That Friday evening, Peter A. Cohen, Schwarzman’s next-door neighbor in the Hamptons, settled in bed and decided to read a magazine before turning in. Weekends were special for Peter Cohen, his time to unwind after a busy week on Wall Street. Here he retreated to his chain saws and tools, built furniture or split wood, spent time with a wife and two children, who were, probably only next to work, the core of his life. On the eastern end of Long Island the Cohens relaxed. Peter Cohen needed that, for if there is a word that epitomizes him it is taut. Cohen’s body is lean, hard and short; a tight cap of dark hair hugs his head; he is all business—from the neat marble-top desk to the terse responses, to the small PC monogrammed on his shirts, to the yellow pad that accompanies him wherever he sits. At Shearson/American Express, where he works, Cohen is known as a “numbers cruncher,” a tough negotiator, a superb cost-cutter, a man perhaps more comfortable with numbers than with people.

Peter Cohen, the chairman and CEO of Shearson, is not an “Our Crowd” type. The son of a clothing manufacturer, he was raised in one of the “Five Towns” on the South Shore of Nassau County, not the North Shore, where German Jews built their estates; he attended public schools and Ohio State University before receiving an M.B.A. from Columbia. Cohen’s office is decorated with a stark-white sculpted chain saw that looks as if it were chiseled out of salt, and with a statue, which is at eye level beside his desk, of two legs cut off at the calves and dressed in gray pinstriped trousers, black shoes and socks; the legs form a platform on which lies the remainder of the neatly folded gray suit and vest, a shirt and a tie. “My wife’s view of me,” says Cohen. A symbol of Cohen’s willingness to cut people off at the knees, say his detractors.

In bed that night, Cohen opened the latest issue of Fortune. Near the end of 1983, Shearson/American Express had taken its top managers on a retreat, where it was agreed that they were interested in acquiring a blue-chip investment banking firm to complement their strength as a “wirehouse”—so named because the heart of Shearson’s business was retail brokerage with individuals, and communication was mostly across telephone and teleprinter wires. When Peter Cohen’s eyes focused on the Lehman story in Fortune, bells went off. “This is it,” he said.

This was not to be a relaxing weekend. Since Peter Cohen is the CEO of Shearson, and at that time the owner of 55,340 shares of stock in the parent American Express Company—2,293 more shares than the chairman of American Express then owned—he was in a position to act. That weekend Cohen telephoned key staff people and they agreed: Lehman’s strength in banking, fixed-income trading, and as a primary dealer in U.S. government securities would shore up Shearson’s perceived weaknesses in those areas; it would bring the luster of Lehman’s name and their client list; and it would result in a firm second only to Merrill Lynch (their chief “wirehouse” rival) in terms of total capital. With Shearson’s proven ability to manage and cut costs—in the second quarter of 1984, while business all over the Street declined and Lehman’s overhead ballooned—Shearson’s direct operating costs were sliced by 2.3 percent, or $7.4 million from the first quarter. With that ability, Cohen and his associates agreed, a sizable chunk of the purchase price could be subsidized by lopping off people and redundant functions.

Cohen and his team did not have to speak the words “good management,” but it was part of their self-concept, their conceit. They thought of Shearson, unlike Lehman, as a well-managed company. And not without reason. A January 16, 1984, in-depth analysis of Shearson by Paine Webber Mitchell Hutchins concluded: “The true measure of a firm is its ability to make money in all kinds of markets. Over the last decade Shearson has compiled one of the best records of any Wall Street firm … One of the most important characteristics of the company is the intense level of attention paid to managing, controlling and operating the business. At times the focus seems almost obsessive. No detail is too small, no transaction too insignificant, to escape the attention of some member of upper management. The tolerance for mistakes is also quite low. For example, brokers who cause an error which results in a loss for the firm are charged for that error on a net basis against their pay.”

Management has been an essential Shearson tool because its strategy has been to grow by ingestion from a tiny firm in 1965 to a behemoth. Before it was acquired for almost $1 billion by American Express in 1981, the brokerage firm begun by Sanford (Sandy) I. Weill and a few partners had acquired ten companies, including Hayden Stone; Shearson, Hamill; Lamson Brothers; Faulkner, Dawkins & Sullivan; and Loeb Rhoades, Hornblower. With the capital of American Express, Shearson/American Express, as the merged company was called, was a mighty power.

If financial service companies were nations, American Express would rank as a superpower. It is a $10 billion-a-year powerhouse whose rivals have names like Citicorp and Merrill Lynch. American Express officials, like planners within a vast government bureaucracy, speak of their “global policy,” one that reaches into 130 countries, and whose scope is enormous. For as regulatory walls crumble and financial giants diversify, distinctions blur among brokerage, banking, insurance and retail industries. The financial services American Express provides include credit cards, traveler’s checks and services, food and travel publications, insurance companies, financial planning, international banking, investment banking, money management, retail brokerage and cable television.

“Our own view is that our model should be one of a holding company able to be in any business we choose to be in,” says James D. Robinson III, chairman and CEO of American Express. Twenty years from now, adds Louis V. Gerstner, Jr., then chairman of the executive committee and now president, there will be a profound “democratization of financial services.” In Gerstner’s vision of the immediate future, American Express cardholders will have the conveniences of one-stop financial services. In addition to current travel services, there will be American Express cash machines all over the world. Customers will be able to do their banking, financial planning and tax preparation; deal with their broker; buy insurance; invest in a money fund; write checks against the money funds—all at home, on a computer terminal.

Since size permits Wall Street giants to compete more effectively, the addition of Lehman would be another step on the long march toward a Wall Street dominated by a few financial service superpowers.

That is the framework in which Peter Cohen operated. After spending the morning on the telephone, he took a break early Saturday afternoon to drive his wife, Karen, and their son to the supermarket. At about two-thirty the Cohens in their station wagon reentered their four-acre compound, going past the copper gates, around the serpentine driveway, past the manmade pond, past the two copper-roofed glass buildings separated by a moat and connected by a bridge. “It looks like a TWA terminal,” says one friend. The car came to a halt in front of the glass house.

