In 1983, Lew Glucksman, then co-CEO of the heralded investment bank Lehman Brothers, demanded the resignation of chairman Pete Peterson, with whom he had long argued over how to manage the company. Shockingly, Peterson, who had taken charge a decade earlier and led Lehman from near collapse to record profits, agreed to step down. In this meticulously researched volume, Ken Auletta details the turmoil, infighting, and power struggles that brought about Peterson’s departure and the eventual sale of one of Wall Street’s oldest and most prestigious firms.
Set against the backdrop of the 1980s stock exchange, where hotshot young traders made and lost millions in a single afternoon, the story of Lehman’s fall is a suspenseful battle of wills between bankers, traders, and executives motivated by greed, envy, and ego. Auletta, who conducted hundreds of hours of interviews and was granted access to private company records, has crafted a thorough, enduring, and engaging account of pivotal events that continued to influence this storied financial institution until its ultimate demise in 2008.
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Greed and Glory on Wall Street
The Fall of the House of Lehman
By Ken Auletta
OPEN ROAD INTEGRATED MEDIACopyright © 1986 Ken Auletta
All rights reserved.
For years the resentments had been building. And now, at a luncheon at the Equitable Life Assurance Society on July 12, 1983, they began to erupt within Lewis L. Glucksman, the co-chief executive officer of Lehman Brothers Kuhn Loeb. That a short, rumpled man with the face of a Russian general, whose shirt pocket often bristled with pens, who wore garish ties and short socks that slipped to his ankles, who was disparaged by Wall Street bluebloods as a lowly "trader" — that he would try to oust Peter G. Peterson, his imperious co-chief executive officer and the chairman of the venerable investment banking house, astonished his partners at Lehman and all of Wall Street.
In contrast to the unpolished Glucksman, Pete Peterson possessed an imposing résumé: summa cum laude graduate from Northwestern University, president of Bell & Howell at thirty-four, Secretary of Commerce in the Nixon Administration, and the man credited with rescuing Lehman Brothers from collapse in 1973 when he assumed command and with having helped steer it to five consecutive profit-breaking years. Just eight weeks earlier, in what Peterson considered a magnanimous act, he had elevated the relatively unknown Glucksman to co-chief executive officer. Lehman partners applauded.
The fallout from the explosion triggered by this July luncheon lifted this story from the business pages to the front pages. Thirteen days later, Peterson would be forced out of Lehman. Within nine months, Wall Street's oldest continuing investment banking partnership, a firm that had survived for one hundred and thirty-four years, would collapse under Lewis Glucksman's stewardship and would be sold to Shearson/American Express.
At the time of the Equitable lunch, Lehman Brothers was more profitable than it had ever been in its long history, averaging $15 million a month in pre-tax and pre-bonus profits over the preceding twelve months. With capital of almost $250 million and equity of $175 million, Lehman ranked as one of Wall Street's powerhouse investment banking houses. Unlike dozens of old-line firms that had already succumbed to the pressures of consolidation that have been reshaping Wall Street — Blyth, Eastman, Dillon; Loeb Rhoades; Hayden Stone; Hornblower & Weeks; White, Weld; Kuhn Loeb, for example — Lehman had rebounded strongly from its travails of the early seventies. Business was so brisk that projections for fiscal 1983, which would end on September 30, once again promised to shatter all previous records.
The modern melodrama that resulted from this lunch is a many-sided tale. It is a story about the life and the death of Lehman Brothers, and one of irreconcilable conflict between two men. It is a story of a poisoned partnership; of cowardice, intrigue and deceit. It is a story of greed for money, power and glory. It is a reminder that human folly and foibles — not the bottom line of profits, not business acumen, not "scientific" management or the perfect marketing plans or execution — often determine the success or failure of an organization. In its broader implications, the fall of the House of Lehman opens a window onto the forces that are reshaping Wall Street and the American economic system.
