“I said, ‘I think what’s going to happen is this: I think Lew ‘s going to fire us as soon as we get in in the morning so that we’ re not partners anymore, so we don’t have to sign a noncompete and the issue goes away. That’s what I think is going to happen.’”
He was wrong. A short time later, American Express agreed to all the demands of the rebels. “I don’t remember Chris calling a meeting to announce what had happened, but I do recall word getting out that we were all safe, and we were jubilant,” says Bob Shapiro.
Moncreiffe and Pettit got their terms and finally signed.
LCPI
, and all the people in it, were kept together. What the press reports never recorded was that some, including Moncreiffe, feared that the name Lehman might have been eradicated from the new merged entity of Shearson and Lehman had Pettit not held out. Peter Cohen emphatically denies this: “We wanted Lehman; we wanted the name.” But the reality was that Lehman was a dying brand and at the time of the merger (May 1984) the only former Lehman Brothers entity that kept the Lehman moniker
was
LCPI
. Had it not been for Chris Pettit, the name Lehman
could
have ended up on the cutting-room floor. The new company
could
have evolved into American Express Shearson.
No more Lehman Brothers.
Pettit’s victory signaled the rebirth of the “one firm” spirit that Glucksman had wanted to instill in his people, and tried—but failed—to spread throughout the firm.
Bob Shapiro says, “In that meeting, Chris and Perry were essentially anointed as the leaders for
LCPI
. It’s a meeting that, for many people, has taken on mythic, almost religious, proportions. It was the beginning of the esprit de corps that
LCPI
took on then.”
“From that moment on, Chris Pettit was the hero and the real leader of what came to be Lehman Brothers,” says J. Tomlinson “Tom” Hill, at the time a top Lehman investment banker and now the vice chairman of the private equity giant Blackstone Group.
There were some casualties in this war. Joe Gregory did not speak to Lew Glucksman for 12 years—which was remarkable given that Glucksman not only had given Gregory that internship when he was 16, but had also paid some of his tuition at Hofstra University when Gregory had flunked a course and was broke.
Boshart, loyal to Glucksman to the end, took several years off and eventually went to work for James L. “Jamie” Dimon at Bank One in Chicago. He did not speak to Fuld for many years, though eventually he got over his bitterness and regretted it
Unsurprisingly, Dick Fuld’s life at Lehman was thereafter complicated; he was now responsible for negotiating for a firm that didn’t really see him as its leader.
“Pettit was our leader,” says Moncreiffe. “Fuld—well, Fuld was the front man who was tough enough to negotiate with the almost-as-tough guys at Shearson who tried to wiggle out of some of the assurances we had elicited. They were not all nice people. Their culture was about the individual. Dick did a good job of facing off with them.”
Others were less diplomatic: “Dick sucked up to Peter Cohen, which no one else wanted to do,” says one employee. Fuld’s role at this point was a lonely one; he didn’t receive much recognition from the troops below him.
Initially both Fuld and Pettit kept glass offices on the ninth floor (the trading floor), but Pettit was the manager who knew your name if you worked on the floor. Fuld did not.
If you had a problem, you went to Pettit. If you ‘d messed up, you went to Pettit.
Pettit understood why Fuld did what he did—and, according to Moncreiffe, was grateful that Fuld was the one who had to negotiate with the tough guys upstairs.
Contrary to some people’s beliefs, the two men actually worked quite well together at this point. “Chris was far more interested in running the business than in battling upstairs,” says Bob Shapiro.
On the corporate videos that got made in the late 1980s and early 1990s, Pettit’s preeminence at
LCPI
is easily deduced from the simple fact that Fuld scarcely appears on them at all.
In “Citizen Genirs,” the video tribute to Bob Genirs, the chief administrative officer, the entire firm comically searches for Genirs ‘s Rosebud (which turns out to be a calculator called Victor). It’s Pettit who appears as the boss.
“Dick was on the sidelines at this time,” says Moncreiffe. “He wasn’t the main guy urging people to do the right thing and stick together. Chris did.”
Jim Vinci, Pettit’s chief of staff, says Pettit convinced everyone that “they were part of something really special. And people believed him.”
