The fall of the house of Lehman opens a window onto the turbulent changes taking place on Wall Street, and within capitalism. Looking through that window, different people seize on different explanations to describe what they see.

One school sees the sale of Lehman as inevitable, brought about primarily by capital needs and institutional forces beyond the control of Pete Peterson, Lew Glucksman or any mere mortal. Individuals may have made mistakes that hastened what happened to Lehman by a year—or five—but to this way of thinking, the sale was inevitable because private partnerships that try to compete with financial superpowers are doomed.

“Five years from now there wouldn’t have been a Lehman Brothers,” Peter Cohen said eight weeks after the merger. “Lehman was running out of capital.” Economic necessity dictated the merger. In Cohen’s view, Shearson/American Express was both a savior of Lehman Brothers and a promoter of greater economic democracy. Financial superpowers like Shearson/American Express may concentrate wealth, but they do so in a more democratic fashion than the amassed wealth of an earlier era, he says. “We’re part of a big public company. The wealth created by the Harrimans, Morgans and Rockefellers was individual wealth. You don’t have that going on on Wall Street today. This is a huge country with a huge amount of capital. If our capital ten years from now is $4 billion, it will still only be a small part of a large arena.”

Former Lehman partner Steven Fenster believes that what happened is much more an institutional story than a human one: “It was inevitable that a private firm like ours would become part of a larger firm within two to three years.” The rush of economic events and capital pressures, he says, have altered America, and not just Wall Street. “If you look all around America, you will find almost no privately owned industries, other than lawyers and doctors, who benefit from regulation. When I came to Lehman we had showcase capital. But it really wasn’t used in the business.” Two decades ago, markets were stable, interests costs and inflation low, the overhead of firms was small, fees were steady, competition gentlemanly, and government regulations paced approval for underwritings; companies were rarely menaced by hostile takeovers, there was “no such thing as positioning a private placement,” no risky trading of bonds in secondary markets, and certificates of deposit were just beginning. To shrink Lehman, as Bob Rubin and others argued, would have been perilous, says Fenster. Many more employees would then have been laid off. The cost of abandoning Lehman’s branch office network, its already contracted leases, its new and elaborate communications system, the severance payments required, would have been prohibitively steep. Clients would no doubt have fled, fearing they would no longer receive full service. And, Fenster concluded, “What happens if you shrink and you’re wrong? If the boutique failed, you would have damaged your franchise and lost the safety net of a sale.”

Asked about the fate of those Lehman associates just below the partner level, Shearson’s vice chairman and chief operating officer, Jeffrey B. Lane, said, “We’ve tried to deal with them by asking, ‘Is the era of private bankers over?’ If it is, they have to face up to this Brave New World. I think it is over. Lehman has to cause the other private investment bankers to view themselves objectively. There’s always a role for the small boutiques. The problem is the firm that is neither fish nor fowl.” Neither small nor big enough. “We’re a wholesaler and a retailer. Why shouldn’t you use us as your banker?” Lane believes that those investment banks just below the top rung of financial supermarkets—perhaps even including the premier private partnership of Goldman, Sachs—are dinosaurs.

The analogy to a supermarket is apt, because what has been happening on Wall Street over the past decade bears a remarkable resemblance to changes at the checkout counter. As Piggly Wiggly stores helped chase the corner grocer out of business earlier in this century, so banking partnerships on Wall Street which offered broader banking services to customers forced other firms out of business. Or compelled them to merge. As supermarket chains eventually drove Piggy Wiggly stores out of business, so banking houses with more capital, less costs per transaction, lower fees and a wider scope of financial services, including burgeoning trading products, chased smaller firms to the sidelines.

Today, this argument goes, another change is taking place at the checkout counter and in banking. The no-frills warehouse store and the so-called “superstore,” which offers nonfood as well as food items, threaten supermarkets because they offer even lower prices and more display space and automated one-stop shopping. Similarly, Wall Street’s “superstores”—Merrill Lynch, Salomon Brothers, Equitable (which swallowed Donaldson, Lufkin & Jenrette in 1984), Prudential/Bache, Sears/Dean Witter and Shearson/Lehman Brothers—pose a threat to smaller investment banks.

