The higher up you were, the higher the percentage of your bonus paid in company stock. Top-tier executives received 50 percent of their bonuses in stock that was restricted for five years while it vested. The amount of stock each employee got was scaled according to pay, but even the janitors participated in this compensation plan.
While there was much about Pettit’s “one firm” culture that Cecil lauded, there was one aspect that nagged at him—and this issue never went away. He saw a dark side to the mantra of sticking together—it encouraged people to place a value on loyalty over ability.
Even so, Cecil was optimistic. He reflected years later: “I don’t think I would have joined Lehman if it hadn’t gone public and if I hadn’t seen that the culture could change. Until then, it hadn’t been run for profitability. It had been run for the bonus pool.”
But Cecil was dismayed by the firm’s first earnings report in the fall of 1994.
It was $22 million.
When Cecil first heard that, he shook his head and thought, “The world’s going to hate that number. ” He was surprised and annoyed that Fuld and Pettit didn’t seem disturbed by that posting. He says Pettit told him, “Twenty-two million dollars is a good number.” Tom Tucker, however, hotly disputes this. “Chris Pettit would never have thought $22 million is a good number. ” What Pettit may have meant, his friends believe, was that there was no point dwelling on it. Certainly everyone must have agreed with Cecil that the next quarter’s results needed to be over double that—especially once the firm was put on review for a ratings downgrade.
Cecil asked Bob Matza, the new
CFO
, if Fuld and Pettit understood what would happen if Moody ‘s downgraded the firm—Lehman would not be able to issue commercial paper, which meant, as Matza put it, “We’ re toast.” Matza told Cecil that neither Fuld nor Pettit understood this, so Cecil called a meeting with both men to enlighten them. He says, “They did not take this very well, particularly Chris.”
Cecil says both Fuld and Pettit had grown up in a subsidiary of a subsidiary; they had no experience running a public company and didn’t know they had to look out for rating agencies. They had to learn on the job.
Still, by the fourth quarter, Cecil had almost met his objective. The firm announced a $46 million after-tax profit and Moody ‘s affirmed them.
A relieved Cecil said to Matza, “I think we should ban the phrase ‘We’ re toast.’ I don’ t want to have to hear it ever again.”
Cecil believed that Fuld, not Pettit, was his best ally in the cost-cutting battle. He remembers patiently explaining to Fuld that by cutting costs and not plowing the savings back into remuneration, the share price would go up. Cecil says this was Fuld ‘s “lightbulb moment.”
“Dick is very pragmatic,” he says, “and he is, more than almost anybody I know, a lifelong learner. Most people get to a point in their career, and they kind of are who they are. Dick, however, at a fairly late stage in his life, went through this transition of being on a trading desk to running Lehman as a public company. That’s a huge change in just five years. Also, he went from being a trader, heavily influenced by all the bad habits of the old-fashioned trading floors, to head of the firm, trying to do the right thing, trying to keep the firm together, recognizing the value of all the different parts of the firm, recognizing the importance of a good culture.
“He also changed personally, becoming a good public speaker and all those things. Becoming good with clients. He went through a remarkable transition in a short period of time.”
Fuld began spending more and more time not just with capital market clients, but with investment banking clients; he already knew men like Henry Kravis (head of
KKR
) and Leon Black (now at Apollo), but now he had to treat them not just as acquaintances, but clients; he had to pitch them. They needed to see him differently, not just as an introverted trader, but as the visionary head of a major securities firm.
One meeting that did not go so well was with the late Bruce Wasserstein, then the co-chief executive of the boutique mergers and acquisitions (M&A) outfit Wasserstein Perella. Fred Segal, a former Lehman partner who was working for Wasserstein at the time, brought his boss down to Lehman’s offices and introduced him to Fuld. Wasserstein told Fuld a harsh truth. “You’ ll never get a premium valuation, because you don’t have a decent advisory banking business,” he said. “So you should buy us.” The meeting ended swiftly.
Later Fuld called up Segal. “Fred,” he said, “never bring that fat fuck here again.”
Pettit, however, stayed Pettit, rallying the troops and diving into staff problems. The only trouble with this approach was that Lehman was growing too big for one man to micromanage.
