DESPITE MEYER'S RAPIDLY growing stature, a pall continued to envelop the three Lazard houses during the mid-1930s. London and Paris were still struggling to pay off the debts incurred to stave off the firm's near collapse. And New York was just muddling along in the ongoing Depression. New York had developed its underwriting business, but it was not all that profitable, given the intense competition. Most of the firm's profits seemed to be coming from its investment in General American, Altschul's pet project. A July 1936 letter from Pierre David-Weill to Altschul reflected the French partners' increasing concern about the poor financial performance of New York, and specifically the ongoing lack of the 4 percent interest payments on their invested capital, an eerie foreshadowing of the same problem Michel would have seventy years later with Bruce Wasserstein. "As you remember," Pierre wrote, "nothing has been paid for the year 1935, and the full interest has not been paid since 1931. Now that these amounts have been earned there is no longer any reason to postpone the payments. Perhaps you will be good enough to look into the matter and let us have your views. We have noticed for sometime the increase of the item 'Partners' Withdrawals' which stands at a rather big figure. I imagine there is some fiscal explanation to it. The whole fiscal problem of L.F., N.Y. seems to me worthwhile reconsidering in the light of the provisions of the new tax law concerning foreigners." When Altschul wrote back nine days later, he told Pierre he was working on the answers but was reluctant to write them down, as "some of the questions involved are of such a nature that they had better not be dealt with by correspondence."
Altschul asked his partner Albert Forsch to study the matter raised by Pierre's letter. Forsch reported back that the 4 percent annual payment on capital had been split into two tranches, a 2.5 percent piece and a 1.5 percent piece. "The method was employed for fiscal reasons and comes from the first profits earned," he wrote. He further elaborated that his understanding of the contract was such that the 2.5 percent piece "does not become payable until the contract has terminated and it is determined that profits remain from which this 2.5 percent can be paid."
No doubt the news that their payments would not be made anytime soon did not please the David-Weills and likely exacerbated the family's ongoing cash needs. After David David-Weill's 1898 marriage to Flora Raphael, herself the heir to a sizable London banking fortune, the couple settled in Neuilly, where they built a huge mansion, complete with separate servants' quarters, horse stables, tennis courts, and formal gardens. David David-Weill also pursued the passion for art he had discovered during his transatlantic move to Paris as a teenager. He bought his first painting--a portrait of the French playwright Marie-Joseph Chenier by Adelaide Labille-Guiard--when he was eighteen. His grandson Michel said that except during the war years, he bought or sold one piece of art, either for himself or for a museum, every day of his life. First thing every day, he would stroll through art galleries or arrange to meet an art dealer at the office, often postponing the day's business until the dealer's departure. While eighteenth-century painting was David-Weill's first love, his increasingly eclectic tastes also extended to medieval sculpture, enamels, Asian art, antiquities, textiles, tapestries, and oversized books of birds by the French counterpart of Audubon. He also indulged his love for silver; at one point he had amassed a world-class collection of nine hundred pieces. His wealth and artistic sensibility were such that by 1923, David Weill--no hyphen yet--had become one of the major benefactors of the Louvre Museum in Paris. His name, in gold-leaf lettering, remains sculpted into the marble walls of the museum. He was fifty-two years old.
In 1926, David Weill was named president of the Council of National Museums and announced a major gift of art to the Louvre to take place at his death. In 1927, Gabriel Henriot, the head of the French Library Association, undertook--with Weill's financial support--a luxurious two-volume catalog of David Weill's extraordinary art collection. Some 155 of Weill's paintings, watercolors, pastels, and gouaches were lovingly reproduced in the volumes, in black and white, and were accompanied by Henriot's descriptions. Included were works by Boucher, Chardin, David, de La Tour, Fragonard, Goya, Ingres, Prud'hon, Reynolds, and Watteau from the eighteenth century, and among the tableaux modernes were works by Corot, Daumier, Degas, Delacroix, Monet, and Renoir.
