After a long illness, Bobbie Lehman died in 1969. His death left a void, for he had been the firm’s guiding spirit for forty-four years. For all those years Bobbie enjoyed watching competition among his partners almost as much as he enjoyed watching his stable of beloved horses race. There were tales of fistfights among partners at the Polo Lounge at the Beverly Hills Hotel; for nineteen years senior partners Frederick Ehrman and John Hertz did not speak, although their desks were five feet apart in the partners’ room on the third floor. Squabbling was normal among the vain and talented partners—over bonuses, over credit for bringing in a piece of business. The squabbling, the aggressive internal competition, the entrepreneurial spirit—all became part of the Lehman culture. As did the sense that partners belonged to an exclusive men’s club, to a firm that attracted men of intellect and breeding and offered them a decorous dining room to equal the finest restaurants, the choicest Bordeaux wines, the freshest Havana cigars, a gymnasium, a masseur, stimulating company and a sense that you were doing God’s work.

As long as Bobbie was present, there was someone to cork the venom, to police the warring factions. “Bobbie was not much of an investment banker,” says Andrew G. C. Sage II, who joined the firm in 1948 and is still there. “He wouldn’t know a preferred stock from livestock. But he was a hell of a psychologist.” There was no doubt that he was everyone’s benefactor. The walls at One William Street were graced with Botticellis, Goyas, El Grecos, Rembrandts, Renoirs, Matisses, Picassos, Cézannes—all on loan from Bobbie’s private art collection worth an estimated $100 million. In the morning, black waiters in beige linen jackets brought coffee, tea or pastries from “our kitchen,” as partners referred to the culinary castle managed by the former chef of Pavilion. Bobbie’s patrician calm, his absolute, unquestioned rule, his friendships with the Whitneys and the Harrimans, his golden touch in spotting embryonic enterprises, gave security and structure to a group of partners better known for their individual accomplishments rather than their team skills. Inevitably, Bobbie’s death in 1969 ushered in a period of chaos.

The partner chosen to succeed Bobbie as chairman was Joseph A. Thomas, who had been with Lehman since 1930. Among Thomas’s numerous exploits was that he almost single-handedly raised the money to launch Litton Industries. Yet within months Thomas became enfeebled by emphysema and alcohol. The firm’s counsel, Edwin Weisl, Sr., of Simpson Thatcher, on whom Bobbie, and later Thomas, leaned, also became ill. Those senior partners who might have filled the void—former General Lucius D. Clay, who won fame as the American who frustrated the Soviet blockade of West Berlin; Paul Davies, a former corporate executive and, along with Clay, a national Republican Party luminary; Paul Mazur, the retail expert who organized Federated Department Stores; Monroe Gutman, who managed the Lehman Corporation, the firm’s investment arm; Harold J. Szold, who ran the banking division; Edwin Kennedy, who helped build several oil giants; Herman Kahn, who developed private placements; banker John Hertz, who shared Bobbie’s love of horses and owned such winners as Count Fleet and Reigh Count—all were gone or too advanced in years. Partners were alarmed, and consequently several withdrew their capital. Over a two-year period, ten partners—more than one-fifth of the firm’s managing directors—left. And in those days a withdrawal of capital was especially injurious because partners collected their cash almost at once, not over two-and-a-half to five years, as was later the case. “It was like the War of the Roses—continuous warfare,” says former partner Kenneth Lipper, who later became a partner at Salomon Brothers and then served as Deputy Mayor of New York City. After a reign of confusion, Frederick L. Ehrman, a talented but gruff and aloof “Our Crowd” banker, was installed as chairman.

With business slipping, partners debated, as they would a decade later, whether to shrink the firm and concentrate on investment banking or to continue to try to expand into a full-service firm. Their fears were amplified by their dislike of Ehrman, who had joined the firm in 1941. In large meetings, recalls partner Andrew Sage, Ehrman would cut off colleagues, declaring, “‘That’s the stupidest idea I ever heard of!’ He had no manners. Someone would say good morning to him in the elevator and he wouldn’t answer.” Behind his back, partners called him “Friendly Fred.” When Lew Glucksman was made a partner in 1967, recalls James Glanville, a former Lehman partner, “Fred Ehrman told him, ‘We made you a partner but you’ll never be a member of the Century Country Club.’”

