Too Big to Fail [71]
McCarthy went on to conclude that “many people today believe that globalization has somehow killed off the natural business cycles of the past. They’re wrong. Globalization did not change anything, and the current risks in the Lehman balance sheet put us in a dangerous situation. Because they’re too high, and we’re too vulnerable. We don’t have the firepower to withstand a serious turnaround.”
Around that same time, Gregory invited Gelband to lunch “just to talk.” The two men had never seen eye-to-eye, and Gelband suspected another agenda. They met in the executive dining room on the thirty-second floor, and after chatting for a while, the conversation took a hard shift.
“You know,” Gregory said firmly, “we’ve got to do things a little differently around here. You have to be more aggressive.”
“Aggressive?” Gelband asked.
“Toward risk. You’re holding back, and we’re missing deals.”
To Gelband’s thinking, Lehman had in fact been pushing through a number of deals that didn’t make much sense. They were piling up too much leverage, taking on too much risk, and getting into businesses in which they lacked expertise. At times there appeared to be no strategy whatsoever guiding the firm. Why had Lehman paid nearly $100 million for Grange Securities, an insignificant Australian brokerage? Earlier there had been discussions about becoming a player in commodities. Had there been a sound reason for acquiring Eagle Energy, a marketer of natural gas and electricity started by Charles Watson, other than the fact that Watson had been a longtime Lehman client, as well as an old pal of Skip McGee? Meanwhile, the firm seemed willing to finance buyouts indiscriminately; loans to private-equity firms were piling up on the books. Some would get securitized and sold, but the pipeline was clogging up.
None of that seemed to bother Gregory; the deals that did concern him were the ones that Lehman had failed to get a piece of, like the blockbuster $5.4 billion acquisition of Stuyvesant Town and Peter Cooper Village, a sprawling complex of more than 11,200 apartments on the East Side of Manhattan. Lehman had joined forces with Stephen Ross’s Related Companies, the developer of the Time Warner Center, to bid on the project, but lost out to Tishman Speyer and Larry Fink’s BlackRock Realty Advisors. Adding insult to injury was the fact that Lehman considered Tishman, which it had helped buy the MetLife Building for $1.7 billion in 2005, one of its closest clients.
Because the real estate division technically reported to fixed income, Gregory held Gelband responsible for the missed opportunity on Stuyvesant Town. “We’re going to need to make some changes,” he said, implying that Gelband should let a couple of heads roll on his staff.
The following day, Gelband took the elevator up to see Gregory, who was in a meeting. Gelband barged in and said, “Joe, you said you wanted to make some changes? Well, the change is me.”
“What are you talking about?” Gregory asked.
“Me. I’m done. I’m leaving the firm.”
“I am very disappointed” was Dick Fuld’s characterization of his personal reaction to Lehman’s second-quarter earnings in a report released at 6:30 a.m., Monday, June 9. The loss was $2.8 billion, or $5.12 a share. A conference call was scheduled at 10:00 a.m. to discuss the result, but by then the blood sport was already well under way on CNBC.
“Dick Fuld is Lehman. Lehman is Dick Fuld,” said George Ball of Sanders Morris Harris Group. “You’ve got a management that wears the corporate logo on its heart…. It’s got to hurt enormously.”
Fuld and Gregory were watching the coverage in Fuld’s office when David Einhorn of Greenlight Capital appeared on the screen.
“Are you saying ‘I told you so’ this morning?” the CNBC interviewer