I guess by this time, at the age of thirty-eight, I had caught up to them. But the main thing was, I wanted to make Larry proud of me. I mapped out my work regime: up at 4:00 A.M. A.M. and into the gym, a full planning program evolving in my head while I worked out. On my second day, armed with the card that would get me through the vast marble entrance hall, I moved swiftly to my third-floor desk, touching down at 5:55 and into the gym, a full planning program evolving in my head while I worked out. On my second day, armed with the card that would get me through the vast marble entrance hall, I moved swiftly to my third-floor desk, touching down at 5:55 A.M. A.M. I had always outworked every one of my colleagues. I had always outworked every one of my colleagues.

But to my amazement, there were a lot of people already at work on the trading floor. It was not yet at full blast noisewise. But there was heavy action, since it was 11:00 A.M. A.M. in London and noon in Paris and Germany, and they were still trading on Hong Kong's Hang Seng and the Nikkei in Tokyo. The cries of the traders split the morning air, which was blasting in cold. Everyone was in their shirtsleeves, unwilling to show the weakness of being bothered by the temperature. All around there are shouts-"Lift!" "Hit!" "Source!" "Five up!" "Five by five!" "Work five on the follow!" "Work it!" It was about three ticks from pandemonium, and more and more people were arriving, apparently oblivious to the whole new language I was hearing. Later I realized that I was pretty well in tune with everything being said, but some of the phraseology was unique to Lehman. in London and noon in Paris and Germany, and they were still trading on Hong Kong's Hang Seng and the Nikkei in Tokyo. The cries of the traders split the morning air, which was blasting in cold. Everyone was in their shirtsleeves, unwilling to show the weakness of being bothered by the temperature. All around there are shouts-"Lift!" "Hit!" "Source!" "Five up!" "Five by five!" "Work five on the follow!" "Work it!" It was about three ticks from pandemonium, and more and more people were arriving, apparently oblivious to the whole new language I was hearing. Later I realized that I was pretty well in tune with everything being said, but some of the phraseology was unique to Lehman.

By seven o'clock the place was jumping. At 7:10 there was not one empty coat hanger in the five huge closets with their splendid mahogany doors. You needed to go about half a block to find somewhere to put your jacket, a closet in a less frenetic section where it did not appear the world was facing a cash meltdown every five seconds unless you stayed sharp.

No one, repeat no one, went out for lunch. You couldn't. You dared not. You might miss a $50,000 trade, which at Lehman was tantamount to running up a white flag of surrender and looking for a different career. There were two in-house kitchens on each floor, one for the workers, traders and vice presidents on down, and one for the managing directors. Our kitchen specialized in outstanding egg sandwiches, and there was a Danish and m.u.f.fin mountain the size of Mont Blanc. You could get c.o.ke and candy, glazed doughnuts and cream-filled doughnuts, and other minor cholesterol bombs rich in energy-sapping sugar. In the afternoon you could get hot dogs, burgers, and ice cream. If you decided to make that Lehman kitchen your sole restaurant, you had a fighting chance of being dead before you reached forty-five. The managing director's kitchen was distinctly upmarket. They could get filet mignon, shrimp, and G.o.d knows what else.

Our section, however, was more or less immune to all this, because Larry was our self-appointed gourmetmeister. He rarely used the kitchen, and almost every day he sent the kids-newly hired a.n.a.lysts-out for pizzas or tacos for everyone. He ate with his men. And he refused flatly to collect one cent for anybody's lunch. He was, and is, probably the most stand-up, generous person I have ever met.

Lehman Brothers, like the great city beyond the ma.s.sive gla.s.s windows, never slept. When the trading bell sounded on the New York Stock Exchange at four o'clock in the afternoon, a lot of equity guys packed up because there was nothing more for them to do. Bank debt and high-yield debt often went till seven o'clock or later. And there were always people waiting for late calls, often from the West Coast. Those guys were there for dinner, working until ten o'clock. But the key moment in the trading day came around 6:00 P.M. P.M., when all the traders had to present their profit/loss numbers to the pit bosses-in my case to Larry and Richard Gatward. Most days the traders had normal-looking balance sheets, not too drastic one way or the other. But losses were not loved at Lehman. And if you turned in a sheet with a drop of $500,000 on the day, that was trouble. The Lehman hotshots would be aware of that in a New York minute.

In a way, Lehman was run by a junta of platoon officers. They'd all learned the basics, but they'd also spent a lot of time in combat. I think of them as battle-hardened, iron-souled regulars, guys like Larry and Alex Kirk, Mike Gelband, Peter Sch.e.l.lbach, Richard Gatward, and Christine Daley. My new commanding general was missing, however. Not missing in action, you understand. Just plain old-fashioned missing, locked in some rarefied war room on the thirty-first floor, an unseen but apparently malevolent presence. His name was Richard S. Fuld Jr.

