The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  Although the Street would be aghast, Felix quickly found a savior for Hayden, Stone in Sandy Weill, the wunderkind financier who had presciently built a state-of-the-art securities clearing operation at his firm, Cogan, Berlind, Weill & Levitt (known as "Corned Beef with Lettuce" among Wall Street wags). Felix decided that Weill, who would go on to create the financial behemoth Citigroup, was one of the few people able to grapple quickly with Hayden's accounting deficiencies. According to Tearing Down the Walls, Monica Langley's authoritative account of Weill's Wall Street career, Hayden, Stone's scion, Hardwick Simmons, was dispatched to meet with Weill to see whether "a bunch of blue bloods would work for these scrappy Brooklyn Jews." Simmons, who later would head Prudential Securities and become chairman and CEO of the Nasdaq Stock Market Inc., recalled that he had "never heard of them, or 'Corned Beef and Mustard' or whatever it is. They're not even on our radar screen." On the three days leading up to the September 11 deadline, Felix alternated between meetings at the stock exchange, with Lasker and Robert Haack, the president of the exchange, and those with Harold Geneen, up at ITT. For his part, Simmons, the great-grandson of the founder Galen Stone, had no choice but to acquiesce, of course, and on September 11, 1970, CBWL purchased what it wanted of Hayden, Stone, especially the tony name, and became the new Hayden, Stone with, voila, instant prestige and history.

  It was a real nail-biter, though, as the September 11 deadline loomed--either to approve the CBWL deal or to shutter Hayden, Stone. Felix recalled:

  At 9:15 that morning, Lasker and I were talking to Golsen [Jack Golsen, the last holdout against the deal and one of the Oklahoma investors] and he said why shouldn't Hayden Stone go broke? Why should this be any different from Penn Central or Lockheed? He was mad. Somebody told him the financial community would never forget it if he failed to go along and he felt this was a threat. I think he also felt he was going to lose everything either way. The Cogan people had flown out there the night before and were working on him from 4 a.m. on. Golsen wanted to talk to Bunny and to me.... Bunny and I talked to him for over an hour. We talked national interest. We talked self-interest. Bunny was extremely effective. He's an enormously sincere man and in the clutch this was important because it came through. Finally, he said how much time can you give me and we said 15 minutes is all we have because we have to close the firm down before the opening of trading. Larry Hartzog [a lawyer for Mr. Golsen] got back to us and said, "Felix, you've got a deal." I went into the next room and told all these people they had a deal and then I took a very deep breath and walked out. It was five minutes to the opening.

  On behalf of the New York Stock Exchange, Felix cut a deal with Weill that required the exchange to contribute $7.6 million in cash to the new company and to assume $10 million of Hayden's liabilities. The deal was a brilliant one for Weill and set him on his extraordinary path.

  TWO MONTHS LATER, Felix and the Crisis Committee had another near disaster on their hands. This time, one of the Street's largest brokerages, F. I. DuPont, Glore Forgan & Co. started to fail barely six months after the shotgun merger that had brought F. I. DuPont & Co., Glore Forgan Staats, and Hirsch & Co. together in the first place. According to the Times, "The brokerage firm found itself in deep distress...its back office an insoluble snarl of paperwork and its account ledgers mired in red ink." Felix had had doubts about the three-way merger from the outset. "Figures from firms with huge back-office problems are meaningless," he told Fortune, "because you can't really know their position."

  Once again, nothing less than the future of Wall Street was at stake with the potential failure of DuPont Glore. At the same time as DuPont was imploding, Felix and Co. had corralled the venerable Merrill Lynch into saving yet another firm, Goodbody & Co., a firm similar in size to DuPont. Felix remembered a particularly poignant moment when James Hogle, the principal investor in Goodbody, appeared before the Crisis Committee but refused to divulge the extent of the firm's capital shortage. "If you don't tell me the facts, you are not leaving here," Felix told Hogle. "And he looked at me and two tears rolled down his cheeks. It was a terrible, terrible moment."

