Lehman Sends Top Brass Packing

CFO Erin Callan and COO Joseph Gregory were dismissed after the firm warned of big losses earlier this week, the latest high-profile casualties of the credit crunch.
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Updated from 3:43 p.m. EDT

Lehman Brothers

(LEH)

ousted CFO Erin Callan on Thursday as part of a top-level management shake-up three days after it warned of a big second-quarter loss.

Lehman replaced Callan, who spent just five months on the job, with Ian Lowitt, who oversaw Callan's day-to-day responsibilities in his most recent role as co-chief administrative officer. It also replaced President and Chief Operating Officer Joseph Gregory with Herbert "Bart" McDade III. McDade was in charge of Lehman's equities division and also has a background in fixed-income and corporate bonds.

Lehman Chairman and CEO Richard Fuld did not explicitly give a reason for the changes in a statement. But he noted the "challenging times" the firm faced and expressed remorse for the fate of his long-time lieutenant Gregory.

"Joe has been my partner for over 30 years and has been a driving force behind who we are today and what we have achieved as a firm," Fuld said. "This has been one of the most difficult decisions either of us has ever had to make."

Cramer: Lehman Not Out of the Woods

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Lehman shares are down about 70% over the past year and closed 2.6% lower to $23.13 in furious trading. Volume was more than four times its three-month average daily volume.

The move comes at a chaotic time for Lehman, which earlier this week said it

expects to report

a massive second-quarter loss of $2.8 billion -- the first in its history -- and raise $6 billion worth of capital. The firm closed that sale of common and preferred shares on Thursday, effectively diluting the stock by 30%.

The stock's slide Thursday could have been worse, but for comments from former

AIG

(AIG) - Get Report

chief Maurice "Hank" Greenberg, who said he still planned to buy Lehman shares, in line with earlier statements, despite the expected loss.

Investors fear that Lehman's troubles could make it the next Bear Stearns, which in March, on the verge of bankruptcy after rumors about its liquidity hammered the stock, sold itself to

JPMorgan Chase

(JPM) - Get Report

. Bear shareholders approved the deal last month.

UBS analyst Glenn Schorr characterized the executive shake-up as "part of the healing process" in a note Thursday, but added that "they don't change the difficult operating environment and the challenges facing Lehman given its remaining risk exposures (and respective marks)."

Lehman still maintains an estimated $60 billion worth of real-estate exposure, according to a recent report from Merrill Lynch analyst Guy Moszkowski.

Schorr also called McDade "very well respected internally and externally." He added that the transition should be "smooth" with "plenty of support in place" since Callan and her two immediate predecessors, Chris O'Meara and Dave Goldfarb, are still at the firm.

Callan was one of the highest ranking female executives on Wall Street who previously launched and headed Lehman's hedge-fund business. She joined Lehman in 1995 after working with the firm as an attorney with Simpson Thacher & Bartlett. She did not have an accounting background or experience in overseeing a large investment bank's finances.

Still, Callan's fall has been precipitous. She was widely lauded for her stewardship of the firm earlier this year, when it was regarded as one of the few Wall Street firms to navigate the credit crisis relatively unscathed. But recently, she was assailed by hedge-fund manager David Einhorn of Greenlight Capital for masking losses.

An Einhorn spokeswoman said on Thursday that he would not be commenting on the shake-up.

However, he noted in a May speech that after Lehman delivered a $489 million first-quarter profit, Callan peppered the conference call with words like "strong," "great" and "incredibly" and reportedly received high-fives on the trading floor once she finished her presentation.

However, Callan did not mention that the company still held $6.5 billion worth of risky collateralized-debt obligations, or CDOs, on which it posted a relatively modest writedown of $200 million. A quarter of those holdings were rated non-investment grade. Lehman first disclosed these important facts 22 days after its earnings report, when it filed its quarterly 10-Q report with the Securities and Exchange Commission.

"I asked them how they could justify only a $200 million writedown on any $6.5 billion pool of CDOs that included $1.6 billion of below investment-grade pieces," Einhorn said in May at the Ira W. Sohn Investment Research Conference. Callan declined to provide him an explanation, but said the firm expected further losses.

Those losses were outlined on Monday by Callan herself, along with the $6 billion capital raise. During a conference call, the then-CFO insisted that discussions with potential lenders and counterparties "are not about our viability or the fact that we will be here or the fact that we have sufficient liquidity. I think we put that to bed."

Callan will now return to the firm's investment banking division in a "senior capacity," though Lehman spokeswoman Kerrie Cohen would not say what her specific role would be. When asked for details on why Lehman was making the executive changes, Cohen said: "You have the press release. I think that speaks for itself."

Callan's and Gregory's departures are the latest in a growing line of executive casualties amid the credit crunch. It's unclear what the future holds for Fuld, who joined Lehman nearly 40 years ago and has manned the helm for more than a decade. He helped build Lehman's reputation as a top risk manager, led a diversification effort and has seen the firm through previous rumors that it would go under. However, all of Lehman's apparent strengths did not keep it safe from the current housing mess.

Ex-

Merrill Lynch

(MER)

CEO Stanley O'Neal and former

Citigroup

(C) - Get Report

head Charles Prince were among the first high-profile casualties late last year, after their banks posted big losses tied to the deteriorating mortgage market.

Ex-Bear Stearns CEO James Cayne gave up the job in January, but retained the chairman title before the firm sold to JPMorgan.

And

Morgan Stanley

(MS) - Get Report

in December fired then-President Zoe Cruz, at the time regarded as the most powerful woman on Wall Street. Some had anointed Callan with the same unofficial title in recent months.