A familiar figure stood waiting at the end of the driveway—Steve Schwarzman. Cohen’s neighbor was smiling broadly.

“Peter, I’ve got to talk to you,” Schwarzman recalls saying.

“About what?” answered Cohen, who was surprised to see him.

“I want you to buy Lehman Brothers.”

“What would I ever want with a bunch of prima donnas like that,” Cohen answered.

The two investment bankers did not have to exchange winks. Each knew how to play the game. They were part of a community of investment bankers, a pack, that moved in the same circles. Most were in their mid-thirties to early forties and generally were raised in upper-middle-class suburban homes. They were men of considerable financial acumen and, in their world, notoriety, The pack included Thomas Strauss, a senior partner and member of the executive committee of Salomon; Bruce Wasserstein, co-head of the mergers and acquisitions department at First Boston; Martin Gruss, who works with his father, Joseph, at Gruss & Company, a potent arbitrage and private investment firm; Kenneth Lipper, a former partner at Lehman and Salomon; Steve Robert, chairman of Oppenheimer; Jeff Kyle, president of Republic Bank; Mickey Tarnopol, head of international banking at Bear Stearns; arbitrageur Jeff Tarr of Junction Partners; Melville Strauss, a partner at the money management firm of Weiss, Peck & Greer; Richard Lefrak, of the real estate colossus that bears his family name; Rick Reiss, a partner at the money management firm of CumberLand Partners.

Although Cohen was an operations executive, a manager, he was a member of this group of go-go bankers and entrepreneurs whose names often streaked across the business pages, who put together the megabuck deals and leveraged buyouts and who had become, unlike bankers of another era, celebrities.

Among themselves, they often talked obsessively about money and deals, though never about their own deals. A few of their wives had careers or were trained for careers—Evelyn Lipper is a pediatrician and is independently wealthy,* and Karen Cohen studied architecture and was, for a time, an interior decorator. Many of these wives are active in charitable work—Ellen Schwarzman chaired the Benefit Committee for the Mount Sinai Medical Center. But most were trained to be professional wives; imbued with the values of the suburban country clubs in which they were reared, where their tennis and social graces were honed. Their life’s goal, explains a Hamptons’ friend of many of these women, “was to marry a man who completely supports you, whom you respect, and then your ambition is carried out through motivating your husband and your children.” Many of these women spent their summers in the Hamptons. They entertained frequently, paying Rolls-Royce prices to cater their parties from “in” food emporiums like Dean & DeLuca’s and Loaves & Fishes. “Ellen Schwarzman’s flowers are like her dinners: everything is perfect,” observes a friend. “They don’t just serve goat cheese. It’s forty-six goat cheeses. When you walk in, you are asked, ‘Would you like champagne?’” In all, this was a group of people eager to show off their perfect buffet, their perfect children, their perfect home; but always with an eye on not being too ostentatious.

Karen Cohen and Ellen Schwarzman were friends; their four children played together, and they went to the same exercise class in the Hamptons. Peter Cohen and Steve Schwarzman had another bond: they had talked many times before about a marriage between the two companies. “For a long time he would say, ‘You ought to buy Lehman Brothers,’” recalls Cohen. But Cohen always responded, “Stephen, it’s not something we’re interested in.”

There had been other overtures between the two firms, and in the past Shearson/American Express had not been interested. Salim (Sandy) Lewis, the matchmaker who helped put Shearson and American Express together in 1981, receiving a fee of $3.5 million in the process, had met with Peterson and Glucksman in 1982. “We didn’t send him,” says Cohen. This discussion led nowhere. Then there was a dinner in December 1982, arranged by Sherman Lewis, who ran investment banking for Shearson. The dinner was organized by Lewis and his former brother-in-law, Eric Gleacher. Cohen attended the dinner, as did Lewis, Gleacher, Peter Solomon, who was invited by Gleacher, and Herbert S. Freiman, who ran trading operations at Shearson. They went to the trouble of dining in Queens, says Gleacher, “so no one would see us.” Neither Peterson nor Glucksman was told of the meeting, says Solomon, because “Shearson wasn’t interested. It wasn’t us saying, ‘Why don’t we merge.’ It was us saying, ‘What do you guys do? Here’s what we do. If there’s any interest, only two guys can talk for Lehman, Peterson and Glucksman.’”

One of the three Shearson executives who attended says Solomon and Gleacher were not so passive: “They tried to persuade us to do something. We decided not to.” The timing was wrong, says the then president of American Express, Sandy Weill; they didn’t want to purchase a firm like Lehman “in a boom environment” when the price would be too steep.* Price was just one factor, admits American Express chairman and CEO Robinson: “We could never figure out how to deal with the price and the superstars at a place like Lehman. How would we avoid making people richer and then see them go elsewhere? Also, there was a worry about what role the management there would want to play. We couldn’t figure out how to do it.”

But with Peterson gone, with Glucksman weakened, and with Lehman careening toward losses that would dwarf those of 1973, this time Peter Cohen could figure out how to make a deal. Although he was nursing a bad cold and felt lousy all morning, suddenly Peter Cohen came alive. For the next two hours he and Schwarzman sat sipping coffee and reviewing why such a merger would be advantageous to Shearson, and what the pitfalls might be. There were several questions on Cohen’s mind. Would Glucksman and Rubin be willing to step aside? Would senior people at the two firms be able to work as one? Could Lehman partners be persuaded to stay, giving up their private partnerships to become employees of a $10 billion financial services empire? Cohen remembered that when Merrill Lynch had acquired White, Weld in 1978, several status-conscious banking partners refused to join a retail house, which is what Shearson is known to be. Unlike the case with the Salomon merger with Phibro, a non-Wall Street commodities trading company, or the Bache Group’s marriage to the Prudential Insurance Company of America, Shearson and Lehman departments would overlap, making a fit more difficult. Would Lehman clients stay with a combined company?

