A Colossal Failure Of Common Sense Part 14

11.

Wall Street Stunned as Kirk Quits We're heading into rough seas, and you don't have the talent in the right places. You have the wrong commanders, the wrong helmsmen. The wrong lookouts. You're doing every d.a.m.n thing wrong.

THEY CARRIED OUR CFO, Chris O'Meara, out of the combat trenches with a few gunshot wounds and very muddy boots. After months of internecine warfare facing the light cavalry of Wall Street's a.n.a.lysts and researchers, d.i.c.k Fuld, his commanding officer, pulled him back from the front line to a more sheltered position. There are no medals awarded for ducking and diving in the face of the enemy, but Chris deserved one for gallantry under fire. CFO, Chris O'Meara, out of the combat trenches with a few gunshot wounds and very muddy boots. After months of internecine warfare facing the light cavalry of Wall Street's a.n.a.lysts and researchers, d.i.c.k Fuld, his commanding officer, pulled him back from the front line to a more sheltered position. There are no medals awarded for ducking and diving in the face of the enemy, but Chris deserved one for gallantry under fire.

For hour after hour, this Georgetown-educated veteran chief financial officer had fended off a barrage of questions about the state of the battle at Lehman Brothers. On those wide-ranging conference calls he had faced interrogation about the firm's balance sheet, its exposure to the now-obvious mortgage calamity, its debt, its ma.s.sive overseas expansion, its losses, its hopes, and its fears.

Regarding the last item, the answer was always that Lehman had none. Chris was not only in charge of the corporate cash but also often in command of corporate morale. Still, enough was enough, and the firm waited with eager antic.i.p.ation for the commanding officer to announce his replacement, the new CFO who would face the anger of the guns.

Joe Gregory made the announcement. And it was not to a known Wall Street hard-a.s.s that he turned. Instead he wheeled his great friend Erin Callan up to the front line. As shocks go, that one went. Erin, a former tax attorney with a penchant for bright red leather jackets and a smile that would have melted the heart of a traffic cop, stepped up to one of the most demanding jobs on Wall Street.

Unlike Lehman's, her a.s.sets were solid. At forty-one, she was vivacious, intelligent, articulate, and fas.h.i.+onable. Educated at Harvard and New York University Law School, Erin Callan's career at Lehman had in recent years been in the investment banking division with a special focus on hedge funds. She had previously headed Lehman's global financial solutions group and the global finance a.n.a.lytics. She had been responsible for more than one hedge fund going public. And she was very confident in front of the television cameras.

However, Erin had one weakness: zero experience in the office of the comptroller in the corporate treasury department, which is an almost unheard-of omission on the resume of a chief financial officer.

I had nothing but admiration for Erin. Everybody liked her. But at this level, when we're talking about running the finances of a bank like Lehman, I would not have put her in quite that league. And that's the league you need to play in when the markets have crested and there is an iceberg the size of Mount Vesuvius lurking up ahead.

Erin enjoyed the attention more than most of us had antic.i.p.ated. And she quickly became a business celebrity. Her good looks and fast mind enabled her to capture the television audience. In the opinion of Joe Gregory, we just had to get out there and tell our story, then all would be well. Confidence would improve, and by G.o.d, if there was anyone who could broadcast our side of the story, it was surely Erin Callan.

But even she had been slightly amazed at her promotion, which had come out of left field. And the fact that it had obviously been created by Joe Gregory cast a mild shadow over it, because everyone knew about his devotion to underdogs and minority groups. Maybe he thought a woman deserved a break to reach the highest rung on our corporate ladder. I imagine he knew he had just made Erin the most powerful woman on Wall Street, the only one with a genuine shot at taking over the helm of a major firm.

How this all came about was a great mystery, because it was difficult to find the catalyst. Was it a desire to move Chris O'Meara? Or promote and reward Erin Callan? That answer may never be revealed, but it emanated from the thirty-first floor and involved a truly bizarre set of circ.u.mstances that centered around Wall Street's queen of risk management, Madelyn Antoncic, holder of a Ph.D. in economics and finance from New York University's Stern School.

Antoncic, a Lehman managing director, had been chief risk officer, the one who determined the overall risk appet.i.te of the firm by setting trading limits. Her experience was awe-inspiring: she'd worked at the Federal Reserve Bank of New York and then at Goldman Sachs, where she ran market risk management. For eight of her twelve years at Goldman she traded mortgage-backed structured products. She then moved to Barclays Bank, where she built a market-risk function, and then became treasurer of Barclays for North America. She was voted 2005 Risk Manager of the Year, an international award, and the following year she was named among the one hundred most influential people in U.S. finance. Her specialization was mortgage securities risk a.n.a.lysis.