Ehrman compounded his difficulties by setting out to restore “discipline” at Lehman following four years of drift. This violated Lehman’s peculiar culture, which stressed individual accomplishment; Lehman partners thought of themselves as entrepreneurs who managed their own profit centers. They did not wish to feel “managed.” Even in Bobbie Lehman’s heyday, they felt free because he never raised his courtly voice, always soothed them with praise, rarely displayed the clenched fist.

Bobbie Lehman was their benefactor, as he was a benefactor of the arts, of sleek horses, of Pan American or Hertz. “Everyone wanted Bobbie’s applause,” says Herman Kahn, who joined Lehman as a $15-a-week office boy in 1928, filling the vacancy left by Billy Rose, who went on to become a fabled Broadway producer. “Bobbie was the golden bull on the top of the hill for whom we were all panting.”

Fred Ehrman tried to rule by fear. When business plunged in 1973, partners mutinied. “I organized a palace revolution,” says former senior partner George Ball, still savoring the memory. From his years in Washington as Under Secretary of State in the Kennedy and Johnson Administrations, and as Ambassador to the United Nations, Ball had learned something of palace intrigue, and he shrewdly waited for a weekend when two of the firm’s senior partners and Ehrman allies—Lucius Clay and Paul Davies—were out of town. The logical successor to Ehrman was Ball, who, like Clay and Davies and other Washington notables, had been recruited by Bobbie. Ball, however, was not interested.

Unlike the 1983 Lehman coup, the 1973 version included many more co-conspirators, including Lew Glucksman, Bob Rubin, Pete Peterson, Ball and most of the board. They gathered in August at Ball’s United Nations Plaza apartment. The circumstances then were different. After strong profit years in 1971 and 1972, Lehman experienced what former partner Kenneth Lipper, in a top-secret August 20, 1973, memorandum, called “a severe decline in its business to a degree which has probably never before been experienced.” By July 1973 the firm was losing money at an unprecedented annual rate of $9 million. Costs had spiraled out of control. The partnership was imperiled. These losses followed another humiliation: just a few years before, the firm was censured by the New York Stock Exchange for sloppy record-keeping. Panic gripped Lehman partners.

The day after the board members agreed at Ball’s apartment that Ehrman would be ousted, Ball and Ehrman’s nephew, Warren Hellman, who was president of the firm and whose great-grandfather, grandfather and uncle once headed the Wells Fargo Bank, were delegated the task of telling Ehrman. To this day Hellman cannot remember the expression on his uncle’s dour face, but he does remember the color socks he wore—gray, and how the elastic was worn, leaving the socks to fall to his ankles. Throughout their brief conversation Hellman’s eyes remained fixed on his uncle’s feet.

Peterson also remembers visiting Ehrman to suggest, as he would to Lew Glucksman a decade later, an orderly transition period. “The gracious thing to do is to finish out the year and let you announce your successor,” he remembers suggesting.

“No way,” Ehrman snarled at him.

The board also was not receptive to an orderly transition. They wanted Ehrman out—now. Aware that the days ahead would be stormy, that benevolent Lehman had to excise employees, tighten cost controls and locate fresh capital, the board turned to the partner with the most administrative experience, the former Secretary of Commerce who had joined Lehman less than two months earlier—the vice chairman, Peter G. Peterson.

Genealogically, Pete Peterson’s background was much different from that of those well-bred West European Jews—like the Lehmans, the Schiffs, the Loebs, the Warburgs—described in Stephen Birmingham’s Our Crowd. Nor was he steeped in the lore and spirit of investment banking, coming as he did from a corporate career, first in marketing and then at Bell & Howell. Nor did his lineage betray prominent ancestry, as did that of former Lehman partners or associates such as ten-goal polo star Tommy Hitchcock, Jr., who died in World War II and was married to a Mellon, or Jamie Niven, son of actor David Niven, or Jeffrey Byers, the late son-in-law of William Paley, or Count Andreis von Bismarck.

