The May 1988 BusinessWeek cover story also revealed that Michel had--for the first time, but not for the last--assiduously courted Bruce Wasserstein in 1987, just as Bruce was deciding whether to leave First Boston, the Wall Street firm he had helped build into an M&A powerhouse. As Loomis alluded to in his manifesto, in the end Wasserstein and his partner Joseph Perella, and a handful of other First Boston bankers, including Chuck Ward, started Wasserstein Perella & Co., an M&A boutique that competed against other Wall Street firms and went on to have many successes during its twelve-year life. "The Fortune 500 is our target clients," Wasserstein told the Wall Street Journal in February 1988 on the day he left First Boston. "We think the custom-tailored merchant bank is the wave of the future. We want to be the Lazard of the 90s." At the real Lazard, meanwhile, there was great relief that Michel and Bruce couldn't agree on the terms under which he would come to the firm. "The Wasserstein thing was viewed with horror because it looked like Michel might be going back to importing top partners instead of promoting from within" was how one relieved Lazard M&A banker put it. Loomis obviously had a different view, that somehow Lazard was so impaired that more money could be made competing against it than working for it.
LATE IN THE summer of 1988, Loomis tried again to convince Michel that the banking group needed more structure to become more productive. He noted for Michel that despite having better and more bankers, banking's revenues were trending down in 1988 both absolutely and compared with those of other firms. He also pinpointed one of the firm's key problems: the failure of the partnership to function as one. He then bemoaned as a "major problem for us"--correctly as usual--the firm's complete lack of accountability. "Accountability for partners at Lazard is not a clear concept, or, at least, does not closely track our goals," he continued. "Accountability tends to be perceived as individual in nature and either a negative incentive (fear of failure) or an endorsement of raw personal ambition (to become a hero)."
Lazard also had no formal training program for new hires or even anyone who gave much thought to what happened to new employees when they arrived. In this sense, and in many others, the firm was totally Darwinian, a fact Loomis lamented, metaphorically. "Interestingly, the 'freedom' of being left to sink or swim in a pool of 100 individuals increasingly raises the question at all levels, 'What are we doing and what am I part of?'" He further explained to Michel that some partners recommended to him shrinking Lazard back to a few partners and associates. "Simple is best," goes this argument, "and all the problems disappear--just fire people." Loomis preferred, though, to find a way to work more effectively with the existing talent. To that end, he told Michel, "We have to be willing to make real changes in our daily pattern of doing business."
He then proposed the previously discussed radical solution--radical for Lazard anyway--of dividing banking into four industry-focused groups. "The partners would be evaluated, in large part, by the ability to work effectively together," he wrote. The beauty of this structure, Loomis believed, would be a more productive and accountable banking effort where junior bankers could be more efficiently employed, mentored, and evaluated and where the productive senior partners could lead by example for those less productive. "Instead of simply being busy as individuals, we need to focus attention on how we become more successful as a firm," he concluded.
Loomis's proposal was thoughtful and well conceived--and utterly ignored by Michel and Felix. Loomis was right that above all Michel and Felix favored the status quo. Loomis was wrong in that the firm was doing fine--in 1988, New York made $141 million, up from $134 million--and the two leaders were each making tremendous amounts of money. His recommendations all but ignored, Loomis entered one of his periodic phases of introspection and frustration. On November 30, Michel announced that his first head of banking would be giving up the post after a mere six months. "Bill Loomis has decided to turn his attention full time to client relationships and transactions," Michel informed the firm. In his place, Michel had asked the partners Tom Haack and Nat Gregory "to assist the Banking Group in various roles previously undertaken by Bill." An odder duo of leaders could not have been conceived. Haack was the son of the former president of the New York Stock Exchange whom Felix worked with on the back-office crisis of the early 1970s, and Gregory, a North Carolina native, had been an academic at the University of Chicago and worked at Bechtel before coming to Lazard in 1983 with no previous investment banking experience.
Although their tenure was brief--Loomis returned to head banking six months later--Gregory was the embodiment of the sink-or-swim mentality then pervading the firm. On one of his first days at Lazard, at the last minute, Lou Perlmutter dragged Gregory into a meeting with the top management of Beatrice Foods. The Beatrice executives--led by the company's CEO, Jim Dutt--had flown to New York from Chicago because they were concerned that someone was buying up their stock and wanted advice on how to react to the potential threat. But after greeting the executives, Perlmutter left Gregory alone in the meeting and disappeared for thirty minutes. One of the Beatrice executives asked Gregory, who was in his mid-thirties, how long he had been at Lazard. "It was one of those moments where you had to decide how you were going to play the fish," Gregory remembered. He chose candor. Here he was faced with a group of nervous executives looking to their investment banker for advice and succor and the partner was nowhere to be found, leaving a neophyte to deal with the situation.
