Is that bad?

[Mike Gelband, who was responsible for commercial and residential real estate, had turned decidedly bearish in March 2007, which Fuld and Gregory did not like, so he was fired.] Gregory brought in one replacement, then another for Gelband, the last of whom, Andrew Morton, left in September.

None of Gelband's successors had deep experience in real estate. And later, Alex Kirk, who'd worked under Gelband and shared his bearish views, confronted Gregory about the hires. "What are you doing [putting these people in critical jobs]? These people are not experts," Kirk told Gregory, according to people who heard accounts of the conversation.

It makes sense, if you've failed to stop pushing the Q-tip into your ear despite resistance.

Gregory disagreed. "No, people need broad experience," he said. "It's the power of the machine. It's not the individual."

Erin Callan.

One person whom Gregory instinctively trusted was Erin Callan, a rising star in the banking division. "She's one of the smartest people I ever met," said a former colleague. "Clients loved her. People who worked for her loved her. She was very confident. Very team-oriented. But naïve.

[...]

Another quality that rankled some was what was seen as Callan's love of attention. She appeared, to some, a sponge for credit.

[...]

Callan's predecessor had been capable and well regarded but, according to some, lacked gravitas and camera-presence. Callan was a different package: blonde, vivacious, intelligent, articulate, and fashionable. She was an instant business celebrity.

Remember when the Street was stupid and docile and believed everything the banks said and didn't let those short sellers and their god damn negativity drag it down? Those were the days.

One hedge-fund owner, David Einhorn, later asserted that Lehman had overvalued important assets, in effect fudging its books. In fact, many of Lehman's losses were "back-loaded," already lurking on its books. But that day, Callan's confident, optimistic account prevailed. "The Street believed that Lehman must be better risk managers [than other banks]," one executive explained. Lehman's stock price jumped 46 percent on the earnings report.

Paulson, man. What the hell, brohamster? I'm sorry but there was no gray area at that dinner. No room for "interpretation." You massaged my thigh during the salad course, I let you, and that meant an unspoken agreement between us you that had our backs. Don't give me that "I'm sorry if you got the wrong idea," shit! Fuck you! A handy under the table is a promise!

About a month later, on April 12, Fuld had dinner with Treasury Secretary Paulson, who'd run Goldman Sachs until June 2006. There was, as one Lehman insider reported, "no love lost between them." Yet the dinner went well. Immediately after, Fuld excitedly e-mailed his legal director, Tom Russo, "We have [a] huge brand with Treasury." At the time, Paulson seemed mainly worried about the fate of Merrill Lynch.

I don't want to put words into his mouth but it wouldn't be too off base to assume that the Oracle of O later noted, "It's like this, see. Lehman was given the option of A. getting in bed with me or B. being gang raped and left for dead. Dick Fuld paused for a moment and decided to go with the latter."

Less than two months after that cheerful dinner, on June 9, Lehman reported second-quarter earnings--a $2.8 billion loss. At the same time, Lehman said it was raising $6 billion in new capital from blue-chip investors, which suggested not only that important people believed in Lehman's future but that its balance sheet now looked stronger. (It turned down Warren Buffett--who was trying to extract a 10 percent guaranteed return, similar to the deal he made with Goldman three months later, for a group of investors who would only take 7 percent, though not with anywhere near the Buffett cachet.)

Earlier: Dick Fuld: Lover o' Leverage, Real Estate, Fashion