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Lehman demotes key executives after surprise loss

NEW YORK (Reuters) - Lehman Brothers Holdings Inc LEH.N said on Thursday it demoted its chief financial officer and chief operating officer, days after the investment bank said it expected its first-ever loss as a public company and following a 65 percent slide in its shares this year.

The exterior of the world headquarters for Lehman Brothers is seen in New York June 4, 2008. REUTERS/Brendan McDermid

The replacement of Erin Callan as CFO, after only six months in the post, and Joseph Gregory as COO, triggered further speculation about whether Lehman can continue to exist as an independent entity given the size of recent write-downs and pressure on investment banks to reduce risk.

The shakeup at Wall Street’s smallest surviving major investment bank also raised questions about whether Chief Executive Richard Fuld could survive investors’ dismay over a wider-than-expected quarterly loss and accompanying news of a move to raise $6 billion.

“I think there’s just a fear that the problems at Lehman are deeper than what Fuld thought,” said Matt Kaufler, portfolio manager and equity analyst at Clover Capital Management in Rochester, New York. “What does this say about his oversight? He’s taking a hit to his credibility, and it all rolls up to him.”

Still, Kaufler pointed out that unlike Bear Stearns when it was under pressure, Lehman is able to borrow at the U.S. Federal Reserve’s discount window.

Lehman Chief Executive Richard Fuld said in a statement that replacing Gregory, who has been at the company for three decades, was “one of the most difficult decisions” he had had to make.


The fourth-largest U.S. investment bank said that co-Chief Administrative Officer Ian Lowitt, 44, will be the new CFO and Herbert (Bart) McDade, 48, global head of equities, will be chief operating officer and president.

“Wall Street moves very quickly and certainly the shareholders were very, very disappointed with the events at Lehman,” said Anton Schutz, a portfolio manager at Mendon Capital Advisors in Rochester, New York. “I think there was a need to change some of the management responsible for some of the shareholder unhappiness.”

Callan, who in recent months has been the public face of Lehman, is the latest in a string of high-profile Wall Street executives who have been fired or demoted as the credit crisis widened.

The demotion of Callan, who has been highly visible in recent months in defending the company from critics like hedge fund manager David Einhorn, left Wall Street with virtually no women in senior management roles.

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Einhorn, whose Greenlight Capital has been shorting Lehman shares in a bet that they will fall further, declined to comment.

But it was unclear whether the high-level demotions and the raising of additional capital would be enough to allay investor concerns.

Lehman shares fell more than 4 percent to close at their lowest level since 2000, and were the weakest performers in the brokerage sector.


McDade, the new COO, used to run Lehman’s corporate bond, fixed income and equity desks. Lowitt, a Rhodes scholar, previously served as chief administrative officer of Lehman Brothers Europe.

Callan, who had been CFO since December, will remain at Lehman, rejoining its investment bank “in a senior capacity,” Lehman said. The 42-year-old executive previously oversaw global hedge funds within its investment banking unit.

Gregory, 56, will remain with the company in an unspecified role, a Lehman spokesman said.

Billionaire investor Maurice “Hank” Greenberg said on Thursday through a spokeswoman that he was buying shares in Lehman Brothers as planned.

Meanwhile, a source familiar with the situation poured cold water on a CNBC television report that Blackstone Group BX.N could be interested in taking a 20 to 30 percent stake in Lehman, saying such a move was unlikely. Blackstone declined to comment.

Lehman’s 6.75 percent notes due in 2017 gained as spreads narrowed by 6 basis points to 354 basis points over Treasuries, according to MarketAxess data.

The cost to insure Lehman’s debt with credit default swaps fell by around 25 basis points to 265 basis points, or $265,000 per year for five years to insure $10 million in debt, after earlier rising on the news, according to Phoenix Partners Group.

Lehman shares fell $1.05 to close at $22.70 on the New York Stock Exchange, their fifth straight daily drop.

Some strategists said investors were buying Lehman Brothers bonds even as the stock tanked, betting that even in the worst case scenario of the investment bank going out of business or being taken over for a pittance, bondholders would be paid back as were those of Bear Stearns.

Additional reporting by Jennifer Ablan, Walden Siew, Jennifer Coogan, Elinor Comlay and Megan Davies; Editing by Steve Orlofsky, Leslie Gevirtz, Phil Berlowitz