By late March the board’s skepticism had hardened into cynicism. The climate inside Lehman was fractious and unpleasant. Yet the internal battles, the hatreds, were still, essentially, a private matter. As long as those outside knew nothing of this, there was hope that Lehman could command a generous sales price. In February bits and pieces of Lehman’s dirty laundry began to show. Banking partners were unnerved by a February cover story in Business Week, featuring a glowering Lew Glucksman, under this headline: THE TRADERS TAKE CHARGE. Partners were appalled by a February story in Institutional Investor, titled: IS LEW GLUCKSMAN CLEANING HOUSE? Page one of the story contained a caricature of Captain Glucksman, astride his ship, with partners diving off the sides. The article reported that several Lehman partners were peddling their résumés and described the anger aroused by the September bonuses; it went on to mention that there were also “signs of a Stalin-style purge, with Glucksman methodically uprooting Peterson supporters.”

But as unsettling as these stories were to partners, they were mere pistol pops compared to the mushroom cloud detonated by Fortune magazine. The four-paragraph piece, written by Monci Jo Williams, first appeared on newsstands on March 28, and began this way: “In Lewis L. Glucksman’s first six months as head of Lehman Brothers Kuhn Loeb, the firm became so deeply split that the board has decided to sell it.” Ms. Williams noted that in March “Lehman suffered a loss in trading”—without citing a figure (she could not, since the March results were not circulated until April); that a “committee of Lehman partners” was “busily peddling the firm”; and concluded: “But several potential buyers have already decided to pass on Lehman, saying that the personality of the firm and its politics may make Lehman more trouble than it’s worth.”

“I remember standing outside my office with Lew and Jim Boshart,” recalls James Hood, who was responsible for marketing and public relations. “Jim Boshart said, ‘Oh boy, this is really going to cause problems.’ It was a devastating article. As that article moved around the firm, it only took reality a few days to catch up with the perception Fortune painted. At that point, the paralysis was full. People stopped working.”

The article infuriated as well as terrified partners. To many partners the Fortune piece was a reminder of a new and sometimes seamy fact of life on Wall Street: Now the well-placed leak or other aggressive public relations moves are weapons in corporate combat. In a world of instant communication, perceptions are all. Rumors concerning the activities of T. Boone Pickens, Jr., or the Bass brothers can overnight inflate or depress a company’s stock price; word that First Boston was “hot” in the M. & A. field attracted business to the firm; publicity has fattened the client list of corporate lawyers like Joseph Flom of Skadden, Arps, Slate, Meagher & Flom, or Martin Lipton of Wachtell, Lipton, Rosen & Katz. Public revelations that Lehman was for sale were bound to depress the sale price.

Was this part of the “destabilizing campaign” one banker had boasted of? Partners assumed the story had been leaked, and speculated endlessly about who might have leaked it, with four theories vying. The first held that a potential buyer, desirous of reducing Lehman’s asking price, was responsible. The second held that the leak came from inside Lehman. For a partner to leak such a story seemed so senseless, so self-destructive, so … venomous. Unless—and this was the third theory—those who leaked it believed there was no other escape; that Glucksman & Company would never relinquish control until the ship sank.

Finally, there were also those who believed the “leak” was cleverly orchestrated by Peterson. “Follow the money,” Deep Throat advised Woodward and Bernstein when they were investigating Watergate. Following the money, Peter Solomon and Bob Rubin, who agreed on little else, believed—without proof—that Peterson was out hawking the firm. Why? Because if Lehman were sold anytime within two years, Peterson’s severance agreement entitled him to receive a full premium. John Gutfreund of Salomon Brothers also believes this, and says he heard that Peterson was shopping Lehman. Peterson responds, “I did not at any time approach anyone about the sale of Lehman; not Equitable, not American Express, not anyone. I was, however, approached on three occasions by others”: by the investment banker of a “modest-sized insurance firm,” and by “two very wealthy individuals who offered me a major piece of the firm if I would go back as CEO.” He says he declined. Peterson does not deny speaking to Fortune. He says, “It is entirely possible someone from Fortune called … I know the people at Fortune.”

The prevalent view within the firm was that the presumed leak came from inside. It had to come from inside, says Jim Hood. “It was too accurate. Fortune may have started with some information, but the details about the four-member committee and other facts could only have come from inside.” But this is not necessarily true, since the existence of the group was known to those outside companies with whom the committee met.

Some partners took the “leak” in stride. “I wasn’t angry,” says Bill Morris, fatalistic as usual. “You don’t get angry at a carrot because it’s red. I wasn’t angry because I wasn’t surprised.”

But Jim Boshart did not take the presumed leak in stride: “There was such a lack of dignity—people going around on their knees saying, ‘Buy us for any price!’ I thought that made it unsalable, shopworn.” Boshart could hardly contain himself. He had become increasingly indignant at the activities of his partners, blaming Schwarzman especially for leaks, blaming Solomon for trying to sell the firm and bad-mouthing Glucksman on the outside, blaming Altman for being two-faced, blaming Gordon for betraying Glucksman. By this time, Boshart had undergone something of a personality transformation. His Jimmy Stewart wholesomeness had given way to truculence. Instead of being Glucksman’s conciliatory dove, he was now hawkish. No longer was Boshart the “Boy Scout.” He wanted to trace the leakers and fire them. He wanted Lew Glucksman to be tough. Jim Boshart’s view mirrored that of many of his adversaries. Both had come to believe they were at war with evil.

