The Devil's Casino E-Book

Vicky Ward

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2010

Seitenzahl: 441

Beschreibung

The inside story of what really happened at Lehman Brothers and why it failed In The Devil's Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers, investigative writer and Vanity Fair contributing editor Vicky Ward takes readers inside Lehman's highly charged offices. What Ward uncovers is a much bigger story than Lehman losing at the risky game of collateralized debt obligations, swaps, and leverage. A can't put it down page turner that opens the world of Wall Street to view unlike any book since Bonfire of the Vanities, except that The Devil's Casino isn't fiction. * Details what went on behind-the-scenes the weekend Lehman Brothers failed, as well as inside Lehman during the twenty years preceding it * Describes the feudal culture that proved both Lehman's strength and its Achilles' heel * Written by Vicky Ward, one of today's most connected business and finance writers On Wall Street, Lehman Brothers was cheekily known as "the cat with nine lives." But as The Devil's Casino documents, this cat pushed its luck too far and died?the victim of men and women blinded by arrogance.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Epigraph

Cast of Characters

Key Players

Lehman 1984 -1994, the Slamex Years

Lehman 1994-2008: From Independence to Meltdown

Key Lehman Spouses

The Original Lehman Brothers

Industry Players

Barclays

The Law

Bankruptcy Administrators

Government Players

Prologue

Part One - THE PONDEROSA BOYS

Chapter 1 - A Long, Hot Summer

Chapter 2 - The Beginning

Chapter 3 - The Captain

Chapter 4 - The “Take-Under”

Chapter 5 - Slamex

Chapter 6 - The Phoenix Rises

Chapter 7 - Independence Day

Chapter 8 - The Stiletto

Chapter 9 - The Ides of March

Chapter 10 - Eulogies

Part Two - THE ECHO CHAMBER

Chapter 11 - Russian Winter

Chapter 12 - Lehman’s Desperate Housewives

Chapter 13 - The Young Lions

Chapter 14 - 9/11

Chapter 15 - No Ordinary Joe

Chapter 16 - The Talking Head

Chapter 17 - The Sacrificial Ram

Chapter 18 - Korea’s Rising Sum

Chapter 19 - The Wart on the End of Lehman’s Nose

Chapter 20 - Damned Flood?

Chapter 21 - Closing the Books

Epilogue

A Note About the Sources

Notes

References

Acknowledgements

Index

Copyright © 2010 by Vicky Ward. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Ward, Vicky.

The devil’s casino : friendship, betrayal, and the high-stakes games played inside

Lehman Brothers / Vicky Ward.

p. cm.

Includes bibliographical references and index.

eISBN : 978-0-470-63824-8

1. Lehman Brothers. 2. Investment banking—New York (State)—New York—History. 3. Investment advisors—New York (State)—New York—History. 4. Finance—New York (State)—New York—History. I. Title.

HG5129.N5W37 2010

332.660973—dc22

2010000762

For my sons, Orlando and Lorcan Doull.Without your laughter,your hugs and your very good-natured patience,“Mummy’s annoying book” would not exist.

The mind is its own place, and in itself Can make a heav’n of hell, a hell of heav’n.

Paradise Lost by John Milton, 1:254-255

Cast of Characters

Key Players

Richard S. “Dick” Fuld Jr., Lehman’s chief executive officer. An underachiever in youth, Fuld got a job trading commercial paper at Lehman in 1969.

Joseph M. “Joe” Gregory, president and chief operating officer. Gregory started at Lehman in 1968 as a summer intern when he was 16 years old. He used to cut the lawn of Lehman’s top trader, Lew Glucksman.

T. Christopher “Chris” Pettit, Lehman president and chief operating officer. A West Point graduate, decorated Vietnam veteran. He joined the firm in 1977 and rose through its ranks—until, that is, 1997.

