WHEN a 2200-page legal report on the collapse of Lehman Brothers landed with a thud in New York last week, exposing the grand deception the firm used for years to mask its perilous financial situation, many were left wondering how so many of its top executives could have been so bloody stupid. What made them think they were so special that the normal rules of the market, of the law and of common sense did not apply to them?
The answers to these questions can be found in The Devil’s Casino: Friendship, Betrayal and the High Stakes Games Played Inside Lehman Brothers, by Vicky Ward, a contributing editor to Vanity Fair.
A British journalist who moved to New York in 1997, this is her first book. Ward knew it would not be hard to find Lehman insiders to talk, but she had little idea that she would finally write a book that focused more on the saga of the firm’s behind-the-scenes life than the drama of its ending.
The book lifts the lid on the extraordinary culture of a firm where an almost messianic belief in unity – motto: “one firm” – turned it into something more resembling a cult. It was a world where the desire to build Lehman into a leading player capable of taking on Wall Street giants such as Goldman Sachs became so all-consuming that few dared to challenge senior management.
Huge gambles were taken without a second thought.
“Even without an economic catastrophe Lehman would have failed,” says Ward.
“It was too dysfunctional.”
As part of the “one firm” strategy, which demanded total loyalty, Lehman invaded all aspects of its senior executives’ private lives and became oddly preoccupied with their marital status.
Giving a toast at a company dinner one night, Chris Pettit, one of the two deputies to chief executive Richard Fuld, said: “Now, look at this! Every single person here is with their original spouse. That is why we are successful. Because our word is our honour.”
Pettit later left his wife for a younger woman, which Ward believes broke his career.
“His closest allies at the firm deserted him,” she says. These included Fuld’s other right-hand man, Joe Gregory, who disliked Pettit’s new mistress and once told a colleague that she was evil. Pettit was eventually frozen out of Lehman in 1997 and died soon after in a snowmobile accident.
Ward recounts that during the annual summer retreats at Fuld’s ranch, in Sun Valley, Idaho, it was common for the chief executive to pull aside one of his employees to find out about his home life.
He once asked Bradley Jack, head of banking and later co-chief operating officer, after overhearing an argument between Jack and his wife, Karin, “Are you all having trouble?” Karin Jack told Ward: “He really wanted to know. He didn’t think Brad and I looked happy enough and it really worried him.”
Some Lehman wives revelled in the “unwritten rules”, which meant that if you were married to a Lehmanite, you belonged to the firm. One was Niki Gregory, wife of Joe, who gave other wives tours of her vast shoe closets at her home. One person on the tour described the closet as being “twice the size of the Jimmy Choo store in New York”. Niki Gregory outsourced all her needs to a personal staff of about 30. “I don’t think she ever set a table in her life for a dinner party,” one wife said.
But other wives found the social events sponsored by the firm and the annual summer retreat an ordeal, not least because of Fuld’s obsession with dress code. Evenings on the summer retreat required dresses, jewellery and Blahnik shoes, while they were all expected to don hiking gear for a trek up a mountain. One wife once brought a fake plaster cast so she could pretend she had a broken leg. She was flummoxed when Niki arrived with a real cast on her leg saying she planned to climb regardless.
Fuld’s requirement that his executives sacrifice all for the sake of the firm often put unbearable strains on their families. Karin Jack recalls that her child had a seizure on the day the Jacks were supposed to go on a Lehman outing. Rather than excuse her for the day, they landed Joe Gregory’s private helicopter at her home and waited for her. “Can you imagine the pressure?” she told Ward. “I have this really sick child, but I know that if I don’t get on that helicopter it’s going to hurt Brad.”
Ward reveals that the wives of executive committee members also were expected to support philanthropic causes that Lehman endorsed, including the New York Museum of Modern Art, where Kathy Fuld, Richard’s wife, was on the board. Not only were they expected to attend MoMA evenings and charity events with their husbands, they “were told exactly how much they had to donate”.
Amid such a testosterone-charged atmosphere, it was not surprising that Lehman was a hard place for women to work. The one woman who rose to the top, Erin Callan, was a beneficiary of a passion Gregory developed, relatively late in the day, for promoting diversity at Lehman. Callan, a Harvard graduate born to a New York cop, was a fighter. But she did herself no favours at Lehman, Ward says, by coming to work in low-cut, short dresses that would have been more suitable to a cocktail party. Callan’s looks were often the subject of morning inter-office emails. She found herself struggling to hold her head above water when the markets started to turn.
“Her biggest mistake was to accept a job [as chief financial officer] she was not up to,” Ward says. “Joe Gregory had no business in appointing her.”
When Ward wrote her book proposal, she admits that while she knew there was a story, she didn’t know what it would be. Her break came early on in her research, when an anonymous source handed her dictated notes from some senior Lehman executives, each giving their personal accounts of the two key decades leading up to 2000. The secret documents were commissioned by Gregory, at the time president of the firm, who intended them to be the basis of a sanitised history of Lehman that never saw the light of day.
What struck Ward from the notes was that Richard Fuld, Lehman chief executive from 1994, featured so little. Nicknamed by colleagues “the gorilla”, Fuld, so the legend goes, spent a career instilling into his traders that new business was like “blood in the water: go get it”.
“It became clear that Fuld was not the tyrant he was made out to be. He was barely mentioned,” Ward says. He emerged from the documents as a man obsessed with appearances and dress codes, but unwilling to apply himself to the intricacies of risk management, not particularly bright and incapable of making decisions. Pettit and Gregory dominated.
Through the notes, Ward also uncovered the story of how a group of working-class friends with high hopes and high ideals, Gregory and Pettit among them, decided to make their mark on Wall Street. Nicknamed the Ponderosa Boys in a reference to the 1960s TV series Bonanza, they drove to work together, went to the gym together and socialised together. All had virtually zero financial training; Pettit was recruited from the army, Gregory joined in 1968 as a teenage intern.
Early on in his career, Pettit made a pledge never to “turn into an asshole” if he made money, something he sadly failed to live up to. Gregory turned into an all-controlling monster, Ward suggests, as he became obsessed with building the firm and his own fortune. He turned out to be a phony who bought his own helicopter and seaplane for his commute and would tell other senior executives that his personal annual spending budget was $US15 million.
Bizarrely, Ward ends the book by relating a conversation she had with Pettit via a medium. It’s a strange way for a journalist to end such a meticulously researched book but it betrays the affection that Ward built up for Pettit, despite his flaws.
It is nevertheless a strange departure for Ward, who interviewed hundreds of (living) people for the book, including Hank Paulson, the former Treasury secretary, and double-checked accounts with the relevant participants. Fuld and Gregory would not talk. “Do I think Pettit was really talking to me? I don’t know,” she says.
She says: “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.” And it doesn’t get much riskier than climbing a mountain in a plaster cast just to prove you love the firm as much as your husband does.