She had greatly enjoyed her career at Lehman but found it difficult to accept being asked to leave the room whenever there were tense issues involving risk being aired in front of the executive committee. After a presentation, the deal team was always asked to leave while the committee discussed the deal. But, defying all logic, d.i.c.k and Joe invariably requested that their risk chief go outside with the wheeler-dealers. This was presumably because of her whip-smart, cautious mind, which dealt with the risk rather than with the maximum profits that might accrue, and the latter was basically all d.i.c.k and Joe wanted to hear about. They did not wish to know what she really thought. With a brand-new billion-dollar project on the table and an internationally recognized genius of a risk chief sitting right there, I would venture that asking her to leave the room was possibly the most outrageous move I've ever heard of, and certainly the dumbest. Would the risk manager kindly leave the room? Would the risk manager kindly leave the room? I mean, that is preposterous. I mean, that is preposterous.

But Madelyn was a bear by late 2006, advising caution, pullback, and extra study. d.i.c.k and Joe were just about as keen to listen to her as they had been to listen to Mike Gelband. So they just threw her out, on the grounds it saved a lot of trouble. I know that she believed that once Mike left, all semblance of sanity was lost, because it was obvious to anyone they would only discuss what they thought the firm could make. Not the possibility of loss.

I have been told by two close friends who were in attendance at one of those meetings that d.i.c.k Fuld, irritated beyond reasonable endurance by Madelyn's warnings, resolutely told her to "shut up." Which was a somewhat eccentric way to treat Wall Street's acknowledged authority on risk.

And so, on a sunlit September afternoon, d.i.c.k Fuld and Joe Gregory decided to make Madelyn's absence from those meetings even more permanent and got rid of her altogether, demoting her to a peripheral government relations job inside the organization. There is no record of precisely how much pain this caused Joe Gregory, who had spent half his life promoting women to positions of immense authority as a part of his multimillion-dollar program of inclusion.

Generally speaking, there was a group who by now believed quite sincerely, and without malice aforethought, that Richard S. Fuld and Joseph M. Gregory had essentially gone mad. In Madelyn's place they promoted the hitherto CFO Chris O'Meara, who was basically an accountant and had about as much experience in the supremely specialized business of risk management as Charlie McDonald. That's my uncle Rob's black Labrador. And into the white-hot seat of CFO they promoted Erin Callan, who had about as much experience of heavyweight corporate accounting as the aforementioned C. McDonald.

Now, it usually takes weeks if not months of a.s.sessments before appointing a CFO. But at the Tower of Lehman, deep into the reign of King Richard the Not-So-Great, it took about twelve minutes. Madelyn was given one day's notice, and the executive committee was never informed until it was a fait accompli.

Erin could scarcely have made her debut at a more difficult time. The obvious threat to the banking system brought on by less liquidity in the short-term commercial paper market was starting to come to fruition. Some rolling loans had stopped rolling altogether, as some banks, terrified of each other's losses and the risk of potential collapse, started to become leery of lending to each other. And they were not thrilled about lending to anyone else either.

Lehman was up to its eyebrows in debt, as well as bonds that had to be sold on. The deal-making party for so long enjoyed by private equity companies was grinding to a complete halt. And word was everywhere around Wall Street that Bear Stearns and Lehman were in the most trouble.

Lehman had managed to lay hands on sufficient capital to take part in its biggest LBO deals. But the issue with them was always to move fast enough to securitize them and sell the high-yield bonds and leveraged loans that made the LBO deals possible. The problem now, though, mostly due to the bank freeze, was a drastic lack of buyers. The big investment funds were not playing this game anymore, and the system was clogged with sellers. Which left billions of dollars of unsold securities on Lehman's books, as well as those of many other banks.

Bear Stearns was involved in financing a $28 billion leveraged buyout of Hilton Hotels, and another $7.4 billion LBO of Chrysler Corporation. Lehman was involved in three of the top five LBOs in the world: the $31.8 billion buyout of TXU, the $22.2 billion for Archstone-Smith, and the $26.4 billion for First Data Corporation. The securities right now could not be sold, which left a lot of very hard currency hanging out to dry in a firm like ours, which was not really big enough to partake of any of them in the first place, at least not in a major way. Estimates were that the big LBO lenders-the commercial and investment banks-were holding well over $200 billion of leveraged-buyout debt. Office rumors suggested we were on the hook for $15 billion, even after Alex's selling campaign. Not to mention the overpriced commercial real estate all over the friggin' world and our calamitous liabilities in the residential mortgages.

There were many jobs in the world of finance that any number of topflight traders and salesmen would have coveted. Chief financial officer of Lehman Brothers was not among them. Erin Callan had that. And hers was not the only appointment in Lehman that had raised eyebrows. Joe Gregory had brought in equities derivatives specialist Roger Nagioff to replace fixed-income savant Mike Gelband, but that was not a great success since Roger was stationed in our London office. That fell through in early February of 2008. Then Joe drafted the intellectual but inexperienced Andrew Morton from Treasuries, and that was not much of a triumph either. The whole process was reminiscent of the bizarre appointment of our former CFO Dave Goldfarb and making him global head of strategic partners.h.i.+ps and princ.i.p.al investing in 2006. The simple fact is that CFOs on Wall Street do not make that kind of a jump from accounting to risk-taking.

There was a theory that d.i.c.k and Joe liked to move people around because it weakened them, at least for the several months that it took them to learn their new business. But it stopped people from becoming dangerous-dangerous the way Mike and Alex were to d.i.c.k and Joe, who could not really understand the subject of high-tech modern finance and preferred to deal with people of comparable ability. It was an extraordinary mind-set, not wanting to be a.s.sisted and supported by the very best.