But it was also around this time that Pettit first realized just how far he had come. Mary Anne Pettit recalls Chris saying to her one Sunday evening as he was paying his bills in his study in Huntington. “You know, I think we are rich.”
Yet this never really changed his lifestyle, despite certain luxuries. There was an annual holiday in the Caribbean with the Tuckers. The Pettits owned a boat with the Gregorys—
Miss T
after Joe’s wife, Teresa—and they started plans for a new, big house down the street in Huntington. But otherwise, their lives stayed the same.
Mary Anne recalls: “Chris sort of had a little prejudice against wealth. He would not consider putting our kids in private school. We lived pretty simply. The Tuckers, Lessings, and Gregorys—the four guys in the car—that was our social circle. We rarely went out. We never did anything with anybody other than them.”
When Pettit came home, he rarely talked about work. Mary Anne was petrified her children would get spoiled, and refused to dole out the sort of generous allowances that were so common among the firm’s families. At the age of 15, Lara Pettit got a job at an animal clinic because she didn’t have enough spending money to buy lunches at school.
Her father was horrified when he discovered that she had a job. “What are you doing?” he said. “You should be focusing on school-work.” He put an end to that distraction by giving her an allowance.
Years later, as Lehman was going public, Lara, who by then had worked at Lehman for three years, still had no idea what her father made. According to the proxy released that year, it was close to $7 million. Despite that impressive number, he still seemed determined to never live large—although he seemed to have forgotten the promise he’d once made to himself:
Only spend 10 years on Wall Street and then get out. Otherwise you will change
.
Inside the firm, Cecil was increasingly viewed as power -hungry. It’s a claim he disputes as revisionist, but Pettit ‘s acolytes began to see him as their nemesis, someone who wasn’t falling into line.
The two men could not have been less alike. One managed by instinct (Pettit), the other by intellect (Cecil). Cecil’s cerebral style was viewed as somewhat antithetical to the Lehman way. “All head, no heart” is how one senior executive put it. Another says: “We all bristled at John Cecil.” He was a typical perfectionist, too sharp for his own good. He had this “tiny handwriting, perfectly formed lines. People weren’t employees, they were ‘ firm members’”—which was the punch line to an infinite number of sophomoric jokes, according to Bob Shapiro, who briefly served as
CAO
of Lehman Brothers before it was spun off from American Express.
Some brokers were wary of Cecil, convinced that he would have been happy if Lehman had become a profitable “boutique bank,” while Pettit had much grander ambitions. “He [Pettit] had one goal in sight and it was to beat Goldman Sachs. His—and Fuld’s—dream was for Lehman to be the best investment bank on the Street.”
In 1994, Cecil hired a few of his former colleagues from McKinsey and put together a group charged with cutting nonpersonnel expenses at Lehman. The team discovered extremely wasteful habits and did their best to curb them.
For instance, they worked out that in 1993, Lehman had spent $11 million moving people around inside 3 World Financial Center. If a new trader joined a desk, the entire desk had to be rewired and altered. This created a domino effect, which required paying union workers massive overtime since the reconfiguring had to be done at night. The bankers demanded the same perk.
Cecil immediately prohibited anyone from moving their desk without getting his permission. He told a new hire, “Why don’t you just ride the elevator or walk from one side of the building to the other?”
None of this made him popular, but he did cut costs. In 1995, he got Lehman’s total expenses down to about $950 million from $1.3 billion, and he held it there for four years. Meanwhile, net profits went up to $71 million, compared to the disappointing $22 million a year earlier.
While all this was happening, Fuld and Pettit still had neighboring offices on the trading floor, as well as offices on the executive floor—but their relationship started, very gradually, to sour.
“I think [initially] they had a relationship of convenience,” says one trader who was closer to Pettit. “They knew they needed each other and both brought something to the table, but as they became more senior, I feel they became less tolerant of each other and gave less credit to the other. I think what friction they had was below the surface and I feel Chris resented Dick.”
“Chris knew that Dick might want to fire him and have all the glory for himself,” said Perry Moncreiffe. “He said to him, ‘That’s fine, but you ‘ll have to pay me out.’” Pettit drew up an agreement that stipulated that if Fuld fired him, Pettit would be paid $10 million.
Moncreiffe says Fuld signed without thinking twice about it.
