Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

CHAPTER ONE

The morning air was frigid in Greenwich, Connecticut. At 5:00 a.m. on March 17, 2008, it was still dark, save for the headlights of the black Mercedes idling in the driveway, the beams illuminating patches of slush that were scattered across the lawns of the twelve-acre estate. The driver heard the stones of the walkway crackle as Richard S. Fuld Jr. shuffled out the front door and into the backseat of the car.

The Mercedes took a right onto North Street toward the winding and narrow Merritt Parkway, headed for Manhattan. Fuld stared out the window in a fog at the rows of mansions owned by Wall Street executives and hedge fund impresarios. Most of the homes had been bought for eight-figure sums and lavishly renovated during the second Gilded Age, which, unbeknownst to any of them, least of all Fuld, was about to come to a crashing halt.

Fuld caught a glimpse of his own haggard reflection in the window. The deep creases under his tired eyes formed dark half-moons, a testament to the four meager hours of sleep he had managed after his plane had landed at Westchester County Airport just before midnight. It had been a hellish seventy-two hours. Fuld, the CEO of Lehman Brothers, the fourth-largest firm on Wall Street, and his wife, Kathy, were still supposed to be in India, regaling his billionaire clients with huge plates of thali, piles of naan, and palm wine. They had planned the trip for months. To his jet-lagged body, it was 2:00 in the afternoon.

Two days earlier he had been napping in the back of his Gulfstream, parked at a military airport near New Delhi, when Kathy woke him. Henry M. Paulson, the Treasury secretary, was on the plane’s phone. From his office in Washington, D.C., some seventy-eight hundred miles away, Paulson told him that Bear Stearns, the giant investment bank, would either be sold or go bankrupt by Monday. Lehman was surely going to feel the reverberations. “You’d better get back here,” he told Fuld. Hoping to return as quickly as possible, Fuld asked Paulson if he could help him get clearance from the government to fly his plane over Russia, shaving the flight time by at least five hours. Paulson chuckled. “I can’t even get that for me,” Paulson told him.

Twenty-six hours later, with stops in Istanbul and Oslo to refuel, Fuld was back home in Greenwich.

Fuld replayed the events of the past weekend over and over again in his mind: Bear Stearns, the smallest but scrappiest of Wall Street’s Big Five investment houses, had agreed to be sold—for $2 a fucking share! And to no less than Jamie Dimon of JP Morgan Chase. On top of that, the Federal Reserve had agreed to take on up to $30 billion of losses from Bear’s worst assets to make the deal palatable to Dimon. When Fuld first heard the $2 number from his staff in New York, he thought the airplane’s phone had cut out, clipping off part of the sum.

Suddenly people were talking about a run on the bank as if it were 1929. When Fuld left for India on Thursday, there were rumors that panicky investors were refusing to trade with Bear, but he could never have imagined that its failure would be so swift. In an industry dependent on the trust of investors—investment banks are financed literally overnight by others on the assumption that they will be around the next morning—Bear’s crash raised serious questions about his own business model. And the short-sellers, those who bet that a stock will go down, not up, and then make a profit once the stock is devalued, were pouncing on every sign of weakness, like Visigoths tearing down the walls of ancient Rome. For a brief moment on the flight back, Fuld had thought about buying Bear himself. Should he? Could he? No, the situation was far too surreal.

JP Morgan’s deal for Bear Stearns was, he recognized, a lifesaver for the banking industry—and himself. Washington, he thought, was smart to have played matchmaker; the market couldn’t have sustained a blow-up of that scale. The trust—the confidence—that enabled all these banks to pass billions of dollars around to one another would have been shattered. Federal Reserve chairman Ben Bernanke, Fuld also believed, had made a wise decision to open up, for the first time, the Fed’s discount window to firms like his, giving them access to funds at the same cheap rate the government offers to big commercial banks. With this, Wall Street had a fighting chance.

Fuld knew that Lehman, as the smallest of the remaining Big Four, was clearly next on the firing line. Its stock had dropped 14.6 percent on Friday, at a point when Bear’s stock was still trading at $30 a share. Was this really happening? Back in India, a little over twenty-four hours ago, he had marveled at the glorious extent of Wall Street’s global reach, its colonization of financial markets all over the world. Was all this coming undone?

As the car made its way into the city, he rolled his thumb over the trackball on his BlackBerry as if it were a string of worry beads. The U.S. markets wouldn’t open for another four and a half hours, but he could already tell it was going to be a bad day. The Nikkei, the main Japanese index, had already fallen 3.7 percent. In Europe rumors were rampant that ING, the giant Dutch bank, would halt trading with Lehman Brothers and the other broker-dealers, the infelicitous name for firms that trade securities on their own accounts or on behalf of their customers—in other words, the transactions that made Wall Street Wall Street.

Yep, he thought, this is going to be a real shit-show.

Just as his car merged onto the West Side Highway, heading south toward Midtown Manhattan, Fuld called his longtime friend, Lehman president Joseph Gregory. It was just before 5:30 a.m., and Gregory, who lived in Lloyd Harbor, Long Island, and had long since given up on driving into the city, was about to board his helicopter for his daily commute. He loved the ease of it. His pilot would land at the West Side Heliport, then a driver would shuttle him to Lehman Brothers’ towering offices in Times Square. Door to door in under twenty minutes.

“Are you seeing this shit?” Fuld asked Gregory, referring to the carnage in the Asian markets.

While Fuld had been making his way back from India, Gregory had missed his son’s lacrosse game in Roanoke, Virginia, to spend the weekend at the office organizing the battle plan. The Securities and Exchange Commission and the Federal Reserve had sent over a half dozen goons to Lehman’s office to babysit the staff as they reviewed the firm’s positions.

Fuld was deeply worried, Gregory thought, and not without reason. But they had lived through crises before. They’d survive, he told himself. They always did.

The previous summer, when housing prices started to plummet and overextended banks cut back sharply on new lending, Fuld had proudly announced: “Do we have some stuff on the books that would be tough to get rid of? Yes. Is it going to kill us? Of course not.” The firm seemed impregnable then. For three years Lehman had made so much money that it was being mentioned in the same breath as Goldman Sachs, Wall Street’s great profit machine.

As Fuld’s Mercedes sped across a desolate Fiftieth Street, sanitation workers were hauling crowd-control barriers over to Fifth Avenue for the St. Patrick’s Day parade later that day. The car pulled into the back entrance of Lehman headquarters, an imposing glass-and-steel structure that may as well have been a personal monument to Fuld. He was, as Gregory often put it, “the franchise.” He had led Lehman through the tragedy and subsequent disruptions of 9/11, when it had had to abandon its offices across the street from the World Trade Center and work out of hotel rooms in the Sheraton, before buying this new tower from Morgan Stanley in 2001. Wrapped in giant LED television screens, the building was a bit gauche for Fuld’s taste, but with New York City’s unstoppable real estate market, it had turned into a hell of an investment, and he liked that.