Soon after the Beatrice fiasco, Gregory found himself on another high-powered deal for which he was ill prepared. The raider Victor Posner had assembled a large minority stake in one of Lazard's Chicago clients, and Gregory was sent to the company along with the partner Arnold Spangler. But neither of them was particularly proficient in the emerging art of takeover defense. When they returned to New York a few days later and Gregory was informing Ward Woods about the developments, Felix popped his head into Gregory's office. He didn't like what he heard Gregory saying, and he ordered Woods to fire Gregory on the spot. Woods ignored Felix, and Gregory stayed. He became a partner in 1986. By late 1988, he was running banking. "Running banking at Lazard was like being dean of a business school," Gregory said. "It was not an easy thing to do because, as you know, it was Michel's firm."
INTO THIS RELATIVE anarchy, intense quirkiness, and immense prosperity strolled Steven Rattner, the one Wall Street investment banker who was every bit as scarily talented, media savvy, and professionally and politically ambitious as Felix and who, much to Felix's surprise and eventual dismay, refused to be cowed by the Great Man's prowess or play by his long-established rules. The impish Rattner, a former New York Times reporter in Washington and London, joined Lazard as a partner from Morgan Stanley, where he had run media investment banking and had made it one of the top groups on Wall Street. He was all of thirty-six years old, but his slight build and elfin appearance made him look even younger. He turned out to be a huge business generator for Lazard, but he often came across as cool, aloof, and indifferent. Surviving depressions and wars was one thing, but the conflict that would soon erupt between Felix and Steve, whose father-son relationship for a time mirrored in many ways that between Andre and Felix, would test Michel, and Lazard, as never before.
CHAPTER 11
THE BOY WONDER
Steve Rattner, pride of Great Neck, New York, a wealthy Jewish enclave some twenty miles outside of Manhattan along Long Island's North Shore, joined Lazard in the early spring of 1989 with surprisingly little fanfare, especially for someone as well connected in media circles as he. Ironically, as the discussions with Steve originally unfolded, at his own insistence, he was willing to consider leaving Morgan Stanley only if Lazard would allow him to do something other than media banking. And the firm, with Loomis as chief negotiator, was more than willing to try to accommodate Steve's wishes. After an often tortured five-month negotiation, where, much to Michel's chagrin, he initially said he would come to the firm before equivocating, he was hired at Lazard as the partner in charge of a new group pro
viding advice and capital in "special situations," an oblique reference to his desire to work with smaller, "emerging growth" companies as either a principal or an agent and to help build Lazard's nonexistent high-yield finance business. Hiring Steve for this role not only satisfied him but was all of a piece with the firm's desire to reinvigorate its long-dormant private-equity business, as evidenced by the creation of Corporate Partners and the much smaller Centre Partners, another Lazard-affiliated fund that invested about $150 million of the partners' money in LBOs.
A brief Times article about Rattner's hiring explained he would head a new group "providing advice and financing in special situations, including restructurings, recapitalizations and leveraged acquisitions"--none of which sounded the slightest bit like advising media and telecom tycoons on their M&A deals. Rattner elaborated on his new assignment in the article and about why he moved from Morgan Stanley. "Lazard has been in the junk bond business for about a year," he said. "My mandate is to take that embryonic effort and turn it into a very successful group. Morgan Stanley is probably the best firm on the Street at what it does. But I just found the attraction of a small private firm, and particularly the job that was created, to be irresistible." To his new team, Steve quickly recruited from within the firm two experienced vice presidents, Tim Collins, one of the few people to ever leave Lazard and return, and Ken Jacobs, who had recently joined Lazard from Goldman Sachs.
But it was a classic bait-and-switch moment, whether intentional or not. One day early on, Felix, Michel, and Damon Mezzacappa decided that Steve had gotten control of too many of the firm's limited resources, and in any event they didn't really want to pursue the business that Steve described. Felix had always been an outspoken critic of Mike Milken and the use of high-yield bonds to finance takeovers, so for Steve publicly to commit the firm to that line of business, while innocent enough, rankled him. Quietly but definitively, Steve's "special situations" group was dissolved even before it began. Steve felt the firm had snookered him but quietly accepted his fate. "In two days the whole thing was gone, and I became just another partner doing my business," he said. "I kind of shrugged and went on.... I don't remember enough about it to know whether Bill was just trying to pat me on the head. I honestly don't remember. I also don't know whether Bill knew it was never going to happen and just wanted to get me there, which you know is the way of the world and I have no problem with, or whether he honestly thought it was going to happen and he got his legs cut out from under him by Michel or Felix."
It was his baptism to the ways of Lazard. Rather than stew or bolt, though, he got over the incident and quickly returned to calling on his old media clients, much to the consternation of his new partners Luis Rinaldini and Ali Wambold, who had been running Lazard's loosely focused media effort and had actually suggested recruiting Rattner to the firm as Wambold had known him well at Lehman Brothers. They felt the sharp edge of Steve's elbows. "What I didn't really understand is that Steve from a business point of view was a loner," Rinaldini said. "He didn't want to have a shared team in this area. I had done a lot of media business. I had actually done Comcast, and he had done it from the Morgan Stanley side, and initially I said to him, 'Why don't we sit down and figure out how we can work together and who does what.' And he kind of looked at me with a blank stare and said, 'Why would I want to do that?'"
