Profiles in Panic

With Wall Street hemorrhaging jobs and assets, even many of the wealthiest players are retrenching. Others, like the Lehman Brothers bankers who borrowed against their millions in stock, have lost everything. Hedge-fund managers try to sell their luxury homes, while trophy wives are hocking their jewelry. The pain is being felt on St. Barth’s and at Sotheby’s, on benefit-gala committees and at the East Hampton Airport, as the world of the Big Rich collapses, its culture in shock and its values in question.

snapshot: East Hampton, late summer, a lawn party at a house on the ocean overlooking the dunes. The host is a prince of private equity known for dressing well. One of his guests is Steven Cohen, the publicity-shy billionaire whose SAC Capital, with $16 billion under management, is perhaps the most revered of the 10,000 or so hedge funds spawned by this giddily rich time. Nearby is Daniel Loeb, of Third Point, one of the better-known “activist” hedge funds, who hopes to move soon into a 10,700-square-foot, $45 million penthouse at 15 Central Park West, a Manhattan monument to the new gilded age. Gliding easily between them is art dealer Larry Gagosian, so successful at selling Bacons and Serras to Wall Street’s new titans—including to Cohen—that he now travels in his own private jet and has his own helicopter to take him to it.

But here’s the odd thing: despite the beauty of the ocean view, nearly all the guests have their backs to it. Cohen is deep in conversation with a colleague who seems to be pitching him a deal. Loeb hovers close to his wife, a former yoga teacher. Gagosian is near his stunning young girlfriend. No one notices the clouds that are, quite literally, on the horizon. Snap.

Six weeks later, the photograph is cracked and sepia-toned, curling at the edges, a historic print. In just that short time, the storm has hit and nothing looks the same.

It may be premature to say our gilded age has ended. Third Point dropped 10 percent in October, bringing it down 27 percent for the year, but Daniel Loeb is still moving into his extravagant new apartment. Steven Cohen’s SAC was down 11 percent in October and 18 percent for the year to date, but that still leaves him plenty of money to add a second ice-skating rink to his Greenwich, Connecticut, estate. And Larry Gagosian is still selling plenty of art.

What’s definitely gone—along with Lehman Brothers and Bear Stearns—is leverage, at least to the dizzying degree it was recently used by Wall Street’s investment banks, hedge funds, and private-equity firms to parlay each dollar of their assets into $10, $20, even $30 or more of credit to make gargantuan deals and profits. The credit crunch has made such leverage as quaint as the market in Dutch tulips. Without it, Wall Street salaries have already started drifting gently back to earth like so many limp balloons.

Gone, too, are jobs—lots and lots of them. Along with a sizable portion of Lehman’s 26,000 worldwide, and Bear Stearns’s 14,000, Wall Street firms across the board—even Goldman Sachs—are cutting back, and that pain radiates out to the limousine drivers and caterers and lawyers and personal trainers and restaurant owners and real-estate brokers who rely on Wall Street clients, not to mention to the many nonprofits and charities that have grown accustomed to Wall Street money. The latest estimate of jobs New York will lose, both on and off Wall Street, is 160,000. Governor David Paterson says the state’s budget deficit has already reached $12.5 billion. In New York City, where Wall Street accounts for more than a quarter of the tax revenues, Mayor Michael Bloomberg thinks the financial-sector crisis will leave a $2 billion hole in the next fiscal year’s budget.

Almost everyone has lost something—if not their jobs, then 25 to 50 percent of their retirement savings—and nearly everyone is glum, anxious, hung over. Prudence is the watchword now: sackcloth after the brilliant silks and brocades of the gilded age. The day after Lehman Brothers went down, a high-end Manhattan department store reportedly had the biggest day of returns in its history. “Because the wives didn’t want the husbands to get the credit-card bills,” says a fashion-world insider. A prominent designer says ruefully, “People really aren’t shopping at all unless there’s a deal or sale. It’s pretty dramatic—they have the stores at their mercy.”

Even those who have plenty left to spend aren’t spending it. “I ran into a couple I always see at the antiques show,” one Upper East Side woman recounts of her visit to the Armory show on Park Avenue. “They always buy something fairly grand. ‘What have you bought this time?’ I asked. ‘Oh, nothing!’ they said. ‘We’d feel … ashamed.’” Another Upper East Side woman often goes from lunch at Michael’s restaurant on West 55th Street to Manolo Blahnik a block away to pick up a $600 or $700 pair of shoes as “retail therapy.” No more. “I was at Michael’s yesterday and was thinking, Oh, Manolo’s … But then I thought, Why? Why do that? It just doesn’t feel good.”

A Penny Saved

Only months ago, ordering that $1,950 bottle of 2003 Screaming Eagle Cabernet Sauvignon at Craft restaurant or the $26-per-ounce Wagyu beef at Nobu, or sliding into Masa for the $600 prix fixe dinner (not including tax, tip, or drinks), was a way of life for many Wall Street investment bankers. “The culture was that if you didn’t spend extravagantly you’d be ridiculed at work,” says a former Lehmanite. But that was when there were investment banks. Now many bankers, along with discovering $15 bottles of wine, are finding other ways to cut back—if not out of necessity, then from collective guilt and fear: the fitness trainer from three times a week to once a week; the haircut and highlights every eight weeks instead of every five. One prominent “hedgie” recently flew to China for business—but not on a private plane, as before. “Why should I pay $250,000 for a private plane,” he said to a friend, “when I can pay $20,000 to fly commercial first class?”

