The last tycoons: the secret history of Lazard Frères & Co
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Felix, as usual, was partly correct. There would be a major market correction, in 1987, and a plethora of corporate scandals. Ironically--and unbeknownst to Felix--another Lazard banker, Marcel Katz, engaged in illegal activity related to the GE-RCA merger. Katz, then a twenty-two-year-old recent Brown University graduate, was a financial analyst on the deal. He passed along inside information about it to his father, Harvey Katz, a wealthy Houston businessman. Harvey Katz and his father-in-law, Elie Mordo, made more than $2 million in illegal profits by trading in the stock and options of RCA before the GE-RCA deal became public. When confronted by Tom Mullarkey, the Lazard general counsel, about how it came about that his father had traded so extensively in the RCA securities before the GE deal was announced, Marcel denied passing along the information to his father. Marcel resigned from Lazard in February 1986, four months after he started and two months after the announcement of the GE-RCA deal. In August 1986, the SEC and the Katzes reached a settlement whereby Harvey Katz agreed to pay a fine of $2.1 million and repay more than $1 million in illegally obtained profits. Mordo agreed to give up $1.1 million in illegally obtained profits. As for Marcel, the SEC charged that he "knowingly disclosed to Harvey Katz material, non-public information" that he had gleaned from working on the deal at Lazard. As part of a consent decree with the SEC, Marcel agreed to be permanently barred from working in the securities industry.
But there seemed to be no stopping the Wall Street deal machine and the riches bestowed upon the people who put the deals together. Despite Felix's claim to modesty, his lifestyle improved steadily throughout the 1980s. Whereas he had once lived at the supposedly shabby Hotel Alrae and drove a beat-up BMW station wagon, with the help of his partner Alan McFarland (who was president of the co-op board) and Liz's social connections--and his own growing wealth and fame--he moved to a duplex at 770 Park Avenue, at the southwest corner of East Seventy-third Street, considered one of the best buildings on Park. Today, Felix has all the obvious trappings of considerable wealth but is careful not to go overboard in the vein of Steve Schwarzman, Saul Steinberg, or Dennis Kozlowski. He and Liz now share a full-floor co-op apartment, facing Central Park, at tony 810 Fifth Avenue (at Sixty-second Street), decorated in simple elegance by the Boston designer William Hodgins with Impressionist paintings and eighteenth-century pastels and drawings. In the early mornings Felix could be spotted strolling down the fourteen blocks of Fifth Avenue on his way to Rockefeller Center, as he had always wanted to do when he convinced Andre to move the Lazard office uptown. Eight hundred ten Fifth is much like Felix--refined, unobtrusive, elegant, and exclusive.
And they have the requisite shingle-style mansion less than a mile from the beach on South Main Street in Southampton, where he invited McClintick to witness his annual, boldfaced-name Easter egg hunt. Another house they own in Southampton, which used to be where Liz summered, occasionally gets rented out to the likes of Barbara Walters. The Rohatyns also own a beautiful, intricate--and huge--log cabin home, designed by Liz's nephew, some seventy-two hundred feet above sea level, outside Pinedale, Wyoming, where they spend most of August and enjoy fishing and bird-watching. "Modest" is not the word that best describes these various real estate holdings but neither is "ostentatious." For his part, Felix has a number of fine paintings in his Fifth Avenue apartment. Jane Engelhard, the socialite wife of his former client Charles Engelhard, gave him a lovely Vuillard portrait of a woman. Andre Meyer gave him a wedding gift of an extraordinary Monet landscape painting of a small town in Provence nestled in and around a hillside, all seen from a distance. He also gave Felix a Bonnard painting of a seated woman who appears to be preparing to wash some clothes. Felix also has a few Canalettos here and there. But one has the sense that art is not his passion.
