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

by William D. Cohan

  But Michel also reveled in old-fashioned autocracy. He could be unabashedly Machiavellian. He alone set the all-cash compensation levels of his partners through an annual, almost medieval, bloodletting that involved his partners' post-Labor Day pilgrimage to his corner office to plead, on bended knee, for an appropriately robust amount of succor. Michel's return to his 820 Fifth Avenue co-op--purchased from the estate of the CBS mogul Bill Paley--each September from his villa in Cap d'Antibes signaled the beginning of what at Lazard became known as the "silly season," when grown men and women prostrated themselves to kiss his ring in exchange for a few--million--pieces of gold. From October 1 to around December 20 of each year, he would see the New York partners one by one in his office to discuss their compensation and tell them what their new percentage of the profits would be for the coming year. Each partner's name would be written down on his yellow pad and his longtime assistant, Annik Percival (who had also worked for Andre), would arrange for the visits by calling up the partners and chiming in her seduisant French lilt, "He is ready for you now." Michel was always prepared for the meetings, where the individual partners would plead their case for their own performance. He always seemed to know who really did what each year.

  What's more, Michel would engage in a sporting bit of negotiation if that was appropriate. A partner unhappy with his compensation could usually get Michel to cough up some more dough out of his own pocket--"perhaps," he would say, "a little bit more for you"--but usually not convince him to alter the given percentage, for that information was widely disseminated among the partners and therefore could be noted and debated. There was no discussing secret arrangements, obviously. On balance, though, the partners recognized that under Michel's patronage, in some years they got paid more than they probably deserved and in some years less.

  Some partners, noticeably Bob Lovejoy, Lou Perlmutter, and Jon O'Herron, were the "early runners" and could usually be seen making a beeline to Michel's office soon after the yellow pad appeared around October 1. Others held back cagily, waiting for Michel to come to them. "I guess the thinking of the 'early runners,'" one partner said, "was that they thought if they got to Michel early they might get more for themselves, since the pie was finite." Naturally, in such a closed system, the role of politics and favoritism was colossal, and "side deals" between Michel and selected partners were known to be commonplace. But no one, except Michel, knew the exact specifics of the side deals. Rumors abounded, however, especially when it came to the side deal cut by Damon Mezzacappa, the partner in charge of Lazard's capital markets business. The rumor was that Michel had granted Damon a percentage of the pretax profits generated by his business, to be distributed at his own discretion. When the truth about Damon's deal became known--around 1998--his partners were flabbergasted.

  Michel was generally happy to reward his partners well, often better than they could possibly be paid at other firms. He was long-term greedy and knew that if the pie kept getting bigger, he stood to make more and more money himself, as he had the largest profit percentage by far. Mostly, though, Michel was interested in his partners' ability to generate fees--as he himself had little ability or desire to do so. "Frank Zarb once told me that when he walked into Michel's office, he felt like he was being looked at as a bag of gold and was being weighed as a bag of gold," a longtime partner remembered. "It was like we were bringing bags of gold to Michel, and he would allow us to take a little bit off the bottom, and then he would put the rest in his pocket." Jean-Claude Haas, a debonair senior Lazard partner in Paris, once said, succinctly, "Objectively, Michel is the landowner and everyone else is a tenant farmer. They get rich but they're still tenant farmers." Frank Pizzitola, another longtime partner, described Michel's unique system of remuneration in this way: "This is not a partnership. It's a sole proprietorship with fancy profit sharing."

  MICHEL DAVID-WEILL, son of Pierre, grandson of David, and great-grandson of Alexander, joined Lazard Freres in 1956, at age twenty-four, after graduating from the Lycee Francais in New York and the Institut des Etudes Politiques in Paris. Michel and Felix became Lazard partners on the same day in 1961. From that point on, like fraternal twins, they maintained an odd sort of symbiotic relationship. Their offices were right next to each other at One Rockefeller Center, although Michel's was easily twice the size of Felix's. And they spoke only French to each other. But they would never tutoyer, or use the familiar form of the language. They lived less than a block away from each other on Fifth Avenue, but they never socialized. Felix brought in significant amounts of business; Michel would only occasionally meet with clients. One former Lazard partner, who knows them both well, once said, "You would need many advanced degrees in psychology to figure out their relationship." Between 1965 and 1977 Michel spent very little if any time in New York, given Felix's increasingly exalted status and Andre's iron grip on the New York partnership.

