( continued from front flap ) $27.95 USA / $33.95 CAN PRAISE FOR VICKY “Readers of this remarkable tale do not stand outside looking in— What Ward uncovers is that Lehman may have lost at the WA R D risky games of collateralized debt obligations, swaps, we are inside looking out. We feel the seething greed and jealousies— and leverage, but that was simply the tail end of a much the stuff that makes novels come alive.” —KEN AULETTA hey were the Rat Pack of Wall Street. Four bigger story. “Little Lehman” was the shop known to be close friends: one a decorated war hero, one forever fi ghting for its life and somehow succeeding. On “Lehman Brothers, the oldest partnership on Wall Street, was always a brilliant but cursed child. Its life, T an emotional hippie, and two regular guys with Wall Street, it was cheekily known as “the cat with nine and death, tells us why it was a magnet for talent, and why it was toxic. There have been a slew of terrifi c big hearts, big dreams, and noble aims. They were lives.” But this cat pushed its luck too far and died—the going to get rich and prove that men like them—with victim of men and women blinded by arrogance. books on how Wall Street brought the economy to its knees, but in The Devil’s Casino, Vicky Ward does something unusual. She takes the reader inside. Not just inside the fi nancial instruments, but inside the zero fi nancial training—could more than equal the Ivy Come inside The Devil’s Casino and see how good men League-educated, white-shoe bankers who were the culture that sired them; inside the families, including the spouses and children that enjoyed lavish riches; lose their way, and see how a fi rm that rose with the competition. They were going to create an institution and inside the internal rivalries and mismanagement that speeded the fall. Readers of this remarkable glory and bravado of Icarus fell burning in fl ames—not for others like them—hungry outsiders—and they were tale do not stand outside looking in, their noses pressed to the glass; we are inside looking out. We feel so much from the sun, but from a match lit from within. going to win, but not at the cost of their souls. the seething greed and jealousies—the stuff that makes novels come alive. In the end, the child dies. But because of the way Vicky Ward unspools the saga of Lehman, its life and death will both instruct and In short, they were going to be the good guys of fi nance. VICKY WARD has been forever sear your memory.” These four men were determined to rebuild the broken a contributing editor to Vanity —KEN AULETTA, author of Googled: The End of the World as We Know It brand of Lehman Brothers, America’s oldest partnership, Fair since 2001, specializing in and Greed and Glory on Wall Street: The Fall of the House of Lehman which had imploded in 1984 and was consumed by investigative reporting. She American Express and Shearson. For a decade or so, has profi led, among others, “The Devil’s Casino tells the riveting story of the four best friends who rebuilt Lehman Brothers, vowing to they drove into the offi ce from the same middle-class Jean-Marie Messier, Carly town in Long Island at 4 a.m. They became known as the Fiorina, CIA agent Valerie be ‘the good guys of Wall Street,’ only to fi nd themselves corrupted by the poisonous culture there. With Huntington Mafi a and the Ponderosa Boys. Plame, businesswoman Louise its illicit affairs, treachery, séances, boardroom backstabbing, and friendships and families torn apart, the MacBain, Morgan Stanley, book reads like a page-turning thriller. Who would guess that the story of life at Lehman would turn out to At fi rst, their unity and their grit were undefeatable. the late Bruce Wasserstein, be even more dramatic than the fi rm’s headline-grabbing, economy-shaking demise?” The men atop American Express and Shearson— counterterrorism expert Rich- supposedly their bosses—found they were no match for —ARIANNA HUFFINGTON, cofounder and Editor in Chief of The Huffi ngton Post ard Clarke, François Pinault, the Getty, the Guggenheim, the defi ant team spirit that confronted them in Lehman Fairfi eld Greenwich Group (a Madoff feeder fund), Commercial Paper Inc., which, in 1990, became known Brooke Astor, and Kate Moss. Ward is a weekly “The Devil’s Casino is the totally compelling true story, deeply researched but as exciting as a thriller—the simply as Lehman. columnist for the Huffi ngton Post and a contributor to almost mythical saga of four friends destroyed by money, sex, and ambition, with a cast of greedy larger- Under their watch, Lehman Brothers started to grow CNBC. She was previously the executive editor of Talk than-life Wall Street monsters, and an intimate history of the fall of Lehman. As exciting and important and became independent again in 1994. But, along the magazine. Her work has appeared in the New York as Barbarians at the Gate, it’s a gripping portrait of American society and fi nancial culture that explains way, something went wrong. The men slowly, perhaps Times, the Financial Times, the London Times, and the much of what is happening today. I can already see the movie.” inevitably, changed. As Lehman Brothers grew, so too Daily Telegraph. A native Briton, Ward was the runner- INSIDE PLAYED GAMES HIGH-STAKES FRIENDSHIP, BETRAYAL, did the cracks in and among the men who had rebuilt it. up for the Catherine Pakenham Award in 1994, Britain’s —SIMON SEBAG MONTEFIORE, author of Stalin: The Court of the Red Tsar FRIENDSHIP, BETRAYAL, Until it all came undone on September 15, 2008. most prestigious award for young women writers. She holds a master’s degree in English literature from “The Devil’s Casino is more than a history of Lehman Brothers; it is a saga of four friends who were LEHMAN BROTHERS AND THE HIGH-STAKES GAMES Investigative writer and Vanity Fair contributing editor Cambridge University and has lived in New York City prepared to sacrifi ce everything—including each other—in the quest for money and power. The devil here Vicky Ward takes you inside Lehman’s highly charged since 1997. is not in the details, but in the souls of the men who lost their moral compass while looking for the corner PLAYED INSIDE offi ces. You’ll meet beloved leaders who were erased suite. Vicky Ward has written a superb social history that should serve as a warning and a reminder to all from the corporate history books, but who could have JACKET DESIGN: PAUL Mc CARTHY who work on Wall Street.” taken the fi rm in a very different direction had they not JACKET IMAGE: © GETTY IMAGES LEHMAN BROTHERS AUTHOR PHOTOGRAPH: © CHLOE CRESPI fallen vic tim to infi ghting and their own weaknesses. You —DR. AMANDA FOREMAN, author of Georgiana: Duchess of Devonshire will encounter an unlikely and almost unknown Marcus AND THE Brutus, who may have had more to do with Lehman’s failings than anyone—including Dick Fuld, considered by many to be the poster child for the mistakes and greed of all bankers.

