Beginning in the 1970s, financial firms started nibbling at the edges of the restrictions imposed by that act, and during the Reagan administration, banks got their snouts into the investment trough again. Under Alan Greenspan, a former director of J. P. Morgan, the Federal Reserve Board loosened the rules even further, turning Glass-Steagall into a joke by the late 1990s, when Weill effectively forced the issue with his proposed merger after receiving signals from Washington that it might just be allowed. Indeed, it soon was, thanks to the 1999 passage of the Financial Services Modernization Act. That’s when securitization, the practice of packaging loans into Wall Street–traded securities, which had played a central role in the stock market collapse of 1929, returned with a vengeance.
By 2005, Citigroup’s assets had soared to $1.49 trillion, but along with them came an investigation of its investment banking practices by New York’s attorney general Eliot Spitzer (resolved with a settlement of $400 million and promises of reform); a Federal Trade Commission lawsuit against a Citigroup subprime-mortgage subsidiary (settled for $215 million); a $120 million settlement with the SEC, which charged that the bank had helped Enron commit fraud; and a $2.65 billion settlement of class action suits over Citigroup’s part in the collapse of WorldCom. That pileup led to Weill’s departure as CEO, and after his replacement announced an ethics plan to guide Citigroup in the future, Weill started talking about leaving altogether, first proposing that he spin off a private equity fund to manage money for Citi, a plan he abandoned when its board told him he would lose his use of company jets if it went forward. Instead, he decided simply to retire.
He’d already decided on his retirement gift for himself and his wife, Joan. Weill’s homes, Judith Ramsey Ehrlich and Barry Rehfeld wrote in The New Crowd: The Changing of the Jewish Guard on Wall Street, “marked clear stages in his passage from limited means and obscurity to financial success and a high profile.” He and Joan had lived in apartments in East Rockaway on the south shore of Long Island before moving up to an attached house in the working-class suburb of Baldwin, a fancier one in posh Brookville, and a colonial on the water in Great Neck. Then, as Weill turned his brokerage firm into an investment banking powerhouse, he had a Fifth Avenue apartment he was forced to sell during a bear market, and later a home in Greenwich, Connecticut, a Park Avenue penthouse, and an Adirondacks camp.
Though he’d been thinking of buying a new place on Park Avenue and had even consulted an architect, Weill signed a contract twelve days after he left Citi to buy the biggest apartment at Fifteen, the simplex penthouse atop the house. The $43,687,752 price proved that, while he may have stepped down as King of the Citi, he was still a king. He was also being a hero to his wife. Their conversation about buying the apartment had actually begun earlier that year. “He’d always been very conservative and lived modestly,” says a member of the Goldman Sachs team. “But Joan loves to swim and he saw an opportunity. He surprised her with the apartment for Valentine’s Day.”
Like Dan Loeb, Weill paid full price for his penthouse, but at the close of six weeks of direct negotiation with the Zeckendorfs, he won a break, picking up a sixth-floor staff unit in the base of the tower with Broadway views for $978,000; by that time, its official price was $2.3 million. “Storage locker included!” says Arthur. “That’s how we would negotiate.” A member of the Fifteen sales team says that Weill’s broker, Kyle Blackmon (whose mother had worked for Citigroup under Weill, though someone else apparently connected her son to her boss), celebrated by spending his commission on a Fifteen apartment of his own, albeit a small, $2.7 million two-bedroom unit in the rear of the tower.
One of the last hedgies to buy at 15CPW was Arthur Shepherd Estey, who cofounded Realm Partners, a multistrategy hedge fund, in 2009. But in the early days of 2007, when he and his wife agreed to pay just over $17 million for apartment 7D, he was still a managing director at Lehman Brothers, then the fourth-largest investment bank in America (only Goldman Sachs, Morgan Stanley, and Merrill Lynch were larger). The Lehman cadre at Fifteen was also a significant one: Estey’s wife, Evelyne, a former French professor who’d gone on to head the private investors’ arm of Merrill, had just left Lehman Brothers Holdings, where she was also a managing director and the chief accounting officer.
