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Greed and glory on Wall Street: the fall of the house of Lehman.

Greed and Glory on Wall Street: The Fall of the House of Lehman.

A year ago, The New York Times Magazine ran Ken Auletta's gripping, two-part series on the fall of the storied investment banking house, Lehman Brothers Kuhn Loeb. There were many surprising things about the series, not least of which was that it was published in the Times magazine, which over the years has become legendary for getting it last and making it boring. But these stories were everything the typical Times magazine story is not: they were richly detailed, full of fresh and interesting facts, and had a narrative so compelling you could not help but turn the page to find out what happens next.

Everyone who cares about such things knew that Lehman Brothers, for over a hundred years one of the half-dozen most prestigious houses on Wall Street, had serious problems towards the end of its life. Those problems had led finally to Lehman's much-lamented shotgun marriage with the much bigger, but infinitely less prestigious, Shearson/American Express (since renamed Shearson Lehman Brothers) in April 1984. Many of those problems had been alluded to, more or less coyly, in newspaper accounts at the time of the merger of the two firms.

Auletta's series, however, was anything but coy, and that was surprise number two. Most businessmen, investment bankers included, take seriously the ethos of "damage control.' When there are internal problems, you issue a press release that puts the best face on things, and then quickly shift into stiff-upper-lip mode. Oh, maybe a few Hollywood types might blab to a reporter-- Indecent Exposure comes to mind--but most ly, if you have to talk to the press, you dust off your platitudes and duck the hard questions. Auletta not only got the Lehman Brothers principals to talk, he got them to absolutely sing. No pertinent corporate document was denied him. No Lehman Brothers partner or associate turned down his persistent requests for interviews. Many of them sat for multiple interviews and recounted with stunning candor who did what to whom, and what was going through their minds while it was happening. This is especially true of the two central characters of the story, Pete Peterson and Lewis Glucksman, the co-CEOs of Lehman Brothers, whose distaste for each other was the spark that led to the eventual collapse of the house. Precisely because of this astonishing level of candor, the stories were the talk of Wall Street, which eagerly devoured every morsel of delicious, venomous gossip. And they were readily consumed by a large non-Wall Street constituency as well, for they illuminated, to an amazing degree, the ethics and mores of an investment banking house, ethics that revolved largely around-- surprise number three?--simple greed. On second thought, maybe that's not so surprising, though it does make you wonder about the state of things on Wall Street that the participants would fess up to it so readily.

Now comes the inevitable book, baldly titled Greed and Glory on Wall Street,* and the first thing you realize is that while it is a very good piece of work, telling a story that remains absorbing and even important, it is not quite the page-turner the magazine stories were. Investment banking plays a crucial role in American business and always has, and the evolution of that role-- from genteel profession to cutthroat business-- serves as the backdrop for Auletta's story. But somehow some of the high drama that infused the Times articles got diluted when the material was expanded into a book; maybe that's simply because, having read the magazine pieces you already know how the plot will unfold.

* Greed and Glory on Wall Street: The Fall of the House of Lehman. Ken Auletta. Random House, $19.95.

Having said that, however, it must also be said that some of the drama was lost for an altogether admirable reason. At every turn, Auletta refused to hype or distort or otherwise stretch his material in order to heighten the suspense. In the introduction to the book he writes, "I have tried to put together the pieces of the Lehman puzzle without resorting to journalistic shortcuts and the air of omniscience that infects much of the new journalism. At the risk of "slowing the narrative'. . . . I have used only the words actually given to me directly in interviews. . . . I have invented no dialogue.' A small point, perhaps, but in this age of omniscient reporting and "recreated' dialogue --why does Indecent Exposure spring to mind again?--it is important to be reminded that memories of even the most crucial events tend to differ among the participants and that life is never as seamless as a journalist would like it to be. There is no question that Auletta's willingness to give every differing recollection its due--the book is studded with footnotes and paragraphs offering contrary explanations for different events --slows down the telling of his tale. But Greed and Glory on Wall Street has to make you forever suspicious of the seamless, you-are-there quality of books like, well, Indecent Exposure.

