• Choose a category
• All
• Classic-Fiction

In many ways, Lehman was no worse than any of its peers. But what was peculiar was

one of its reasons for staying bullish on the housing market. A senior executive said,

quite seriously, that part of Lehman's push in the mortgage space stemmed, according to

his observation, from Joe Gregory's desire to encourage a protege, the mortgage chief

Ted Janulis. Janulis had sold his New York apartment to one of Fuld's daughters.

Gregory always talked him up. (In the Myers-Briggs typology, the senior executive

further explained, Janulis was the only senior manager besides Gregory who tested "F"

for "feeler." ) In 2006 Lehman's subprime mortgage arm employed nearly 4,000 people.

As early as 2005, the so-called smart money--namely Deutsche Bank, JPMorgan, and

Goldman Sachs--had started backing out of the business and scrambling to hedge its

remaining exposure, while the dumb money--Bear Stearns, Lehman, Citigroup, and

Merrill Lynch--all seemed to be pursuing a strategy best summed up by former Citigroup

CEO Charles O. "Chuck" Prince in June 2007, when he told the Financial Times that "as

long as the music is playing, you 've got to get up and dance. We' re still dancing."

("Music" was Prince's metaphor for liquidity--which anyone with a Bloomberg terminal

could have told him by that time had dried up.)

Lehman Brothers, however, had even bigger problems on its balance sheet than subprime

mortgage collateralized debt obligations (CDOs)--it had some massive mortgages of its

own, leveraged loans and in 2006 Mark Walsh still wasn't finished investing in

commercial real estate.

Walsh had unparalleled access to the firm's balance sheet, which he used to directly

invest in thousands of commercial real estate deals--something that made Lehman unique

among its peers. Fuld loved Walsh's strategy, many of his former colleagues speculate,

because it mirrored that of a private equity firm and put Lehman in direct competition

with his old rivals at Blackstone Group--and also, obviously, because during the boom it

was immensely profitable. Former colleagues estimated that Walsh's real estate

investments accounted for 20 percent of the firm's record profits of $4 billion in 2006.

But this success came at a horrible price. When the housing market began to turn at the

end of 2006, and as foreclosures began to spike across southern California, investors

wanted out of a partnership Walsh had previously struck with Boris Elieff, the founder of

SunCal Companies, which invested in undeveloped land in southern California. Walsh

returned the investors a small profit and transferred $2 billion in SunCal to Lehman's

balance sheet.

But Walsh was not yet leery of the commercial real estate sector. In 2007, when some

property developers were skeptically referring to Lehman as "the lender of last resort,"

Walsh spearheaded a deal--along with Barclays and Bank of America--to finance

Tishman-Speyer's $22 billion buyout of Archstone-Smith, a massive portfolio of East

Coast rental properties in May 2007.

It was a controversial move. Walsh did it partly because he believed, along with leading

research at the time, that a fall in the residential market can be good for rental apartments.

But within the firm there was dismay at yet more billions of illiquid assets being moved

onto the balance sheet to pay for it. The voices of dissent within Lehman got louder. Bart

McDade, whose equity division had closed out the year with a record annual revenue of

$4 billion, was scared by the large amount of debt piling onto the firm's balance sheet. He

knew that the facts behind the housing bubble were troubling, and he was deeply worried

by the firm's exposure to commercial real estate, mortgages, and loans.

So too was his former deputy, now the head of fixed income, Mike Gelband, and

technically Walsh's boss who had issued his first dire warning about the coming housing

crash to "Fortress FID" almost two years previously.

Subsequently, in