It had become nothing less than one of the world's finest art collections in private hands. The catalog showed photographs of David Weill's extraordinary home in Neuilly with nearly every inch of wall space covered with beautifully framed and valuable art. Indeed, the house was like a museum itself. A rarely seen painting of David David-Weill, by Edouard Vuillard, a family friend, shows the nattily dressed banker standing in one of the rooms of his Neuilly home surrounded by his many paintings, sculptures, and candelabras. Not many of these expensive catalogs were printed, probably fewer than a hundred, and David Weill gave them to his friends and a few public libraries. He gave number sixty-one to one of his favorite art dealers, Nathan Wildenstein, the patriarch of the Wildenstein clan, with the handwritten inscription "In remembrance of our so agreeable and friendly relationship--July 7, 1927." David-Weill's art acquisitions continued through the 1930s despite the near-death experiences of the Lazard partnerships in London and Paris. The curator of his collection, Marcelle Minet, became a full-time David-Weill employee. "David Weill was--what you would call in America--a compulsive buyer, yes," said Guy Wildenstein, the scion of the famous art-dealing family.
But the events of the early 1930s at Lazard and the ongoing lack of dividends from New York began to put the financial squeeze on David David-Weill. In 1936, David-Weill sold half of his "famous" collection of miniatures and enamels--"paintings delicately executed and small in size"--to Nathan Wildenstein, and the other half he donated to the Louvre. This was done after a commission of experts had divided the collection--described at the time as "probably the finest and most complete that exists to this day"--into two parts of equal value. Then, without warning, came the stunning announcement in February 1937 that David-Weill had also sold "a large part" of his "noted" collection of paintings, drawings, and sculptures to the Wildensteins, for $5 million. At the time, the $5 million payment was one of the largest ever in the art world--around $70 million today--and a fitting sum it was, too, for the collection was considered one of the world's best of eighteenth-century art. The sale comprised 60 paintings, 150 drawings, 50 sculptures, and several pastels, and was described as "one of the most important collections of French eighteenth century art in private hands." In the New York Times article about the announcement, no reason was given for the sale. In his memoir about his family, Daniel Wildenstein said David David-Weill sold the collection because he had simply run out of space in his Neuilly home and wanted to start over collecting more modern works. "He had liberated his walls," Wildenstein wrote, "and he started collecting again."
The truth, Michel David-Weill confirmed, was far less romantic. By 1937, the financial situation of the Lazard houses in Europe had once again become dire, and the David-Weills had lost control of their remaining 20 percent stake in Lazard Brothers to Pearson. The price to buy back 20 percent of the firm turned out to be very close to the $5 million David-Weill received from the Wildensteins. Although no doubt an extraordinary sacrifice at the time, David-Weill's $5 million investment in the London partnership was vital to Michel's 1984 deal to regain control of all three houses and then to merge them in 2000, creating the global Lazard that exists today. The reacquisition of the stake in Lazard Brothers also turned out to be very valuable in its own right.
AS OF January 1, 1938, Lazard in New York announced it would merge its separate three-year-old securities underwriting affiliate back into the main firm to create a new partnership, to be known thereafter as Lazard Freres & Co. This combination was said to be "a logical development to meet more effectively the existing conditions in the securities business." The firm's offices would be consolidated on the second floor of 120 Broadway, the Equitable Building, and would have three branches in Chicago, B
oston, and Philadelphia. There were seven partners, led by Altschul, who was said to have a large mahogany desk "weighted with four telephones" and to enjoy a pipe, the smoke from which "floats past rare prints hanging on the walls." But Pierre David-Weill's concerns about the performance of the New York office under Altschul did not abate. In June 1938, Pierre sailed to New York to discuss the firm's performance with Altschul. "We all agreed the partners' room was top heavy and that something would have to be done to reduce its burden," Pierre wrote about the June meeting. "Notwithstanding that, you and I, and I think Stanley [Russell], felt that the team had to be strengthened. The more we have been thinking about it, the more certain we are that this is essential if we want to succeed in making a success of the new firm." In a November 10 letter of that year, Pierre told Altschul he was coming to New York again on November 26 on the Queen Mary. "The object of my trip is to confront our views on these questions and to take our decisions accordingly," he wrote. "That is, I think, in accord with what Stanley, you and I had in mind when I left in June, and it seems to me that nothing has happened since, either in results or otherwise, which makes it wise to postpone these matters further."
