(FORTUNE Magazine) – Three years ago in September, the head of human resources at Bankers Trust wrote a letter to Frank Newman, who had just stepped down as Deputy Secretary of the Treasury. It began: "On behalf of the Board of Directors of Bankers Trust...it gives me great pleasure to extend to you the following offer of employment." The letter laid out a generous pay package, with total compensation through 1997 worth well over $6 million. The letter must have been most welcome to the newly remarried Newman, who had tired of his $133,600-a-year government job and was readying himself to return to the private sector.

From Bankers Trust's perspective, yes, it was a rich offer, but if that's what it took to get Newman, well--it was worth it. In case you've forgotten, back in 1995 Bankers Trust was mired in a horrible derivatives scandal. Important customers like Procter & Gamble had charged that the bank misled them about the value of esoteric derivatives contracts that BT had sold to them. The derivatives mess was a big black eye for the bank, which until that point had enjoyed a reputation as an innovative blue-chip commercial bank that was cleverly transmogrifying into a Wall Street firm. But BT and its CEO, Charles Sanford, had been discredited. The bank needed to bring in someone with a sterling reputation. It needed a straight arrow who was smart and tough, and who could clean things up. The bank needed Frank Newman.

Initially, Newman appeared to be Mr. Right. He was well respected in Washington, and before that he had had a solid career in banking, lastly as CFO at BankAmerica. He moved forcefully to clean up the derivatives mess, settling a nasty legal battle with P&G and greatly reducing the bank's dependence on that business. (The bank no longer deals in "highly leveraged speculative derivatives," according to a bank spokesman.) He pushed briskly into new arenas, buying investment banking businesses like Wolfensohn & Co., the tony M&A boutique, and Alex. Brown, the Baltimore-based investment banking firm. The numbers seemed to evidence his success. BT's net income climbed from a low of $311 million in 1995 to $866 million last year. The stock responded to Newman's magic as well, rising from the mid-60s in early 1996--Newman became CEO on Jan. 1--to a high of $136 this year. Newman was widely hailed in the press. His turnaround of BT had worked.

Or had it? Looking back, trouble spots were visible in the spring of 1997, as the first symptoms of the Asian flu began to spread through the financial system. BT's exposure to emerging markets began to nibble at its bottom line. It first reported a loss--$19 million--in Asian markets in the second quarter of 1997. The full force of the sickness became apparent, of course, only this August--with the shocking collapse of emerging markets. The bank took a tremendous hit in Russia and in other countries as well. Its stock fell hard, from a high of $136 to $59 at the end of September--wiping out $7.7 billion in market value. All of a sudden Newman's strategy didn't appear to be the home run that everyone thought it was. Could it be that Mr. Right was in fact Mr. Wrong?

During a recent interview Newman, 56, defended his strategy and argued that Bankers Trust has taken only a temporary hit--just like all its peers. Only time will tell, but there is widespread speculation about Bankers Trust's performance and Newman's strategy both inside the bank and on Wall Street in general. And there is another issue: Fueling concerns about the bank's strategic direction are questions about Newman's personal management style. Specifically, Newman's critics say he and his wife, Lizabeth, exhibit a taste for lavish living that calls into question--at least in some minds--his judgment. Newman says he hasn't done anything at all improper and is "puzzled" by the talk. But FORTUNE has spoken with BT directors, bank employees, former employees, and sources on Wall Street. And while passing judgment on a CEO's strategy, never mind his demeanor, can be tricky stuff, the point is that both Newman's substance and style are the subject of a great deal of conversation.

That conversation, it turns out, is going on even inside the Bankers Trust boardroom. FORTUNE has learned that Bankers Trust directors have also become concerned about Newman and the bank's direction, so much so that three board members were recently delegated by their colleagues to speak with Newman. Board member Vernon Jordan (who was not one of the three) declined to comment except to say, "Whether or not he [Frank Newman] will be a good CEO is still something to be answered." Not exactly a ringing endorsement for a man who has been at the helm for more than 2 1/2 years.

Part of the board's ire probably has to do with the surprising depth of the bank's problems in emerging markets, particularly Russia. On Sept. 1, BT announced that it had incurred a trading loss of approximately $350 million, primarily because it marked many of its Russian securities down to 15% of their face value. Some of the losses were incurred in dealings with a troubled hedge fund run by III Offshore Advisors. The bank also let it be known that activity in its investment banking business had declined markedly. The last line of the press release was the punch line: "Bankers Trust expects to report a net loss for the third quarter." Though BT's stock had been in a free fall since mid-August, when Russia began its slide--dropping from $105 to $74--over the next few days the stock declined another 10% to under $67. Analysts ratcheted down their numbers, and Standard & Poor's put the bank on CreditWatch.