The Petropouloses (the name was first changed to Peterson—son of Peter—by his father’s older brother) followed the Union Pacific Railroad to Kearney, Nebraska. George Petropoulos, Pete’s father, came to America at age seventeen and went to work in the caboose of a freight train as a dishwasher. George Petropoulos skimped and saved and asked relatives to arrange a marriage to a fellow immigrant whom he had never met, Venetia Paul. Eventually, they had hoarded enough to open the Central Café, a twenty-four-hour-a-day restaurant that served everything but Greek dishes. To this day Peterson, who along with his younger brother John mopped floors and scrubbed dishes and served food, can recite from memory the daily specials—“hot beef sandwich, mashed potatoes, white bread, apple pie and all the coffee you can drink for twenty-five cents.” He also remembers the Ku Klux Klan parading in front of the Central Café with signs protesting “the Greeks.”

Pete participated in a statewide competition and came in first, winning a Regents scholarship to Kearney State Teachers College. He stayed one year, excelling in math. In 1944 he volunteered for the Navy, but with 20/450 vision, he flunked the physical examination. Wanting the best for their son, his parents dipped into their savings and sent him to M.I.T. Boston was his first exposure to big-city life, to culture and to great wealth. His almost two years at M.I.T. were also the occasion of his first visits to New York. Nostalgically, he still recalls the train from Boston to New York. He would take the train with a college friend, Generoso Pope, who would invite him to stay with his family at their sumptuous 1040 Fifth Avenue apartment. The Pope family, which owned a cement company and Il Progresso, unofficially adopted the boy from Nebraska, taking him to Radio City Music Hall for the first time, to the opera, to Sulka’s, where he marveled at the silk ties and shirts. Since Peterson was too poor to travel back to Nebraska, the Popes invited him to stay for Christmas and gave him gifts as if he were part of the family. The bond between Peterson and Pope was strengthened by their common immigrant past. “We used to joke about being immigrants,” says Peterson.

Although Peterson transferred to Northwestern after a year and a half because he wished to attend a business school and study retailing, to this day he and Generoso Pope, who is the publisher of the sensational tabloid, the National Enquirer, among other ventures, remain friends. A special bond was formed, Peterson says, because both men are parents of a retarded child. And soon after Peterson left Washington in 1973, Pope retained Lehman to serve as his investment banker. He also asked Peterson to serve as his personal financial adviser and the co-executor of his estate, tasks for which he paid him about $75,000 annually through mid-1984.*

After graduating summa cum laude from Northwestern in 1947, Peterson worked in Chicago, earning $12,000 a year at Market Facts, Inc., a market research company; at night he studied marketing at the University of Chicago, graduating with an M.B.A. in five quarters. He married Dorothy Krengel and joined the University of Chicago faculty as a $5,600-a-year associate professor, teaching nights while continuing to work days for Market Facts. A few years later he moved to McCann-Erickson in Chicago as a market researcher. Within a brief span, after pitching and luring such new accounts as Peter Pan Peanut Butter, Swift, and Rival Dog Food, Peterson was managing McCann’s Chicago office.

By the age of twenty-seven, Peterson was divorced from his first wife and had married Sally Hornbogen, a small, vivacious woman who would eventually bear him five children. They moved to a fashionable house in Kenilworth, a Chicago suburb, where they became tennis partners of neighbors Loraine and Charles Percy, then president of Bell & Howell, one of Peterson’s advertising accounts. In those days, before television came to dominate our lives, before German and Japanese cameras crowded the market, Bell & Howell was a more visible company than it is now. Its movie cameras were a household name. Spurred by Peterson, Bell & Howell sponsored Edward R. Morrow’s CBS Reports.