Alex was unafraid to speak his mind, and he banged the table during long, fractious conversations with Joe Gregory, and to an extent with d.i.c.k Fuld. He told them that key positions in the firm were being held by people without sufficient experience. He cited Callan, Nagioff, and Morton. At one meeting he told Joe, "We're heading into rough seas, and you don't have the talent in the right places. You have the wrong commanders, the wrong helmsmen. The wrong lookouts. You're doing every d.a.m.n thing wrong: buying hedge funds at the top of the market, buying back stock to impress the Street, holding on to astronomically priced real estate. You're buying when you should be selling. You're all over the d.a.m.n place."

Now, there are some corporate presidents who would have given that very serious consideration, coming as it did from a man who had personally made the firm more than $250 million over the dot-com crash. Alex was a wartime general who thrived in times of market turbulence. But Joe Gregory was not such a character. He seethed about Alex, resented him, which was really odd, because any d.a.m.n fool could see Alex had only the best interests of Lehman at heart.

With so many doubts being cast about her capacity to carry out her high-level duties, Erin might have been slightly fazed. But she was no such thing. Night after night she appeared on camera and stated our position. She was smiling, confident, and sure of her lines. She informed the world that all was well, our debt was manageable, and our worldwide profits were excellent. Lehman was the great globalizer. Lehman looked beyond local U.S. markets. The bank's horizons were wide. Its reach was far and thorough. Lehman was certain that its decoupling policy was correct. Yes, the chairman was buying back stock, but that was his privilege. A sign of bravado? Nonsense. A sign of inner strength.

The stock market, however, rallied in September, and in October reached an all-time peak, with the Dow over 14,000. Which was not good news for my group. All of us had taken ma.s.sive short positions-I refer, of course, to Eric Felder, Jeremiah Stafford, Peter Sch.e.l.lbach, Rich Gatward, and me. We seemed to have waited a lifetime for the market to turn down, and another lifetime while the stock market was surging upward.

I have no doubt that the executive suite on the thirty-first floor was knee deep in self-congratulation. And that Fuld and Gregory, plus Callan, were smiling away, certain in their own minds that for this great investment bank, it was right and proper that men like the know-it-all Mike Gelband and the brash, arrogant Larry McCarthy were out of here. Their pessimism was misplaced. They had plainly been wrong about everything, and stand by for a beautiful sleigh-ride, carefree, into the end of the year, where the big-bucks bonuses were awaiting. A new Manet for d.i.c.kie boy another Sikorsky for Joey boy and a bunch of very big new Louis Vuitton handbags for missy Erin.

But on Thursday, November 1, shortly before lunch, the market finally shuddered. By the closing bell it had fallen 356 points. For a few brief sessions it held; then, on Wednesday, November 7, it tumbled again, another 361 points. On Monday the twelfth, it dipped through the 13,000 barrier, winding up at 12,988. On Monday the twenty-sixth, a further loss of 256 points from its high left the industrial index at 12,724, around 1,300 points below its peak. Bond prices were also cras.h.i.+ng. It was the worst month in the history of the Lehman High-Yield Bond Index. (High-yield bonds back in June had been trading at an all-time low of only 231 basis points over Treasuries. They were now blowing out and yielding more than 500 over Treasuries. High-yield bonds were once again high-yield.) There were two distinct schools of thought about this. Some people believed this was the start of something truly awful, since it had been the worst month in the history of the credit markets. Others, followers of the recent Dow form book, believed that nothing could shake the U.S. market. For them, the sensible idea was to hang right in there and wait for it to go right back up, then on to 15,000.

Confidence on the Lehman bridge was still high. And by the time Lehman held its fourth-quarter conference call, Chris O'Meara had been installed as global head of risk management. He introduced Erin Callan, taking her first quarterly conference call as CFO. This was essentially unnecessary, since Erin had made more television appearances than Lisa Kudrow in Friends Friends. And, though lacking a leading Hollywood director, Erin was about as well prepared as any actress had ever been.

As the sharks circled, waiting to nail the Lehman rookie, a squad of a.s.sistants and writers formed a huddle around their quarterback. There were prepared scripts for every question, many of them masterminded by the old battle-zone warrior Chris O'Meara himself. And when the whistle sounded, the offensive coach sent her in, straight off the bench.

Our radiant head of finance stepped right up there. "Thank you, Chris. I want to take a step back for a moment and make some comments about full-year results. Despite all the pressures in the latter half of this year, our 2007 net revenues were a record $19.3 billion, representing a 10 percent increase over last year. That was the fifth consecutive year we've posted record revenues," she said. "Net income for 2007 was at an all-time high of $4.2 billion, $7.26 cents a share, up 7 percent on the prior year. This was achieved on a record first half and the successful navigation of the difficult market conditions we saw in the second half. All things considered, we are pleased with this performance. These results were a clear demonstration of the diversification we have achieved, and worked so hard for, over the past several years."

