The last tycoons: the secret history of Lazard Frères & Co
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THE MID-1970S were a period of profound change across Wall Street. The back-office crisis of the early part of the decade, which Felix had helped to solve, resulted in any number of old-line brokerages being merged out of existence and others being liquidated. Then, on May 1, 1975, the SEC ordered the end of fixed commissions on stock transactions. "After 183 years of doing business under fixed commissions, Wall Street will have to respond to the challenges of free enterprises," Donald T. Regan, then the chairman and CEO of Merrill Lynch, told the New York Times. Added Billy Salomon, the head of Salomon Brothers, "There was a time when a client handled by X firm stayed with that firm. Today it's a dog-eat-dog world." That decision began to break the clubby covalent bonds that had existed between many Wall Street firms and their corporate and institutional clients. This benefited firms outside of the club (many of which happened to be predominantly Jewish), such as Lazard, which had lower overhead and could gain access to new clients as a result of the rapid breakdown of the conventional order. The decline in brokerage-fee revenues further exacerbated the need for the large brokers to consolidate, so, among others, Bache Halsey Stuart, itself formed by the merger of Bache & Company and Halsey, Stuart & Company, bought Shields Model Roland. Then Paine Webber bought Mitchell Hutchins. If this weren't enough commotion, a number of the old-line investment banking partnerships were facing succession issues. Not only was Lazard struggling with succession, but so were Allen & Company, where Charles Allen Jr., then seventy-four, was slowly disengaging from the highly secretive media boutique; and Dillon, Read & Company, where Clarence Dillon, then ninety-four, no longer came in to the office. Sidney Weinberg, Gus Levy, and Bobbie Lehman--giants among men--had died. Pete Peterson, Felix's old friend from Bell & Howell and the Nixon administration, had left Washington in 1973 to help rescue the financially troubled Lehman Brothers, after turning down an offer from Andre to come to Lazard. Then there were both Loeb, Rhoades & Company, run by John Loeb, then seventy-four, and Kuhn, Loeb & Company, run by John Schiff, then seventy-three. Both of these firms were pondering their future, given the aging of their leaders. The two even considered merging their complementary businesses as a way to compete more effectively. In the end, both Loeb, Rhoades and Kuhn, Loeb ended up being bought, at separate times, by Lehman Brothers.
Michel, ever protective of his birthright, determined early on not to let Lazard fall prey to the merger forces running rampant on Wall Street. He needed to make Lazard more profitable and the Lazard partnership more meaningful. His decision to demote seven partners (including Mel Heineman) and then force another seven (including Andre, at his request) to become limited partners sent a powerful message. "It was a Napoleonic first act, if you will," one partner remembered. "I am sure it was all calculated to instill fear and trembling in the troops." Many said Michel took a page from Voltaire, in Candide, where the great French writer explained how the British executed one of their own admirals who lost an important battle "pour encourager les autres" (to encourage the others). Michel also declared that for the next four years, he had no intention of promoting any internal candidates to the partnership ranks, a decision that added to the frustrations of the firm's long-suffering younger bankers. One of the demoted partners, Peter Lewis, remembered being "disappointed" by Michel's decision but also understood his logic for it, given that Lewis's main focus at Lazard to that point had been on Blackwell Land, the huge agricultural enterprise in California owned by the original family heirs, including Michel, individually and not by the firm. Lewis eventually became a partner again after he "reinvented himself as an M&A banker." Peter Smith, who also was demoted, reclaimed his partnership two years later. Mel Heineman thought his demotion related directly to his SEC testimony and his clear-eyed sentiment that he would not go to jail to protect Felix. Not surprisingly, Felix took a different view of the cuts. "We cut back quite a bit," he said. "It was a brilliant piece of work." He noted that as a result of the cuts, a Lazard partnership was now more "meaningful," as in, the remaining partners all made more money. "It was a difficult, thankless task," he added.