  He was not an unknown in New York, though. At the request of both his father and Andre, Michel had spent several years in the mid-1950s serving an apprenticeship at both Lehman Brothers and Brown Brothers Harriman, the uber-WASP, two-hundred-year-old private bank still located near Wall Street. He worked in New York until 1965, when he returned to Paris to work with his father. He remembered his early years in New York with some fondness. He "did things as a helper--very ordinary things," he said once, and recalled receiving "an extreme degree of attention" from Andre. Only later, when Michel arrived in New York to take over, did he, too, feel Andre's wrath. Before that, though, when Michel was somebody Andre found it important to cultivate, he worked with Andre on one of the first hostile takeovers ever, the 1964 unsolicited tender offer for Franco Wyoming Oil, a Paris-based company with diverse interests in ranch land in the western United States, oil and gas reserves, and a valuable portfolio of oil company stocks. Michel found him charming.

  Andre had asked the young Michel to analyze Franco Wyoming's assets. The analytical exercise wasn't for Lazard acting as agent for a client; the task was to decide whether the partners of Lazard, acting as principals, should buy Franco Wyoming. "If you don't see us getting back two hundred percent of what we put in, then forget it," Andre told Michel, according to an account of the deal in Reich's Financier (an earlier Fortune article put Andre's supposed hurdle rate at 150 percent). Michel's analysis determined Lazard would make 197 percent on its money, and "I had to persuade him the other three percent," he recalled. At the time, many Wall Street analysts thought Franco Wyoming was vulnerable to a takeover because its oil and gas assets alone were worth more than the current share price, with the $40 million stock portfolio as additional gravy. Management of the company was thought to be opposed to any takeover, but Andre determined, correctly, that their opposition would be little impediment to victory since the company's stock was owned largely by Europeans and was held in French banks. But no one ever thought the partners of a Wall Street firm would launch a hostile offer against a public company. (Even today the idea is anathema to financial buyers, such as private-equity firms and hedge funds, let alone an established Wall Street firm.) But Andre decided to do that very thing, enlisting in his effort--in a rare example of three-house unity--Lazard partners in Paris as well as the Pearsons, who controlled Lazard in London. On April 8, 1964, large ads appeared in the financial press announcing the tender offer. The Lazard group wanted two-thirds of the company's stock and offered $55 a share for it, or a total of $45.1 million. At the time, the shares were trading at $48.50, up from $40 a few weeks before the offer. Predictably, the Franco management, based in Delaware, fought the Lazard bid by filing a suit to block it and by sending a letter to shareholders urging them not to tender. A month later, though, Lazard had emerged with an easy victory. A group from Lazard walked into Franco Wyoming's annual meeting in Wilmington, Delaware, and voted its newly acquired shares. "The president stepped down," Michel recalled. "And one of us walked up to the podium. It was the only physical takeover I've ever seen." In the end, Lazard decided to liquidate the comp
any, and the partners pocketed a fortune, estimated at $25 million, "close to three times what we put in," Michel said. But as Cary Reich pointed out in Financier, "The real significance of the Franco Wyoming deal wasn't the huge capital gain Lazard reaped. It was that an eminent group of investors, led by one of the world's most prestigious investment banks, had mounted a tender offer against the target company's wishes, had weathered the storm and had won. The hostile takeover had, in a sense, finally come out of the closet."

  BY THE MID-1970S, the ongoing ITT-Hartford scandals, combined with Andre's health problems and Felix's refusal to manage the firm, created a serious leadership vacuum at Lazard. The firm was starting to drift and lose focus. The day after Christmas 1974, Andre began to seriously address the issue for the first time. In a "Memorandum to Partners," he wrote, "After 35 years of management of Lazard Freres & Co., New York, and because of the irregular condition of my health, I have decided, effective the first of the year, to reduce substantially my activities and my responsibilities for the day to day operations of the firm. I will continue as a general partner, having the same role as in the present Partnership Articles."

