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

by William D. Cohan

  Once again, Loomis was not wrong. At Lazard, there was no central authority when it came to deciding how partners should spend their time. Any many partners liked it that way. So what if other firms were centrally organized and professionals were held accountable? Lazard was different. Bureaucracy was minimal, and despite Loomis's repeated efforts--and best intentions--the resistance to his entreaties remained intense. There was a meeting a week later between Michel, Felix, Steve, Damon, and Loomis, who for a while formed a sort of informal executive committee. It was clear by this time that 1992 was going to be a tough year for M&A deals in general, and that meant that a tough year loomed for Lazard despite its increasing market share in M&A deals. This group of partners met to try to figure out what the firm should do, if anything, to address the situation.

  Loomis returned to his favorite theme, that the firm needed to get more organized. "But Felix was part of the problem," one partner recalled, "because he didn't want to get more organized. He liked it unorganized." After the meeting, Michel asked Loomis to summarize in writing what had transpired for use at a subsequent meeting. Agreeing may have been Loomis's first mistake. Loomis quickly compounded his ongoing problems with Felix by trying to carve out a bigger role for himself at the firm, with more responsibility. He confessed his belief that "I have contributed to some of the progress of the firm internally" and then added, bizarrely, "As I believe other partners would say, I have been most successful when the contribution is a lot of little steps which are separately not very visible and not designed to credit me." He recognized, though, what others had been whispering about him: for whatever reason, he wasn't doing a lot of business. "There is a tension with how I can be effective with clients," he wrote. "It is easier for me to help with a sales pitch, participate in some Nestle discussions and join a partner for a board meeting, than it is for me to become the primary partner on six or more relationships and to be effective (and here) internally." But as this was what partners at Lazard were supposed to do, he made himself vulnerable to attack from the ones, such as Felix and Steve, who were doing just that.

  Nevertheless, he threw down the gauntlet. He said he doubted he could do "much more" running banking unless: "(i) There is consensus on what I term an 'operating approach' instead of changing theories and strategies; (ii) Felix is supportive instead of oscillating between support at one time and undercutting at another; this is less a matter of my feelings than of an impediment to my effectiveness; and (iii) Within Banking, and excepting those (including myself) on our committee, Michel has to be willing to have me set Banking partner percentages with him, and this needs to be known informally but broadly."

  He had touched the third rail of investment banking at Lazard. Although he worked well with Felix in his early years at Lazard on deals for the Limited and for Revlon, among others, when it came to matters of firm management, the two clashed repeatedly. Now Loomis had openly criticized Felix. Worse, he had attached to the memo a copy of Felix's "Dark Ages" memo from nineteen years earlier, a crass document that reflected poorly on Felix and that one could easily have assumed would never see daylight again since many of those partners who had originally received it had long since left the firm. Predictably, Felix was incensed. No doubt Felix's ongoing refusal to run banking himself and his not wanting anyone else to run it, either, contributed greatly to Loomis's frustrations.

  But Loomis had also, equally momentously, demanded the right to help Michel set compensation for the bankers in the firm, excepting the most senior. As this had always been solely Michel's responsibility (and before him, Andre's) and the major source of his ongoing relevance and power, this could only have been viewed as an attempted suicide on Loomis's part. He must have sensed it, too. The memo concluded, archly: "Alternatively to all the thoughts in this memorandum, I am happy just to work on companies. I enjoy it; it is easier for me; and, in the ensuing disarray, I will have no difficulty attracting the best people to my projects. What I am unwilling to do is either lend my credibility to more futile organizational exercises or to try to do the difficult without your substantive support on a sustained basis. I am happy to have you meet privately on this subject."

  Since Michel spent the better part of every summer at his spectacular seaside villa, Sous-le-Vent, the matter seemed to go dormant for a few months while he was away. It was obvious, though, that Michel was not going to allow Loomis to have any role in setting compensation. Still, Loomis's logic for asking to have this authority was impeccable. There was no other way, really, to get a banker's attention and cooperation than to determine his pay. For Loomis to be effective as head of banking, this was a necessary authority and one held by other heads of investment banking on Wall Street. The opposite is also true. Without this authority, Loomis's fate was sealed because he would have difficulty being effective. If Loomis had not been such a student of the firm's history, his demand could be derided as foolish and naive. Instead, it was the opening salvo in the increasingly impossible task of getting Michel not only to confront the larger question of his own future succession but also to address the smaller question of managing the firm more efficiently as it grew. "He never would give an inch," Loomis said later of Michel. "And I'd say, 'You know, how can I influence behavior in these people if they know not only that you solely decide their percentage but secondly that you solely talk to them at year end about what they're doing?'" But this being Lazard, Loomis's frustrations were not only with Michel's viselike grip on authority but also with Felix's incessant undermining. His feud with Felix had now bubbled up into the open, just as Steve and Felix were starting to get along well. "Bill wrote it down and Michel gave it to Felix and that was the end of Bill," a partner recalled. Loomis kept pushing, though. "I would always say that I had responsibility without authority," he said by way of explanation.

