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exposure to Mexican bonds and related counterparties and it looked like Mexico could

default soon. At the time, Lehman was worth only $3.5 billion.

Steve Carlson, the head of emerging markets, which had put $1 billion of Lehman money

into Mexican tesobonos (dollar-indexed, peso-denominated short-term government

bonds), was exposed firsthand to Pettit's fury, which was aimed more at Gregory than at

Carlson. Pettit had known about Carlson's $1 billion exposure; he had not known about

the other $4 billion that cropped up in other parts of the business--fixed income,

derivatives, financing desk, and foreign exchange. "He was really pissed off with Joe,"

says Carlson. "Pettit told Carlson to consolidate and manage all of the risk underneath the

emerging markets umbrella. This earned Carlson the sobriquet "Five-Billion Guy."

Carlson and his team aggressively halved the positions and moved the remaining

exposures into a special purpose vehicle (SPV), which got them off the balance sheet and

shielded the firm from mark -to-market losses on those assets.

Still, as long as Mexico was vulnerable, so was Lehman. Moody's downgraded the firm.

Mexico was saved only when Robert Rubin, Clinton's Treasury secretary, stepped in on

February 21, 1995, and underwrote the country's debt.

While Lehman waited to see if the peso was going to bring them down, Pettit called

Gregory and Carlson into his office every Friday for a risk-management meeting and

update. "Take me through what you got--how is the risk reduced?" he'd ask sarcastically.

"Nice work, buddy," he'd add to Joe. Carlson winced. He liked Gregory and felt bad for

him.

The real purpose of these meetings with Pettit, it seemed to him, was to chew Gregory

out. "He was really pissed at Joe," says Carlson. " He would say really nasty things to

Joe," "and I could see that the blood between them was toxic." In fairness to Pettit, it's

true that Gregory had not been watching the store. Pettit also demanded that most of the

emerging markets employees be fired.

Tensions got so high that during an emerging markets executive committee meeting

headed by a senior confidant of Pettit 's, Jim Carbone, Carlson started to thump the table

in anger. Somebody had made a comment about "crazy poor risk management." Carlson

felt that it had been forgotten that his business was not responsible for the $5 billion mess

and banged the desk because he felt the emerging markets team was doing a good job

under the circumstances.

Gregory called Carlson into his office. He said, "Don't lose your temper." Carlson

replied, "Just like Chris does with you?" He added that he was tired of watching Pettit

berate Gregory each week. "It makes me sick," he said.

At this, according to Carlson, Gregory turned around and kicked his trash can, shattering

it. "He got in my face," says Carlson. "I said, ' Looks like I touched a nerve, didn't I?' "

A week later, Carlson was demoted.

Gregory told Carlson he had decided that Carlson had become the symbol of the

"Mexico" problem. Gregory cried when he told him the news. Carlson believed that

Gregory was doing this only because he thought this would help repair Gregory's

relationship with Pettit. He told Carlson that he had to move him off the floor in order to

protect him to get him out of Pettit's line of fire.

But the rift between Gregory and Pettit was by now irreparable.

Even the Pettit family noticed they no longer saw as much of Joe. Now--according to

Lara Pettit--her father was tight-lipped and never discussed Gregory.

She also says she never heard her father say anything remotely derogatory about Fuld.

"He was always completely respectful of him," she says.

In a telling sign, the carpool was breaking up. Tucker and Lessing still drove in together,

but Pettit and Gregory gradually found their own ways in. Pettit drove; Gregory got

himself a driver.

Chapter 8

The Stiletto

The thing about Martha Dillman is she definitely wasn't

a femme fatale or some sort of Mata Hari who tried to reel