Lehman 1984 -1994, the Slamex Years

Board Members of Either Amex or Shearson Noted in the BookDavid Culver John Byrne

President Gerald Ford Richard Furlaud Henry Kissinger Dina Merrill (actress)

CEOsHoward L. “H” Clark Peter A. Cohen Lewis L. “Lew” Glucksman Harvey S. Golub J. Tomlinson “Tom” Hill James D. Robinson Sanford I. “Sandy” Weill

Managing Directors

James S. Boshart III Herbert Freiman Ronald A. Gallatin Jeffrey Lane Robert “Bob” Millard The Hon. Peregrine Moncreiffe Theodore “Teddy” Roosevelt V Peter J. Solomon

Executives

Jim Carbone, senior deputy to Chris Pettit Steve Carlson, head of emerging markets John F. Cecil, chief financial officer (later also chief administrative officer) Steven “Steve” Carlson, global emerging markets John Coghlan, managing director of fixed income Leo Corbett, deputy head of equities Martha Dillman, sales Robert A. “Bob” Genirs, Shapiro’s successor as CAO Nancy Hament, human resources Allan Kaplan, banking Bruce Lakefield Stephen “Stevie” Lessing, senior deputy to Tom Tucker Robert Matza, Stewart’s successor as CFO Paul Newmark, senior vice president and treasurer, Lehman Commercial Paper Inc. (LCPI) Michael Odrich, chief of staff to Dick Fuld Marianne Rasmussen, head of human resources Thomas Russo, chief legal officer until 2008 Mel Shaftel, chief of investment banking Robert A. “Bob” Shapiro, chief administrative officer Richard B. Stewart, chief financial officer Kim Sullivan, sales Thomas H. “Tom” Tucker, sales Jeff Vanderbeek, rose to run all of fixed income, then capital markets James “Jim” Vinci, Pettit’s chief of staff Paul Williams, equities chief

Lehman 1994-2008: From Independence to Meltdown

ExecutivesMadeleine Antoncic, head of risk Steve Berger, briefly co-head of banking Steven Berkenfeld, global head of legal, compliance, audit Jasjit “Jesse” Bhattal, replaced Tyree as head of Asia in 2000 Tracy Binkley, head of human resources Erin Callan, chief financial officer Steve Carlson, head of emerging markets Jerry Donnini, head of equities Eric Felder, replaced Reider Scott J. Freidheim, office of chairman, later chief administrative officer Mike Gelband, McDade’s successor at fixed income David Goldfarb, chief financial officer turned chief administrative officer turned global head of strategic partnerships Hope Greenfield, chief talent officer Jeremy Isaacs, head CEO of Lehman Europe from 2000 onward Bradley Jack, banking, then co-COO Ted Janulis, head of mortgages Todd Jorn, hedge funds Alex Kirk, high-yield business Fran Kittredge, philanthropy Bruce Lakefield, Europe until 1999 Ian Lowitt, treasurer, later co-chief administrative officer, then chief financial officer

Herbert “Bart” McDade, fixed income and later equities Hugh “Skip” McGee, investment banking Michael McKeever, briefly co-head of banking Christian Meissner, Europe Maureen Miskovic, risk Andrew Morton, Nagioff’s successor in fixed income Roger Nagioff, European equity derivatives, then Gelband’s successor in fixed income

Chris O’Meara, CFO, then head of risk Rick Rieder, head of credit Thomas A. Russo, chief legal counsel Benoit Savoret, Europe Robert “Rob” Shafir, global equities David Steinmetz, Chris Pettit’s chief of staff Paolo Tonucci, treasurer C. Daniel Tyree, Asia until 2000 Jeffrey Vanderbeek, head of fixed income turned vice president George Herbert Walker IV, investment management Mark Walsh, real estate Ming Xu, analyst

