Gregory was not a target for mockery because of his big -picture cultural goals for Lehman, which were laudable. He became a target because he had a smallness about him; he was man who was emotional and had instinctive likes and dislikes that sometimes seemed to inhibit common sense. He also seemed to grow increasingly distant from the business he was meant to be supervising.
One anecdote illustrates Gregory’s shortcomings. In Lehman’s lore, it is called “the glass door story.”
Bob Millard had always irked Gregory. Millard was extremely bright—a well-educated and self-described intellectual. He quoted, with ease, Richard Dawkins, Charles Darwin, and William Shakespeare. He had an
MBA
from Harvard and a degree in architecture from
MIT
. His returns on his investment business, now named Realm Partners (which was funded by Lehman), were legendary. His compensation was even greater than that of Fuld or Gregory since he took a percentage of his fund’s profits, rather than the firm’s. He was also widely liked within the firm, and he would talk as often to assistants as to senior executives. Yet he was not on the executive committee, in part because he also didn’t want to have his compensation lowered to the same level as the other executives. Millard’s revenues had been lifesaving for Lehman during the 1990s, and he was somebody Fuld was careful to cultivate. He was definitely not someone Fuld wanted to offend.
Millard believed Gregory disliked everyone who, like Millard, had a direct line to Fuld. (This had been part of Gregory’s problem with Goldfarb, who was directly reporting to Fuld when he was appointed
CFO
.) The two men were also pretty dissimilar. Millard is a cultured, cerebral man; Gregory was a self-made man who, many felt, still couldn’t believe he had made it. There was always tension between them.
After Lehman relocated, Millard was given a small corner office at the 399 Park Avenue location, next to a conference room. He asked the architect if he could have a glass door installed so that he could see into the adjoining conference room. A while later the answer came back: The glass door would violate the building code. Millard, who had a degree in architecture, knew that was not true. He suspected Gregory ‘s handiwork, and called Fuld to complain.
Fuld laughed at him. “You are paranoid,” he told him. “Don’t be ridiculous. Of course Joe has nothing to do with it. But I will look into it for you and see if I can get you your glass door.”
A few days later, Fuld called Millard back. “Well, I have to say it—and I cannot quite believe it—but you were right. It was Joe. Joe wants to talk to you. And you will, of course, get your glass door. I am very sorry for having doubted you.”
A few minutes later, Millard’s phone rang again. It was Gregory. “I will come and see you,” Millard said.
“No, no, I will come to you,” said Gregory. The episode swiftly descended into farce. Millard found himself stuck listening to Gregory for an hour as Gregory’s apology meandered on and on. “I know I haven’t behaved well toward you in the past,” Gregory said.
From then on the two men stayed distant but cordial.
Fuld’s efforts to cultivate the press were starting to pay off—though not without much pain in Lehman’s PR department. If ever a story appeared that was remotely negative, Fuld would give the press officer responsible a grilling—or worse. One by one, over the years, the most senior Lehman PR executives—Bill Ahearn, Tony Zehnder, Hannah Burns, and Andrew Gowers—were fired because of stories Fuld had not liked. Only Scott Freidheim (who was in charge of them all) survived, along with a hire of his, Rose Shabet, a former chief of staff for Henry Paulson, John Thornton, and John Thain, the former gods of Goldman Sachs. (Shabet resigned in April 2008 and moved to the hedge fund Viking.)
By 2002 Moody’s had improved its outlook on Lehman’s long-term debt from stable to positive, which the rating agency said reflected “the disciplined risk controls, posture and culture that Lehman has installed throughout the organization and its people in recent years.” Fuld was named one of the “Top 25 Managers of the Year” by
BusinessWeek
. The fixed income division had a record revenue year, and the European mortgage business was expanded through the purchase of SPML—a subprime mortgage lender in the United Kingdom. Lehman’s business in Europe slowly started to improve under Jeremy Isaacs, as did their prospects in Asia, thanks to Jesse Bhattal.
By now it was time to get rid of all weak links, so Gregory turned his knife on the last remaining Ponderosa Boy: Steve Lessing.