Steve soon became the partner in charge of the firm's media and telecommunications banking practice. Or as one of his many freely available biographies puts it, "Mr. Rattner founded the firm's Media and Communications Group and was involved in many of the largest and most important transactions in the industry." Charitably, Rinaldini said he didn't feel Steve had pushed him out of media. "It's tough competition," he said, "which is different than being cut out. I wasn't going to be the media star, because we already had one of those--Steve--so you say, 'Okay, can't do that. Okay, I'm not going to be the star of the basketball team, I'll try football.'"
Steve's ability to overcome the initial confusion derived, in large part, from both his quiet confidence and his mighty ego, which is often a prerequisite for success in the competitive sea of investment banking. He had the confidence of a man who believed that the world would provide what he needed when he needed it. Steve had--and has--an unrequited ambition and an ability to manipulate and court the press that rivaled--and rivals--Felix's. His genuine friendship with Arthur Sulzberger Jr., the publisher of the New York Times, whom Steve has known since they were both young reporters together at the Times in Washington, has been much documented and is replete with multiple instances of public support of one for the other, often in Sulzberger's paper. In short, Steve had his own Great Man credentials and was determined to use them for his own advancement both at Lazard and beyond.
Before Rattner's arrival at Lazard, the firm had quite purposefully not made group-head designations by industry despite Loomis's urging. Michel had the long-held view that specialist groups would balkanize the firm. True, there was a small, world-class effort advising companies in, or near, bankruptcy, led by the brilliant longtime partner David Supino, but that effort obviously cut across all industries. Lazard bankers had always prided themselves on being generalists, with no specific industry expertise and with world-class M&A execution skills. Furthermore, if a client wanted to raise debt or equity capital rather than, say, make an acquisition, the client's Lazard banker would execute that transaction regardless. It was also a given that Felix would lead the charge on the firm's big deals (because more likely than not he would have received the client's call in the first place) and then rope in acolytes as needed. It was also gospel that by his own choice, Felix would have no administrative responsibilities in running the firm's banking operation: He would only do deals. Period. Of course, Felix didn't want anyone else running the firm, either, a doctrine that made Lazard somewhat out of control operationally, as Loomis had the scars to prove.
Steve's hiring exacerbated the long-overdue metamorphosis inside the firm toward industry specialization--a change other firms had long ago adopted--a process that would hasten his blowup with Felix as the two clashed repeatedly over roles and responsibilities on the firm's high-profile media deals. So, in addition to Supino's restructuring group (which the firm disbanded in 1992 despite its being arguably the best on Wall Street), at the urging of Ira Harris the firm hired on its second try, in January 1990, Ken Wilson, a onetime Salomon Brothers partner, to start, run, and build up the so-called FIG group (coverage of financial institutions, such as banks and insurance companies). Michael Price was hired a little before Steve, also from Morgan Stanley, to focus on technology and telecommunications. Previously, of course, Michel had poached the Lehman Brothers gang, led by Jim Glanville, in 1978, to focus mostly--but not exclusively--on oil and gas clients. And there had always been "industrial men," such as Frank Pizzitola and Donald Cook, at Lazard. These hires were all in addition to the seemingly random, so-called Felix hires, generally a group of his former clients or high-level political acquaintances with little banking experience whom Felix convinced Michel to hire. None of these men remains at Lazard, a testament to, among other things, Felix's transient loyalty and their own shortcomings, in many cases, as bankers.
The creation of these new industry groups necessitated, of course, the hiring of additional bankers to be part of them; on Wall Street, it was simply inconceivable to be a group head without a group. Lazard was starting to grow its historically modest head count. As with nearly everything else at the firm, though, the hiring process at that time was antiquated and convoluted. In early 1990, Michel had urged his partners to hire people based on their "human qualities" rather than just their professional qualifications. "Intelligence...spark...humor...wit...and a paradoxical mind...boring people are bored here...unhappy people remain unhappy however diligent or skilled they may be technically," he said. There was also the acknowledgment at the time that Lazard had never been very good at nurturing. "The firm has been relatively unsuccessful with those who w
ant a lot of guidance, structure and rationality," the partners observed. Nevertheless, despite Loomis's efforts, there was no "hiring on campus" as with other investment banks, meaning that no Lazard professionals appeared at the top business schools to interview slates of eager MBAs. Nor did Lazard retain executive search firms to fill positions. Rather, the way to be hired at Lazard as a neophyte was through enlightened nepotism or luck--or both. If you knew someone who worked there, you had a shot, although not a very good one. (Not so long ago, the lucky few who managed to somehow wrangle an interview often heard nothing back from the firm afterward.) This explained, in part, the presence at the firm of people such as Thomas Pompidou (whom peers took to calling "Thomas Pompidant"), grandson of Georges, the former French president; Lou Gerstner III, son of the former CEO of IBM; Gregory Salinger, son of Pierre, John F. Kennedy's press secretary; Anne Bevis, granddaughter of Dwayne O. Andreas, the founder of ADM; Mike Dingman Jr., son of the CEO of Wheelabrator-Frye; and Lyle Wilpon, son of Fred, the owner of the New York Mets.
The last tycoons: the secret history of Lazard Frères & Co Page 41