Felix also made another attempt to instill a little discipline in the M&A team. He demanded, in a January 1979 memo, that associates in the group monitor the "broad tape," the old-fashioned paper version of the "crawl" that now appears at the bottom of the CNBC television screen, and immediately inform the "senior members" of the group of any M&A deals "within minutes of the announcement in order that we inform our clients in a timely manner." He instructed the associates, on a rotating basis, to write a one-page synopsis of the relevant deals. Felix's memo was an early and modest effort at marketing Lazard's services. He wanted the associates to answer the question "Should we call either of the companies involved to determine if our services may be useful and, if so, is there evidence to suggest, such as by means of a review of the directorate of both companies, who in this firm should make such a call?" But within a month, the system Felix had tried to set up had already malfunctioned. In a memo to all the partners, including Michel and Felix, Frank Pizzitola observed, "The procedure outlined in Felix Rohatyn's memorandum of January 24th, a copy of which is attached, appears to have broken down. We are going to make another concerted effort to see if this system will work to the benefit of us all."
Regardless of the system failure, in quick succession, the firm--principally Felix--represented United Technologies in its acquisition of Carrier, the air conditioner manufacturer; ABC in its acquisition of Chilton Books; and Unilever in its acquisition of National Starch. Indeed, the money once again started rolling in. After the shaky transition year of 1978, the firm earned $54.5 million in 1979, with fully 46 percent of that amount, or $25.3 million, coming from New York. Lazard as a whole had never earned more than $40 million in a given year and now had cracked the $50 million level. Felix earned more than $1.5 million in 1979; Michel made more than $4.5 million, just from New York alone. The partner Frank Zarb, for one, remembered this period as golden. "One year, we paid our entire expenses by the end of February," he said. "Invariably, we did the same thing. We'd look at the pipeline in December. Felix would panic. We'd put together a new business committee, have a new business committee meeting, talk about lists and bullshit. And by February, we were all so busy we couldn't go to meetings anymore. Year after year after year."
In the spring of 1979, two lengthy magazine articles--one about Andre in Institutional Investor, the other about Felix in The New Yorker-- added immeasurably to the firm's growing luster. The Cary Reich article in Institutional Investor about Andre, coming some five months before his death, was both an homage to his legacy and an early obituary. One observation, by the partner David Supino, captured Andre's mysteriousness. "He has a European penchant for elegant inconspicuousness," Supino said. "Even if everybody knows who he is, nobody knows all the facts." In short, it was the portrait of a man in full, complex and brilliant, relentless and flawed.
The New Yorker article coincided with Felix's brief departure from MAC and with a pair of testimonial dinners designed to honor the key participants in the more than three-year drama to save the city. One dinner was to honor Victor Gotbaum, then the executive director of the city's biggest municipal employees union. The ordeal of saving New York from bankruptcy had forged--for a time--a formidable friendship between Gotbaum and Felix and their wives. At the first testimonial dinner, more than thirty years ago, Felix described Gotbaum as "today probably my closest personal friend."
The closeness of their friendship would often find its way into print. Gotbaum was the best man at Felix's 1979 wedding to Elizabeth Vagliano, one month after The New Yorker article appeared. Indeed, it was Victor Gotbaum who convinced Felix, while walking on a beach in Southampton, that he had better propose to Elizabeth or risk losing her. "Liz was getting very frustrated with it and was very negative about the whole thing, the way Felix was behaving," Gotbaum explained. "We took this famous walk on the beach, Felix and I, and I said, 'You know, what the fuck's holding you up?' He made all kinds of excuses about money, how you'd lose this and you'd lose that, and so I gave him my customary stuff. I said, 'Felix, you're full of shit, you know, you're just full of shit. You're insecure about it, okay, but you're not going with anybody else. You seem to care for her a great deal.' I said, basically--in much better language than this--'Shit or get off the pot.'"