The daunting thirty-first executive floor, known around the firm as “Club 31,” was nearly empty as Fuld stepped out of the elevator and walked toward his office.

After hanging his coat and jacket in the closet next to his private bathroom, he began his series of daily rituals, immediately logging on to his Bloomberg terminal and switching on CNBC. It was just after 6:00 a.m. One of his two assistants, Angela Judd or Shelby Morgan, would typically arrive in the office within the hour.

When he checked the futures market—where investors make bets on how stocks will perform when the markets open—the numbers hit him in the face: Lehman shares were down 21 percent. Fuld reflexively did the calculations: He had just personally lost $89.5 million on paper, and the market hadn’t even opened.

On CNBC, Joe Kernen was interviewing Anton Schutz of Burnham Asset Management about the fallout from the Bear Stearns deal and what it meant for Lehman.

“We’ve been characterizing Lehman Brothers as the front, or ground zero, for what’s happening today,” Kernen said. “What do you expect to see throughout the session?”

“I expect these investment banks to be weak,” Schutz replied. “The reason is there’s just this tremendous fear of mismarking of assets on balance sheets, and how could JP Morgan have gotten away with paying so little for Bear Stearns, and why did the Fed have to step up with $30 billion to take on some of the bad assets. I think there’s a lot of question marks out here, and we’re in need of a lot of answers.”

Fuld watched with a stone face, mildly relieved when the conversation veered away from Lehman. Then it veered back. “What do you do if you’re one of the thousands and thousands of Lehman employees watching every tick here today?” asked Kernen. “This is people on pins and needles.”

Pins and needles? That didn’t begin to describe it.

At 7:40 a.m. Hank Paulson called to check in. Dow Jones Newswire was reporting that DBS Group Holdings, the largest bank in Southeast Asia, had circulated an internal memo late the previous week ordering its traders to avoid new transactions involving Bear Stearns and Lehman. Paulson was concerned that Lehman might be losing trading partners, which would be the beginning of the end.

“We’re going to be fine,” Fuld said, reiterating what he had told him over the weekend about the firm’s solid earnings report, which he planned to announce Tuesday morning. “That’ll quiet down all this shit.”

“Keep me updated,” Paulson said.

An hour later tumult ruled on every trading floor in the city. Fuld stayed glued to the two Bloomberg screens on his desk as Lehman’s stock opened: down 35 percent. Moody’s reaffirmed its A1 rating on the investment bank ’s senior long-term debt, but the rating agency had also lowered its outlook to stable from positive. On the flight back from India, Fuld had debated with Gregory and Lehman’s chief legal officer, Tom Russo, about whether to preannounce the firm’s earnings today, before the market opened, instead of tomorrow, as originally planned. There was no compelling reason to wait. The earnings were going to be good. Fuld had been so confident that, before leaving for Asia, he had recorded an upbeat internal message to employees. But Russo had talked him out of moving up the earnings announcement, fearing that it might look desperate and ratchet up the anxiety.

As Lehman’s stock continued to plummet, Fuld was second-guessing not only this decision but countless others. He had known for years that Lehman Brothers’ day of reckoning could come—and worse, that it might sneak up on him. Intellectually, he understood the risks associated with cheap credit and borrowing money to increase the wallop of your bet—what is known on the Street as “leverage.” But, like everyone else on Wall Street, he couldn’t pass up the opportunities. The rewards of placing aggressively optimistic bets on the future were just too great. “It’s paving the road with cheap tar,” he loved to tell his colleagues. “When the weather changes, the potholes that were there will be deeper and uglier.” Now here they were, potholes as far as the eye could see, and he had to admit, it was worse than he’d ever expected. But in his heart he thought Lehman would make it. He couldn’t imagine it any other way.

Gregory took a seat in front of Fuld’s desk, the two men acknowledging each other without uttering a word. Both leaned forward when CNBC ran a crawl along the bottom of the screen asking: “Who Is Next?”

“Goddamit,” Fuld growled as they listened incredulously to one talking head after another deliver their firm’s eulogy.

Within an hour, Lehman’s stock had plunged by 48 percent.

“The shorts! The shorts!” Fuld bellowed. “That’s what’s happening here!”

Russo, who had canceled his family’s vacation to Brazil, took the seat next to Gregory. A professorial sixty-five-year-old, he was one of Fuld’s few other confidants in the firm besides Gregory. On this morning, however, he was fanning the flames, telling Fuld the latest rumor swirling around the trading floor: A bunch of “ hedgies,” Wall Street’s disparaging nickname for hedge fund managers, had systematically taken down Bear Stearns by pulling their brokerage accounts, buying insurance against the bank—an instrument called a credit default swap, or CDS—and then shorting its stock. According to Russo’s sources, a story making the rounds was that the group of short-sellers who had destroyed Bear had then assembled for a breakfast at the Four Seasons Hotel in Manhattan on Sunday morning, clinking glasses of mimosas made with $350 bottles of Cristal to celebrate their achievement. Was it true? Who knew?

The three executives huddled and planned their counterattack, starting with their morning meeting with nerve-racked senior managers. How could they change the conversation about Lehman that was going on all over Wall Street? Every discussion about Bear, it seemed, turned into one about Lehman. “Lehman may have to follow Bear into the confessional before Good Friday,” Michael McCarty, an options strategist at Meridian Equity Partners in New York, told Bloomberg Television. Richard Bern-stein, the respected chief investment strategist for Merrill Lynch, had sent out an alarming note to clients that morning: “Bear Stearns’s demise should probably be viewed as the first of many,” he wrote, tactfully not mentioning Lehman. “Sentiment is just beginning to catch on as to how broad and deep the credit market bubble has been.”

By midmorning Fuld was getting calls from everybody—clients, trading partners, rival CEOs—all wanting to know what was going on. Some demanded reassurance; others offered it.

“Are you all right?” asked John Mack, the CEO of Morgan Stanley and an old friend. “What’s going on over there?”

“I’m all right,” Fuld told him. “But the rumors are flying. I’ve got two banks that won’t take my name”—Wall Street-speak for the stupefying fact that the banks wouldn’t trade with Lehman. The newest rumor was that Deutsche Bank and HSBC had stopped trading with the firm. “But we’re fine. We’ve got lots of liquidity, so it’s not a problem.”

