Gregory didn’t trust the taciturn McGee (or anyone else who seemed to keep to themselves; he once complained that Mike Gelband, the head of fixed income from 2005 until 2007, looked down at the ground too often). Even though banking under McGee had brought Lehman its second best year in firm history—2004—with revenues of $11.6 billion (34 percent ahead of 2003), Gregory grumbled that it wasn’t good enough, and pointed out that the firm’s global fee share still had not cracked the top five, which was one of Fuld ‘s goals.
Hope Greenfield, who worked for Gregory in human resources beginning in 2001, told McGee that he’d “gone as far as he would at Lehman Brothers.” She’d heard this from Gregory, who was reportedly hoping to assign McGee to a commodity trading business in Houston—where McGee lived, and commuted from every week via NetJet. According to a source who encountered McGee right after his talk with Greenfield, he was “crestfallen.”
One of Gregory’s complaints against McGee was the long hours his bankers put in. Gregory got a time sheet each week, and he wasn’t happy with what he read, according to colleagues. The bankers worked far longer hours than employees in the other divisions.
Partly this was cultural. The banking analysts and associates would throw footballs around the office and even hit golf balls—precisely because they
wanted
to still be at work and sending e-mails from the office at 3 A.M. It looked macho. But Gregory abhorred such practices. He viewed them as unhealthy.
Workaholics and introverts weren’t the only people who annoyed Gregory. Now topping the list of people he wanted to fire was chief financial officer David Goldfarb, who rivaled Gregory as Fuld’s top sycophant, and kept a perennially bullish outlook, which he attributed to the market’s decoupling from the fundamentals of the American economy. He also had a habit of referring to the firm as “the Bros.” One person joked, “You may only guess at Joe Gregory’s reaction to this.”
But when Gregory told his boss he planned to fire Goldfarb, the
CEO
took the unusual step of intervening. Instead of being sacked, Goldfarb was “promoted” to the position of chief administrative officer (
CAO
).
Goldfarb, ignorant of the behind-the-scenes machinations, took the new position as a hearty endorsement.
He went out and immediately bought snappier suits and a St. Regis condo in Fort Lauderdale. “His shirts had a sheen,” says a colleague, and he wore booties, or ankle boots.
The condo became Goldfarb’s albatross: He’d told the rest of the executive committee how he had invested $4 million in renovating the property, only to have some mix-up on the deeds keep him from finishing the job. He kept droning on and on until his audience lost his thread of thought. He even called Jeb Bush, the governor of Florida, and Mark Walsh for help. Some on the committee snickered secretly at his meandering tale of woe and apparent ineptitude. However, someone close to Walsh felt that the people who belittled Golfarb over this were petty and mean-spirited. “The developer died right after David bought the property,” someone close to Walsh points out. “That’s a pretty unusual thing to have happen.”
Fuld’s efforts might have been better utilized sparing some other underlings from feeling Gregory’s wrath—namely, Bart McDade and his deputy, Mike Gelband, a duo Gregory disparagingly called “Fortress FID” for the fierce loyalty they commanded over the traders in Lehman’s fixed income division. They were too “isolated,” too cut off from Lehman’s “one firm” culture, Gregory complained. This was why he had been able to convince Fuld to let him move McDade over to run equities, even though McDade didn’t have the usual experience required for that job.
Fuld increasingly left the firm’s management to Gregory, whose general directive was to “do as much business as you can; take risk.” He argued with Madeleine Antoncic, the risk officer, that she was out of line and being too fussy when she suggested in 2006 that falling house prices might mean the balance sheet should come down. She was gradually sidelined, kept out of meetings, ignored, and asked—constantly—to leave the room.
Fuld, meanwhile, was out of the office a lot, visiting clients. Few employees ever caught a glimpse of him, including the executive committee. Fuld routinely skipped the Monday morning meetings, leaving Gregory in charge. Fuld wasn’t missing much: Gregory’s agenda generally centered on what he’d done over the weekend and how much he had spent. As one exasperated former committee member recalls: “Not once—in, say, 20 meetings, for argument’s sake—did he ever ask about the business or the numbers or risk, or anything else.”
In one memorable Monday meeting, an executive committee member asked what the firm’s China strategy was. “I don’t have a China strategy,” Gregory blithely replied. “That’s for you guys to work out.”