As one of his new troop commanders, I looked forward to meeting this famous CEO. When I mentioned this possibility to Larry McCarthy, I recall him laughing, a touch sardonically, which was not all that unusual for him.

"That probably is not going to happen, buddy," he said. "I've never met him myself."

Huh? A managing director, the head of distressed-debt trading, had never met the CEO? Beat the h.e.l.l out of me. But slowly in the coming weeks I learned about several unorthodox aspects of Fuld's character. I spoke to a few people who met him a couple of times a year. But there were a few guys who had never even seen him.

When Lehman's CEO arrived by limousine in the morning at a VIP entrance at the back of the building, his driver had already called ahead alerting the front desk in the lobby of his majesty's imminent arrival. The front-desk attendant then hit a b.u.t.ton programming one of the elevators in the rear bank to go directly to the thirty-first floor. A security guard would then hold the elevator until Fuld's arrival. This was Fuld's private transport to the heavens, the one that preserved his G.o.dlike existence. Into this rarefied capsule he slipped silently, and was, in a way, beamed up to his somber mahogany-paneled office, far from the madding crowd. He left the building the same way, which was not, I thought naively, much of a way to keep your finger on the pulse.

"I hear he's a very defensive guy," said Larry.

"You mean he's paranoid?"

"Paranoid? h.e.l.l, no. He just thinks everyone's out to get him." Which was, in case you hadn't noticed, vintage McCarthy.

There was, it seemed, no doubt that our spiritual leader and battlefield commander was an extremely remote and watchful character, surrounded by a close coterie of cronies, with almost no contact with anyone else. And I suppose that was fine so long as the place was chugging along without civil war or mutiny breaking out, and continuing to coin money, which is after all the prime objective of the merchant bank.

But I sensed there was something deeply disquieting about his strange wraithlike presence, this oddball demiG.o.d who ruled everyone's lives. Quite simply, people were afraid of him, even though they couldn't see him. And this was a fear based upon reputation, because through the years Fuld had fired many, many people, for a thousand different reasons. Popular local intelligence, however, suggested that the most prevalent way of incurring his rank displeasure was to be so clever that you threatened his power base.

He worked within a tight palace guard, protected from the lower ranks, communicating only through his handpicked lieutenants. And as the years went by, d.i.c.k Fuld had tightened his circle, shutting out more and more key people from the downstairs floors where the daily action seethed, where the trading battles ebbed and flowed, where more critical information flew around than anywhere else in the city. That was the place from which he had, to all intents and purposes, removed himself. In the process, he had become separated from the most modern technology and the ultramodern trading of credit derivatives-CDO (collateralized debt obligations), RMBS (residential mortgage-backed securities), CLO (collateralized loan obligations), CDS (credit default swaps), and CMBS (commercial mortgage-backed securities).

Stories about long-departed commanders were legion. There were mind-blowing tales of the Fuld temper, secondhand accounts of his rages, threats, and vengeance. It was like hearing the life story of some caged lion. Tell the truth, I ended up feeling pretty darn glad I wasn't meeting him. There was something of the night about this guy, and it all dated back to the early part of the 1980s, when he and his chief cohort had not quite covered themselves in glory. In fact, he had been instrumental in one of the biggest screwups in Lehman's long history, and not surprisingly, there was a touch of Prince Machiavelli about the whole episode.

Richard S. Fuld, New York born and bred, graduated from the University of Colorado and earned his MBA at NYU's Stern School of Business. He joined Lehman in 1969, which was, with terrifying irony, the year Bobbie Lehman, the last of the family partners, died. Some say the grand old Wall Street firm died with him.

In any event, Fuld, who began his career fresh out of college as a commercial paper trader, moved steadily up the organization. By the high summer of 1983 he was a well-established bond trader, and in a ferocious bull market, Lehman was under the rule of joint chief executive officers, who were just about as similar as JFK and Nikita Khrushchev. On one hand, there was the urbane former secretary of commerce in the Nixon administration, Washington heavyweight Peter G. Peterson, and on the other there was Lewis Glucksman, the short, overweight, hotheaded man who occupied the position of Lehman's chief of trading. It was Peterson who as CEO had elevated Glucksman to share the position of co-CEO in June 1983. As a general expression of his undying grat.i.tude, Glucksman had Peterson paid off and thrown out of the corporation within eight weeks of his own elevation to one of the two big chairs.

It was a shocking error in judgment by Glucksman, rooted in some perceived slight by the establishment investment banker Peterson toward the rambunctious, hard-driving trader. And it ended an unlikely ten-year partnership that had taken Lehman into a realm of profit never before seen. In 1982 Glucksman's traders had made an astounding $122 million, twice as much as the more staid but rock-solid investment bankers who were being forced to take a backseat.