In the past five years, almost one out of every five retail supermarkets has closed. In the same period, while the number of securities firms is little changed, the concentration of wealth within investment banking has undergone a fairly dramatic change. According to the Securities Industry Association, in 1979 the top ten securities firms claimed 45.8 percent of all industry capital and 48.7 percent of all revenues; by mid-1984, the top ten firms monopolized 54.7 percent of all security industry capital and 57 percent of all revenues. The next fifteen largest securities firms claimed but 16.6 percent of all capital and 17.4 percent of revenues. When the sale of Lehman was announced, speculation sprinted throughout Wall Street that other private firms would soon follow—perhaps Morgan Stanley. Or Bear, Steams. Or Kidder, Peabody. Or L. F. Rothschild. Maybe even the “crown jewel,” Goldman, Sachs.

Indeed, soon after the sale of Lehman a senior partner at Goldman, Sachs said his partners’ nerves were frayed. “We are absolutely off the record, right?”* he said. “Some people here think our $700 million is enough capital to run the firm. Some people feel those who question whether it is enough capital are really using a code word for: Let’s sell.”

The code words and the moods shift with the fortunes of investment banking. Back around 1981, after a sluggish period on Wall Street, a cluster of firms was swallowed by the giants—Shearson by American Express, Bache by Prudential, Dean Witter by Sears, Salomon by Phibro. Yet when Wall Street was soaring—between 1981 and 1983—no major investment banks merged. When business slid in 1984, Lehman merged with Shearson/American Express, A. G. Becker with Merrill Lynch, Donaldson, Lufkin & Jenrette with Equitable. In an effort to replenish its capital base and join the ranks of the top ten securities companies, in mid-1985 Bear, Stearns & Company announced that it would go public after sixty-two years as a private partnership. And after rejecting a merger offer, L. F. Rothschild, Unterberg, Towbin announced that it, too, would soon convert from a partnership to a public corporation. Each is following the First Boston pattern in which a percentage of shares are sold to the public and the remainder are retained by the partners. Those who subscribe to the fatalistic (It’s Inevitable) school of thought believe that if business is bad, private partnerships will die; if it’s good, they might survive, particularly if they don’t try to compete with the financial superstores.

If this consolidation is fated, then it follows that individuals are not to blame; larger institutional forces, the crush of history, the economic and political environment, are to blame. And, surely, among these forces must be counted the social and economic environment of America in the 1980’s. A freer market economy has been in the ascendancy for the past decade, energized by a variety of catalysts, including the presidency of Ronald Reagan. Whatever excesses arguably exist on Wall Street—the scramble for mergers, leveraged buyouts, fat fees, arbitrage speculation, junk bonds or greenmail†—the Securities & Exchange Commission wants to regulate by relying on market forces, not on its policing power. This restraint springs from several factors, including the political mood of the nation and a belief that government prescriptions are sometimes worse than the disease they are meant to cure.

Times have changed. In the 1960’s, the emphasis of American society was on social freedom; today greater emphasis is placed on economic freedom. Among Americans in general it has always been respectable to be a millionaire, certainly to strive to become a millionaire. What may be different today is the preoccupation even many on the left have with money. Wall Street is in; the Great Society is out. The New York Review of Books now publishes the economic wisdom of Peter G. Peterson and Felix Rohatyn. Around the globe, from China’s Communist rulers to Socialist President François Mitterand of France, the profit motive is in the ascendancy. The grim economic experience of most centralized Communist regimes has helped convince intellectuals that social freedom is not possible without economic freedom.