Erin stuck to her prepared scripts. Sometimes Chris stood up and helped, but in general terms it was like all the other conferences. The questions were often hostile but sufficiently convoluted to baffle anyone, even a person of extraordinary learning. And the answers would have brought a frown to the face of Confucius. One by one, the interrogators faltered, then died out of the conversation, making remarks like "Okay," or "I hear you," or "Thank you for addressing that question." Shoulder to shoulder on the ramparts, Chris and Erin had beaten back the enemy.

Meanwhile, by year's end, Alex's group, Sch.e.l.lbach, Felder, Hammack, Stafford, and me, had made an impressive contribution to the 2007 balance sheet by posting a $2 billion profit shorting all the usual suspects: the major mortgage corporations, real estate investment trusts, home builders, and restaurant chains-in other words, everyone who needs a thriving economy and access to credit to function.

My own contribution was a profit of more than $34 million. But Jeremiah, the most profitable trader on the floor, trading the high-yield indexes, had made $230 million. As the corporation lurched toward its inevitable high-spending destiny, we put in one h.e.l.l of a performance. Everyone understood our contribution. And we waited for our just rewards when the bonus pool was announced.

It was, however, perfectly obvious that the two leaders had nothing but contempt for us. And when they sat down to work out the bonuses, they screwed us all. The traders' standard agreement on Wall Street had been a $20 million profit to earn a $1 million bonus. That went straight out of the window. My bonus, after my second straight $30 million year, was way down, nowhere near my expectations. It was the same all through the department. d.i.c.k and Joe just cut us all back-Beggans, Gramins, Sch.e.l.lbach, Stafford, Castle. And now we had no one to fight for us.

At first we wondered whether the guys on the thirty-first floor had finally accepted the true position of this outrageously leveraged corporation. But we quickly learned differently. d.i.c.k and Joe at the end of 2007 paid themselves stock bonuses valued at $35 million for Fuld and $29 million for Gregory, right up there with the largest bonus either of them ever received. Let's raid the piggy bank one more time Let's raid the piggy bank one more time. And since they both knew this would be instantly discovered, you have to put it down either to greed beyond redemption or to stupidity beyond the outer bounds of the greater common crested lughead. Because if Lehman went down for several hundred billion and the feds turned up that final desperate raid on the trough, it would surely put them both in the slammer.

I think when we found that out, we finally understood the character of these two men. And that discovery confirmed our worst dreads. They had set our course, flank speed, directly at the iceberg-vowing to spend our way out of trouble with money we didn't actually have. They had no intention of swerving either to port or starboard. They had essentially fired our best helmsman, and the most skillful navigator aboard, Kirk, was rapidly being sidelined. The bonus debacle put the lid on everything. In our opinion, d.i.c.k and Joe had decided to make themselves so rich that it wouldn't matter to them whether the s.h.i.+p survived or not.

Joe Beggans is a very cool customer, and I had rarely seen him so utterly exasperated as when the news broke that Fuld and Gregory paid themselves record bonuses for the year. "What the h.e.l.l are they doing?" demanded Joe. There was, in his view, but one word to describe it: unconscionable unconscionable. The Oxford American Dictionary Oxford American Dictionary is plainly in a blue funk about the word unconscionable and all its intonations. It offers a diatribe of definitions and similes- is plainly in a blue funk about the word unconscionable and all its intonations. It offers a diatribe of definitions and similes-unethical, amoral, immoral, unprincipled, indefensible, unforgivable, wrong, unscrupulous, underhanded, dishonorable, excessive, unreasonable, unwarranted, uncalled for, unfair, inordinate, immoderate, undue, inexcusable, unnecessary.

d.i.c.k and Joe lived like a couple of potentates, and for them the occasional $40 million was very necessary. Fuld lived in an enormous Greenwich mansion, over 9,000 square feet, valued at $10 million. He had four other homes, including a mansion on Jupiter Island, one of Florida's garrisons of the big muckety-mucks in Hobe Sound, thirty miles north of Palm Beach. d.i.c.k picked it up five years previously for $13.75 million.

He also owned a vast $21 million Park Avenue apartment with three wood-burning fireplaces, and a spectacular ski chalet near Sun Valley, Idaho. His art collection was valued at $200 million, including a collection of postwar and contemporary drawings worth tens of millions, one of them by Jackson Pollock.

And so, with his stock and cash bonuses crammed in his rucksack, Richard S. Fuld took his Christmas break, smiling with his fellow potentate Joseph M. Gregory, who also headed home with a bank balance bulging with cash hijacked from his brutally indebted corporation.

As far as d.i.c.k was concerned, it was all more than fair. I mean, h.e.l.l, that Peterson and Schwarzman had been paid a billion each, right? How could it possibly have been unreasonable for him and Joe to have helped themselves to a couple of modest little bonuses of $29 and $35 million? Compared to those Blackstone guys, they both felt like paupers.

The rest of us, devalued, demoralized, and generally p.i.s.sed off at the bonus-cutting treatment they had leveled at us-we who had tried so hard-also made our separate ways home. We were apprehensive about what 2008 might have in store for us. In a sense, we were all slightly afraid to face the great unknown.