Lehman Staff of NoteHolly Becker, equities Marianne Burke, Dick Fuld’s secretary Barbara Byrne, investment banking Kerrie Cohen, press officer Andrew Gowers, press officer Ros L’Esperance, investment banking Lara Pettit, sales Marna Ringel, Scott Friedheim’s assistant Craig Schiffer, bond salesman Peter Sherratt, Europe

Key Lehman Spouses

Celia Felcher Cecil Isabelle Freidheim Kathleen Fuld Teresa Gregory Niki Golod Gregory Karin Jack Sandra Lessing Martha McDade Mary Anne Pettit Michael Thompson, ex-husband of Erin Callan Heather Tucker Nancy Dorn Walker

The Original Lehman Brothers

Henry, Emmanuel, and Mayer Lehman, founders Philip Lehman, managing partner, 1901-1925 Robert “Bobbie” Lehman, took over as head of Lehman from father Philip in 1925

Industry Players

Gary Barancik, partner, Perella Weinberg Partners James L. “Jamie” Dimon, chairman and CEO, JPMorgan Chase David Einhorn, chairman, Greenlight Capital Kenneth D. “Ken” Lewis, president, chairman, and CEO, Bank of America John Mack, chairman of the board and CEO, Morgan Stanley Joseph R. “Joe” Perella, chairman, Perella Weinberg Partners Daniel Pollack, lawyer for Chris Pettit Robert K. “Bob” Steel, president and chief executive, Wachovia, also domestic undersecretary at the U.S. Treasury Min Euoo Sung, CEO, Korea Development Bank Mark Shafir, partner and senior investment banker, Thomas Weisel Partners Bruce Wasserstein, the late chairman and chief executive, Lazard Andrew Zimmerman, analyst, SAC Capital

Barclays

Archibald Cox Jr., chairman, Barclays Americas Jerry del Missier, president, Barclays Capital Robert E. “Bob” Diamond Jr., president and CEO, Barclays Capital Michael Klein, independent adviser, Barclays Rich Ricci, chief operating officer, Barclays John S. Varley, CEO

The Law

H. Rodgin Cohen, chairman, Sullivan & Cromwell Steve Dannhauser, chairman, Weil, Gotshal & Manges Victor Lewkow, attorney, Cleary Gottlieb Steen & Hamilton Harvey R. Miller, partner, business finance and restructuring guru, Weil, Gotshal & Manges James M. Peck, judge, United States Bankruptcy Court for the Southern District of New York Daniel Pollack, lawyer for Chris Pettit Simpson Thacher & Bartlett, Lehman’s primary law firm, Erin Callan’s former employer Anton R. Valukas, official examiner probing the Lehman bankruptcy

Bankruptcy Administrators

Tony Lomas, PricewaterhouseCoopers partner and administrator of Lehman’s London estate

Bryan Marsal, chief restructuring officer and co-CEO of turnaround firm Alvarez & Marsal LLC

Government Players

United States

Ben S. Bernanke, chairman, Federal Reserve C. Christopher Cox, chairman, Securities and Exchange Commission (SEC) Michele Davis, assistant secretary Timothy F. Geithner, president, Federal Reserve Bank of New York, later secretary of the Treasury Dan Jester, Paulson’s adviser David G. Nason, assistant secretary Henry M. Paulson Jr., secretary of the Treasury Steven Shafran, Paulson’s adviser Kendrick R. Wilson, adviser to the secretary of the Treasury

United Kingdom

Alastair M. Darling, chancellor of the Exchequer Sir Callum McCarthy, chairman, Financial Services Authority (FSA) Hector Sants, chief executive, FSA

Prologue

The most crucial talent required in business is an ability to understand people. You have to know what motivates them, what their strengths and weaknesses are. . . . If you’re a good judge of character, you will go very far. If not, it’s over.

—Stephen A. Schwarzman (2009), former Lehman Brothers partner and current CEO of the Blackstone Group

What do I think when I look back on that period when I interviewed all those Lehman bankers in the 1980s? Honestly, I was relieved that I’d never have to see many of them ever again. They were, with some exceptions, a greedy, selfish, deeply unpleasant bunch of people.