What particularly distinguishes Greed and Glory on Wall Street--what makes both book and magazine versions a model for business journalists --is Auletta's instinctive understanding that the key to first-rate business reporting has very little to do with profits or annual reports or numbers of any kind. Rather it has to do with people--with the interplay of personalities, with emotional and psychological factors, with what you might call the "soft' side of life at the office. Indeed, the weakest part of the book is Auletta's attempt to explain the intricate financial details of the merger with Shearson/ American Express. But it scarcely matters, because on the things that count--things like motives and ambitions, conflicts and internal politics, and the environment that a group of people who work together create for themselves-- Auletta's reporting is faultless. And it is these human elements that are his true subject matter in Greed and Glory. Early on he writes, "[H]uman folly and foibles--not the bottom line of profits, not the business acumen, not scientific management or the perfect marketing plans or execution--often determine the success or failure of an organization.' Thus it was at Lehman Brothers Kuhn Loeb, and thus it surely is at most any place in America where two or more people have gathered together to make a profit. When business writing fails, it is almost always because of the failure to appreciate this most fundamental insight.

Ah, but rare is the business reporter who has as much human folly to work with as Auletta had at Lehman Brothers. There was, to begin with, the culture of the place, which was almost pathologically self-destructive.' "Investment banking had been changing from a business based in large measure on personal relationships,' Auletta writes, "to a business based on a variety of transactions and an instinct for gambling on interest rates in stock market shifts and the invention of new financial instruments.' To put it another way, a business that had always been the quintessential old-money establishment profession, a profession in which connections are the most important asset and lunch the most important part of the day, was being transformed into just another tough business, in much the same way that the nation's law firms had been transformed by a newly demanding marketplace. Every investment bank, no matter how old or prestigious, had to adapt or die; but in some of the oldest firms, the changes that had been forced on them had led to tensions that can be described only as class resentments. For instance, the changes had led to a new breed of investment bankers called "traders,' who made money (or lost it) by risking the firm's capital in arbitrage and the securities markets. In the world of investment banking, they were considered the parvenues. The old guard--the Wall Street elite who looked down their noses at the traders--were the "bankers,' who carried out the traditional functions of an investment bank: advising a company on acquisitions, underwriting stock issues, and so on. The bankers still had to hustle for business to a degree that would have been unimaginable even two decades ago, when the bond between a banker and his client was thought to be unbreakable (ha!); nonetheless, they liked to think of themselves as several cuts above their trading brethren.

At most firms, this tension was manageable. But not at Lehman Brothers. Lehman Brothers absolutely seethed with tensions and resentments and backbiting and bitterness. The traders made most of the profits at the firm; yet the bankers held most of the top management positions. The traders felt they worked the hardest; yet the bankers got the most obscene of Lehman Brothers' obscene bonuses. Lehman Brothers was founded by Jews, yet the Jewish traders (Glucksman especially) felt at arms length from the snobbish blue-bloodedness that permeated the banking sections of the firm. Pete Peterson recalled for Auletta how difficult it was to force the bankers even to share the same building as the traders. (Until 1980, the two divisions had operated out of different quarters.) "They [the bankers] found them [the traders] a lower form of species,' Peterson said. "Those guys over there were referred to as "animals,' as crude.' . . .'

Part of the problem, as Auletta astutely points out, was that there was no sense of shared enterprise at Lehman Brothers. For years the firm had encouraged a go-it-alone ethic among its bankers, who saw themselves as independent entrepreneurs who did deals not for the greater glory of the firm but for the greater glory of themselves. Partners often saw themselves in competition not with Goldman Sachs but with each other. The idea of "fairness,' though much talked about in the abstract at Lehman Brothers, was about as foreign a concept among the partners as, say, socialism. What mattered was not whether profits were distributed fairly but whether "I got mine.' Thus the definition of fairness became whether my bonus was larger than yours. That this ethic created an extraordinarily fragile basis on which to build a partnership was something that became evident to the partners only after it was much too late.