The stock market, utterly contrary to the end, and still in flagrant denial of the obvious, rallied over the Christmas period, the Dow climbing back to 13,550. But in the New Year reality came slamming home again, all the way from Wall Street to midtown Seventh Avenue. By January 8 the Dow had skidded around 1,000 points to 12,589. There was a brief rally, and then on Thursday, January 22, the Dow fell 458 points at one stage to a new low, but rallied to close at 11,971.

In the middle of this unpleasant trend, As.h.i.+sh Shah, Lehman's own nuclear scientist of credit derivative research and a.n.a.lysis, had set his sights on another ma.s.sive corporation he was quite certain would crash into oblivion before any of us were much older. And again it was a gigantic operation, sited in a seemingly impregnable sixty-six-story Wall Street edifice that dominated a large part of the financial district's landscape. I refer to American International Group (AIG), one of the world's major insurance corporations, the eighteenth-largest public company in the world, with offices in the City of London and in Lehman's very own Coeur Defense outside Paris. As big hitters go, AIG was out there swinging the bat as a component of the Dow Jones Industrial Average and the largest underwriter of commercial and industrial insurance in the United States. It was also up to its ears in insuring CDOs, one of its favorite heavy earners in the past three years.

Once more As.h.i.+sh had spotted a corporation that was happy to race in front of an express train in order to grab a $50 bill. AIG had been collecting large premiums, accepting bets from nervous investors against the failure of these mortgage-backed bonds. In return they had agreed to pay out billions of dollars if the bonds dipped below, say, 60 or 70 cents on the dollar. AIG had, of course, written the insurance at par, on the basis that the securitization was rock solid, issued by banks like us, Merrill Lynch, Bear Stearns, and Citigroup and rated AAA by the agencies, same as Uncle Sam. No risk.

As.h.i.+sh and Pete Hammack considered that AIG was getting into very deep water. Both of them knew those CDOs were currently becoming very dangerous, losing their par value. It was not quite time for those bets to be paid out, but the value of the bonds was sliding ever downward. Lehman had already taken a $100 million bath, and As.h.i.+sh and Pete concluded, "We ain't seen nothin' yet."

AIG had really ridden the mortgage wave. After years of steadily writing highly profitable life insurance and insurance for floods, hurricanes, tornadoes, and sundry other acts of G.o.d, they had suddenly hit pay dirt. From 2002 to 2007 their revenues had almost doubled, exploding from $59 billion to $115 billion. That wasn't flood or tornadoes. That was the rampaging mortgage-backed CDOs, everybody's glorious profits.

And in the insurance world, it was not just AIG that might have hit the wall. It was also AMBAC Financial Group, one of the major bond insurers in the country. Their revenues had also more than doubled, from $725 million to $1.8 billion. Another huge bond insurance group, New Yorkbased MBIA, was also headed for uncharted waters as the mortgage world spluttered and stalled.

The looming problem for all of them was they had been eager to accommodate Wall Street when investors began laying off colossal bets on the CDOs. There had as yet been no payouts, but As.h.i.+sh was blowing a very loud whistle. In his opinion AIG was ma.s.sively exposed, for billions and billions of dollars. They were the patsy at the poker table. Everyone had laid off their bets, but the board of AIG was not taking a hard look at their own position.

Remember one of Larry McCarthy's great slogans: Always take a long look around any poker table for the sucker. If you can't find him, it's probably you Always take a long look around any poker table for the sucker. If you can't find him, it's probably you. AIG was, in the opinion of As.h.i.+sh, that sucker, and they could go down for billions. As.h.i.+sh was not just firing a soft warning. He and Pete Hammack were recommending we take one of our biggest short positions ever against AIG, MBIA, AMBAC, and and Merrill Lynch. The latter, he believed, was in well over their skis, thanks to the lunatic calls allowed by their recently departed CEO Stan O'Neal. So far as As.h.i.+sh and Pete could tell, Merrill was in for $100 billion, possibly as high as $140 billion, in long positions on CDOs, the worst on Wall Street. Whatever we considered to be a large short, As.h.i.+sh said he would recommend multiplying it by three times. Merrill Lynch. The latter, he believed, was in well over their skis, thanks to the lunatic calls allowed by their recently departed CEO Stan O'Neal. So far as As.h.i.+sh and Pete could tell, Merrill was in for $100 billion, possibly as high as $140 billion, in long positions on CDOs, the worst on Wall Street. Whatever we considered to be a large short, As.h.i.+sh said he would recommend multiplying it by three times.

At the last count in very early 2006, there was $26 trillion worth of CDS bets outstanding in the market. Now, in the beginning of 2008, it was $70 trillion, and throughout the world there were only seventeen banks carrying that risk. And, remember, there was another $15 to $18 trillion out there in credit derivatives, CDOs, RMBSs, CMBSs, CLOs, and ABSs, and the same seventeen banks had issued them between 2000 and 2007, including Credit Suisse, Goldman Sachs, JPMorganChase, Barclays, Bank of America, Citigroup, Royal Bank of Scotland, UBS, HSBC, and Lehman.