By joining the companies and eliminating duplicate functions, said Schwarzman, Shearson could save $100 million; the fit made the whole stronger than the separate parts; Lehman’s prestige would be showered on Shearson. “I told Peter the deal would be excellent for him personally,” said Schwarzman. “It would be prestigious and newsworthy. And it would be his deal, not Sandy’s.”

“You don’t have much time to think,” Schwarzman recalls saying. “There is a board meeting Monday. The firm is chaotic and there is a real crisis of confidence. In this kind of situation the first guy in will win. You’ve got to act with dispatch. Which means you’ve got to act before the board meeting Monday.” Cohen, rising from his chair, said he wanted to ponder the many questions involved and to consult with his people. He walked his neighbor to the door.

By Sunday, Cohen had reviewed these and other points on the telephone with his team and had spoken again with Schwarzman, who remembers advising Cohen to call Lew Glucksman on Monday morning. Schwarzman so distrusted Glucksman that, he says, he cautioned Cohen to be sure to mention that they had talked about a possible merger over the weekend.* That way, said Schwarzman, Glucksman would not dare summarily reject a bid from Shearson/American Express and fail to present it to the board, the way he had secretly vetoed ConAgra; and if he should dare, this time Schwarzman would be there to blow the whistle.

Before calling Glucksman on Monday morning, Cohen first placed a conference call to his two immediate superiors, chairman Jim Robinson and president Sandy Weill of American Express, Cohen’s former mentor at Shearson. “I have reason to believe Lehman is going to be sold,” Robinson recalls Cohen saying. “Should we take a good hard look?”

“If it’s going to be sold, we should take a good hard look because it’s one of the great old-line trade names,” answered Robinson.

The three men knew that once before, in 1977, when Shearson was interested in acquiring a blue-chip investment house—Kuhn Loeb—Shearson moved too slowly and was bested by Lehman. So with a green light to explore a merger, Cohen hung up and dialed the chairman of Lehman Brothers Kuhn Loeb. He remembers the call this way:

“I read the present Fortune,” said Cohen.

“You can’t always believe what you read,” said Glucksman.

“I know that. But it stimulated the thought that we have a lot of complementary strengths, and maybe you’d be interested in talking.”

“I’d love to meet with you if you people are serious,” Glucksman recalls saying.

“We are serious,” said Cohen.

They agreed to move fast, and Glucksman said he would call Cohen back after he met with his board at ten-thirty that morning.

By this time, Lehman board members had an additional reason to be anxious. The March figures were being processed, and they revealed another dismal month. All over Wall Street, business was down. But unlike Shearson, Glucksman refused to slash overhead costs, believing that the firm had to ride out the storm and be prepared to return in strength when the market perked up.

Although Glucksman would later tell Forbes magazine “there were no heavy losses in this firm” during his reign,* and to this day proclaims, “We had no losses. We were profitable up to the end,” that is not quite the case. Lehman’s books show that the equity and fixed-income trading divisions of Lehman lost $12.6 million in March before taxes and bonuses; these losses were only partially offset by the profits of the banking and money management divisions. In all, Lehman lost $5.5 million in March of 1983. From October 1,1983, to March 31, 1984, the first six months of the fiscal year, Lehman’s pre-tax, pre-bonus profits dwindled to $1.6 million (compared with post-bonus profits of $74.3 million a year earlier). Counting a $2.5 million tax credit and bonus payments, the firm’s six month pre-tax profits were $733,000. This is the profit number Glucksman snookered Forbes with. What he also didn’t share with Forbes were operating and trading losses in that period of about $30 million.† To appreciate the enormity of these losses, consider: Lew Glucksman almost got fired in 1973 for losing $8 million; and the 1984 trading losses exceed the $27 million the fixed-income division of Becker Paribas lost in the nine disastrous months before they were forced to sell to Merrill Lynch in August 1984. And Lehman’s losses would mount in April and early May.

Lehman partners complain that these trading losses were never adequately explained. To this day Lehman traders are defensive about them. “These were not trading losses,” says Dick Fuld, who was responsible for all trading at Lehman. “Maybe $5 to $10 million were trading losses. Most of it was due to no generation of income.” By Fuld’s novel logic, managers were not responsible for high overheads, nor should trading overhead costs or reduced revenues be counted in calculating profitability; the score should only be kept on actual trades where money was lost.

Was Fuld gambling more in 1984, perhaps in the hope of shoring up Glucksman’s rule? “That was not the case,” he answers. “I take it as a personal failure to lose money. Although we daily bought and sold securities, we did not take speculative long positions on fixed-income securities during that period.”

The firm lost money, much as it had in 1973 when traders invested heavily in securities, gambling that interest rates would fall. Then, when interest rates rose, instead of shedding these securities, Lehman traders held on to them too long. These losses are linked to Lehman’s curious approach to what traders call marking to market, or pricing the current worth of securities in their portfolio, rather than carrying forward the value at the time of the transaction. Fuld says Lehman marked to market “every day.” He is contradicted by chief financial officer Michael Schmertzler: “It had been the policy of the firm not to mark short-dated money market securities to market. This was a policy in the process of being changed.” It had been Lehman policy not to mark to market Euro certificates of deposit (C.D.’s), since these were short-term instruments, payable within the year and therefore within a single accounting year. But in the early 1980’s, when longer-term Eurodollar C.D.’s and similar money market instruments were developed, some stretching for up to five years, Lehman policy did not change. The firm did not mark these to market daily, as was the case with other long-term securities. By doing this, says one former Lehman partner, “it was to their advantage to buy longer-dated securities with a higher yield, which they financed with lower-cost short-term borrowings, thereby creating a current profit on the carry. So long as you didn’t have to mark to market, the only risk one had was that overnight interest rates would go higher than the interest rate on the longer-dated security.” In reality, one could hide enormous losses this way.

Stephen W. Bershad, who ran the London office through which many of these securities were traded, protested. “For reasons I’ve never fully understood,” he says, “the firm had a policy where we didn’t mark money market securities to market daily.” Bershad says he raised the issue with various people and was “told that was the policy of the firm. I thought it didn’t make sense because I didn’t understand why a five-year C.D. wasn’t treated for accounting purposes on the same basis as a five-year Eurobond. I, frankly, didn’t make a big deal of it. I’m not an auditor.”

