The fall of a Wall Street highflier

(Fortune Magazine) -- When Erin Callan talked, people listened.

Such was the case at least on the March 2008 weekend after Bear Stearns collapsed. Global markets were reeling. Many feared that Lehman Brothers would be the next to fail. And Callan, a tax-lawyer-turned-investment-banker who had rocketed to CFO of Lehman at age 41, was about to be tested.

Throughout the weekend and then on Monday from 5 a.m. on, Lehman's brass, including Callan, hunkered down in the firm's Manhattan headquarters, making phone calls in the hopes of calming investors and trading partners. Despite their efforts, Lehman shares tumbled 19% that day.

By Tuesday the onus had shifted to her. She'd been CFO for only three months, and now she was essentially being asked to save the firm. She'd have to explain Lehman's quarterly results.

That meant sitting in a conference room with just a speakerphone and one colleague, and convincing panicked shareholders that Lehman was not in fact facing Armageddon. Before the call, CEO Dick Fuld patted Callan on the back. "Good luck!" he said. "I was like, 'Oh, my God,'" she recalled. "Like it just hit me at that point: There's a lot of pressure here."

But given a challenge, Callan always delivered. Over the next hour she fielded two dozen questions and assuaged suspicions that Lehman's assets were worth billions less than the firm claimed. Callan succeeded, and Lehman's stock price jumped 15% in an hour, lifting the firm's market value by more than $4 billion.

Upstairs, she saw Fuld again. "Dick said, 'The only complaint I have is that you shouldn't have hung up on the call. Because as long as you were on there, the stock kept coming up.'" Lehman's bond traders gave her high-fives.

For a moment Erin Callan was the most powerful woman on Wall Street. "Moment" is the key word, because she arrived like a flash -- a bright, glamorous figure, the likes of which Wall Street had never seen in a finance chief. She burned out even more quickly.

Her appointment as CFO -- the first woman ever on Lehman's 13-person executive committee -- made her a bona fide breaker of the glass ceiling. But her promotion also stunned many people. Callan lacked a background in accounting, treasury, or operations -- the usual routes to the CFO position.

When Lehman landed in the vortex of the financial crisis and CEO Fuld retreated from public view, Callan became the face of the firm. Her seeming candor and confident turns on CNBC briefly fueled positive publicity: "Lehman's Straight Shooter," the Wall Street Journal titled a May 2008 profile. One month later Callan was out. Three months after that, Lehman went bust.

So ended the saga of Erin Callan as most people know it. But the rest of her story -- before her rise and after her fall -- is equally intriguing, perhaps more so. It's also draped in mystery. Today, 18 months after Lehman's bankruptcy, most of Callan's ex-colleagues are back in the game. Some, like Fuld, have started their own firms. Others have moved to private equity. Many have landed at Barclays (BCS), the British bank that bought the firm's U.S. core out of bankruptcy. And Callan? She's gone Garbo.

Poof! Callan has simply vanished from the business world. A month after leaving Lehman, she accepted a job at a rival investment bank, Credit Suisse (CS) -- only to depart five months after starting there.

Ever since, she has been out of touch, cutting off communication with practically all her former colleagues and many friends and declining repeated requests to be interviewed. (Callan's quotes in this article are taken from an interview she gave this magazine right after joining Credit Suisse and another that Fortune contributing editor William Cohan conducted with her right before she lost her job at Lehman.)

Why did a person with such drive and ambition -- still only 44 today -- give up her career?

Callan's disappearing act has prompted gossip and speculation on Wall Street. Many people who knew her told Fortune, "Well, I've heard the rumors ..." Those run the gamut from the prosaic to the exotic. Many even allude to whispers that she had a breakdown, whispers that have never been substantiated and that are denied by a person close to Callan. Over the past four months Fortune's search for Callan and the truth about her did lead somewhere -- if not to Callan, exactly, then to signs of a new and starkly different life.

Lehman is dead. Callan is long gone. Why even care about her? For starters, she is reportedly among the executives subpoenaed in at least one of the three federal criminal probes of whether Lehman misled investors.

The investigations have been slow, but interest in who is to blame for the biggest bankruptcy in U.S. history has increased since the bankruptcy examiner filed his 2,200-page report in February. (The report is sealed, but a federal bankruptcy judge will consider whether to release it publicly.)