The new thriftiness takes a bit of getting used to. “I was at the Food Emporium in Bedford [in Westchester County] yesterday, using my Food Emporium discount card,” recounts one Greenwich woman. “The well-dressed wife of a Wall Street guy was standing behind me. She asked me how to get one. Then she said, ‘Have you ever used coupons?’ I said, ‘Sure, maybe not lately, but sure.’ She said, ‘It’s all the rage now—where do you get them?’”

One former Lehman executive in her 40s stood in her vast clothes closet not long ago, talking to her personal stylist. On shelves around her were at least 10 designer handbags that had cost her anywhere from $6,000 to $10,000 each.

“I don’t know what to do,” she said. “I guess I’ll have to get rid of the maid.”

Why not sell a few of those bags?, the stylist thought, but didn’t say so.

“Well,” the executive said after a moment, “I guess I’ll cut her from five days a week to four.”

There were, to be sure, some big-name “blowups” as the market began to implode. Here was Sumner Redstone, chairman of Viacom and CBS, who had to sell $233 million worth of Viacom and CBS stock in order to pay down part of an $800 million loan. T. Boone Pickens, legendary Texas oilman, was another blowup, and so was Chesapeake Energy’s Aubrey McClendon, forced by a margin call to sell 94 percent of his 32 million company shares into the bear market. (Worth $2.2 billion last July, the shares were sold in October for $569 million.) Kirk Kerkorian, 91, has lost about $12 billion on his 54 percent ownership stake in MGM Mirage, the casino and hotel operator that owns almost half the hotel rooms on the Las Vegas Strip, including those in the Bellagio, the MGM Grand, the Mirage, and Mandalay Bay. The company’s stock is down 86 percent this year, and its bonds were downgraded deeper into junk status in October. Kerkorian has reportedly told friends that he “lived one year too long.” (He now claims he never said it.) Nevertheless, he and the other three men are all still billionaires.

These were the stories known because they involved large chunks of publicly traded stock. But as October turned into one of the worst market months since October l929, rumors ran rampant about which high-flying hedge funds would crash as they tried in vain to unwind their investments in derivatives and other unregulated securities, many of them entwined with subprime mortgages. With their lenders forcing them to sell assets at new lows, and their investors trying to pull their money out, the hedge funds were caught in the middle: the gilded age’s biggest winners were now among its biggest losers. Would Ken Griffin’s Citadel be the first big hedge fund to go? Or Fortress—whose clients are trying to redeem $4.5 billion? In fact, the first big tree down following that dreadful month was Tontine Associates, which managed $11 billion through its four hedge funds and whose activist founder, Jeffrey Gendell, had become a billionaire by generating more than 100 percent returns in 2003 and 2005. After two of his funds had lost two-thirds of their value, Gendell bowed to the inevitable and is expected to close them. Days later came word that Steven Rattner was closing his small but high-profile media hedge fund, Quadrangle Equity Investors, after approximately 25 percent year-to-date losses.

Of those 10,000 hedge funds, as many as half may join the casualty list in the next few years. Not that many hedge-fund managers, though, will be reduced to selling apples. Take Remy Trafelet, 38, a handsome, smooth-faced preppy whose fund faces steep year-end losses and dwindling capital—from $6 billion to $3 billion—as investors depart. In a good year, such as 2005, when Trafelet racked up 42 percent returns, he and his partners pocketed hundreds of millions of dollars.

Still, he may have to trim his lifestyle a bit.

Sandcastles in the Sky

Tellingly, no fewer than 50 high-end New York apartments have been put on the market since late September, most by Wall Streeters. Usually, the fall listings for apartments between $10 and $20 million are all teed up by Labor Day. Not this year, as The New York Times’s Josh Barbanel notes. At the Majestic, on Central Park West, two Wall Streeters listed their three-bedroom units within hours of each other. Robert Long, a managing director of hard-hit Allied Capital, listed 8C for $13.8 million as “the most magnificently renovated grand apartment to become available on Central Park West in years.” James Kern, a former senior managing director of Bear Stearns, listed 17D—the “ultimate renovation”—for $12 million.

Ten blocks away, at the Park Laurel tower, on 63rd Street, Charles Michaels, of the hedge fund Sierra Global Management, listed his 2,800-square-foot, four-bedroom apartment with terrace for $14.9 million. In early October, Steven F. Stuart, of the Garrison Investment hedge fund, listed the apartment directly above Michaels’s—no terrace—for $10.8 million. Ten days later, real-estate developer Ira Resnick put his own, similar apartment at the Park Laurel up for sale—for $10 million.

Nowhere is the downturn more dramatic, though, than downtown, where new condominium towers by cutting-edge architects vie for a market that’s almost vanished overnight: young Wall Streeters with bonuses to throw at sleek, overpriced apartments in Richard Meier–knockoff buildings. For the developers, it’s proved a game of high-stakes musical chairs. Those who got their buildings up by early 2007 have sold many of their units by now. Those who started selling after Bear Stearns’s collapse, last March, are struggling, as the Web site StreetEasy confirms. And for those just getting started, good luck.

