American Scandal - Lehman Brothers | Lehman is Different | 2

Episode Date: January 20, 2026

After the collapse of top Wall Street investment bank Bear Stearns, Lehman Brothers scrambles to convince the world it won’t be next, but dirty truths about the firm’s finances threaten to destroy what credibility it has left.Be the first to know about Wondery’s newest podcasts, curated recommendations, and more! Sign up now at https://wondery.fm/wonderynewsletterListen to American Scandal on the Wondery App or wherever you get your podcasts. Experience all episodes ad-free and be the first to binge the newest season. Unlock exclusive early access by joining Wondery+ in the Wondery App, Apple Podcasts or Spotify. Start your free trial today by visiting wondery.com/links/american-scandal/ now.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

American scandal uses dramatizations that are based on true events. Some elements, including dialogue, might be invented, but everything is based on historical research. It's early morning on March 17, 2008, and Times Square, New York City. The wind bites against the glass facade of Lehman Brothers' headquarters as traders, analysts, and bankers stream inside. They clutch coffee cups, anxiety written on their faces, because yesterday, one of Wall Street's largest investment banks bear Stearns suddenly collapsed, and now there are fears that Lehman could be next. A black Mercedes pulls up to the curb. The door swings open and Lehman's CEO Dick Fould steps out. He walks briskly through the revolving doors and takes the elevator up to the 31st floor.

Under Fould's leadership, Lehman bet big on mortgage-backed assets. And despite mounting warnings that the real estate bubble was about to burst, Foll did little to change course. Now the company may be about to pay the price. The elevator door opens and Fould steps out into an executive suite that feels like a bunker under siege. Phones ring nonstop, screens flash red, voices are sharp and tense. Fult goes to his corner office and logs into Bloomberg. Lehman's shares are already down 21%. Fult's jaw tightens as he does the math. He personally just lost about $90 million. Beside him, Fultz's phone buzzes with calls from reporters,

Analysts, even family members. He answers some callers, but ignores others. Then the name John Mack flashes across the phone screen. Mack is an old friend, but more importantly, he's the CEO of Morgan Stanley. So this time, Fold picks up the phone. John, how you doing over there, buddy? Well, I'm a little spooked, but we're holding up. I'm hearing a lot of rumors about Lehman, though. Yeah, the press is gunning for us. It's ugly. You got that right, but they smell blood in the water. Is it true? Some of the other banks have stop trading with you? Yeah, there are two, Deutsche Bank and HSBC, but that's it. The American firms are still with me. Oh, good. All right. That's good. But look, Dick, I've got to hear from you. Is Lehman sound?

John, how long have we known each other? I have to ask. You and I both know this mess has nothing to do with the balance sheets. Bear didn't die because of their real estate assets. The hedge funds destroyed them. They talked Bear down until everyone believed it was worthless. Yesterday, those vultures were drinking mimosives down at the four seasons. Well, what if they come after you next? Oh, they'll try. And the press will help them, of course, but Lehman is too strong for that. We've got liquidity. We've got capital. Hey, the firm's been around for 150 years. We're not going anywhere. All right, John. And I can rely on you right, John. Morgan Stanley will keep

trading with us? We got your back, buddy. If you say Lehman is sound, that's good enough for me. It's critical for Dick Fogg and Lehman brothers that other banks continue trading with them. Those deals keep money moving in and out of the company. They're the lifeblood that keeps an investment bank like Lehman alive. But the market is fragile and confidence on the trading floors can disappear in moments. To keep the other banks on their side, Fault will need something more than just assurances. He'll need proof that his company can survive, a story strong enough to restore faith in Lehman Brothers for good. You're listening to the first episode of this American scandal season.

