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The deal he couldn’t close

Eric Gleacher is killing me on the golf course. It’s a sunny morning at the exclusive Seminole club in Juno Beach, Fla., and Gleacher splits every fairway with a sweet draw. I’ve just pulled two shots out of bounds. Gleacher, Wall Street’s top golfer for most of the past three decades, is now 73. He may have lost a couple of strokes with age. But his six handicap would still spark envy in the rivals he fought as Morgan Stanley’s top dealmaker back in the 1980s when he advised KKR on its then-record $25 billion RJR Nabisco buyout and orchestrated Texaco’s defense against a marauding Carl Icahn.

As a rule, Gleacher doesn’t talk business on the course. It’s just as well, since business is a painful subject lately. In January he quit as chairman of the New York investment bank that carries his name after losing a fight to sell the struggling company. Things only got worse for the bank after that. Employees continued streaming for the exits, and in June, Gleacher & Co. announced that it will be liquidated or sold.

Even at this pristine golf course bordering the Atlantic Ocean, Gleacher can’t let go of the past year’s bitter memories. “This has turned into a business nightmare,” he says.

What Gleacher & Co.’s meltdown lacks in financial stakes — at its peak the company’s revenue was a mere $340 million — it makes up in rancor and the celebrity of its key player. Gleacher, along with bankers such as Bruce Wasserstein and Robert Greenhill, was one of the breed for whom the phrase “master of the universe” was coined. Like those two, Gleacher launched his own self-named boutique, paving the way, years later, for more successful banks such as Evercore. The cause of Gleacher & Co.’s imminent demise: a procession of management errors, an overly optimistic board of directors, and the resurgence of large banks.

Back at his house in North Palm Beach, sipping a Propel water after golf, Gleacher is ready to talk business. He has the bearing and steely, penetrating gaze of the Marine first lieutenant he once was. Gleacher is direct, the sort of person who has a five-point plan for everything. Yet his frustration is evident, and he says that as things unraveled, he would confess his woes to his caddy. Most of all, he’s frustrated with himself. Gleacher can’t stop thinking about the deal, he says, that would have saved the firm. He didn’t fight the board hard enough, he laments. He didn’t play the right cards. He realizes the irony: The legendary dealmaker couldn’t close a deal to save his own firm.

Gleacher’s most recent journey began in a moment of vulnerability. It was 2008, and the financial crisis was intensifying. Mergers and acquisitions looked as if they were headed into long-term hibernation. Gleacher and his partners decided to sell their little M&A boutique.

This wasn’t Gleacher’s first time selling his own firm. He had opened his own M&A shop after leaving Morgan Stanley in 1990, and he turned out to be as skilled at buying and selling his own business as he was at striking deals. He sold the firm for $135 million in 1995 to the British bank NatWest, then bought it back for less than $4 million four years later when NatWest fell on hard times.

Gleacher looked smart again when he resold his firm for $65 million in 2009. The latest buyer was a small but growing investment bank called Broadpoint Securities — publicly traded — which mostly ran trading businesses. Gleacher’s M&A boutique offered Broadpoint the potential to transform itself into the next Jefferies, the successful middle-market investment bank. At least, that’s what everyone hoped.

But Gleacher says he made two crucial errors. First, he believed (as many did) that a golden age for boutique banks was at hand as giants like Merrill Lynch had been wounded in the crisis. And there was hubris too. Gleacher thought he could change Broadpoint’s culture, which he considered to be paying way too much cash to a small number of stars. He would be proved wrong on both counts.

Broadpoint enjoyed a banner year in 2009 after acquiring the Gleacher boutique. Traders in fixed-income and mortgage-backed securities posted huge profits, helping the firm earn $55 million for the year.

The company installed Gleacher as CEO in 2010, but he quickly alienated key employees. He was trying to tame compensation even as his own M&A business was stagnating. Some traders carped that Gleacher should focus on improving his own results rather than (in their minds) punishing them. Gleacher had tried to renegotiate the contracts of some top traders, a few of which guaranteed them 50% of their pretax trading profits (almost double the typical arrangement), a deal struck years before when Broadpoint was quickly growing.

Ultimately the traders prevailed, and some board members took Gleacher aside after six months and asked him to step down as CEO. Gleacher agreed but retained his role as chairman of the board.

Even as the firm was ousting him as CEO, it made an odd move: Broadpoint changed its name to Gleacher & Co. to build Street cred for the little-known firm. Gleacher was wary about giving his name to a firm he didn’t control. But he decided to go along.

By late 2010, Gleacher & Co. was showing signs of trouble. Big banks had returned to markets, such as fixed-income trading, that they had previously abandoned, and the company was being squeezed. M&A remained depressed. Gleacher & Co. revenues fell by 27% in 2010 as earnings turned into losses.