Of course, moods—and election results—change. But today, says Jeffrey Lane, forty-two, the force of history imperils most private investment banks. Size will permit powerful financial service empires to provide the cheapest and most varied services to consumers. “I think we will see an era of superpowers in institutional international competition,” says Lane. “The wall between banking, insurance and brokerage will completely crumble. And competition will be international. The large players will be Citibank, Sears, American Express, maybe American Can or Security Pacific, BankAmerica, A.T. & T. and I.B.M., large German and French banks and Japanese trading houses.”

The inevitable march of history is one interpretation of the events surrounding the sale of Lehman. Through the same window, others glimpse something else. They see human more than institutional culprits. To this way of thinking, what happened at Lehman is a tale of political intrigue unrivaled in Washington, of incompetence unmatched in the civil service, a sordid tale of vanity, avarice, cowardice, lust for power, and a polluted Lehman culture. These human ingredients—not a capital shortage, not impersonal market forces, not deregulated banking, not competition from financial superpowers—are what ultimately crushed an illustrious institution.

John C. Whitehead, on whose desk sat a sign with the single word—“Excellence”—and who retired at the end of 1984 as co-chairman of Goldman, Sachs, which he joined in 1947, insists Goldman will never follow Lehman’s lead.* A strong corporate culture, he believes, compels Goldman partners to think first of the firm, rather than themselves. “I think Lehman went under in part because the culture there was not conducive to teamwork,” he says. “Ever since Bobbie Lehman’s death they’ve been a group of bright, able individualists who all happen to work in the same office but feel a principal responsibility to themselves, not the firm. Bobbie Lehman held that group together by his prominence.” Whitehead blames Glucksman for booting out Peterson, whom he admires, and for making shortsighted decisions. He blames Lehman partners for being greedy—“They should have retained more of their earnings.” Instead, he says, they diverted earnings from the firm in the form of swollen bonuses and dividends to themselves.

Whitehead is a traditional conservative, A God-Fearing Republican who is anchored to a core set of convictions and who is appalled by what he considers the frenzied, speculative atmosphere that has invaded investment banking. Like others on Wall Street, he believes capital limitations are just one of many limits individuals, firms and governments cope with daily: “Everybody here knows we have restraints on capital. Capital should be a restraint. It helps you make selections. You have to make choices. We can’t do both leveraged buyouts and arbitrage—or we can only do a little of each.” Although Goldman, Sachs has over $700 million in capital, it has made certain choices, deciding, for instance, not to offer money management services. First Boston rebounded as a firm not because it advertised full services but, in part, because it excelled in at least one arena—mergers and acquisitions. Now it excels in others, including underwriting. Drexel Burnham’s phenomenal growth was fueled by junk bonds. Smaller investment banks such as Lazard Frères or Allen & Company continue to thrive. According to one Lazard partner, “Of every dollar we receive at this firm, seventy cents is pre-tax profit. At firms like First Boston, the profit margin is only 8 or 10 percent.”

There is a larger human context that might be invoked. The backdrop to what happened at Lehman was the unstable climate in which we live—a transactional, deal-oriented psychology on Wall Street and elsewhere. Television programs are abruptly canceled by poor ratings, team owners like George Steinbrenner suddenly sack managers, star athletes sack local teams for the lure of free agency, boards sack CEO’s after a couple of weak quarters, fickle consumers clamor to follow this year’s instant fashion or celebrity fad. A sense of standards, of tradition—like the refusal of San Francisco to discard slow-moving cable cars or The New Yorker magazine’s refusal to jazz up its graphics—often seems odd, quaint, inefficient. This larger human context can be invoked by those who claim that Lehman was a victim of forces beyond the control of individuals.

But this argument also supports a view that places blame on submissive Lehman partners. “The thing that brought Glucksman down,” observes Peterson’s attorney, Morton Janklow, “was not avarice, not lust for power, not personal insensitivity or cruelty—though they should have. What brought him down was losing money. He was like Jim Aubrey. Everyone hated Aubrey at CBS. Yet he was only brought down when the ratings declined.”