In the financial district itself, hotel impresario André Balazs embarked on the 47-story William Beaver House in 2006. StreetEasy’s Sofia Kim suggests the name was meant—or at least interpreted—as a naughty wink to hard-partying bachelor traders. With the Tsao & McKown–designed building due to open this month, 209 of its 320 mostly one- and two-bedroom units have sold at top-of-the-market prices—from $900,000 to $6 million. But the rest are either for sale or being held in reserve. That’s a lot of unsold units.

Still, Balazs has done better with the Beaver House than Kent Swig has with his condominium tower at 25 Broad Street, designed by Cetra/Ruddy. Swig closed its sales office until further notice, citing liquidity problems due to Lehman Brothers’ demise. At One York Street, the soaring glass tower designed by Enrique Norten overlooking busy Canal Street, developer Stan Perelman says 28 of his 40 units have closed, though he admits that his 6,096-square-foot penthouse, with an asking price of $34 million, has yet to find a taker. The raw space, entirely glass-walled, is both exhilarating and somewhat vertiginous; as for the small ventilation windows at ankle height, they’re probably not a good idea for an owner with cats. “When the hardwood floors are in, the slabs, the home theater—press a remote and all the shades go up automatically and the music begins—someone will say, ‘Where do I sign?,’” Perelman suggests. Next month, that is, or the month or the year after …

River views—and the cachet of a world-class architect—do help. The Superior Ink building, a former factory on West 12th Street overlooking the Hudson, was given a Robert A. M. Stern makeover, and most of its 68 apartments and seven adjoining town houses have sold. So, then, how about partial river views and a famous artist, just one block away?

On West 11th Street, painter and filmmaker Julian Schnabel has lived for years in a wide former stable he calls Palazzo Chupi. In keeping with the gilded age, he added nine lavish floors of his own design. Richard Gere bought the fourth floor, but now it’s back on the market. A “private individual” took the fifth, and Schnabel himself lives on the sixth and seventh. Still for sale above are a duplex and a triplex penthouse.

From across the street, the addition’s dusty-rose stucco and Italianate arches look striking enough. Inside, Palazzo Chupi is nothing less than a brilliant artist’s interpretation of a gilded age—only not this one. More like the Italian Renaissance.

A bronze-domed elevator with Italian-tile floor opens into the penthouse’s furnished living room, with nearly 15-foot ceilings of hand-hewn wood beams, a colorful Venetian-glass chandelier, and a massive, 8-foot-high fireplace. Giant Schnabel canvases fill the walls. They aren’t included in the $24 million price, but as Corcoran broker James Lansill puts it, “You could try … ” Schnabel is, he says, a seller. In fact, the triplex started at $32 million—before the market meltdown.

The triplex has 3,713 square feet of interior space, but also 2,304 square feet of balconies and terraces (seven in all). It has arched windows throughout, baronial bathrooms with vintage fixtures, and the most romantic master bedroom in New York. The interior of the duplex is even larger, and features a living room—25 feet by 41.6 feet—with wood-beamed ceilings nearly 20 feet high. Only three terraces, though, hence the bargain price of $23 million. Among its many splendors is a huge square bathroom with a sunken tub in the middle, a fireplace, and French doors that open out through red velvet drapes to an Italian-tiled balcony. “His idea is for you to be able to sit in the bath with a roaring fire, the doors wide open, and snow on the balcony,” Lansill says.

Either of Schnabel’s gilded-age fantasies is well worth the price for anyone with $20 to $30 million to spare. The question is: Does anyone have $20 to $30 million to spare on a gilded-age fantasy these days? Perhaps. In the black-and-white-tiled lobby, as Lansill leads the way out, a trim, elegantly dressed Russian fellow with blond hair and wraparound sunglasses sweeps in. “I have an appointment,” he says to the guard in a thick Russian accent, “with Mr. Schnabel.”

Going, Going, Gone

Fall’s auctions, in both London and New York, have tracked the deepening gloom as surely as real estate and stocks have. Literally on the heels of Lehman’s bankruptcy, in mid-September, Damien Hirst held a two-day sale of animals in formaldehyde and other nature-based art at Sotheby’s in London and raised $200 million, apparently from Russian, Middle Eastern, and Asian buyers for the most part, thus panicking the private-art-dealer world, which he’d circumvented by using the auction house. For perfect end-of-an-age timing, his “Beautiful Inside My Head Forever” auction ranked right up there with Blackstone’s June 2007 I.P.O., at private equity’s high-water mark. Then came the sickening slide in the stock market. By early November London’s Evening Standard was reporting rumors that some buyers had reneged on their bids and that a lot that had purportedly sold was being offered to a collector. (A Sotheby’s spokesman denied the rumors.)

By mid-November, Sotheby’s was reporting a $52 million loss in guarantees from the season’s first auctions—sums the auction house had guaranteed sellers before the market meltdown and had to make good on when their art fetched prices below those figures. That included the $40-million-plus guarantee reportedly promised to private-equity titan Henry Kravis and his wife, Marie-Josée, for Edgar Degas’s Dancer in Repose. On November 3, the circa 1879 pastel and gouache sold over the phone, with a bid placed in Tokyo for only $33 million, leaving Sotheby’s on the hook for millions. William Ruprecht, Sotheby’s chief executive, later announced, “We’re out of the guarantee business, at least for a while.”

