Shakeup at Lehman Brothers

Just months after becoming the company's chief financial officer, Lehman Brothers said Thursday that Erin Callan would be replaced but remain within the company's investment banking division.

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NEW YORK (CNNMoney.com) -- Just days after announcing a $2.8 billion loss, Lehman Brothers stunned Wall Street yet again Thursday saying it has replaced two of its top executives, including chief financial officer Erin Callan.

Replacing her is Lehman's current co-chief administrative officer, Ian Lowitt.

Also stepping down was Lehman's chief operating officer Joseph Gregory, who is handing the over the reins to Herbert "Bart" McDade III. McDade has been the head of the firm's equities division since 2005. The company said that Gregory would remain at the firm in a yet to-be-determined role.

Lehman (LEH, Fortune 500) shares initially plunged as much as 11% after the news was announced but recovered as the day went on and were down about 1% in mid-day trading.

The company said both changes are effective immediately.

"You print a loss of that magnitude in the quarter and the precedent has been set that someone needs to be held accountable," said David Killian, a portfolio manager at Stoneridge Investment Partners in Malvern, Pennsylvania, which oversees $600 million, and just recently sold its shares of Lehman.

The demotion of Callan to a senior role in the company's investment banking division was particularly surprising.

Callan had taken on the role of the public face of the embattled firm in recent months. She, and not chairman and CEO Richard Fuld Jr., had often been the executive that handled earnings conference calls and other investor presentations.

Just months ago, her star was rising not only at Lehman but on Wall Street as well after she was appointed to be CFO in December - the first woman to ever serve on Lehman's executive committee.

After providing exhausting detail about Lehman's financial position in the wake of the Bear Stearns collapse in March, Callan earned a reputation as a savvy executive who was adept at deflecting criticism of the firm.

And earlier this week, it was Callan who defended the company's decision to raise $6 billion in capital and explained how Lehman arrived at its billion second-quarter loss.

The company's results were hit hard by sluggish investment banking activity and a sharp slowdown in its fixed income business. But Lehman's biggest problems were hedging strategies that backfired and a series of writedowns on the company's mortgage portfolio.

Still, she argued that the company was well positioned, despite rabid speculation about the firm's heath and liquidity position.

"I think we put that to bed on a number of different levels through our own actions," Callan told analysts in a conference call Monday.

But in light of Thursday's development, there is likely to be more chatter about whether or not Lehman can remain independent or if it too will need to sell out as Bear Stearns did.

"[The announcement] could suggest they are preparing to review strategic options and these two individuals were an impediment to that," said Killian.

The management upheaval at Lehman is the latest in the financial services industry since the credit crunch erupted last summer.

Earlier this month, Wachovia's (WB, Fortune 500) board of directors booted CEO Ken Thompson from his corner office, following the company's sluggish performance.

Citigroup (C, Fortune 500) chief Chuck Prince and Merrill Lynch (MER, Fortune 500) CEO Stanley O'Neal both stepped down last year after the two firms reported multi-billion dollar losses after making big bets on the U.S. housing market.