When the Fortune piece exploded, Glucksman, a man who instinctively shied from the press, followed the advice of Boshart and instructed Hood to issue a “no comment” to all press queries. Appalled, Hood appealed to Shel Gordon and Bob Rubin. Together they persuaded Glucksman that a “no comment” would be taken as a confirmation of the story. The problem was how to walk the tightrope between lying and telling the awful truth. The next day, March 29, Glucksman convened a meeting of the Lehman board in his forty-third-floor corner office. He was smoking mad. “I think the story was planted by a partner here,” he charged. Though he did not make this allegation to the full board, his suspicions were directed upstairs, to the banking partners on the forty-fourth floor. He had two chief culprits in mind—Peter Solomon and Steve Schwarzman—and two lesser suspects, former partners Pete Peterson and Eric Gleacher. Each of the four denies having been the source of the story; Schwarzman and Gleacher, however, concede they did return the reporter’s phone calls. “The Fortune reporter got it from the outside and read it to me,” says Schwarzman. He told her, he remembers, “You don’t need my confirmation. You’ve got it cold.” Gleacher says he spoke once to the reporter, but did not know such vital facts as the existence of the four-man committee. Ms. Williams, the reporter, says the assumption that “someone there leaked it to us is not correct.”*

The board talked about what to do. The feeling in the room, recalls de Saint Phalle, was that the Fortune story “killed the firm’s ability to negotiate from a position of strength.” Boshart remembers that it was the consensus of the board that the Fortune story killed a sale. He reported to the board that Lehman employees were edgy, and deserved to be told something. “They told us,” he recalls, “to tell the people who work for us that the firm was not going to be sold and that they could take our word for it.”

The board debated what to say to reporters, who were calling, and to partners, who were agitated. For the press, they decided to issue a carefully hedged statement crafted by Hood and Altman that was designed, says Hood, “to say something truthful and informative, and yet at the same time say something whose net affect would be to calm employees and the rumor mill.”

Hood and Glucksman read this statement over the phone to reporters: “We have no plans to transfer ownership of the majority of the capital, nor will the firm initiate such a plan. Nothing has been done or consummated, nor are we in serious negotiations to that end.” Literally, this was true—there were no concrete “plans” or “serious negotiations”; but it was hardly an accurate statement of the facts. Hood was quoted by Leslie Wayne of the Times as saying that Lehman was “absolutely” not searching for a buyer and that the board did not vote in January to locate a buyer, which was simply untrue. To reassure the partners, the board decided to summon a rare meeting of the full partnership the next day.

The next morning’s newspapers rudely greeted partners with these headlines: LEHMAN MAY SELL A STAKE, announced the New York Times. The Wall Street Journal blared: LEHMAN BROTHERS WANTS TO INCREASE CAPITAL BASE BY SELLING MINORITY STAKE. The stories were advertisements for Lehman’s internal bloodletting. The second paragraph of the Journal story, for instance, reported: “The firm’s management said it intends to retain a controlling interest, but sources close to Lehman Brothers maintained that its ultimate goal is to find a buyer for the entire firm willing to pay as much as $400 million.”

The partners’ meeting on Friday, March 30, the first since October, was abrupt—lasting just fifteen minutes. As partners filed into the boardroom, Glucksman sat erect at the end of the mahogany table, glaring; he was flanked on either side by Rubin, Boshart and Fuld, who slumped in their chairs. Glucksman opened the meeting by saying, “I am going to read you a press release already released”—and then read the brief, misleading statement issued by the board earlier. Glucksman refused to discuss the substance of any rumors about the sale of the firm or the trading losses or questions of capital adequacy. No one else was encouraged to speak or to ask questions. Glucksman had hunkered down; he was visibly angry, and warned that anyone who spoke with the press should—many partners heard would—be fired.

The meeting was terminated.

The partners were more unsettled at the end than at the beginning of the brief encounter. They wandered out of the boardroom dazed; some resorted to gallows humor: “Yeah, I’m a partner here. But I have nonvoting stock!” Many felt overwhelmed, imprisoned, convinced their fate rested in unsteady hands. “It was clear to everyone at this point, whether they were trading people or in investment banking, that these guys were no longer capable of effectively governing the firm,” says mergers and acquisitions specialist Steve Schwarzman.

That afternoon Schwarzman went to see Shel Gordon. For months Schwarzman had been talking to people on the outside about selling the firm to gain a premium for each partner and to rescue them from what he believed was a nightmare. “Every person at Lehman Brothers in the corporate area talked to someone when it was clear the firm should have been sold or should go public,” he says. “The value of security firms were at such unbelievable levels. And the business needed to have significantly more capital.”

Schwarzman looked at Gordon, and saw himself: both men were disheartened. “I told Shel I thought it was pretty clear the firm was under enormous stress, and I thought it was too late to get any nonindustry purchaser of the firm,” Schwarzman recalls. “But it was still possible to find an industry partner.”

“Who do you suggest?” said Gordon.

“Shearson/American Express; E. F. Hutton; Paine Webber,” said Schwarzman.

*At first I accepted the common assumption at Lehman that the story had been leaked. For the pieces that appeared in the New York Times, I was reluctant to call the Fortune reporter—or any reporter—and quiz her as to her sources. As I delved deeper into this matter for the book, I nervously telephoned Monci Jo Williams. She was upset that I had accepted the “leak” theory without checking with her. While refusing to discuss her sources, Williams noted that the “leak” could have come from any one of the outside investors the committee met with and with those they consulted.