Peterson enjoyed advertising, but he was becoming restive. He and Percy talked often of the future. Percy dreamed of running for public office, Peterson of running a corporation. “I saw in him qualities that went far beyond advertising,” says Percy, who urged him to become Bell & Howell’s executive vice president for marketing. One day Peterson accepted. In 1961, at the age of thirty-four, Peterson ascended to the presidency of this corporation of 13,000 employees. After Percy decided to enter politics, running unsuccessfully for governor of Illinois in 1964, and then successfully for the United States Senate in 1966, Peterson succeeded him as CEO. “He got into a lot of details at the company,” recalls Percy. “Pete particularly liked working with the engineering department. He liked to think in terms of a product that didn’t exist. He brought a great deal of thought to the simplification of photography.” As the head of one of Chicago’s major employers, a friend of the governor’s and both senators, a trustee of the University of Chicago, a lover and patron of modern art, Pete and his wife Sally became a socially prominent couple in the Windy City.

In December 1970, George Schultz, a former colleague and fellow trustee at the University of Chicago, who was then serving as Director of the Office of Management and Budget, telephoned from the White House to say that President Nixon wished to see him. When they met, in early 1971, Nixon offered Peterson a position as Assistant to the President for International Economic Affairs. Peterson accepted. “The challenge there,” says Peterson, “was that there wasn’t even a definition of the problem.” The dollar was overvalued. Productivity was declining. Energy costs were soaring. The NATO alliance was riven with disagreements. United States economic supremacy was being challenged. Trade agreements with the East beckoned. The State Department was not focused on international finance, and National Security Adviser Henry Kissinger was preoccupied with other matters, including a miserable war in Vietnam.

Peterson supervised the principal staff work leading to the replacement of the international gold standard with a floating exchange rate. Working with Kissinger, he helped prepare for the Nixon-Brezhnev Summit of 1972, and chaired important trade negotiations with the Soviet Union, Poland and Japan. In the first volume of his memoirs, White House Years, Henry Kissinger says of Peterson’s appointment:

I agreed enthusiastically when, at OMB Director George Shultz’s urging, the new post of Assistant to the President for International Economic Affairs was created at the White House—though it technically represented a diminution of my power. Peter Peterson, its first incumbent, and I established a close working relationship reinforced by personal friendship. Peterson, equipped with a subtle and wide-ranging mind, taught me a great deal about international economics; I respected him enormously, and this was another reason why I intervened rarely and only when an overwhelming foreign policy interest seemed involved. The arrangement worked well until the frontal assault on the White House staff system by the new Secretary of Treasury, John Connally … He refused to send memoranda through or receive instructions from him; if he needed White House guidance, he simply crossed the street from the Treasury and went to the Oval Office … He had reduced Peterson to the role of a spectator even before Nixon ended Peterson’s agony by appointing him Secretary of Commerce, a position he filled with great distinction.

Peterson may have had difficulties within the government, but in status-conscious Washington he was in orbit. Sally and Pete Peterson became, along with Kissinger, among the few Nixon Administration luminaries who accepted invitations to Georgetown parties and who dared dine at the home of Washington Post publisher Katharine Graham. Peterson counted among his friends columnists and senators who opposed Nixon, he played tennis with Art Buchwald and Robert McNamara, he was usually available to the media, including those Nixon considered “enemies.” The flatness of the terrain made Peterson stand even taller.

Peterson was immeasurably aided by Sally’s lively personality. The Petersons often gave dinners and “movie parties,” courtesy of their Bell & Howell cameras, dispensing popcorn to guests. To this day, people in Washington can remember the irreverent statements the irrepressible Sally would make about Nixon during Watergate, the way she would puncture with a joke a pompous statement from Pete. When they speak of Peterson it is usually of “Sally and Pete.” What is often remembered about Pete is that he was the rare Nixon Cabinet member who would deign to come to their homes and talk freely. Ever the rationalist, he believed one tried to reason with adversaries. Besides, the power structure of the Washington colony would persist long after the stone-faced Republicans in the White House were gone.