The numbers were just too big for anyone to make sense of. And somehow the $70 trillion was the less important number, because many of those were just bets between counterparties and investors. Some of them would win, some would lose. That other $15 trillion was real, and if that ever crashed, the consequences to the world banking system would be horrific, because there weren't sufficient reserves to pay out. Nevertheless, if the CDSs had been called insurance, the banks would have needed $5 trillion to $10 trillion in capital loss reserves. As it was, they needed nothing. And had nothing.

On the Lehman trading floor one of the few people expressing real concern over our corporate position was still Alex Kirk, who had for the past two months been telling Gregory that we simply did not have the balance sheet to hold on to our biggest deals. More than once he went into Joe's office and raged, "How many times do I have to tell you? We're forty-four times leveraged, and we cannot go on like this. We have to cut back in a big way, and all you do is keep saying we need to hit the gas pedal."

Joe's typical reply was that Alex was too conservative, that we needed to catch Morgan Stanley and Goldman Sachs, to play at the high-stakes table. "Growth, growth, growth, Alex. That's what we want and need, and we have to stay focused."

Vainly, Alex tried to reason with him, to explain that the securitization system had broken and was not coming back anytime soon. The repeal of Gla.s.s-Steagall had heralded a devastating new era, where the huge deposits in the commercial banks had enabled them to get into our game simply by buying and owning an investment bank. And now it was all coming home to roost. Our borrowing was stratospheric, just because d.i.c.k and Joe wanted to play in a game we could not afford.

"Where's the number?" roared Alex at yet another stormy meeting in Joe's office. "Where's the G.o.dd.a.m.ned number? We tried twenty times leverage and that didn't work. So we tried thirty times leverage, and that didn't work either. Now we've tried forty times and that won't work. Well, what is the number? What will make you happy? One hundred times leverage? One thousand times? Where does it end?"

Alex was also furious over the farce being enacted about Lehman's supposed diversifications, because they were all in the same area. Lehman wasn't diversified at all. And as always, he railed against having the wrong people in the wrong jobs. Joe may have understood that Alex was correct, though I seriously doubt this. But Joe was more aligned with d.i.c.k than he was with anyone else. The two men had sat within a hundred feet of each other for thirty years. He may also have suspected that Alex believed Joe himself was in the wrong job. In the end he invited Alex up to his office on the thirty-first floor. And there, for the last time, he told Alex that the only aim of Lehman's senior management was growth, risk, and major deals. There was to be no pulling back, no more trying to trade out of our big positions in real estate. The only way was forward, and Alex needed to understand that.

Alex replied, "Joe, I'm not going to sit here and watch this happening."

"Then, Alex," replied Joe, "there's no place here for you. You can stay if you like. But it will have to be different."

Alex Kirk had run his course as one of the great Lehman financiers. He quit immediately, and while the resignation was no great surprise to his very closest friends, of which I was one, it had a shattering effect on the remainder of the trading floor. People were absolutely floored by it, and some of them walked around expressing disbelief that it had happened.

For most people it was the pure shock of the announcement; for others it was just the size of the gap he would leave. At the end of the afternoon, he and I said a private good-bye. We both spoke on the phone to Larry, and then he was gone. The team of Wall Street masters that I had joined almost four years previously had been well and truly decimated: Christine, Mike, Larry, and now Alex. To make matters even worse for me, my man Rich Gatward had also gone a few weeks earlier, transferred to Liberty View Capital Management, another of the many hedge funds Lehman owned.

For me at least, the place had the air of the Valley of Death, but I never stopped trying. I still gave it my all, still arrived earlier than almost everyone, still put in sixty-, seventy-, and eighty-hour weeks, but now I'd lost all my closest allies in deploying capital. I was suddenly all alone-and only a d.a.m.n fool could have felt secure, or even wanted, in an environment where the two top executives in the firm had demonstrated not one shred of trust in the people I fervently believed were among the best there had ever been.

I looked around at the remnants of that supreme team, at Peter Sch.e.l.lbach, Joe Beggans, John Gramins, Jane Castle, and the rest. How long did any of us have in this poisonous atmosphere, where the big brains lived in fear of the small ones, high above us?

Right now there was no sign of turmoil, but there was a feeling of real unease. Not just at Lehman, where the departure of Alex had shaken every trading desk on the Street, but right through the financial industry. You could sense it: early 2007's feeling of robust confidence had just drained away. Rumors were everywhere, and they concerned especially Bear Stearns and us: losses and layoffs, mortgages and mayhem. It was darned unnerving, I'll say that. As we moved into March 2008, our two mortgage brokers, BNC and Aurora, were finally firing bodybuilders left, right, and center. The CDO market, now in its death throes, had screeched to a complete halt, leaving a swath of destruction right across the United States-especially in the ultrasecret warehouses of Lehman and Merrill, which both housed a mountain of this unsellable, multibillion-dollar junk.

I guess, secretly, I thought I was safe. With two $30 million years in succession, I was the most profitable trader on the convertible desk in 2006 and 2007. And I was number two behind Sch.e.l.l on the distressed desk in 2007. Yet the noose was tightening, because I was a member of the unwanted tribe, the group of cynics who believed that they alone were the people to save Lehman.