The story begins on July 12, 1983. John B. Carter, President and chief executive officer of the Equitable Life Assurance Society of the United States, the nation's third-largest life insurer, had invited Pete Peterson to lunch in the private Hyde Room at Equitable's corporate headquarters thirty-eight floors above the Avenue of the Americas and West 51st Street. Peterson invited Glucksman to join him. This was not done grudgingly. On a professional level Peterson knew he needed Glucksman. For three years, Glucksman had managed the day-to-day business of the firm; all of the departments reported to him, and his knowledge of Lehman's affairs was vast. Moreover, Peterson had an agenda for the lunch and he wanted Glucksman's cooperation to carry it out. And on a personal level Peterson enjoyed taking credit for producing what he called a "new," a tamer Lew Glucksman. It was undeniably true that after almost twenty-one years at Lehman, Glucksman had become a calmer, less volcanic executive; he had shed about seventy pounds and improved a wardrobe once dominated by light suits and wide ties.
Peterson knew that Equitable and Lehman had engaged in a modest amount of business together. Lehman Brothers, like other investment bankers, served as an intermediary, matching wealth with ideas, those who needed capital with those who accumulated it. The choices the firm offered clients were broad: Lehman could midwife companies wanting to merge, proffer financial advice to avert or spur takeovers, advise local governments and countries, assist managers wishing to take their companies private by arranging so-called leveraged buyouts or by divesting unwanted divisions, help underwrite and sell corporate and government bonds, manage pension and money funds, trade various securities, gamble their own monies on stock hunches, speculate in the rise or fall of interest rates. For an investment banker, the fees and profits from these transactions were immense. In a private partnership like Lehman, the wealth of the firm was owned by the partners, who variously claimed from 500 to 4,500 shares of common stock apiece. Together with the preferred stock, the average partner's equity totaled $2.3 million in the fall of 1983. Partners were paid salaries ranging from $100,000 to $150,000, bonuses ranging from $200,000 to $1.6 million, and a 3 percent dividend on the value of their preferred stock, of which the senior partners owned the majority. In a good year, a fairly senior partner who owned 2,000 shares — a fifth of the partners owned this sum — made pre-tax income equal to a salary of about $2 million.
Peterson drove his executives hard before each business meeting, demanding detailed information about the companies they wished to do business with and the key executives who would be involved. He insisted on strategy sessions, detailed memoranda, marketing plans. The Equitable luncheon was no different. Even this "casual" luncheon demanded a series of parleys. Lehman strategists became conversant with that piece of Equitable's $53 billion worth of assets then under management by various investment banks, including Lehman, and Equitable's $30 billion in pension assets, of which Lehman also handled a share. They war-gamed new ideas to broach with Equitable. For years Peterson had been pressing his partners to go beyond their normal advisory role, a role in which Lehman's income was derived mostly from fees, to go beyond their underwriting and other trading functions, where profits were often hostage to an uncertain market or to fluctuating interest rates and to shrinking profit margins in a deregulated environment where customers shopped for the cheapest fees. Instead of serving simply as an intermediary or risking its capital to accommodate important clients, Peterson was pushing his partners to risk more of their own capital on new business ventures, on leveraged buyouts, in real estate ventures where there might be no ceiling on earnings. This was the kind of merchant banking practiced by Lehman Brothers for much of its then one-hundred-and-thirty-three-year-old history, the kind of risk-taking that once financed the railroads that linked the new American nation or gave birth to the airlines that shrank the globe. If Lehman could advise an average of seventy-five large corporations a year on mergers and acquisitions, why couldn't it tap its own capital to purchase a major interest in a company? The risks were greater but so were the rewards, as Equitable and Allen & Company and Odyssey Partners and several of Lehman's major competitors, including First Boston, had already demonstrated.
From Lehman's standpoint, the luncheon was designed to educate Lehman and, Peterson hoped, point toward a joint business venture of some kind with Equitable.
