The last tycoons: the secret history of Lazard Frères & Co
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Finally, after all the critical words, Loomis offered his solution. He believed Michel should lead and delegate, by appointing--and overseeing--a new management committee comprising Mezzacappa, from capital markets, Norm Eig, from asset management, and...Bill Loomis, with a "disproportionate responsibility for banking." He wrote that this was only one alternative but urged Michel to give it a try. "If in 2-3 years, this does not work, so be it," he continued.
The risk of the firm taking a bold step now is less than the risk of the firm not taking it. I am young and ahead of my time. (But I am also ahead, after all, of David Verey.) There would be more pressure to increase the percentage of Ward Woods (producers like Felix, Ward, and later, Luis, should receive resources, respect, fame and cash but not the right to terrorize organizations and harass young people at the firm), and you need to hear the opposition of Lou Perlmutter. Beyond that, there would be the natural but strong resistance to change and direction where there has been a lack of commercial discipline. I am prepared for that as long as I have your support and a close relationship with you. I am less prepared for more large committee meetings which mimic the more serious focus of the 25 professionals at Wasserstein, Perella. And I am not anxious to be Lazard's Oliver North who takes the next 25 hills without authorization and is anointed or disowned according to the ultimate result.
He urged Michel not to let the good men of Lazard go stale.
As if this were not aggressive enough, a month later Loomis urged Michel to take on London next. He said London "is a long-lasting boil which should be lanced, once and for all, and then healed by respect for national tradition within certain parameters of commercial conduct and respect for you. Any other approach is, at best, confusing and has nothing to do with the tradition of Lazard. You are that tradition. My fear is that you, like the British, draw back because one is British and one is French, and it all fits into an inherited history of political sensitivities. You are above such defensiveness by your authority, which we, the Americans--the youngest and thus the most brash of the lot--have recognized out of personal and commercial respect for you as Lazard." For Loomis to be flying this aggressively close to the Sun King could result in only one of two outcomes: either his own feathers would shimmer in the reflection, or he would end up like Icarus, tumbling to his death.
FOR A WHILE, remarkably, he soared. The former "world's best associate," whose father was a respected career naval officer, was about to get a battlefield promotion. Somehow he had turned all of this frank talk into career advancement. Just eleven days after his "lance the boil" memo, in a May 20, 1988, memo to the "Banking Group"--most of the New York partnership--that could have been written by Loomis himself (and probably was), Michel and Felix sounded the trumpets, albeit in a low-key way. "The excellence of our partners and associates, as well as our business philosophy, have allowed us in the past few years to outperform other firms," the memo said. "At the same time, our banking business is larger, more complex and faces tougher competition in the future." Felix and Michel wrote that Lazard had a finite "window of opportunity" to exploit the unresolved internal problems of larger firms and the still evolving role to be played by several emerging advisory boutiques. "We need to address successfully difficult issues of organization, priorities, allocation of scarce resources, new undertakings, momentum and accountability for performance," they continued. "Without fundamentally changing the nature of the Firm, a more formal process and some centralization of authority are required to achieve our banking objectives."
With that, Loomis became the firm's first official head of investment banking. To be fair, through the Andre years, of course, others such as Felix, Frank Pizzitola, and George Ames had loosely held the reins of the firm's advisory business. But they all understood the pointlessness of the role in a small firm so totally dominated by the presence of Andre Meyer (in Felix's case) and Felix (in Pizzitola's and Ames's cases). Loomis became the first person under Michel's leadership to successfully maneuver himself into a position of relative authority just as it was beginning to mean (a little) something more than just being a clerk for Andre or Felix. Loomis was to "work closely" with Mezzacappa to ensure an "effective relationship" between banking and capital markets, and, of course, he was to "seek guidance" from Felix and Michel, "as appropriate."