When Glucksman struck, he struck hard, if a tad gracelessly He told his old boss, Peterson, he wanted him gone by September 30. He was, it seemed, tired of Peterson's image, wining and dining media types and other CEOs and appearing in the society pages, while he, shirtsleeves rolled up, never even went out for a quick lunch because he was so busy trading, making money, and getting the results that counted. In truth, it was Peterson's priceless contacts that had allowed this old-style merchant banker to make Lehman the fourth-largest investment house on Wall Street. But the sloppy, disheveled Glucksman did not see it that way. He saw only this beautifully mannered, highly educated former member of the Nixon administration moving effortlessly around town in a way he could never hope to achieve.

When Peterson took his money and left, Glucksman elevated his thirty-five-year-old protege, Richard Fuld, to become a member of the board, and appointed him global head of equity and bond trading. With Lehman turning profits of more than $15 million a month, Glucksman could do more or less as he wished, and it swiftly became obvious that the venerable bank had moved into a new era-the Glucksman/Fuld era, when these swashbuckling, rough-edged traders took over from the traditional sure-footed bankers.

With Glucksman rampaging around the premises doing his level best to establish a reputation comparable to that of Attila the Hun, a curious power struggle was developing between the traders and the bankers, who still dominated the ranks of the firm's seventy-six partners. In the end, though, there could only be one winner. Glucksman's traders were moved onto the board, and some partners, most of whom lived in fear of the tyrant from the wrong side of the tracks, began to depart. Lew a.s.sumed complete control in October 1983, and almost from that moment things changed.

It should be remembered that my sources were mostly old-timers at the bank, probably with a few axes to grind. Nonetheless, there are several indisputable facts that should be conveyed, especially as Fuld's career is so significant. From the moment Glucksman took control, Wall Street was in a raging bull market, and that year profits soared from $122 million to $148 million. The traders were on a ferocious roll, with America's baby boomers, now hitting their forties and getting richer, piling their cash into new mutual funds and Wall Street private money management accounts. It was a trading paradise. And Glucksman's plain desire to be respected and feared, not liked, saw him swiftly attain all-powerful status.

He expanded the board, installing his cronies, not so much with the other directors' approval but because none of them wanted to rock the boat when the bank was coining money at a breathtaking rate. Glucksman turned into a steamroller, driving through his wishes and whims, uninterrupted, unenc.u.mbered. It was a serious and destructive misuse of power. d.i.c.k Fuld looked on with admiration for his rampant mentor, certainly not disapprovingly.

Glucksman had the board and all of his department heads in his back pocket. And almost immediately he began to take on more risk, such as the venerable investment house had never dared in all their history. There was a growing suspicion that this hustling trader was in over his head, but that did not prevent Glucksman from approving an annual salary and bonus of $1.6 million for his protege. The Lehman traders were now responsible for $4 of profit for every $3 made by the corporate bankers.

Glucksman seized control of the executive committee and forced several of the investment bankers to sell shares back to the corporation at book value, for immediate distribution to the traders. Fuld did well. Thanks to Glucksman's largesse, his own share count went from 1,700 to 2,750, valued around $1,000 apiece. As your average bonus grab goes, this one went high and tight.

Divisiveness and tension were rife at Lehman during this time, and by early 1984, predictably, the talent started to walk. Six prominent bankers, led by Eric Gleacher, left that spring. And, as partners, they took the firm's capital with them, at book value-17 percent of it, straight out the door. Lew Glucksman and d.i.c.k Fuld adopted an increasingly embattled stance, detested by many of their own banking partners.

At around this time, there were large financial supermarkets popping up all over Wall Street. Created by mergers and acquisitions, there were suddenly new and powerful ent.i.ties in the game, outfits with balance sheets that were already big and burgeoning by the hour. There was Prudential Bache, Shearson American Express, Dean Witter Sears, and Salomon Phibro. Suddenly there was fear and insecurity among the smaller "boutique" investment houses, and nowhere was this more p.r.o.nounced than at Lehman Brothers, where the remaining partners were braced for another walkout, since talent had become so transferable. There was a suspicion that Lehman Brothers was too small, too dependent on winning all of their trading skirmishes while the big guns of Wall Street exploded with capital and threatened to crush the life out of even the most powerful old-school investment banks, like Bear Stearns and Goldman Sachs.

Some bankers on the Lehman board believed the only way forward was to merge with a much bigger partner and proceed from there. They accepted this would mean a total loss of ident.i.ty, and that the oldest continuing trading partnership on Wall Street would be gone forever. But no one was having much fun under the Glucksman/Fuld axis and several of the partners were happy to cash out and leave.