Lehman executives were trained to spot and seize profitable opportunities. “At the time, Lehman wasn’t bankrupt, but things were getting difficult,” says another Lehman buyer. “I’d seen a bunch of buildings going up, and you didn’t get the impression the developers were focused on quality in every aspect. I saw a precious asset [at 15CPW], and I thought it would be good to get in early. It was obvious to me it would be a rare opportunity.”
David Scott Bizer, another Lehman employee, lived in London but owned an apartment at the Century next door when he paid just under $5.4 million for Fifteen’s apartment 24C in October 2006. Raymond C. “Ray” Mikulich was the co-head of the Lehman division that financed real estate (similar to Goldman’s Whitehall) when he signed to buy apartment 15D for more than $17.2 million. Annica Cooper van Starrenburg may be better known for her exploits on the tennis court—she was a top player as a teen—than for her later work at Lehman Brothers, but she and her husband, Daniel van Starrenburg, bought a pied-à-terre in the rear of the 15CPW tower for a little over $4 million. Van Starrenburg, an accomplished Dutch-born arborist, heads SavATree, a shrub and tree-care firm operating in nine states, but based in posh Bedford Hills, New York, where they also live. Once Richard Fuld folded his tent and departed the scene, the most significant Lehman player at Fifteen was Erin Callan, Lehman’s chief financial officer. She is also one of the few 15CPW purchasers who was symbolically tarred and feathered for her role in the events that set off the Great Recession.
The international economic decline wasn’t Callan’s fault, of course. Its seeds had been sewn many years before, early in Bill Clinton’s presidency, when it became public policy to encourage home ownership, and the financial industry did all it could to make that “dream” come true. As William D. Cohan wrote in House of Cards, a book on the death of Bear Stearns, it created in 1997 the first investment products based on subprime mortgages, the risky loans that might not have been made in a more careful era, and the rest of the financial industry followed suit. Focused on their banks’ windfall profits and their personal bonuses, the creators and promoters of those securities ignored what with hindsight seems like the distinct possibility that those loans, packaged into securities and hedged with credit default swaps, would lead to an international nightmare.
Loans of all types had become significantly easier to get in the early twenty-first century. That was mostly thanks to derivatives, which are contracts—though some would call them wagers—between parties that are used to hedge risk and have fluctuating value based on underlying assets (which can be anything from stocks, bonds, and currencies to intangibles such as interest rates). They are “unregulated contracts . . . agreements between two parties to exchange payments based on such things as interest rates, currencies or changes in credit quality,” Businessweek has explained. “The most notorious of these instruments are credit default swaps, which provide protection against a borrower failing to pay its debts.” They created “a huge unseen web of financial obligations” that would soon catch the world in a sticky mess.
Mortgage-backed securities, complex bundles of loans packaged as investment vehicles called CDOs, collateralized debt obligations, became wildly popular—even as they inspired concern. In 2003, Warren Buffett warned that they were “financial weapons of mass destruction” that posed a “mega-catastrophic risk” for the economy. Nonetheless, throughout 2004, the Department of Housing and Urban Development continued to encourage low-income borrowers to take on what would prove to be unaffordable loans; over the next two years, Fannie Mae and Freddie Mac, the government-sponsored companies that supported the secondary mortgage market, would buy more than $400 billion in subprime-backed securities. At that point, the risky underlying
mortgages made up about a fifth of the US housing market. Mortgage fraud had become an epidemic, but with homeownership rates and home prices reaching record highs, few were willing to entertain the notion that the bubble could burst.
In 2004, warning bells finally started to ring as the value of the market for subprime-mortgage-backed securities crept over $500 billion. Former Federal Reserve Bank chairman Paul Volcker warned of “disturbing trends: huge imbalances, disequilibria, risks” in a speech at Stanford University in February 2005. “I think we are skating on increasingly thin ice.” That August, Yale economist Robert Schiller warned that a “dangerous housing bubble” had led to “irrational exuberance.” Yet one month later, just after the 15CPW sales office opened, the incoming chairman of the Federal Reserve Bank, Ben Bernanke, told Congress that he did “not think the national housing boom is a bubble that is about to burst” because “US house prices have risen by nearly 25 percent over the past two years,” reflecting “strong economic fundamentals.” He couldn’t have been more wrong. It was the beginning of the end, as predicted by the financial analyst Meredith Whitney that October, when she warned that the credit quality of the underlying assets in mortgage-backed CDOs and other derivatives were deteriorating. After a decade characterized by the lowering of both borrowing standards and required down payments, interest rates in America rose substantially between 2004 and 2006, slowing the overheated housing market and triggering the first defaults of the loans tucked inside all those securities.