Michel elaborated: "Particularly during the years when Mr. Andre Meyer was sick, there was a natural tendency to satisfy the ambition of young individuals by naming them partners relatively quickly. But to me being a partner is not an honor; it is either a fact or not a fact. It is much better to be a highly paid senior vice president when you are in fact doing the job of a senior vice president than to be a partner, which attracts other partners' attention to the fact that you're not completely right to be one." Or, put another, more metaphorical way, Michel explained, "It was like looking in the mirror. You don't realize you're gaining weight, until one morning you look at yourself and realize you're getting fat. Then you do something about it." In another act laden with symbolism, Michel moved into Andre's old office but was careful to keep Andre's desk exactly as it had always been, untouched. He moved his own desk into the opposing corner, near where his father had a desk during his infrequent visits to New York. He kept the Lazard offices as drab as ever and echoed Andre's old saw: "Luxury helps at home, not in the office." Partners noticed that while Michel may have occupied Andre's office, he was not Andre. "Mr. Meyer wanted to know every time a pebble turned over," the partner David Supino told Cary Reich approvingly. "Not Michel." Michel also, for the first time, invited Lazard Brothers, the U.K. affiliate still owned 80 percent by S. Pearson & Son, to invest $1.5 million in the fixed capital of Lazard in New York and to receive a 1.5 percent stake in the firm's profits. "It is a little different if you are a partner of the owner than if you are just a cousin of his" is how Michel put it at the time. This was a critical first step toward Michel realizing his vision to reunite the ownership of the three houses of Lazard. "The relationships are getting closer and closer all the time," Michel explained. "I have a sense of being at home when I am at Lazard Brothers. To me it's very much a part of the family."
But perhaps his most important initial decision was to recruit four highly productive partners from Lehman Brothers to Lazard in New York. The defection of the Lehman partners--known as "the Gang of Four"--in the wake of the Kuhn, Loeb merger, was organized and led by James W. Glanville, an oil and gas banker with one of the largest ownership stakes in the Lehman partnership, and included Ian MacGregor, the former chairman of AMAX, a U.K.-based minerals and coal giant, Alan McFarland Jr., and Ward Woods, two younger partners who had worked with Glanville. "Last month, four Lehman partners chose the more measured music of Lazard, with its golden notes and emphasis on solo turns, over the orchestrated innovations of the much larger Lehman firm," Fortune reported in September 1978.
Notwithstanding the sweet music being composed in the pages of Fortune, this was a highly controversial decision inside both firms, the reverberations from which are felt by many of the individuals involved to this day. Glanville hated that Pete Peterson was pushing Lehman to become a full-service firm and opposed him openly on the executive committee. Beyond that, he just hated Peterson. The feeling was mutual. "Before coming to Lehman Brothers," Peterson told Ken Auletta in Greed and Glory on Wall Street, "I was told the firm itself was seriously divided and Jim Glanville was at once very productive in the energy area and perhaps the most divisive and even vindictive of the partners. I found both statements to be accurate." One month before his first discussion with Michel about decamping, Glanville asked Lehman to write a $5,000 bonus check out to William Loomis, an associate who worked for Glanville. Peterson and the executive committee rebuffed Glanville since determining bonuses was not the purview of an individual partner but rather the responsibility of the firm. "So it is to be war," Glanville wrote Peterson after the rebuff, in July 1977.
Soon Glanville "whispered" his displeasure with Peterson and Lehman to the Lazard partner Frank Pizzitola, who knew Glanville from energy deals. Thanks to Pizzitola, Glanville met with Michel in August 1977--just before he took control--to see "what Lazard might be like under its new managing partner." In December 1977, Lehman c
ompleted the acquisition of Kuhn, Loeb, but the tension between Glanville and Peterson continued. Michel and Glanville met again in the spring of 1978, and afterward Michel urged Glanville to meet with Felix. Felix met with Glanville several times and even volunteered to reduce his percentage of the firm's profits to help recruit the Lehman team. (Felix voluntarily cut his points by 25 percent, to 6 percent, from 8 percent, in September 1978, which cost him $240,000 that year; Michel, too, reduced his points to 13.2 percent, from 19.1 percent, but his stake went back up to 18 percent the next year while Felix's take stayed fixed at 6 percent.)