With Wondery Plus, you can binge the remaining episodes. Listen to new episodes early and explore more exclusive seasons completely ad-free. Start your free trial of Wondry Plus in the Wondry app, Apple Podcasts, or Spotify today. From Wondery, I'm Lindsay Graham, and this is American Scamp. In the spring of 2008, the long and highly profitable boom on Wall Street ended in spectacular fashion. The investment bank, Bear Stearns collapsed, and its shattered remains were picked up by rival J.P. Morgan Chase for just two a share. When Lehman Brothers CEO Dick Fould heard that price, he thought the phone call had cut off and missed the rest of the number. Just a year earlier, Bear Stern's shares were trading for

$170.2 couldn't possibly be right. But it was. The deal had been pushed through by the U.S. Treasury Secretary Hank Paulson with $29 billion in emergency government loans. It was a vast amount of money, but Bear Stearns was just the smallest of Wall Street's Big Five investment banks, the cost of bailing out any of the others would be far higher. This is episode two. Lehman is different. It's the morning of March 17, 2008, at the headquarters of Lehman Brothers in New York. CEO Dick Folle gathers his top executives in the conference room on the 31st floor.

For hours, he's been taking calls with other Wall Street CEOs, trying to convince them to keep trading with Lehman. But while he's been talking, Lehman's share prices plunge by 48 percent and fall in has now realized he can't do it all himself. Looking around the room, he lays out his plan. The company will mount a media blitz to crush the negative rumors that are threatening to pull Lehman down. Interviews will be lined up with the Wall Street Journal, the Financial Times, and Barron's,

and while that's happening, Fault wants every other executive available on the phones, targeting the hedge funds that are pulling back from Lehman. In public and in private, these executives are to hammer home the same simple message. Lehman has plenty of liquidity. Lehman is safe. But the truth is more complicated than that. Lehman's balance sheet is drowning in real estate assets no one wants to buy or can even accurately price.

But selling those assets won't be necessary if the executive team can just restore the market's confidence in Lehman. If investors don't try to pull out their money, the firm doesn't need cash, and if it doesn't need cash, Lehman can just sit on its toxic assets and write out the crisis. So as Lehman executives contact, every reporter and hedge fund manager they know, the company's stock begins to claw back some of its losses. By the end of the day, Fault's plan seems to be working. After dropping nearly 50%

in that morning's trading, the stock closes out only 19% down on the day. It's Lehman's lowest stock price in nearly five years, with all the gains of the real estate boom wiped out in less than 24 hours. Yet inside the firm, the executives are proud of their efforts. They're determined to keep the momentum going because they know this is just the beginning. Tomorrow will be an even greater test. On March 18, 2008, two days after the collapse of Bear Stearns, Lehman is set to release its latest earnings report. The call was planned weeks earlier, but now it carries an even greater weight. What was once a routine quarterly financial report has suddenly become a referendum on Lehman's survival. Investors from every corner of Wall Street and beyond will be watching. The earnings call

will be hosted by the firm's chief financial officer. The hope inside Lehman headquarters is that it will calm markets, prove the firm's solvency, and show everyone that Lehman has the liquidity it needs to survive. But that's a tall order. Not everyone at the company is convinced that their CFO, Aaron Callan, is up to the challenge. Callan has been with Lehman for 12 years. She began her career at the firm as one of its many tax lawyers,

but quickly climbed the ranks. Still, when Lehman went looking for a new CFO in 2007, few predicted the job would go to Calman. In the company's entire 150-year history, she was the first woman to sit on the firm's 15-member executive committee. But despite her obvious intelligence and career success, many skeptics on Wall Street whispered that she was out of her death. She was only 41 years old and had no background in accounting.

Didn't help that she was also a striking blonde who wore stiletto heels and name-brand outfits. To her most cynical critics, that all meant that she was just a diversity pick who'd been chosen to look good on camera. But Callan has never been deterred by naysayers. Soon after her appointment, Condi Nast Portfolio magazine published a profile that called her the most powerful woman on Wall Street, and ever since, Callan has been determined to live up to the title. But she knows today's upcoming earnings call will be the biggest test of her career so far. Sitting at her breakfast table, she studies the Wall Street Journal. One headline reads,

Lehman finds itself in the center of the storm. She lays the newspaper. She lays the newspaper her aside, downs her coffee, and then goes to get ready. She slips into a tailored black suit chosen by her personal shopper. She blows out her hair, mentally rehearsing every talking point dozens of times, and then finally, she's ready to step into the storm herself. When she arrives at the office, Dick Folle pass her on the back and wishes her luck. She heads into a conference room with only the firm's treasurer at her side. Then at 10 a.m. sharp, she dials into the call. Over 11,000 investors, analysts, and journalists are listening in. Callan takes a deep breath and then begins.