Erin Callan’s main responsibility as Lehman’s CFO was to assure its partners, customers, and investors that even though Lehman held mortgage-backed securities worth billions, the investment bank was not in trouble. In retrospect, her primary qualifications for that job appear to have been her preternatural self-confidence, poise, presence, and, most of all, ambition. Callan’s fierce need to achieve was visible even in childhood. The youngest of three daughters of a policeman growing up in a lower-middle-class community on the border of urban Queens and the Long Island suburbs, she was a top gymnast at thirteen, basking in the admiration of her school’s football players, who would crowd the gym to watch her practice until her hands bled. “She would think nothing of it,” her coach told Patricia Sellers of Fortune.
After graduating magna cum laude from Harvard, Callan earned a law degree and got a job as a tax lawyer assigned to Lehman. In 1995, she called her top contact at the investment bank and asked if she could work there, instead. Lehman had just been spun off from Sandy Weill’s first financial “supermarket”; it had gone public as Lehman Brothers Holdings the year before.
Callan was a “woman to watch” in more than one sense long before she was named one by Fortune toward the end of her dozen-year climb to the top of Lehman. She favored high heels and sexy, expensive designer clothes from Chloé and Chanel, and with her blond hair and good looks attracted both attention and a husband from inside the firm; she’d married a Lehman vice president in 2001. Her looks were matched by her talent for explaining complex transactions to Lehman clients, and she was named head of Global Finance Solutions, an in-house think tank.
In 2004, Callan was “noticed by all the senior management” of Lehman Brothers when she gave a keynote speech at its annual dinner for women executives, Vicky Ward wrote in The Devil’s Casino, a book on the firm’s collapse. A top Lehman executive saw her as a telegenic poster girl who could send strong signals to the outside world about Lehman’s vigor and diversity. Callan became, Ward continued, a particularly well-compensated teacher’s pet. Other Lehman executives noted that her pay surpassed those of her peers in the company.
Callan lived in the south tower of Time Warner, but was also ambitious when it came to status signifiers and decided to move up in the world. Apartment 31B at Fifteen fit the bill, and at the end of 2005, she agreed to pay almost $6.6 million for it. Though it was not one of the trophy apartments, 15CPW was already the trophy building.
Shortly after signing her 15CPW contract, Callan was named head of Global Hedge Fund Coverage, a new business for Lehman. Then, in September 2007, she was named Lehman’s new CFO. Her husband, who’d left Lehman, left her the same year and sued for divorce. Colleagues, outraged by her rapid rise into a job for which they deemed her unqualified, complained openly about her utter lack of an accounting background and about her wardrobe—which had grown more provocative, as her hair had gotten blonder, since her promotion.
A year earlier, Nouriel Roubini, an NYU economist, had given a speech to the International Monetary Fund predicting “homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide, and the global financial system shuddering to a halt.” Late in 2006, some investment firms, including Goldman Sachs, began betting against the same mortgage-backed securities they were selling to investors, secretly positioning themselves to profit when (for it no longer seemed like an if) the housing market crashed.
In the months before Callan started her new job, that had begun to happen. In March 2007, the New York Stock Exchange suspended New Century Financial, a big subprime mortgage lender. A month later, it filed for bankruptcy protection. By June, the bond-rating agencies were downgrading instruments backed by subprime mortgages. By summer’s end, the mortgage market was melting down. Investment banks such as Bear Stearns were frantically trying to dump their subprime positions.