“Okay, we’ll trade with you all day,” Mack assured him. “I’ll talk to my trader. Let me know if you need anything.”

Fuld began reaching out to his key deputies for help. He called the London office and spoke to Jeremy Isaacs, who ran the firm’s operation there. When he got off the phone with Fuld, Isaacs told his team, “I don’t think we’re going bust this afternoon, but I can’t be one hundred percent sure about that. A lot of strange things are happening… .”

Despite his recent infatuation with leverage, Fuld believed in liquidity. He always had. You always needed a lot of cash on hand to ride out the storm, he would say. He liked to tell the story about how he once sat at a blackjack table and watched a “whale” of a gambler in Vegas lose $4.5 million, doubling every lost bet in hopes his luck would change. Fuld took notes on a cocktail napkin, recording the lesson he learned: “I don’t care who you are. You don’t have enough capital.”

You can never have enough.

It was a lesson he had learned again in 1998 after the hedge fund Long-Term Capital Management blew up. In the immediate aftermath, Lehman was thought to be vulnerable because of its exposure to the mammoth fund. But it survived, barely, because the firm had a cushion of extra cash—and also because Fuld aggressively fought back. That was another take-away from the Long-Term Capital fiasco: You had to kill rumors. Let them live, and they became self-fulfilling prophecies. As he fumed to the Washington Post at the time, “Each and every one of these rumors was proved to be incorrect. If SEC regulators find out who started these stories, I’d like to have fifteen minutes with them first.”

One of the people on Fuld’s callback list that morning was Susanne Craig, a hard-nosed reporter at the Wall Street Journal who had been covering Lehman for years. Fuld liked Craig and often spoke to her on “ background.” But this morning she had called trying to convince him to be interviewed on the record. She pitched it as a way for him to silence the critics, to explain all the advance planning Lehman had done. Fuld, who hated reading about himself, thought it might be a good idea to participate. He regretted the way he had handled the media during the Long-Term Capital crisis. He wished he’d been more proactive from the start. “I want to do it right this time,” he told her.

By noon, Fuld and his lieutenants had formulated a plan: They would give interviews to the Wall Street Journal, the Financial Times, and Barron’s. They’d provide a little ticktock and color to Craig, about what was going on inside the firm, in the hopes that her editors would splash the story on the front page. They set up back-to-back sessions with the reporters starting at 3:00 p.m. The talking points were clear: The rumors were bogus. Lehman had ample liquidity, right up there with Goldman Sachs and Morgan Stanley. If the firm did need to make a payout, it was good for the money.

For the interview with Craig, Fuld was joined in a conference call by Gregory, Russo, and Erin Callan, the company’s new chief financial officer. “We learned we need a lot of liquidity and we also know we need to deal with rumors as they arise, not long after,” Fuld told the reporter. He also stressed the fact that, with the Fed window now open, Lehman was on much stronger footing: “People are betting that the Fed can’t stabilize the market, and I don’t think that is a very good bet.”

“We have liquidity,” Gregory reiterated. “But while we don’t need it right now, having it there alone sends a strong message about liquidity and its availability to everybody in the market.” That remark skirted the catch-22 involved with the Fed’s decision to make cheap loans available to firms like Lehman: Using it would be an admission of weakness, and no bank wanted to risk that. In fact, the Fed’s move was intended more to reassure investors than to shore up banks. (Ironically, one of Lehman’s own executives, Russo, could take partial credit for the strategy, as he had suggested it in a white paper he presented in Davos, Switzerland, at the annual capitalist ball known as the World Economic Forum, just two months earlier. Timothy F. Geithner, the president of the Federal Reserve Bank of New York, had been in the audience.)

After wrapping up the interview, Gregory and Callan returned to their offices and worked the phones, calling hedge funds that were rumored to be scaling back their trading with Lehman and doing everything they could to keep them on board.

The blitz paid off: In the last hour of trading, Lehman’s stock made a U-turn: After falling nearly 50 percent earlier in the day, it closed down at only 19 percent, at $31.75. It was now at a four-and-half-year low, the gains of the boom years erased in a single day. But the executives were pleased with their efforts. Tomorrow they would release their earnings, and maybe that would keep the good momentum going. Callan would be walking investors through the report in a conference call, and she went back to Gregory’s office to rehearse her lines.

Exhausted, Fuld got into his car to head back home and get a good night’s sleep. Once again he found himself wishing that the renovations on the sixteen-room, full-floor apartment he and Kathy bought at 640 Park Avenue for $21 million were finished, but Kathy had decided to gut it. He settled into the backseat of the Mercedes, put down his BlackBerry, and enjoyed a few minutes of respite from the world.

No one would ever have voted Dick Fuld the most likely to rise to such levels on Wall Street.

As a freshman at the University of Colorado at Boulder in 1964, he seemed lost, struggling academically and unable to decide on a major. Looking for answers, he joined the Reserve Officers’ Training Corps, the college-based, officer-commissioning program.

One morning during ROTC training, the commanding officer, a university senior, lined up all the students in the huge university quadrangle for a routine inspection.

“Fuld, your shoes aren’t shined,” the officer barked.

“Yes they are, sir,” he began to answer. But before he could get the words out of his mouth, the officer stomped on Fuld’s left shoe and sullied it. He ordered Fuld to go back to the dorm and shine it, which he did without complaint. When Fuld returned, the officer then stepped on his right foot—and again sent him back to the dorm.

By the time Fuld returned, the officer had turned his attention to the next person in line, a diminutive student. He placed his heavy army-issue boot on the young man’s ankle and pressed hard, causing him to fall to the ground and cry out in pain. For good measure he thrust his knee in the boy’s face, breaking his eyeglasses.

Fuld didn’t know his classmate, but he had seen enough.

“Hey, asshole,” he said to the commanding officer. “Why don’t you pick on someone your own size?”

“Are you talking to me?” the senior asked, stepping up to within inches of Fuld’s face.

“Yes,” Fuld shot back without hesitation.

They soon came to blows, and in the end, both Fuld and the officer lay bloodied on the floor after other cadets had separated them. The eighteen-year-old Fuld was promptly hauled in front of the head of the ROTC program at the university and informed that he was being expelled. “You got into a fight with your commanding officer,” an ROTC official told him. “That’s not behavior becoming of a cadet.”

“I understand that, sir, but I’d like you to hear my side of the story,” Fuld protested. “You have to understand what happened.”

“No, there’s only one side to the story. You got into a fight with your commanding officer. That’s all that matters. I can’t have you in the program.”

The ROTC was only the latest in a series of disappointments for Fuld, but it was also a sign that he was slowly coming into his own.

