGee with a promise that he’d have lunch with the top investment bankers to give them a chance to air their grievances.

What Fuld did not know was that a palace revolt was already in the offing. The week before a group of fifteen traders had gone to dinner at the private Links Club, on East Sixty-second Street, right off Madison. The purpose of the dinner was to discuss how Fuld could be pressured into firing Joe Gregory. If Fuld wouldn’t do it, they agreed, they’d threaten to resign en masse.

Jeff Weiss, the head of financial services banking, was not at the dinner, nor was Gerald Donini, but both were patched in for the key discussions on speakerphone. Weiss advised against a confrontation. “Dick is not gonna react well,” he said. “You’re not going to get him to move by trying to corner him. Slow down. Things are moving in the right direction. Let this thing out over the next couple of days.”

At the executive committee meeting the following morning, Fuld looked exhausted, like a boxer gone one round too far. The fight had not gone out of him, but he knew that he had to try another approach. To keep the firm together, he was going to have to be more conciliatory.

“There’s a lot of unrest,” he acknowledged. “We haven’t been together. We made some mistakes.” Then he suggested they go around the table and get everyone’s take on the question: How do we restore confidence?

Everyone was in attendance—Joe Gregory, Tom Russo, Skip McGee, Bart McDade, Steven Berkenfeld, and a handful by phone. Everyone except Erin Callan, who was still making calls to investors.

Fuld pointedly asked Skip McGee to go first. “Morale has never been worse,” McGee told the committee. “We have to admit publicly we made some mistakes. We continue to spin like we’ve done nothing wrong. We’re better than this.”

McGee paused and then added quietly: “We need to make a senior management change.”

“What do you mean?” Fuld snapped.

“We need to hold ourselves accountable—that’s what the market wants, and that’s what our troops want.”

While McGee did not mention Gregory by name, everyone at the table understood whom he was talking about. Indeed, just a month earlier, at another executive committee meeting, Gregory had actually offered to resign. “If there’s a bullet to be taken, I’ll be the one to take the bullet,” he said stoically. At the time everyone had dismissed the comment as a rhetorical flourish, an easy thing to propose when there was little chance of its happening.

Fuld continued around the table. As each executive took his turn, making various suggestions, nobody seconded McGee’s call for change.

Russo, looking at McGee the entire time, chose to make a statement about the importance of teamwork, a sentiment that was then taken up by Gregory. “We’ve got to stop all the Monday-morning quarter backing,” he insisted. “We’re all in this together. We’ve made a lot of decisions over the years— all together . Some have been better than others, but we can work through this together .”

As the others spoke, McGee, his BlackBerry hidden under the table, typed a two-word message to his colleague Jeff Weiss: “I’m dead.”

Returning to his office, McGee called his wife, Susie, in Houston, and told her bluntly, “I may be out of here by the end of the week.”

That afternoon the thirty-first floor had become a gossip mill, a collection of various cliques assembling and reassembling to try to divine what might happen next. Even though Erin Callan had missed the executive meeting, she had certainly heard about what had transpired there. She was convinced that it was she, not Gregory, who might be on the firing line, and if she had to step down as CFO, she hoped to be able to keep a job of some sort at the firm. So she sent Fuld a two-sentence e-mail without a subject line: “Just to be clear I am very willing to be part of the accountability of management. Think I have become so closely tied with the performance and the public face of the firm that it may be helpful to put someone else in my role.”

He didn’t reply.

By the time Fuld met with the investment bankers for lunch on Wednesday, June 11, in the wood-paneled private dining room on the thirty-second floor, Lehman’s stock price had fallen another 21 percent. This was McGee’s show, Fuld knew, and that meant he was going to get tested.

He was right. It was five on one. McGee, Ros Stephenson, Mark Shafir, Jeffrey Weiss, and Paul Parker. They jumped at the chance to tell their boss why he needed to make management changes. The real estate investments were killing the firm. Good people had been let go, while novices, like Erin Callan, had been promoted to positions out of their depth. Joe Gregory had become distracted and knew nothing about risk. If there was a single problem, he was it.

“Look, the answer is, somebody’s gotta pay,” Mark Shafir said.

“Joe’s been with me for thirty years,” Fuld shot back. “He’s great at what he does, he has a great career, he’s done so much for this place. You’re asking me to throw him over the side just because we have one bad quarter?”

“It’s not just a bad quarter,” McGee replied. “It’s more deep-seated than that.”

Fuld paused and looked down at the food that he had not touched. “Are you telling me that you want me to—”

“No, no!” the bankers cried out. They certainly did not want his resignation; his departure would be a death knell for the firm. But the status quo could not continue; Fuld had to break out of the inner circle that was buffering him from the firm and get more involved with its operations.

Fuld was willing to accept that criticism. “I get that, that’s the feedback I’ve been getting,” he said. “I’m going to do it. I will do the right thing.” Still, he would not commit to firing Gregory.

“What are you going to say when you leave this meeting?” he asked the bankers.

“That the guy doesn’t get it,” said Weiss, laying it right out on the table.

“I got it,” Fuld replied.

As the bankers rose from the table and headed back to the elevator bank, no one was quite certain what Fuld intended to do. It seemed unlikely that he was going to fire Gregory; nothing he’d said indicated that he was ready to take that drastic a step. Still, McGee and the bankers were relieved to have finally had an audience with Fuld and said their piece.

While that lunch had been going on, Gregory was stirring downstairs in his office. He knew the rumors—he could see the sentiment quickly building up against him. Fuld had made enough comments about the morale problem inside the building for him to understand that he was under fire. He wasn’t blind to the snippy comments and office rumor mill about him. Indeed, if there was one thing Gregory focused on—what he called “culture”—he could now see it fraying.