Late in 2007, the Commerce Department reported a 28 percent drop in new home permits. Experts predicted millions of foreclosures as the subprime mortgage market, then valued at $1.3 trillion, withered. Freddie Mac stopped buying mortgage-backed securities. Citigroup became the first bank to admit defeat and write off the value of those it was still holding. The International Monetary Fund would shortly estimate that the final cost of the collapse of the subprime market would approach $1 trillion. Many of the largest financial institutions on Wall Street began selling preferred stock in a frenzy of bargain-basement dealmaking to attract new capital and stay afloat.
Some couldn’t survive. That January, Bank of America took over Countrywide, another subprime lender. In February, President Bush signed the Economic Stimulus Act. In March, Bear Stearns, the smallest of Wall Street’s big investment banks, faced imminent collapse and agreed to sell itself to JPMorgan Chase for $2 a share. “You didn’t see it as a life-or-death event,” Callan would later observe. “You just saw it as something that was going to be problematic.” But initially, Lehman benefited. Hedge funds were fleeing Bear, she continued, and “we were the beneficiary of some of those pullbacks.”
Though the Bear sale price inched up to $10 a share before the deal was completed a week later, it was about a tenth of Bear’s book value just a few months earlier. The word on the street was that Lehman Brothers, the runt of the litter of the four big banks still standing, but with a whopping $85 billion portfolio of mortgage-backed securities, was going down next. Lehman would soon complain to the SEC that hedgies and short sellers were doing their worst to bring down the bank.
Callan spent the weekend after Bear collapsed on the telephone, insisting Lehman was still solvent and had sufficient liquidity to survive, even though it had billions in toxic debt on its books and she had neither the skill nor the power to do anything about that. Monday, as Lehman’s shares declined by 19 percent, Callan kept at it. She was well-suited for this high-wire act; the teenage gymnast had been a performer all her life.
The next day, she presided over an earnings conference call with analysts. Just before it started, Fuld backslapped her and wished her good luck. “I was like, ‘Oh, my God,’ ” she told William D. Cohan. “Like it just hit me at that point. There’s a lot of pressure here. There’s a lot at stake, a lot at stake.” She spent an hour parsing Lehman’s numbers, then another taking questions. Lehman’s stock rose steadily throughout the call, and afterward she got high fives, hugs, and an ovation from Lehman’s bond traders and its executive committee. “Dick [Fuld] said, ‘The only complaint I have is that you shouldn’t hav
e hung up the call, because as long as you were on there, the stock kept coming up,’ ” she recalled.
Callan kept beating the transparency drum while raising her own profile. “Her seeming candor and confident turns on CNBC briefly fueled positive publicity,” Fortune later observed. That May, the Wall Street Journal even dubbed her “Lehman’s Straight Shooter” in the headline over a story that closed with the image of her personal shopper from posh Bergdorf Goodman delivering racks of new clothes to her apartment. Inside Lehman, the piece was perceived as part and parcel of the same hubris that saw her keep a model of a private jet on her office desk and a framed photo of herself debarking from a limousine on its wall. It had appeared in a glossy business magazine story headlined “Wall Street’s Most Powerful Woman,” which called her “the only female now in line to run a major financial institution.” She was likely also one of the best-paid women on Wall Street. Though her salary was never reported, a 2007 list of Lehman’s fifty best-paid employees below her corporate rank shows its three top earners making between $30 million and $51 million a year, and eleven more hauling in $15 million to $20 million.
With press and pay like that, Callan should have been feeling on top of the world when she closed on her new apartment on April 24, 2008, but two days later, she put it on the market asking $14 million. It’s tempting to think she was worried she was on shaky ground because, just a few weeks later, a hedgie named David Einhorn, who had serious doubts about Lehman’s stability, turned her world upside down. Within days of her closing, Callan had spent an hour on the phone with Einhorn, who felt the bank was overvaluing its assets and wasn’t impressed by the CFO’s responses. That call was followed by an acrimonious e-mail exchange. Then, on May 21, Einhorn gave a speech and explained why he was shorting Lehman’s stock. His argument was a frontal assault on Callan’s credibility. Lehman’s stock dropped sharply the next morning.
House of Outrageous Fortune: Fifteen Central Park West, the World’s Most Powerful Address Page 27