The four were regular dinner companions, and the Gotbaums rarely failed to appear at the Rohatyns' annual Easter egg hunt in the Hamptons. And thanks to Felix, Gotbaum's son Josh was a partner at Lazard for thirteen years, beginning in 1981. "Felix wanted him," Gotbaum said of how his son ended up at Lazard. "We used to congratulate each other that we had two sons that were smarter than we were. Josh in my case and Nicky in his case." It was an unexpected friendship, this one between the refugee multimillionaire investment banker and the labor leader prone to Khrushchevian acts of violence. Felix used to refer to them as the "municipal 'Cage aux Folles'" and talked repeatedly about their close personal friendship. In his speech at the Gotbaum dinner, Felix described their first meeting, in July 1975. "We had an extraordinarily enlightening night, which ended at five in the morning with Victor pounding his shoe and being very vocal and intimidating." Felix's retort to Gotbaum after that episode: "Look, you're not Khrushchev and this is not the U.N. So stop pounding." Gotbaum said that his display was simply part of the early theater of the principals' staking out their positions.
But something happened to this beautiful friendship. Inexplicably, Felix no longer speaks with Gotbaum, one of the saddest developments in the former labor leader's life. Some mark the day Gotbaum retired--in 1987--as the city's most powerful labor leader as the day Felix lost interest in him. But the break became complete when Felix returned to New York in 2001, after serving as ambassador to France. "It didn't unwind," Gotbaum said. "It didn't unwind. I think a better word is it somehow dissipated. And somehow began to disappear. And I think a lot of it had to do--it wasn't just Felix, it had to do with me also. He became very rich indeed. I think the best way of saying it is we grew apart."
For a moment or two in the 1980s, Gotbaum toyed with the idea of running for mayor of New York City. As he was thinking about this decision, he shared his private ruminations with his dear friend Felix, who supposedly told Gotbaum that he was sorry, but he just would not be able to publicly--or privately, for that matter--endorse him for mayor. Now, lacking the endorsement of his high-profile partner in solving the city's financial crisis put Gotbaum in a most difficult position. When he left Felix's apartment after this conversation and got into his waiting car, he did two things. First, he decided to terminate his nascent efforts to become mayor; and second, he cried. Although Gotbaum said years later that he never seriously considered running for mayor and didn't recall crying in his car (what man would?), he did remember talking to Felix about the possibility and being very disappointed about how nervous Felix seemed to be about the prospect of his running for mayor. "Felix was very nervous about it in terms of his growing constituency," he said. "That bothered me. That bothered me because I wasn't going to run for office, you know. I figured, fuck it. Why the hell he was nervous, I don't know. And you know, it just reached a point where I almost told him, like, 'Felix, fuck off. I'm not running for office and that's it. And, you know, let's cut the shit.' But he was very nervous about it. The truth is that if he said he wouldn't support me, I'd have gone anyhow, and, guess what, he'd have looked like shit if he didn't support me. So I just really didn't care in that sense. One, I wasn't going to run, and two, if I ever decided to run, I had him by the balls, because there's almost no way he could get out of supporting me."
The New Yorkerr piece made another point. While Felix's involvement with the city's financial crisis consumed much of his time for three-plus years beginning in 1975, neither he nor Lazard charged the city a penny. Nor did Lazard charge the city for the services of the other partners who, on occasion, worked with Felix on MAC. This was not as crazy as it sounds. The three houses of Lazard took precisely this tack during the franc crisis of 1924, when together they es
chewed their fees in favor of copious amounts of favorable publicity. True, Lazard was by no means a charitable organization, as Felix had told the Celler commission in 1969, but the amount of glowing press coverage that Felix, and by extension Lazard, received was immeasurable and invaluable. Felix's increasingly high profile, according to the New York Times, "propelled him to national prominence and showered more incidental publicity on the firm than it desired." The Times got half of it right: Felix had become a national figure, but nobody inside Lazard was complaining anymore about the firm's increasing renown. The days of Andre's false modesty were decidedly over.