CHAPTER 3
ORIGINAL SIN
By 1938, everything in Europe seemed to be happening against the backdrop of increasing German military aggression. On March 13, 1938, Hitler announced the Anschluss, the annexation of Austria by the German Reich. Then, on November 9, more than two hundred synagogues across Germany and Austria were set aflame and destroyed in a devastation known as Kristallnacht, the first major orchestrated attack on the Jewish populations of those countries. Stores and businesses owned by Jews were ransacked and gutted. Some ninety-one Jews were murdered and another thirty thousand sent to concentration camps, in Dachau and Buchenwald. Hitler and the Nazis were seeking to make their country Judenfrei, and much of their original focus was on getting rid of the approximately fifty thousand Polish Jews then living in Germany. The Germans rounded up the Polish Jews and transported them to near Posen, on the Polish side of the border with Germany. Poland shunned these refugees as well, and many of them died of starvation and exposure during the harsh winter.
With a war in Europe looking more and more inevitable by Christmas 1938, the David-Weills and Andre Meyer took the opportunity to rewrite the Lazard New York partnership agreement. The estate of Andre Lazard had been settled by this time, and there must have been some recalibration of his family's ownership stake in the firm. The ostensible reason for the change, according to Michel, was the need to legally separate the French partnership from the New York partnership in the event that the Germans took control of Lazard in Paris--which they eventually did--and endeavored to run the New York firm (which they did not). The change in the agreement was designed to prevent such an event. But the main reason for the rewrite was to create a highly authoritarian management and governance structure--found in section 4.1 of the agreement--that would endow one person alone with the absolute power to unilaterally hire and fire partners and other employees and to unilaterally set annual compensation. In investment banking, as in most businesses, there is no more absolute power over employees than the authority to set their compensation and determine if they will still have a job.
The December 31, 1938, partnership agreement became the firm's Rosetta stone, and the "partner under section 4.1" became the firm's absolute monarch. As of the new year, 1939, Andre Meyer was not only the creator of the concept of Lazard's "partner under section 4.1," he was that partner. "He wanted the power of the firm in New York in granite," Michel said of the brilliant, mercurial, and impossible Andre Meyer.
Although the rewriting of the partnership agreement could not have been welcome news to Frank Altschul in New York, he did his best to ignore its implications. Instead, in the following stressful years of World War II, he performed for both Andre and Pierre David-Weill--and their families--any number of the most selfless acts of partnership, only to be betrayed by them in return. Regardless of the help he would later provide, it was clear with the new partnership agreement that considerable tension had developed in the relationship between Andre and Altschul.
"I suppose by now it will have occurred to you that your tone on the telephone this morning was highly offensive," Altschul wrote to Andre in August 1939. The two had been speaking and cabling about Andre's involvement in the just-announced bankruptcy of Mendelssohn & Company, a small but well-regarded Berlin-based investment bank. Dr. Fritz Mannheimer, a friend of Andre's and one of the leading financiers and art collectors of his day, ran Mendelssohn & Company from a branch in Amsterdam. Virulently anti-Nazi, Mannheimer, a Jew, had fled his home in Stuttgart, Germany, for obvious reasons and reestablished the bank in Amsterdam. On June 1, 1939, at his chateau just outside Paris, Mannheimer married Jane Pinto Reiss, another friend of Andre's.
On his wedding day, the 250-pound Mannheimer suffered a heart attack. Eight weeks later, on August 9, he suffered another heart attack, and died at his chateau after he discovered his bank was insolvent (although there remained the serious suspicion he committed suicide by gunshot). Eventually, it came out that Fritz Mannheimer had borrowed heavily from his own bank to buy his extraordinary art collection, which included works by Vermeer, Rembrandt, and Fragonard. When he died, the loans could not be repaid, and the bank failed.