She starts by acknowledging the volatility and uncertainty in the market, but her voice is even and controlled. As she pivots to drive home the company's key message, Lehman has plenty of liquidity and is still posting a profit. The $489 million that made the previous quarter is admittedly smaller than usual, but Callan reminds the listeners that this is Lehman's 55th consecutive quarter of profits, and that's not a record many companies can boast. She then guides analysts through the balance sheets,

her every word carefully chosen, and when her presentation is finally over, she opens the call to questions. She responds to them with an instant command of the facts, her voice radiating the one thing Wall Street craves the most right now, confidence. By the time the call wraps, Callan's voice is raw,

and she's mentally drained. She leans back in her chair, and the room is silent. Then she hears applause. executives spill into the room and give her high-fives. Then Dick Fould storms in, grinning for the first time in days. He jokes that she shouldn't have hung up on the call. As long as she was talking, Lehman's stock kept rising.

The company's recovery continues all day, and at Lehman headquarters, there's an electricity in the air that feels like hope. By the closing bell, its stock prices up almost $15. In percentage terms, it's the biggest one-day gain since Lehman went public. Despite all the cruel whispers of the Wall Street cynics, Callan seems to have calmed the storm. But beneath the triumph, buried deep in the company's balance sheets, there is a dirty secret.

Lehman has far more debt than it's publicly admitted. For the past seven years, every quarter, the company has been using an accounting trick known internally as a repo 105 transaction. This involves Lehman temporarily selling billions of dollars' worth of securities for cash. That cash is used to pay down debts and make the headline figures in the company accounts look better. But then, once the reports are published, the deals are quietly reversed. Just weeks before this latest quarterly earnings call, Lehman repeated the trick.

It temporarily moved $49 billion worth of debt off its books just long enough to report better numbers. But in a few days' time, those debts will return when the firm buys the securities back. These transactions are so secretive that even people at the very top of Lehman, including Dick Foll, don't seem to know about them. But despite these accounting slice of hand, some in the finance world are still suspicious about Lehman's health. One of those skeptics is 39-year-old David Einhorn. He's the head of his own firm Greenlight Capital. His hedge fund only has seven analysts and a handful of support staff, but it manages over $6 billion in assets and has an average annual returns of over 25 percent. So when Einhorn speaks, Wall Street generally listens.

And months ago, he noticed several small hedge funds with stakes in mortgage-backed securities had collapsed, and he asked his team to investigate. Usually his firm was known to spend weeks researching a single company, but after the sudden collapse of these hedge funds, there wasn't time for that. So instead, Einhorn ordered a rapid survey of all Wall Street firms with large investments in mortgage-backed securities. Internally, the project was codenamed the Credit Mask. and Einhorn's team soon came up with a list of 25 companies that felt were at risk. Lehman Brothers was among them.

So at that moment, Einhorn took a closer look at Lehman's numbers, and the more he dug, the more suspicious he became. He started to believe that Lehman was using accounting maneuvers to inflate its profits, so he had Greenlight take a short position on the company, essentially a bet that the stock is overvalue. A trader borrows a share from a broker and sells it on the open market. Eventually, the trader will have to buy the company. that share back and return it to the broker. If on that date, the stock in question is worth

less than the price the trader sold it for, they can pocket the difference. But if it's worth more, they can be left exposed to enormous losses. Einhorn, though, was convinced that a correction in Lehman's stock price would be coming soon, and he didn't keep that opinion to himself either. At the Value Investing Congress conference in November 2007, Einhorn led a presentation suggesting that Lehman's debt to asset leverage was approaching 31 to 1, and the company's financial outlook couldn't possibly be as strong as it claim. Executives at Lehman quickly arranged a conference call with Einhorn to try and address his concerns, but the meeting only deepened his doubts.

