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year, and profits fell by over half. In July, the employees who could afford to do so

bought Lehman stock; Fuld sensed that at $14 the purchase would be a steal. He bought a

lot.

By the end of October, Fuld owned more than 179,000 Lehman shares, the majority

purchased at $25.54 per share; Pettit owned more than 132,000 shares. It wasn't a tactic

they could use forever, but it worked in the short term; and over the long term, it made

them all very rich, at least on paper. "We had the last laugh," says Ronald Gallatin.

"The stock did trade poorly initially," says Cecil, "in part because there hadn't been a

market created for the stock, really, as a new company, but also because these shares

were given to American Express shareholders, who really wanted to own American

Express." Those folks quickly dumped their Lehman stock, devaluing it.

Adding to the new company's problems: In 1994 the Federal Reserve tightened interest

rates, which, as a general rule, impacts the price of bonds negatively, and thereby

weakened Lehman's fixed income division. Its share price fell 30 percent in just five

months, from $20 per share when it first went public in May to $14 per share in October.

(In a final kick to the 14 or 15 executives on Lehman's operating committee, Golub had

made them buy the stock at book value. They had to pay $20 per share when it was

trading for $14.)

Less than a year after Lehman went public, Moody's would downgrade its rating.

It was time for Fuld, Pettit, Gregory, Tucker, Lessing, and their band of merry men to do

what they did best--roll up their sleeves and go to war.

According to the methodical John Cecil, Lehman had to do four things if it hoped to

survive.

Above all, it had to cut costs--there was still a vast amount of fat, including luxuries such

as the barbershop and shoe-shine stand on the executive floor, and Lehman was paying

out over half of its revenues in compensation and another 41 percent in "nonpersonnel

expenses."

Not only was cutting costs "the right thing to do," Cecil argued, but it would also buy

them time and capital to grow their other businesses. Still, there was the inevitable pushback. One person joked, "When the milk came out of the refrigerator and they replaced it

with dairy creamer, we knew it was a bad market."

Cecil also decreed that the nepotism had to stop. Family members and friends could no

longer be hired unless they actually merited a spot. (Steve Lessing, in particular, was

infamous for placing an inordinately large number of alumni from Fairfield University,

his alma mater.)

The new recruiting strategy was largely led by Joe Gregory and Pettit, and only the best

would be hired. According to Tom Tucker, "the best" did not mean "the elite." In other

words, Harvard MBAs were welcome in areas such as investment banking, where

Harvard MBAs were likely to do well. In other areas, like bond sales, Lehman was

looking for people who were hungry and could work in a team.

The third goal was to be competitive in all capital market areas, globally, beginning with

Europe and Asia.

The fourth and most important part of Cecil's survival strategy was to fix the culture of

the firm. "Doing the right thing for the firm" and "One firm" had to be more than

platitudes. Everybody had to buy into that ethos if Lehman was to become the place Dick

Fuld, Chris Pettit, Joe Gregory, Steve Lessing, and Tom Tucker wanted it to be.

Cecil thought this was crucial for many reasons, but chiefly because he knew that a

securities house could be ruined at the whim of a single trader. The only way to stop

"selfish " or "foolish" acts of trading, as he called them, was to get people to always

consider the firm's return on equity (ROE)--and not just their bonuses--before acting. In

pursuit of this Cecil introduced the restricted stock unit (RSU)--as a form of payment to

every "firm member."

The higher up you were, the higher the percentage of your bonus paid in company stock.

Top-tier executives received