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presentation before 150 of the firm's senior managers, warning that if they continued to

grow their leveraged businesses, they could lose billions of dollars.

Fuld heard the presentation with Gregory, but shrugged off the warning. He believed that

"the more business we can do, the better," says Kirk.

As one attendee puts it, "Dick had this idea that for every dollar of revenue you earn in

doing an LBO [leveraged buyout] you earn five more dollars of follow-on business-which, by the way, when you do the math, is actually two times. And you have to take a

lot of risk to earn all those dollars. So Dick and Joe didn't like being told to be riskaverse."

Also troubling: By 2006 David Goldfarb had been moved out of the CAO spot and made

head of strategic partnerships and principal investments, essentially giving him control

over $50 billion of Lehman's balance sheet with instructions to invest it at the very peak

of the market. (Again, according to a member of the executive committee, most of them-except for Goldfarb--realized this was because Fuld was inventing a way for him to stay

at the firm, while Gregory wanted him gone.)

By 2007 Treasury Secretary Hank Paulson had begun warning all the securities houses to

recapitalize, by slashing dividends and scaling back their balance sheets. But Lehman

ignored Paulson, too. Among Treasury staffers, Dave Goldfarb acquired the nickname

"Planet Goldfarb," because, as one of them explains, "the things he said could only be

true on Planet Goldfarb, because they weren't true on Earth."

Lehman spent most of 2007 on an otherworldly buying spree. In May, the same month

the Archstone deal closed, the firm also acquired Eagle Energy, a Houston-based energy

company, for $400 million, against the advice of Mike Gelband. Sources say Fuld

boasted that Eagle Energy, which was run by a friend of Skip McGee, would turn a

billion-dollar profit for the firm within 12 months. But over the next 12 months, Eagle

Energy would come to owe Lehman $664 million in outstanding loans. In October 2008,

the French utility giant Electricite de France SA (EDF) bought Eagle Energy out of

bankruptcy court for only $230 million, under the condition that Lehman forgive $433

million in outstanding loans. And then there was Grange Securities, an Australian CDO

distribution house Lehman paid $100 million for on the advice of Jesse Bhattal. The

acquisition happened just as "CDO" was entering the public lexicon as shorthand for the

insanity that characterized the mortgage boom of the prior few years. Gelband squawked,

but he was told to be quiet. Grange Securities was another bust.

The danger in buying up whole businesses this way, especially when it required Lehman

to pile on billions in debt, was that if the profits failed to meet the rosy projections,

Lehman could have a tough time making the payments. And unlike other firms, Lehman

made few attempts to get anyone else in on the action by securitizing its deals so

investors could buy in. Lehman kept all the risk for itself.

Gelband spent the year in constant conflict with Fuld and Gregory. Fixed income had

made $9 billion in 2006; Gregory told Gelband that he and Fuld expected $12 billion the

next year. The tension, former colleagues say, had much to do with the intellectual

disconnect between them. "Mike would say something and Dick would argue with him

because he didn't understand what Mike had said," says one observer at executive

committee meetings. "A lot of people didn't understand what Gelband said."

In May 2007, Gregory fired Gelband. "You wanted to make changes. Well, I'm the

change," Gelband reportedly said to Gregory.

Steve Lessing e-mailed Tom Tucker to say that Gregory had fired Gelband without even

giving the executive committee the opportunity to discuss it, adding that he could not

believe Gregory had been so stupid and jealous as to push Gelband out. He told Tucker

that everyone was now so terrified of Gregory that he feared