When Einhorn asked how frequently Lehman was reassessing the value of the mortgages on the firm's balance sheet, he got a contradictory answer. Some executives insisted that they were revalued every day, but others claimed it happened quarterly. Lehman's CFO, Aaron Callan, was on the call, but she never acknowledged the inconsistency or tried to correct it. That was four months ago, but Einhorn hasn't been able to let it go, and in the wake of Lehman's latest earnings report,

he gathers his team of young hedge fund managers for a debrief. All right, everyone, quiet down, quiet down. All right, so what are your thoughts on Lehman? There's a silence in the room until a young analyst chimes in. Well, we were just discussing it. We think Callan sounded solid, actually. I mean, if she's right, Lehman could be undervalued. There could be an opportunity here.

I'm sorry. You're new here, right? Jason, yes, sir. I started last week. Well, welcome to Greenline. So you think Callan's numbers were solid. The balance sheet looked clean. I think we should reevaluate. Where are you from, Jason? From Montana?

grew up outside Missoula. Well, I grew up outside Milwaukee, which means neither of us are from here. So, Jason, I want to teach you something about Wall Street, something I had to learn when I first came to New York. Numbers are the purest thing we have. They're sacred, in my opinion. But sometimes you can't trust them. Wall Street guys like to manipulate them to tell a story, and our job is to catch them in the act. You think Aaron Callen was lying? No, not necessarily, not on purpose. But do you know about her

background? She's a tax lawyer. She's never run a treasury desk. But she was very confident. Confidence is not the same thing as truth. And frankly, I don't believe a single word she said. Last time I spoke with Calland, she couldn't answer even simple questions about Lehman's financials. No matter what training she's had since, I still think they're hiding something. So we should continue to short them. Yes, we should continue to short them. The young analyst looks around the room at the others. He isn't sure whether David Einhorn is paranoid or brilliant. The implications of his claim are serious, though. If he is right, one of Wall Street's largest and most prestigious firms has been built on a line,

and they're going to be the ones to expose it. Hello, American Scandal listeners. I have an exciting announcement. I'm going on tour and coming to a theater near you. The very first show will be at the Granada Theater in Dallas, Texas on March 6th. It's going to be a thrilling evening of history, storytelling, and music with a full band behind me as we look back to explore the days that made America, and they aren't the days you might think.

Sure, everyone knows July 4, 1776, but there are many other days that are maybe even more influential. influential and certainly more scandalous. So come out to see me live in Dallas or for information on tickets and upcoming dates, go to American History Live.com. That's American History Live.com. Come see my Days that Made America Tour live on stage. Go to American History Live.com. While Lehman Brothers scrambles to project confidence on Wall Street, down in Washington, D.C., the shockwaves from the growing financial crisis has put Treasury Secretary Hank Paulson under siege. When Bear Stearns was on the brink of bankruptcy, Paulson played a key role in

brokering the deal to sell the company. In a single weekend, the government facilitated the merger with J.P. Morgan Chase. Greasing the deal with $29 billion in government financing, the Fed invoked rarely used emergency powers meant only for unusual and exigent circumstances. It was a bold move for the administration of President George W. Bush. As a Republican, Bush had championed the free market and the virtues of laissez-faire economics throughout his political career. And while the government supported the Bear Stearns deal with an emergency loan rather than a direct cash bailout, the optics are still difficult for the Bush administration. Making matters worse, only a few years ago, Hank Paulson with the CEO of Goldman Sachs, New York's largest investment bank. So now many people

suspect he's bailing out his old Wall Street buddies at the expense of the American taxpayer. But Paulson is convinced he did the right thing. The collaboration is a lot of the collaboration. The collaboration of Bear Stearns had to be contained to protect the rest of the economy, and the U.S. government was the only party with the means and resources to take action. Now, though, Paulson's priority is making sure no other Wall Street giants go under, and despite its positive recent earnings call, he is especially worried about Lehman Brothers. So with pressure mounting, Paulson calls Lehman's CEO Dick Fold directly. Former adversaries in the business world, the two men have become friends in recent months,

and now he urges Fold to immediately seek fresh capital. His firm's survival may depend on it. Fold reassures Paulson that he already has a plan to do that. He's got a proposal ready for one of the most powerful names in finance. The billionaire investor warned Buffett. Hearing this, Paulson's relieved. A quick, private sector solution would spare him the political headache of more government intervention. So he promises Fault he'll do whatever he can to help get the deal with Buffett over the line.