The tension between Glucksman and Peterson was hinted at by the fact that they were chauffeured uptown separately. Peterson rode to the lunch with J. Tomilson Hill III, a young Lehman banking partner he had helped to recruit; Glucksman rode with a member of his own team, Sheldon S. Gordon, head of equity trading and sales at Lehman, one of four major divisions at Lehman (the others being banking, fixed-income trading and investment management). "If I could avoid being with Peterson, I'd avoid being with Peterson," explained Glucksman. "I couldn't stand the monologues."
During cocktails, Glucksman and Peterson exchanged perfunctory greetings and mingled with the other seven guests at opposite ends of a bar area just outside the executive dining room. Glucksman began to seethe almost as soon as they entered the Hyde Room, a snug, cream-colored corner room dominated by a long, white-linen-covered dining table. It did not please Glucksman to notice that his co-CEO was invited to sit beside John B. Carter, at one of two places at the head of the rectangular table, while Glucksman was seated toward the far end of the table, to the right but not alongside chairman Robert F. Froehlke, who sat alone facing Carter and Peterson. Across from Glucksman, and to his right, sat two Equitable vice presidents. Glucksman later said he felt as if he were confined to the bleachers.
Then came "the speech," as Glucksman derisively described a typical Peterson presentation. Oh, how he had come to detest that speech! He knew it was coming when Peterson began to drop names. The A list usually included "Henry" (Kissinger), whom he worked beside in the Nixon Administration and in preparing the Nixon-Brezhnev Summit meeting; "Paul" (Volcker, chairman of the Federal Reserve Board), whom he consulted on the international debt crisis; "the Prime Minister" (Nakasone of Japan), with whom he had hosted a lunch just weeks before; "Art" (Buchwald), with whom he played tennis.
Glucksman's pale blue eyes narrowed as he listened to Peterson talk about his tenure as president of the Economic Club of New York, about how he had helped forge the Bi-Partisan Budget Appeal to build public support to reduce the alarming federal deficits, about how the American political system dispensed too much pleasure and not enough pain, about how, if we were to compete with Japan, consumers needed to save and invest more, and spend less. Too much pleasure and not enough pain — Glucksman had heard "the speech" so often he could recite it.
While Glucksman stewed, Peterson launched another pet speech, this one about how he was pushing merchant banking at Lehman. He remembers Peterson proclaiming, "Leveraged buyouts" — which require huge infusions of borrowed capital and thus often divert precious savings from other perhaps more productive investments — "are the way to go." Peterson invoked the name of former Treasury Secretary William E. Simon. In 1982, Simon's Wesray Corporation put up a few million dollars to purchase Gibson Greeting Cards from RCA in a leveraged buyout. The bulk of the purchase price — $80 million — was paid when Gibson borrowed money against its own assets to pay RCA. A year later, in May 1983, Gibson made a public stock offering in which Simon pocketed over $80 million in profit on the Gibson stock he sold and retained stock valued at about $50 million. In all, over a four-year period Simon and six partners had bought nineteen companies with total revenues of $8 billion.
"Pete at this particular time was obsessed with the amount of money William Simon made selling Gibson," says Glucksman. "And he couldn't stop talking about it." Since Peterson was a member of the RCA board that approved the sale to Simon, since Lehman Brothers represented RCA, and since Simon then went on to embarrass RCA by making such colossal profits, Glucksman was humiliated that Peterson would even mention Simon to Equitable. Nor did Glucksman understand why Peterson droned on rather than sitting back and listening to those more expert in merchant banking. "We had never done a leveraged deal," says Glucksman, "and the problem was that we looked like amateurs."
As soon as Peterson began talking, Glucksman lowered his head and glared at his shrimp cocktail, noisily fidgeted with the silverware and banged his heavy chrome chair closer to the table. He glanced across at his partner Sheldon Gordon, rolled his eyes and stared up at the stern portrait of the Equitable founder, Henry B. Hyde. Glucksman couldn't understand why Peterson didn't shut up!
