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mergers and acquisitions deals.

Peter Cohen had also made what now looked like two bad missteps. A year earlier, in the

fall of 1988, he and Robinson had stepped on their own feet when they bid unsuccessfully

for the snack and tobacco conglomerate RJR Nabisco. In a battle that exemplified the

excesses of the 1980s, they were beaten to the prize by buyout king Henry R. Kravis-events chronicled by Bryan Burrough and John Helyar in Barbarians at the Gate.

In the fall of 1988, F. Ross Johnson, a Canadian originally from Winnipeg, who was the

president and CEO of RJR Nabisco, was looking to pull off a company buyout of RJR

Nabisco and take the company private. Johnson first approached buyout specialist firm

Kohlberg Kravis Roberts & Co. (KKR) about doing the deal, but he ultimately went with

Shearson Lehman Hutton (SLH). They offered Nabisco shareholders $75 per share, or

$17 billion. But a fierce bidding war between KKR and Shearson ensued, and in April

1989, KKR emerged victorious, taking control of RJR Nabisco with its bid of $109 per

share, or $25 billion. It was a humiliating defeat for Cohen and Robinson. Johnson retired

and all of a sudden both Cohen and Robinson looked vulnerable.

Then came another fiasco.

In 1988, Cohen had bought the upscale brokerage E.F. Hutton & Company--at a vast

premium--for almost $1 billion, because he believed that Dean Witter's CEO, Philip J.

Purcell, was bidding low. (According to multiple sources, it was widely believed within

Lehman at the time that Purcell was bidding merely to drive up the price.)

When Cohen called Ron Gallatin into his office and told him what he wanted to do, and

how he wanted to do it, Gallatin said straight off that he wouldn't get involved in

something like that. Cohen asked him why, and Gallatin said: "Because it's going to take

us down."

"What are you talking about?" Cohen responded, clearly annoyed. Gallatin privately

thought Cohen was empire building, that he wanted E.F. Hutton for its size. He thought

Cohen wanted to be bigger than Merrill Lynch, which had approximately 13,000 brokers.

"Your timetable does not allow for enough due diligence," Gallatin said, "particularly

given their [Hutton's] tax shelter liability." Gallatin was reminding Cohen that Hutton

was being sued by almost every customer who had bought a tax shelter from the firm.

Hutton had also recently (May 1985) pled guilty to 2,000 counts of mail and wire fraud,

and agreed to pay a $2 million fine plus $750,000 for costs and $8 million in restitution to

the victims of a so-called check-kiting scheme. Gallatin thought buying the brokerage

was idiotic. "Hutton is falling on its ass, the markets aren't in good shape, and you' re out

of your fucking mind," he told Cohen.

Jim Vinci also came to the same conclusion. In late November he and Robert Druskin,

the CFO at Shearson Lehman, met to try to get a handle on Hutton's value. Vinci says

they began with the book value and started subtracting liabilities. It took all day.

At the end, the number they were left staring at was a big, fat zero.

"After all the adjustments, there was no book value," Vinci said. "I went home to my wife

and told her I'd just wasted Thanksgiving."

But Cohen went ahead with the acquisition. (He now says that Robinson had promised

him a cash balance of $1 billion the following year to pay for it, but that Robinson failed

to deliver--hence the implosion.)

Whatever the reason, Gallatin and Vinci were proven right. The deal went through, and

again there was a clash of cultures. Hutton brokers left Shearson Lehman Hutton in

droves. Hutton regarded itself as the superior brand, and thought of Lehman, in an

unusual twist, as retrograde. By the early 1990s what had been a brokerage of over

13,000 employees was down to 9,000 and SLH was shutting down branches throughout

the United States.

Hutton was the second nail in Cohen's coffin.

In 1990, Robinson decided he wanted to streamline