One of the reasons Fuld was aloof to the foot soldiers was his devotion to family, a quality he tried to instill throughout the company—although on occasion he got mocked for it. Fuld had two priorities: Lehman and his family.
“With Fuld, it didn’t matter who was in the room; it didn’t matter if it was clients in the room. It just didn’t matter,” says Bob Genirs. “If his secretary came to the door and said, ‘ Your wife’s on the phone,’ Dick always took the call! I’d never met anybody in business who’d do that.”
The Fulds lived first in Bayshore, Long Island, and then New York’s Upper East Side before moving to Greenwich, Connecticut, with their three children. (They also bought homes over the years in Florida and Sun Valley.)
On trips to Asia, while his colleagues and clients would visit geisha houses after dinner, Dick always went back to his hotel. When he was still fairly new to the firm, Glucksman once told him: “Take our most important client out to dinner. Don’t fuck this up.” Fuld took the man to dinner. As soon as Fuld had paid the check, he wanted to leave (he was taking night courses at New York University’s Stern School of Business at the time), but the client was adamant that their evening was not over.
“Let me be plain,” Mr. Very Important Client said. “You are going to take me downtown and get me laid. And you are going to pay for it.”
Fuld said, “Fuck you,” and left.
The next morning, Glucksman was livid when he heard that his client had not had a good time. He summoned Fuld to his office and screamed at him. In an echo of Fuld’s
ROTC
fallout in Colorado, Fuld said to his boss, “Do you want to hear my side?”
“No!” roared Glucksman.
Later that day, though, Gucksman came into Fuld’s office and said, “So what is your side?”
When he told Glucksman what had happened, Glucksman cut off business with that client.
And now, Fuld was the one sending young brokers out to butter up important clients. And he expected to them to behave the way he had. He expected them “to do the right thing.”
In early January 1995 Joe Gregory, then the head of fixed income, walked down the corridor of the glass doughnut-shaped space that comprised the trading floor into Chris Pettit’s office with some bad news. He had just discovered the firm had $5 billion of gross exposure to Mexican bonds and related counterparties and it looked like Mexico could default soon. At the time, Lehman was worth only $3.5 billion.
Steve Carlson, the head of emerging markets, which had put $1 billion of Lehman money into Mexican
tesobonos
(dollar-indexed, peso-denominated short-term government bonds), was exposed firsthand to Pettit’s fury, which was aimed more at Gregory than at Carlson. Pettit had known about Carlson’s $1 billion exposure; he had not known about the other $4 billion that cropped up in other parts of the business—fixed income, derivatives, financing desk, and foreign exchange. “He was really pissed off with Joe,” says Carlson. “Pettit told Carlson to consolidate and manage all of the risk underneath the emerging markets umbrella. This earned Carlson the sobriquet “Five-Billion Guy.”
Carlson and his team aggressively halved the positions and moved the remaining exposures into a special purpose vehicle (SPV), which got them off the balance sheet and shielded the firm from mark -to-market losses on those assets.
Still, as long as Mexico was vulnerable, so was Lehman. Moody’s downgraded the firm. Mexico was saved only when Robert Rubin, Clinton’s Treasury secretary, stepped in on February 21, 1995, and underwrote the country’s debt.
While Lehman waited to see if the peso was going to bring them down, Pettit called Gregory and Carlson into his office every Friday for a risk-management meeting and update. “Take me through what you got—how is the risk reduced?” he’d ask sarcastically. “Nice work, buddy,” he’d add to Joe. Carlson winced. He liked Gregory and felt bad for him.
The real purpose of these meetings with Pettit, it seemed to him, was to chew Gregory out. “He was really pissed at Joe,” says Carlson.
“
He would say really nasty things to Joe,” “and I could see that the blood between them was toxic.” In fairness to Pettit, it’s true that Gregory had not been watching the store. Pettit also demanded that most of the emerging markets employees be fired.
Tensions got so high that during an emerging markets executive committee meeting headed by a senior confidant of Pettit ‘s, Jim Carbone, Carlson started to thump the table in anger. Somebody had made a comment about “crazy poor risk management.” Carlson felt that it had been forgotten that his business was not responsible for the $5 billion mess and banged the desk because he felt the emerging markets team was doing a good job under the circumstances.