At the back end of 1983, in response to persistent rumors that the Lehman board might be open to offers for the firm, the agricultural commodity giant ConAgra made a $600 million bid. Lew Glucksman did not report it to the board, which was a truly heinous act of treachery in an old established partnership, especially since the offer erred on the reckless side of generosity.

However, both Lew Glucksman and d.i.c.k Fuld, for different reasons, did not want to sell. They wanted to hold their positions of power and command in the vanguard of this famous old Wall Street warrior. They wanted that power and influence as dearly as they wanted life itself. It was an all-consuming hunger both shared.

It was true that both Fuld and Glucksman loved money, personal money, stuff-it-in-your-pockets money-more, more, more, millions and millions of dollars. And there was an attraction in the fast buck for the quick sale. But Lehman's boardroom gave them status, and they each liked that at least as much as cash.

In the early 1980s, there were still many gentlemanly traits left in the traditional old finance houses in New York. And one of them is extremely difficult to understand unless you were born with it, which neither Glucksman nor Fuld was. In the broadest terms, it is the difference between natural greed-quiet, well-concealed avarice, understated self-interest-and the kind of undisguised, naked greed that men like Glucksman and Fuld wear like a misplaced badge of courage. They wear it not because they mean to offend but because they cannot help it. They know of no other way. And it betrays them every time; they are unable to act as the cool, enthusiastic amateur rather than the self-seeking capitalist. The tragedy is that men like Glucksman and Fuld are unable to see what it is about them that turns others against them. But deep inside, they are aware there's something. And this is precisely what leads them to those beleaguered positions, almost barricaded inside their ivory towers, snarling and growling at bad news, taking every sc.r.a.p of credit for good news, learning to enjoy the fear and dislike of others, pretending that respect is all they really want.

In the end there is always mutiny. Even one of the greatest seagoing autocrats of all time, Captain Bligh, found that out on the quarterdeck of the Bounty Bounty. Lew Glucksman and d.i.c.k Fuld found it out at Lehman Brothers in 1984. A mutiny was building right before their eyes, in the form of a splinter group around three of the most influential Wall Street financiers of all time-Peter Solomon, Steve Schwarzman, and later Shel Gordon, all Lehman partners, all of them certain a sale was the best answer.

The year 1984 did what it had been threatening to do: it turned bad for the markets. Fuld's trading desk was headed south, and he compounded his own problems by staying close to deals he had made that were unlikely to come up trumps. On the Street, it's called marrying a bad trade. Since the ConAgra bid, the Lehman balance sheet was declining, and even if it had been possible to revive it, an offer would never look anything like the $600 million Glucksman had played so close to his chest.

By midsummer, Lehman Brothers was on the run. At least Glucksman and Fuld were on the run. The board of directors had veered against them, and there seemed to be nothing they could do. Both men made attempts to trade their way back into the game, but it was too late. Power was slipping away from them. Glucksman made one last roll of the dice, persuading the board to sell Lemco, Lehman's a.s.set management business. But this was simply burning the furniture in order to stay warm. For several days, they just sat there in a kind of trance, racking their brains to solve the ever-present ident.i.ty crisis that was paralyzing the firm. Did the bank want to remain the cla.s.sic boutique investment house on which the firm was built? Or did they want to be all things to all people, like Merrill Lynch?

Their other problem was that Glucksman and Fuld had saved nothing from the prosperous years of 1982 and '83. They'd spent the money on capital investment, and increased operating expenses and technology expansion. Not to mention those heavy bonuses for themselves.

And right then, the bombsh.e.l.l dropped. A cover story in Fortune Fortune not only pointed out the current losses but elected to air the Lehman dirty laundry, highlighting the boardroom clash of philosophies and personalities. Temporarily, this story killed all interest in anyone paying $600 million for Lehman. It was a relatively vicious example of financial journalism, and it painted a grim picture of an old investment house dominated by a couple of bullying leaders, with schisms of unrest lurking throughout the company. not only pointed out the current losses but elected to air the Lehman dirty laundry, highlighting the boardroom clash of philosophies and personalities. Temporarily, this story killed all interest in anyone paying $600 million for Lehman. It was a relatively vicious example of financial journalism, and it painted a grim picture of an old investment house dominated by a couple of bullying leaders, with schisms of unrest lurking throughout the company.

Fuld did not come out of it very well, which was not really all his fault. By far the greater problem was the explosion on the Lehman balance sheet, which showed that d.i.c.k Fuld's trading operation had lost a staggering $30 million in the six-month period from October 1, 1983, to March 31, 1984. It would not be the last time a Lehman committee sat in dumbfounded amazement at the marks Fuld made on Lehman's trading positions. An added worry was the possibility that Lehman may have been hiding a.s.sets that would have materially affected the merger with Shearson. Fuld's power base was thus protected and the control he and his mentor held over the other men was maintained.