In 2005, Joe Perella once again came knocking on Lehman’s door. He had left Morgan Stanley and formed his own advisory boutique, Perella Weinberg Partners, and Fuld wanted an exclusive deal with the outfit. He and Perella (who had been a mentor of Skip McGee) even drew up a contract. The idea was that Perella would give Fuld exclusive advice. Since he was on the outside, he could bluntly tell Fuld the kinds of things his own staff might not. Then, Perella met Gregory—and according to someone close to Perella, “the idea sort of died.” Nobody inside Lehman was surprised. The last thing Gregory wanted was Fuld having a direct line to somebody of Perella’s stature, with zero input from Gregory.
Gregory liked to remind senior executives that they should not confuse life with work. “I’ m a little concerned about this group of guys who are very tight in fixed income,” Gregory once told Alex Kirk, then the head of the high yield business. Kirk would be well advised, Gregory implied, to learn some lessons from the Lehman history books. He bemoaned what had happened between Tucker and Pettit and the rest of the carpool guys—it hurt the firm, he said. “Rick Rieder, Mike Gelband, and Bart McDade are good friends. They play golf together and they vacation together. If there’s a time when you think that personal closeness is interfering with business decisions, I want you to let me know.”
Rieder—who ran a proprietary hedge fund for Lehman, R3 Capital—was once given a pep talk by Gregory, who told him that if Goldfarb ever got in his way, Rieder was to talk to “Uncle Joe.”
In 2006, McGee was still on Gregory’s hit list. The investment banking group had advised on three of the five largest mergers and acquisitions (M&A) transactions of the year, pulling in record revenues of $3.3 billion. But the department still ranked only ninth among its peers—underscoring perhaps more than anything else the feverish pace of the deal flow at the peak of the bubble—and Gregory, according to colleagues, tried again to use it as an excuse to fire McGee—or in lieu of that, undermine him as often as possible.
Gregory kept a rotating roster of teacher’s pets, and he liked to dangle the
CEO
carrot in front of them. According to multiple sources, he independently told Bart McDade, Scott Freidheim, and Roger Nagioff they could all be the president of Lehman one day.
In 2004 both Freidheim and Ian Lowitt, the former treasurer, had been promoted to the title of chief administrative officer. Freidheim’s golden boy moment had come in 2004 when he gave a presentation to the board on Lehman’s strengths and weaknesses around the world. It was the first time, one board member said to him, that they’d heard the “unvarnished truth” about where Lehman was weak, and the board loved it so much he ended up giving them two more presentations.
Fuld was proud of his protege’s performance. He increasingly called on him to present at corporate retreats. He would introduce him with a snippet of Shakespeare he reserved for a favored few: “Lay on, Macduff.” Freidheim obliged.
Jeremy Isaacs, believed that he too was a candidate for the seat of president. “Jeremy thought he was the rightful number two,” explains a former colleague who was close to Isaacs. “If anything happened to Joe, he thought he should be number two. He had reason to believe this. . . . He says be had said to Dick in May 2007: ‘ I’ve been running Europe and Asia now for eight or nine years. I’ve done what you asked. Europe now contributes 50 percent of Lehman’s revenues. I need to have an idea of where I’ m going next. So, if you can give me a signal of that forward pathway, good. If not, let’s have a conversation about how I can gracefully move on.’ According to Isaacs, Dick basically said, ‘Oh, you are wrong. Give me a year. If I can’t work something out, I will give you $500 million to start your own firm, but give me a year.’ ”
But Isaacs did not help himself when he gave an interview to the
Daily Telegraph
at the end of 2006 in which he stated that the following year Lehman planned to open an office in Russia. The plans had not been finalized (even before the 1998 default, Fuld mistrusted the Russians), but Isaacs had been involved in two years of discussions on the matter and thought he’d expedite matters if he went public with the plan. It was not a move Isaacs could get away with, and the new public relations chief, former
Financial Times
editor Andrew Gowers, knew it.
“Jeremy,” he asked gently during the interview, “are you sure you are now off the record?”
“No,” Isaacs insisted. “It’s on the record.”
As soon as the interview appeared, Gregory called Isaacs and tore him apart. Isaacs later told Gowers, “You were quite right to try to stop that story. . . . I had myself a new asshole ripped by Joe Gregory.”