Meanwhile, many others continue to explore the collapse of Lehman. In his new memoir of the financial crisis, On the Brink, former Treasury Secretary Hank Paulson accuses the firm of overvaluing its assets by "more than $20 billion." As CFO, Callan signed off on Lehman's numbers, though it's important to note that she ascended to the position long after the firm had set the course that led to its demise.

Callan's rise and fall also revives an age-old question about women on Wall Street: Can they ever win? Callan soared not only because of her skills but also because of her style. She was charismatic and flirty. Callan not only commanded a room -- dissecting a balance sheet and articulating ideas to raise capital -- but charmed everyone in it. She could package deals -- and package herself. Indeed, Callan's sex appeal accelerated both her rise ("She looks good on TV!") and then her fall ("She's a media hound!"). She was one CFO whose hemline was more likely to occasion comment than, say, her management of working capital.

More than just a breaker of Wall Street's heavy-duty glass ceiling, Callan may be an example of the "glass cliff." That is a theory developed by Michelle Ryan, an associate professor at the University of Exeter in England, who argues that some companies, in pursuit of diversity goals, promote women to tough jobs where they're doomed to fail. Often the women then stumble quite visibly, thereby "proving" that women aren't ready. (Plenty of men get promoted and then flop, of course, but nobody cites that as evidence that their sex isn't ready for the big time.)

When Wall Street's two other most prominent women executives, Zoe Cruz and Sallie Krawcheck, got pushed from their high posts at Morgan Stanley (MS, Fortune 500) and Citigroup (C, Fortune 500), respectively, they drew public scrutiny that perhaps they rose too fast. Both are back: Cruz is building a hedge fund, and Krawcheck is running wealth management at Bank of America (BAC, Fortune 500). By contrast, although Callan's future is murky, one thing seems clear: She won't be reappearing in a big Wall Street job anytime soon.

Erin Callan may be best known for her star quality. But in truth, her determination and energy had more to do with her rise than anything else. Callan was the sort of person who would work all day, then, for example, stay up with the guys till 3 a.m. at Lehman's management offsite. But while some of her colleagues got hammered, Callan always, always remained in control. She'd be up early the next morning. Back in Manhattan, Callan started most days at 6 a.m. in a spinning class at the gym or with a personal trainer. Then she was in the office from 7:30 a.m. to around 8 p.m.

Callan seemed marked for some kind of stardom from an early age. The daughter of a New York City police detective (who is now a lawyer), she grew up in the tidy Long Island community of Little Neck. She has two sisters, both older, both successful: One is senior vice president of marketing at Weight Watchers (WTW), and the other is a director in the equity research department at Credit Suisse.

But Erin was the wonder child. In 1979 the New York Times published a story about a 4-foot-11 13-year-old who was one of the top gymnasts in the New York City area. She was also an outstanding tennis player -- and straining to find time to practice and excel at both sports. "She was struggling and trying to please everybody," recalls Linda Chencinski, who was then chairman of the U.S. Gymnastic Federation and manager of the Cherry Lane Gymnastics Center, where Erin practiced.

Even as a child, Callan was not only talented but also disciplined and self-motivated. Midge Stack-Lennon, who was Callan's high school gymnastics coach, remembers her as "this adorable, teeny little thing with the strength of a man." Football players used to troop into the gym to watch Erin practice, and she was happy to perform for them. "She would get up on the bars with hands that were ripped and go through her routine," Stack-Lennon says. "Her hands would be bleeding. She would think nothing of it."

Callan went on to Harvard (magna cum laude), New York University Law School, and then Simpson Thacher, the elite New York firm, where she was an associate in the tax department. Tax law isn't the typical path for a stunning young woman who grew up playing to crowds, but she was attracted to the intellectual complexity of that field.

"She was widely regarded as a star performer in the tax department," recalls Bob Friedman, who worked with Callan at Simpson Thacher in the early '90s and is now general counsel at Blackstone (BX), the private equity firm. "She was handpicked to work on Lehman Brothers, which was one of the firm's most important clients."