Gregory believed that Lessing had hung himself by bringing too many friends into Lehman who were not up to the job. Lessing had been running all capital market sales, but, according to many sources, he was not respected by younger employees. In 2002, he was made head of client relationship management, a title that was meant to save face while he looked for another job.
Lessing’s move was never announced publicly—that would have been too humiliating for a man with so much tenure. To many, Lessing was synonymous with Lehman, so his demotion was kept an internal secret. Still, everyone who knew about it expected Lessing to quit.
But he did not. Instead, he turned the client relationship job into such a success that within a year he rejoined the executive committee. Unlike most people who interpreted the title “head of client relationship management” as “time to find a way out, ” Lessing actually did what it asked of him—he built client relationships. Furthermore, he got one of three corner offices on the 31st (executive) floor of 745 Seventh Avenue. (Dick had one, and Fran Kittredge gave herself the other.)
“Dick never quite got over how Lessing turned this bad situation to his advantage,” said Cecil, who had remained close to Lessing. “It really impressed him that he hadn’t quit. He’d stuck and made the job work.”
Lessing had one huge advantage: As had been proved with the Russian crisis, thanks to both his popularity and his vast Rolodex, there were not many clients—or potential clients—Lessing could not get on the phone.
As Doug Ireland, a former Lehman managing director, recalls, “He’s a natural sales guy. He knew the guys at Met Life, and he knew the guys at Federated, and he knew the guys at Black Rock. And when we needed favors, during [the Russian crisis], Steve was Johnny-on-the-spot, calling every single one of them, saying, ‘What do you need? How can we help? We’ re going to be okay; stay with us.’ And he was absolutely, in my mind, the
MVP
.”
Lessing was also the liaison between Greg Maffei, then the
CFO
at Microsoft, and Fuld—which was a precious relationship for Lehman. Unlike his contemporaries, Lessing was also able to “eat crow,” as one peer put it, and get back into Gregory’s good graces. This was a feat no one else in the history of the firm managed to pull off.
Jeff Vanderbeek was not as lucky. He was demoted from the position of head of all capital markets to office of the chairman, “responsible for risk, strategy, and private equity.”
Vanderbeek was not respected by many of the people who worked under him in fixed income, including Bart McDade and Mike Gelband. Vanderbeek was expected to find a graceful exit strategy.
The following year—2003—was a big one for Lehman. Its price-to-earnings ratio was now finally up to 14, which meant it was in a position to buy a valuable investment without diluting shareholder value. On July 22, 2003, it bought the investment management business NeubergerBerman for approximately $2.625 billion—which brought Lehman’s assets under management to $116 billion. Neuberger became known as “the crown jewel” at Lehman.
Fuld was enjoying mountains of good press, and he was named the top
CEO
in fixed income sales and trading by
Institutional Investor
. Lehman’s brand of fixed income sales and trading, equity research, and fixed income research were all ranked first on the
Institutional Investor
list. There were no such accolades for banking. As usual, this was Lehman’s weakest spot.
So Fuld again decided to shake up personnel. He promoted a former Texas high school football player turned formidable Houston energy lawyer, Hugh “Skip” McGee, to global head of investment banking; Mark Shafir, from Thomas Weisel Partners, was hired as head of mergers and acquisitions (M &A). Other strong hires included a young German, Christian Meissner, who was recruited to run banking under Isaacs in Europe, where the firm still had not broken into the top 10. In private equity, Charlie Ayres was hired from MidOcean Partners to head up global merchant banking.
Fuld and the executive committee prodded Walsh to work harder than ever. Walsh now had several funds under management, aping Goldman Sachs’s model, the so-called Whitehall Funds—but Fuld and Gregory wanted to keep using the firm’s balance sheet for his lucrative deals. Walsh was happy to oblige. “When Mark was keen to do a deal he didn’t want to know about obstacles or risk; there wasn’t much stopping him,” says John Cecil. One major New York City realtor recalls that at this time, “Lehman’s aggression was just startling in [real estate]. They were determined to beat out absolutely anyone to every deal.”