  With this memo, Meyer set off a succession battle at Lazard that raged for the next thirty years. Never again, despite many high-profile attempts, would authority and control at Lazard be vested so clearly in one man as it had been during Meyer's long reign at the haute banque d'affaires. He had been both chief deal maker and chief administrator. It is a failure of imagination that still haunts Lazard. No doubt, though, Andre thought he had a workable solution when he appointed a new management committee, with Felix and Howard Kniffin as its co-chairmen. Kniffin joined Lazard in 1946 and became a partner in 1952, nine years before Felix and Michel. There were six other partners at that time. Per Andre's edict, the nine-member management committee, "composed of men in whom I have the greatest confidence"--including Disque Deane, Patrick Gerschel, Tom Mullarkey, and Frank Pizzitola--was to be "responsible for the coordination of all firm activities and for daily conduct of its business" and was to meet every day at 8:45 a.m.

  Meyer also spelled out, briefly, an ownership arrangement for Lazard, a yoke that existed until 2005. "My family and I, together with the David-Weill family have arranged for establishing and maintaining the stability of a fixed capital of $17,500,000, of which our two families will own roughly 75%," he wrote. "We will all be signing new Partnership Articles before January 1 which will implement the Management Committee and establish the fixed capital." As of that date, Andre had $3.187 million of capital in the firm. Pierre David-Weill had $3.215 million. Felix and Kniffin each had $700,000.

  As the all-powerful "partners under section 4.1" of the partnership agreement, Andre and Pierre David-Weill set the all-important partnership percentages. Before he cut his stake back, Andre had 13.236 percent of the net profit in 1974, which translated into almost $1.1 million in compensation for him that year, given that New York made $8.1 million in net income before taxes. Pierre David-Weill took just over $750,000 that same year from the New York partnership. Felix, who had the second-largest percentage as of 1974, at 10.796 percent, took home $875,000.

  Indeed, given the contents of section 4.1, it is understandable that Pierre David-Weill was the only man Andre referred to as his partner. On the occasions when Pierre came to New York from Paris, Andre would relinquish his desk to him and sit in a seat on the side. "So as to show who was in charge," one former partner recalled. This partner also remembered that Pierre was known around the firm--but never to his face--as "Pinky" because of his red hair and "flushed complexion." (In his younger days, Michel, too, had red hair.) In the 1920s, while still a young man, Pierre collected the finest examples of Art Deco--the "modern art" of the day--and filled his Paris apartment on Avenue Emile-Accolas with avant-garde works by La Fresnaye, Matisse, Picasso, and Balthus. According to one observer, Pierre's apartment had "become a veritable private museum" of Art Deco. He commissioned the painter Andre Masson to come to his apartment to paint him two huge surrealistic murals, which were displayed in his dining room. He also hung in the apartment two absolutely remarkable surrealistic tapestries by Jean Lurcat. Pierre also commissioned the sculptor Alberto Giacometti to create radiator covers for his apartment.

  Robert Ellsworth once said that Patrick Gerschel, Andre's grandson, told him, "Pierre was so smart that he was smart enough to hire Andre Meyer and trust him." Michel believes his father never received enough credit for reviving both the Paris partnership and his own fortune after World War II. "My father had, in my opinion, an exceptionally hard life, but he was exceptionally courageous," Michel explained.

  But because if you think about it, there is a fellow who at the age of thirty-two has no money left, and has to fight. And has to fight to get the firm back on track. At age forty, the firm is taken from him, and the Germans come in, and he has to fight to liquidate the firm decently so that nobody gets hurt. At age forty-two, he arrives back in the U.S., which he had never lived in but had visited plenty of times, and has to fight with Washington because of the Trading with the Enemy Act because of the way the liquidation involved money coming from elsewhere. Then he has to deal with Andre Meyer, which was not that easy. Then in 1945, he has to rebuild from scratch Lazard Freres Paris. From scratch. There was nothing. There was not an office. There was not an employee. Not an easy life.