Soon enough, Lazard would be asked for its professional advice to solve the financial problems of other cities in crisis, such as Detroit, Cleveland, and Washington, D.C. "I like big cities," Felix told Newsweek. "Civilization grows there. Religion develops in the open air, I suspect. But civilization--that is in the cities." Lazard was also asked by the state of Illinois to help with a crisis in public education finances and by the U.S. Treasury to help it evaluate the proposed $1.2 billion--later $1.5 billion--federal bailout of the Chrysler Corporation. (Lazard had been an adviser to Chrysler but had resigned over "policy differences.") Felix's role in the Chrysler bailout caused him once again to champion a new version of the Reconstruction Finance Corporation on the editorial page of the New York Times. "Somebody told me we were getting to be the Red Adair of municipal finance," he said at the time.
Felix estimated that had Lazard charged MAC for its services, the bill would have been in the range of $2.5 million. And Lazard was the only adviser to MAC to serve pro bono; Paul, Weiss, Simon Rifkind's law firm, albeit at a reduced rate, billed MAC--and received--$500,000 for the legal work necessary to set up the corporation. But when he resolved to leave his position at MAC, in January 1979, Felix "felt that it was unfair to expect his partners to continue on the old basis," Andy Logan wrote in The New Yorker. The Lazard partners met to discuss the situation and decided to continue the firm's advisory work with MAC, since the firm possessed an immense institutional knowledge about the city's financial picture. The firm also decided, though, to ask for a monthly retainer, at a reduced rate, which also specified that Felix would not receive his percentage share of the pretax income the MAC fees generated. The new chairman of MAC, George Gould, recommended hiring Lazard at a modest annual retainer of $250,000 (assuming this was all profit, Felix's sacrifice for not taking his 6 percent share was to have been $15,000). Representatives of Ed Koch, the new New York City mayor, were present at the MAC board meeting two weeks later when the board unanimously approved the Lazard arrangement.
It turned out, though, that after Felix had independently made some negative comments about Koch's proposed city budget, Koch decided to take his anger out on Lazard and its proposed financial arrangement with MAC. Before going to the dinner to honor Felix, Koch gave an impromptu interview to the New York Post where he derided Lazard's hiring, without a competitive bidding procedure, as "certainly a moral conflict of interest." When asked by a reporter if he was going to confront Felix with this issue at the tribute, Koch demurred. "This is Felix's Bar Mitzvah, and you don't say mean things to the Bar Mitzvah boy," he said. A predictable firestorm ensued. Two days after the Post story appeared, Lazard resigned its MAC assignment. "The privilege of public service does not carry with it the obligation to be subjected to needless abuse," the Lazard partner Jack Tamagni wrote MAC in the firm's letter of resignation. Governor Carey, the board of MAC, and Simon Rifkind all defended MAC's hiring of Lazard and urged the firm to reconsider.
A barrage of positive publicity for Lazard ensued, including a lengthy assessment of the matter in London's Economist, which hailed Felix's long record of "notable public service" and blasted Koch for remarks the magazine found to be "both ill-timed and needlessly offensive, apparently calculatingly so." More favorable press came when the Daily News reported that the city had actually asked Lazard to serve as its financial adviser, for a $500,000 annual fee, but that the firm turned down the opportunity out of concern about a possible conflict of interest with what Felix had been doing with MAC. (Dillon Read took the assignment, and the fee.) The News described the whole matter as "a pretty shabby episode" and said that "Ed Koch would be a lot better mayor if he would learn to use his brain before shooting off his big mouth." Koch made a feeble attempt to apologize to Felix. Those "who want to run the city should stand for election," he went around town saying. To which Felix replied, "I don't accept that notion. Nothing precludes me from criticism. I pay taxes. If you pay to see Isaac Stern and he gives a bad performance, then you reserve the right to criticize that performance. And the critic doesn't have to have had violin lessons."