THE ROHATYNS' FACILE command of the New York social scene in 2006 makes it easy to forget that in 1985, Felix and Liz were at the epicenter of a self-inflicted if well-intentioned social faux pas. In a November 1985 speech at the City Club of New York about mass-transit financing, Felix made some comments about New York socialites, partially in response to a recent speech by Senator Pat Moynihan about the growing disparity between rich and poor in New York City. Felix chastised the city's upper crust by claiming that "while dazzling benefit dinners are attended by our richest and most elegant New Yorkers, and millions of dollars are raised for our golden institutions, it is increasingly difficult to find money for less glamorous needs. If our wealthiest institutions were to exercise more restraint over the proportion of charitable funds they try to absorb; if our most energetic, glamorous, and wealthy citizens were to become involved with community houses, the 'Y,' shelters for the homeless and programs for unwed mothers, then New York would be a much better place for her citizens." Sitting in the audience at the City Club that day was Kathleen Teltsch, the New York Times reporter who covered charities. She dutifully reported Felix's concerns. In separate remarks to Liz Smith of the Daily News, Elizabeth Rohatyn echoed her husband's concerns.
The Rohatyns' comments fell with a thud on their intended recipients. But they weren't done roiling the waters. In January 1986, Felix told the New York Times, "There is so much concentration on the gala and on catching a glimpse of the gala-goers, we are losing sight of the purpose of the exercise. The opulence of some of these affairs becomes an embarrassment when one remembers the misery the charity is trying to alleviate." Then followed Ron Rosenbaum's definitive take on the matter in a Manhattan Inc. cover story, which, though a bit of a send-up, explored not only the reaction from New York society but also some of the Rohatyns' proposed solutions. Rosenbaum interviewed the Rohatyns at 770 Park, surrounded by "porcelain and damask," and during his interview they all enjoyed "sherry and biscuits." He asked them about the firestorm of reaction from their socialite friends.
"They said they were pleased that two people have stood up and said much of what they were thinking about," Liz replied.
"But sweetheart," Felix interjected, "I think in fairness that what was equally important is how many people in our circle of friends who are involved in these things didn't really speak to you. It's a very eloquent silence."
"It's a pregnant silence," Liz said.
When told by Rosenbaum that his article would be published in the magazine about six weeks after the interview, Liz said to Felix: "We'll just have to plan to be out of town then, dear."
The coup de grace was a nasty, unsigned May 1986 article in the fashion industry bible, W, ominously titled "Felix the Cat and Snow White vs. the Social Sisters," which recounted the Rohatyns' battle with the then-all-powerful social doyennes Brooke Astor, Annette Reed, and Pat Buckley. The article suggested Felix had raised the issue to curry favor with New York's governor, Mario Cuomo--with whom he shared an interest in Sir Thomas More, the sixteenth-century statesman and martyr--in hopes of becoming Cuomo's secretary of the Treasury should Cuomo be elected president, or decide even to run. (Felix's later response: "Ludicrous.") The W article included this tasty morsel from one "Socialite B": "How dare they? The Rohatyns have a right to spend their money--if they spend any--with any charity they like. And so do I, and so do you. It amazes me that someone who works at Lazard Freres, which is not a place that you put your money if you're in a charitable mood, thinks he has the right to dictate how Annette or Pat or any of the others spend their time and effort. These women have gotten into the trenches for the Met and the Library and AIDS and everything else. So some of the parties were fancy. Some of RCA and GE's profits are fancy too. Does Felix criticize them? You bet your life he doesn't."
In the face of this controversy, a quite normal urge would be to lie low for a while and keep out of the press, especially if the new matter doesn't juxtapose particularly well with all that had just transpired. Felix, though, chose not to follow this path. Instead, he remained true to his unarticulated philosophy that there is no such thing as bad publicity. A week after a Newsweek article rehashed the charity ball debate, he was quoted in the New York Times talking ab
out the quality of the wines in the Lazard wine cellar and engaging in some polite banter with Robert Pirie, the CEO of Rothschild in North America, whose office was three floors below Felix's in Rockefeller Center. "What we serve," Felix said, "is not the crown jewel of our escutcheon." To which Pirie observed, "I've drunk Felix's wine, and he's right." Pirie, of course, could boast of the finest corporate wine collection and select simply from among the "homemade reds," including the Rothschilds' Chateau Duhart-Milon and Moulin des Carruades. "He gave me a Lafite-Rothschild," Felix told the Times, referring to one of the world's most expensive wines, "and I almost went to work for him as a result."