Thus the failure of Lehman Brothers can be traced to the failure of Lew Glucksman to be a statesman-leader, can be traced to the collapse of comity and civility among a group of partners more interested in themselves than the firm, can be traced to a corporate culture poisoned by too much individualism; it is a story of greed for money, power or glory. Even before Glucksman assumed power, as Peterson has said, a majority of the partners probably favored selling the firm. As Peterson didn’t say—but his wife did—the former chairman also hoped to sell before he reached sixty.

What happened at Lehman is a reminder that human relationships matter as much as the bottom line, if not more. “I don’t think there is a larger story here,” says Henry Breck. “You have the story of a social contract with people that broke down. Essentially, you had a group of bickering people who resolved their differences by selling. This is not Vietnam or Watergate. It’s a personal story.” That seems to have been the story of David Tendler of Phibro and John Gutfreund of Salomon Brothers. Their working partnership did not disintegrate in 1984 because their merger was failing or because the firm was losing money. Gutfreund, unlike Glucksman, waged an open battle for board support to remove Tendler as co-CEO, and did so for the most ancient of reasons: power. Power, and a need for greater fulfillment, prompted Sandy Weill to resign as number two at American Express. He said he wanted to run his own show again. An equally personal, if uglier, battle took place at Apple Computer. When business soured in 1985, so did the brotherly relationship between its two top executives, co-founder Steven Jobs and the president he recruited from PepsiCo, John Scully. Their business differences led to lapsed communications, which led to estrangement, then mistrust, and finally to Jobs’ resignation.

Looking at what happened at Lehman in this human context, one sees that some behavior simply may not have been rational, even if practiced by tough-minded, profit-oriented businessmen. It wasn’t “rational,” observes Pete Peterson, for Glucksman to keep ConAgra’s offer from the board, to give himself more stock, to appoint Bob Rubin president. “Why not consolidate your position first, particularly with the investment bankers? Why make these moves when the firm was losing money? It’s not rational. Even Machiavelli wouldn’t do it that way.” Nor was it “smart” for Peterson to treat Glucksman and many of his partners in the frostily aloof way he did.

What happened at Lehman can also be seen as a microcosm of what is happening in the world of finance. The transactional world of trading is replicated in the transactional world of mergers and acquisitions, where deals are made at a dizzying pace. In 1984, there were 2,543 mergers and acquisitions, reports W. T. Grimm & Company of Chicago. These transactions set a dollar record—$122.2 billion, up from $73.1 billion in 1983. According to the April 30, 1984, Fortune, “A record-breaking sum, about $398 billion, was spent by U.S. corporations in the last decade on mergers and acquisitions. In all, some 23,000 deals were sealed, including 82 in which Fortune 500 companies were swallowed up.” Billion-dollar-plus deals are now commonplace, as are million-dollar-plus M. & A. fees. The blockbuster $13.4 billion merger of the Gulf Oil Corporation and the Standard Oil Company of California in March 1984, for example, resulted in a record $63 million in fees—about half of which went to Salomon Brothers and the remainder to Morgan Stanley and Merrill Lynch.* First Boston netted $10 million for putting together, in just four hectic days of negotiations, the Getty Oil merger with Texaco.

The transactional, speculative nature of financing extends to other widespread practices. Greenmail—which literally means blackmailing companies with green money—is now a common occurrence. To repulse a hostile takeover by Sir James Goldsmith, who had captured 8.6 percent of its stock, the St. Regis Corporation enticed Goldsmith to sell his stock back—for a $50.5 million profit. To escape the clutches of Saul P. Steinberg, Walt Disney Productions paid him $297.3 million for the 11 percent ownership he secured a short time before for $265.6 million—a cool $32 million profit; Disney also agreed to pay $28 million to cover Steinberg’s “out of pocket” expenses. Rupert K. Murdoch backed away from his plan to take over Warner Communications—after Warner agreed to purchase his 7 percent stock ownership for a $40 million premium, plus $8 million in legal expenses.