Richard Severin Fuld Jr. grew up in the wealthy suburb of Harrison in Westchester County, New York, where his family owned United Merchants & Manufacturers, a textile company whose annual revenue ultimately grew to $1 billion. United Merchants had been co-founded by his maternal grandfather, Jacob Schwab, in 1912 as the Cohn-Hall-Marx Company.

Because Fuld’s father didn’t want his son to go into the family business, Jacob Schwab, his grandfather, reached out to his longtime banking firm, a Wall Street outfit called Lehman Brothers, and secured his grandson a part-time summer position in its tiny Denver trading outpost in the summer of 1966. It was a three-person office, and Fuld did the chores—he spent most of his day copying documents (and this was the pre-copy machine era) and running errands. But the job was a revelation. Fuld loved what he saw. On the trading floor men yelled and worked with an intensity that he had never experienced before. This is where I belong, he thought. Dick Fuld had found himself.

What attracted him was not the fulfillment of some lifelong dream about playing with other people’s money, but rather something far more visceral, something that instantly clicked. “I truly stumbled into investment banking,” he acknowledged years later. “Once I got exposed to it, I discovered that I actually understood it, and all the pieces fit.”

There was one person in the company, though, whom he didn’t really like: Lewis L. Glucksman, a rough-hewn, sloppily dressed muckety-muck from headquarters who occasionally dropped by the Denver office, intimidating and speaking gruffly to the crew. As keen as he was on landing a job in finance, Fuld swore he’d never work for this tyrant.

After graduating from college a semester late, in February 1969, he rejoined Lehman as a summer intern, this time working at the firm’s magnificent 1907 Italian Renaissance building at One William Street in the heart of Wall Street. He lived with his parents and commuted into the city. He worked on the desk that traded commercial paper—basically short-term IOUs used by companies to finance their day-to-day operations. For Fuld, the job was perfect except for one significant detail: He reported to Glucksman, who picked up rattling him right where he had left off in Denver.

Fuld didn’t mind all that much. He considered the job at Lehman temporary; he had eventually picked international business as his major at Colorado and was determined to get his MBA. Halfway through his summer internship, he walked up to Glucksman and asked if he would write a letter of recommendation for him.

“Why the fuck do you want to do that?” Glucksman growled. “People go to graduate school to get in a position to get a job. I’m offering you a job.”

Fuld, however, wanted to stick to his plan.

“We don’t get along,” Fuld shot back. “You scream at me.”

“Stay here and you won’t have to work for me,” Glucksman told him.

Fuld agreed to remain at Lehman as he pursued his degree from New York University at night. He continued doing menial tasks, one of which was operating the firm’s latest technology—a video camera. One day he was taping an interview with Glucksman, when in the middle of the recording session, Glucksman asked, “Who’s behind the camera?” Fuld poked his head out.

“What the hell are you doing?” he asked. “Come see me in my office first thing tomorrow morning.”

When Fuld appeared in his office the following day, Glucksman told him that it was ridiculous that he was doing “all this menial bullshit. Why don’t you just come work for me?”

“Do I get a raise?” asked Fuld.

The two became fast friends, and Fuld began his ascension at the firm. His salary was $6,000 a year, roughly 1/10,000 of what he’d take home as the firm’s CEO some three decades later. By the end of the year, he was able to move out of his parents’ house and rent a one-bedroom at 401 East Sixty-fifth Street for $250 a month. He drove to work in an orange Pontiac GTO, giving a lift to colleagues, including a young Roger C. Altman, who would later become the deputy Treasury secretary.

In Fuld, Glucksman saw himself as a young trader: “He didn’t let his emotions get the best of his judgment,” said Glucksman, who died in 2006. “Dick understood buys when they were buys and sells when they were sells. He was a natural.”

Every morning, as he walked onto the cramped trading floor, Fuld could feel his heart pounding with excitement. The noise. The swearing. Surviving by your wits alone. Trusting only your gut. He loved it all. As it happened, he had arrived at Lehman just as the firm was undergoing a major transformation that would benefit him enormously.

Since it was founded in 1850, Lehman Brothers has been a banker to an outsized share of twentieth-century business icons. Emanuel Lehman, who with his brothers, Henry and Mayer, emigrated from Bavaria in southern Germany just years earlier, had originally gone into business in Montgomery, Alabama, where they traded cotton, the country’s cash crop before the Civil War. Twenty years later the three brothers set up shop in Manhattan, where they helped establish the New York Cotton Exchange. In New York, Lehman quickly morphed from a trading house to an investment bank, helping finance start-ups such as Sears, Woolworth, Macy’s, and RCA. (The rough equivalent today would be the bank behind Apple, Google, Microsoft, and Intel, if such a bank existed.)

Fuld’s first year at the firm coincided with the death of its legendary senior partner, Emanuel’s grandson, Robert Lehman, who had seen it through the crash of 1929 and turned it into a financial powerhouse in post-Depression America. The aristocratic, Yale-educated Lehman had reigned during the firm’s glory years and was a banker to some of the biggest and most important U.S. corporations early in the American Century.

By the 1960s the firm’s advisory banking business was second only to that of Goldman Sachs. But because Robert Lehman and the other partners hated the fact that corporate clients would have to go to Goldman for their financing needs, Lehman decided to start its own commercial paper-trading operation, hiring Lewis Glucksman from the powerful Wall Street investment bank of A. G. Becker to run it.

When Fuld came on board, Glucksman’s trading operation was beginning to account for a majority of the profits at Lehman. The trading space was noisy and chaotic, with overflowing ashtrays, cups of tepid coffee, and papers piled on the tops of terminals and under the telephones. Glucksman had the windows blacked out in a bid to re-create a Las Vegas casino atmosphere, with traders focused only on the Quotron and Telerate machines that were standard-issue on Wall Street then. Phones were thrown; wastebaskets were kicked. And as in a Vegas casino, a miasma of cigarette smoke hung everywhere. It was a galaxy away from the genteel world of the bankers, but it was increasingly what Lehman Brothers was all about.

Although Fuld stands no more than five feet ten inches tall, he has an intimidating presence, a definite asset in the kill-or-be-killed environment that Glucksman fostered. He has jet-black hair and a broad, dramatically angular forehead that hoods dark, deep-set, almost morose eyes. A fitness buff and a weightlifter, Fuld looked like someone you didn’t want to take on in a fight, and he had the intensity to match. With his gaze fixed on the green early-generation computer screens in front of him, he would grunt out his trades in staccato, rapid-fire succession.