However, Bershad remained uncomfortable and suspicious. “The firm was capable of buying up to $500 million worth of C.D.’s,” he says. “If the market goes up, you can always realize your profit by selling the securities. On the other hand, if the market goes down, you don’t have to recognize the loss because the securities are not marked to market. You merely continue to hold them until they are paid at face value. In Europe, our Euro certificate of deposit position got to be fairly large and no one wanted to recognize the loss. So it was just held. The question is whether that whole system was used to manufacture or control profit. Or was it just a vestige of an accounting system designed at a time when C.D.’s were ninety-day instruments and there was no need to mark to market?” The answer, Bershad thinks, comes in two parts: by not taking down the losses, the traders could avoid making themselves look bad and therefore make Glucksman look better, and also it honestly “got lost in the cracks and the accounting wasn’t a major focus of interest.” Bershad believes total trading losses hidden by not marking to market “could have been substantial, but because they were not marked it’s impossible to know.”

Inside Lehman, trading losses were no secret. And they helped produce a psychological reversal of roles. Now the bankers were carrying the traders. To this was added an insult: the money set aside for partners’ bonuses was a paltry $3.3 million, only an eighth as much as the $27 million set aside the year before. Partners understood that profits were off all over the Street. But Lehman’s numbers trailed the industry norm. Such trading houses as Goldman, Sachs and Salomon Brothers were generating better numbers.* Lew Glucksman was shorn of his armor. No longer was he a guaranteed money-maker. A fickle market had denuded a troubled partnership. After months of trench warfare at Lehman, partners were openly distraught.

Thus the Shearson feeler was seen as a life raft. Some partners would have preferred that the feeler had come from a nonindustry source, allowing them to preserve near total independence, as Salomon did when it consolidated with Phibro or Dean Witter when they hooked up with Sears. But now Lehman was racing the clock. Options were limited. Their hope was to induce Shearson to become a partner, one that would both infuse Lehman with fresh capital and award each partner an ample premium, while allowing the firm to remain a partnership. And although this was not discussed at the board meeting, with an established management team in place at Shearson a majority of the board assumed it meant the demise of Glucksman & Company.

“This is very serious. I think we have a buyer here,” Glucksman told the board. He asked for, and received, permission to negotiate. The board was happy; Jim Boshart was not. Just a few days earlier he had been told to tell employees that Lehman was not for sale. Now it was. Boshart raised his voice in frustration, and remembers one of his partners snapping, “Grow up!”

“If that’s what growing up is,” Boshart shot back, “I’d prefer to be Peter Pan.”

Glucksman sympathized, but he did not side with Boshart. He felt he knew what he had to do, and he announced that he would make a breakfast date the next morning with Cohen and the four-member Lehman committee. The meeting was adjourned.

As they wandered out, many partners wondered if they could trust Lew Glucksman to put his heart into selling Lehman. As a precaution, Schwarzman met secretly that afternoon with Shel Gordon to brief him on his conversations with Cohen; and that evening, as he would most evenings for the next ten days, Peter Cohen telephoned and kept his back channel open to Steve Schwarzman. “He told me Lew handled the matter very professionally,” says Schwarzman.

The next morning, Glucksman hurried across American Express Plaza, which divides Lehman’s 55 Water Street headquarters from the American Express building, perched near the southern tip of Manhattan. As he rushed to breakfast he remembers vowing: “I made up my mind going to that meeting with Peter Cohen that I was going to sell the company.”

The April 3 breakfast meeting was conducted at the rectangular table in James Robinson’s private dining room, a small room with flowered, cloth-covered walls and a single painting of a horserace at Brighton. Attending were Robinson, Sandy Weill, Peter Cohen and members of his team, as well as Glucksman, Rubin, Gordon and Solomon, the committee from Lehman.

Eggs were served, and for the next three and a half hours, with Robinson and Weill excusing themselves from time to time, the men discussed their business philosophies, their views of the future direction of the business, what ingredients were needed to succeed.

Most of the talking in the meeting was done by Cohen and Glucksman. Each explained how he managed his firm. They talked about how the two firms might mesh. Glucksman said he hoped they might structure a deal to be fifty-fifty partners. Near the end of the meeting, remembers Shel Gordon, Peter Cohen punctured this illusion: “Let me make clear that we are not interested in any minority interest. If we are interested, it is only on the basis of a total deal.”

“By eleven-thirty I had enough of a thumbnail sketch of their firm to know there could be a fit here,” says Cohen. He turned to Glucksman and said, “Lew, we would definitely like to pursue something with you. We are prepared to act quickly if you are inclined.”

“I’ll call back after I talk to my partners,” Glucksman responded. “How late will you be in tonight?”

“Eight P.M.”

“I’ll call you at seven-thirty,” said Glucksman.

As he hurried back to Lehman, Glucksman was also pleased. “I liked the conversation with Peter,” he says. “I realized it was the right deal for them and for us. I did not want to attempt to hold an auction in which everything could go wrong.”

The Lehman board met at four that afternoon. Glucksman reviewed the breakfast meeting; the pulse of the board quickened. They were, for the first time in a long while, hopeful that a sale was near. They were heartened that Lew was acting in what they perceived as the firm’s best interests, and for the first time in months they felt a sense of solidarity with Glucksman and Rubin.

Then, once again, the demons took over. “Peter Solomon will not be part of the negotiations with Shearson because of the exceptionally destructive position he has taken toward me on the outside,” Glucksman recalls announcing to his startled partners. “I’m not going to let Peter Solomon be involved in my fate!” The chairman recommended that the negotiating team consist of him, Rubin, Shel Gordon, and chief financial officer Michael Schmertzler. He demanded and received an immediate vote. “The vote was to support my slate,” Glucksman says, still savoring the memory.