A week after Mannheimer's death, Altschul wanted to determine the extent of Andre's personal involvement in the German banker's financial distress. "I dislike hearing from newspapers and from others that you have $1,000,000 unsecured credit, and I still cannot make out whether your secured liabilities amount to $2,500,000 or Fr. francs 2,500,000 or guilders 2,500,000; nor have I a clear idea as to whether there are any other further contingent liabilities of Mendelssohn toward you," he wrote. "It is quite clear from what you told me that whatever these figures may be, they are in no sense a matter of concern to you. Accordingly, they are not a matter of concern to me, but merely a matter of perfectly natural interest in view of the position that I occupy vis-a-vis all of you in Paris. And I object, once again, and most strenuously, to your tone on the telephone this morning." How long these hard feelings lingered is not clear. Andre did help put Altschul in touch with the trustee of Mannheimer's personal estate so that he could inquire about his French chateau--Villa Monte Cristo, in Vaucresson, seven kilometers west of Paris--as Altschul was thinking of purchasing it. "I am wondering whether it can be bought at a terrific bargain?" Altschul wrote Andre. "If so, I would like an opportunity to consider it, because I am sure happier days are coming again in your country, when it will be a delight to have a little place like that nearby."
ON SEPTEMBER 1, 1939, Germany invaded Poland without warning. Two days later, France and England joined together in announcing they were at war with Germany. These ominous world events did not take long to light on the doorstep of Lazard Freres et Cie; Lazard now faced a new life-threatening crisis. On September 13, 1939, David David-Weill wrote Altschul from Paris thanking him for his "friendly cable" sent on the "eve of the outbreak of war." He reported that his son Pierre, who had been drafted into the French army at the start of the war, had been gone from Paris for a "relatively long time" but was "far from the dangerous zone." He said his son Jean, who had received the coveted Croix de Guerre in World War I, was awaiting his "mobilization order" and his two sons-in-law had been mobilized. He explained that the Lazard Paris "staff" was "really very reduced" but "fortunately, Andre is here, but his task is tremendous, and it is in times like those we are going through that I realize how handicapped I am by the years and to what extent my age prevents my giving a continued effort."
And here David-Weill tugged at Altschul's emotions:
I therefore turn to younger men to ask them to give this effort, of which, unfortunately, I feel myself incapable, and I am counting on you as head of the one of our houses the least affected by the world cataclysm. I know so well the noble traditions which your father transmitted to you, and to which you have
always shown a faithful attachment, that I cannot but be confident that you will always do everything in your power so that the name of Lazard Freres, in New York, as well as in Paris and London, will retain its full prestige, and so that, after the war is over, the magnificent working medium constituted by our three houses, will find again in the world the incomparable standing which they have enjoyed for so long. In the present circumstances, it is for me a great source of comfort to feel that, if need be, I can rely on your faithful and traditional cooperation.
Twelve days later, David David-Weill wrote Altschul again, to follow up his previous missive. This one was slightly cryptic and therefore somewhat mysterious. "Supplementing my letter of September 13...I want to tell you that we all rely on you and that I personally rely on you to give our interests in the United States the most complete and friendly attention," he wrote. "If you are willing to do so, we shall ask you to follow very closely anything in your possession which belongs to us, and to make such changes and take such steps as circumstances may require or your judgment and faithful friendship may suggest to you." He added, by way of a postscript: "Andre sends you all his friendly greetings." Two days later, Altschul wrote directly to Andre asking him to write about "all the matters of common interest," because "you can't imagine how remote and isolated we feel from you and all of your cares." He concluded: "There are many matters about which we should speak and on this account it would be highly desirable if you sent Moser or some other homme de confiance on a flying visit to New York."
The last tycoons: the secret history of Lazard Frères & Co Page 6