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about that company on a Friday, particularly in the afternoon. Nobody can do much about

it, but the traders talk about it over the weekend, and everybody who's got exposure to the

subject of the rumor gets nervous over the weekend--when they can't do anything about

it, of course. And then they cut their exposure on Monday, driving the price down. And

that seemed to be what was happening to us."

Since drops in the stock price are taken as an indication that a company might be in

trouble, Lehman knew it was crucial that it calm investors and clients. "We started to get

pressure on liquidity," Cecil says. "Basically people wanted larger 'haircuts,' wanted more

secured financing, less unsecured financing. It became generally more difficult for us to

get financing for certain kinds of assets."

Cecil says that both Jeff Vanderbeek and Steve Lessing, together responsible for all sales,

equities, and fixed income, "did an absolutely wonderful job of keeping together the

firm's funding base," and kept the firms ' clients in place.

Lessing says, "I would spend 16 hours a day on the phone with clients. We'd say, 'This is

where the firm is, we 're fine, we're viable. We' re going to have a profitable quarter. . . . '

At that point the whole executive committee worked extremely hard; we were all

hunkered down on the client side, keeping the funding of the firm going. Those were the

most intense days that I've experienced in my 22 years--the patch in '98 where there was

a real thought that the firm could fail, and we actually ended up having a record year."

Fuld had his own uncharacteristic fix for this problem: he decided to go on the offensive

and go out to the market, especially the equity market. He hit the road and visited client

after client, along with Cecil and Lehman's talented risk manager, Maureen Miskovic,

recently hired from Goldman Sachs.

What Fuld told the market was this: Lehman's credit exposure to hedge funds amounted

to $447 million, of which $72 million was uncollateralized. The firm's potential jeopardy

in regard to Long-Term Capital Management was $32 million, against $41 million of

U.S. Treasury collateral. The firm's emerging markets risk was $305 million. Contrary to

the rumors, the firm was in good shape.

This was the moment that all of Fuld's elocution and public speaking lessons paid off.

Cecil says Fuld calmed his investors. "Clients were looking at us the way we'd looked at

Meriwether--' Do they seem scared, or do they seem comfortable with their position? Do

they have a good plan for the short-term period of difficulty and for the longer term?' In

times like that, Dick can be very, very effective. And it 's kind of a 'What makes you

good makes you bad' kind of thing--he was very forceful about the firm. And it worked."

Fuld also worked with Cecil to placate the rating agencies, which wondered if Lehman's

credit risk was going up because of pressure around liquidity. At one point Cecil feared

Standard & Poor's wouldn't hold its rating. He went to Fuld and said, "We' re dead." Fuld

replied, "Can't be. Go back." He then lay down in the corridor outside of his office and

looked up at the diminutive CFO.

"Do you just want me to lie down like this?"

Cecil went back to S&P and prevailed.

By November the fuss had died down. At the end of the year, the firm had $4.1 billion in

revenue--an increase of 6 percent. Earnings per share rose from $4.72 to $5.19, meaning

that Lehman shareholders received a 20 percent increase in their common stock dividend.

But Cecil took his time signing off on the balance sheet. He was concerned that as CFO

he could announce earnings that spoke of the size of the balance sheet not just for the

year-end, but for the future. He wanted to be sure the figures were correct and easily

verifiable.

Cecil does not recall Gregory "or the guys in banking" having any involvement in any of

this. "Joe had absolutely nothing to do with the financials," he says pointedly.