Callan was on course to make partner at Simpson Thacher but decided she'd prefer to work for the client instead. In 1995, Callan called Neil Sherman, her senior contact at Lehman, and asked whether there might be a role for her. To Sherman, who is now at J.P. Morgan Chase (JPM, Fortune 500), it was a no-brainer. "She had technical skills," he says. "And she had a personality quality. It was the right mix." Callan helped Sherman develop and market complex preferred and hybrid securities.

Often restless, Callan was supremely confident that she could handle any challenge. By the late '90s she was bargaining for bigger jobs. She became one of Lehman's go-to people on complex structured transactions for banks, insurance companies, and so-called frequent financers like General Electric (GE, Fortune 500) and Fannie Mae (FNM, Fortune 500). "She was brilliant and eloquent," says a former colleague. "She could explain complex things simply. CFOs and treasurers loved her."

Like the little gymnast with the strength of a man, Callan became the girl whom the Lehman guys pulled for. She launched an in-house product-development shop, Global Finance Solutions, which allowed her to market her ideas to clients and showcase herself within the firm.

Callan was so good that Lehman chose her to run a new business serving hedge funds. She was "confident, with a bit of swagger," says Mike Novogratz of Fortress Investment Group (FIG). Callan helped Fortress become the first U.S. alternative investment firm to go public. She advised Och-Ziff (OZM) and Blackstone on their IPOs. Citadel turned to Callan to lead its $500 million bond offering, the first public debt deal for a hedge fund.

Callan was flying high, but also starting to draw criticism inside Lehman. Many colleagues disapproved of her ever more provocative wardrobe. She favored elegant brands, such as Chanel and Chloé, but the skirts were short and the tops tight. Callan seemed hungry for attention. Word got around that she had had cosmetic surgery to enhance her figure. And friends say her husband, a fellow investment banker she had married in 2001, couldn't compete with Callan's career or clients for her attention. The couple divorced in 2007.

When word leaked in 2007 that Callan was going to be named CFO, people inside Lehman were shocked. Many thought that Lehman president Joe Gregory, Callan's most fervent promoter and the leader of the crusade to lift Lehman's stature on the diversity front, had gone too far. As Novogratz says, "What you want in a CFO is a dour, no-personality numbers guy."

One of Lehman's most senior women actually went to Fuld and tried to scotch Callan's promotion. Ros Stephenson, who was co-head of corporate finance and is now at Barclays Capital, told the CEO that Callan wasn't qualified to be finance chief. But Fuld refused to rescind the promotion, and Callan started her new job in December 2007.

Had Callan been CFO under ordinary circumstances, she might have done just fine. But Lehman's situation was extraordinary. The firm had billions in rotten assets, and she had limited power to fix the problems. Her mission as CFO, in her view, was to be "more transparent" in order to repair the investor distrust that was poisoning the entire financial services business. "That confidence break that the industry had with investors," she said in 2008, "could only be repaired through being more open, more educationally oriented."

So down that path she went, on a publicity campaign that included CNBC interviews and profiles -- with details about her personal shopper at Bergdorf Goodman -- that some colleagues viewed as evidence she was milking her own celebrity. "I think I was personally naive," Callan later admitted. "Any kind of positive exposure runs the risk of negative exposure. It becomes celebrity, and you get a persona." She added, "Not only does it get away from you personally, it gets away from the firm, and they can't control it."

Callan's ability to reassure investors had made her a star. But once that charm wore off, her tenure as CFO began a sharp downward trajectory. Her first major failure occurred in May 2008, two months after the investor call that earned her kudos.

Greenlight Capital's David Einhorn, an outspoken hedge fund manager who was shorting Lehman stock, requested a conversation with Callan. She didn't want to do it, she told Fortune: "If we pay attention to him, we are digging our own grave." But Fuld, she said, directed her to get on the phone.

When she did, Einhorn grilled her about discrepancies between her March earnings call and subsequent Lehman filings. Callan's responses did not impress him.

Five days later, at an investment conference, Einhorn publicly skewered Callan's performance on that March call: "Lehman CFO Erin 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 'incredible' in a different way to describe the report." Clearly Einhorn thought Callan was dodgy and not telling the truth.

Einhorn's blistering report helped drive down Lehman's share price, as did a raft of problems that emerged over the following weeks. The firm was facing a $2.8 billion quarterly loss and desperately needed capital, despite Callan's steady public assurances that Lehman was okay. As Callan was losing credibility, Gregory was increasingly blamed for the firm's calamitous real estate investments.