But a great deal of the problem had to do with the two men at the top of the firm, Peterson and Glucksman. The two men not only lacked the managerial skills to diffuse the tensions at Lehman Brothers but over time came to represent the two most extreme poles in the battle between the bankers and the traders. Ironies abounded, most of which Auletta deftly captures. Peterson, the ultimate establishment insider, friend of Henry Kissinger and occasional author for The New York Review of Books, is a self-made man, born and raised in Kearney, Nebraska, and an alumnus of Kearney State Teachers College--and forever starry-eyed about having been accepted by the establishment. Glucksman, meanwhile, who ran Lehman's trading operation while raging at what he saw as Peterson's snobbish, effete behavior, began his life far more comfortably than his rival. Peterson, who takes pride in his therapy and likes to say that he is in touch with his subconscious, was completely oblivious to his own pomposity and to the multitude of slights he inflicted on others, Glucksman included. Glucksman, who ousted Peterson in a power play and promised to bring the firm together at last, immediately rended it further apart by promoting traders and demoting bankers. Brilliant trader though he was, Glucksman's inner resentments made him incapable of running Lehman Brothers, and his great failing was his inability to see this about himself. Having taken charge of the firm, he was loath to merge or sell; yet it was his coup d'etat that probably made a sale inevitable. And then there is the great final irony that Pete Peterson, who had made something of a career warning about bloated federal pension benefits and greedy federal workers, almost brought down the Shearson-Lehman Brothers merger by refusing to scale back the frighteningly greedy golden parachute he had negotiated for himself--a package that, by my calculations, brought him around $20 million.

Greed, in fact, was evident everywhere at Lehman Brothers; it permeated the atmosphere and fouled it. Greed is what motivated the partners--probably the only thing that motivated them. If the saga of Lehman Brothers proves anything at all, it is that people have to have more at stake in an enterprise than money. Pride of product, a feeling of self-worth, a shared sense of identity, something. When greed is the only glue binding an organization together, sooner or later the organization's going to fall apart.

The thing to understand about investment bankers is that they make huge sums of money, sums that defy all logic or rationable. (And you wonder why every MBA in America wants to be an investment banker!) By contrast, lawyers and doctors look like so many Ralph Naders. Here, for instance, is Auletta detailing a few of the bonuses--not salary or valuable partner's stock, mind you, just bonuses--given out by Lehman Brothers in 1983: "Glucksman's bonus jumped from $1.25 million in 1982 to $1.5 million (and since Peterson's severance agreement guaranteed him the same bonus as his former co-CEO, that was his bonus as well); Richard Fuld, whose trading operation attained record profits, also received $1.5 million, down from $1.6 million the previous year. (Glucksman thought it would look unseemly if his protege received more than he did.) Shel Gordon went from $400,000 to $1 million (according to Bob Rubin, Gordon complained when his bonus did not match Fuld's); Bob Rubin's rose from $700,000 to $900,000; Jim Boshart's went from $300,000 to $400,000 and Henry Breck's from $250,000 to $325,000.' In such a poisoned environment, the absurd, and comical, self-pity of the rich took hold. Partners squabbled for higher bonuses and felt deep and lasting wounds when someone got more than they did. Reality, and the worth of the work they did, went out the window. ("Arguments here,' one partner told Auletta, "always revolved around what the other guy got, not on what you needed to live on.') So out in the open was greed at Lehman Brothers that when Glucksman made his one big try at keeping the firm whole, he did it not by invoking the great Lehman name or its long and honorable history but by devising a plan to make the partners more liquid. "He knew,' Auletta writes, in a passage that neatly illustrates the heights to which self-pity had risen at Lehman Brothers, "that despite the hefty sums each received, many partners complained of being cash poor; they could not afford expensive Manhattan co-ops or second homes in the Hamptons.' The heart aches for these poor, down-trodden investment bankers. But with that kind of mentality, is it any wonder that when push came to shove, the partners were going to "cash out' at the first tremor of a business downturn? There simply wasn't anyone on the premises who believed enough in Lehman Brothers to try to save it.

What is one to make of all this? My own feeling is that there's not much to lament here. Lehman Brothers pretty much got what it deserved. All the post-merger breast-beating about the loss of a "great institution' is belied by the gruesome particulars of Auletta's reporting. Truly great institutions have more at stake than whether a partner can cash out when he wants.