The memo was eerily reminiscent in its conclusion of those few written some fifteen years earlier when Andre pretended to cede some of his absolute authority to Donald Cook. "We also intend to continue to use small meetings with a few partners to discuss issues of business direction or potential engagements with policy implications for the Firm," they concluded. Loomis's promotion was an "evolution not a creation" that sprang from his initial and ongoing concerns about the proper treatment of the junior professionals. This had led him to be given incremental responsibility first for recruiting, then for assignments, then for a general review of the promotion process, then to head of banking. In a firm famous for the independence of its idiosyncratic bankers and where Michel alone still made all the important decisions regarding partner pay, promotion, hiring, and firing, for Loomis to be named head of banking appeared to be, at best, an oddly Pyrrhic victory. But there was no denying his role, pretty much out of nowhere, as a member of the loosely taken management committee and the important symbolism of moving his office, at Michel's request, to between Michel and Felix.
But Lazard being Lazard, May 1988 would mark for Loomis the beginning of a thirteen-year period that left him resembling Saint Sebastian, where his "authority was always informal" and his frustration was always immense, caught between the Sun King and an ever-changing committee of senior partners ready, willing, and able to launch arrows at him. Whereas Felix had an intuitive sense that a management role of any kind at Lazard "was not a winner," Loomis, whether through ambition or naivete, possessed no such instinct. He would have to learn the hard way.
THE FIRST INDIGNITY came within ten days of his appointment. Business-Week ran its first-ever cover story about the firm (as opposed to just about Felix)--and Loomis was not even mentioned. The article, titled "The Last Emperor," featured on the cover an imperious-looking Michel, hair slicked back, holding one of his ubiquitous Cuban cigars. He acknowledged that as a man with four daughters, none of whom had an interest in finance, he was likely to be the last David-Weill to lead Lazard. But at a mere fifty-five years old, he was quick to point out this was not about to happen anytime soon. "It's more than probable that the firm will move outside my family when I die or retire," the emperor acknowledged. "I'm getting used to the idea--slowly." One of the reasons he was in no hurry was simply how well the firm was doing and how fabulously wealthy he was becoming as a result. "Compact, steady Lazard Freres, meanwhile, is thriving as never before," the article stated. For the first time since the creation of Lazard Partners forced the firm to reveal five years of its historical financial performance, Michel shared the firm's financial performance: In 1987, New York made $134 million before taxes (but down from $168 million in 1986); Paris made $70 million pretax (up from $36 million in 1986, reflective of the firm's luck and skill in avoiding nationalization); and London made $58 million (although this number is after payments to partners, whereas the New York and Paris numbers are before those payments).
Michel received in 1987 about 20 percent of the profits from New York alone, or some $25 million, and likely another $20 million or so from the other two houses. Not a bad haul, making him one of the wealthiest bankers on Wall Street with a net worth around $1 billion. (Michel, though, was a distant runner-up to Mike Milken, of Drexel Burnham infamy, who made $550 million in 1987.) Felix's 6 percent take put his 1987 pay at around $8 million.
The BusinessWeek story also trotted out the usual Lazard myths--some of them patently untrue--and embellished upon them. Back was one of Michel's favorite descriptions of the firm as a "haute banque d'affaires," an elite private bank. "To me, private banking is a state of mind vis-a-vis the world," he explained yet again. "It means no
t being in the way, being one who helps instead of being a power unto oneself. I see our role as very, very modest." He shared this same mantra with the new young hires, when he met with them once each year. There was also mention of Lazard's renowned frugality with regard to office space, with a new twist: When workers found a "magnificent slab" of marble in the Lazard lobby on the thirty-second floor of One Rock that Andre had considered "ostentatious" and ordered covered up with drab wallpaper, "there was serious discussion around here about putting the wallpaper back," one partner said. Michel made the decision to reveal the marble. "That's the new Lazard," the same partner said, joking. "Damn the overhead." There was the de rigueur discussion of Felix's prowess as a deal maker, his devotion to public service, and the need for Lazard to prepare for the day when he was gone. "It is beginning what might be called its post-Felix era," BusinessWeek confided, "which is greatly complicated, to be sure, by the fact that Rohatyn is still very much a force at the firm." But there was also the acknowledgment that the firm had grown and Felix, alone, could no longer generate sufficient business to cover everyone's high-level compensation expectations. "Lazard is not exactly kicking down the door any more in terms of major new business coming to Felix Rohatyn," Eric Gleacher, then head of M&A at Morgan Stanley, told the magazine hopefully. But Michel dismissed this speculation. "The intimacy between Felix and I," he said, "has been the cornerstone of the firm's success--not a cornerstone, the cornerstone." Take that, Loomis.
