Ward, The Devil's Casino

Over the weekend I read Vicky Ward’s The Devil’s Casino: Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers (Wiley, 2010). Ward, who started off her career in England as a gossip columnist and is now a contributing editor for Vanity Fair, focuses on the people who ran Lehman and the culture they instilled. It’s harder to mourn the demise of the firm after reading this book.

Take, for instance, the chapter entitled “Lehman’s Desperate Housewives.” The wives of the top brass at Lehman were expected to attend countless corporate and social events, they were told what charities they were expected to donate to and how much they were expected to give, they were expected to dress appropriately for every occasion, and they were expected to attend the annual summer get-together at the Fulds’ ranch in Sun Valley, Idaho, where (among other things) they were expected to hike. One wife hated the rigorous hike up Bald Mountain so much that she arrived in Sun Valley with a fake cast on her leg. Unfortunately her scheme failed because another wife, higher up in the pecking order, arrived with a real broken leg and announced that, broken leg or not, she planned to climb.

The Lehman dress code was taken seriously. Dick Fuld’s motto was “Sloppy dress, sloppy thinking.” The dress code extended beyond the office. For instance, on the golf course men were expected to wear either a golf or a button-down shirt and khaki pants. And when the co-head of global equities appeared at an off-site meeting dressed business casual, Fuld announced “Off-site, yes. Out of mind, no.”

To meet these expectations and to indulge themselves some Lehman executives and their wives relied on outsized personal staffs. Niki Gregory had a staff of about 30 who seemed to do everything except shop for shoes; that she did herself, filling a closet “twice the size of the Jimmy Choo store in New York.” Joe Gregory had his own domestic staff of 30, presumably to take care of his fleet of boats, multiple houses, and private planes. And Erin Callan, named CFO in 2007 despite no finance background, saw nothing wrong with talking to the Wall Street Journal about her personal shopper at Bergdorf Goodman even as Lehman was fighting for its life.

To those who know Wall Street culture these stories may seem typical, not unique to Lehman. Worse, they may seem irrelevant to the financial crisis. I have no first-hand knowledge, but throughout Ward’s book one could see ways in which corporate expectations led to group-think. Just as no one in the upper echelons could challenge the dress code, so no one seemed prepared to challenge Lehman’s appetite for risk. The firm rewarded loyalty and discouraged dissent. In 2007 Hank Paulson warned securities firms to recapitalize, but Lehman kept growing its leveraged businesses and piling on billions of debt. The head of risk management was demoted and subsequently left; “she says she couldn’t believe the stupidity of what she was seeing—and she had seen a lot.”

Joe Gregory introduced a diversity program at Lehman, which received much praise. But diversity is useful to a firm only if it brings with it a diversity of opinions, not just a diversity of sex, skin color, or sexual orientation. And this diversity of opinions must have a voice. It’s hard to run a business effectively in an echo chamber. The demise of Lehman Brothers bears sad witness to this fact.