And on March 28, 2008, Buffett gets the call from Dick Fould. Buffett is in the Omaha headquarters of his firm Berkshire Hathaway. His desk is a plain wooden one, the same his father used, because despite his vast wealth, Warren Buffett is not one to show off. Maybe that's why he's never much liked Wall Street. Its brash displays of wealth and consumption have often seemed tawdry to him. Still, he's willing to listen to what Dick Folt has to say. Fould's voice is urgent but composed. He explains that Lehman is looking to raise between three and five billion dollars in fresh capital. He talks about the strength of the firm and what an opportunity this would be to become part of

Lehman's long history. And despite his doubts about Wall Street times like Fault, Buffett finds the pitch persuasive. He says that under the right terms he might consider it, a 9% dividend would do the trick. On a $4 billion investment, that would be an annual return to Buffett of almost $360 million. A call ends amicably with both men agreeing to run the number, and think it over. But then moments after finishing the call with Fault, Buffett's phone lights up again. This time, it's Hank Paulson on the line from Washington. He emphasizes just how rattled the markets are right now, but he says that word of Buffett, investing in Lehman, might be enough to steady Wall Street all on its own. Buffett leans back in his chair. Two back-to-back calls are clearly

orchestrated. He wonders if this isn't really an investment opportunity at all, but a piece of theater, an attempt to borrow his reputation to pacify nervous traders in New York. So he tells Paulson that he's going to consider what Fold said, but it's not his business to save Wall Street. That's the government's job. After these calls, Buffett flipped through Lehman's financial reports until late into the evening. That's when the phone rings again. It's Fold wanting to talk numbers.

But then to Buffett's confusion, the conversation takes a strange turn. Fold seems to have misunderstood Buffett's original offer, Now he says a 9% dividend in exchange for the investment is too much and won't agree to it. But those are the terms Buffett wants, and he has no intention to agreeing to anything less. The two men talk in circles, the mistrust between them growing with every minute, so that by the time Buffett hangs up the phone, any prospect of a deal with Lehman has slipped away. He won't be coming to that company's rescue anytime soon. Having been rejected by Warren Buffett, Dick Foll takes his search for capital elsewhere.

He makes discreet calls to other prominent investors and fund managers to raise the $4 billion he thinks he needs, but short-sellers like the hedge fund manager David Einhorn are still taking the company down. Over the last few months, Einhorn has become a very public thorn in Lehman's side. What began as a bet on the company's share price has become something of a personal crusade. When Einhorn first went public with his doubts, there weren't many on Wall Street who wanted to believe him. But now, in the wake of Bear Stearn's collapse, the move. is shifted dramatically. Einhorn claims that from a balance sheet and business mixed perspective, Lehman Brothers is not

that different from Bear Stearns. This directly contradicts what Lehman executives have been telling everyone since Bears' collapse. They are still insisting that Lehman is better capitalized, better managed, and better place to weather this crisis. So Einhorn's criticism and all the people who seem to be listening to him are an ongoing source of irritation for Lehman. Determined to neutralize these persistent critics, Lehman's time. team arranges another call with Einhorn. And to make Lehman's case, Fall puts forward what he believes

is his most persuasive executive. This isn't a job for his aggressive style, so instead the responsibility falls once again on Lehman's CFO, Aaron Callan, and she takes a call in her office. Hi, David. This is Aaron. Good to talk to you again. Yeah, my pleasure. Well, I appreciate you taking the time today. I know you're busy. I understand you have some questions. You can say that. Well, hopefully, I clear some of those up for you. All right, well, I've been studying Lehman's balance sheet for the past year, and I don't think it adds up. Well, this will be news to my team. We have a lot of expensive accountants

