USA; LEHMAN FALLOUT, NYT

In Lehman Fallout, Two Stars Are Given Lesser Roles

Lehman Brothers

Erin Callan, left, and Joseph M. Gregory have been removed from their posts but will remain at Lehman Brothers.

By LOUISE STORY and JENNY ANDERSON

Published: June 13, 2008

After 10 nightmarish days inside the headquarters of Lehman Brothers, nerves on the 31st floor continued to fray. By Wednesday evening, the president and chief financial officer were out — a dramatic attempt by Richard S. Fuld Jr., Lehman’s pugnacious chief executive, to restore confidence in his beleaguered bank and safeguard his own job.

CNBC Video: Timeline of Callan's Lehman Career

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Times Topics: Lehman Brothers Holdings Inc.

The move, announced Thursday morning, claimed Erin Callan, whose rise to chief financial officer seven months ago made her the public face of Lehman and one of the most senior female executives in an industry dominated by men. It also brought down her mentor, Joseph M. Gregory, who presided over Lehman’s push into risky mortgage investments, with disastrous results.

The announcement capped a tumultuous few days at Lehman, which stunned Wall Street on Monday with news that it had lost $2.8 billion in the second quarter and would raise $6 billion from investors.

That admission, after repeated assurances from Ms. Callan and other executives that Lehman’s finances were sound, set off a plunge in the bank’s share price that some feared might unleash the kind of panic that brought down Bear Stearns. For Lehman, the slide has been remorseless: 8.7 percent on Monday, 6.7 percent on Tuesday, 13.6 percent on Wednesday. The shares sank 4.42 percent more on Thursday, bringing the total loss over the last four weeks to 47 percent.

But the removal of Ms. Callan, 42, and Mr. Gregory, 56, who will remain at Lehman in diminished roles, may not erase doubts about the future of the bank and of Mr. Fuld, one of the longest-serving chief executives on Wall Street.

While Lehman is unlikely to founder, partly because it has access to a government lending program put in place after Bear’s collapse, some analysts doubt that Lehman can thrive as an independent firm.

To replace Ms. Callan and Mr. Gregory, Mr. Fuld named Ian Lowitt, 44, as chief financial officer and Herbert McDade III, 48, president and chief operating officer.

“Our credibility has eroded,” Mr. Fuld wrote Thursday in a memorandum to employees. “The current market environment is forcing us to take a number of measures to regain the confidence of all our constituents.” Analysts agreed.

“The Street has lost confidence in management, and they’ve got ground to recover,” Lauren Smith, an analyst at Keefe, Bruyette & Woods, said of Lehman. “In times like this, I think change is good.”

But only days ago, it seemed inconceivable that Mr. Gregory, who has run all of the firm’s major capital markets divisions, would lose his job. He and Mr. Fuld are so close that they often wander in and out of each other’s offices, discussing both family and business. Last Saturday, as Lehman scrambled to drum up new investors, the pair had dinner together with their wives.

This week, though, Lehman’s stock plunged in a deluge of selling, despite the capital raising, which one person close to the firm said was over-subscribed. Still, several analysts downgraded the company, and it became clear that a drastic step was necessary.

On Wednesday afternoon, Mr. Gregory and Mr. Fuld discussed their options. Shortly before the market closed at 4 p.m., the two decided Mr. Gregory would resign, said a person close to the situation. He will remain at Lehman in an unspecified role.

Ms. Callan, feeling the pressure, resigned a few hours later, that person said. She will return to work in Lehman’s investment banking division.

It is a remarkable turnabout for Ms. Callan, who, unlike Mr. Gregory, played no significant role in Lehman’s mortgage business. A tax lawyer by training, she stepped into a storm when she became chief financial officer in December. For months, she tried to dispel rumors that Lehman might run into trouble like Bear Stearns. In recent weeks, she struggled to rebut criticism of Lehman by David Einhorn, a hedge fund manager who is betting against Lehman stock.

Now, it will fall to Mr. Fuld to persuade both investors and employees that Lehman is sound. He plans to meet with the managing directors in New York and London next week to try to improve morale. Lehman may yet sell part of itself to a strategic investor in South Korea, which would most likely buy the stake in the open market, said a person close to the talks.

On Thursday, Mr. Lowitt and Mr. McDade, known as Bart, received a standing ovation when they addressed employees on Lehman’s trading floor. Mr. Fuld tried to rally his troops with a speech over the bank’s internal speaker system.

“Einhorn didn’t lose us $2.8 billion — we lost it,” Mr. Fuld said, referring to the hedge fund manager who has been shorting Lehman’s stock. He added: “Now let’s get out there and beat” them.

Mr. Fuld may be cheerleading now, but in the last few months, as Lehman’s troubles mounted, he left the cheerleading to Ms. Callan. Analysts were surprised that he did not speak on a conference call with them on Monday when Lehman announced its loss.

Mr. Fuld’s public absence has baffled many investors, but others are less generous. “Where is the C.E.O.?” asked Jeffrey A. Sonnenfeld, a senior associate dean at the Yale School of Management. “Where is the revered Richard Fuld?”

As Lehman’s spokeswoman, Ms. Callan became a lightning rod for investor anger.

Ms. Callan persuaded fellow executives to disclose more financial information to investors than chief financial officers typically do. She also alerted investors in May that hedges that Lehman had put in place to cushion its losses had fallen apart.

On Monday, Ms. Callan ended her call with analysts by saying, “I’m going to be happy to be back here talking to you again next week,” she said. On Thursday morning, however, Ms. Callan gathered belongings from her office and drove to her house in East Hampton on Long Island, her sister said. Ms. Callan was napping and could not come to the phone.