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

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 protege 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.