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

by William D. Cohan

  By 1986, the explosion of M&A deals and the introduction of spreadsheet software had exponentially increased the need for junior bankers with greater technical skills. For the first time, Lazard now had ambitious associates, many of whom were recruited from MBA programs or other firms. They were not content to just have a job at Lazard; they demanded a career at Lazard that included a clear shot at becoming a partner.

  ONE PART OF this initiative was to find a new partner to work in London for Lazard New York. Now, the mere thought of this was plenty controversial inside Lazard, regardless of who was hired for the post. Since the creation of Lazard Partners in 1984, Michel had taken some preliminary steps to have New York and Paris work more closely with London. Given the historic idiosyncrasies of the three firms, cooperation was not natural, especially with London. Not only had Andre and Felix basically ignored Lazard Brothers, but also Pearson's fifty-three-year control of the firm made it a far different culture from that in New York or Paris, despite being in many of the same business lines. London was not a partnership, and since the near liquidation in 1931 senior bankers there had no share of the profits. Lazard Brothers--often referred to as the "House of Lords" because of the preponderance of British aristocrats working there--was by and large a far more insular, genteel, and haughty place than its scrappier and meaner cousins in Paris and New York. "They were Pearson men," one former partner recalled. "They were--you know what they were? It was almost a priesthood. As far as they were concerned, they were in an independent bank with a shareholder, and they would not be intimidated or altered in their course."

  Then there was also the matter, discussed rarely and only sotto voce, that some of the leading lights at Lazard Brothers may have harbored more than a passing feeling of anti-Semitism, which, given the very Jewish nature of both New York and Paris, could not have facilitated cooperation. (Michel denied feeling any sense of anti-Semitism directed toward him but conceded that at Lazard Brothers such sentiments were possible. "I don't think these people thought for a minute to be anti-Semitic, but they didn't think for a minute of recruiting any Jewish people, either," he said.)

  In any event, with Lazard Partners more than two years old and Michel feeling the tug of his DNA, he decided the time had come to attempt to forge a greater sense of business cooperation among the three houses. To that end, he decided Lazard Freres, the New York partnership, should have its own representative in London, working out of the Lazard Brothers offices. The idea was not only to promote cooperation among the three houses and to participate in cross-border M&A transactions but also to begin to transfer the cutting-edge M&A techniques--the firm's intellectual capital--to London from New York. While all of this sounded rational, many of the leaders of Lazard Brothers suspected that what Michel really wanted in London was a spy who would allow the Sun King to get increasing control of London, too.

  In November 1986, Loomis recommended for the job a thirty-three-year-old American, Robert Agostinelli, who was then head of Goldman Sachs's M&A business in London. After a four-hour interview the prior evening, Loomis wrote Michel, "In my judgment, we should hire him, and I believe that there is now an opportunity to hire him."

  Agostinelli, born to immigrant Italian parents outside Rochester, New York--where he was known as Bobby--graduated from St. John Fisher College, a Jesuit school in Rochester, and from Columbia Business School. Agostinelli had wanted to work for Lazard after graduating from Columbia. He had even managed to work his way into the office of the Lazard partner Disque Deane, whereupon Deane offered him a job and asked him how much he expected to be paid. The going rate for associates on Wall Street at the time was $35,000 a year. However, Agostinelli recalled telling Deane, "'Given the opportunity and the ability to work with you, I'll take a discount. I'll take $25,000.' Because I thought that was the right way to deal with this guy." Deane was appalled. "Let me understand this," Deane said to Agostinelli. "You want me to pay you $25,000 a year for me to make you a multimillionaire? Son, don't you realize that this is a guild? That Lazard is one of the great Florentine guilds? That I'm one of the richest men on Wall Street today, and it's all because of learning at the right hand of Andre Meyer, and we're giving you--we don't hire people."

  Deane urged Agostinelli to go work on Wall Street for a "wire house" for three or four years before considering a return to Lazard, which is pretty much what Agostinelli did. Spurned by Lazard, Agostinelli first went to work for Jacob Rothschild and then Goldman Sachs. Reinvented as Robert, a suave, sophisticated, energetic international financier with extravagant tastes and slicked-back jet-black hair, who pretended to speak Italian but could not, he worked briefly in New York at Goldman before being dispatched to London to build the firm's fledgling M&A effort there. "I thought my career was over," he said about the move overseas and away from the Goldman power center at 85 Broad Street in New York.