—Ken Auletta (2009), author of Greed and Glory on Wall Street: The Fall of the House of Lehman (1986)

When I started researching this book, I thought I’d be telling the lurid story of the final few months of America’s fourth-largest investment house, Lehman Brothers, which was almost 160 years old when it gasped its last breath on September 15, 2008.

When it filed for bankruptcy, credit markets around the world trembled, and U.S. Treasury Secretary Henry Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke realized with terror that they were facing the worst economic catastrophe since the Great Depression of the 1930s.

I thought I would simply be telling the dramatic story behind that harrowing moment, viewing Lehman’s history through the lens of Paulson, Bernanke, and Lehman’s chairman and CEO, Richard S. “Dick” Fuld, who held his position for nearly 15 years, and once joked—during better times, when Lehman stock rose to its all -time high—that “they’ ll be carrying me out of here feet first.” And they almost did.

What I had failed to realize until I dug far deeper into the annals of Lehman’s history was that the drama of the ending was no match for the saga of its life. The story of the 160 -year-old firm up until 1984 had been well-chronicled (in particular, by Ken Auletta in Greed and Glory on Wall Street: The Fall of the House of Lehman). But what happened to it in those crucial intervening years—from 1984 until 2008—had not.

Ironically, Lehman had tried to tell this story itself, and failed. In 2003, Joseph M. “Joe” Gregory, the firm’s president, asked the chief players of the preceding 20 years (among them himself, Steve Lessing, Jeff Vanderbeek, John Cecil, and Paul Cohen) to each give their accounts in the hope of compiling “The Modern History” of Lehman. He gave up after fifty pages. But in one of those rare, extraordinary gifts that biographers pray for, those fifty pages—and, more important, the many pages written by each individual—were handed to me by a source to whom I am forever deeply indebted.

“The Modern History” opened in 1994 as Lehman gets spun out of American Express and Dick Fuld, the new CEO, stood in front of a cascade of balloons in the Winter Garden, the party space in the World Financial Center, across the street from the World Trade Center towers in the heart of Wall Street. Fuld proudly proclaimed: “It’s a new day. We have the opportunity to create our own destiny, and I need you to do it.”

There is talk among the senior executives about the “remarkable will of Lehman Brothers,” and the “nonnegotiable values of the Lehman culture,” which include “integrity, strength of character, open communication, loyalty, and teamwork.” The unfinished manuscript discusses rating these values above the more superficial inclinations of Wall Street: Valuing spirit over education, for example, makes Lehman a “special place to work.” The firm was small but the employees were united. They were, they proudly proclaimed again and again, “one firm.” The Lehman mantra was “Do the right thing.” They were the good guys of Wall Street.

But were they?

There’s a reason “The Modern History ” was never finished; the individual contributions—like journal entries—make it clear what happened to the project. And former CFO John Cecil confirmed my suspicions.

As Joe Gregory poured through the “diaries,” he realized that there were two major problems. One was that the portrait being painted of Dick Fuld, the leader of the firm, was negative—he was not the great general that Gregory wanted him to be, but a man who either was invisible or needed to be told what to do by a stronger subordinate. The second was that the accounts were so different from one another that they could scarcely be said to represent a united front, the “one firm” ethos.

So the project was abandoned, waiting until someone wanted to write a history of the way things had actually been at Lehman, without concern for the egos, or the agendas.

The irony was that had Gregory really thought about why his project had failed, he might have understood the firm’s inherent problems, and realized that a cacophony of opinions at the top was something not to be ignored, but embraced. Had he interpreted the material differently, Lehman might still be alive.

Despite appearances and the endlessly self-perpetuated myth of being a mighty gorilla, Dick Fuld was never truly synonymous with Lehman (never mind that it was a public securities house, and therefore owned by its shareholders and not by him).