A month after the testimonial dinners, Governor Carey asked Felix to return to MAC as its chairman. George Gould had resigned after only five months. Some Lazard partners believed Felix engineered Gould's resignation so that he could get back the powerful position he missed. "If Guidry can pitch relief for the Yankees, I guess I can pitch relief for the governor," Felix said, doing his best common man imitation. Lazard also returned to advising MAC, once again without pay. The next day Felix and Koch supposedly patched up their differences, although the tension would linger for years. The recollection of Koch accusing Felix and Lazard of having a "moral conflict of interest" still rankles. "I thought it was outrageous," Felix said in 2005. "I still do." But the two men were able to let bygones be bygones. "Well, he didn't hurt me," Felix allowed. "I mean, if he said that and if it had been true, that would have been a different thing. But no, he popped off in terrible taste and I reacted. After a while, we both grew older and we were both out of power. And he's an amusing guy, and every once in a while we have lunch together." Felix's return to MAC and the ongoing kerfuffle with Koch seemed to reinvigorate both Lazard and Felix (after he got back from his honeymoon), and now, led by the "bicameral" team of Michel and Felix, the firm began a lengthy renaissance, but not one without more than a few bumps in the road.
ON SEPTEMBER 9, Andre died at the Nestle Hospital in Lausanne, Switzerland. He had turned eighty-one six days before. Andre's death, of course, occasioned yet another rewriting of New York's partnership agreement. Michel now had the absolute authority, under section 4.1, to unilaterally make all decisions for the partnership. He no longer had to check with anyone at all. Publicly, Lazard liked to keep the fiction alive that New York had merely $17.5 million of capital, when in fact the partners' capital totaled close to $31 million, still unbelievably modest for a Wall Street firm--not that Michel or Felix found there to be a particular need for more money.
In the French tradition, a photograph of Andre was placed above his Lazard desk with a ribbon of black crinoline draped across one corner. One year to the day exactly, Michel removed the desk and the photograph. Outwardly, Michel had great respect for Andre, but according to one partner, "the fact was that he did not like Andre's ghost lingering around." Indeed, in the early days of Michel's stewardship, one of the quickest ways to become, in the words of one partner, "persona non grata" would be to invoke the memory of how "Mr. Meyer" would have done this or that. Michel slowly but surely began to put his own imprint on the firm. In addition to the high-profile Lehman Brothers raid, he made a few hires in the municipal finance area, authorized the new partner Frank Zarb to set up the "International Group" to advise sovereign governments, and promoted Stanley Nabi, who had been president of the New York Society of Security Analysts, to head and increase the assets of Lazard Asset Management, or LAM, after the death of Engelbert Grommers.
Mostly, though, Michel kept the firm focused on M&A work, and in 1979 alone Lazard advised RCA on its $1.3 billion acquisition of CIT Financial (Lazard's former partner in Andre's hugely successful SOVAC deal); Reliance Electric on its $1.2 billion acquisition by Exxon; United Technologies on its more than $1 billion acquisition of Carrier; and International Paper on its $805 million acquisition of Bodcaw. "They are making a fortune right now," a partner at a competitor told t
he New York Times. "They are a merger house, and mergers have hit it big." Indeed, Lazard would have its best year to that time, in 1979. In New York, profits had risen almost twofold from the year before. In 1980, the firm made even more money--$84.1 million, $39.2 million from New York and $29 million from London. In the two years since Michel had taken over the New York office, pretax income had risen from $12 million to $39 million. His five-year stewardship of Paris had increased pretax income from $6.8 million in 1975 to $15.6 million in 1980--thanks to Paris's involvement in a wildly profitable partnership that produced precious-metal coins for the 1980 Moscow Olympics. Felix made almost $2.4 million in 1980, and Michel, from the New York profits alone, took home more than $7 million.
The last tycoons: the secret history of Lazard Frères & Co Page 31