Felix was also being urged to challenge the U.S. senator Alfonse D'Amato, Republican of New York, in the 1986 election. He declined. "It's just not something I could do well or be comfortable doing," he said at the time. "Besides which I promised the Mets I will play shortstop for them next season." Upon hearing this, Frank Cashen, then general manager of the Mets, wrote Felix a letter. "Having followed your career with great interest, I was pleased to learn that you are now committed to playing shortstop for the Mets during the pending season," Cashen wrote. "To this end, I have enclosed your official 1986 Uniform Player's Contract and trust the terms are satisfactory." Felix declined Cashen's offer, too. "I was thrilled to get your letter with the contract for next season," he wrote back.
Imagine my dismay when, upon closer reflection, it now appears that I will not be able to play for you in 1986 for the following reasons: (1) My arrangements with Lazard Freres include noncompetitive clauses. It seems to me there is not much difference between a hostile corporate takeover raid and a high inside fastball thrown at somebody's ear. We are both in show business and I am afraid that our lawyers would feel that I should stick to our kind of show biz. (2) I am sure that Rafael Santana is a serious hard-working young man with a great future with your club. I shudder to think what would happen to his morale if, all of a sudden, he found a 58-year-old, left-handed shortstop on your roster. I don't want to risk creating such unrest. (3) Last, but not least, I must come to the issue of money. Your proposed contract at $75,000 per year seems to me somewhat on the skimpy side even though I recognize that my fielding has been erratic and that in my last full season (fraternity college in 1949), I hit only .089. In addition, I should point out that your proposal is way below the minimum wage scale set by the Investment Bankers' Benevolent Association and that $75,000 is what one of my very junior partners earns in one weekend, working on a deal that doesn't even go through. Nonetheless, I do appreciate that, under the circumstances, your proposal undoubtedly appears generous to you.
In response to Felix's letter, Cashen said, "I really didn't feel I wanted to give him the minimum, because of who he is"--major-league rookies in 1986 received a minimum of $60,000. "But his experience seemed a little thin." Felix's decision may have saved him from a salary cut of 99 percent, but it also cost him a World Series championship ring.
Felix's growing fame, though, could not insulate him and his family from the randomness of big-city life. Three times over the years, Liz Rohatyn was mugged on the streets of the Upper East Side. First, a bicyclist ripped a gold chain off her neck on Madison Avenue, then her wallet was stolen on Fifth Avenue, and, finally, her Hermes handbag was grabbed after she and Felix left a friend's Passover seder on East Sixty-second Street and were almost home. Felix said a waiter at Arcadia, a nearby restaurant remarked, "God, how can they do this to you? You saved the city."
Around the time Felix was joking around with the Mets, Michel, previously quite press shy, chose to announce his arrival on the international social scene. In the summer of 1986, while on his annual flight from Lazard, he permitted both the fashion reporter Christa Worthington and a photographer from W to visit him and his family at Sous-le-Vent, his aerie in the French Mediterranean town of Cap d'Antibes, near the Italian border. The resulting three-page color spread on the oversized pages of the mid-August issue of the magazine featured large pictures of many of the rooms and charming gardens of his "summer retreat," described as a "pink stucco wedding cake of a mansion with cool marble stairways, grand Moorish archways, potted lemon trees on its myriad of terraces and so many servants that one rarely sees the same domestic face twice in the course of an afternoon." There were revealing pictures of "Monsieur," clad only in his bathing suit, "conducting business" on the phone at the beach, thanks to a telephone cord that snaked throughout the vast property (it was before the days of commercial use of cellular phones). Right on the first page, W got in an ironic dig at Felix, which of course was the point of Michel agreeing to the article in the first place. After explaining that Michel made $50 million in 1985 as the "world's best-paid banker" (and supposedly $125 million in 1986), Worthington wrote: "But when it comes to personal publicity, the kind that one of David-Weill's employees, Felix Rohatyn, routinely attracts, this wheeler-dealer couldn't, frankly, give a damn. 'I don't know who you are. I don't know what you do, but I know you are famous,' is the punchline of the New York anecdote that makes him guffaw."