  But in fact, he caught the wave. American know-how was beginning to have a major impact on London's financial markets at the very moment the M&A boom had spread to Europe. Goldman, led by Agostinelli, started to dominate the M&A league tables in London. Agostinelli started to get noticed, including by Michel, at the very moment he began to feel the intellectual pull, yet again, of Lazard.

  "Bob is not normal," Loomis's memo to Michel about Agostinelli continued. "He has been successful at Goldman, in part, precisely because he is not typical of Goldman." But there were words of caution, too. "Bob clearly has a large ego," he wrote, "and can be abrasive.... Quite apart from where he might actually be from, imagine him as a tough, confident Italian kid from Brooklyn who is in a hurry and is not willing to let anyone get in his way. He could be an enormous asset." Loomis strongly urged Michel to meet Agostinelli and consider him for the posting at Lazard Brothers. Soon enough, the requisite Michel meeting had been arranged, this time for breakfast at Michel's apartment at 810 Fifth Avenue. After a long chat, Michel told Agostinelli, "You are Lazard, and you should be a partner of Lazard. Certain things exist, and other things don't exist--this exists. You are a partner. You belong in Lazard, and you need to come here." Agostinelli joined the firm as a partner in early 1987.

  Having successfully orchestrated Agostinelli's arrival in London, Loomis turned his attention again to recruiting junior bankers. On January 20, 1987, he wrote Michel another confidential memo about his assessment of the Lazard associates and the need to actively recruit more of them. While noting that six associates had left the firm in the past year (including Mina Gerowin, the first female associate), he was complimentary of the ones who remained. But the combination of the associate departures and the pickup in M&A business made the need for new associates acute. "There are, for example, more partners than associates in M&A and Corporate Finance in aggregate," he wrote. He recommended to Michel an active recruiting campaign and even outlined the names and assessments of seven candidates then under "serious consideration" for jobs at the firm. Today, of the seven, three are partners at private-equity firms, one is a member of Parliament, one owns his own information services firm, and one, Michael Price, rose up the ranks at Lazard to become a partner. In the late winter of 1987, as the market was reaching dizzying heights, Loomis met with MBA candidates at Wharton and extolled the virtues of Lazard and how the firm prided itself on being different. It was an extremely seductive elixir. "Even senior people at other firms know remarkably little about Lazard," he told them. "We see no advantage to publicity. Indeed, there is a private quality integral to our franchise." He dismissed many of Lazard's competitors as "processors of capital" and celebrated the firm's differences. "We will not be all things to all people," he said. "The world is large and our firm is small. We will, however, continue to find companies that do not want to go through the checkout line of a financial supermarket." Furthermore, Loomis took up the fight for the junior professionals at Lazard who were expected to slavishly put together materials for a client meeting, only to be excluded from it at the last moment. Life at Lazard for the younger bankers was always a h
ard one, caught as they were between extreme overwork and the desire to emulate what they perceived as the idealized version of the suave Lazard partner who never unbuttoned his suit jacket in the office, all the while swilling Evian and smoking Montecristos. They often worked in sweatbox-like conditions, literally. In the summer, the air-conditioning in One Rockefeller Plaza was turned off at 11:00 p.m. One year, in the early 1990s, as the late evening hours bled into the early morning, and it became hotter and hotter inside the Lazard offices, the young male bankers still there took to sitting at their desks in their T-shirts and boxers. Finally, after a few days of this, a group of them worked up the courage to ask the administrative partner, Nancy Cooper, if she would ask the building management to keep the air-conditioning on until 2:00 a.m. "You people are the most ungrateful group we've ever had at this firm," she told them, completely seriously.