In such a climate, companies often find their attention diverted to short-term, defensive stances. They are advised to swallow “poison pills,” making it prohibitively expensive for another company to acquire them. They are advised to exercise the “crown-jewel option,” selling off a lucrative subsidiary—as Carter/Hawley Hale threatened to sell Waldenbooks to block a takeover by The Limited.* They undertake a “leveraged buyout,” in which managers purchase their own company by pledging corporate assets as collateral for loans that the company—not the managers—must repay. They design “golden parachutes,” in which managers who lose control can bail out of the company with lucrative severance agreements.

The public now reads of high-finance megadeals and corporate warfare as we read of the off-air frolicking of the stars of TV’s Dynasty. Will T. Boone Pickens conquer mighty Gulf Oil? What are the Bass brothers really up to? Will Bill and Mary find a white knight to save Bendix? Will a “poison pill” or “Pac-Man” defense succeed in staving off an unfriendly takeover?

The romance of corporate combat sometimes cloaks a more subtle clash between short- and long-range interests. A preoccupation with short-term results—focusing on current rather than long-term shareholders, selling less secure junk bonds, peddling assets to boost earnings, gobbling up smaller companies to inflate revenues, reducing long-term capital investments in order to stretch fourth-quarter earnings—is not unique to the world of finance. Federal deficits are partly the result of a political preoccupation with immediate gratification (votes), as is the soaring out-of-wedlock birth rate (sex). Norman Lear’s long-running smash comedy, All in the Family, opened to depressed ratings, but television executives were more patient a decade or so ago, and after sixteen weeks Archie Bunker and family climbed from the ratings cellar. In 1984, Lear had a new comedy show—a.k.a. PABLO. It was canceled after only six shows.

The change in business is mirrored in the changes going on in investment banking. As Wall Street strayed from merchant banking, in which firms invested their own resources in companies they believed in, and from traditional banking services, where bankers spoke proprietarily of “my client,” today investment banking is increasingly a transactional, service business. Investment bankers became more like lawyers—if the client could afford the fee, they rarely said no, for everyone deserved representation. What one does professionally is often segregated from what one thinks personally.

When asked, “What fees wouldn’t you accept?,” many Lehman partners responded that they wouldn’t do business with “the mafia,” or they wouldn’t do business where there was a conflict between two clients, or with a bad credit risk. But when pressed for further examples, they usually reacted as if they had not thought before about the question, as if saying no was something that government and young women were supposed to do.

“Investment banks respond to clients’ interests,” says Roger Altman, who admits to having ambivalent feelings as a citizen—as does investment banker Felix Rohatyn or prominent merger and acquisitions attorney Martin Lipton—about some of the things he does professionally. “Investment banks follow clients. The same as accountants or lawyers,” he says. “It wasn’t the investment bankers who told the oil companies to get in the mergers game.” But once they were in the game, Altman says, he was “all for putting additional resources into the mergers area. My job then and now is to help earn the largest amount possible for the shareholders. Since large profits continue to be earned in the merger area, I’ve supported it all the way. That’s our business.”

This reasoning bothers conservative men like John Whitehead, who believe investment banks should sometimes lead as well as follow. “We are a service business,” he says. “Sometimes—as Goldman does in our refusal to underwrite nonvoting stock or to participate in hostile takeovers—there are some times we take a stand in the public interest.” The assumption investment bankers and their business partners often share is that a free market behaves rationally. This may come as news to anyone familiar with the sharp swings of the stock market. Because of the excesses of the true believers in supply-side economics and the unalloyed virtues of a free market, today conservatives as well as those on the left debunk this article of faith. “Market theorists love to rhapsodize about the wisdom of markets,” Republican Senator Pete V. Dominici, the conservative chairman of the Budget Committee, wrote in the Wall Street Journal.* “But part of this wisdom consists of dealing harshly with fools who believe that the good times are without end.”

Investment bankers commonly perform as the economy’s magicians, as wise intermediaries who match ideas and wealth, users and savers of capital; they provide lifelines for embryonic companies; they devise creative products that pump desperately needed capital into, say, starved housing, as they have done with Fannie Mae’s and mortgage interest-rate swaps. But, increasingly, many investment bankers justify everything they do.