On the morning train from Connecticut, Glanville confided to his old client--now a partner at Lehman--MacGregor that he was thinking of moving to Lazard and that he "trusted small firms," a phrase that became a bit of a mantra for the Lehman crowd at Lazard. "Count me in, Jimmy," MacGregor said. Woods and McFarland joined the others. With word beginning to leak out, though, Glanville needed to move quickly. Michel interrupted his August vacation and took the Concorde back to New York to negotiate with each man individually--Glanville won a 3.75 percent stake; MacGregor 2.5 percent; Woods 2 percent, and McFarland 1.45 percent. The Gang of Four also flew to Switzerland to meet with Andre. "I was very well impressed by their perfect manners," Andre said at the time. On August 8, the four submitted their resignations to Peterson, and the next day he announced the departures in the midst of a strike of New York newspapers. Peterson hoped the news would go unnoticed. But he was also extremely upset at the time about the unprecedented raid. "Peterson was not happy for a minute after we hired those people," Michel said, with some understatement. "But my personal relationship with him has remained quite good." There were rumors of "angry shouting, sealed desks, chauffeurs dismissed, lawyers hired," according to Fortune. To which Auletta added: "Door locks were changed, credit cards were canceled."
Michel let it be known he had trekked down to One William Street to tell Peterson what he had done. "With his big cigar, like he was on some sort of French diplomatic mission," Peterson recalled. And according to Auletta, at some point Peterson went to see Michel to warn him that Glanville was "poison." Glanville hired the ubiquitous Simon Rifkind to fight Lehman, after, according to Glanville, Peterson "cancelled the bonus of my secretary and of the other secretaries who were leaving." Other charges were leveled at Glanville as well by his Lehman partners. First, according to Greed and Glory on Wall Street, members of the Lehman executive committee accused the Gang of Four of attempting to buy a real estate asset from one of their oil and gas clients, without telling the firm the client had made the offer to them, a charge Glanville vehemently denied. Peterson said he called a meeting of Lehman's top partners to discuss what Glanville had done. He invited the tax partner to show the other partners the papers related to the Glanville deal. "Everybody was pretty appalled," Peterson recalled, and the committee voted unanimously, 8-0, to tell Glanville that he had to leave the firm. The following Tuesday, Michel made his pilgrimage down to One William Street to see Peterson and tell him that the Gang of Four were coming to Lazard. "And I just sat there and kind of smiled," Peterson said. "Obviously Glanville had told [Michel] nothing about this whole situation. But Glanville had undying enmity for the firm and for me and so forth. And that was my last year of contact with Andre and Michel. I virtually never talked to them again."
The second charge against Glanville, equally serious, was that he was anti-Semitic. The short, stocky Glanville was a Texan, born and bred. His father was a history professor at Southern Methodist University. Glanville graduated from Rice with a degree in chemical engineering, and then went to graduate school at the California Institute of Technology. All he wanted to do was work in the oil business, and he started his professional career as a petroleum engineer for what is now Exxon-Mobil. Lehman recruited him to be an oil and gas banker in 1959, and according to Auletta, he became a Lehman partner in 1961 (Fortune said 1963). In an interview with Auletta, Glanville answered the charges of anti-Semitism: "It is the sort of typecasting you give to someone when you can't figure out what to say about them." Glanville's Lehman partner Lew Glucksman, a Jew and occasional ally of Glanville's, said of him: "People have said Jim Glanville is anti-semitic. That's bullshit! He was a guy with lots of strong opinions on every subject in the world."
Twenty-eight years later, the rift caused by Michel's recruitment of the Gang of Four is still palpable. Actually, the Gang of Four was really the Gang of Six because two Lehman associates--Bill Loomis and, two months later, Dod Fraser--were part of the block trade. (Ultimately, Loomis would have more impact on the future of Lazard than anyone else Michel had recruited that September day.) Sitting in his office at Bessemer Securities in Rockefeller Center, Woods reluctantly confided: "Pete is a friend of mine now, and I have great admiration for him. He wasn't then. It was a very difficult separation, so I'd rather not talk about it. It was very bitter. Let's put it this way. I came back from visiting clients. And I got a call in Tulsa. I was on my way back. I got a call in Tulsa from my secretary, in tears, because she'd been kicked out of the office and it was locked. And then we had a settlement, which I negotiated with Pete, and it was over. But there was a little scratching around. They tried to make it difficult. They were very angry. We had a significant percentage of the clients in the firm, and we were lucky enough that most of them went with us."