  LOOMIS ALSO FOCUSED on the concerns he had long harbored about his partners' lack of interest in a coordinated, dedicated, and professional new business development effort. He was greatly bothered both about the tendency of many Lazard partners "to wait for the phone to ring" to get new assignments and about preparing for the day when Felix retired from the firm or was no longer generating his perennial huge M&A fees. "There is a need to increase our ability to generate business in a tougher environment in order to balance our established ability to execute business," he wrote Michel. "We still have to spread the ethic of business development beyond Felix Rohatyn. In the absence of addressing these issues, we are likely to earn $50-$75 million less." The problem, as Loomis perceived it, was that Luis Rinaldini, "an extraordinary investment banker," who previously had been asked to lead the new business development effort, didn't have "a 'strategy' to increase our business." Indeed to Loomis, Rinaldini was "a particularly ironic volunteer as there is no demonstrated (versus expressed) inclination toward new business on his part, no consistent record of working effectively with peers and subordinates, scant inclination to organization, and a lexicon (e.g. 'control,' 'idiots,' 'screwed up,' 'inefficient') which hardly inspires confidence in his ability to encourage, as opposed to discourage, entrepreneurial activity by others who have equally large egos and ambitions." His perfectly logical solution was to have those partners skilled at developing new business teach those who were not and then to establish a set of loose and modest new business "goals." Loomis was right about the importance of these initiatives, of course, but like a battleship in the open sea, Lazard would not be turned around quickly or easily.

  Six months later--just after the Black Monday stock market crash, when the Dow Jones average lost 22.6 percent of its value, or some $500 billion, in one October 1987 day, and when nerves were still a little raw from the market's fall--Loomis wrote a firm, three-page typed response to Michel's simple question to him of what is "wrong" with the associates. Loomis explained that while the quality of the associates had improved throughout the mid-1980s, the quality of their professional lives had deteriorated. He recounted for Michel what his partner Jon Kagan had recently told him. "When I was an associate, I learned a lot from Jon O'Herron, but now I sense that young people are missing that experience. Now O'Herron talks to Golub, Golub talks to Mohr, and Mohr talks to them." He also railed against many of his partners' tendencies to ask associates to create overly lengthy presentations to be used in client meetings. Loomis called this phenomenon the "blue book syndrome" since Lazard's corporate logo was often displayed in dark blue, or on a dark blue background, and the covers of these presentations were dark blue as well. Loomis took his partner Lou Perlmutter to task in the memo on the matter of "personal respect" for his fellow professionals. "One example says it all," Loomis wrote. "Lou Perlmutter did not want Jamie Kempner to do the McGraw-Hill 'blue book' analysis. When a conflict on McGraw-Hill became apparent, he did not bother to tell Jamie to stop work on the book. Three days later, he returned Jamie's two-day-old phone message, and Jamie asked Lou the status. The response? 'Oh yes, I thought Loomis would have told you that it's dead because of a conflict.'"

  On Halloween 1987, two weeks after the crash, Loomis wrote Michel another emboldened memo, this one, essentially, about how to make Lazard a great firm. This goal was "of paramount concern" to him now that his fortieth birthday was on the horizon. His comments were made against the backdrop of the crash and the fact that, in New York, Lazard was on its way to making $133 million pretax, down some 26 percent from the $168 million the firm made the year before. "Associates understand very well that investment banks are under pressure and that Lazard may be under pressure in the future," he wrote. "We do not need references to Andre Meyer in 1974. Associates have already been offended by Felix gloating in the newspapers, as he did two weeks ago, about the Wall Street associates who would no longer earn $650,000 a year."

  He then tackled the even more divisive issue of relative partnership pay and offered Michel, unsolicited, ways to redress the inequities he perceived. "The current partnership distributions are analogous to transfer payments and social security in the national budget," he wrote. "On the whole, there is a tendency to be more generous with the last generation than with the next generation. The partners in the middle and upper end, like myself, should accept the necessary dilution in current income, if the result is a bolder plan for a stronger partnership." He recommended that Michel cut the profit percentage of Bob Lovejoy, a former partner at Davis Polk who had joined Lazard the year before as a partner. Michel was considering paying Lovejoy a healthy 1.75 percent (worth about $2.3 million) of the pretax profits, up from 1.189 percent (worth about $2 million) in 1986. Loomis thought Lovejoy should be kept at his 1986 percentage or even decreased to 1 percent (which would have been worth about $1.3 million, a significant pay cut). He proposed taking from Lovejoy and giving to partners such as Luis Rinaldini (an increase to 1.25 percent, from 1 percent) and giving four younger partners a twenty-five basis-point increase as well. "The current plan," he told Michel, "risks keeping Bob Lovejoy and losing Luis Rinaldini, instead of just risking the loss of Bob Lovejoy." Needless to say, Lovejoy and Loomis were never close.