Solomon blew up. “I’ve had enough of this!” he recalls shouting at the top of his lungs. “This is outrageous. This is the last meeting I’ll attend.” Before storming out of the boardroom, he says, “I gave Shel the high sign. What I was trying to do was to make sure there was no backsliding.” Glucksman didn’t notice any signal to Shel. To him, Solomon was just being his normal petulant self. “I enjoyed watching him get hysterical,” Glucksman recalls. “That’s the only time during this period that I enjoyed myself a lot.”

That night, at seven-thirty, Glucksman called Peter Cohen and told him, “We would like to pursue something with you.”

The next day, Wednesday, Glucksman was in St. Louis on business. Schmertzler sent over a packet of financial information on Lehman Brothers Kuhn Loeb. The ball was now in Shearson/American Express’s court. Shearson executives began to inspect the names of the Lehman partners and began to make discreet calls, remembers Shearson vice chairman and chief operating officer Jeffrey Lane, to others on the Street to “check out all of Lehman’s key players.” Shearsori was worried. If they went ahead with a merger, they wanted to be sure they first identified those partners they wished to keep; then they might find a contractual way to lock them in after the merger. By the end of the week, says Lane, who had been an M.B.A. classmate of Peter Cohen’s at Columbia and who also grew up in one of Long Island’s “Five Towns,” each top executive at Shearson was assigned a list of Lehman partners to check out. “We looked for at least three cross-references on each,” he says. “It came to a point where we knew all of the idiosyncracies of a partner, but we wouldn’t have known him if he walked in here!”

James Robinson worried about whether Lehman would lose clients after a merger, whether the two firms would fit, whether their cultures were too diverse to blend, whether their back-office operations could be integrated. He spoke with Cohen about the contracts Peterson and Glucksman were given beginning in 1982 to receive 1 percent each of Lehman’s profits. A public firm could not honor such an agreement. Besides, how could Shearson segregate its earnings from Lehman’s? The lawyers reported that in the event of a merger Glucksman’s 1981 contract clearly assigned this obligation to the parent company. The nine-page agreement stipulated that in case of a merger or sale, the contract would be “binding upon” the “successor corporation.” But Peterson’s severance agreement, which superseded this contract, was, according to Shearson’s attorneys, less clear on whether Shearson/American Express was bound to pay him 1 percent. However, litigation was in no one’s interest. Would Glucksman and Peterson be willing to substitute a fixed fee? Cost was very much on Jim Robinson’s mind. He knew that in late 1982 Lehman partners had signaled that they thought the firm was worth $800 million, which is one reason he says American Express passed on a deal then. Now he wondered whether his view of a fair price—about $325 million—was acceptable. Until Peter Cohen and his team could study the Lehman books, they would not talk price.

Overnight, Cohen’s team poured over Lehman’s books. Cohen and Glucksman began feeling each other out about a price at a seven o’clock breakfast in Glucksman’s chart room. Munching on bagels, the two CEO’s met alone for two hours. The tone was set by Glucksman, who early in the meeting recalls saying, “Neither Lew Glucksman or Bob Rubin will work for Shearson/American Express.” It was no threat. In fact, they were words Cohen and his superiors were hoping to hear. With a team in place at Shearson, there was no management role they wished Glucksman or Rubin to perform. Cohen was grateful, and came to see in Lew Glucksman certain qualities—magnanimity, generosity—many partners at Lehman did not see.

The tone established, the two CEO’s moved on to other matters. “We talked broadly about the elements that would go into a pricing,” says Glucksman. They talked about the need to compensate young associates, those just below the rank of partner who owned no stock and thus would receive no premium; about how the top Lehman executives might mesh with Shearson’s; about how senior executives were compensated at the respective firms; about how Shearson would manage the joint firm.

Then Glucksman’s 1 percent contract came up. In addition to stepping aside as a manager, Glucksman volunteered to waive his deferred compensation agreement, which promised him 1 percent of Lehman’s profits running through 1986. Glucksman says, “I have enough pride that I put above $600,000-a-year. To me it was blood money from all the people who came to work here and who we told we would not sell the business.” Peter Cohen was startled, and gratified: “He had the firm’s interest only, first and foremost.”

The two men were joined at about nine by Rubin, Gordon and Schmertzler. They talked for another hour, reviewing what other data Schmertzler could provide Cohen. They talked about how quickly they had to move. “Glucksman suggested he would like to get together in the evening and wanted us to present to him our terms,” recalls Cohen.

They parted optimistically. Glucksman sensed they would be able to make a deal and was impressed that Peter Cohen and he talked the same language, used the same shorthand to communicate. Both skipped verbal pieties, the smooth posturing of old-line bankers. Yet Glucksman knew there were obstacles ahead. He wanted about $400 million for the merger, and guessed that Shearson was thinking about a number closer to $325 million. Could they do the deal fast enough to avoid damaging leaks? How would a deal be structured? Cash? Securities? What kind of securities? Would the Lehman name appear in the new firm? And then there were the people issues. Would Dick Fuld run trading operations? Would Sel Gordon head the joint banking division? What of Henry Breck in money management? Or Glucksman’s trusted right arm, Jim Boshart?

Glucksman and Cohen and their respective teams would gather that night in Cohen’s wood-paneled office on the one-hundred-and-sixth floor of Two World Trade Center. The office is dominated by an immense curved marble desktop, resting on two leather-covered barrels; neat rows of phone messages parade in single file across one side of the desk; on the other is a Quotron machine. Three straight-back chrome chairs with gray cushions face the desk. Across from the desk, on the other end of the room, are two low brown leather couches separated by a marble-topped coffee table, which also rests on leather-covered barrels. Glucksman sank into one couch facing Cohen, who sat in one of his chrome chairs. Looking to his right, Glucksman eyed the eerie legs, cut off at the calves, with the gray suit resting on a two-foot-high platform.

Cohen and his team came prepared with questions, mostly of a financial nature. Both sides felt each other out about a sales price. They stood up to prepare their own sandwiches from trays delivered from a nearby delicatessen. Glucksman said they were looking for about $400 million in all—$200 million less than ConAgra said it was willing to pay only eleven months before.*

Cohen and his team then recessed, leaving the Lehman people in his office while they gathered in Jeffrey Lane’s nearby office to try to arrive at a counteroffer. The Shearson executives knew Lehman was negotiating from weakness. “They saw that once the negotiations started there was no turning back,” says Jeffrey Lane. “If our negotiations collapsed, they knew Lehman would blow up.”

