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March 29, 1993, Golub fired Hill.

"Where's Dick on this? " was Hill's first question to Golub. "In the office next door,"

replied Golub. In other words, Fuld already knew.

Gallatin, who had by now earned the official title "minister without portfolio," says that

Hill's exit was inevitable. "Golub knew he had to spin off Lehman, and between the two

of them [Hill and Fuld], the one he least wanted to deal with was Hill, because Hill was

this mature, brilliant M&A banker he didn't want to have to negotiate with. It didn't cross

his mind that maybe by now Dick Fuld had every attribute that made Tom who he was."

Gallatin thinks that Fuld was now finally ready to apply all that he'd learned in his socalled postgraduate studies of Tom Hill. "He realized that there was only going to be one

leader--but who? In Dick's mind, that was a silly question: it was going to be him."

Chapter 7

Independence Day

I knew I would be retiring soon. I thought: "What the heck."

I will take it upon myself to fight one last battle for Lehman

Brothers.

--Ronald Gallatin

In early winter of 1994, Harvey Golub hosted a meeting in a conference room in lower

Manhattan to negotiate the spin -off of Lehman with his hand-picked opponent, Dick

Fuld. With Hill gone, Fuld knew he needed help getting favorable terms from Golub,

who knew Fuld wanted desperately to be the next CEO of Lehman Brothers. If Fuld was

too disagreeable in these negotiations, Golub had the power to fire him, thus ending Fuld

's campaign to get the top job. To help him, Fuld had brought John Cecil and Ron

Gallatin.

After announcing that he planned to spin American Express out, Golub blithely told Fuld,

Cecil, and Gallatin that he'd leave Lehman with $2.8 billion in equity--enough, he said,

for them to get a single A rating.

Gallatin smiled at Golub and said, "Three point six."

Gallatin's counter-proposal was understandable. He believed Golub was trying to

shortchange Lehman. With only $2.8 billion on their books, with a strong fixed income

department but weak banking and equities arms, Lehman needed a cushion. But Golub

thought Lehman could get by on $2.3 and was furious that his half-billion of padding

wasn't enough for Gallatin. He screamed, "Two point eight!"

Gallatin, still calm, his voice low, repeated, "Three point six."

Perhaps thinking he hadn't much to lose--he was nearing retirement--Gallatin decided he

would be the one to fight for Lehman's future, and maybe establish his legacy as well.

Golub screamed at Gallatin, "You can convince them to give you an A rating with $2.8

billion!" Gallatin smiled again and said, "Maybe I could, but I' m not going to."

Golub told everyone at the table that it was $2.8 billion or "I will crush you like a fly!"

Some executives were startled at his display of temper.

Gallatin calmly threatened to take the story to the press--and reminded Golub that he had

already announced he would be doing the spin-off at a single A rating. Gallatin's

implication was obvious: Did Golub want to look like he wasn't keeping his word?

Would people start to wonder about the sincerity of the management of American

Express?

In the end, Gallatin won out; but when Lehman was finally spun off, it had a few onerous

terms foisted on it by Amex.

Golub forced Lehman to buy from Amex several floors in the World Financial Center at

top-of-the-market prices, so they were now "co-tenants." Together, Lehman and Amex

had issued $700 million to $800 million of long-term notes to finance the property.

Lehman's share of this debt was about 50 percent, but the debt was guaranteed by Amex,

to whom Lehman had to pay a "guarantee" fee of 928 shares, and Nippon Life Insurance

Company acquired 72 shares of Lehman redeemable voting preferred stock. There was

also a noncompete clause with regard to bankers; Lehman could not hire any American

Express bankers for eight years (fortunately the Lehmanites didn't want to). Amex would

be entitled to 50 percent of Lehman Brothers'