The reaction inside the firm to the W article about Michel was one of stunned amazement. "This was just a terrible article in W, a terrible article," remembered Damon Mezzacappa, himself no stranger to the society pages. "It was kind of silly. It showed Michel sitting in his bathing suit with a big cigar"--actually it was one of the few times Michel was pictured without his cigar--"and it was pretty unflattering, pretty unflattering." In retrospect, Mezzacappa viewed the W article as the distinct point in time when Lazard began to change, and not necessarily for the better. Michel had decided he now wanted some of the recognition that for years had been Felix's exclusively. "Michel really started to love the press attention," Mezzacappa said. "And Felix got pretty angry about it because the roles had changed, and a tension developed between the two of them." Michel's comings and goings began to show up in the society pages, and his picture graced, among others, the pages of Forbes, BusinessWeek, the New York Times, and the Wall Street Journal.
WHILE FELIX FOUND himself momentarily subsumed by his charity crusade and Michel by his own extraordinary foray onto the pages of W, Bill Loomis was embarking on a lonely crusade of his own: nothing less than a total revamping of the infrastructure and the quality standards for Lazard professionals, partners included. In September 1986, he wrote Michel a lengthy confidential treatise about what he thought needed to be done to maintain and increase the worth of a Lazard partnership, absent which he feared the position would be devalued. The memo at once highlighted Loomis's substantial intellect and writing skills, the depth of his appreciation for the firm's uniqueness, and, of course, the quintessential irony that now that he was a partner he wanted to raise the bar higher for other candidates. There was also a masterful display of sycophancy and advocacy. Loomis began: "In Euromoney six years ago, you said about becoming a partner, '...if you are serious with yourself, you will know it at the same time as I shall know it.' This is a wonderful statement. It motivated me, encouraged me to develop substantively, and at the same time, provided reason for patience. The values appeared to be leadership in terms of transactions and relationships, independent judgment and already acknowledged stature within the firm. Partnership was also valuable because there were so few."
The problem, as Loomis saw it from his perch, at all of thirty-seven years old, was that the standards for a Lazard partnership had been increasingly lowered--partnerships had become a "reward" for "hard work and excellence"--from the amorphous and subjective standards articulated by Michel in Euromoney. A "two tier" partnership structure had evolved: the real, rainmaker partners were getting paid a profit percentage of 1 percent or above, and as the standards fell, partners who were focused only on executing deals were getting paid far less. "Such a change at Lazard is analogous to going off the gold standard at a time when other firms are more rapidly devaluing the currency of partnership," he continued. "The standard for partnership is a critical part of our franchise which is in danger of be
ing eroded, almost imperceptively, in a series of individual decisions. As other firms become institutions where partnership is merely a title, Lazard should be moving in the opposite direction, as the stature of partners is critical to differentiating the firm commercially." Without a midcourse correction, Loomis feared, Lazard would by the early 1990s have sixty to seventy partners (which is exactly what did happen). "In terms of motivating young people, we will be in a box with a wrenching purge as the only alternative to mediocrity," he wrote presciently. He urged Michel to reduce the partnership ranks by "four or five" and to tighten the selection process. "The ability to be generous with the economics of partnership should not extend to generosity with the position itself, or it will lose value. The issue is criteria and absolute numbers, now and in the future. This is not a subject where consensus and exclusivity are contradictory concepts. Lazard would benefit from a return to partnership as your personal, and closely held, prerogative."
There had surely been nothing like this Loomis memo in the 138-year history of the firm. In the early days, partnerships were passed within the Lazard or David-Weill families, or among their close friends, and from father to son. Then Andre had divined, in his own judgment, who from outside the founding families was worthy of a Lazard partnership. True, unlike many other early Wall Street partnerships, Lazard had always been open to inviting non-family members into the firm--a point that Michel made frequently.