Six months into the second Nixon Administration, Peterson was looking for work. His turf battles with Connally had persisted, as the Secretary of the Treasury, often with success, fought to cut the Secretary of Commerce out of the economic decision-making process. In addition, Peterson’s social friends irritated the White House. “Pete was canned because he was a leaker,” says one member of Nixon’s Cabinet who remains a, friend of his. Peterson offered this explanation to friends: “My calves were so fat I couldn’t even click my heels.” He remembers once playing tennis at the home of Katharine Graham, whose husband Phil had been a fellow trustee at the University of Chicago. The phone rang; it was Nixon calling for his Secretary of Commerce. Soon thereafter, Peterson recalls: “I remember meeting the President one day and he said to me, ‘That’s an interesting idea. I suspect it’s an idea your friends of the Georgetown cocktail set like.’” Peterson says he would tell Nixon’s aides, “By being with those people, Henry and I can debate them.” To no avail. The Nixon Administration, wanting to remove him from Washington, proffered a major post in Europe. Peterson declined, deciding that he’d like to come to New York and explore investment banking, where he might amass the fortune that had so far eluded him.

“Ehrman was the guy who had the idea to bring Pete in,” recalls Andrew Sage. Ehrman, who was then sixty-seven, visited with Peterson and arranged for him to meet with key partners, including George Ball, Lucius Clay, Paul Davies, Warren Hellman and Lew Glucksman. Glucksman recalls: “Fred Ehrman sprang on Warren Hellman and me the fact that he was recruiting Pete Peterson as vice chairman. Warren and I both went through the roof. It certainly wasn’t a promotion for Warren or me. Fred was doing a lousy job. Pete had no particular qualifications to be brought in as vice chairman.”

Glucksman and Peterson first met for dinner at Warren Hellman’s home. Hellman, who remains a friend of Peterson’s, has a different recollection. “Pete had a good reputation. Everyone was enthusiastic about his coming to the firm.”

Before agreeing to the Lehman offer, Peterson seriously considered becoming a senior partner at Salomon Brothers. For this surging Wall Street partnership, whose reputation and expertise were concentrated in trading, the acquisition of Peterson was seen as a way to strengthen the banking, or corporate, side of their business. “He would have been number three in the pecking order,” says Salomon managing partner John Gutfreund, who interviewed Peterson. The firm made it clear that Peterson would stand behind Billie Salomon and then Gutfreund and that Peterson would not be permitted to sit on any corporate boards, a Salomon Brothers policy. Since corporate boards are a source of clients and outside compensation, and since he would rank below a shrewd, powerful trader like Gutfreund at a firm dominated by trading, Peterson chose Lehman.

Peterson joined Lehman on June 6, 1973. Two months later he was chairman. “Lehman at that time was a mess,” says Felix Rohatyn, who had administered Peterson’s blind trust during his federal service and whose banking firm, Lazard Frères, worked for Bell & Howell. “They wanted Pete to help settle the place down and at the same time establish corporate relationships. He took over the firm and in a short time he did an absolutely brilliant job.”

When he took over, Peterson was stunned to discover that Lehman was run like a candy store and appalled that partners spoke of “my clients,” as if they would remain so forever. The firm did not have departmental budgets; even while they were losing money, partners were spending lavishly on the best hotels, the most expensive restaurants, and justifying it by quoting Bobbie Lehman: “At Lehman we go first class.” The pace was leisurely, reflecting the firm’s very own Italian Renaissance-style building, Bobbie Lehman’s splendid art collection, which graced the walls, the mahogany desks and crackling fireplaces, the private gym and masseur, the elegant eighth-floor dining room supervised by Mathum Allanos, the former Pavilion chef. Lehman functioned as if corporate titans were still dependent on “my banker.”