Within Lehman, Fuld earned a reputation as a single-minded trader who took guff from no one. One day he approached the desk of the floor’s supervisor, Allan S. Kaplan (who would later become Lehman’s vice chairman), to have him sign a trade, which was then a responsibility of supervisors. A round-faced man, cigar always in hand, Kaplan was on the phone when Fuld appeared and deliberately ignored him. Fuld hovered, furrowing his remarkable brow and waving his trade in the air, signaling loudly that he was ready for Kaplan to do his bidding.

Kaplan, cupping the receiver with his hand, turned to the young trader, exasperated. “You always think you’re the most important,” he exploded. “That nothing else matters but your trades. I’m not going to sign your fucking trades until every paper is off my desk!”

“You promise?” Fuld said, tauntingly.

“Yes,” Kaplan said. “Then I’ll get to it.”

Leaning over, Fuld swept his arm across Kaplan’s desk with a violent twist, sending dozens of papers flying across the office. Before some of them even landed, Fuld said, firmly but not loudly: “Will you sign it now?”

By this time, Fuld was known within the firm—and increasingly outside of it—as “The Gorilla,” a nickname he didn’t discourage. Years later, as the firm’s chief executive, he even kept a stuffed gorilla in his office, where it remained until Lehman had to evacuate its Lower Manhattan headquarters across the street from what had been the World Trade Center on September 11, 2001.

Several years after he started at Lehman, Fuld noticed a fresh face on the mortgage desk. While Fuld was dark and brooding, the new guy was pale and affable. He quickly introduced himself—a gesture Fuld appreciated—sticking out his hand in a manner that suggested a person comfortable in his own skin: “Hi, I’m Joe Gregory.” It was the start of an association that would endure for nearly four decades.

In terms of temperament, Gregory was Fuld’s opposite—more personable, perhaps, and less confrontational. He looked up to Fuld, who soon became his mentor.

One day Fuld, who even as CEO upbraided executives over how they dressed, took his friend aside and told him he was sartorially objectionable. For Fuld, there was one acceptable uniform: pressed dark suit, white shirt, and conservative tie. Glucksman, he explained, could get away with soup stains on his tie and untucked shirt tail, but neither of them was Glucksman. Gregory set off to Bloomingdale’s the following weekend for a wardrobe upgrade. “I was one of those people who didn’t want to disappoint Dick,” Gregory later told a friend.

Like Fuld, Gregory, a non-Ivy Leaguer who graduated from Hofstra University, had come to Lehman in the 1960s almost by accident. He had planned to become a high school history teacher, but after working a summer at Lehman as a messenger, he decided on a career in finance. By the 1980s Gregory and three other fast-track Lehman executives were commuting together from Huntington on the North Shore of Long Island. During the long early-morning ride, they discussed the trading strategies they’d try out on the floor that day. Within the firm the group was known as the “Huntington Mafia”: They arrived with a consensus. They often stayed around after work and played pickup basketball at the company’s gym.

Both Fuld and Gregory advanced quickly under Glucksman, who was himself a brilliant trader. Fuld was clearly Glucksman’s favorite. Each morning Fuld and James S. Boshart—another rising star—would sit around with Glucksman reading his copy of the Wall Street Journal, with Glucksman providing the color commentary. His bons mots were known as Glucksmanisms. “Don’t ever cuff a trade!” he’d say, meaning don’t bother picking up the phone if you don’t know the latest stock quote.

Glucksman’s unkemptness, they had come to realize, was a political badge of sorts, for Glucksman seethed with resentment at what he regarded as the privileges and pretenses of the Ivy League investment bankers at the firm. The battle between bankers and traders is the closest thing to class warfare on Wall Street. Investment banking was esteemed as an art, while trading was more like a sport, something that required skill, but not necessarily brains or creativity. Or so the thinking went. Traders had always been a notch lower in the pecking order, even when they started to drive revenue growth. The combative Glucksman encouraged this us-against-them mentality among his trading staff. “Fucking bankers!”was a constant refrain.

Once, Glucksman heard that Peter Lusk, a successful banker in Lehman’s Los Angeles office in the 1970s, had spent $368,000 to decorate his office with crystal chandeliers, wood-paneled walls, and a wet bar. Glucksman immediately got on a plane to the West Coast and went straight to Lusk ’s office, which was unoccupied when he showed up. Horrified by the decor, he rummaged around a secretary’s desk, found a piece of paper, scribbled a message in block letters, and taped it on the door: “YOU’RE FIRED!”

He didn’t leave it at that. Glucksman returned to the secretary’s desk, grabbed another piece of paper, and wrote an addendum to his previous message, taping it right below: “And you will pay Lehman Brothers back every cent you spent on this office.”

In 1983 Glucksman led one of Wall Street’s most memorable coups, which ended with an immigrant—Glucksman was a second-generation Hungarian Jew—deposing one of the most connected leaders in the industry: Peter G. Peterson, a former commerce secretary in the Nixon administration. During their final confrontation, Glucksman looked Peterson in the eye and told him he could go easy or he could go hard, and Peterson, who went on to co-found the powerful Blackstone Group, went easy. Glucksman, who became more diplomatic with age, never liked talking about the clash. “That’s kind of like talking about my first wife,” he remarked years later.

Glucksman’s tenure as the head of Lehman was short-lived. Eight months later, on April 10, 1984—a day Fuld called the darkest of his life—the company’s seventeen-member corporate board voted to sell out to American Express for $360 million. It had been Peterson’s loyalists who had initiated contact with American Express, making the deal, in effect, a countercoup. And it prevailed for more than a decade, until the original insurgents fought back and won.

Shearson Lehman, as the newly combined investment arm was known, involved merging Lehman with AmEx’s retail brokerage operation, Shearson. The idea was to combine brains and brawn, but the relationship was troubled from the start. Perhaps the biggest mistake the corporate parent made was not immediately firing the Lehman managers who had made it clear that they thought the whole deal had been a big mistake. At the time of the merger, Fuld, who was already a member of Lehman’s board, had been one of just three directors to oppose the sale. “I loved this place,” he said in casting his dissenting vote.

Glucksman, Fuld, Gregory, and the rest of Glucksman’s inner circle would spend the next decade fighting to preserve Lehman’s autonomy and identity. “It was like a ten-year prison sentence,” recalled Gregory. To encourage their solidarity, Glucksman summoned Fuld and his other top traders to a meeting in the firm’s conference room. For reasons no one quite understood, Glucksman was holding a few dozen number 2 pencils in his hand. He handed each trader one and asked him to snap it in half, which everyone did, easily and without laughing or even smirking. He then handed a bunch of them to Fuld and asked him to try to break them all in half. Fuld, “The Gorilla,” could not do it.