“All this frenzy may be good for investment bankers now,” banker Felix Rohatyn has said, “but it’s not good for the country or investment bankers in the long run. We seem to be living in a 1920’s jazz age atmosphere.”

At Lehman, as on much of Wall Street, the operating ethic is fees—fees to cover expanding overheads, fees to boost profits and stock value and bonuses. “The fees paid today are outrageous,” says Herbert Allen, Jr., of Allen & Company, who collects his share of fees. “They are not in relation to the product delivered. If Gulf Oil merges with Standard Oil and the two chief executives agree and then call in Lehman and Allen & Company, the investment banks didn’t originate the deal, and they only do a week of work. Yet they get $20 million for the deal. It’s nonsense! What would happen if they called investment banking firms for competing bids? The fee would be 50 to 90 percent less. It’s a terrible system. Investment bankers are like ambulance-chasing lawyers who sue on every deal on the basis of getting fees. It’s a bribe. Directors of many corporations are derelict in their responsibility and are paying investment bankers huge fees for long reports which only serve as protective padding for their own rear ends.”

Attorney Martin Lipton disagrees with Allen, somewhat. “I am making a fortune,” says this intelligent, personable man. “I think it’s wrong and I’m urging changes. I’m not doing something wrong or illegal. There are lots of things in this area that we refuse to do.” Asked if he felt hypocritical because he benefits from a system he deplores, Lipton answered: “I’m in a position like anyone who works in an area and sees abuses and says they should be changed. You have to draw a distinction: in areas of uncertainty one doesn’t substitute one’s judgment for another’s. We’re not dealing with moral judgments. We’re dealing with economic beliefs. I’ve never been comfortable enough in my economic beliefs to push them on other people who disagree with me. A lot of people feel that takeovers ought to run riot. That the problem today is too much regulation and restrictions. You can almost say I’m in the middle.”

While it is often observed that deregulation has weakened client ties to investment banks, it is also true that a preoccupation with fees can weaken the loyalties of bankers to their clients. Since they are not producing a standard product, often they produce what Robert B. Reich, professor of business and public policy at Harvard University has christened “paper entrepreneuralism.” For the investment banks, the M. & A. activity, the “poison pill” and “Pac-Man” maneuvers, the greenmail and leveraged buyouts, the risk arbitrage speculation on whether T. Boone Pickens will win or lose—all mean money. Everything becomes a transaction, like the sale of Lehman.

One does not have to romanticize the Robber Barons of the last century to recognize the rootlessness, the frequent absence of a sense of tradition in today’s high-overhead, transactional world of Wall Street. One also doesn’t have to choose sides, either blaming fate or human culprits for the fall of the House of Lehman. “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function,” F. Scott Fitzgerald wrote in The Crack-Up.

No doubt, what happened at Lehman owes something to both personal and institutional factors, to excess greed and insufficient capital, to fear of Glucksman and fear of bankruptcy, to a mosaic of reasons. Whatever one’s perspective, it is hard not to see that the plug has been pulled on an important piece of corporate history. With the passing of Lehman, Wall Street’s oldest continuing partnership has disappeared. A link stretching back one hundred and thirty-four years has been severed, as have commitments to Lehman employees who invested their lives in a private partnership, or the seven hundred or so employees who were laid off by the merged firm. Of greater moment, the death of Lehman signals the passing of a way of life—of a handshake as solid as a contract, of mutual loyalty between client and banker, of fierce but respectful competition, of a belief in something larger than self—in this case, The Firm.

*By “off the record,” he meant that he did not wish to be quoted by name.

†A company that is a target for a takeover pays a bounty to the predator to encourage him to take his advances elsewhere.

*In April 1985, Whitehead was nominated by President Reagan to become Deputy Secretary of State.

*New York Times, September 30, 1984.

*They eventually sold Waldenbooks to K-Mart.

*Wall Street Journal, May 14, 1985.