Some people questioned why the five-year European certificates of deposit on the Lehman books were not marked to market but held at face value, or par, 100 cents on the dollar. But nothing altered the big numbers, which were going from bad to worse. Lehman's profits were in free fall, its overall value plummeting at one stage to $325 million. The issue of what is known as "performance smoothing" is one that would raise its head in 2008.

The sharks were still circling, and thanks to Fortune Fortune they sensed a bargain, that Lehman could be grabbed for a lot less than the $600 million ConAgra had mentioned. Shearson American Express's Peter Cohen and James Robinson were now in active talks with the Lehman executive committee. But they were shocked by the discovery of more hidden a.s.sets on the Lehman books, used to offset trading losses. they sensed a bargain, that Lehman could be grabbed for a lot less than the $600 million ConAgra had mentioned. Shearson American Express's Peter Cohen and James Robinson were now in active talks with the Lehman executive committee. But they were shocked by the discovery of more hidden a.s.sets on the Lehman books, used to offset trading losses.

In the final reckoning, the firm's book value had fallen 33 percent. Lehman's banking partners were afraid that even more discrepancies would be found, but Shearson wanted to buy the firm, and in the end they went to $360 million for Lehman, a $175 million premium over stated book value.

Thus 132 years of Lehman history was quietly dissolved. Once the envy of Wall Street, the revered private partnership had been swallowed whole by a financial supermarket. They'd survived the Civil War and two world wars but could not survive Glucksman and Fuld. Without the counterbalance of the canny sophisticate Pete Peterson, Lew and d.i.c.k had taken exactly seven months to wreck the Lehman legend. The thirty-eight-year-old Fuld pocketed a net of $7.6 million for his 2,750 shares.

Shearson Lehman muddled through for almost ten years under the Amex umbrella. Lehman traditionalists were unhappy being a part of a financial supermarket during this time. Glucksman and Fuld, much to their credit, helped keep the Lehman spirit and camaraderie alive. Their salvation came in 1994 when Lehman was spun off as a separate ent.i.ty. Fuld grabbed the vacant helm. And from that moment, stories about him abounded, as they would continue to do throughout my own tenure at the firm.

I had read the two most prominent histories of the firm, one old, the other older, and I could not help being struck by the sharp similarities between the Fuld of the eighties and the Fuld of the present. It seemed to me he was still in some kind of ivory tower. At least that's what everyone was saying. Down on the trading floor no one ever saw him, and that represented one h.e.l.l of a lot of important people, many of whom knew almost nothing about their leader.

Greed and Glory on Wall Street, one of the books on Lehman's history, pointed out that in his previous incarnation twenty years earlier, d.i.c.k Fuld was extremely sympathetic to the concept of golden handcuffs-paying people generously with stock in the corporation, albeit stock they could not cash in for years. It held them in some kind of highly paid bondage, with their own money consistently out of reach. From what my new colleagues told me, that was still the system: big rewards and huge bonuses, but too often beyond the horizon.

Looking back down the years, d.i.c.k Fuld had seen what had happened to Pete Peterson, stabbed ruthlessly by Glucksman. Whatever affection he may have had for his old mentor, nothing could obfuscate the sheer nastiness of Lew's move against Peterson. Fuld had plainly made a vow that nothing like that would ever happen to him personally, which was probably why he had never worked with a really strong number two. Throughout all the years of his long reign at Lehman Brothers, d.i.c.k Fuld had never had a powerful deputy. That modus operandi modus operandi continued in May of 2004 when fifty-four-year-old Joe Gregory was appointed president and chief operating officer. A key factor in the appointment was that his ambitions did not apparently include becoming CEO. His great concern was with what he called the "culture" of Lehman Brothers. continued in May of 2004 when fifty-four-year-old Joe Gregory was appointed president and chief operating officer. A key factor in the appointment was that his ambitions did not apparently include becoming CEO. His great concern was with what he called the "culture" of Lehman Brothers.

Down where I worked, on the gundeck of the ship, where financial cannons roared and real people found themselves in the thick of the battle, I never once heard the name Joe Gregory as a possible commanding officer if Fuld ever decided to retire. Joe was a man who stayed well clear of the action, heard the explosions only from afar, never smelled the cordite. Never saw the blood of heavy losses.

Joe was mostly closeted with Fuld up there on the thirty-first floor. In the coming years, I would constantly hear of their scheming to keep Lehman's stock prices high, quietly obscuring bad news, loudly announcing good news, gathering vast mountains of shares for themselves.

