Heads rolled at Lehman Brothers as the Wall Street bank took action to restore its tattered credibility after a brutal couple of weeks raised questions about its viability and that of the rest of the financial sector.

The Wall Street Journal and Financial Times on A1 and The New York Times on C1 report that Lehman removed its president Joseph M. Gregory and its chief financial officer Erin Callan and that longtime CEO Richard Fuld may be next. They were just the latest high-profile Street executives to lose their jobs in the credit crisis.

Callan, the most prominent woman on Wall Street, has particularly had her credibility battered in recent days as she came out on the losing end of a public battle with hedge fund whiz David Einhorn, who has been touting Lehman’s woes and betting that the company’s share price will fall, which it has so far this week—by 26 percent. The Journal says yesterday’s 4.4 percent decline signals “continuing doubts that Lehman—and the rest of the financial sector—is out of the woods.” The NYT says Gregory led Lehman’s “disastrous” push into mortgages.

Einhorn maintains that Lehman has been fudging its accounting to stave off even deeper losses. Callan had argued that the company didn’t need to raise additional capital, and then turned around and raised billions (which it said it didn’t really need, but was raising just ‘cause) only weeks later. The markets were not reassured by a CFO firing during the midst of an accounting controversy, viewing it as an admission that the company’s books may be wrong, as the FT’s Lex column points out. Einhorn has said Callan fabricated an account of why the bank registered a several hundred million dollar gain in the first quarter.

Lehman shares are down 65 percent this year, Bloomberg says. It also notes that CEO Fuld was one of the Wall Street execs several weeks back who said “the worst is behind us.” The NYT notes that he seems to have hidden behind Callan, while the Los Angeles Times pointedly says:

It was the third time in 18 months that the highest-ranking woman on Wall Street lost her title while her male boss—the chief executive—kept his.

The Journal on C1 says movements in Lehman’s bonds yesterday show the markets don’t think the Federal Reserve will let it collapse like Bear Stearns. But all the papers say it’s likely the company will be swallowed by another in the months ahead.

The WSJ’s Heard on the Street says Lehman’s trading partners “while nervous, don’t seem to be pulling business from the firm.” But it says the company’s shareholders face years of weak prospects, and it still has some $65 billion in mortgage assets. The column says its weak board helped keep it from avoiding its current state.

KeyCorp cuts dividend, goes begging for cash

The crunch hit yet another bank as KeyCorp said it would reduce its dividend for the first time in forty-three years and raise $1.5 billion in fresh capital. It shares plummeted 24 percent.

The Journal on C1 says it’s a bad sign that even ”banks viewed as prudent in much of their past lending are being rocked by the housing decline and the credit-market crunch.” Its CEO Henry L. Meyer sounds like he just got hit by a truck:

“I’ve never seen this kind of incredibly fast deterioration in asset quality,” said Mr. Meyer, 58 years old, who has been in banking 35 years. “It was so fast that it was hard to get out of the way. It’s so fast that regulators are complaining that appraisals done every month are not fast enough. How fast is fast enough?”

What was that, honey? Oh, the stimulus check!

Retail sales jumped in May as the government’s stimulus checks got cashed and spent. Sales rose 1 percent in non-inflation-adjusted terms. The Journal says on A3 that some economists raised their projections for growth as a result, but that “rising prices and a weakening labor market could mean the boost to the economy will be short-lived.”

The FT says that April sales were also revised sharply upward, boosting optimism. The NYT does a good job of noting that sales were actually down 2.5 percent from May 2007 (the 1 percent number is compared to the month before).

And even as Americans headed to the mall, they faced higher prices when they got there.

“Once one begins to look over the horizon for a catalyst to support consumption, all that remains is a stressed consumer whose purchasing power is rapidly being reduced by the ravages of inflation,” Joseph Brusuelas, an economist at Merk Investments, wrote in a note.

Initial jobless claims rose by 25,000 to a relatively high 384,000 last week and import prices were up a huge 17.8 percent, largely due to oil. The House passed a bill that would extend unemployment benefits, but the White House says it will veto it.

SEC circles troubled AIG division

The Journal on C1 writes that the federal government is investigating an American International Group division that has previously had accounting shenanigans and already been “put on a tight leash” and fined $126 million.

The Securities and Exchange Commission is investigating whether the insurance giant’s division, which put out contracts called credit-default swaps (insurance against a security’s default), intentionally low-balled its losses on swaps.

AIG wouldn’t do anything wrong, now would it?

Hating on speculators

The NYT reports on A1 on the rising din in Washington against speculators, who are being blamed for a little bit of everything recently, including “high gas prices, soaring grocery bills and volatile commodity markets.” The paper notes dryly that “it is common in tough financial times to blame the speculators” but that the calls increasingly have commodity markets worried.

Before it was a Beltway epithet, “speculator” was simply a type of trader in the commodity futures markets. Unlike hedgers — the farmers, miners, refineries and other commercial interests that actually make or use the commodities themselves — the speculators, like day traders in the stock market, are simply trying to profit from changing prices.

Some speculators follow market trends, buying as prices rise and driving them higher. But others buy when they think prices have fallen too low, sell when they see prices as too high or place bets that pay off only when prices fall.

The more money that speculators are willing to put to work in the market, the more liquid it is and the easier it is to buy and sell without causing big ripples in prices.

Yes, conservatives, the Times has the free market’s back.

Microsoft, a fickle suitor

In deal news, Microsoft said it doesn’t want Yahoo anymore even at the price it was willing just one month ago, a move that doesn’t do wonders for its credibility. The WSJ and FT front the news, while the NYT puts it on C1. Yahoo signed a search deal with Google in a bid to boost its prospects and an admission that its search strategy hasn’t worked. The FT and NYT say the alliance will face “intense” antitrust scrutiny, something the Journal’s main story doesn’t get around to somehow, though a C3 post briefly raises the idea.

How long until Microsoft CEO Steve Ballmer, who ought to already be on the outs for its abysmal Vista operating system, sees the door?

The Journal on B1 says Anheuser-Busch, a day after InBev’s $46 billion offer for it, is in “preliminary” talks with Grupo Modelo of Mexico for a link-up. The American beer giant is trying to avoid being bought out by the Belgians, something the paper on B6 says is unlikely without a Modelo deal. The paper in a separate B6 story says if InBev succeeds, it could be bad news for the ad business since the European company doesn’t rely on “carpet-bombing” campaigns like its American competitor.

Are banks low-balling foreclosure rates?

The Washington Post on D1 reports that the comptroller of the currency, a key regulator of big U.S. banks, is questioning the data that banks and mortgage companies are providing on foreclosures.

Comptroller John C. Dugan said his office has calculated that the Mortgage Bankers Association is low-balling the foreclosure rate, which the Post notes is used widely in the press. He also raised questions about how many homeowners the Hope Now coalition—a voluntary group of lenders and servicers put together by the administration—has helped.

His office found that the new foreclosure rate was 1.13 percent in the first quarter compared to the MBA’s 1.01 percent number.

To Zell with this!

The Chicago Tribune’s publisher quit a few days after Tribune Company announced drastic cuts in its newspaper business, “indicating he agrees that parent Tribune Co. must change but not necessarily in the ways being discussed by Chairman Sam Zell.”

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.