The Long Knives at Lehman


The Devil’s Casino:
Friendship, Betrayal and the High Stakes Games
Played Inside Lehman Brothers
By Vicky Ward
Wiley; $27.95; 270 pp

Othello had Iago. King Lear had Goneril and Regan. The Lehman Brothers tragedy also had a villain, to hear Vicky Ward tell it in her gossipy book, The Devil’s Casino: Joseph M. Gregory betrayed a friend and revered Lehman leader, T. Christopher Pettit.

In 1996, writes Ward, a Vanity Fair contributing editor, Gregory persuaded Lehman CEO Richard Fuld to demote Pettit, his top deputy. “In less than a year, Gregory had changed from Pettit’s acolyte to his Brutus,” she writes, adding that the episode “is still called the Ides of March by senior Lehman executives because it occurred on March 15, the day Julius Caesar was killed by his former friends in 44 B.C.”

In case a mid-’90s office coup seems irrelevant to Lehman’s 2008 meltdown, read on. Ward succeeds in showing how the avarice and egotism that precipitated the biggest bankruptcy in U.S. history were rooted in a rivalry among five men who rose to power at Lehman after it was acquired by American Express (AXP) in 1984. Along the way she presents a now familiar take on Fuld, who oversaw Lehman for almost 15 years: “He was not the great general that Gregory wanted him to be, but a man who either was invisible or needed to be told what to do by a stronger subordinate.”

Ward is more interested in personal foibles than in profits and losses. Drawing on accounts written by Lehman executives and extensive interviews, she presents a history spiced with shouting bankers, desperate wives, and one hurled adding machine.

Of her five main characters, Fuld is the best known. The other four—named the “Ponderosa Boys” after the ranchers in the TV show Bonanza—were Pettit, Gregory, Thomas Tucker, and Stephen Lessing. Together they carpooled, went to the gym, and climbed the ranks. The lead Ponderosa Boy, Pettit, was a West Point grad who earned two bronze stars in Vietnam. He rose the fastest, becoming a partner in 1982 and, essentially, Fuld’s co-leader. Like a tough father, he inspired workers even as he ripped into them, writes Ward, who makes no attempt to hide her admiration.

These five men transformed Lehman’s culture, taking their cue from Lewis Glucksman, the bond trader whose feud with Peter G. Peterson led to the Amex takeover. One by one, bankers such as Steve Schwarzman fled, leaving Fuld as the most senior member of the merged firm, Shearson Lehman Brothers.

With Pettit on hand to keep the troops in line, Fuld had the lonely role of battling Shearson boss Peter Cohen over leverage and bonuses, Ward shows. That was Lehman at its finest, she argues. “The duo was unstoppable,” she says. But Fuld’s increasing isolation and aloofness, teamed with his later loss of Pettit’s support, mark the beginning of Lehman’s end.

When the spinoff from Amex came in 1994, Pettit was the last threat to Fuld’s leadership of the new investment bank. Though the troops were loyal, a stew of personal and professional distractions made him vulnerable; his brother was dying of brain cancer, and his marriage was crumbling. Meanwhile, Gregory was fuming because Pettit was protecting the heads of two underperforming divisions, Ward writes. He was also livid after Pettit scolded him over his handling of the Mexican peso crisis. So Gregory got Fuld to demote Pettit.

“It took a remarkable amount of push from me and Steve Lessing to get Dick emboldened enough,” Gregory wrote in an unpublished “Modern History” of Lehman that Ward cites.

“How am I going to do this…?” Fuld asked Gregory and Lessing before the showdown, according to Gregory.

Within a year, Pettit had resigned, and died in a snowmobile accident. His departure left no one to hold Fuld in check, least of all Gregory, who would become president and chief operating officer. Fuld’s isolation and Gregory’s elevation set the stage for Lehman’s demise. As the credit bubble swelled, Fuld was shut in his 31st-floor office, spending billions on commercial real estate and bullying those who urged him to pull back.

Unfortunately, Ward allows unnamed sources to lob insults. She also casts in the best light those who gave her the most access. Gregory, who was ousted himself in Lehman’s final days, spoke to her in one fleeting phone call. He didn’t respond to a request for comment from Bloomberg News.