  Loomis also urged Michel, "at the risk of seeming incorrigible," to institute partners' meetings. "I believe this firm has to evolve toward real partners, and thus, real partners' meetings," he wrote. "The two are inseparable." In closing, Loomis made certain Michel understood how respectful he was trying to be. "You have created this firm as it now exists with all of its stature and potential," he said. "The firm of Andre Meyer and his employees did not, could not, have such opportunities. You talk about firms of national character. You have a great firm that is fundamentally French in character, and another which is British in character. What you are still lacking is an American partnership. You can create a broadly based and self-perpetuating firm in New York--a great firm--only with partners."

  Michel said he appreciated these insights.

  FIVE MONTHS LATER, in March 1988, Loomis broached the matter of "blue book" banking again, this time in a memo to both Michel and Felix. Very little of substance had changed since he first expressed his opinions to Michel. And then in April, all of Loomis's boundless ruminations congealed in a four-and-a-half-page, single-spaced manifesto to Michel following a breakfast the two had together. "Fundamentally, the issues of concern are competitive strategy and competitive appetite for success," he wrote. "We have two philosophical alternatives. We can place, or we can win. A firm cannot win by seeking to place. Your comments about patience, about the ability to sustain the loss of 75% of the partners, about keeping the doors open and not forcing business and about Felix's simple cure of getting two or three major deals in the newspaper--left me deeply disillusioned. If the objective is only to place, then these statements are consistent."

  Loomis then criticized what he perceived had been years of drift at the firm. "This is the time to be commercially aggressive," he wrote. "And we have, after all, missed important opportunities. We came to junk bonds too late, valuation expertise too late, business dev
elopment too late, industrial focus too complacently, business organization not yet, the concept of investment of resources in business segments not yet. The business has changed and we do not own a self-perpetuating franchise. It is not enough to be a larger Lazard of the 1970's in the 1980's. We must be the Lazard of the 1990's, now. It is deeply troubling to me that Wasserstein, Wilson and Volker [sic]"--Bruce Wasserstein, Ken Wilson, and Paul Volcker--"albeit for different reasons, all explored Lazard and then went elsewhere. We can rationalize individual decisions but collective judgment is indicative. And Wasserstein, in particular, having seen us, chose to compete with us." Loomis then recounted, with names, the "deep-seated constructive frustration about our lack of competitive strategy and drive" that he had been hearing from a diverse group of bankers he described as the "best under the age of 50 plus Damon" Mezzacappa. "People are crying out for direction, an organization, a desire to be the best in a changed and changing competitive environment."

  Loomis continued by praising Michel as "extremely wise" but fretted that the firm could not "win" with the "dilution inherent" in having Michel running Lazard in New York and Paris and worrying about the problems of Lazard in London. He then lit into Felix in a most ungenerous way. "And Felix is both able and 60 in a world that is able and 45," he wrote.

  Contrary to his stature internally at Lazard, there is a widespread consensus of takeover specialists outside the firm that Felix is too conservative and is simply no longer a leading factor in the industry. Meanwhile, he "sits" on our best resources when our best resources should be encouraged to blossom. This is a lesser but still important aspect of our future business strategy. Felix's interests do not necessarily coincide with those of the firm. In a laissez-faire administration, he would, consciously or unconsciously, leave the status-quo for the next 3-5 years, not upsetting his apple-cart, thereby leaving a sudden and substantial void upon his departure or retirement. Felix can be an asset or a liability--depending on your decisions now. Since he can be a constructive genius or a destructive force, much more deliberate thought needs to be given to his role from the perspective of others here. People like me are being encouraged by his conduct to view him as an adversary to progress. This is sad as I admire him and respect him. We need to find a better way to allow Felix to flourish and others to benefit (rather than rebel) from his presence in the future. As opposed to concentrating Lazard's efforts around Felix, we need to focus our attention on the rest of the firm. Let's build up something else of value which he can adapt to gracefully--eventually.