“Stay together, and you will continue to do great things,” Glucksman told the group after this Zenlike demonstration.

Lehman’s traders and executives chafed at being part of a financial supermarket—the very name suggested something common. To make things worse, the new management structure bordered on byzantine. Fuld was named co-president and co-chief operating officer of Shearson Lehman Brothers Holdings in 1993, along with J. Tomilson Hill. They reported to a Shearson chief executive, who reported to American Express’ chief, Harvey Golub. A Fuld protégé, T. Christopher Pettit, ran the investment banking and trading division. No one really knew who was in charge, or, for that matter, if anyone was in charge at all.

When a red-faced AmEx finally spun off Lehman in 1994, the firm was undercapitalized and focused almost entirely on trading bonds. Stars like Stephen A. Schwarzman, the future CEO of Blackstone, had left the company. No one expected it to survive for long as an independent firm; it was just takeover bait for a much larger bank.

American Express CEO Harvey Golub anointed Fuld, who was Shearson Lehman’s top trader and had risen to be co-president and chief executive of the newly independent entity. Fuld had his work cut out for him. Lehman was reeling, with net revenue plunging by a third when the Shearson units were sold; investment banking was down by nearly the same amount. They were bailing water.

And the infighting continued. By 1996 Fuld had pushed out Pettit when he made noises about increasing his status. (Pettit died three months later in a snowmobile accident.) For years, Fuld operated the firm alone, until he appointed Gregory and another colleague, Bradley Jack, to the role of co-COO in 2002. But Jack was quickly pushed out by Gregory, who had the confidence of Fuld, in part because of his talent and, perhaps more important, because he appeared nonthreatening.

“You’re the best business fixer I have,” Fuld told him, vowing that with Gregory’s help he would do away with the backbiting that had nearly torn the firm apart in the 1980s. Fuld began by slashing payroll. By the end of 1996, the staff had shrunk by 20 percent, to around 7,500 employees. At the same time that he was downsizing, he was adopting a smoother management style. To his own surprise Fuld proved to be good at massaging egos, wooing new talent, and, perhaps most shocking for a trader, schmoozing clients. As Fuld recast himself as the public face of the firm, Gregory became the chief operating officer: “Inside” to Fuld’s “Mr. Outside.” Yes, Fuld had become one of the “fucking bankers,” intently focused on one goal: boosting the newly public company’s stock price. Lehman shares were increasingly doled out to employees; eventually the workforce owned a third of the firm. “I want my employees to act like owners,” Fuld told his managers.

To encourage teamwork, he adopted a point system similar to the one that he used to reward his son, Richie, when he played hockey. Fuld taped his son’s games and would inform him, “You get one point for a goal, but two points for an assist.” He had some other choice paternal advice for his son that he also applied at Lehman: “If one of your teammates gets attacked, fight back like hell!” At Lehman, senior executives were compensated based on the performances of their team.

If you were loyal to Fuld, he was loyal to you. Almost everyone at Lehman had heard the story about his vacation with James Tisch, the chief executive of Loews, and his family. The group went hiking together in Bryce Canyon National Park in Utah. Nearly a mile down from the rim of the canyon, Tisch’s ten-year-old son, Ben, had an asthma attack and began panicking when he realized he had left his inhaler back on top of the canyon.

Fuld and Tisch took charge, helping the boy to make the hike back. “Ben, lead the way,” Fuld instructed, trying to build up the boy’s confidence.

Halfway up they encountered another hiker who looked at Ben and said, “My, aren’t we wheezy today.”

Fuld, without slowing, turned on him and shouted with a memorable ferocity: “Eat shit and die! Eat shit and die!”

Exhilarated by Fuld’s defense of him, Ben nearly ran up the rest of the way.

Perhaps Fuld’s greatest moment as a leader came after the 9/11 attacks. As the world was literally crumbling around him he instilled a spirit of camaraderie that helped keep the firm together. The day after the towers were hit, Fuld attended a meeting at the New York Stock Exchange to discuss when it should reopen. Asked if Lehman would be able to trade, he told the room, almost on the verge of tears, “We don’t even know who’s alive.”

In the final reckoning, Lehman lost only one employee. But the firm’s global headquarters at 3 World Financial Center was so severely damaged it was unusable. Fuld set up makeshift offices for his 6,500 employees at a Sheraton hotel on Seventh Avenue in Midtown; a few weeks later he personally negotiated a deal to buy a building from one of his archrivals, Morgan Stanley, which had never moved into its new headquarters. Within a month Lehman Brothers was up and running in a new location as if nothing at all had happened. But there was one casualty of the move: Fuld’s stuffed gorilla was lost in the shuffle and never replaced. Gregory later pointed out that both Fuld and the firm had outgrown it.

For all his talk about change, however, Fuld did not so much overhaul Lehman’s corporate culture as tweak it. He instituted a subtler version of the paranoid, combative worldview propagated by Glucksman. The martial metaphors remained: “Every day is a battle,” Fuld barked at his executives. “You have to kill the enemy.” But traders and bankers were no longer at each other’s throats, and for a while, at least, Lehman was less riven by internal strife. “I tried to train investment bankers to understand the products they were selling,” Glucksman said long after Fuld had gone on to be CEO. “We were one of the first firms to put investment bankers on the trading floor—and Dick has gone far beyond where I was when I left the firm.”

Fuld eventually decided that Lehman was too conservative, too dependent on trading bonds and other debts; seeing the enormous profits that Goldman Sachs made by investing its own money, he wanted the firm to branch out. It fell on Gregory to execute the boss’s vision. Though he was not by nature a details guy or a risk manager, Gregory played a pivotal role in the firm’s increasingly aggressive bets, pushing Lehman into commercial real estate, mortgages, and leveraged lending. And in a galloping bull market, its profits and share price soared to unprecedented heights; Gregory was rewarded with $5 million in cash and $29 million in stock in 2007. (Fuld made a package worth $40 million that year.)

Gregory also handled Fuld’s less desirable conversations. Whenever a personnel matter called for discipline, the rebuke usually came from Gregory; the person on the receiving end invariably referred to the “new asshole” he had just been provided. Around the office, Gregory was known as “Darth Vader.” Though Fuld was unaware of it, Gregory’s heavy-handed tactics were regular fodder at the water cooler.

In 2005 Gregory made one of his harshest personnel decisions, one that would become legend within the firm. He inexplicably sidelined his protégé and longtime favorite, Robert Shafir, Lehman’s global head of equities, who had helped him build that business, for what seemed like no reason. Gregory, who said he’d find him another role at the firm, then kicked him off the firm’s executive committee. In case Shafir hadn’t gotten the message, Gregory then gave him an office right across from the conference room where the executive committee met, a cruel reminder of his diminished status. In the middle of all this, Shafir’s daughter was diagnosed with cystic fibrosis, and he took some time off, hoping that when he returned to the firm, Gregory might have a job for him.