The Shearson executives returned to Peter Cohen’s office. “We told them what we thought was a fair ball-park number”—about $325 million, recalls Sherman Lewis, vice chairman of investment banking for Shearson. “They didn’t respond one way or the other.” It was clear to the Shearson people that the Lehman people thought the price too low. Glucksman said he had scheduled a board meeting for the next morning. Cohen and Lane said they would be in Washington, D.C., in the morning and would return by twelve-thirty that afternoon.

“I’ll call you at one o’clock,” said Glucksman.

The Lehman board convened the next day at ten, and quickly decided that they were close to a deal, though they wanted to hold out for a price closer to $400 million. They agreed to pursue negotiations and selected Shel Gordon and Michael Schmertzler to do the negotiating. This was agreeable to Glucksman and Rubin, who, once they determined that a deal was do-able, lost heart. They never liked the idea of selling, and no longer trusted Shel Gordon, who would emerge as the Lehman figure the Shearson people gravitated toward. “Shel stood passively by while a lot of these guys hurt my reputation,” says Glucksman.

Glucksman and Rubin were angry. Yet they had obligations to fulfill. So they seesawed between magnanimity and peevishness. Externally, in their negotiations with Shearson/American Express, they were models of responsibility. Internally, they rarely made an effort to heal wounds. As Glucksman settled a score with Peter Solomon, so Bob Rubin maintained a mental enemies list. He refused to attend any meeting—including negotiating sessions with Shearson—at which Solomon, Roger Altman or Steve Schwarzman were present. Solomon he accused of aggressively shopping the firm on the outside and of badmouthing Glucksman & Company all over Wall Street; he thought Altman was a double-dealer, someone who at first pretended to be their ally after Peterson left and who then turned on them; and he accused Schwarzman of being “deceitful,” suspecting that he (and Solomon) were somehow involved in the presumed Fortune leak. Both men wanted little to do with a board they believed had betrayed both them and the independence of Lehman Brothers. Of course, their withdrawal pleased most members of the board, who felt confident that Shel Gordon was more likely to consummate a deal.

Glucksman telephoned Cohen at one o’clock. “Shearson is the right place for Lehman Brothers,” Cohen recalls him saying. “We like you people. We like your philosophy. And we’d like to consummate a transaction. Shel Gordon and Michael Schmertzler have been authorized by the board to negotiate a final transaction.” Glucksman told Cohen that he was off to Florida, where he had a retail sales meeting and that he would then largely bow out of the negotiations. Cohen thanked him and arranged for Gordon and Schmertzler to meet at five that afternoon in Jim Robinson’s conference room.

The afternoon meeting lasted two hours, and spanned a range of subjects, including the ultimate sales price and the concept of creating a separate pool of money to reward promising associates who had hopes of one day becoming partners. At about seven, Gordon and Cohen shook hands on a tentative agreement. They parted, and Cohen telephoned John Gutfreund, asking if Salomon Brothers would serve as an adviser on a possible merger with Lehman. In any merger, both sides are usually represented by an investment banker who checks the numbers and confirms the fairness of the offering price. Choosing Salomon made sense to Cohen because the firm had been through a similar merger in 1981 and because, says Cohen, “we needed them to help in valuing Lehman’s trading inventories.” Clearly, Cohen’s auditors had flashed a cautionary signal. An added reason was that one of Cohen’s most trusted friends, Thomas Strauss, was the senior partner at Salomon, and Cohen wanted him assigned the task.

That weekend Peter Cohen’s wife, Karen, and Tom Strauss’s wife, Bonnie, were off to Paris on a shopping trip, attending fashion shows and art exhibits. Peter Cohen had a deal to close, one of the most momentous deals of his life, but he also had a six-year-old son and an eleven-year-old daughter to care for, meals to prepare, and an old hunting dog—“Sam,” a Brittany spaniel—to walk. Cohen dispatched his daughter and a nanny to their Hamptons home for the weekend. He took his son, Andy, to the Post House in Manhattan for dinner, returning home to a ringing telephone. It was Tom Strauss. “Can’t talk to you,” the CEO of Shearson/American Express hurriedly exclaimed. “I’ve got to walk Sam. I’ll call you back.”

The next morning Cohen took Andy to a sporting-goods store to buy a speed punching bag for his bedroom. Then he raced uptown, dropped his son at a friend’s house, where he arranged for him to spend the weekend, returned to his Park Avenue apartment to walk the dog, and sped to the Manhattan Café on First Avenue, where he was to meet Sandy Weill and Shel Gordon. Of Gordon, Weill says, “He seemed like the most senior guy there, and I wanted to get a feel from him of what he thought of the company and how we would fit.” The Shearson team had spotted the personable, adroit Gordon as the prime prospect to become a senior officer in the new firm, seeing in him a natural bridge builder. Although they had not yet decided whether Gordon would be number one or number two in the combined banking department, he obviously impressed them, for the lunch lasted four and a half hours.

When Cohen arrived home the housekeeper handed him a list of telephone calls, which he spent the next two hours returning. Then he hurried to attend the Manhattan wedding of a friend’s sister. There he met Michael Phillips, producer of such movie hits as The Sting, Close Encounters of the Third Kind and The Flamingo Kid. Phillips’s wife was also away. “We decided to be each other’s date for the evening,” says Cohen. At eleven they left the wedding and went to watch their mutual friend, actor Michael Douglas, host Saturday Night Live. “I was ready for a break,” says Cohen. He arrived home at one-thirty in the morning. The housekeeper was still up, and somberly reported that his wife was not on her scheduled plane and that his dog had eaten a pencil and was vomiting. Cohen vainly tried to reach Karen in Paris, comforted his dog and went to bed.