I had no idea whether either Fuld or Gregory possessed the kind of giant brain that was necessary on twenty-first-century Wall Street, though there were certainly grave doubts cast on this score. But there was one shining truth in Lehman Brothers that could never be conquered: down here on the trading floor, there were four people who possessed, without question, the cleverest, shrewdest, most decisive minds I had ever encountered in my business career. I watched Alex Kirk, Michael Gelband, Richard Gatward, and Larry McCarthy at close quarters. I saw them s.n.a.t.c.h victory from apparent defeat. I saw them probe weakness, scent triumph, switch strategy, and lay siege to the unwary. had no idea whether either Fuld or Gregory possessed the kind of giant brain that was necessary on twenty-first-century Wall Street, though there were certainly grave doubts cast on this score. But there was one shining truth in Lehman Brothers that could never be conquered: down here on the trading floor, there were four people who possessed, without question, the cleverest, shrewdest, most decisive minds I had ever encountered in my business career. I watched Alex Kirk, Michael Gelband, Richard Gatward, and Larry McCarthy at close quarters. I saw them s.n.a.t.c.h victory from apparent defeat. I saw them probe weakness, scent triumph, switch strategy, and lay siege to the unwary.

Whatever the h.e.l.l else happened in this great financial man-o'-war, where no one could see the hand that held the tiller, I was among the safest possible company. I thought back to my dad's old alma mater, Notre Dame, and the legend of the most famous college folklore in the world. I even made my own rewrite: Outlined against sunny New York autumn skies, the Four Hors.e.m.e.n rode again. In financial lore, their names were Debt, Bankruptcy, Short Selling, and Fraud. Their real names were Kirk, Gelband, Gatward, and McCarthy Outlined against sunny New York autumn skies, the Four Hors.e.m.e.n rode again. In financial lore, their names were Debt, Bankruptcy, Short Selling, and Fraud. Their real names were Kirk, Gelband, Gatward, and McCarthy.

The backup battalions, which surrounded them every step of the way, were no less accomplished. Especially Christine Daley, for it was she who administered my first serious test of character and knowledge in the first week of my employment at Lehman.

The subject was one of the largest energy producers in the United States, the wholesale electricity giant Calpine, out of San Jose, California. At their peak, they owned almost a hundred gas turbines and power plants in twenty-one states, with natural gas fields and pipelines in the Sacramento Valley and 22,000 megawatts of capacity. Calpine ranked among the world's top ten electricity producers, with a.s.sets worth billions and billions.

They did, however, have one serious problem. Christine Daley, our iron-souled Lehman researcher, thought they would almost certainly go bust, and she was recommending we take a ma.s.sive short position in this company. That took a lot of guts, because Calpine's creed of clean energy-the cleanest possible energy, turbines off which you could eat your lunch, emissions from which spring flowers would sprout, electricity so pure and spotless it would safely caress a newborn child-made it beloved among investors.

"Bulls.h.i.t," said Christine inelegantly. "They're going down. That CFO of theirs could dance through raindrops without getting wet."

Anyhow, to return to my first major meeting, I stood before Christine, and in the first five seconds I understood why I was there. She knew all about my background in convertible bonds. She knew about ConvertBond.com, and she plainly knew that at Morgan Stanley I had never sold any of the many, many bonds issued by Calpine.

Instantly I was aware of her skepticism toward this darling of the investment world. "What do you know about them?" she asked. "And what do you think about Bob Kelly, the CFO?"

I told her I knew two major facts. They had one h.e.l.l of a debt load, a lot of it convertible. I'd never been entirely convinced about Calpine, and in turn she questioned me about who would get paid, and when, upon the bonds' maturity. She wanted to know if Calpine could settle their convertible preferred shares for cash, or whether they could just box their way out and issue more shares.

I mentioned the convertible preferred stockholders-the guys who stand one tier higher than equity in the corporate capital structure. I utilized the finest Wall Street jargon, stressing that each one of the convertible preferreds had a different delta and a different gamma.

I will not easily forget the speed with which she cut me off in midsentence. "Never mind that ConvertBond.com mumbo jumbo," she snapped. "I am concerned with what the company can do to defer paying the dividends and defer their obligations to repay these preferred shareholders, because I can see a big fight developing right here." mumbo jumbo," she snapped. "I am concerned with what the company can do to defer paying the dividends and defer their obligations to repay these preferred shareholders, because I can see a big fight developing right here."

"What kind of fight?" I asked, a bit lamely.

"The kind that starts when the preferred shareholders are senior to about $19 billion worth of debt, some secured, some unsecured," she replied. "That kind."

"Because the convertible preferred stock matures well before the debt, right? Kind of seniority by maturity," I said.

"Exactly," she agreed. "But I think the bank debtors will organize, hire some hotshot lawyer, and stage a battle in a courtroom, try to force Bob Kelly's hand, force him to cram down the preferred stockholders, while the bankers grab what there is of Calpine's a.s.sets."

"That would be a dividend roadblock, stopping all payments to the preferreds that mature in the next two years."

"Correct. They'd all lose out to the banks."