By Monday morning, March 10, it was clear something was going on. Little things that might not have been important at any other time suddenly a.s.sumed greater significance: people going missing for an hour, others not where they were supposed to be. The talk was that there would be some ma.s.s layoffs and that the balance sheet was heading south. I suddenly began to feel that if there were layoffs, I might be next, because of my close a.s.sociation with a different era and with people no longer at the firm. I had a bad feeling. I made it to my desk at the usual time, 6:00 A.M. A.M. But as the markets opened, I noticed Peter Sch.e.l.lbach was not there, and that was very odd. Three hours later, Joe Beggans picked up a house call and told me to go up to the twenty-fourth floor right away. I guess I knew right then it was over. But as the markets opened, I noticed Peter Sch.e.l.lbach was not there, and that was very odd. Three hours later, Joe Beggans picked up a house call and told me to go up to the twenty-fourth floor right away. I guess I knew right then it was over.

I walked to the elevator and reached the correct floor. But when I emerged there was a very depressing sight: there were signs all over the opposite wall giving directions. Plainly a lot of people were expected. I followed the instructions for the fixed-income division. When I reached the right door, I tapped and entered. Inside were Pete Ramsey, Rich Gatward's successor, and Pete Sch.e.l.lbach, and they both looked embarra.s.sed. Sch.e.l.l told me that this had nothing to do with my performance or any other part of my work; they were just following orders. A lot of people were leaving over the next two weeks, and I was to be one of them. He told me that in his view, no one had worked harder than I had, and that a good severance package had been prepared, with shares of Lehman stock and full pay through September. It didn't make it any easier. I cannot describe how upset I was.

I went back down to my desk and told Terence and Joe I'd just caught a bullet. Then I went down to say good-bye to Jane, who was bewildered at the way things were going. "On one hand we're buying enormous buildings," she said, "increasing risk and leverage, and buying back stock. Next minute we're cutting back, reducing risk, and firing people." She told me she'd miss me, and that as far as she was concerned, I had the best market instincts she'd ever seen. Even that didn't make it easier, and I was struggling with tears as I went back downstairs to pack my boxes.

I hung around for a while, finding things to do, but the truth was I just didn't want to go. Then Sch.e.l.l came back and offered to help me carry my stuff down to the street. As we walked across the trading floor, I could see the kids watching me, and I could see the looks on their faces, all of them scared that it might be them next. It was the worst short journey I ever made, walking through there with my boxes.

Out on the sidewalk Sch.e.l.l shook my hand. Neither of us said anything, because anything that might have been said somehow could not be said. I climbed into a cab and we pulled out into the traffic. But, by G.o.d, I felt awful. I glanced back at the building and was seized by sadness. Lehman Brothers, where I had reached the holy grail, where I had fought it out on the trading floor with the best in the business. I was just so proud of it. I was proud of the people I had known. And I was proud of our many triumphs. I had loved every minute of my time there. I was proud of my achievements, and when I thought of them, somehow this bad day didn't matter. I'd been there. I'd made it to the top, and I had a pile of Lehman shares to prove it. I had no money worries, and I had a lot of friends.

Yet it was gone, and all my hopes and dreams with it. Gone forever, and there were tears streaming down my face as we pulled up outside my apartment building. Me and my two melancholy boxes.

Irrationally, I thought of three other Lehman faithful who had in the past been fired. There was Christopher Pett.i.t, president and CEO, a charismatic, decorated West Pointer who had served in Vietnam, booted in 1996 in a poisonous web of intrigue in which he played no part. There was John Cecil, chief administrative officer and CFO, a brilliant financial thinker, edged out in 2000 by Joe Gregory and David Goldfarb for being too clever. And in May 2004, the likable Bradley Jack, president and cochief operations officer, who stood too close in friends.h.i.+p to d.i.c.k, was exiled by Joe Gregory. Those were the landmarks that marked the stranglehold the strange axis of Fuld and Gregory held over the entire corporation. But, curiously, I still loved the memory of Lehman.

I'll never be able to explain how I felt about the firm. But perhaps someday someone will ask me how long I would have stayed if I could have remained a Lehman Brothers trader. And I can answer that: about a thousand years.

Meanwhile, as I slipped into temporary obscurity, Wall Street, with all its shocking underlying problems, was seething. And the place that was really roiling was a few blocks down the street, over on Madison Avenue, deep inside the world headquarters of Bear Stearns. Another glittering Manhattan fortress, impregnable in its day, was resting on foundations made of sloppy California Delta mud.

Bear Stearns was tottering. With crippling debt stifling its balance sheet and CDOs and other derivatives detonating from bas.e.m.e.nt to rooftop, the venerable eighty-five-year-old investment bank, which had survived 1929, was gasping for air. The trouble with Wall Street air, as opposed to regular air, is that it consists of very large bundles of greenbacks, billions of them, and they are hard to acquire in stressful times. The overnight repo and commercial paper markets were, for the first time ever, just not available to Bear Stearns. These markets provide a nightly vote of confidence from investors globally on a financial firm's survivability.