  But the deals had a house-of-cards aspect to them; Merrill agreed to take over Goodbody--after a $20 million indemnification from the New York Stock Exchange--but only if no other firm failed before Merrill could complete the deal. Recalled Lasker: "If DuPont had failed, Merrill Lynch would not have taken over Goodbody, and if both of these leading firms had gone down at once, there's no question that the effect on the country, on the industry, on investors, on the economy would have been severe, if not disastrous."

  Riding in from Texas to rescue DuPont, sporting a three-piece suit and a crew cut, was H. Ross Perot, the founder, in 1962, with all of $1,000 in his pocket, of Electronic Data Systems Corporation, a computer services company. At that time, Perot was "one of the few men who ever made a billion dollars on paper," after EDS went public in 1968, at $16.50 per share, before soaring to as high as $161 per share in 1970. DuPont was also one of EDS's largest customers, a fact that had no doubt drawn Perot's attention since he owned, at that time, 80 percent of EDS's stock and the loss of a major customer would surely affect EDS's stock price. Perot claimed that EDS's stock price was not what motivated his interest in DuPont. "At any price per share, I am worth more than I ever dreamed I'd be," he said.

  Felix initially considered Perot a potential Wall Street savior when he went to the White House for his friend William Casey's swearing in as SEC chairman and met President Nixon for the first time, as well as--more significantly for Felix's future--Attorney General John Mitchell. He also saw at the ceremony Peter Flanigan, Nixon's close adviser and a former investment banker at Dillon Read. "I'm sort of going through the line, and I get to Nixon," Felix said. "And Flanigan introduces me to Nixon, and says, 'Felix Rohatyn. He's head of the Crisis Committee of the exchange.' Nixon says, 'Oh, I hear you're doing such a great job and I hear that everything's gonna be all right.' I said, 'Well, Mr. President, I don't know where you hear that because we're up to here with Goodbody.' At that point, it looked really bad for Glore DuPont." The president pulled Felix aside. "'Does Flanigan know all this?'" he asked. Felix said they talked every day. "'Good,' Nixon said. He calls John Mitchell over, and he said, 'John, I want Felix to call you every night to tell you what's happening and what they need because I don't want anything to go wrong here.' So I said, 'Fine.' And I started calling Mitchell every night at 10:00, and half the time Mrs. Mitchell answered the phone, and she was absolutely, totally drunk." Felix further explained that in one of those late-night conversations with Mitchell, the attorney general suggested that if DuPont Glore needs "five million or ten million, why don't you talk to Perot, who wants to be helpful. So that's how he got involved. That's how I met him."

  It turned out, though, that the deal Perot made for DuPont was not one of his smarter ones. "We just threw money in," Perot said at the time. "It took more guts than brains." On May 14, when DuPont had been saved, Perot became the largest single individual investor in a Wall Street firm at that time. He had his work cut out for him and quickly installed EDS managers to run the brokerage. "I've been told," Perot said, "that you can't expect people on Wall Street to be as disciplined as they are in the computer business. But until DuPont has the same position in the brokerage business that EDS has in the computer service industry, I won't be able to rest." Despite Perot's determination, it didn't work out. Felix said that Perot eventually lost more than $100 million in his ill-fated Wall Street adventure when even the newly reconstituted DuPont could not be saved. "And nobody ever said thank you [to Perot] for actually saving Wall Street," Felix concluded. In 1974, lawyers hired by Perot liquidated DuPont Glore, despite the last-ditch decision to second Mort Myerson, Perot's partner at EDS, to run the brokerage.

  Despite this deal's terrible outcome, Perot harbored no ill will toward Felix--he was just the agent after all--and their relationship flourished for the next thirty-five years. Perot put Felix on the EDS board. Fe
lix would later represent Perot in the $2.5 billion sale of EDS to General Motors, in 1984, for a new class of GM stock. More fatefully for Felix, he supported Perot for president in 1992 and more than likely, as a result, lost his chance to be secretary of the Treasury. Felix's loyalty had cost him.