Christine Daley was as sure of her ground as anyone I'd ever met. She was convinced the cash flow of Calpine was nothing like good enough to support the gigantic debt the corporation carried. She knew there were bonds all over the place, many of them in different parts of the capital structure. There was first-lien and second-lien bank debt, senior secured notes, and a ton of unsecured straight debts. The last in line for repayment were three different convertible preferred debts.

In Christine Daley's opinion, Calpine was constantly robbing Peter to pay Paul, and constantly pushing the legal envelope, ducking and diving around the covenants that governed the financial structure of their debt. The entire corporation was structured to confuse the life out of the a.n.a.lysts as the company moved money from place to place, trying to stay solvent.

Christine did not buy it. And I could see she cared pa.s.sionately. The look in her eyes was one of pure defiance, and it was backed by a laser beam of logic from which she could not be deviated. She was determined to persuade Lehman Brothers to take a huge short position. I thought of the ma.s.sed ranks of lawyers and smart-a.s.s execs who must be lined up against her, this one voice of profound certainty that stood alone against them.

"Calpine cannot last a year," she said as I was leaving. "And we are going to make millions of dollars watching them go bankrupt. It's just a hall of mirrors. Trust me, they're already broke."

"I'm with you all the way," I told her. "I always thought they were suspect. Which is why I never traded their bonds." But she needed no encouragement. I never heard anyone express a corporation's forthcoming woes better than Christine. You don't often meet a soothsayer with an AK-47.

As I walked away from her desk, back to my own little s.p.a.ce on the computer line, I pondered that Calpine scenario. It was, of course, the oldest trick in the corporate playbook, building a vast network of separate components, corporations with different ident.i.ties, and moving cash between them. One plant needs a few million, so you get it from another, pay it out, then pay it back from somewhere else. It's a process that can go on for years, removing the money and making big transfers all over the place, until no one knows where the money is, where it came from, where it went, or even whether it's real. All the while firms like Calpine would keep coming to Wall Street and issuing more debt.

Christine knew real when she saw it. And among all of that vast sea of numbers that made up Calpine's introverted/extroverted, hot/cold, now-you-see-it-now-you-don't balance sheet, only two mattered to her: her own year-end prediction of $650 million of Calpine EBITDA (earnings before interest, taxes, depreciation, and amortization) versus a truly daunting debt load of $18.5 billion.

"They have only one real chance," she had told me. "They'll have to trip at least one of those bond covenants. They don't have any choice."

It should be remembered that the end of 2004 was a very rosy time for the fixed-income markets. And for Christine Daley to come out and predict a major bankruptcy in a healthy market and economy was, I thought, an act of supreme daring and high confidence. Also, she was vocal in her views. Her faith and resolve knew no bounds.

She knew, of course, that Calpine was continually coming to the convertible market with bond after bond, 6 percent converts-the Last Chance Saloon for an outfit trying to get their hands on heavy capital. They were always trying to convince one of their largest bondholders, the gutsy Ed Perks of Franklin Mutual Funds, to lend them even more money through those convertible bonds. That's probably the soundest way out when you have mounting operating costs, a debt mountain with rising interest expenses, and falling earnings.

Meanwhile, out on the Street there was no letup in the lovefest for Calpine stocks and bonds. For cynics like Christine and me, it seemed nothing short of a cult following, with wide-eyed investors eager to play their part in the world's cleanest industrial energy program. We could see them rushing to the colors of the green flag with missionary, idealistic zeal. Oh, to be a part of the least-polluting, newest fleet of gas turbine plants in the world. Oh, to repair that shuddering hole in the ozone layer, re-ice the Arctic, stem the warming tides, save the stranded polar bears, replant the rainforest ... Mayday! Mayday! Save our planet! Mayday! Mayday! Save our planet!

Of course, Christine Daley and I knew it should have been save our ship save our ship, not save our planet save our planet, because the green ship Calpine was holed below the waterline. For mayday mayday read read payday payday-for the Calpine directors, that is. Not for the preferred stockholders, who were about to get crunched by the banks. As were the holders of Calpine equities.

The only interested party likely to come out of this laughing was Lehman Brothers, because they had Christine Daley and they were listening to her. Go short, baby, go short, in the biggest possible way Go short, baby, go short, in the biggest possible way.

Of course, back in Calpine's headquarters in San Jose the name Christine Daley was not universally loved. Wall Street has one of the most sensitive radar systems in the world. The network is a 24/7 communications sprawl in to which every single member of the finance industry is, on some level, tuned. Christine, conducting her traditional scorched-earth policy while researching critical information, spoke to many, many important people. I am sure they asked her advice, I am equally sure people asked her about any new bond that had just been issued by Calpine. And these people were often clients of Lehman Brothers. Christine was honor-bound to provide them with an honest a.s.sessment. I am sure that for many months she turned people off Calpine, shared with them her fears that this giant archipelago of power plants carried too much debt to be considered a buy, either shares or bonds.