In the week of my demise, there was effectively a run on Bear Stearns. Traders and investors who had never really forgiven the bank for the resounding collapse of those two hedge funds the previous summer were now refusing to deal, and Bear's lenders were literally closing it down, refusing credit. The stock, which had stood at $170 a share at the beginning of 2007, had become mired in the low $20s. The firm had huge trading obligations, chilling subprime exposure, and more than fifteen thousand employees worldwide. Identically to Lehman, Bear Stearns held mortgage bonds that could no longer be sold; they were trapped in the theater with the fire raging, trapped by their own greed, by their terrible borrowing, and finally by their inability to repay their loans.

Bear Stearns once had been among the most admired securities firms in the country. In 1929 they were the only Wall Street bank to lay off no one as the world collapsed all around them. That towering reputation for prudence followed them down the years and enabled them to open branches in just about every major American city and all over the world: Milan, London, Hong Kong, Tokyo, Mumbai, Dublin, Beijing, Singapore, and So Paulo.

But in that bleak week beginning March 10, Wall Street stood pop-eyed at a sight almost without precedent. There stood the gleaming limo, steam blowing out from under the hood, four flat tires, with the occasional deafening explosion from the exhaust pipe. It was pulled over onto the shoulder, and everyone was just hurtling past, staring straight ahead, all of them afraid to look.

Wall Street was terrified, because this was real. By Thursday, both the Treasury and the Fed had been called in. Immediately Henry Paulson and Ben Bernanke had funds transferred from the Treasury into JPMorganChase, which was instructed to finance Bear Stearns for twenty-four to thirty-six hours. Innovative windows providing liquidity such as the PDCF, primary dealer credit facility, had not yet been set. Uncle Sam had to use JPMorganChase to infuse emergency cash into Bear to get them into the weekend. Up until this point the government had never injected money into an investment bank. On Friday there was a near-desperate search going on to find someone to buy Bear before news of the looming bankruptcy at one of the most revered names in world finance caused outright global panic. The deadline would come around midnight on Sunday, when the Asian markets opened. And Sunday was pandemonium. With lines open twenty-four hours to Was.h.i.+ngton, meeting after meeting took place inside the Bear Stearns tower, trying to find someone to buy the bank at almost any price. The purchaser would need to a.s.sume support for around $30 billion of Bear's "less liquid a.s.sets"-that's the mortgage securities no one in their right mind would buy.

Right from the get-go, the hard-eyed CEO of JPMorganChase, Jamie Dimon, was out in front of the pack. He had 150 employees in there examining the firm's books and trading accounts. He looked interested, but no one could guarantee anything, and despite the somewhat comforting presence of the supportive Federal Reserve, Bear Stearns partners were preparing to file for bankruptcy first thing Monday morning. That's how serious it was. That's how desperate they were.

By late Sunday night, JPMorganChase had agreed to buy Bear Stearns for $2 a share, around one-tenth of the price at which the stock had closed on Friday. Both JPMorganChase and the Fed would guarantee the enormous trading obligations that had shoved Bear to the brink of total collapse. And the Federal Reserve agreed to finance the deal. After outcries from both investors and Bear employees, the price paid by JPMorgan was increased to $10 per share.

The fact was, despite the brilliant negotiating skill of Jamie Dimon and his foresight in comprehending the advantages of such a merger, Bear Stearns had been saved by the government of the United States. Jamie never would have done it without them. No one would have done it without them.

The news. .h.i.t the wires late on Sunday night, and the world stood still. It was like a snowstorm in August: Bear Stearns snapped up for a bargain-bas.e.m.e.nt price as it stood on the verge of extinction. My apartment was suddenly like my old desk, with the phones ringing, all the old familiar voices, Larry, Mike, Christine, Joe, and the rest.

The news. .h.i.t the Far East Monday morning, March 17, right at the start of the trading day. In Tokyo, the Nikkei dropped 4 percent. But Wall Street opened to calm waters. The intervention and support of the Fed had not just saved Bear, it had saved everyone else. The Dow Jones Industrial Index held the line. A St. Patrick's Day ma.s.sacre had been averted.

I could not work out whether I was still involved or not. But I had a considerable amount of Lehman stock that I could not sell for several years-half my bonus money for the past sixteen quarters. So it was deeply in my own interest for Lehman to prosper. Despite all of my forebodings, I wished them well in the serious task of protecting my Lehman shares. Beyond that I was in a bit of a void, not quite ready to make a move for a new job, nor just to sit here and feel sorry for myself. could not work out whether I was still involved or not. But I had a considerable amount of Lehman stock that I could not sell for several years-half my bonus money for the past sixteen quarters. So it was deeply in my own interest for Lehman to prosper. Despite all of my forebodings, I wished them well in the serious task of protecting my Lehman shares. Beyond that I was in a bit of a void, not quite ready to make a move for a new job, nor just to sit here and feel sorry for myself.

As had occurred once or twice in the past, the sudden telephonic arrival of Larry McCarthy put things into perspective.