June 12 (Bloomberg) -- Lehman Brothers Holdings Inc. replaced Chief Financial Officer Erin Callan and President Joseph Gregory after the firm failed to quell speculation about mounting losses and stem a 65 percent plunge in the stock this year.

Callan, 42, who has been Lehman's public face in television appearances and magazine profiles since she was promoted to CFO six months ago, will return to the firm's investment banking unit and be succeeded by co-chief administrative officer Ian Lowitt. Herbert ``Bart'' McDade, the 48-year-old head of the equities business worldwide, will replace Gregory, the New York-based firm said today in a statement.

Chief Executive Officer Richard Fuld's ability to maintain Lehman's independence has been called into question this week after the 158-year-old company posted the first quarterly loss since it went public in 1994 and turned to outside investors for a $6 billion cash infusion. Merrill Lynch & Co., Wachovia Corp. and Oppenheimer & Co. cut their ratings on the stock and hedge-fund manager David Einhorn said the firm hasn't fully disclosed its high-risk assets.

``Our credibility has eroded,'' Fuld, 62, said in a memo to his employees today. ``The current market environment is forcing us to take a number of measures to regain the confidence of all our constituents.''

Lehman, the fourth-biggest U.S. securities firm, fell $1.05, or 4.5 percent, to $22.70 in New York Stock Exchange composite trading. It is the worst performer in the 11-company Amex Securities Broker/Dealer Index this year.

Deck Chairs

``The new investors who bought in this week probably asked for some heads to roll,'' said Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, which oversees $17 billion and invests in options to buy and sell Lehman shares. ``But when you don't bring a proven captain to turn things around, it's more like re-arranging the deck chairs on the Titanic. This might be too little at this point.''

Former American International Group Inc. CEO Maurice ``Hank'' Greenberg and New Jersey's pension fund are among the investors who paid $28 a share on June 9 to buy $4 billion of Lehman common stock and $2 billion of convertible preferred shares.

McDade, who ran the fixed-income division for three years before being chosen to head equities, is considered by current and former Lehman executives to be a leading candidate to succeed Fuld. The equities division grew during McDade's tenure to account for one third of the firm's revenue, as Lehman became the largest trader of stocks on the London Stock Exchange and Euronext.

No Material Change

``It's positive that Fuld isn't bringing people from outside,'' said Tom Jalics, a Cleveland-based analyst at National City Bank, which manages $34 billion, including Lehman shares. ``McDade has been around for 25 years, knows the firm well, ran fixed income then equities. He's a good choice.''

Lowitt, 44, was treasurer of the firm between 2000 and 2005 before being appointed as chief administrative officer. He has been with the company since 1994.

``News like this, totally unexpected on the heels of a large share offering, rattles investors,'' said David Killian, a portfolio manager at Malvern, Pennsylvania-based Stoneridge Investment Partners, which sold the last of its Lehman shares yesterday. ``When their CFO leaves, it raises concern about the accuracy of the financials. Has the CFO been taken out of the position because there is a mistake yet to be disclosed?''

Lehman said in a separate statement today that it doesn't expect to disclose any ``material changes'' to the preliminary financial results released on June 9. The firm will publish final figures for the quarter on June 16.

Cayne, Mack

Fuld, whose career at Lehman spans four decades and makes him Wall Street's longest-serving CEO, has endured previous crises of confidence. He slashed the company's assets by 20 percent in 1998 when slumping debt markets in Russia and Asia prompted speculation his company might founder.

At the firm's annual shareholders meeting in April, he said ``the worst is behind us'' in the credit-market contraction that has cost the world's biggest banks and brokerages more than $390 billion. His decision to push aside top executives today amid the turmoil mirrors steps taken by his counterparts at rival Wall Street firms.

Bear Stearns Cos. CEO James ``Jimmy'' Cayne ousted co- president Warren Spector in August, and wound up losing his own post and then his firm to a takeover by JPMorgan Chase & Co. Morgan Stanley CEO John Mack has fared better since firing Co- President Zoe Cruz, whom he held responsible for the bank's mortgage-related losses.

`New Face'

Gregory ``has been my partner for over 30 years and has been a driving force behind who we are today and what we have achieved as a firm,'' Fuld said in today's statement. ``This has been one of the most difficult decisions either of us has ever had to make.''

Callan, a Harvard University graduate and former tax lawyer, got high marks from investors and analysts in March for being candid about the firm's finances during her first earnings conference call. Portfolio magazine dubbed her ``Wall Street's Most Powerful Woman'' in an April profile.

Then Einhorn, who has bet Lehman shares will fall, challenged her credibility in a speech last month, saying she spoke with him privately and later changed her story about how the firm had valued a private equity investment.

``Six months ago everybody loved her as the new face,'' said National City's Jalics. ``But the Einhorn dispute did her in.''

Oxford Degrees

When the firm reported the $2.8 billion second-quarter loss on June 9, Callan said during a conference call with analysts that Lehman had raised the $6 billion to put an end to ``chatter'' about the company's financial soundness, not to protect against future writedowns on mortgage-related assets. Wachovia analyst Doug Sipkin wrote after the call that Lehman ``potentially still does not have a complete grasp of its exposures.''

Callan and Einhorn declined to comment through spokeswomen.

McDade received his bachelor's degree from Duke University and a master's in business administration from the University of Michigan. He joined the firm in 1993 as a corporate bond trader. Eight years later he was promoted to run the division. Gregory, whom he's replacing, ran the day-to-day operations of the firm and hasn't been involved with trading, which is Fuld's strength.

Gregory, 56, will remain at Lehman in an unspecified role, the firm said today.

Lowitt, a native of South Africa, got a bachelor's degree in engineering and a master's in economics from University of the Witwatersrand in Johannesburg. He also has two degrees from Oxford University, a bachelor's in philosophy and master's in economics. He joined Lehman from consulting firm McKinsey & Co. in 1994.

Strategic Partner

The cost of insuring against a default on Lehman's bonds declined after the management shakeup was announced. Credit- default swaps tied to Lehman dropped from the highest since the end of March. Contracts on New York-based Lehman fell 10 basis points today to 280 basis points, according to CMA Datavision.

``By bringing in new players, you could have a new set of eyes to validate prior disclosures,'' said Stoneridge's Killian. ``It could also indicate that they're ready to evaluate strategic options and partner with a larger, more diversified firm.''

While Lehman may consider selling a stake to a strategic partner, Fuld is unlikely to sell the entire firm, UBS AG analyst Glenn Schorr said in an interview last week. Many of Lehman's bigger rivals have also been weakened by the subprime crisis, making it unlikely they could buy the firm, Schorr said.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: June 12, 2008 17:50 EDT