Flowers of Evil
It’s a funny thing, fidelity. Last week’s enormous bankruptcy-report filing on shady financial practices at the late Lehman Brothers investment house depicts an internal braintrust desperate to conceal reckless debt transactions and deceptive accounting practices from public view. The court-appointed examiner in the firm’s bankruptcy proceedings, Anton Valukas, found that senior Lehman officials tried to alert their bosses of blatant efforts to reclassify debt as “sales” under a recondite accounting trick known in house as “Repo 105”-so named because it permitted the company to assess buy-back transactions of assets sold for cash at a value representing 105% or more of the cash the company actually pulled in. And presto, Valukas observes: “Unbeknownst to the investing public, rating agencies, Government regulators, and Lehman’s Board of Directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption.”
In other words, notes the Wall Street Journal reporting team of Mike Spector, Susanne Craig, and Peter Lattman, what normally would appear as debt exposure was minted, in the alchemy of creative internal accounting, into assets: “Assets shifted away from Lehman’s balance sheet, reducing the amount of debt it showed to investors.”
Months ahead of the firm’s September collapse, its global financial controller, Martin Kelly, had warned senior Lehman finance chieftains Erin Callan and Ian Lowitt that the transactions presented the firm with “reputational risk” should they come to the light of day; Kelly told Valukas, meanwhile, that “the only purpose or motive in the transactions was reduction in balance sheet” and “there was no substance in the transactions.” Lehman Chief Operating Office Bart McDade portrayed the deals rather more pithily in an April 2008 email; they were, he explained in the teen-inflected cyberspeak that investigators no doubt instantly recognized from the Jack Abramoff email archives [PDF], “another drug we r on.”
The Lehman deceits, of course, are only exceptional for their forensic detail-similar balance-book hijinks at other major Wall Street houses will take considerably longer to come fully to light, sloshing around as they are in an oversight-challenged state of TARP-turnaround. Still, the Valukas revelations also make for bracing reading alongside Vicky Ward’s expose of the weirdly obsessive Lehman domestic cult in Vanity Fair’s April “Money” issue. The piece, excerpted from Ward’s forthcoming book The Devil’s Casino, shows former Lehman head Dick Fuld taking a Captain Queeg-like interest in the stability and longevity of the marriages in the firm’s overwhelmingly male inner circle. After Fuld saw Karin Jack openly arguing with her husband Bradley, Lehman’s banking head (and later co-chief operating officer), Fuld continually pressed his colleague for reassurance on the state of his union. “He really wanted to know,” Karin recalled. “He didn’t think Brad and I looked happy enough. It really worried him.”
Signs of marital discord had been a companywide cause for worry ever since a palace coup in 1996 to topple Fuld’s predecessor, Chris Pettit, after Pettit abandoned the inhouse Lehman code of anxiously monitored fidelity to embark on an affair with a female Lehman colleague. It’s a well worn piece of company lore, Ward notes, that Fuld once scandalized a major client after a business dinner by refusing to spring for a post-prandial hooker.
But as is often the case with policers of marital rectitude, Fuld’s firm was much stronger on points of public etiquette than it was in the traditional understanding of what it is to be family-friendly. Karin Jack notes, for example, that her husband, after setting out to support her as she went into labor, was instead forced to turn around to attend a major client meeting in Hong Kong. After she was conscripted to handle a household move entirely on her own, she received a flower bouquet and a note of consolation from Lehman managing director Teddy Roosevelt IV (yes) that apologized because “all we do is steal your husband.”
This Foucauldian regime of total marital surveillance went into overdrive at the firm’s annual retreats in Sun Valley, Idaho. After being flown in on firm-owned jets, each couple was met by one in a vast armada of black S.U.V.’s. In the morning, the wives would be marshaled for punishing, competitive hikes up nearby Bald Mountain-Karin Jack recalls that Fuld himself would pantomime pushing her forward for the final upward stretch. (She once tried to shun hiking duty by faking a leg injury, replete with a phony cast-only to be one-upped by another go-getting Lehman wife who arrived in an actual leg cast and nevertheless professed her intention to march grimly up the mountain regardless.) When she awoke one morning to find that the hiking-wives’ corps had left without her, she instantly put Brad on alert that his star was in decline. (And she was right-he was demoted a few months later, and left the firm in 2005; the Jacks divorced in 2008, both informing Ward that the intrusive reach of the Fuld regime had irreparably harmed their marriage.) Small wonder that ambitious Lehman execs on the make would cannily trade their domestic partners up when they were perceived as a career liability; equities-division fella Joe Gregory, for instance, was divorced from his wife Teresa in 1999. The poor woman “didn’t fit in at the Lehman dinners,” one of Ward’s informants recalls; Joe took to abandoning her at Fuld family functions, Karin Jack remembers-”She needed help, guidance, and Joe didn’t give her any.”
By the following year, Joe had teamed with a recently divorced “Greek beauty” named Nicki Golod, who helped propel Joe into the front ranks of the high-living Lehman nomenklatura. She’d conduct detailed tours of her cavernous shoe closet when other Lehman wives would come calling to the couple’s spread in Huntington, Long Island; Joe, meanwhile, eschewed the LIRR for a seaplane and helicopter to navigate his daily commute, and appeared to relish telling his colleagues that his annual living expenses were in the $15 to $20 million range. Dinners at the Gregory home would mobilize a domestic staff of 30 kitchen and household workers.
One can’t help but be struck by how starkly these closely monitored pecuniary displays contrast with the haphazard state of the books that Lehman was nominally expected to treat as its main order of business. Clearly, the most effective way to signal your playerhood status to a Comstock-minded boss like Dick Fuld was to pile up your domestic holdings to a potlatch-style scale. But the tragic plight of the Lehman executive, of course, was that the transactions financing these suburban fortresses were, in market terms, the very kind of nonstarter that Joe Gregory’s first marriage proved to be. Still, you have to give this much to Dick Fuld: even as he presided over the gruesome Lehman endgame, he still hewed to his high ideals of domestic order. In Lehman’s final swoon in fall 2008, he’d imposed an inhouse gag rule forbidding comment on rumors of the firm’s impending sale, and he still had a female executive tasked with monitoring the condition of the flowers in the company meeting rooms. It would be a fitting gloss on his keen interest in the inner workings of marriage had he recalled that Lady Macbeth was scouring her hands not so much to remove the stain of blood as to mask its smell.
Chris Lehmann would like to remind you that his last name has two n’s.