Peterson remembers arriving at Lehman in June and being advised to meet with Joe Thomas. Although by this time Thomas had stepped down as chairman, he remained an influential figure at the firm. On this day president Warren Hellman told Peterson that Thomas was up in the eleventh-floor health club. Peterson had heard the legends of Thomas’s swashbuckling exploits, of how he raised the first capital that breathed life into Litton Industries, of how he fathered American Export Lines, Halliburton Industries, served on the board of Black & Decker, Getty Oil, Litton and other major companies, collected more substantial bonuses than most of his partners, and now owned more Lehman stock than any other partner. He had heard that Thomas was a rugged individualist who thought the New York Times was a left-wing newspaper and only read the New York Daily News and the Daily Racing Form, who invested in thoroughbred horses and Caribbean property.

“I didn’t even know where the health club was,” says Peterson, who went upstairs in search of Thomas. Entering the gym that morning he saw only a man stretched out naked on a massage table, clear plastic tubes connecting his nostrils to an oxygen tank. In one hand the naked man held a lit cigar and in the other a glass of vodka. A Daily Racing Form rested on his ample stomach. A television set was blaring. And Don Cannon, the masseur, was on the phone with a bookie placing the man’s bets. Warren Hellman remembers that Peterson wandered back downstairs and said, “I didn’t see anyone up there except a guy with two oxygen tubes, a cigar and a martini.” Peterson remembers that he and Thomas had a nice chat, although he also remembers nervously glancing at the lit cigar and the combustible oxygen tank.

Within a year, Peterson slashed expenses—paring, for example, the number of employees by a third, from 955 on September 30, 1973, to 663 the following September. The new chairman had his eye on the competition, and at that time Lehman counted ten firms as its chief banking rivals—Kidder, Peabody; Salomon Brothers; First Boston Corporation; Lazard Frères; A. G. Becker; Merrill Lynch; Morgan Stanley; Goldman, Sachs; Dillon, Read; and Halsey, Stuart.

Peterson also had his eye on Lehman’s internal weaknesses, which were delineated for the new chairman in a confidential hundred-and-one-page report that the board commissioned from two partners, Kenneth Lipper and Joseph J. Gal. Completed in December 1973, and stamped “Most Confidential,” the report highlighted these “significant weaknesses”: (1) “the lack of a carefully defined business strategy”; (2) “a fragmented and undisciplined approach to running its business”; (3) “a portion of the partnership whose ability, training, and/or work habits are inconsistent with the competitive demands of the marketplace and with Lehman’s present business”; (4) “too small a professional staff relative to the number of clients to be serviced and transactions to be processed”; (5) “a bond distribution system which is in chaos and an equity distribution system which is experiencing declining market share”; (6) “recent management changes throughout the organization”; (7) “high overhead relative to current revenue levels”; (8) “comparatively limited capital.” The authors warned that “in our judgment the long-term future of this firm is uncertain.”

“The Firm must face up to the fact that the ability, training, and/or work habits of a substantial number of partners (totaling perhaps 10 to 15 throughout the Firm) are inconsistent with the competitive demands of the marketplace and with that expected of Lehman partners,” the authors concluded. “These individuals should be phased out according to some specific plan. The single most important conclusion of this study is that the quality of the partnership is the key to our present problems and to our ability to be successful in the future [their italics].”

Peterson was determined to phase out some partners and to reinvigorate the forty-four-man partnership with new blood. But he was sensitive to how fragile the partnership was, and he moved slowly. It wasn’t until September 1976 that he replaced seven senior members of the board, reducing the average age of the board from fifty-six to forty-seven years. After his friend Warren Hellman left in 1977 to start his own venture capital firm, Peterson left the presidency vacant.

To address the composition of the partnership required Peterson to confront a strategic question: What kind of investment bank did Lehman wish to be? With remarkable prescience, the internal report had sketched how investment banking had changed, and was likely to change further: “As the nation industrialized, financing was the most important element of corporate life, since shortages of goods created demand which eliminated marketing as the key feature. Few of the inventor-entrepreneur class understood how to raise capital; they had limited contacts with financial institutions and knew of only the handful of investment banking firms whom they could solicit to assist them in the critical function of raising capital … Personal contacts, imaginations, salesmanship and an entrepreneurial orientation were important characteristics of successful investment bankers.