in the building. I'm sure you do. You'd have to, to try to pull something like this off. Callan swallows her irritation. Well, perhaps if there are specifics you'd like to discuss? Yeah, sure. So, well, for one, Lehman hasn't sufficiently written down six and a half billion dollars worth of CDOs. CDOs are collateralized debt obligations. I know what CDOs are, David. Thank you. But we've been entirely transparent about our mortgage investments. Well, you've disclosed the amount of CDOs you hold. Yes, I'm asking whether you've properly lowered the value of those assets on your balance sheet to reflect conditions in the market. Yes, we've written down 200 million to account for those

losses. Yeah, but just last month, about 25% of your CDOs were given a junk rating. Well, what do you imply? Simple math. Lehman has a $6.5 billion pool of CDOs, and a quarter of that are below investment-grade assets. That's $1.6 billion's worth. So how can you justify only a $200 million write-down? I can assure you we've been up front. We expect to recognize further losses next quarter. Einhorn is silent for a moment. You know, I got to ask, does this work on other people? Dave, I don't know what you mean.

Well, it's just like last time we spoke. All you can offer is inconsistencies and empty explanations. Callan shifts in her seat, struggling to contain herself. Look, David, we both know there's only one reason you're publicly comparing Lehman to Bear Stearns? Because they're similar. We are not. That's not it. If you make us look weak, you make money off your shorts. You need us to fail.

Aaron, believe it or not, I don't take pleasure in the demise of other financial institutions. I have an ethical responsibility to tell the public when they are being misinformed. Lehman is not insolvent. We just posted a $489 million profit. Paper profits don't mean a thing if you aren't being transparent about your debts. Now, I'm giving you the opportunity to own up here. David, you're not a detective, and we are not criminals. The numbers don't lie.

But you don't understand them, do you? I am CFO. Didn't you used to be a competitive poker player, right? In my last tournament, I won over half a million. Well, of course you did, but what does that have to do with anything? Well, everyone knows that poker is about statistics, right? but it's also about understanding people. And you think I might be right about all this.

Why would I think that? By the way you're acting, by the way you sound, it's how an inexperienced player acts when they're bluffing with a losing hand. Soon after this tense phone call, Aaron Callan receives an email from David Einhorn. He tells her that he plans to reference their discussion in an upcoming speech. Callan replies it angrily. But Einhorn insists that neither of them had any reason to think the conversation was confidential.

Callan doesn't see it that way and feels like she was set up, that Einhorn has tricked her, but she understands better now. There will be no more facades and no more civility, because from now on, it's open war. It's May 2008, the crisis on Wall Street is deepening, and Greenlight Capital's David Einhorn is about to take his public feud with Lehman Brothers to a new stage. Every year, hundreds of people pay $4,000 to attend the Sown Investment Charity Conference in New York. Top investors are invited to discuss their ideas, their stock picks, and their general thoughts about developments in the market.

This year, Einhorn is one of the speakers, and his talk is the most anticipated of the entire conference. Einhorn's conversation with Lehman Brothers CFO Aaron Callan has only reinforced his determination to expose the company, so he's decided that Lehman will be the centerpiece of his presentation. This won't be Einhorn's first public expose of a failing firm. Six years ago at the same charity conference, he accused private equity company Allied Capital of cooking its books. You went on stage and dissected the firm's financial reports and questionable accounting practices. The next day, Allied shares dropped 11%. Einhorn's influence was so drastic that regulators investigated him, suspicious that he

was trying to manipulate the market with his opinion. But eventually, it was allied that was found guilty of fraud, and Einhorn who was vindicated. At only 33, years old at the time, Einhorn emerged with a reputation as a man who could destroy a company with a single PowerPoint presentation. Now, though, he's taking on an even bigger opponent. On May 21, 2008, Einhorn sits in a packed auditorium in Manhattan's Time Warner Center. His palms are sweaty and his heart pounds as he does one last review of his notes. Around him sit over a thousand Wall Street's elite fund managers, analysts, and bankers. collectively, they manage over half a trillion dollars, and they all want to hear what Einhorn has to say.