  Three months after striking the deal between Perot and DuPont and a year after he took on the assignment, Felix quit his position as chairman of the Crisis Committee. In the end, about one hundred New York Stock Exchange member firms, one-sixth of the total, either had failed or had been merged out of existence during the crisis. In his three-page letter of resignation to Haack and Ralph DeNunzio, distributed to the thirty-three members of the New York Stock Exchange board, Felix suggested his task was complete. He continued to worry, though, about Wall Street's self-regulating ability. "The questions raised by the not infrequent inaccuracy of both internal and audited reports will have to be studied by the Exchange," he wrote. "In my opinion, they involve the entire concept of self-regulation since, if our tools are inadequate we either have to get new tools or someone else should do the job. I think we have, at enormous cost and with little public recognition, paid for the sins of the past and have stopped the current bleeding. I am not convinced that we have adequate early warning and adequate measuring to prevent recurrence if industry conditions should change again." In closing, he wrote, "I don't believe we can take the position that it has been a success over the last few years. Hopefully, we may convince our critics, which will include the Congress, the SEC, and the public, that very costly lessons"--estimated by Felix later at more than $140 million, at the time a considerable sum--"have been learned and will result in greater effectiveness. The proof of the pudding will obviously be in the eating."

  Subsequently, the House of Representatives convened a series of hearings to study the securities industry to determine just what occurred during the crisis and what additional legislation, if any, was required to prevent a recurrence. Felix testified, as did his friend Bill Casey. "We had a house on fire," Felix at one point told the congressmen, "and we could not change the fire regulations at the time; we had to put the fire out and then start to work on these things, and I think that is being done." It would not be the last time Felix would combine prescience with a sky-is-falling doom and gloom.

  FELIX'S JUNE 1971 resignation from his prominent role at the stock exchange to return full-time to Lazard coincided with the release of the Celler commission's final report. In a matter-of-fact way, the report definitively linked Felix and Lazard to ITT's aggressive acquisition program. "Felix Rohatyn, a [Lazard] partner on ITT's board of directors and a member of its executive committee, was in a position to play a major role in shaping ITT's acquisition program," the report concluded.

  Information on companies available for acquisition came through Lazard Freres investment banking activities. With an intimate knowledge of ITT operations, Lazard Freres stimulated its own income and facilitated ITT's acquisition program.... Further, the major thrust in ITT's acquisition program came after Mr. Rohatyn's appointment and election to the ITT board. ITT's acquisition activity greatly accelerated both in terms of numbers and size of companies acquired. A total of 24 acquisitions were made in 1968, as compared with the totals of 13 in 1967, and 11 in 1966. Such acquisitions included Continental Baking Company (for a total consideration of $279.5 million); Rayonier ($293.1 million); Sheraton ($193.2 million)--all the largest firms in their industries.

  Left basically unexplored by the subcommittee (since Lazard was asked to produce a list of closed deals only through September 5, 1969, and so this deal was mentioned only in passing by Felix) was to that time the largest ever merger in corporate history and, accordingly, Lazard's biggest assignment for ITT: the proposed $1.5 billion acquisition of the Hartford Fire Insurance Company. At the time of Felix's Celler commission testimony, December 1969, ITT was awaiting the approval of the insurance commissioner in Connecticut in order to close the deal. It would be a long wait. And the deal, first announced two days before Christmas 1968, would over the course of the next thirteen years of controversy become, according to Andre Meyer, a "cause celebre," and change the lives of all of those involved in it, especially that of Felix Rohatyn, ITT's principal investment banker.

  "The Extraordinary ITT Affair," as the New York Times dubbed it, was a jambalaya of exceptionally intricate international financial shenanigans and political influence peddling that at times devolved to the level of opera buffa. It became nothing less than the overture to the Watergate drama that followed it directly. Three highly entertaining and informative accounts of the scandal are Inside Story, by Brit Hume, who made his bones as a reporter covering it for Jack Anderson's column; Anderson's own Anderson Papers; and Anthony Sampson's authoritative Sovereign State: The Secret History of ITT. There is also a treasure trove of information about what transpired in the records of the Senate Judiciary Committee and thirty-two boxes of documents at the SEC. It is the unusual role in the affair played by Felix--who told the Celler commission that he wanted Lazard to be "purer than Caesar's wife"--that concerns us here.

