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has done. I suspect that some of the authorities applaud Lehman's accounting ingenuity."

But, he cautioned, "If there is no penalty for misbehavior--and, in fact, such behavior is

rewarded with flattering stories in the mainstream press about how to handle a crisis--we

will all bear the negative consequences over time."

Lehman's stock price fell a dollar from $29.50 and slowly drifted lower.

Lehman's executive committee was squirming. "She's been caught in her underwear," one

of them later griped. But Callan, "spiraling out of control," according to someone on the

executive committee, continued her media blitz, shilling for Lehman, and herself.

Around this time David A. Viniar, Goldman Sachs 's 53-year-old CFO, picked up the

phone and called Callan. He was concerned for his young rival, who seemed to be on

CNBC every time he turned it on. Viniar had held his seat for nine years and no one had

ever seen him on TV. He wanted to pass along some friendly advice: He didn't think the

young CFO was helping herself or Lehman by taking on Einhorn or the short sellers in

the open like this.

According to Callan's colleagues, she wasn't overly receptive to the call. When he

suggested they meet, she said she didn't have time. "I think she may have thought he was

the enemy, Goldman Sachs," says Michael Thompson, her ex-husband, in her defense.

But even Fuld always took the calls of his Goldman Sachs counterpart, Lloyd Blankfein.

A couple of years back, Fuld's son Richie even went to work for Goldman Sachs. Callan

seemed to think she was too good to speak to a rival CFO. What had happened to the

smart young banker? Where was her judgment?

"We didn't know she would turn into a rock star," Tom Russo said later.

And that was just the beginning. In the Saturday edition of the Wall Street Journal on

May 17, right before Einhorn's devastating speech, a long profile on Callan concluded

with a snippet about her personal shopper at Bergdorf Goodman. Her colleagues were

appalled. She was now the most senior woman on Wall Street, Lehman was fighting for

its life, and this was how she was presenting herself to the most important business paper

in the country?

Callan had been given little or no guidance on this stuff by Gregory, according to Russo.

She had just done her own thing.

"She wanted the limelight. As smart as she was, she should have been smart enough to

know her own limitations," says one of her former colleagues, adding that she should

have known enough to turn down the job of CFO when she was offered it, "and she

didn't."

During the buildup to George Walker's June wedding, Callan stayed out of the limelight.

She knew that this time there could be no gloss on the earnings she had to sign off on.

Lehman was about to report a $2.8 billion loss for the second quarter, its first quarterly

loss as a public company. She needed to prepare the market for this very bad news.

But on June 4, three days before the Walker wedding, an article appeared in the Wall

Street Journal by Susanne Craig, breaking the news that Lehman was considering a

"capital raise." This was technically incorrect, and it made Lehman look like it was

running scared. Freidheim, who kept a tight lid on the communications staff, went

ballistic when he read it. Sources say he went through the Lehman phone records to find

the leak.

"Lehman had been looking for a strategic partner for the past three years and equity in the

open market--not a capital raise," he told people at the time. The distinction was

important--a capital raise would dilute the stock and therefore lower its price, while an

open-market purchase of equity from a strategic partner would not.

In the logs, Freidheim found calls from Callan's office to the Wall Street Journal.

Fuming, he reported this to Fuld and Gregory, telling them, "We should consider all

options, including firing her."

"We can't," Gregory said. "She's under a lot of pressure with the earnings coming up. We

don't want her distracted