Christie’s had its own problems. One in particular involved auctioning 16 postwar drawings owned by former Lehman chairman Richard Fuld and his wife, Kathy, in New York on November 12. Christie’s had given them a $20 million guarantee, but the group fetched only $13.5 million. The entire auction, of contemporary works by such noted artists as Barnett Newman, Willem de Kooning, and Roy Lichtenstein, achieved only half its pre-sale low estimate.

As auctions go, so, soon enough, will museums, accustomed to Wall Street largesse. People are wondering: Will Kathy Fuld, who has donated or helped acquire 42 artworks for the Museum of Modern Art, stay on the board as a vice-chairman? For that matter, will private-equity billionaire Leon Black, another MoMA vice-chairman? In early October a company owned by Black’s Apollo Management lost a legal battle in Delaware chancery court over its efforts to back out of a $6.5 billion deal. The judge ruled that a deal was a deal and must go forward, but Apollo’s lenders, Credit Suisse and Deutsche Bank, now seem unlikely to participate, and Black and his Apollo co-founder, Joshua Harris, may face having to pay billions in damages. That may not put Black in a mood to buy art for MoMA.

Other museums face similar funding threats, as do all philanthropies. When the meltdown deepened, talk inevitably turned to the Robin Hood Foundation, started by hedge-fund legend Paul Tudor Jones II and underwritten largely by hedge-fund money. Citadel Investment’s Ken Griffin has been a generous donor, but with his largest fund down nearly 40 percent for the year, how likely is Citadel to pony up a major gift in 2009? Or Glenn Dubin, of Highbridge Capital Management? (Two of its funds are down 32 and 37 percent for the year.) Or Alan D. Schwartz, on whose watch as C.E.O. Bear Stearns went down? In the case of Richard Fuld, the answer seems already clear: as of late October, his name was no longer listed on Robin Hood’s board of directors.

The fate of the Lehman Brothers Foundation tells the larger story of post-meltdown Wall Street philanthropy all too well. In the halcyon days, before the downturn, when one year Lehman Brothers was racking up a record $4 billion net income, its employee-funded foundation pledged $3 million to Lincoln Center’s redevelopment campaign, $1 million to the Apollo Theater’s education and outreach programs, and $50,000 to the Orchestra of St. Luke’s, among other New York causes. The good news is that the foundation, as a non-profit entity, wasn’t linked to Lehman’s bankruptcy filing. The bad news is that Lehman’s ex-employees, their jobs gone and their stock all but worthless, probably won’t be kicking in any more money to the foundation. (A spokesman for the Lehman foundation did not respond to a call from Vanity Fair.)

The Huntington Mafia

If the gilded age has come to an end this fall, surely Lehman’s demise—with its bankruptcy filing on that Monday morning of September l5, 2008—was the tipping point. It panicked the money markets, froze global credit, and sent stock prices spiraling down.

Lehman’s 31st floor—where Fuld and his top executives worked—was by all accounts a quiet place, especially by midafternoon, one managing director recalls dryly. Among Fuld’s loyalists, no one was more loyal than his number two, chief operating officer Joe Gregory, whose story, even more than Fuld’s, seems emblematic of the age now past. If Tom Wolfe were writing a sequel toThe Bonfire of the Vanities, Gregory would be his man.

Gregory, 56, was a legend at Lehman—less for his business exploits than for his lifestyle. He had several homes: a principal residence in Lloyd Harbor, on Long Island’s North Shore; an oceanfront McMansion in Bridgehampton; a ski home in Manchester, Vermont; an apartment at 610 Park Avenue; and reportedly a house in Pennsylvania. “He had a kid who went to a small school in Pennsylvania,” a former senior colleague recalls. “Joe didn’t like the hotel, so he bought [a] house in town. It was probably only $500,000, but he paid for it so that, on the maybe two trips a year he took there, he’d have a nice place to stay. And then he had it redecorated!” The colleague says he heard it on good authority that Gregory’s after-tax expenses approached $15 million per year. That, he heard, was exclusive of mortgages. (Gregory’s lawyer declined to comment on e-mails from Vanity Fair.)

Gregory came from a modest background, an ex-colleague recalls; at one time he had aspired to be a high-school history teacher. One summer while attending Long Island’s Hofstra University, though, he worked as an intern at Lehman and got hooked. Both he and Fuld joined the firm soon after college; as the two men rose in the ranks, they became close friends.

Like Fuld, Gregory started on the commercial-paper trading desk. By the 1980s he’d become a top executive in fixed income and was known as one of Lehman’s Huntington Mafia, because all four executives in it lived in or near that North Shore town and often commuted together. “It was said that the four of them decided the fate of the floor every day on their drives back and forth,” recalls one ex-colleague. “And you had to be in their good graces to survive on the fixed-income floor.”

Gregory’s rise was strongly linked to Fuld’s: loyalty was his strong suit. “Joe never had clients,” says a lawyer who worked with the firm. “So he wasn’t on 31 because he was a rainmaker. And he never really had a business he was responsible for. He was Fuld’s full-time loyal lieutenant. And Fuld did have a yes-man mentality, where if people didn’t agree with him they’d get shot. And Gregory was sort of the hatchet man, who fired them or tried to enforce rules.”