CONTRIBUTING EDITOR, VANITY FAIR ( continued on back flap )

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ffirs.indd i 2/20/10 5:50:10 PM ffirs.indd ii 2/20/10 5:50:11 PM The Devil’s Casino

Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers

Vicky Ward

John Wiley & Sons, Inc.

ffirs.indd iii 2/20/10 5:50:11 PM Copyright © 2010 by Vicky Ward. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Ward, Vicky. The devil’s casino : friendship, betrayal, and the high-stakes games played inside Lehman Brothers / Vicky Ward. p. cm. Includes bibliographical references and index. ISBN 978-0-470-54086-2 (cloth) 1. Lehman Brothers. 2. Investment banking—New York (State)—New York— History. 3. Investment advisors—New York (State)—New York—History. 4. Finance—New York (State)—New York—History. I. Title. HG5129.N5W37 2010 332.660973 —dc22 2010000762 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1

ffirs.indd iv 2/20/10 5:50:13 PM For my sons, Orlando and Lorcan Doull. Without your laughter, your hugs and your very good-natured patience, “Mummy’s annoying book” would not exist.

ffirs.indd v 2/20/10 5:50:14 PM ffirs.indd vi 2/20/10 5:50:14 PM The mind is its own place, and in itself Can make a heav’n of hell, a hell of heav’n. Paradise Lost by John Milton, 1:254 –255

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Cast of Characters xi Prologue 1

Part One: The Ponderosa Boys Chapter 1 A Long, Hot Summer 11 Chapter 2 The Beginning 17 Chapter 3 The Captain 25 Chapter 4 The “Take-Under” 35 Chapter 5 Slamex 47 Chapter 6 The Phoenix Rises 57 Chapter 7 Independence Day 67 Chapter 8 The Stiletto 81 Chapter 9 The Ides of March 89 Chapter 10 Eulogies 97

ix

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Part Two: The Echo Chamber Chapter 11 Russian Winter 107 Chapter 12 Lehman’s Desperate Housewives 127 Chapter 13 The Young Lions 135 Chapter 14 9/11 141 Chapter 15 No Ordinary Joe 157 Chapter 16 The Talking Head 173 Chapter 17 The Sacrifi cial Ram 183 Chapter 18 Korea’s Rising Sum 191 Chapter 19 The Wart on the End of Lehman’s Nose 199 Chapter 20 Damned Flood? 217 Chapter 21 Closing the Books 229