But when Shafir failed to resign after a few months, Gregory called him into his office. “What do you think about moving to Asia?” he asked him after an awkward silence.

Shafir was dumbstruck. “Asia? You have to be kidding, Joe. You know about my kid, you know I can’t go to Asia.”

Shafir left the firm for Credit Suisse, perhaps the most notorious victim of what people inside Lehman referred to as a “Joeicide.”

Some of Gregory’s hiring decisions, meanwhile, struck people as highly unorthodox. In 2005, he took the firm’s head of fixed income, Bart McDade, who was an expert in the world of debt, and made him the head of equities, a business he knew very little about. In 2007, as the property bubble neared the breaking point, Gregory was asked repeatedly why so many of the executives he placed in the commercial real estate business had no background in that area. “People need broad experience,” Gregory explained. “It’s the power of the machine. It’s not the individual.”

Of all the individuals whom Gregory anointed, none was more controversial than Erin Callan, a striking blonde who favored Sex and the City-style stilettos. When he chose the forty-one-year-old Callan as the firm’s new chief financial officer in September 2007, Lehman insiders were stunned. Callan was obviously bright, but she knew precious little about the firm’s treasury operations and had no background in accounting whatsoever. Another woman at the firm, Ros Stephenson—perhaps the only Lehman banker besides Fuld who could get Kohlberg Kravis Roberts kingpin Henry Kravis on the phone—was furious about the appointment and took her complaint directly to Dick Fuld, who, as always, backed Gregory.

Callan yearned to prove to her colleagues that she was a seasoned street fighter, just like Fuld. If anything, her path to the very top of the financial industry had been even more improbable than his. One of three daughters of a New York City police officer, she graduated from NYU Law School in 1990 and took a job working for the big Wall Street firm of Simpson Thacher & Bartlett as an associate in its tax department. Lehman Brothers was a major client.

After five years at Simpson, she took a chance one day and phoned her contact at Lehman: “Would it be weird for someone like me to work on Wall Street?” she asked.

No, it would not. Hired by Lehman, she caught a break early on when a change in the tax law sparked a boom in securities that were taxed as if they were debt. Callan, with her tax law expertise, became adept at structuring these complex investments for clients like General Mills. Savvy, confident, and a skillful pitchwoman, she quickly catapulted up the ranks, overseeing the firm’s global finance solutions and global finance analytic groups within a few years. Hedge funds were becoming top Wall Street clients, and in 2006 Callan was entrusted with the critical job of overseeing the firm’s investment banking relationships with them.

In this role, she solidified her reputation as a player by helping Fortress Investment Group become the first American manager of hedge funds and private-equity funds to go public; she later oversaw the initial public offering of another fund, the Och-Ziff Capital Management Group. For Lehman’s most important hedge fund client, Ken Griffin’s Citadel Investment Group, she orchestrated the sale of $500 million worth of five-year bonds, a groundbreaking offering by a hedge fund.

She soon caught the eye of Joe Gregory, an executive who believed strongly in the value of diversity. He recognized that the world was changing and that Lehman, as well as the rest of the financial community, could no longer be a sanctuary for white men only. Promoting someone who was young and smart—and a woman—would be good for Lehman and would reflect well on him. It didn’t hurt that Callan looked great on television.

On the night of March 17, in her apartment at the Time Warner Center, Erin Callan endlessly tossed and turned. The next day was going to be the biggest of her career, a chance to single-handedly extinguish the flames threatening to engulf Lehman—and to prove her critics inside the firm wrong.

In just a few hours Callan would represent Lehman Brothers—to the market, to the world. She would run the crucial conference call detailing the firm’s quarterly results. Scores of financial analysts from around the nation would be listening in; many of them would be ready to shred Lehman at the slightest sign of weakness. After presenting Lehman’s numbers, there’d be questions, and given all that was going on, there’d probably be a few very tough ones that would force Callan to think on her feet. Her answers might literally make or break the firm.

Finally giving up on getting any sleep, she rolled out of bed and grabbed the Wall Street Journal outside her apartment door. The page-one story did nothing to alleviate her nerves; its headline read: “Lehman Finds Itself in Center of a Storm,” and it featured her as one of the main Lehman executives fighting back rumors about the firm’s failing health. But she liked the press.

Despite her fatigue, Callan was fired up, adrenaline coursing through her slender body. She dashed downstairs, coffee in hand, dressed in an elegant black suit picked out by her personal shopper at Bergdorf Goodman. She had blown her hair out for an appearance later that day on Closing Bell with Maria Bartiromo on CNBC.

She waited for her driver under the awning of the Time Warner Center. She was hoping her place there would be only temporary. With her new job title and expected income, she had been looking to upgrade and was in negotiations to buy her dream home: a 2,400-square-foot apartment on the thirty-first floor of 15 Central Park West, one of the most coveted addresses in New York City. The limestone building, designed by Robert A. M. Stern, was the new home to such storied financiers as Goldman Sachs’ Lloyd Blankfein, Citigroup’s legendary Sanford Weill, hedge fund maestro Daniel Loeb, and the rock star Sting. She was planning to borrow $5 million to pay for the $6.48 million space. As she entered the backseat of the company car, she reflected on how much was at stake this morning—including the new apartment she wanted.

In his office at Lehman, Dick Fuld steadied his nerves and got ready to watch Treasury secretary Paulson live on CNBC. He reached for the remote and turned up the volume. Matt Lauer of the Today show was conducting the interview, simulcast on both NBC and CNBC.

“I don’t want to make too much of words,” Lauer began, “ but I would like to talk to you about the president’s words that he used on Monday after meeting with you. He said, ‘Secretary Paulson gave me an update, and it’s clear that we’re in challenging times.”’

Paulson, looking sleep deprived, was standing in the White House press-room, straining to listen to the question coming through in his right ear.

Lauer continued: “I want to contrast that to what Alan Greenspan wrote in an article recently,” he said. A photo of Greenspan flashed on the screen accompanying his quote: “The current financial crisis in the U.S. is likely to be judged in retrospect as the most wrenching since the end of the Second World War.”

“Doesn’t ‘we’re in challenging times’ seem like the understatement of the year?” Lauer asked, in his polite but persistent style.