Gregory installed another golden boy in 2006, hiring George Walker away from Goldman Sachs, where he’d been the
CEO
of Hedge Fund Strategies and then Alternative Investment Solutions. Walker, a relative of President George Bush, was made head of investment management and immediately put on the executive committee. Gregory told the understated, likable Walker that he was a future candidate to run the firm. That year investment management had its third record-breaking year in a row, with revenue of $1.7 billion.
But Gregory’s most successful—and divisive—teacher’s-pet project was yet to come. She was a young blonde banker named Erin Callan, who—with a push from Gregory’s hidden hand—was vaulting up Lehman’s ranks. He planned for her to be the most visible symbol of his cultural remake of Lehman Brothers.
In 2004 Erin Callan was one of three Lehman executives to deliver a keynote speech before the annual dinner of Lehman’s group for women executives, Women’s Initiatives Leading Lehman (
WILL
), at Avery Fisher Hall in New York’s Lincoln Center. Diane Sawyer was the paid keynote speaker; 1,500 Lehman employees were in attendance. It was an event that got the blonde banker noticed by all the senior management.
Gregory was pleased.
“It was never clear if [Callan] took the position at
WILL
to get noticed by Joe, or if Joe gave her the position to make sure she got noticed by everyone else,” one of her peers, a banker, noted wryly. (Callan’s ex-husband, Michael Thompson, says Gregory asked her to make the speech and she spent a great deal of time preparing it.)
Whatever the case, it was soon widely understood within Lehman that Callan was Gregory’s newest diversity initiative. Senior executives who were privy to who got paid what in banking noticed that Callan’s compensation was always “bumped up” way above that of her peers.
When, in 2006,
BusinessWeek
spotlighted the enterprising work of Lehman’s finance solutions team in an article on the boom in so-called hybrid securities—complex securities blending attributes of stocks and bonds so as to maximize tax benefits and minimize the appearance of risk—the magazine quoted only one executive at the firm: Erin Callan. Only one executive’s photograph appeared in the magazine: Callan’s. The decision was, of course,
BusinessWeek
‘s, but the rest of the team took it as a slight. To them, the real innovator on the team was John Curran, who left for Deutsche Bank the month before the story appeared.
After the
BusinessWeek
article appeared, Callan was promoted to run Lehman’s hedge fund group, where she threw herself into the high-profile initial public offerings (IPOs) of the hedge fund Fortress Investment Group and a bond offering for the hedge fund Citadel Investment Group. A June 2007
Institutional Investor
profile depicts Callan pitching Citadel founder Ken Griffin on the $500 million debt issuance as a cautionary measure she encouraged after expressing “amazement” that Citadel, like most hedge funds (and indeed, like the very firm that employed her), relied so heavily on overnight loans that “banks could pull at a moment’s notice.”
Callan had the ideal blend of fancy and scrappy credentials when she joined Lehman in 1995. Raised in Queens, she was a New York City cop’s daughter and a product of the Catholic school system—but she was also an alumna of Harvard, New York University Law School, and the prestigious corporate law firm Simpson, Thatcher and Bartlett. And she was family—she’d been married since 1991 to Michael Thompson, a former Lehman investment banker, who now trades for himself. The couple made extra money renovating and flipping houses. She used to refer to her husband as “my
CFO
.”
Unlike Callan, who found her passion at the bank and truly “bled Lehman green,” Thompson was miserable at work. “I was struggling to find what I wanted to do while she was zooming ahead,” he says.
Callan used to ask her husband why he wasn’t happier at the firm. “I think she found [my uncertainty] very frustrating,” he says. He filed for divorce in 2007, but the two remained on friendly terms until 2008, when he told people, “She’s cut me dead.”
Before the divorce, Thompson says, she’d worn pretty much one designer: Chanel. But Callan underwent a gradual makeover after the split.
The hair became blonder, the gym routine intensified, and what she considered suitable work attire increasingly played up her femininity. She occasionally came to work in an ensemble that “would have been fine for a cocktail party but not for the office.”
“She really played on the fact that she was a woman,” says one member of Lehman’s executive committee. “She always wore low-cut dresses and short dresses, and she was always very flirty and almost girly. And I always thought it was pretty inappropriate.”