In sunlit San Jose, I have no doubt she was regarded as the Princess of Darkness. They did not, I hasten to add, believe she was treating them unfairly, because they knew the score as well as she did. Christine was the Wall Street sleuth who had them nailed.

After that first meeting with her, I wondered just how many people around there knew as much as she did. And it did not take me long to find out. Lehman Brothers had a meeting every Tuesday morning at seven for the high-yield/distressed-debt traders' teams, always with a guest speaker and thirty-five to forty traders and researchers in the room. Lehman believed in keeping the best information and a.n.a.lysis in front of its traders at all times, rotating different levels of expertise-the CDO maestros, the head of U.S. Treasury trading, the head of credit strategy. I could not help thinking how utterly disadvantaged the investing public was against this giant a.r.s.enal of research and talent at the immediate disposal of Wall Street's frontline traders. The standards I would be working to, once I settled in as an active trader, were the highest possible. The quality of the people was exemplary. At least it was down here on the third floor.

Aside from Larry McCarthy, I had to answer to the English-born managing director and global head of sales and convertible trading, Richard Gatward. He was a Lehman veteran of many years' standing, around thirty-six years old, a hard-nosed, stocky character who could see right through you if he suspected for one split second that you did not know precisely what you were talking about. If he'd been a Navy SEAL, he'd have been a combat instructor, drilling his team, driving them forward, testing them, letting them decide for themselves. But he was ever-present, ready for the screwup, listening for the bulls.h.i.t, poised to pounce, probing to discover your inner reserves and whether you could take umbrage and learn from it. Because if you couldn't, he had no use for you. You might as well quit right now.

Gatward wanted respect, not personal popularity. He operated on some kind of radar that informed him precisely when things might be going awry. He knew when any one of us was losing money on a trade, knew it and disliked it intensely. He treated the firm's money as if it were his own. He was loyal to a fault, and he'd have gone to the barricades for Lehman Brothers.

In my first couple of weeks as an operational trader I found out all about him. One day I had the flu. I was on time and at my post, but I was trying to fight a headache, I felt colder than usual, and I simply was not on top of my game. As usual, the pressure was mounting. The traders were yelling, instructions were being called. I had a client on the line trying to sell $5 million of Calpines, unwinding a hedged position in a convertible bond. I was on my feet, calling a swap trade. I knew full well the bond had a 60 percent delta, which meant that if the stock dropped 10 percent, the bond would lose only 6 percent of its value. For a fraction of a second my concentration slipped, and I did the trade on a 30 percent delta. That left me exposed to Calpine's mountain of debt, which we were about to short ma.s.sively, and I was suddenly and inadvertently long.

The trading floor is an arena of instant decisions: all traders are called to make markets all the time, to price the stock, price the bonds, buy, sell, or hold. And I'd just made a mistake. A big one. There was nowhere to turn. No one could help. My word was my bond. There was no going back.

Which was precisely when Rich Gatward appeared on my left shoulder, like the angel of death.

"That Calpine trade ... what delta did you do it on?" The equity trading floor around me suddenly seemed like the petrified forest. It always does when Gatward comes over. Everyone stops, watching for the scene to unfold. I knew only one thing: I'd shorted only half the stock I should have.

"Ah ... er ... Rich, I did it on a 30, but I probably should have done it on a 60."

"What's this word probably probably-what do you mean by that?" "Er ... I mean we should have done the trade on a 60 delta ..." "How many shares of stock do you need to sell right now to be hedged?"

I grappled for the bond calculator on the screen and hit the b.u.t.tons as my entire career flashed before my eyes, the way it does, I believe, when you face instant death.

"Forty-five thousand two hundred, Rich."

"Well, don't look at me. Sell the f.u.c.king stock," he snapped. I could feel every eye on the floor trained on me, and he was not finished yet. "If you're gonna work on my desk, you don't fly blind. You'd better know your deltas to the f.u.c.king penny."

"You're right. I screwed up, and I'm sorry. It won't happen again." "You're G.o.dd.a.m.ned right it won't, because if it does we're going to have a big f.u.c.king problem. Do you understand that?"

"Yes, I do. It was a mistake. It won't happen again. I'm sorry." "You'd better be f.u.c.king sorry. Right here we're dealing with the firm's capital. You're on my watch, and I have an eye on every f.u.c.king penny of risk on this desk-and if you have a problem with that, you can get the f.u.c.k out."

And with that he stormed off, back to his desk. It was as if the entire place could breathe again. People went back to work and the whole shouting, yelling, tempestuous atmosphere of the trading floor swiftly resumed business as usual.