Part of Lazard's problem was the "cruelly ironic" fact that--as the economist Joseph Schumpeter said about capitalism itself--the seeds of its own destruction were being sown by its own unparalleled success. As Felix aged--he was sixty at the time of the BusinessWeek piece--he was steadily selling off the firm's historic clients, among them RCA, Revlon, and Owens-Illinois. Loomis had recognized this as a problem but had had no success in solving it. This dilemma, while hugely lucrative in the short term as large fees rolled into the firm, presented Michel with the long-term conundrum of somehow attracting new clients.
Lazard had always resisted prostrating itself for business. "The best way to get business is over the transom" is how the onetime partner Bob Lovejoy put it, much to Loomis's ongoing consternation. Unlike the other, far better capitalized Wall Street firms, Lazard had few ways, other than sound advice, to get its hooks into new clients. The firm didn't make corporate loans and rarely underwrote corporate bonds, high-yield bonds, or corporate equity. Once the leader in principal investing--the buying and selling of companies for its own account--Lazard had long ago abandoned the business, leaving behind the possibility of healthy profits and a steady stream of captive clients.
The article revealed that while there would be no changes to the basic business model, created by Andre, of offering blue-chip clients world-class advice, Michel was now prepared to make tweaks on the margins. First, following Loomis's recommendation, the firm would make a stab--perish the thought--at actually calling on clients with thoughtful M&A ideas. Partners made a list of likely prospects and organized themselves into four separate teams of about twenty professionals each, including six partners per team. Each team was responsible for particular industries. Loomis was to assist coordination among the groups as well as be part of the group focused on the retailing and financial services industries. This surely had never been done before at Lazard. "Everything is being done to fan out clients and encourage quite a number of people to go out and get business," Felix said.
Another new development was the introduction of a $1.5 billion white knight fund--so called because the firm used the capital to help corporations under attack from raiders by putting a slug of stock into friendly hands--to be called Crossroad Partners and headed by Lester Pollack, the former general counsel of Loews Corporation (a Felix client) and a former partner of Odyssey Partners, an early private-equity fund. Ali Wambold, another Lazard partner, by way of Lehman Brothers, was to work with Pollack on investing the fund.
The fund, to be an entity separate from Lazard, had a five-member board made up entirely of Lazard partners, including Michel. The Lazard partners invested $60 million of their own money in the fund. And of course, Pollack and Wambold would remain partners of Lazard. (Lazard changed the name Crossroad Partners to Corporate Partners after lawyers told them they had to, and the fund ended up being $1.55 billion, less than the hoped-for $2 billion.) The idea for the fund was for Lazard to buy between 10 and 40 percent of the stock of a company under attack from an unwanted suitor. By putting a chunk of stock into friendly hands, the raiders would, theoretically, go away. "The gist is Corporate Partners represents a pool of capital to invest in the company to allow the company to do something constructive and have the time to do it," Pollack said.
This was a different strategy by far from the one Andre used to buy Avis and Matador Ranch, but that didn't stop Pollack from spinning Lazard's historical success in principal investing to his advantage in promoting the new fund. "Lazard in Paris has been operating as a principal, acting as a friendly shareholder, for a long time and has been very successful," he said. "Lazard in New York has also acted as a principal from time to time and has done very well at it. Because we do act as principals, as proprietors, we have longstanding relationships with corporations. We're on a lot of boards not only of clients but other companies where we provide an active director role. Other investment-banking firms are finding ways to buy market share through use of their own capital. That's the phenomenon of bridge financing and the like. We're not in that business."
