stock at book value. They had to pay $20 per share when it was trading for $14.)
Less than a year after Lehman went public, Moody’s would downgrade its rating.
It was time for Fuld, Pettit, Gregory, Tucker, Lessing, and their band of merry men to do what they did best—roll up their sleeves and go to war.
----
According to the methodical John Cecil, Lehman had to do four things if it hoped to survive.
Above all, it had to cut costs—there was still a vast amount of fat, including luxuries such as the barbershop and shoe-shine stand on the executive floor, and Lehman was paying out over half of its revenues in compensation and another 41 percent in “nonpersonnel expenses.”
Not only was cutting costs “the right thing to do,” Cecil argued, but it would also buy them time and capital to grow their other businesses. Still, there was the inevitable push-back. One person joked, “When the milk came out of the refrigerator and they replaced it with dairy creamer, we knew it was a bad market.”
Cecil also decreed that the nepotism had to stop. Family members and friends could no longer be hired unless they actually merited a spot. (Steve Lessing, in particular, was infamous for placing an inordinately large number of alumni from Fairfield University, his alma mater.)
The new recruiting strategy was largely led by Joe Gregory and Pettit, and only the best would be hired. According to Tom Tucker, “the best” did not mean “the elite.” In other words, Harvard MBAs were welcome in areas such as investment banking, where Harvard MBAs were likely to do well. In other areas, like bond sales, Lehman was looking for people who were hungry and could work in a team.
The third goal was to be competitive in all capital market areas, globally, beginning with Europe and Asia.
The fourth and most important part of Cecil’s survival strategy was to fix the culture of the firm. “Doing the right thing for the firm” and “One firm” had to be more than platitudes. Everybody had to buy into that ethos if Lehman was to become the place Dick Fuld, Chris Pettit, Joe Gregory, Steve Lessing, and Tom Tucker wanted it to be.
Cecil thought this was crucial for many reasons, but chiefly because he knew that a securities house could be ruined at the whim of a single trader. The only way to stop “selfish ” or “foolish” acts of trading, as he called them, was to get people to always consider the firm’s return on equity ( ROE )—and not just their bonuses—before acting. In pursuit of this Cecil introduced the restricted stock unit ( RSU )—as a form of payment to every “firm member.”
The higher up you were, the higher the percentage of your bonus paid in company stock. Top-tier executives received 50 percent of their bonuses in stock that was restricted for five years while it vested. The amount of stock each employee got was scaled according to pay, but even the janitors participated in this compensation plan.
While there was much about Pettit’s “one firm” culture that Cecil lauded, there was one aspect that nagged at him—and this issue never went away. He saw a dark side to the mantra of sticking together—it encouraged people to place a value on loyalty over ability.
Even so, Cecil was optimistic. He reflected years later: “I don’t think I would have joined Lehman if it hadn’t gone public and if I hadn’t seen that the culture could change. Until then, it hadn’t been run for profitability. It had been run for the bonus pool.”
----
But Cecil was dismayed by the firm’s first earnings report in the fall of 1994.
It was $22 million.
When Cecil first heard that, he shook his head and thought, “The world’s going to hate that number. ” He was surprised and annoyed that Fuld and Pettit didn’t seem disturbed by that posting. He says Pettit told him, “Twenty-two million dollars is a good number.” Tom Tucker, however, hotly disputes this. “Chris Pettit would never have thought $22
Less than a year after Lehman went public, Moody’s would downgrade its rating.
It was time for Fuld, Pettit, Gregory, Tucker, Lessing, and their band of merry men to do what they did best—roll up their sleeves and go to war.
----
According to the methodical John Cecil, Lehman had to do four things if it hoped to survive.
Above all, it had to cut costs—there was still a vast amount of fat, including luxuries such as the barbershop and shoe-shine stand on the executive floor, and Lehman was paying out over half of its revenues in compensation and another 41 percent in “nonpersonnel expenses.”
Not only was cutting costs “the right thing to do,” Cecil argued, but it would also buy them time and capital to grow their other businesses. Still, there was the inevitable push-back. One person joked, “When the milk came out of the refrigerator and they replaced it with dairy creamer, we knew it was a bad market.”
Cecil also decreed that the nepotism had to stop. Family members and friends could no longer be hired unless they actually merited a spot. (Steve Lessing, in particular, was infamous for placing an inordinately large number of alumni from Fairfield University, his alma mater.)
The new recruiting strategy was largely led by Joe Gregory and Pettit, and only the best would be hired. According to Tom Tucker, “the best” did not mean “the elite.” In other words, Harvard MBAs were welcome in areas such as investment banking, where Harvard MBAs were likely to do well. In other areas, like bond sales, Lehman was looking for people who were hungry and could work in a team.
The third goal was to be competitive in all capital market areas, globally, beginning with Europe and Asia.
The fourth and most important part of Cecil’s survival strategy was to fix the culture of the firm. “Doing the right thing for the firm” and “One firm” had to be more than platitudes. Everybody had to buy into that ethos if Lehman was to become the place Dick Fuld, Chris Pettit, Joe Gregory, Steve Lessing, and Tom Tucker wanted it to be.
Cecil thought this was crucial for many reasons, but chiefly because he knew that a securities house could be ruined at the whim of a single trader. The only way to stop “selfish ” or “foolish” acts of trading, as he called them, was to get people to always consider the firm’s return on equity ( ROE )—and not just their bonuses—before acting. In pursuit of this Cecil introduced the restricted stock unit ( RSU )—as a form of payment to every “firm member.”
The higher up you were, the higher the percentage of your bonus paid in company stock. Top-tier executives received 50 percent of their bonuses in stock that was restricted for five years while it vested. The amount of stock each employee got was scaled according to pay, but even the janitors participated in this compensation plan.
While there was much about Pettit’s “one firm” culture that Cecil lauded, there was one aspect that nagged at him—and this issue never went away. He saw a dark side to the mantra of sticking together—it encouraged people to place a value on loyalty over ability.
Even so, Cecil was optimistic. He reflected years later: “I don’t think I would have joined Lehman if it hadn’t gone public and if I hadn’t seen that the culture could change. Until then, it hadn’t been run for profitability. It had been run for the bonus pool.”
----
But Cecil was dismayed by the firm’s first earnings report in the fall of 1994.
It was $22 million.
When Cecil first heard that, he shook his head and thought, “The world’s going to hate that number. ” He was surprised and annoyed that Fuld and Pettit didn’t seem disturbed by that posting. He says Pettit told him, “Twenty-two million dollars is a good number.” Tom Tucker, however, hotly disputes this. “Chris Pettit would never have thought $22
Similar Books