On June 12, facing an uprising against Gregory and Callan by Lehman's senior bankers, Fuld reluctantly accepted the resignations of his president and his CFO. A Lehman press release that day said that Callan would be "rejoining the investment banking division in a senior capacity." Callan insisted that she had expected to stay at the firm. But, she told Fortune, "they ignored me."

Callan's decision to join Credit Suisse just a month after losing the CFO job worried some who knew her. Too soon, they said. In her new role as head of Credit Suisse's global hedge fund business, she aimed to replicate the specialty area she had built at Lehman.

When Fortune interviewed Callan two weeks after she started at Credit Suisse, in September 2008, she said she felt "a relief" to have landed safely. But tearing up as she spoke about Lehman, she admitted, "I never thought I would leave that organization. It's hard to be in a new place with new people and start over when you didn't really plan it." She was looking forward to escaping her celebrity, though. "I just want to get back to doing business with clients," she said.

It's unclear what exactly happened at Credit Suisse. Some friends thought that the post-Lehman legal pressures, on top of her work building a new business, were too much for her.

Callan's financial drain -- from losses on her Lehman stock, her divorce settlement, her lawyer fees -- was clearly significant, although she ended up better off than many: Credit Suisse bought her out of her Lehman stock when she came onboard, at a price probably above $15 a share. Plus, she bagged a nice gain in October 2008 by selling for a reported $11.8 million a Manhattan apartment that she had bought for $6.5 million only six months earlier.

Rumors traveled around Wall Street that she had a tearful meltdown in her glass-walled office on the fifth floor at Credit Suisse -- but Fortune found no one who attested to seeing such an incident, and a Credit Suisse colleague close to Callan says no such episode occurred.

In early 2009, Callan told her bosses that she wanted to quit. The two sides agreed to characterize it as a leave of absence. In retrospect, the opaque description of her "temporary" departure was a mistake. As Callan stopped returning calls and e-mails, the lack of information only fed rumors about her untimely exit.

So where in the world is Erin Callan? Her Elba turns out to be the sort of exile most of us could only dream about. She's living quietly -- only 100 miles from Manhattan -- in East Hampton, the Long Island summer playground for affluent New Yorkers. Her traditional wood-shingled house, which she bought for $3.9 million in 2005, sits behind a gate marked "Callan."

These days the onetime superachiever is keeping company with Anthony Montella, a New York City firefighter who attended high school with her at St. Francis Prep. The two eat out regularly. One of their favorite spots is Citta Nuova, an Italian restaurant partly owned by another Wall Street honcho, Joe Perella. People who have known Callan for years say she looks better than ever. She and Anthony seem to be in love.

Montella was reluctant to talk to Fortune. But when reached on his cellphone in early February, he says Callan is "doing very well." Asked whether she had a mental breakdown, he replies, "No comment on that." Pausing, he adds, "That's what people would like to think. It's so far from true. Erin is fine. She's very happy now."

Despite repeated attempts to reach Callan -- by phone and e-mail and through her lawyer, friends, and family -- she declined to talk at every turn. But she did surface indirectly, e-mailing a former Lehman colleague who was urging her to speak with Fortune. "I do not trust that any journalist ever truly captures the essence of the person or their story, and it is all filtered through someone else's lens," Callan wrote. "Somehow everything that happened had its purpose and its reason," she went on. "I try not to read anything about myself, and I've taken myself out of the environment that provided a constant reminder. I have changed my life in a very significant way, which I hope will be more fulfilling and worthwhile. It is difficult to have created such a hard line. But it is the way that, I have learned, is critical to moving forward."

These days Callan tests her mettle on a much smaller stage. She is now a regular at Ride the Zone, an East Hampton spinning studio. Owner Marion Roman, who is also an instructor there, says that Callan opts for the more intense classes, like Cyko Zone and Kick Ass Zone. "She's always the best student in the class," Roman says. "Her form is perfect. She looks so great on the bike. She always has a smile on her face." When Callan is there, Roman adds, "we always give Erin a shout-out. She inspires other women to do their best and work harder." That sounds right. Erin Callan always did want to be No. 1.