Gregory played the sidekick role well, two ex-colleagues suggest. The problem, says one, is that as president and chief operating officer, beginning in 2004, he came to oversee all departments, including the derivatives that would get so tricky. The commercial paper (i.e., short-term loans solicited by creditworthy companies and banks) he’d traded in his early days was lower-risk. “If you bought it wrong, you could hold the position,” one ex-colleague explains, “till it rolled off—30 or 60 days. So it would cost you a few basis points, that’s all.” The longer end of the market involved bonds you might get stuck with if the market changed. “I don’t know if Gregory knew how much risk he was taking,” the ex-colleague says. “The other thing, which Joe had never seen, was how a market could go highly illiquid. Joe had observed this but not lived it.”

As the real-estate bubble swelled, and with it the $55 trillion market in unregulated, collateralized debt obligations and credit-default swaps, so did Gregory’s compensation—and lifestyle. He and his current wife, Niki, provided generously for their five children—three of them hers, two his. They gave to medical charities—Huntington Hospital, Weill Cornell Medical Center, and the Maurer Foundation for Breast Health Education, among others. When their daughter became a serious soccer player, the Gregorys underwrote a new local soccer field. “Joe had a huge heart—he gave a ton of money away,” says one ex-colleague. At Lehman, the ex-colleague adds, “he drove all the diversity and philanthropic initiatives.”

But the Gregorys rewarded themselves too. Tired of the 90-minute commute, Joe bought a helicopter for the ride. When he realized the chopper couldn’t fly to Manhattan in inclement weather, he got a seaplane. Niki was known as the best customer at the high-end boutique where all the wealthy North Shore wives shopped; the store’s personal buyers came to the house, their arms filled with couture and cashmere. The Gregorys undertook a renovation of the Lloyd Harbor home that would cost, by one report, $3.5 million. They bought the Bridgehampton home for about $19 million in 2006 and hired a top local designer to do it up. One day Gregory called his staff out to admire the new Bentley he’d just bought for his wife. “Look at the dashboard,” he allegedly said. “It’s one piece of burled wood.”

“They weren’t society people,” says an acquaintance of the Gregorys. “They didn’t buy art the way the Fulds did; they didn’t really entertain.” The Lloyd Harbor renovation included a new state-of-the-art kitchen, but the Gregorys ate cold cuts on their fine china. (One guest espied a $4,600 price sticker on one of the plates. She chose not to ask whether the price was for one plate or the set.) At a local restaurant he frequented, Gregory once left an $1,800 tip for a $200 tab, says a Lehman colleague.

The problem was that roughly 75 percent of Gregory’s compensation—which reached $26 million in 2007—was in Lehman stock. Some of the stock could be sold only after a five-year waiting period, but most Lehman employees kept the bulk of their holdings long after that—not only out of loyalty but because its rise from $6 a share in 1998 to $85 in early 2007 had made them very, very rich. At least on paper. Fuld had by far the largest in-house holding: at the high-water mark, he owned stock worth almost $1 billion—not counting his stock options. Gregory had the second-largest stake: an estimated $574 million.

Most Lehman bankers saw little risk in borrowing against their stock to fund the lifestyle to which they were, on paper, entitled. “Say you have $8 million of Lehman stock,” suggests a senior investment adviser, using hypothetical numbers but a true-life case about a good friend who worked at Lehman. “You want to build a $2 million house. You pledge your stock and you borrow the money and you say to yourself, ‘Let’s say the worst happens: we have a terrible drop in the market. My $8 million will still be worth $4 million, and I’ve only borrowed half of that. So I’m being very conservative.’ But that doesn’t allow for $8 million down to zero.”

At Lehman, Gregory set a new goal in 2007, according to a former colleague: he wanted Lehman to overtake Goldman Sachs, which was raking in huge profits by leveraging as much as 40 to 1. And he wanted Lehman’s share price to reach $100. He imposed ambitious targets on all of Lehman’s capital departments, targets that required taking big risks on deals that would become increasingly shaky.

As the real-estate market collapsed, so did those investments. For Gregory, the end came in June 2008, with the release of Lehman’s shockingly bad second-quarter numbers: $2.8 billion in losses, after months of confident pronouncements from the firm.

When the numbers came out, the outcry was fierce. Lehman was accused of misleading the market by attaching wildly over-optimistic values to its portfolio of commercial real estate and mortgage-backed securities. Class-action suits by pension funds hard-hit by Lehman’s losses were filed. Groups like the Operative Plasterers and Cement Masons International Association Local 262 and the Fire & Police Pension Association of Colorado—these were among the plaintiffs who hadn’t even known they were part of the gilded age. Only they were: Lehman’s bankers had used their retirement money to make those 40-to-1 bets and live like princes. Now that money was gone.

Fuld seemed reluctant to fire his old friend, so Gregory made the decision for him. “Wall Street wants a head,” he said sadly, The Wall Street Journal reported. At some point, Gregory apparently turned to Lehman for a loan, according to New York magazine, borrowing money against his stock.