At eight Sunday morning Cohen met Dick Fuld for breakfast at Kaplan’s, a delicatessen on East 59th Street, where they discussed how the two trading operations could be integrated. On his way out, Cohen paused to place a lunch order and asked that it be delivered to his apartment by noon, when he was expecting his team to arrive. “Send paper plates, plastic forks. Send everything!” he instructed.

At ten Cohen was at River House on East 52nd Street. Joined by Robinson, who also lived there, they went to Gutfreund’s duplex to discuss Salomon Brothers’ initial findings and to solicit his views. “I advised them that if they could hold people, it was a good acquisition for Shearson because it brought them good investment banking and money market and trading expertise,” says Gutfreund. Salomon’s chief added, recalls Robinson, that he always wondered “why Lehman continued to outdraw us at the top business schools. He said Lehman had panache.”

From Gutfreund’s apartment Cohen headed west, back to his own home, where his team and the delicatessen order awaited. The meeting focused on people—on how to fit the two organizations together, on which Lehman partners were essential and which were not. To lock in those partners deemed critical to the continued success of the merged firm, they came up with the idea of fashioning a noncompete clause in the sales contract. Those Lehman partners judged essential would be required to sign, pledging not to join another Wall Street firm—or there would be no sale. By three o’clock, when Robinson and Weill arrived, Cohen and his team had a tentative structure to recommend: the Shearson or Lehman people who might head each department.

Suddenly, Karen Cohen swept in from Paris, laden with packages. After saying hello to everyone and spying the bountiful buffet, she beckoned to her husband, “Can I see you for a second.” Karen led him into a bedroom. Trailing after her, Cohen remembers feeling pretty good. In her absence, he had juggled a number of things this weekend—one of the most momentous merger negotiations of his career, two children, a sick dog, a wedding and a meal for the Shearson/American Express team. Karen Cohen, however, was not impressed. “How can you serve your associates on paper plates?” she asked.

An American Express board meeting was called for the next morning to vote on the merger, but there were still issues to resolve. Cohen spent most of Monday, April 9, on the telephone, gathering information about Lehman partners. Decisions still needed to be made about what role Lehman people, particularly Shel Gordon, should play in the new firm. In arriving at these decisions, Cohen was not a totally free agent. He had the wishes, and insecurities, of his own team to contend with.

Sherman Lewis, for instance, was understandably concerned about his own responsibilities after the merger. Would he continue to run the investment banking division? Or, because banking was Lehman’s strength, would Shel Gordon run the joint department? When Loeb Rhodes, Hornblower was acquired by Shearson Hayden Stone in 1979, Sherm Lewis was a good soldier, stepping down as co-CEO to run the banking division. Would he be expected to do so again? Would Lewis and Gordon get along? Cohen had encouraged Sherm Lewis to get to know Shel Gordon, and to this end the two bankers lunched for four hours on April 5. On Monday, April 9, they lunched again, and in order not to arouse curiosity they met in Weill’s conference room at the American Express building. Together, they made preliminary judgments about people who would run such critical banking branches as mergers and acquisitions, divestitures and financial restructuring services. “It was apparent to me,” says Lewis, “that we were going to get along well together.” That afternoon Sherm Lewis visited Peter Cohen, who remembers that Lewis said, “Look, we’re buying one of the major banking franchises. I think Shel should be in charge of banking.”

A last minute snag developed. Before Cohen would take the deal to the American Express board he said he needed to resolve with Pete Peterson the question of his deferred 1 percent of profits. Glucksman had already ceded this contractual provision. Peterson, in several telephone conversations with Cohen, refused. Cohen and Peterson, joined by Jim Robinson, met for breakfast at the Glass Box, a coffee shop across from the U.N. Plaza. Peterson remembers that they talked mostly about client service and about his hope that Shearson would allow Steve Schwarzman to leave and to join Peterson, Jacobs. Cohen remembers that they spoke at some length about the 1 percent issue. Cohen says he informed the former Lehman chairman that although Glucksman’s contract clearly required Shearson to pay him 1 percent, Shearson lawyers advised that Peterson’s severance agreement was murky in the case of a merger. Peterson disputes this, saying, “There was never any question of ambiguity.” Morton Janklow, who negotiated his severance agreement, says flatly, “What he was entitled to was one percent of Lehman’s profits.” Noting that the agreement took care to provide Peterson with a premium if Lehman were sold anytime within a two-and-a-half-year period, Janklow asks, “Do you think we would anticipate the possibility of a sale without anticipating all the possibilities a sale would bring about?”

Over coffee, Cohen hoped to shame Peterson by mentioning that Glucksman had waived this provision. He also said that since it was next to impossible to segregate Lehman earnings from Shearson earnings, surely Peterson couldn’t expect to receive 1 percent of the profits of the combined firms.

“I’m not sure that I don’t have a right to one percent of Shearson/Lehman profits,” Cohen remembers Peterson saying.

“I can’t find a lawyer to say that you don’t have a claim on one percent of Lehman’s profits,” said Cohen. “We have to negotiate it out.” Peterson agreed. However, Peterson flatly disagrees that he ever discussed a claim to a percentage of Shearson’s profits: “There was never any discussion about Shearson’s profits. Shearson was earning six to seven times what Lehman was earning.” The question they grappled with, he says, was how to compute Lehman’s profits. He recalls saying, “The last thing I want to do, Jim, is get involved in an accounting argument.”

After much back and forth, they reached an agreement. Peterson would receive, as a substitute for the 1 percent, an additional annual payment of $300,000 for five years. Since Cohen says Lehman would not have made a profit in 1984, that is $300,000 more than Peterson would have gotten had the firm not been sold. Adding the annual $300,000 allowance for office expenses granted in his severance agreement, Shearson was now required to pay a total of $600,000 annually to Peterson for the next five years. The three men failed to resolve the question of how Shearson would honor Lehman’s pledge to invest $5 million in Peterson’s new venture-capital firm, but agreed to keep talking.