No, the hopes—and heart and spirit—of modern Lehman lived and died with two men with huge presences, both of whom served as Dick Fuld’s number twos, his confidants, his presidents, his victims.

Lehman was made great and almost brought down twice in the past thirty years, thanks to these two men. Dick Fuld was pretty much a lieutenant to each, which is why in some ways the second half of this book reads like an echo of the first. Some men refuse to learn from the past.

The first Lehman president is buried in Farmingdale, Long Island. He was 51 when he died in 1997. T. Christopher “Chris” Pettit stood six feet two inches and had dark hair and piercing brown eyes; when he spoke both male and female hearts melted. Prior to joining Lehman, he graduated from West Point and was an Army Ranger in Vietnam.

On a tip from a friend, in 1977 Pettit applied for and got a job with Lehman Commercial Paper Inc. (LCPI), the commercial paper trading unit of the investment house Lehman Brothers. With his extraordinary leadership skills, Pettit rose with almost unprecedented speed to be head of sales, effectively Fuld’s number two within LCPI.

LCPI at the time was run by Lewis “Lew” Glucksman, an obese giant of a bond trader who ran Lehman’s capital markets division; Glucksman had ousted Peter G. Peterson, the urbane former secretary of commerce, as the chairman of Lehman Brothers in 1983. Glucksman had argued that since he made the most money, he should run the business. He won that argument.

Fuld was one of Glucksman’s protégés. He operated the way Glucksman had: tyrannically. The men were similar, though they looked nothing alike. Fuld, who is five feet eleven inches and has dark eyes, was a fit squash player, in contrast to his slovenly mentor. Both men said little in the office, but were notorious for shouting insults and expletives.

In 1984 when Shearson American Express acquired Lehman and Glucksman was bought out of the business, Fuld rose to run Lehman’s fixed income division. Pettit was his complementary number two. Pettit was the man on the ground, in the trenches with his soldiers. He could be tough, but he was respected. Pettit was the man the traders really worked for, the leader they revered. Pettit would go to Lehman parties and give speeches that left everyone ready to put down their cocktails and head straight back to the office.

For 10 or so years, while Lehman was merged with Shearson and American Express, Fuld reigned largely unseen. He was “neither a leader nor a dazzling intellect,” one former trader says.

After Lehman was spun out of American Express and became a public company in 1994, the only person who could threaten Fuld’s place as head of the new investment bank, Lehman Brothers, was Pettit. And as long as Pettit had the loyalty of the troops, there was nothing Fuld could do about his rival.

Until, that is, his rival, for the first time in his life, made himself vulnerable. Pettit was struggling to manage his private life at that time; he had a dying sibling and a dying marriage. He was also having an affair. None of this ought to have mattered in the workplace, but his three best friends ensured that it did. Their names were Joseph “Joe” Gregory, Stephen “Steve” Lessing, and Thomas “Tom” Tucker. All worked for Lehman. In fact, together, they ruled Lehman, at least the fixed income division that was essentially the new independent Lehman. All had carpooled together since the 1970s from Huntington, Long Island, until fights over compensation drove them apart.

Joe Gregory persuaded Tucker and Lessing to go to Fuld and essentially ask for Pettit’s resignation in March 1996. Fuld knew that with Tucker, Lessing, and Gregory behind him, he finally controlled the firm; he demoted Pettit to head of client relations. The episode is still called the Ides of March by senior Lehman executives because the demotion occurred on March 15, the day Julius Caesar was killed by his former friends in 44 B.C.

Six months later, Pettit resigned. Three months after that, he was dead.

With Pettit gone, Fuld was able to tighten his grip on the firm. He took elocution lessons, and evolved into the leader he had never before been. Lehman’s stock soared over the next ten years as it evolved into an investment bank. The stock price rose to $86, and Fuld was the hottest CEO in town, featured in a 2006 issue of Fortune magazine as the man who had transformed the “notoriously fractious” firm into a “super-hot machine.” The chief banger of the drums, the man urging the firm to take more risk, was the man who had orchestrated the ousting of Pettit—and had replaced him: Joe Gregory, the second Lehman President.