He did not sell any of his Lehman stock in the first half of 2008, company records show. How much of it he was able to sell over the summer—if any—remains an open question, since upon his departure from the firm his transactions were no longer publicly posted. Ben Silverman, of InsiderScore.com, which tracks corporate compensation and insiders’ transactions, says that regulatory filings indicate that Gregory was bound by a lockup agreement preventing him from selling his stock for 90 days. By the time that period was up, it was Friday, September 12; the following Monday, Lehman announced its bankruptcy and the stock closed at 15 cents a share. Unless Lehman had agreed to release Gregory from the lockup after he resigned, he would barely have had a chance to act before his paper millions vanished into thin air.

What Gregory could do—and did—was put property up for sale. The apartment at 610 Park Avenue found a buyer in October for $4.4 million. The Bridgehampton house is still on the market for what local brokers diplomatically call an “aggressive” price: $32.5 million.

Outside, the Gregory house on Surfside Drive looks like a thousand other Hamptons McMansions—an architectural hodgepodge built on spec—though it sits somewhat oddly next to a public parking lot, separated only by a hedge of tall firs.

Inside, the house is decorated not just exquisitely but relentlessly. The long foyer has a high, arched ceiling, raised-panel walls, and a curved papal balcony from which the owners might look down from the second floor to greet arriving guests. One guest recalls that when the Gregorys bought the house it was already fully decorated, but the couple hired Winn Cullen, a decorator based in nearby Locust Valley, to rip everything out and make it perfect again—in an entirely new way. No expense was spared.

In the main living room—all creams and beiges—the built-in bookcases hold not one but two large flat-screen TVs: one on either side of the fireplace, like big black bookends. Why two? The broker is stumped. Perhaps because the bookcases would be almost empty without them. Or perhaps it’s a theme: in the kitchen are two Sub-Zero refrigerators flanking the large butcher-block island. And upstairs are two master bedrooms, each with a grand view of the Atlantic.

Sometime over the summer, before the market meltdown, the house on Surfside was nearly sold. Unfortunately, the would-be buyer was perturbed to learn that the large back lawn, with its gunite pool and walkway over the dunes to the beach, would have to be drastically reduced before the house could be sold. That’s because Gregory’s property is in violation of a Southampton town ordinance requiring preservation of natural beachfront vegetation. Before a sale can close, the broker explains, a broad swath of the lawn will need to be ripped up and the natural flora restored. The potential buyer may also have balked at the carrying costs: $66,000 annually for full insurance, including extra flood coverage for hurricane damage, and $34,000 in taxes—$100,000 a year before walking in the door. Plus the grounds crew.

Gregory never used the Bridgehampton house much; these days, he spends his time dealing with his lawyers. He’s one of a dozen top Lehman officers federal prosecutors have subpoenaed for one of three grand-jury investigations probing whether Lehman painted too rosy a picture of its finances—including that portfolio of commercial real estate. If they knowingly misled investors, some of those officers may go to jail.

The New Math

Most 60-year-old ex–Lehman Brothers bankers likely squirreled away enough to at least scrape by on a couple of million a year. As for the 25-year-olds, they never earned enough to have much to lose. But the mid-30s or mid-40s Lehman banker who lived up to his high compensation—or beyond it—is reeling, hurting, and possibly bankrupt.

One Sunday evening in October, a former Lehmanite in his mid-30s settles into a velvet banquette at the Gramercy Park Hotel’s elegant Rose Bar. At first he’s circumspect. But after a couple of Johnnie Walker Blacks on the rocks, he opens up.

“Let’s take a guy who makes $5 million a year,” the banker suggests. “He’s paid two and a half million dollars of that in equity compensation”—Lehman Brothers stock. Plus he gets to buy that stock at a 30 percent discount, so he’s really getting $3.25 million in stock. “Plus appreciation? Over five years? That’s $25 to $30 million!

“Then let’s say a guy in that position borrowed $5 million against the $30 million in stock. It would seem a very conservative loan, right? Until the $30 million goes down to zero, which is what happened. So now he’s negative $5 million.”

True, that same Lehman banker got the other half of his compensation in cash. The banker nods. “For five years, he made two and a half million dollars a year in cash. So that’s twelve and a half million dollars. But of course he’s had to pay more or less 50 percent in taxes, so divide that and he’s got six and a quarter million. He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right? So he has nothing—and he has to repay that $5 million loan.”

A month before the bankruptcy, the banker muses, his peers were complaining about the $10,000 or $20,000 they had to pay for lifetime dibs on the best season tickets in the New York Giants’ new stadium. But they were paying. They were complaining about private-school tuitions. “But it was actually a way of saying, ‘I’m rich—rich enough to afford it.’

“The day Lehman went bankrupt, people realized they were going to get no bonuses, no severance, and no equity. Oh—and no health care. And no salary.”

So far, many seem more stunned than angry, or even timidly hopeful now that Barclays, the English bank, has bought much of the firm and offered shell-shocked Lehmanites their jobs—for now. Peter J. Solomon, 70, a former vice-chairman of Lehman Brothers who runs his own investment-banking firm, says, “What I see in the Lehman people is not enough bitterness. They’re still there, they have three months, Barclays is offering them jobs for a while. But that won’t last for most of them. You’re going to see the biggest impact in the first quarter of next year.”

At least the thirtysomething banker in the Rose Bar isn’t married with kids.