  A PREREQUISITE FOR a better understanding of what transpired--from late 1968 until the matter was once and for all resolved in 1981--is a brief overview of Lazard's by then almost fifteen-year relationship with Mediobanca, an equally secretive and enigmatic Italian investment bank run with absolute authority by Enrico Cuccia. "Very shy but very clever" is how Lazard partner Francois Voss described him. If an Italian analog to Lazard were to be conjured cosmically out of "star stuff" and plunked down in the heart of Milan, Mediobanca would be it. Like Lazard, Mediobanca in Italy had its fingers in every important deal and its hand in every important politician's pocket. If possible, Cuccia was more elusive than even the tight-lipped Andre. "If any banker could be said to cast no shadow, it was Enrico Cuccia," Cary Reich said of him in Financier. "The standard shot of him," according to the Financial Times, "conveys a man in a homburg hat, coat tightly wrapped around him, giving a hasty backward glance down a foggy Milan street." But Cuccia and Meyer were said to be birds of a feather. "Their relationship was exceptional," recalled Jean Guyot, a longtime Lazard partner who knew both men well. "There was a fundamental confidence between them, which was relatively astonishing, because the two were so different. But they had something in common--the exclusive love for work." They spoke on the telephone nearly every day. "They were intimates," Voss remembered. Andre was one of the few men in the world of finance whom Cuccia respected, and he kept a picture of Andre in his office throughout his long career at the Italian bank. For his part, Andre described Cuccia as "on top of everybody in the banking fraternity.... I have the highest regard for his character and his decency and his loyalty and everybody feels the same way as I do."

  They also had in common a relatively simple business arrangement. In 1955, Lazard in New York and Lehman Brothers each bought 10 percent stakes in the Italian investment bank for an undisclosed amount and with a vague understanding that they all would attempt to do business together. In April 1958, Lazard Brothers in London also bought an unspecified block of shares in Mediobanca, along with two other European banks--Sofina, of Brussels, and Berliner-Handelgesellschaft, of Berlin. In 1963, Lazard represented the Agnellis in the sale of the Ferrania film company to what is now 3M.

  By the end of 1963--December 18, 1963, to be exact--the three firms felt a need to get a little bit more specific about their ongoing relationship and so drew up a "memorandum of understanding concerning cooperation between Mediobanca, Lazard Freres & Co., and Lehman Bros. respecting Italian business." Cuccia was the signatory of the agreement for Mediobanca, and Andre signed for Lazard. It is a crude document, reflective perhaps of a less litigious and more trusting time. The gist of the agreement was that the firms would split the fees received for M&A deals and equity underwritings involving Italian companies in the United States and American companies in Italy. How the publicity for the assignments would work was also agreed.

  The
history of successful joint ventures among investment banks is mercifully short, because they typically devolve rather quickly into petty jealousies and arguments over the proper allocation of fees and publicity--the two hot buttons these three firms were clever enough to try to address up front. With this agreement, there were three high-strung, fiercely proud partnerships trying to work together, a sure recipe for disaster. The irony, of course, is that the three houses of Lazard, where there was much common ownership, had never shown even the slightest aptitude for working together. Nevertheless, there is evidence that Lazard in New York sought to shuffle business toward Mediobanca and vice versa. And there were at least two deals where the three firms did in fact work together and split fees: the aforementioned Ferrania film company deal and Royal Dutch Shell's acquisition of the petrochemical business of Montecatini.

  Nowhere was that more evident than in the case of ITT, perhaps Lazard's most important client. ITT was constantly looking at deals all over the globe. And Geneen and his team kept the Lazard bankers hopping. Just as ITT was in the midst of its full-fledged assault on the Hartford, it was also pursuing, albeit less aggressively, the acquisition of a small, family-owned Italian manufacturer, Necchi. Necchi was best known for its newfangled sewing machine, with a rotating bobbin, but the sewing machine division, faced with heavy Japanese competition, was a money loser.