“The maturation of American industry, professionalism among the new management class and the development of broad capital markets reversed some of the above factors, at least on a superficial basis. The major corporate names which Lehman Brothers desires as clients are now solicited, not soliciting, parties. Marketing and high-technology operations have replaced finance as the elements of major concern to chief executives and much of the latter has been delegated to skilled financial vice presidents. These professionals often design their own issues and view the investment banker simply as a distributor. Therefore, many of Lehman’s traditionally high-margin products have been reduced to commodities, where price and distribution are more important in selecting a banker than historic and social relationships.”

What was called for, Lipper and Gal suggested, was a less passive Lehman strategy, one that recognized that Lehman could not remain a carriage-trade banking house. To prosper, the firm had to broaden the financial services it offered. This strategic view perfectly coincided with that of the new chairman, who quickly saw that Lehman had been resting on its laurels. While others questioned whether this stranger to Wall Street knew enough about banking, Pete Peterson believed that his corporate background prepared him for the task ahead. He had been trained to think strategically, to prepare organization charts and marketing plans, to devise and sell “new products.” The challenge excited him.

But first he had to address the capital question, from which all else flowed. In 1974, with the assistance of George Ball, and despite internal resistance from Bob Rubin and a few others who believed Peterson’s plan would alter the private nature of the Lehman partnership, Peterson persuaded the world’s thirty-fifth largest bank, Banca Commerciale Italiana (BCI) of Milan, to invest $7 million in Lehman Brothers in exchange for 15 percent of the firm’s stock. As part of this package, Peterson presented a dramatic cost-cutting plan, including a slashed payroll and reduced partners’ salaries. In subsequent years, in addition to luring BCI to invest further capital, Peterson would also engineer two significant mergers, first with Abraham & Company, a brokerage firm, and then the more momentous 1977 merger with prestigious Kuhn Loeb and its blue chip clients. In the decade of Peterson’s stewardship, Lehman’s capital multiplied ten times.

Besides the capital, strategic and overhead crises, another crisis confronting Peterson in these early days involved Lew Glucksman. Investment banking had been changing, from a business based in large measure on personal relationships and advice to a business based on a variety of transactions and an instinct for gambling on interest rates and stock market shifts and the invention of new financial instruments. Clients began to explore a variety of financial tools; they shopped for the firm with the broadest sales distribution network, the most experience, the cheapest price. One of those new financing tools was commercial paper, a “product” pioneered a hundred years before, but not widely used until it was popularized in the United States by Gustave Levy at Goldman, Sachs, which today handles about 30 percent of the $220 billion or so of dealer commercial paper outstanding.

Commercial paper works the same way it did when Goldman invented it: Instead of borrowing from a bank or the bond market, a company issues an unsecured IOU, usually repayable in thirty days, sometimes longer. (The company can also “roll over,” or renew, the loan on different terms.) Investment firms like Goldman, Sachs and Lehman typically act as agent, collecting a fee for placing these IOU’s with large investors. They can also serve an underwriting function, taking some of the paper into their own accounts to help provide the funds sought by a client.

Commercial paper was one of several “new products,” as Wall Street calls them, which had been gaining wide popularity since the early sixties, along with money market accounts, tax exempt bonds, bankers acceptances, among others. To serve their clients and to tap into huge brokerage fees, traditional investment banking houses had begun to diversify and offer these “new products.” Lehman was no exception. And thus it was that Bobbie Lehman hired Lew Glucksman to take charge of these operations. When Peterson became chairman of Lehman, Lew Glucksman had already been there for more than a decade.

*Peterson abrogated this financial arrangement in September 1984, soon after I asked him about his ties to Pope. He remains an executor of the Pope estate, although he says he now refuses to accept a fee for this. Concerned about appearances, he insists that he has never had anything to do with the Enquirer itself. That is not quite the case. As an investment banker, he has represented the Enquirer in business negotiations. And Peterson concedes that when Pope was searching for an attorney who knew publishing, he recommended his own attorney, Morton Janklow, to serve as counsel to the newspaper, a position Janklow’s firm still holds.