Vanities on The Bonfire

By Christine Gorman

No one embodied Wall Street's gold-rush spirit of the 1980s more than Peter Cohen, the high-strung chairman of the investment firm Shearson Lehman Hutton. A short, cigar-smoking firebrand, Cohen transformed Shearson from a stolid retail brokerage into an investment-banking giant. Backed by American Express, which bought the firm for $360 million in 1981, Shearson grew from 11,000 employees to 47,000 by the mid-'80s. But Cohen's expansion drive proved unstable. Hurt by several missteps and the slowing pace of Wall Street dealmaking, Shearson's investment-banking revenue declined 27% last year, to $963 million.

As the stress on Cohen increased, his composure frayed. Colleagues reportedly heard him yelling over the phone at his boss, American Express Chairman James Robinson III. At one point, Cohen even had his offices at Shearson swept for listening devices. When Robinson pressured Cohen for his resignation last week, the Shearson chief complied. As Robinson told TIME: "The conditions of the market, the problems on Wall Street, all of ((the firm's woes)) led to Peter's feeling that his own identification had been linked to so many of the problems that he could not provide the ongoing leadership that the firm deserved." To succeed Cohen, Robinson named Howard Clark Jr., who is known to favor a no-frills corporate style, as the chief financial officer of American Express. "Times have changed," says Lawrence Eckenfelder, who follows the securities industry for Prudential-Bache. "The name of the game now is to wring out the excess, cut costs, retrench."

The son of a Long Island clothing manufacturer and a graduate of Columbia Business School, Cohen had planned to enter the family business but changed his mind when his father offered him only half the going rate for M.B.A.s, then $12,000 a year. Eventually Cohen joined a brokerage firm named CWBL- Hayden, Stone, one of the forerunners of Shearson. By 1983, Cohen had been named chief executive of Shearson, making him, at 36, the youngest head of a major Wall Street firm.

Cohen was determined to build a firm that would rival Merrill Lynch in size. In 1984 he orchestrated a $360 million merger between Shearson/American Express and Lehman Brothers Kuhn Loeb. That move catapulted Shearson into the immensely profitable investment-banking business. But signs of stress began to appear in the wake of the 1987 stock-market crash, when Shearson paid nearly $1 billion to acquire E.F. Hutton. Dozens of top-notch Hutton brokers defected to other investment firms. At the same time, the firm suffered dwindling business from individual investors, on whom Shearson was still heavily dependent. Cohen, meanwhile, who had begun acting the part of the jet-setting dealmaker, was paying less attention to the day-to-day management of his empire.

The crowning blow came in the fall of 1988, when Shearson lost the $25 billion buyout battle for RJR Nabisco, the largest takeover fight in history. Wall Street insiders contend that Cohen -- whose firm had advised F. Ross ( Johnson, then the head of RJR, in his original bid for the company -- stumbled badly by assuming that takeover specialist Henry Kravis would stay out of the running for RJR. Kravis surprised Cohen with a higher bid and eventually outmaneuvered the Shearson executive.

After that debacle, one setback followed another. In December 1988, the Boston Company, a Shearson subsidiary, disclosed that it had overreported its earnings by $30 million. In March of the following year, Shearson was forced to cancel its introduction of "unbundled stock units," a new kind of corporate-finance vehicle, in part because the Securities and Exchange Commission objected to the accounting methods the securities employed.

Cohen's final battle was an effort to raise more capital to bolster confidence in the firm. Last week American Express announced a plan to offer current stockholders the right to buy an additional $250 million worth of Shearson shares at $12 a share. The move will reduce American Express's stake in the firm from 61% to about 45%. One result is that American Express will no longer have to include Shearson's performance in the parent company's financial statements. Even so, American Express is likely to carry clout as it supervises Shearson's adjustment to the grinding '90s.

With reporting by Kathryn Jackson Fallon/New York