His presentation is scheduled for 405 p.m. just after markets close in New York. It's a deliberate choice by the organizers given the impact his speech could have. Lehman isn't a mid-sized private equity firm like ally. It's one of Wall Street's biggest investment banks. Taking them down in public could ignite chaos. But when the time comes, Einhorn is introduced. and he walks on stage to polite applause. He starts off his speech by recounting his battle with Allied Capital, reminding the audience of his track record.

Then, with a click of his remote, slides about Lehman Brothers appear on the screen behind him. Murmurs ripple through the crowd as he takes apart Lehman's latest quarterly report point by point. But then he gets more personal. Einhorn recalls Aaron Callan's performance for traders and analysts after Bear Stearns was sold. He says, On the conference call that day, Lehman's CFO, Aaron Callan, used the word great 14 times, challenging, six times, strong, 24 times, and tough once. She used the word incredibly eight times. I would use the word incredible in a different way to describe the report.

On the projection screen behind him, more numbers flash. According to Einhorn's calculations, there are discrepancies in Lehman's accounts that add up to billions of dollars. He insists that whatever Lehman claims, it's not the short sellers that are the cause of the company's difficulties, it's Lehman itself. At the end of his talk, Einhorn closes his notes and steps off stage. Whispers break out as the traders in the audience tap messages into their phones. Within moments, word is spreading to trading floors all over the world. Lehman Brothers is in trouble. When trading opens in New York the next morning, the company's shares immediately drop by 5%.

And in the two weeks that follow Einhorn's attack, panic simmers inside Lehman's gleaming offices. Executives huddle and crisis meetings as the company's stock continues to fall. CEO Dick Fold again orders his top team to hit the phones and try to counter the market gloom. But despite Fold's public bluster, behind the scenes, he knows that there is at least some truth in Einhorn's warnings. Lehman is running out of cash. Even after raising $4 billion from outside investors, the company needs more. more, but this time it's far harder to find anyone willing to sink their money into Lehman. The most promising talks have been with the Korea Development Bank,

a state-owned commercial and investment bank with experience in restructuring, struggling businesses. The negotiations have all been kept secret. Fould fears that if they're made public and then fail, confidence in Lehman could fall even further, but someone does talk. On June 3, 2008, the Wall Street Journal publishes an article revealing Fould's plans under the headline, losses push Lehman to raise new capital. Korea Development Bank isn't named, but Fault is still furious, and he calls an emergency meeting with senior executives. He demands to know who leaked the story, but no one speaks up.

Still raging, Fault then gets the reporter on the phone. She's a journalist he's known for years, but with his voice low and scathing, he tells her that her seat at the table is gone. No one at Lehman Brothers, not even the PR department is going to speak to the Wall Street Journal ever again. Lehman's communications team is horrified. Folld is making enemies with the most influential financial paper in the world at a time when Lehman needs all the friends it can get.

But Folld doesn't care. He's done playing defense. From now on, he's determined to be far more aggressive with Lehman's detractors, even if they come from within his own ranks. Because around the same time, the company is reeling from David Einhorn's attack, Matthew Lee, a vice president in the finance division, sends a letter to senior managers. In it, he outlines six irregularities he says he's uncovered in Lehman's accounts.

Among them are the repo 105 transactions that Lehman has been using to massage its debt figures. But no concrete action is taken to investigate or resolve these allegations properly. Instead, a few days after Lee sends his letter, the company terminates his employment. It pays him $300,000 to leave quietly and sign a non-disparagement agreement. Lehman claims it's part of a broader downsizing in the face of the financial. crisis, but Matthew Lee believes the executive team is simply trying to silence an inconvenient whistleblower. Either way, Lehman successfully keeps the story out of the press, but it's not the firm's PR strategies that will decide its future. All eyes on Wall Street are on the company's next

quarterly results, and on June 9, 2008, Lehman Brothers releases its latest earnings report. The numbers are staggering and impossible for the company to explain away, because Lehman has lost two-point $8 billion, much of that was a result of an enormous write-down of now worthless mortgage investments. If anyone on Wall Street still had any doubts, it's now obvious even to them that David Einhorn was right. After the release of this most recent quarterly report, Lehman's stock plummets another 20%. At the firm's headquarters, there is panic. On every floor, in almost every office, the same thing is said, something has to change. In the firing line are two of Dickfold's closest house.