But inside Lehman’s headquarters at 745 Seventh Avenue, people worried that dangerous corners were being cut in Fuld’s haste to beat what he perceived as the enemy: Goldman Sachs. On June 9, 2008, Lehman reported its second-quarter loss of $2.8 billion, the company’s first quarterly loss since going public in 1994. The stock fell 9 percent that day. Yet for months, Erin Callan, the new CFO and a Gregory “pet,” had been telling the market that Lehman had plenty of capital—that the company was in good shape.

On June 12, Lehman announced that Joe Gregory was out. When he left, he took Callan down with him, but the damage they had done was irreversible. Disaster loomed.

For a while Dick Fuld could not see where he had gone wrong. As he later testified before Congress about the fall of Lehman, “I wake up every single night thinking, ‘What could I have done differently? What could I have said? What should I have done? ’ And I have searched myself every single night. And I come back to this: At the time I made those decisions, I made those decisions with the information that I had. I can look right at you and say, this is a pain that will stay with me for the rest of my life. . . .”

This was before he learned that Gregory, who had cashed several hundred million out of Lehman, asked for a further $233 million from the Lehman estate after the company had been declared bankrupt plus, according to filings, another employee benefit plan for $700,000 per year for 25 years at the firm and a further $2.4 million per year for 15 years.

Fuld, who had asked for nothing when the end came, was reportedly horrified. He, like a handful of others, had deluded himself into thinking that Gregory was a good guy; Gregory was the guy who told young Lehman managing directors he didn’t want to hire people “who regularly checked their bank balances.” Yet Gregory was, in the words of his former friend and carpooler, Steve Lessing, “a phony.”

So, no, this is not yet one more book about the crash of 2008. Rather it is a parable about the foibles of men, the corrosive influence of money, and the dangers of hubris.

“One firm” was the Lehman Brothers mantra, and most people thought Fuld had dreamed up the slogan. But he hadn’t.

That was the handiwork of Lew Glucksman, who used to stand in his office by the trading floor and snap a single pencil in front of his employees. He would then hold a group of pencils together and say, “Watch: When they are together, I can’t break them.”

The man who embodied that slogan best was not Fuld. It was Chris Pettit, who once, in a sly tribute to Glucksman and the camaraderie Pettit had instilled at Lehman Brothers, handed out pencils with all the senior executives’ names on them as party favors. He was the man who once staked his career and his lifesavings to protect the jobs of the traders, back-office workers, and secretaries in his unit. He was Lehman Brothers at its best. Yet now he is all but forgotten, nearly erased from the public record by a culture of ruthless avarice.

Part One

THE PONDEROSA BOYS

Character is destiny.

—Heraclitus

Chapter 1

A Long, Hot Summer

I just remember the nights. George would come in from the office at what seemed like 4 A.M. every single night. I don’t know how he got through those months. I don’t know how any of them did. It was crazy.

—Nancy Dorn Walker

By nightfall on Saturday, June 7, 2008, the Manhattan streets were still radiating heat, an unwelcome harbinger of a long, stifling summer. At the Skylight Studio, a sprawling private event space in SoHo, George Herbert Walker, a 39-year-old second cousin of then President George Walker Bush, and at the time head of Lehman’s Investment Management division, was celebrating his marriage to Nancy Dorn, 31, a pretty blonde hedge fund analyst from Texas. The couple—who had exchanged their vows at New York’s City Hall a few weeks earlier and had already celebrated with family down in Texas—ate Southern food, danced to the overwrought musical stylings of a suitably ironic wedding singer, and drank margaritas with 400 of their friends. It was, however, a celebration tempered by the first signs that Lehman Brothers was about to come crashing down.