On Sept. 16 the bank filed an 8K, which provided new details about its emerging markets cross-border outstandings (really its exposure in various developing countries) since Dec. 31. As a percentage of overall assets, those positions had declined from 8.4% to 4.7%--a reduction of $3.7 billion. A BT spokesman says that was mostly due to the bank's cutting its exposure. But it also reflected a decline in the value of the assets. The following week S&P lowered its ratings on some of BT's debt. Though S&P's downgrades were on the mild side (senior debt, for instance, was cut from A to A-), the rating agency warned that BT's "credit problems are likely to grow due to relatively high, though decreasing, emerging market exposure."

Back in the early 1980s, then-CEO Charlie Sanford had pushed BT hard into all sorts of investment banking activities, such as trading, underwriting debt, and of course derivatives. During those years, the bank was known for a style that some saw as cutting edge and others regarded as cowboy capitalism, and it attracted droves of hotshot bankers. Problem is, that pushing-the-envelope mentality went too far, and Sanford and his top managers lost touch with what some cowboys in the derivatives business were up to.

To clean up after the scandal, Newman needed to find new strategic directions for the bank. First, as federal regulators allowed the distinction between commercial banking and investment banking to blur, he moved further into equity investment banking last year by buying Alex. Brown--which had had ties to BT--in a deal worth $1.7 billion. He bought NatWest's European equities business, as well as Wolfensohn & Co. Newman also expanded the bank's high-yield businesses. So while Bankers Trust is still technically a commercial bank, now more than ever it is really a quasi-investment bank.

The immediate question is, how big a hit will Bankers take in the third quarter? (Those numbers should be announced in the third week of October.) When the Russian mess first came to light, analysts were looking for a loss of $3 per share. But now they're talking about a $4 loss, which Newman, in a recent interview, did not dispute. With some 100 million shares outstanding, that's a loss of around $400 million, after tax. Since analysts had been expecting about $240 million in earnings, that's a $640 million swing. "They were hit harder than any of their peers," says David Berry, director of research at Keefe Bruyette & Woods. "They are the only major bank or brokerage that I expect to report a loss in Q3."

Even on Wall Street, that's real money, though as a one-time shot it's nothing that Bankers Trust's balance sheet can't handle. Yes, although the bank's tier-one capital--an important regulatory measure of strength--will probably fall from 8% (of risk-weighted assets), BT should still be above 6%, which the Federal Reserve characterizes as "well-capitalized." Even so, the fact that these emerging market losses came on Newman's watch riles some folks at the bank. "Frank was brought in here as Mr. Controls, Mr. Risk Management, Mr. Regulator," says a senior bank executive. "That's his strength. But then this emerging market thing hits and everyone says, 'What the hell is this?' "

To be fair, Newman has had it tougher than CEOs at other banks in that he has attempted to transform an entire institution whose culture to a large degree was based on selling and trading derivatives.

Some argue that Newman merely swapped the dicey business of derivatives for a concentrated bet in U.S. equities (i.e, Alex. Brown), and in doing so, he didn't reduce the bank's risk profile--he just shifted it. But that criticism is probably off the mark. Even though the U.S. equities business isn't very healthy right now, it's surely not as risky as BT's old derivatives business. (For evidence, see Meriwether, John.)

When pressed about his strategy, Newman is somewhat vague, saying, "We are going to reduce our exposure to emerging markets. We are going to focus on global clients. Europe will be strong for us, and so will private clients." As for the bank's recent troubles, "it has been a hard time for everyone," he says. Other firms such as Credit Suisse First Boston have taken their lumps, "and all of these stocks are down 40% to 50%, like ours is." True, but among money-center banks and the big investment banks, only Bankers Trust's stock is below where it traded in the beginning of 1996, when Newman became CEO. J.P. Morgan, the other old-line commercial bank that's remade itself into a quasi-investment bank, is close (see "Despite Boom Times J.P. Morgan Still Can't Make It on Wall Street," April 13, in the fortune.com archive).

