• Choose a category
• All
• Classic-Fiction

showed was that he had no idea who his audience was. We were people who could lose a

million in the final two weeks of the year. That was our business. It showed us he had no

clue about what we actually did."

"Of course they didn't like me," Cohen retorts. "I was younger than a lot of them, I was

their boss, and they were a bunch of difficult guys."

The Lehman veterans continued to isolate themselves from the rest of the company. In a

small sign of rebellion, Pettit's troops answered their phones with "Lehman," snipping off

the prefix "Shearson."

"They were tough people, and they made money," recalls John Cecil, a McKinsey

consultant who was brought in by Pettit and who would later become the firm's chief

financial officer. "No one wanted to mess with them, because they were known as people

who'd push back if you'd try to tell them what to do. They took over other businesses in

the company, and they hired most of the other people who went on to be senior

management."

Cohen tried to exert control over LCPI, but this was a revolution that wouldn't be put

down. The Lehmanites took pride in running circles around him.

Cohen had to negotiate between LCPI and Shearson/American Express mainly over two

subjects: LCPI 's compensation and the amount of leverage (or, as the American Express

board saw it, risk) that was kept on its books. The latter was always a subject that greatly

alarmed the American Express board, mostly made up of industrialists, like David Culver

and Richard Furlaud, who had a collective heart attack when they saw a balance sheet of

$90 billion. "To them this meant huge risk must be being taken," says Cohen.

In fact this was not necessarily the case. The balance sheet was often inflated by low-risk

hedged U.S. Treasury trades and repurchase agreements (repos)--a common practice on

Wall Street, but not in the more conservative credit card business. "They [Amex] didn't

quite get the mechanics of the whole thing," said one source.

Cohen told Fuld to make sure that at the end of each quarter the leverage got taken down,

to placate both the board and the rating agencies. (In fairness to Lehman, it was not the

only bank that made money by raising leverage between quarters--all banks did it.)

Cohen suspected that LCPI had a secret cushion, but according to several senior LCPI

executives, he was never told the precise size of what was known on the LCPI floor as

"Dick's reserve."

The Lehman traders did their best to make sure Cohen and Robinson couldn't tell what

gambles they were making, and what enormous stakes were on the table. "Dick's reserve"

might as well been called "the daily fiction"--which, in fact, it was. A former managing

director says it worked like this:

Every day we would report up to Shearson and American Express our P&L [profits and

losses] for the day. We knew that the management upstairs, if they saw the P&L going up

and down dramatically--one day we made a lot of money, and the next day we lost a lot

of money--they'd know that we were betting a lot of money, and taking a lot of risk. But

if our P&L looked like a nice steady EKG kind of thing, then everything was okay. So on

the days we made a lot of money, Dick didn't report all of it, and when we lost a lot of

money, he took a little out of that kitty to make that day 's P&L not as bad. We called that

kitty [kept on a piece of paper] "Dick's reserve."

A nice story, but neither Peter Cohen nor the rating agencies were fooled for long.

Toward the end of each quarter, it was standard practice for rating agencies like Moody's

Investors Service and Standard & Poor's to ask banks to write down their risk. Cohen told

Fuld to get it done. Fuld went to Pettit, who managed the deleveraging. But on one

memorable occasion the chain was broken and chaos ensued.

In 1987 Cohen told Fuld to take his leverage down. Dick passed on the news to Jim

Vinci, Pettit's staff officer.

Fuld said, "I made another deal