Alexandra Lebenthal, a New York–based wealth manager for investors with between $2 million and $20 million in assets—the modest to mid-level rich—offers a keenly authoritative portrait of a thirtysomething Lehman banker, married with kids, in a guest column called “What It Costs” on the Web site NewYorkSocialDiary. Blake and Grigsby Somerset are fictional, their finances all too plausible.

Before Lehman’s stock began to plummet, Lebenthal suggests, Blake’s annual compensation was $9.5 million—much of that in company stock. He was carrying a $2 million loan used for a house in the Hamptons, but felt perfectly able to afford his annual expenses: the Park Avenue apartment maintenance ($120,000); the Hamptons house mortgage ($75,000); the nanny and driver ($100,000); his wife’s clothing ($100,000); the personal trainer three times a week ($18,000); food, including restaurants ($30,000); charitable benefits and other nonprofit causes ($200,000); private school for three children ($78,000); Christmas in Palm Beach ($15,000); spring in Aspen ($15,000); and a wedding-anniversary diamond necklace for Grigsby ($50,000).

At least Blake has been hired on by Barclays. But his Lehman stock portfolio is now worthless. He and Grigsby have to cut their annual living expenses from about $1 million to a fraction of that, and do it in ways that don’t show, for the worst—the worst—would be the public disgrace of falling out of their social class.

First to go: vacations, the trainer, the driver, and entertaining. No restaurants, no shopping excursions, no new ball clothes for Grigsby (last year’s will have to do). But, for now—for appearances—the Somersets will scrimp to keep the kids in their schools, and the nanny, and the Hamptons house. For now.

Bears at the Hedgerow

What, indeed, of the Hamptons, where the Somersets still go, though they can’t afford to anymore? On high-hedged roads everywhere, for-sale signs are nearly as prevalent as in southern Florida. A broker in Bridgehampton says she’s often the only one in her storefront office, the neat rows of little white desks as desolate as tombstones. Some brokers are rumored to have even taken jobs in East Hampton Main Street stores.

All over the Hamptons, overstretched owners hope to rent next summer to cover the bills. But even if supply doesn’t overwhelm demand, fear and greed may roil the market. One East Hampton broker tells a story of clients who wanted to renovate their house and asked her—before the meltdown—to find them a rental to live in for a year while the work was being done. The broker called an owner on Further Lane, who agreed to rent for $425,000. Then came Lehman’s demise. The owner decided she’d need more money: $500,000. One week later, the market had fallen again. Now the owner panicked: “I’ll take $400,000,” she declared. Six days later, she was down to $300,000. Then … $250,000. “The $500,000 was all about greed,” says the broker, “and the $250,000 was all about fear.”

At East Hampton airport, so recently the scene of Gulfstream gridlock, an eerie silence has settled in. The private-jet parade diminishes, of course, right after Labor Day, but this fall, says one airport employee, “it was like turning off a light.” September traffic was down 35 percent from the previous year. The stalwarts still come, sources say: Revlon’s Ronald Perelman, industrialist Ira Rennert, Michael Bloomberg, and Starbucks chairman Howard Schultz. But there’s a lot of time for staff to read.

Up in Greenwich, Connecticut, unofficial hedge-fund capital of the world, the real-estate market is, if anything, worse. Jean Ruggiero, one of the town’s leading brokers, at William Raveis, still sells houses—the good brokers know how to play a down market—but currently there are 55 available for $9 million and up. That’s a lot for Greenwich. “The owners are having a hard time just getting the brokers to come,” says Ruggiero. “The broker thinks, Why bother? I don’t have any clients—why waste the gas?”

Ruggiero offers a white-elephant tour. Here’s a Georgian mansion that sold not long ago, she says, to a Russian oligarch for more than $10 million, with a 10 percent down payment. Unfortunately, says Ruggiero, the Russian was unable to close on the deal. “So he lost the deposit, and the house is still on the market.”

Here’s the infamous “Lake Carrington Estate,” an unfinished stone mansion of 35,000 square feet that sits seemingly abandoned in an overgrown field surrounded by a chain-link fence. When the spec mansion was listed at $28 million in mid-2007, it was declared “couture-ready.” Ready, that is, for a proud hedge-fund buyer to make his own design decisions about the interior, since the house was raw inside, with unfinished floors and no kitchen or bathroom fixtures. Those flourishes would probably cost another $10 million, not counting the grounds, which are couture-ready too. Is its recent sale for $13.7 million to an unnamed buyer a good market sign … or a bad one?

Here’s one more: a $19.9 million mansion that just sold—after 763 days on the market—for $11 million. Good or bad? “Oh, that’s a good one,” Ruggiero says.

Greenwich estate manager Jacqueline de Bar describes how wealthy locals are cutting back: letting the pastures grow, canceling the leaf blowers, doing the storm windows themselves. At Betteridge Jewelers—known as Wall Street’s jeweler—third-generation owner Terry Betteridge says a lot more customers are coming in since the meltdown, to sell, not buy. “I’ve seen some bad ones in the last two months,” he says. “I know a Wall Street guy who’s literally been selling jewelry to make the mortgage payments. He and his wife came in together, bringing things to sell.… Just this morning, we took in a $2.7 million lot. An amazing collection, some of the best jewelry in the world, everything signed—extraordinary things I couldn’t buy before. No matter what I bid wasn’t enough. Now I can.”