And there's another thing. While it's true that Merrill's, Chase's, and Morgan's stocks are way down, employees at those firms aren't pointing fingers at their respective CEOs. Markets are markets, and Merrill Lynch bankers know that CEO Dave Komansky has had as much to do with causing the recent maelstrom as sunspots. Goldman Sachs just canceled its IPO, but you don't hear the Goldman grandees calling for the head of Jon Corzine or Henry Paulson. The same is true even of Sandy Warner at J.P. Morgan. But at BT many employees are angry at Newman and are blaming him in a very personal way. Why is that? Probably a combination of factors. First, Newman lacks the common man's touch that Komansky, for instance, so clearly possesses. Newman would be the first to admit this. "I'm not a backslapping, chitchat-in-the-halls kind of guy," he says. But that in itself might not be a problem, were it not coupled with a reputation for acting like what some describe as the lord of the manor.

Newman says he's baffled by this characterization. "I'm literally puzzled," he says. "I don't know what people mean." Here's one example: On Sept. 3, two days after Newman announced the $350 million trading loss, he and Lizabeth jumped on BT's G-IV jet and flew to Paris for the long weekend. "I thought we were going to be working all weekend," said one amazed banker. In fact, Newman and his wife use the jet so frequently that the airplane personnel reportedly call him "Alpha" and her "Alpha2."

In late September, Bankers Trust sponsored an opening-night gala at Carnegie Hall. Newman and his wife flanked First Lady Hillary Clinton during the performance, and a society-page photo of the couple appeared in the Sunday New York Times. Bank employees report seeing an enlarged copy of the picture, with a derisive caption added, posted at bank headquarters.

Newman recently traded up in terms of his domicile. This summer Newman sold an apartment in New York City that he had paid $3 million for and bought a new one for $9.8 million on Fifth Avenue. "He used to be a conservative guy when I knew him in San Francisco [when Newman worked at BankAmerica]," says a banker at another firm. "Now he's traded in his Ford Fairlane for a corporate jet."

What brought on this change in Newman? Perhaps, not surprisingly, the word from the macho world of Wall Street is, cherchez la femme. In other words, blame it on his wife, Liz, a Florida divorcee whom Newman married while he was at the Treasury Department. The boys grouse that Liz is around the bank too much. Liz, they say, even has an office there. When FORTUNE called the bank to check that last point, a receptionist in the bank's executive offices said: "Mrs. Newman doesn't really have an office, but I can put you in touch with one of her assistants." Newman says that his wife has no full-time staff assigned to her, and that she is a great help in planning events like the recent evening at Carnegie Hall.

Without question, much of the complaining about Newman comes from shell-shocked employees who have watched their stock drop over 50%, who are about to see their bonuses slashed, and who maybe even fear for their jobs. Newman also represents a major change for both Bankers Trust employees, who were used to Charlie Sanford's understated style, and Alex. Browners, who felt comfortable with Alvin "Buzzy" Krongard's brass-knuckled, Marine Corps way of doing business. Still, Newman's detractors may have a point--if only because Newman is so out of touch that he can't or won't acknowledge the criticisms. In better times, Newman's high living might be overlooked--and indeed the carping is louder now with the stock price down--but as one Bankers Trust executive puts it: "We are about to cut some costs around here. Meaning layoffs. How is that going to go over with him sponsoring galas at Carnegie Hall?"

Apparently, Bankers Trust's board wants answers too. After its Sept. 15 meeting, the outside directors gathered to discuss Newman and the direction of the bank. They decided that Nick Nicholas, former co-CEO of Time Warner (FORTUNE's corporate parent), ex-Philip Morris CEO Hamish Maxwell, and NFL President Neil Austrian should speak to Newman about BT's strategic direction as well as his personal style. People familiar with these events say that no conclusions were drawn, nor were any ultimatums handed down. But the board, perhaps taken by surprise by the magnitude of the Russian losses and perturbed by the stories making the rounds, now clearly has its antennae up. "I'm puzzled if anyone at the bank doesn't believe in my strategy," says Newman. "It's extraordinary that anyone thinks I'm doing anything but work to the best of my abilities to achieve what's best for the bank."

Just how loud the chorus of criticism gets depends on how well BT holds up over the next couple of quarters. As FORTUNE went to press, BT's stock was under pressure because of fears of further losses, prompting Newman to send a memo to the staff on Oct. 2 denying the bank is in trouble. "The going gets tough from here," says one insider. "No one thinks the capital markets are going to turn on a dime, and that will make Frank's job very difficult." In fact, Frank Newman's biggest challenge may be convincing Wall Street that he is Mr. Right after all.

REPORTER ASSOCIATE Ann Harrington