Paulson stammered for a moment, then recovered and continued with what he clearly hoped was a soothing message. “Matt, there’s turbulence in our capital markets, and it’s been going on since August. We’re all over it, we’re looking for ways to work our way through it. I’ve got great confidence in our markets, they’re resilient, they’re flexible, but this has taken some time and we’re focused on it.”

Fuld waited with growing impatience for Lauer to ask about the implications of the Bear Stearns bailout. “The Fed took some extraordinary steps over the weekend to deal with the Bear Stearns situation,” Lauer finally said. “It has some people asking: ‘Does the Fed react more strongly to what’s happening on Wall Street than they do to what’s happening to people in pain across the country, the so-called people who live on Main Street?’”

An exasperated Fuld thought Lauer’s question was just another example of the popular media’s tendency to frame complex financial issues in terms of class warfare, pitting Wall Street—and Paulson, Goldman’s former CEO—against the nation’s soccer moms, the Today show’s audience.

Paulson paused as he searched for his words. “Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders, so I don’t think that they think that they’ve been bailed out here.” He was obviously trying to send a message: The Bush administration isn’t in the business of bailouts. Period.

Then Lauer, quoting from the front page of the Wall Street Journal, asked, “‘Has the government set a precedent for propping up failing financial institutions at a time when its more traditional tools don’t appear to be working?’ In other words, they’re saying, is this now the wave of the future, Mr. Secretary? That financial institutions that get in trouble in the future turn to the government to get bailed out?”

It was a particularly poignant question; only nights before Paulson had railed on a conference call with all the Wall Street CEOs about “moral hazard”—that woolly economic term that describes what happens when risk takers are shielded from the consequences of failure; they might take ever-greater risks.

“Well, again, as I said, I don’t believe the Bear Stearns shareholders feel they’ve been bailed out right now,” Paulson repeated. “The focus is clearly, all of our focus is on what’s best for the American people and how to minimize the impact of the disruption in the capital markets.”

When she sat down at her desk Callan turned on her Bloomberg terminal and waited for Goldman Sachs to announce its results for the quarter, which the market would take as a rough barometer of the shape of things to come. If Goldman did well, it could give Lehman an added boost.

When Goldman’s numbers popped up on her screen, she was delighted. They were solid: $1.5 billion in profits. Down from $3.2 billion, but who wasn’t down from a year ago? Goldman handily beat expectations. So far, so good.

That morning, Lehman Brothers had already sent out a press release summarizing its first-quarter results. As Callan knew, of course, the numbers were confidence inspiring. The firm was reporting earnings of $489 million, or 81 cents per share, off 57 percent from the previous quarter but higher than analyst forecasts.

The first news-service dispatches on the earnings release were positive. “Lehman kind of confounded the doomsayers with these numbers,” Michael Holland, of Holland & Company, the private investment firm, told Reuters. Michael Hecht, an analyst with Bank of America Securities, called the quarterly results “all in all solid.”

At 10:00 a.m., a half hour after the market opened, Callan entered the boardroom on the thirty-first floor. Though Lehman’s results were already calming market fears, a great deal was still riding on her performance. Surely everyone listening in would ask the same questions: How was Lehman different from Bear Stearns? How strong was its liquidity position? How was it valuing its real estate portfolio? Could investors really believe Lehman’s “marks” (the way the firm valued its assets)? Or was Lehman playing “mark-to-make-believe”?

Callan had answers to all of them. She had prepped and studied and gone through dry runs. She had even rehearsed the numbers for a roomful of Securities and Exchange officials—hardly the easiest crowd—over the weekend, and they had left satisfied. She knew the numbers cold; she knew by heart the story that needed to be told. And she knew how to tell it.

The markets roared their approval of the earnings report. Shares of Lehman surged while the credit spreads tightened. Investors now perceived the risk that the firm would fail had diminished. All that had to happen now was for Callan to supply the punctuation. She took a sip of water. Her voice was raspy after talking nonstop for four straight days.

“All set?” asked Ed Grieb, Lehman’s director of investor relations.

Callan nodded and began.

“There’s no question the last few days have seen unprecedented volatility, not only in our sector but also across the whole marketplace,” she said into the speakerphone, as dozens of financial analysts listened. Her voice was calm and steady. For the next thirty minutes she ran through the numbers for Lehman’s business units, carefully elucidating the specifics, or, in the jargon of Wall Street, providing the “color.” She put particular emphasis on the firm’s efforts to reduce leverage and increase liquidity. She spelled it all out in painstaking, mind-numbing detail.

It was a stellar presentation. The analysts on the call seemed impressed by Callan’s candor, her command of the facts, her assuredness, and her willingness to acknowledge the outstanding problems.

But she wasn’t finished yet; next came the questions. First up was Meredith Whitney, an analyst with Oppenheimer, who had made her name as an unsparing banking critic the previous fall with the accurate prediction that Citigroup would be forced to cut its dividend. Callan, as well as every other Lehman executive in the room, held their breaths as they waited for Whitney to start probing. “You did a great job, Erin,” Whitney said, to everyone’s amazement. “I really appreciate the disclosure. I’m sure everyone does.”

Callan, trying hard not to show her relief, knew then that she had pulled it off. If Whitney was buying it, all was well. As they spoke, shares of Lehman continued spiking. The markets were buying it, too. The stock would end the day up $14.74, or 46.4 percent, to $46.49, for the biggest one-day gain in the stock since it went public in 1994. William Tanona, an analyst with Goldman Sachs, raised his rating on Lehman to “buy” from “neutral.”

When the session ended, the excitement at Lehman was palpable. Gregory rushed over to give Callan a big hug. Fuld was ecstatic. “The only complaint I have is that you shouldn’t have hung up on the call. Because as long as you were on there, the stock kept coming up,” he told her. Later, as she went down to the bond-trading floor, she passed by the desk of Peter Hornick, the firm’s head of collateralized debt obligation sales and trading. He held out his palm, and she slapped him a high five.

For a brief, shining moment, all seemed well at Lehman Brothers.

Outside Lehman, however, skeptics were already voicing their concerns. “I still don’t believe any of these numbers because I still don’t think there is proper accounting for the liabilities they have on their books,” Peter Schiff, president and chief global strategist of Euro Pacific Capital, told the Washington Post. “People are going to find out that all these profits they made were phony.”

Across town, a prescient young hedge fund manager named David Einhorn, who had just gotten off a red-eye flight from Los Angeles and had raced to his office to listen to the call that morning, was coming to the same conclusion: Lehman was a house of cards. He was one of those “hedgies” investors Fuld had railed about. And he was so influential, he could move markets just by uttering a sentence. He had already bet big money that the firm was more vulnerable than Callan was letting on, and he was getting ready to share his opinion with the world.