Goldman Sachs was envious, but wary. “We stuck to ensuring that the maximum we had exposed of our own money was only 20 percent—the rest was put out to a fund,” says a source at the company. “You just couldn’t assume the real estate market would continue to go up.”
But Walsh, Fuld, and Gregory did.
By 2008, the firm had at least $30 billion of commercial real estate on its books, the result of 2,500 different line items (deals). Cecil watched this from afar and shook his head. “It needs to be $5 to $10 billion at most,” he believed. No matter how lucrative Walsh ‘s deals were, they were illiquid—if trouble hit, he wouldn’t be able to get out of them and shrink the balance sheet. It was an appalling risk.
But if anyone said to Gregory, “Shouldn’t we be careful?” they were given this answer: Got to beat Goldman Sachs.
Gregory continually talked about “building a better brand than Goldman.” He gave speeches saying Lehman needed to surpass Goldman Sachs in the next five years. Meanwhile he continued to build his diversity program. He hired Anne Erni as chief diversity officer in the United States, and Fleur Bothwick as head of diversity for Europe. Mentoring and inclusion programs started to attract positive press—and, as mentioned, even a Harvard Business School report—which was a useful counterweight to the press reports on star Internet analyst Holly Becker, whom, it emerged, the Securities and Exchange Commission (
SEC
) had been investigating since 2003. The agency thought Becker might be giving her husband, Michael Zimmerman, a stock trader at the hedge fund
SAC
Capital, inside information on Lehman research reports. (Becker left Lehman that year, and the
SEC
eventually dropped the investigation without charging her.)
Several senior executives told Fuld they were concerned that the firm’s focus on diversity was taking up too much of Gregory’s attention—and too many resources. Fuld talked to Gregory about the concerns but nothing changed. It was clear that Gregory was no longer interested in running a business. In executive committee meetings he talked about his tremendous wealth. He was also obsessed with cleanliness and personal hygiene. He kept a ready supply of Tic Tacs on his desk that he offered around, and he swilled Listerine at least twice daily. Like Fuld, he did not like slovenliness in others.
It was commonly known among the senior executives on the 31st floor of 745 Seventh Avenue that Gregory’s personal annual spending budget was $15 million a year. “I never did understand why he bought a vast house in the Hamptons for just two weeks each year,” one colleague noted dryly. He also had both a seaplane and a helicopter ready for his daily commute.
Another employee says: “Joe always stayed in Huntington rather than moving somewhere more affluent because he wanted to be a big fish in a small pond. He wanted to be the richest man in town.”
In 2004 Gregory pulled off his best political move yet. He persuaded Fuld to get rid of Brad Jack on the grounds that he had not been sufficiently focused on work since his illness. Jack says this is nonsense.
On May 24, 2004, Jack was demoted to office of the chairman, with responsibility for overseeing all of the firm’s investment banking relationships. Soon he was out—with an $80 million severance package. In 2008, Brad and Karin Jack divorced but remained great friends. They speak daily. Jack says, “The truth is that if it had not been for the years of long hours and pressures, Karin and I would still be married. But we had drifted apart.”
In 2004 Vanderbeek had left, too. He knew his career was over when he was demoted; an avid hockey player, he had seized the chance to buy the New Jersey Devils for $175 million.
Fuld so trusted Gregory now that he did something that would have been unthinkable a year before: He anointed him president. It was official: The ghost of Chris Pettit had been vanquished.
This move was not universally hailed in the office. The problem with Gregory, many said, was not so much what he was, but what he was not: He was not on top of the numbers and the businesses. A few months later Peter Cohen idly asked Fuld, “Why did you make Joe president?”
Fuld replied cavalierly, “I don’t know. He will probably be my undoing.”
I think if Joe had been in some other job—say, head of diversity—there would have been no problem. But he was president of the firm and all he appeared to be interested in was diversity. That was the problem.
—Lehman executive committee member
J
oe Gregory and Skip McGee never got along. McGee was completely unlike Gregory—he scored an “I” for introvert on the required Myers-Briggs personality-type tests, whereas Gregory was an “F” for feeler and an “E” for extrovert. In executive committee meetings McGee said as little as possible—a marked contrast to the loquacious Gregory.