Down the street is Consigned Couture, where Wall Street wives come to unload last year’s designer clothes and accessories. Some send their housekeepers, others their daughters. “My calendar is booked a month ahead, up to eight appointments a day,” says owner Dolly Ledingham. That’s sellers. Buyers? Not so much. “They used to come in to spend $1,000. Now they spend $100.”

In this global economy, the age’s excesses and aftermath are spread wide, nowhere as vividly as in London. Notting Hill was the epicenter of London’s gilded age, where every driveway, it seemed, had a Maserati, every mansion a makeover, often including an underground pool. Now, says Sunday Times columnist Rachel Johnson, who chronicled the invasion of the financiers in her 2006 novel, Notting Hell, bankers are staggering around like lost souls, while their wives gather at 202, the stylish Westbourne Grove restaurant in Nicole Farhi’s boutique, to share their fears. “What they’re crying about is they’ve lost all their stock, and their houses are worth less than they were,” says Johnson of the wives, “but they’re really upset that on January 31 they have to pay huge tax bills. Even though they don’t have the cash anymore, the liability remains on what they earned before.”

In London as in New York, Lehman bankers are among those hardest hit. One in his mid-30s says that for two weeks after the bankruptcy the New York office was cloaked in ominous silence—no communication from the 31st floor to London’s Canary Wharf. After the filing, the banker and his colleagues were all told to keep coming to work, or else possibly not get paid. So they came in and played Pac-Man and Tetris. Finally, he says, the whole London-based fixed-income group was called into an auditorium and “made redundant” by a representative from the accounting firm PricewaterhouseCoopers. That was it for the banker’s Lehman career—and the $1 million in company stock that a friend says he lost.

On a higher level, major figures on the London financial scene have lost billions—tens of billions, in some cases. Only last May, Indian tycoon Lakshmi Mittal, who owns the world’s largest steel company, paid $230 million for Israeli-American hedge-fund tycoon Noam Gottesman’s Georgian mansion, in Kensington Palace Gardens—a London record. Now, amid the commodities plunge, Mittal is said to have lost some $50 billion, and to be down to his last $16 billion. Michael Spencer, founder of icap, the interdealer broker, watched roughly $700 million of his stake in the firm go up in smoke as the market came down.

Another name bandied about is that of Nat Rothschild. The 37-year-old son of Lord (Jacob) Rothschild, he some years ago weaned himself from a dissolute life, gave up alcohol (even his family’s Château Lafite Rothschild wine), and turned to the serious work of making money, eventually becoming co-chairman and rainmaker of the New York–based hedge fund Atticus Capital. Rothschild continued to live well—very well, with homes in London, Manhattan, Moscow, Greece, and Klosters, Switzerland, where he established his principal residence, where there are no English taxes. He went from home to home, the London Daily Mail reports, in an elaborately equipped Gulfstream jet, supposedly always with two uniformed butlers, rarely staying more than four days in any locale. But the rainmaking worked: Atticus pulled in eye-popping returns, and Rothschild probably made more than $800 million—all in advance of the $750 million or so he’d one day inherit. “He has a very difficult relationship with his father,” suggests London-based columnist Taki Theodoracopulos. “I think his father would have liked him to be more interested in houses and furniture. This guy just cares about making money.”

Now Atticus has racked up staggering losses of $7.5 billion. Its Atticus European fund, once worth $8 billion alone, was down 43 percent by early October.

Usually, December is the year’s most festive time in New York. Wall Street bankers either have their bonuses or know what they will be. Their wives have bought new gowns for the season’s charity balls—the Metropolitan Museum’s acquisition-fund benefit and the New York Botanical Garden’s Winter Wonderland Ball, and more, at ticket prices ranging from $400 to $15,000. Then it’s off to St. Barth’s for sun worshippers, Aspen for skiers.

But not this year.

Privately, some New York benefit organizers wonder if even half the stalwarts will show up. On St. Barth’s, rental villas are usually booked by early fall; this year, many were available as of early November. At Aspen’s St. Regis hotel, Christmas week was still available, at $13,920 for two.

For bankers and hedgies, the fear this holiday season is not of bonuses reduced or denied—that’s expected. The real fear is of massive layoffs and massive redemptions by hedge-fund investors, of another Wall Street bloodbath in early ’09.

Soon, says wealth manager Alexandra Lebenthal, the Blake and Grigsby Somersets will find out what they’re really made of. “Were their lifestyle, friends, and even marriage based on living a certain way, without limits, or do they have the values to make it through the tough times?”

Philip K. Howard, a New York lawyer and social critic whose new book is Life Without Lawyers,sees a sea change which was overdue. Every 30 years or so, he notes, the country has to redefine its social values. We’ve just reached the next time. “So this end of the new gilded era—it’s like a bucket that spilled, and finally the money spilled out, and we were left with a culture whose sense of purpose and responsibility were lacking. And now there’s a real need for people, and society as a whole, to rethink and re-structure their values.”

“I may be the only one who’s thrilled by this recession,” says the wife of one London private-equity manager who took his lumps this fall. “It just means we’ll have to get possibly another job. But the bottom line is that it is just money. When you realize that you have enough—your health and a roof and good food and your family—you have to just feel lucky.”

Happy New Year.

Michael Shnayerson is a Vanity Fair contributing editor.