They were right to. According to Moncreiffe and others, they made way more money than their Shearson counterparts.
And Jim Robinson noticed.
As a result, by 1990
LCPI
was running all of fixed income for Shearson Lehman. The Lehman traders had taken over the house. And the man pulling the strings was Chris Pettit.
“He took such pride in
LCPI
,” says Mary Anne. “To him they were family; it felt like he was coaching a team; everyone had a part. They were going to be different, stand apart from the other Wall Street players.”
“He was a Marine; they were all a bunch of Marines,” says Peter Cohen, the
CEO
of Shearson, now the chairman and
CEO
of the securities firm, Cowen Group. Cohen admits he loathed Pettit. “I can guarantee you that if you asked anyone in investment banking if they liked Chris Pettit the answer would have been no. . . . He always wanted more money, more independence for
LCPI
. They may have worshipped him—but it was like a cult thing. They were soldiers and he was their captain.”
Moncreiffe says, “Of course Cohen and Pettit didn’t get on. Cohen understood Fuld’s motivation but couldn’t deal with Chris’s altruism.”
Shearson had bought Lehman, and yet it was Lehman that seemed to be incubating its power.
“The truth is, Chris understood that unless we retained independence we would lose control of our business, our revenues, our accounting. We’d disappear,” says Vinci. “By hanging on to those, we eventually submerged Shearson into
our
culture.”
Steve Carlson, then in the mortgage business, said that within
LCPI
the troops took to snickering that the Shearson takeover ought better to be known as the “take-under,” for it was clear almost from the start that there was no quit in Lehman Brothers.
On our corporate videos we had music from
Les Miserables
. InChris’s mind we were fighting tyranny—just like the French
Revolution.”
—Ronald Gallatin, Lehman’s “minister without portfolio” and chief bonus negotiator
T
he fight led by Chris Pettit and Perry Moncreiffe might have been over, but the war in the offices of the newly fashioned Shearson Lehman Brothers was just beginning. It was inevitable, really—here was the shotgun marriage of two of Wall Street’s most culturally diverse houses, a combined firm that, as Helyar and Burroughs note in
Barbarians at the Gate
, “came to be marked by a peculiar blend of elegance and streetwise chutzpah: brass knuckles in a velvet glove.”
Shearson was a vast brokerage of 8,000 salespeople who made money purely on commission. They neither cared about nor understood investment banking, whereas Lehman had its deep roots in providing initial capital to firms like the Woolworth Company, Sears, Roebuck & Company, the Studebaker Corporation, and
RCA
.
The Lehman executives thought that the Shearson brokers were self-centered idiots; the Shearson brokers had little comprehension of what the Lehman guys were doing. As for Lehman Commercial Paper Inc. (LCPI)? They thought they were the modern -day equivalent of the Three Musketeers--“all for one, one for all.”
“They were the only unit in the entire organization which had salaries and systems entirely for themselves,” says Peter Cohen. More than 20 years later he still sounded irritated by that.
They proudly identified themselves as the working class of Wall Street, and in their rarefied circles—and bank accounts—they were. They smirked at the extravagances of Cohen, who at 38 was the
CEO
of Shearson Lehman. He was an easy target. At a year-end party hosted at the Greenbrier resort in White Sulfur Springs, West Virginia, Cohen arrived atop an elephant.
“A circus had been provided as part of the entertainment, and someone said ‘Why don’t you ride an elephant?’ so I did,” he explains.
But the moment became a running joke among the Lehman traders.
Cohen had worked his way up the operational side of Shearson, but had little experience in investment banking and none in capital markets; he was resented.
Joe Gregory told people that Cohen’s first meeting with the Lehman team was a disaster--Cohen had come to placate his new employees, but he only enraged them. He came across as high -handed and was met not with obedience, but with derision.
“Basically he came in and told us that each January his brokers knew they would make a million dollars that year,” says Bob Shapiro. “It was meant to be inspirational but what it showed was that he had no idea who his audience was. We were people who could lose a million in the final two weeks of the year. That was our business. It showed us he had no clue about what we actually did.”
“Of course they didn’t like me,” Cohen retorts. “I was younger than a lot of them, I was their boss, and they were a bunch of difficult guys.”