But Auletta can't help but see in his story a sad metaphor for the state of investment banking today. Towards the end of the book, he takes the position that most of respectable Wall Street took at the time: that the disappearance of Lehman Brothers into the maw of the giant American Express Corp. is something worth mourning, a symbol that an era has ended. "One does not have to romanticize the robber barons of the last century,' Auletta writes, "to recognize the rootlessness, the frequent absence of a sense of tradition in today's high-overhead, transactional world of Wall Street.' He adds, "[T]he death of Lehman signals the passing of a way of life--of a handshake as solid as a contract, of mutual respect between client and banker, of fierce but respectful competition, of a belief in something larger that self--in this case, The Firm.'

Well, maybe. Myself, I get suspicious when people start talking about the good old days, and I wish Auletta had been a little more skeptical about this bit of Wall Street conventional wisdom. Without question, it is true that the pressure to "do the deal'--and hence add to the firm's bottom line--has caused most of today's investment bankers to care not a whit whether the deal they are structuring makes any sense or not. (But doesn't some of the blame for this rest with the nation's CEOs for allowing themselves to be so easily led around by the nose by their investment bankers?) And it's also true that in the new transactional environment corporate loyalties run very thin indeed, having more to do with who's offering the best deal than with long-standing ties. (Though it's hard to see why anybody but investment bankers would find this something worth bemoaning.)

But the old days had their problems, too. Wall Street was rife with snobbery and elitism--for decades, proper breeding was practically a requirement for becoming an investment banker-- and, notwithstanding the fact that some of the most heralded names in investment banking are Jewish, it was rife with anti-semitism. The fees were only a smidgen less outrageous in the old days than they are today, and the deals that were put together were not necessarily better. It's worth remembering that the era of "the conglomerate' --one of the great lasting disasters of postwar American business--took place during the old days of investment banking.

What was most different about the old days-- and what I think the old-line investment banker really misses when he longs for that bygone era--was that there wasn't any competition to speak of between firms. It was an utterly comfortable profession, requiring very little in the way of such unseemly tasks as, say, hustling business. You didn't have to worry about whether your client would fire you if you made a mistake, since he never did. And there was that great seductive feeling of being able to huddle with the CEO of one of "your' companies and make momentous corporate decisions without having to worry about such nuisances as stockholders and boards of directors. Whether the net evils of the modern age outweigh the net evils of the good old days is something I don't pretend to know. But I do know that the answer is a good deal less pat and that the subject deserves a keener analysis than it gets from Auletta.

But this is quibble. What sticks with you after you've finished with Greed and Glory on Wall Street is the reporting: the telling details, the well-drawn portraits, the sense of Lehman Brothers as an emotional cauldron on the verge of bubbling over. And it seems to me a very good sign for the future of business reporting that talented non-specialists like Ken Auletta are finding it a subject worthy of their considerable skills. Business writing has come a long way in the last decade, with pathbreaking books like In Search of Excellence and regular front-page stories in The Wall Street Journal that take seriously the idea that corporate cultures can spell success or failure and the tremendous expansion of business coverage in places like The New York Times. Not every story is laudable, of course--too often the business page can be reduced to a kind of yuppie sports page--but it does seem to me that business writing aims higher and hits the mark more often than just about any other journalism in America today. To cite one recent example, just look at Alex Jones's first-rate dissection in the Times of the decision to sell the Louisville Courier-Journal.

If Greed and Glory on Wall Street falls a little short in its analysis, it is nevertheless an important next step in the evolution of business reporting. Auletta has brought to this task the same seriousness of purpose and all-encompassing curiosity that marks his best work--The Underclass in particular. As a result, the level of reporting in Greed and Glory is just that much higher than in any business book I've ever read; and the intelligence at work that much keener; and the exploration of the psychology of the office that much deeper. And, as a result, there's now a new bench-mark by which business books will be judged.
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Copyright 1986, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Nocera, Joseph
Publication:Washington Monthly
Article Type:Book Review
Date:Mar 1, 1986
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