Epilogue 235 A Note About the Sources 241 Notes 247 References 255 Acknowledgments 257 Index 263

ftoc.indd x 2/20/10 3:54:50 PM Cast of Characters

Key Players

Richard S. “Dick” Fuld Jr., Lehman’s chief executive offi cer. An underachiever in youth, Fuld got a job trading commercial paper at Lehman in 1969. Joseph M. “Joe” Gregory, president and chief operating offi cer. Gregory started at Lehman in 1968 as a summer intern when he was 16 years old. He used to cut the lawn of Lehman’s top trader, Lew Glucksman. T. Christopher “Chris” Pettit, Lehman president and chief opera- ting offi cer. A West Point graduate, decorated Vietnam veteran. He joined the fi rm in 1977 and rose through its ranks—until, that is, 1997. Lehman 1984 –1994, the Slamex Years

Board Members of Either Amex or Shearson Noted in the Book David Culver John Byrne

xi

flast.indd xi 2/20/10 3:54:07 PM xii cast of characters

President Gerald Ford Richard Furlaud Henry Kissinger Dina Merrill (actress)

CEOs Howard L. “H” Clark Peter A. Cohen Lewis L. “Lew” Glucksman Harvey S. Golub J. Tomlinson “Tom” Hill James D. Robinson Sanford I. “Sandy” Weill

Managing Directors James S. Boshart III Herbert Freiman Ronald A. Gallatin Jeffrey Lane Robert “Bob” Millard The Hon. Peregrine Moncreiffe Theodore “Teddy” Roosevelt V Peter J. Solomon

Executives Jim Carbone, senior deputy to Chris Pettit Steve Carlson, head of emerging markets John F. Cecil, chief fi nancial offi cer (later also chief administrative offi cer) Steven “Steve” Carlson, global emerging markets John Coghlan, managing director of fi xed income Leo Corbett, deputy head of equities Martha Dillman, sales Robert A. “Bob” Genirs, Shapiro’s successor as CAO Nancy Hament, human resources Allan Kaplan, banking Bruce Lakefi eld

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Stephen “Stevie” Lessing, senior deputy to Tom Tucker Robert Matza, Stewart’s successor as CFO Paul Newmark, senior vice president and treasurer, Lehman Commercial Paper Inc. (LCPI) Michael Odrich, chief of staff to Dick Fuld Marianne Rasmussen, head of human resources Thomas Russo, chief legal offi cer until 2008 Mel Shaftel, chief of investment banking Robert A. “Bob” Shapiro, chief administrative offi cer Richard B. Stewart, chief fi nancial offi cer Kim Sullivan, sales Thomas H. “Tom” Tucker, sales Jeff Vanderbeek, rose to run all of fi xed income, then capital markets James “Jim” Vinci, Pettit’s chief of staff Paul Williams, equities chief

Lehman 1994 –2008: From Independence to Meltdown

Executives Madeleine Antoncic, head of risk Steve Berger, briefl y co-head of banking Steven Berkenfeld, global head of legal, compliance, audit Jasjit “Jesse” Bhattal, replaced Tyree as head of Asia in 2000 Tracy Binkley, head of human resources Erin Callan, chief fi nancial offi cer Steve Carlson, head of emerging markets Jerry Donnini, head of equities Eric Felder, replaced Reider Scott J. Freidheim, offi ce of chairman, later chief administrative offi cer Mike Gelband, McDade’s successor at fi xed income David Goldfarb, chief fi nancial offi cer turned chief administrative offi cer turned global head of strategic partnerships Hope Greenfi eld, chief talent offi cer Jeremy Isaacs, head CEO of Lehman Europe from 2000 onward Bradley Jack, banking, then co-COO

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