  The partnership economics made clear, though, that after Andre reduced his stake to 7.236 percent, as promised, this was now Felix's firm--at least from a day-to-day perspective--indicating definitively that the entire ITT-Hartford fiasco had little effect, if any, on the trajectory of his career. Felix retained his partnership share of 10.796 percent, so he would take home $1.1 million in 1975 (the firm made $10.2 million that year). Pierre David-Weill took the next-largest share at 9.431 percent, while Andre, who had the largest share in 1974, reduced his share, per his memorandum, in 1975 to 7.236 percent.

  WITHIN TWO WEEKS of Andre's memo, fate intervened, and Pierre David-Weill died unexpectedly. At Pierre's funeral, Disque Deane, by then a very wealthy man, was said to have made change in the collection plate. (Deane denied this.) "He was an immortal," Patrick Gerschel said, with some sarcasm, about Pierre. "So everyone at the funeral, which was in a big church in Paris, was in their finest uniform. But his mistress wasn't allowed to come. She had to send a wreath." Pierre David-Weill was buried in the Montparnasse Cemetery, in Paris, in the same catacomb as his father, grandfather, and brother Francois, who died tragically in 1934, at age twenty-seven, after the plane he was piloting crashed on landing at Orly Airport in Paris. After his father's death, Michel took over the running of the Paris partnership, but he remained some distance removed from New York, as Andre's intimidating influence was still strong, despite his Christmas memo. When the partnership agreement was amended next, six months later, to account for the hiring of two new partners and the retirement of one other, Felix had his percentage lowered slightly to 10.671 percent, and Pierre David-Weill's stake had been shifted, per the partnership agreement, into the David-Weill family account under "Lazard Groupement," which now received 18.735 percent of the firm's profits.

  But this new arrangement lasted barely a year, as Felix continued to have little interest in managing the firm. Around Thanksgiving 1975, with Felix increasingly consumed with solving New York's fiscal crisis and Andre debilitated by the pancreatic cancer that had been diagnosed in January--indeed, after an immediate operation, doctors gave Andre forty-eight hours to live, which he characteristically defied, but he had slowly been reduced to wearing a bathrobe and slippers around the Carlyle while awaiting his daily toast and tea--Lazard Freres in New York turned to an outsider, Donald Cook, then sixty-seven, to be the firm's "managing partner," effective March 1, 1976. Cook had been a close friend of Andre's, as well as chairman of the SEC under President Harry S Truman and the CEO of American Electric Power for fourteen years in the 1960s and 1970s. In the quaint argot of a simpler era on Wall Street, a Times article
explained that Andre had been looking for "an industrial man." Cook was given a 4 percent profit share; Felix's share was increased to 11.5 percent (in 1976, Felix was paid $1.43 million; he took no compensation as head of MAC); and Andre's was decreased again, to 6.56275 percent. "I have a certain degree of influence but I am not the boss," Andre told the New York Times. "The new boss is Mr. Cook. The managing partner of the firm is Don Cook."

  In the same article, which mentioned the ITT-Hartford fiasco only in passing, Andre lavished praise on Felix yet again. "Mr. Rohatyn is a very important man," he said. "He is absolutely unique. He could have been boss years ago if he had wanted it, but he wasn't keen for the responsibility." Indeed, the article touted Felix as a potential New York City mayoral candidate or for an important position in the Carter administration. Felix denied an interest in politics and said he didn't want to move his family to Washington "at this stage in my life."

  In an article five months earlier that attempted to predict who might end up in a Carter cabinet, even though it was still some two months before the election, Felix was of course mentioned as a potential for the Treasury post. He had been part of a gathering at the "21" Club in Carter's honor hosted by a group of New York businessmen in angling mode. He said, though, going to the nation's capital was "not something I yearn for." In another Times article, in March 1976, this one a fawning profile in the Sunday magazine titled "The Wizard of Lazard," he also denied interest in going to Washington. But it was more in the nature of--in keeping with the Nixonian shadow still looming in national politics--a nondenial denial. "Suppose I was appointed Secretary of the Treasury," he mused. "Can you see me driving up to the gates in my old BMW?" The Times, though, made clear Felix's associates "say" that the Treasury position would be "welcomed."