Peterson could not help but notice the din from Glucksman's end of the room. Pausing to peer down the table, he saw Glucksman perched on the edge of his chair, his shoulders now hunched over his broiled tenderloin, which he was only picking at. "I was clearly aware of some tension, such as Lew's interrupting discussions at our end of the table," Peterson recalls.
Belatedly, Peterson tried to include Glucksman in the conversation. Several times he asked, "Lew, what do you think?" Glucksman seized on the questions as opportunities to silence Peterson and plunged into embarrassing monologues on how investment banking had changed or how Lehman recruited young associates. "It was almost like a canned speech," recalls one participant. "He really shut Peterson down. His speech really made no more sense than Pete's speech in the context of why Lehman was there ... Lew was trying to demonstrate that he was in charge."
The tension between the two was palpable among the nine men gathered in the room. "John Carter and I both remarked after the luncheon that Lew strove to have the concluding comment on every subject," says Equitable's executive vice president Robert M. Hendrickson, who arranged the luncheon with Peterson. "By the end of the lunch it seemed apparent there was a fair amount of tension between Glucksman and Peterson."
This was remarked upon by the two other Lehman partners who had attended the lunch. When he returned to Lehman later that afternoon, Sheldon Gordon, who had shared Glucksman's limousine, told Glucksman he was "embarrassed" by Peterson's half-hour speech and by the way Peterson "hogged" the limelight. When J. Tomilson Hill returned to his office he told partners of the "crazy scene" he had witnessed. Those he told wondered how long the eight-week-old co-CEO marriage between Peterson and Glucksman would last. But their doubts were stilled by the firm's bountiful profits — $123 million pre-tax in 1982, up from $117 million in 1981. Besides, partners remembered that when the co-CEO announcement was made eight weeks before, Glucksman had smiled for his partners and the press and proclaimed that he was gratified. What many partners didn't know was that blunt-talking Lew Glucksman was acting. The resentments of an adult lifetime were percolating within him. The "emotional volcano," as François de Saint Phalle, one of his partners, referred to him, was about to erupt.
Lew Glucksman had spent a lifetime accumulating resentments. The son of middle-class Hungarian Jews, he constantly inveighed against the "Our Crowd" Jews in banking — symbolized in his mind by the Lehman family. He thought of them as WASP's, not as fellow Jews. "All my life I resented it," Glucksman says, referring to the bigotry that he felt kept a heel to the throat of East European Jews and other minorities on Wall Street. Vividly he remembers how one senior partner, decades earlier, advised him not to apply to join the Century Country Club in Westchester, an "Our Crowd" bastion. He can still recite the exact number of black-balls — seventeen — he once received when he tried to join the New York Athletic Club. "I didn't know seventeen people there," says Glucksman. The club historically discouraged Jewish membership, but Glucksman thought it would be a convenient place to swim each morning on his way downtown. Intent on reversing the rejection, Glucksman went to see then partner George Ball. The former Under Secretary of State in the Kennedy and Johnson Administrations and Ambassador to the United Nations in the Johnson Administration contacted his friend William Bernbach, a partner in the ad agency, Doyle Dane Bernbach, who knew the club's membership chairman. Bernbach, who was not a member, tried to do a favor for Ball by looking into the matter. He reported back to Ball that Glucksman collected more blackballs than anyone else in the history of the club. Ball relayed this to Glucksman, who exploded. That night Glucksman telephoned Bernbach, whom he did not know, and screamed, "You were the kind of Jew who should have gone to the gas chambers!" Why Glucksman should have blamed Bernbach, who was only an intermediary, suggests Glucksman's mercurial temperament. Bernbach, a gentle, fragile man who passed away a few years ago, told Ball he had never had a more unpleasant conversation in his life.
Excerpted from Greed and Glory on Wall Street by Ken Auletta. Copyright © 1986 Ken Auletta. Excerpted by permission of OPEN ROAD INTEGRATED MEDIA.
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