allies, company president Joe Gregory and CFO Aaron Callan. Many at Lehman Brothers blame them directly for the firm's predicament and believe nothing can improve until they are gone. Callan tries to put on a brave face, but on the afternoon of June 11, 2008, she's in a meeting when Gregory steps in to ask for a word. With dread churning in her stomach, she follows him down the hallway to his office. What's this about, Joe? Gregory gestures to a couch. Now, why don't you sit down? I wanted you to be the first to know.

I'm leaving. Oh, it's for the good of the company. After last quarter's results, Dix under a lot of pressure to make changes. I understand. Thank you, though, for everything you've done for me. Gregory looks down. Well, there's something I need to ask you to do.

What's that? Everyone in this building knows who I am. For the sake of company morale, if nothing else, on the one who's got to go. But the media, the public. They don't know me from Adam. Callan stares at him, understanding, crystallizing in her mind. I see. You want me to resign as well. You've been the public face of the firm. We should do it together. It'll make more of an impact. It's the only way I can see Lehman regaining any credibility.

Have he spoken to Dick about this? Oh, he doesn't like it, but he'll come around. Well, I've already offered to resign once after the whole Einhorn thing. He turned me down. I think he understands now. Callan shakes her head. She's not angry. Not yet. she just feels numb. There'll be a lot of happy people here when the news breaks. They never wanted me in this job. Oh, no, no, neither me nor Dick regret appointing you. I want you to know that.

This is not your fault. You've still got a lot ahead of you. What about you? Where are you going to go? Ah, well, I'm going to retire, I guess. I don't know. I've been here 25 years. I barely even know what the outside world looks like anymore. Aaron Callan is at home the next morning when her departure from Lehman Brothers is announced.

But she's stunned to see the newspapers don't report that she and Joe Gregory have resigned. Instead, journalists have clearly been told that they were fired. For Callan, this is a deep betrayal. She suspects it's been done to make Dick Fold look ruthless and in control. Gregory was his closest ally. She was talked up as his protege. Getting rid of them sends a stronger message than simply accepting their resignations. But Callan can't stop thinking about all the sacrifices she's made over the past 13 years.

Too late, she realizes that all that matters to Dick Fould is Lehman Brothers, and he will do anything to keep it alive. From Wondering, this is episode two of our four-part series on Lehman Brothers for American Scandal. In our next episode, as Dick Follb desperately searches for new investors, Treasury Secretary Hank Paulson summons Wall Street's most powerful CEOs for an emergency summit to find Lehman Brothers a savior before it's too late. If you'd like to learn more about Lehman Brothers, we recommend the book, Too Big to Fail by Andrew Ross Sorkin, a colossal failure of common sense by Lawrence G. McDonald and Patrick Robinson, and The Big Short by Michael Lewis. This episode contains re-nagnments and dramatized details. And while in most cases, we can't know exactly what was said, all our dramatizations are based on historical research.

American Scandal is hosted, edited, and executive produced by me, Lindsay Graham for Airship. Audio editing by Mohan Shazi, sound design by Gabriel Gould, music by Throng. This episode is written and researched by Olivia Times. Thomas, fact-checking by Alyssa Jung Perry, managing producer Emily Burr. Development by Stephanie Jans, senior producer Andy Beckerman. Executive producers are William Simpson for airship, and Jenny Lauer Beckman and Marshall Louis for Wondry. Wonderly Plus subscribers can binge American Scandal early and ad-free right now. Join Wondry Plus in the Wondry app or on Apple Podcasts.

If you enjoy American Scandal, be sure to give us a five-star rating and leave a review. I read every one of them. I also have two other Wondry podcasts you might. like American History Tellers and business movers. Follow American Scandal on the Wondry app, Amazon Music, or wherever you get your podcasts. You can binge all episodes of American Scandal early and ad-free right now by joining Wondry Plus

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