For his part, Felix never liked Glanville as a person but respected his effectiveness as a banker. He sided with his friend Pete Peterson on the subject of Glanville's anti-Semitism. "I mean, Glanville was a really difficult, very difficult, very rather sinister person," Felix said. "I mean he was very, very racist, very anti-Semitic." Indeed, Glanville gave his critics all the ammunition they needed about his anti-Semitism in a 1980 letter he wrote to his former Lehman partner George Ball, who had once been an undersecretary of state and was a close friend of Peterson's. (When Ball joined Lehman in 1966, Frank Altschul wrote a letter of "congratulations" to Bobbie Lehman.) Ball had authored a piece in the Washington Post critical of Israeli policy. Glanville wrote him: "My view on U.S. relations with Israel completely in line with yours (as they should be, as I learned from you) but I doubt if they receive much sympathy from the members of your Executive Committee. The members of that Committee are overwhelmingly of one ethnic persuasion with the exception of one gentleman who found it necessary to change his name in order to disguise his heritage"--a reference to Pete Peterson, who is Greek. "This is the same Committee that exhibited such glee over the opportunity to delete four Presbyterians from their list of partners." After Glanville's letter became public, many Lehman partners demanded that Peterson initiate a libel suit against him. "Glanville wrote one of the most blatantly anti-Semitic letters I've ever read, about how my partners' first loyalty was to Israel and not to the United States," Peterson said. "And the chairman has hidden his ethnic persuasion, which was ridiculous. Everybody knew I was Greek. So what? And it was just vile. And my partners are now absolutely furious. And they wanted to sue him for libel and so forth. I said, 'Look, in this business of an eye for an eye and a tooth for a tooth, everybody gets disfigured ultimately, and let's just forget it. And I'll call and tell Michel and I'll see if I can get a commitment from him that he totally clamps down on Glanville.'"
Peterson called Michel and asked to see him, but not in his office at Lazard. They agreed to meet at Michel's Fifth Avenue apartment "with his big cigar and so forth." They sat down together to discuss Glanville's letter. "And I recall saying," Peterson said,
"Michel, I have been in this business now for a while. I know it's a very tough business. But I assume there are levels below which we don't stoop. And somehow the questioning of the patriotism of some of the firm's partners strikes me as well below the levels that are appropriate and acceptable behavior." So I said, "I'm going to show you this letter. And then all I ask from you is a commitment that you're going to get Glanville and set him down in your office and tell him he can never, ever again do such a thing." And
then he lit up that big cigar. He said, "Well, everybody knows that Glanville's a bigot, but he produces a lot of business." I said, "I thought I was having a discussion with you on another level. I know he produces a lot of business. I know he is one of the biggest producers. But I'm approaching you on a level of civil behavior." And Michel then said, "Well, he has a lot of clients." So I got up and walked out, and I don't think I ever spoke to him again."
For his part, Michel said he has always maintained a cordial relationship with Peterson.
Controversies aside, Michel had sold the Gang of Four on the wonders of Lazard. Woods recalled what he had said to them:
There was a place in the world for people, serious people with global connections who can do things on a more sophisticated, less bureaucratic, individual basis, where there will be three, or four, or five partners who you can trust to go out and represent--or maybe ten partners, if you get really lucky--who can really go out and sign up any company and have the sophistication, the knowledge of the business to actually be able to do what the client has asked you to do, in a way that the client is happy and comes back. It's that simple. Michel said to me, "We don't need money. Swiss Bank Corp. wants to put in $500 million and have Lazard be a global investment bank like Goldman Sachs, or like Morgan Stanley. I don't want to do it. We don't need to do it. We have this wonderful franchise that no one else has, and we'll nurture it. We've got partners in Paris, partners in London. They're there and they are part of Lazard. They do share business. And we've gotta fix New York. But we're going to fix it."
Woods also spoke to Michel about Felix and his role. And Michel told Woods that Felix had offered to cut his percentage so the Lehman partners could join the firm with a proper economic incentive. "And frankly, we talked about Felix," Woods said. "Felix was a wonderful partner. He never was political. He didn't give a shit. He was very pleased to have me do business. He never tried to interfere or anything. He has his guys, and those guys knew where their bread was buttered. But I wasn't one of those guys. And he was great. We had a good time."