The Lehman veterans continued to isolate themselves from the rest of the company. In a small sign of rebellion, Pettit’s troops answered their phones with “Lehman,” snipping off the prefix “Shearson.”
“They were tough people, and they made money,” recalls John Cecil, a McKinsey consultant who was brought in by Pettit and who would later become the firm’s chief financial officer. “No one wanted to mess with them, because they were known as people who’d push back if you’d try to tell them what to do. They took over other businesses in the company, and they hired most of the other people who went on to be senior management.”
Cohen tried to exert control over
LCPI
, but this was a revolution that wouldn’t be put down. The Lehmanites took pride in running circles around him.
Cohen had to negotiate between
LCPI
and Shearson/American Express mainly over two subjects:
LCPI
‘s compensation and the amount of leverage (or, as the American Express board saw it, risk) that was kept on its books. The latter was always a subject that greatly alarmed the American Express board, mostly made up of industrialists, like David Culver and Richard Furlaud, who had a collective heart attack when they saw a balance sheet of $90 billion. “To them this meant huge risk must be being taken,” says Cohen.
In fact this was not necessarily the case. The balance sheet was often inflated by low-risk hedged U.S. Treasury trades and repurchase agreements (repos)—a common practice on Wall Street, but not in the more conservative credit card business. “They [Amex] didn’t quite get the mechanics of the whole thing,” said one source.
Cohen told Fuld to make sure that at the end of each quarter the leverage got taken down, to placate both the board and the rating agencies. (In fairness to Lehman, it was not the only bank that made money by raising leverage between quarters—all banks did it.)
Cohen suspected that
LCPI
had a secret cushion, but according to several senior
LCPI
executives, he was never told the precise size of what was known on the
LCPI
floor as “Dick’s reserve.”
The Lehman traders did their best to make sure Cohen and Robinson couldn’t tell what gambles they were making, and what enormous stakes were on the table. “Dick’s reserve” might as well been called “the daily fiction”—which, in fact, it was. A former managing director says it worked like this:
We called that kitty [kept on a piece of paper] “Dick’s reserve.”
A nice story, but neither Peter Cohen nor the rating agencies were fooled for long. Toward the end of each quarter, it was standard practice for rating agencies like Moody’s Investors Service and Standard & Poor’s to ask banks to write down their risk. Cohen told Fuld to get it done. Fuld went to Pettit, who managed the deleveraging. But on one memorable occasion the chain was broken and chaos ensued.
In 1987 Cohen told Fuld to take his leverage down. Dick passed on the news to Jim Vinci, Pettit’s staff officer.
Fuld said, “I made another deal with Peter Cohen, but I haven’t told anybody yet. We have to get the balance sheet (as in risk) lower than expected.” Fuld hadn’t told Pettit yet about the new agreement with Cohen, and yet Vinci went over to Jeff Vanderbeek, a friend at the trading desk, and said to the man who ran the repo book, a book of short-term loans, “Jeff, look—Dick’s just told me that you’re going to have to be a lot lower.”
Vanderbeek (now the owner of the New Jersey Devils), according to Vinci, was tired of getting picked on in the quarterly deleveraging issue. (“The repo book was always the place with the most elasticity,” says Vinci.) His bonuses were taking a hit because they no longer reflected his true performance.
Vanderbeek was furious. Fuld was negotiating with Cohen, seemingly to the detriment of his business and LCPI’s loans. He bolted from his desk and went to Pettit’s office. Vinci recalls, “I’ m watching from across the trading room. And there’s a lot of arms being waved, and a lot of screaming and yelling. Next thing I know, Pettit gets out of his chair, leaves his office, slams the door, and goes into Dick ‘s office. And now Pettit and Fuld are yelling and screaming at each other.
“Pettit leaves Fuld’s office, slams
that
door, walks back to his office, and goes back to work. I see Fuld coming for me across the trading floor, making a beeline. I have never been so belittled and berated in my entire life. He backs me into a corner and starts screaming expletives—’You little bleep! This is my fucking trading floor! I don’t know what the fuck you were thinking when you betrayed me!’ ”