In mid-2011 the company named a new CEO: Tom Hughes, a former chief of Deutsche Bank’s asset-management business. Like Gleacher before him, Hughes tried to renegotiate the contracts of two top traders. When the process stalled, he fired one; the other left. Hughes tried to fill revenue shortfalls by shifting the firm’s focus to money management, vowing to launch a business that would grow to $1 billion in assets by 2013.

Company filings also detail a dire threat to the firm in early 2012 when its mortgage business, Clearpoint, suffered a small-scale replay of the 2008 crisis. Clearpoint sold mortgages to consumers, then offloaded them to big banks. That was fine until banks stopped buying the mortgages, and the unit found itself badly overextended.

Gleacher & Co. struggled in the first half of 2012, losing $216 million. By then Gleacher had lost confidence in Hughes. The money-management unit looked like a failure. Costs and salaries topped $4 million, but the managers hadn’t attracted a penny in assets. Gleacher told other board members they had made a mistake hiring Hughes. “He has no business savvy,” Gleacher said. (Hughes defends his time as CEO. In an e-mail to Fortune, he writes, “Approximately $125 million of losses incurred during my tenure were the result of having to shutter or write off acquisitions done by previous management and the largest shareholder.”)

Just as the situation turned grim, a potential savior materialized. In June 2012, St. Louis-based investment bank Stifel Nicolaus offered $250 million to buy Gleacher & Co. That meant a nearly 100% premium for the shares, which had fallen 38% in 2012. Gleacher advocated the deal.

But the Gleacher & Co. board — some of them Gleacher’s friends — reacted warily. “They were very suspicious of me because I’m an M&A guy, and they felt I was going to get some kind of big position with Stifel,” Gleacher says. “They felt I wanted to sell the company cheap.” They also considered MatlinPatterson, a private equity firm and the company’s largest shareholder, to be conflicted: Its fund holding Gleacher & Co. shares closed in 2013. MatlinPatterson, they thought, might be looking for a way out. MatlinPatterson denied that, and Gleacher disavowed any notion that he would join Stifel. Still, the board’s distrust altered the prospects for the deal.

The board voted to form a five-person special committee to investigate the proposal and vote on it. Gleacher, along with MatlinPatterson’s two board members, was excluded from the committee. That meant the deal’s biggest advocates — who happened to be Gleacher & Co.’s two largest shareholders, with nearly 40% of the stock — were barred from the discussions. Instead, five directors with negligible ownership stakes would make the decision. Gleacher considers it a crucial error that he didn’t fight harder against forming the committee. “I should have gone to the mats on that,” he says.

The special committee hired outside lawyers and bankers to evaluate its options, while the company hired Credit Suisse to examine other deals. In a confidential July 12 report, the investment bank Houlihan Lokey estimated the value of Gleacher & Co.’s core business at between $127 million and $239 million, less than the $250 million Stifel was proposing.

But the report also included an alternative analysis, this one based on rosy assumptions from CEO Hughes and his team about what the company might be worth if it grew struggling divisions in asset management and mortgages. Those forecasts portrayed Gleacher & Co. as worth as much as $400 million.

The company’s losses were mounting, but the special committee accepted the optimistic forecasts and concluded that remaining independent was a viable option. It also felt that a Stifel sale, which might be valued at $1.50 a share, would prevent many shareholders from recouping their losses. At a December board meeting, one special-committee member said he believed Gleacher & Co. shares would be worth $4 if the company continued on its path.

In February 2013, Hughes announced that the strategic review was complete: No worthy alternatives to a Stifel deal had turned up. The firm would no longer seek a buyer. The stock price plummeted by 30% over the next week. For his part, Gleacher, incensed at the decision to rebuff Stifel, quit as chairman in January. He decamped for Florida and nursed his wounds on the golf course.

Gleacher stewed as the firm continued its descent through the spring. On an April day, he flipped through messages on his iPhone as we talked. He read news that Gleacher & Co. might merge with a small brokerage called Sterne Agee. “How?!” he shouted at his phone. “There’s nothing left!” It was just a passing proposal that wouldn’t come to fruition. Key employees had fled. Revenues had evaporated.

The end was near. At Gleacher & Co.’s annual meeting in late May, MatlinPatterson took control of the Gleacher board. It fired Hughes the next day, then announced plans to liquidate or sell the firm for its cash and venture capital investments.

Gleacher is embarrassed by the whole episode, in particular by the fact that his name is attached to a failed firm. Still, he has no plans to retire. He has connected with like-minded investors to form a real estate investment firm. Ethan Penner, a trader who’s credited with pioneering the market for securitized commercial mortgages, is one of his partners. Gleacher believes the Fed’s policy of rock-bottom interest rates will backfire, giving rise to inflation and poor returns for stocks and bonds. Real estate is a hedge.

Gleacher has come back to New York. He didn’t become a star banker by dwelling on his failures. He’s moving on to the next deal.

This story is from the July 1, 2013 issue of Fortune.