Before the end of the month, Peterson and Cohen had one other conversation, in which Peterson volunteered to subtract $100,000 from the $600,000 Shearson was to pay him annually. While refusing to discuss the details, Peterson says, “I voluntarily made what I think was a significant reduction. I did it so there would be good feelings all around”—among his former partners, among executives at Shearson/American Express, and among his friends on the American Express board. A member of the American Express board put it somewhat differently: “He was afraid that it would look to his friends on the American Express board as if he were overreaching in his negotiations with us. He called Peter Cohen and said, ‘Maybe it’s a little too rich.’”

With that ticklish issue resolved, the American Express Company board gathered on Tuesday to consider the merger. In addition to Cohen, Robinson and several of their executives (Weill was in California and participated through a telephone hookup), the board contains some prominent public figures, including former President Gerald R. Ford, who in addition to the payments he receives for serving on the parent board also receives a $20,000 retainer for serving as a director of a subsidiary, Shearson/American Express, and another $120,000 a year to provide “management services” as a consultant; former U.S. Ambassador to Great Britain, Anne L. Armstrong; former National Urban League head Vernon E. Jordan, Jr.; and former Secretary of State Henry A. Kissinger, who joined the board soon after the merger.* For the next hour and a half the board inspected the deal, asked whether Lehman partners or clients would be lost in the merger and how much of the acquisition price could be made up by rigorous cost-cutting. Then the board enthusiastically ratified the acquisition of Lehman Brothers Kuhn Loeb.

The new banking house would be called Shearson Lehman/American Express (since changed to Shearson/Lehman Brothers); the purchase price was advertised as $360 million, of which $325 million went to the Lehman partners (with about $175 million of this sum being the premium above the book value of their stock); an additional $35 million was to be paid out as an incentive, primarily for nonpartners to stay with the new firm. In exchange, Shearson demanded that fifty-seven of the partners they wished to retain (of the seventy-two remaining at Lehman at the time of the sale) agree to sign a noncompete contract, certifying that they would not leave to join a competing firm within a ninety-mile radius of Wall Street for at least three years. The combined capital of the merged firm was officially pegged at $1.7 billion—about eight times Lehman’s capital.

The Lehman board also met that morning to review the proposed sale. The terms of the deal were discussed, including Shearson’s stipulation that if each of the fifty-seven partners who were asked did not sign the noncompete clause, there would be no deal. The Lehman board was not unanimous. Nor was their vote in keeping with the stereotypes of short-term “traders” and long-view “bankers.” Opposition to the sale and impassioned pleas on behalf of Lehman’s exalted past and majestic future were advanced by so-called “barbarians,” like Richard Fuld; support for the sale came from the so-called traditionalists in investment banking, many of whom cast the same cold eye on this transaction they did on others. Fuld, who played on the Lehman baseball team, who took his first and only job at Lehman fifteen years before, cared about Lehman the way he cared about Alpha Tau Omega, the University of Colorado fraternity that elected him president. Fuld believed no price justified selling something he considered family. Although he despised many banking partners, he concluded, “I loved this place.” So Fuld voted against the sale.

He was joined by his close friend James Boshart, who was both disillusioned and bitter. “This is a firm that is a hundred and thirty-four years old,” Boshart remembers saying. “People are made partners of this firm as a reward for doing a good job. They didn’t start the firm. My feeling is that no group of partners has the right to sell the business and deny an opportunity to nonpartners, to people who had been absolutely integral to the success of the firm the last five years … We are taking the brass ring away.”

The third dissent came from Robert Rubin, who minced no words in accusing his partners of panicking and, above all, of a greed that filled their eyes with dollar signs and blinded them to what Lehman was, and could continue to be. The business would rebound, he said. In any merger, he warned, hundreds of Lehman employees would be summarily fired. Rubin said he was prepared, as were Fuld and Boshart, to shrink the firm in order to preserve its independence. To many of his fellow board members, Rubin was acting like Rubin—negative, passive, resistant to change. Rubin, however, thought he was the noble sentimentalist, not the cynic.

Those favoring the sale spoke of the advantages, including a fresh infusion of capital, that Shearson/American Express would bring. They spoke of being a full-service firm, of competing toe to toe with the giants. Little emphasis was placed on the premium the partners would pocket, or the partners’ genuine anxiety about bankruptcy. And, out of politeness or exhaustion, little was said in this room of the political as opposed to economic reasons for the sale. “Our decision to sell was actually not motivated by economic considerations,” says Peter Solomon, overstating his case. “Our problem was a political problem. We had a political situation that could not be resolved, and that’s why we were sold.”

Except for Lew Glucksman, everyone—including Bill Welsh—spoke. The majority of the board clearly favored the sale. Then it was Lew Glucksman’s turn. He felt miserable, ambivalent. He did not really want to sell, yet he believed there was no other way to assuage the board. He knew that power at the firm had passed to the board. And, he says, “I recognized there was no role for me in the sale to Shearson. This was hardly my choice.” So Glucksman swallowed hard and said he was impressed with Shearson/American Express as an organization and as a group of people. He said he was fearful for the future of Lehman as an independent partnership and felt this was the less undesirable solution. Reluctantly, Lew Glucksman cast his vote with the majority.

“We were all terribly relieved,” says François de Saint Phalle. “It was like waking up from a nightmare.”

*She is the daughter of Joseph Gruss.

*In June 1985, Weill, saying he was restless to once again “run and build something,” tendered his resignation. He was replaced by Louis Gerstner.

*Cohen at first said he did not recall this advice; later he amended this: “Schwarzman told me, ‘Don’t tell Glucksman you told me because he hates me.’”

*Forbes, June 18, 1984.

†The banking division made $22 million and the money management division $6.8 million during these six months. Add a bonus for the partners, and the losses attributed to trading climb above $30 million.

*Later it would come out that one of the giants, Prudential-Bache, reported a net loss of $113 million in 1984.

*Because part of the ConAgra purchase price would have been paid in ConAgra securities, and since these securities were of lesser investment quality than American Express’s, it could be said that the ConAgra offer was worth somewhat less than $600 million.

*Outside directors receive an annual retainer of $20,000, a $700 fee for each board meeting, and $500 for each committee meeting they attend.