Too Big to Fail

  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 cofounded 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 life-long 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 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 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 Lehm
an, 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.