Wambold, who had conceptualized the fund, tried to slice the Lazard difference even thinner. "I think if you asked Michel whether he is an investment banker investing in companies, he would tell you the answer is no," Wambold said at the time. "He would say he is a senior partner of an investment-banking entity. He is also an investor. We are very suspicious of mixing the two mentalities because there is always the danger of using capital on the investment side to generate fees on the current income side. You're making $20 million on the income side, while putting $300 million at risk on the investment side." Before long, Lazard and Corporate Partners would find there were big risks investing this fund, risks that reflected very poorly on Lazard. But with the new Corporate Partners fund at least Lazard could say it was back in the often lucrative business of private equity, with its own differentiated twist.
THE ARTICLE ALSO announced that Lazard had hired J. Ira Harris, then fifty, as a senior partner in M&A, from Salomon Brothers, where he had built up the firm's Chicago office into a big moneymaker. Harris, a walrus of a man who was born in the Bronx and played stickball growing up--he could hit the ball three sewer lengths--had known Felix for years and had worked on the opposite side of many deals with him. Harris remained in Chicago--although he often shuttled back and forth to his palatial home in Palm Beach and to New York--where he built up a Lazard office by hiring a number of new partners, including William Gottschalk and Jeffrey Golman. Lazard, oddly, took to marketing the "Felix and Ira" show--"two mature bankers with decades of experience behind them, men whom a corporate executive can trust" is how the overture went. Of course, Felix and Ira couldn't have been more different--the massive, gregarious, and outgoing Harris loved spending time with clients playing golf or attending Chicago Bears football games, whereas the aloof and cerebral Felix rarely socialized with clients; it has been suggested that Felix's idea of a good time in Chicago was to "speak to the Economic Club." Ira, meanwhile, organized an annual golf tournament in Chicago that attracted around a hundred of the nation's top executives. There is even an Ira Harris sandwich at a local Chicago deli.
But the tag team proved effective--for a while--with Ira playing a prominent role at Lazard in a number of legendary deals: representing the special committee of the board of directors of RJR Nabisco during the infamous saga that resulted in the largest leveraged buyout of a company until late 2006 (and a $14 million fee); the sale of Kraft to Philip Morris; the merger of Primerica with Commercial Credit; the
sale of Associates Financial from Gulf & Western to Ford; and Bridgestone's acquisition of Firestone. Felix and Ira worked together on these deals, with one pinch-hitting for the other in meetings if needed. "It's not bad having Babe Ruth as a substitute" is how Harris described his partnership with Felix to the New York Times.
Despite his success at Lazard, which would have put him in the top of the partnership percentage ranks, the financially conservative Harris maintained a special arrangement with Michel whereby--unlike every other Lazard partner--he was paid a large fixed salary that worked out to around a synthetic 3 percent stake of the firm's profits with a significant upside potential based on his own performance only, without having any actual percentage of the firm's overall profits, which of course depended on how all the partners together performed. On the one hand, this spared Ira from having to make the annual fall pilgrimage to Michel's office in New York to determine his profit percentage, and also absolved him from liability in the event something went wrong and partners' capital accounts were docked. His thinking was that since he had spent twenty-five years making his money at other Wall Street firms before coming to Lazard, he had no intention of losing it there if someone did something stupid--another bit of prescience on his part. When other partners became aware of Harris's deal with Michel, some of them became so paranoid that they scurried around trying to figure out what he was getting that they weren't. One of them was so concerned that he marched into Tom Mullarkey's office to demand to know what was going on with Ira's deal. "None of your goddamn business," Mullarkey told the startled partner on his way out.