  He now decided to take on Damon Mezzacappa, the head of Lazard's small but highly profitable capital markets business, who had often been described as the third most important partner at the firm after Michel and Felix. In two separate and lengthy memos--over time some partners gave up caring what Loomis did, or did not do, just as long as he agreed to stop copying them on these long diatribes--during the first two weeks of August 1992, Loomis, under the guise of passing on an increasingly emotional set of other people's views, in effect ratted out Damon to Michel (while he was in the south of France) by enumerating a fulsome list of problems that seemed to be engulfing the capital markets group: political infighting derived from Damon's cocksure behavior, unjustified requests (in Loomis's view) for additional resources, incompetence in pitching Lazard's financing capabilities to clients, and a total lack of a "cohesive plan or organization to the overall effort." He conveyed to Michel that he keeps being told by bankers asked to work more closely with the capital markets effort that "it's a mess down there. Nobody who is already there really knows who they are working for or whether the partners agree on anything."

  But it was in "Capital Markets (II)," his second memorandum on the subject in as many weeks, that Loomis took off the gloves. He named names. In but one example of four, he explained to Michel that Felix had asked him to speak to Steve Niemczyk, then a senior vice president working for Ken Wilson in the FIG group, about the firm's still uncertain role in a proposed IPO of Van Kampen Merritt, the former wholly owned money management subsidiary of Xerox. "After some fearful hesitation, Steve explained to me that a meeting to 'pitch' the business at Xerox should have been a formality, confirming the assumed lead role," Loomis wrote. But "the oral presentation was a complete disaster. This was reportedly because of the inability to limit the number of participants (nobody can make a decision) and the lack of any prior discussion within Lazard of the oral portion. The subject matter was passed from one to another randomly. Thus, Xerox heard a rambling prologue from Luis followed by Jeremy, I believe, stating that we don't risk capital, and so on, through the six Lazard participants." Lazard eventually won a lead role on the underwriting, but Xerox decided to sell the
company instead for $360 million to Clayton Dubilier & Rice, a buyout firm.

  Then Loomis relayed a story about Joe Maybank, at that time a vice president in banking, who had been asked to join Lazard's fledgling high-yield finance effort. Maybank had been concerned about infighting in the capital markets division. Loomis reported to Michel that Mezzacappa's response to Maybank on this score was, "Look, it's not important that these people don't get along with each other because they all report to me, and that's a problem I take care of." Loomis followed this example with yet another about how Ken Jacobs, a young banking partner, had agreed at Loomis's suggestion to spend some of his time talking to his clients about using Lazard for high-yield financing. But when Jacobs talked to Al Garner, then the head of high-yield finance at Lazard, Garner was dismissive of the potential assignment. According to Loomis, Garner told Jacobs, "How can we be sure we get paid for thinking about this? Can you assure me that they won't take our ideas and shop them? Is this a real assignment? Why should we devote time to this instead of other stuff?"

  Having furnished these examples to Michel, Loomis then turned to what he categorized as the "underlying causes" of the problems, which he felt needed to be "addressed openly and with some friction." Among these was his observation that "Damon is quite good at creating business units and talent...up to a certain point. He then falls back on three flaws," which he was more than happy to describe. First, "he senses that you are fearful of capital exposure or losses and preys upon his perception of you and passes it on to the others under him as a fundamental premise." Second, he resisted "shared responsibility and accountability" between bankers and his capital markets teams. Third, "it suits his own importance to have conflict, once business units or partners exist, for him to mediate as the sole mediator." The other partners in capital markets, with a single exception, were described as "not that strong individually and feel beholden to Damon.... These are not brave men, but they are capable men if effectively led and woven into the fabric of the firm's overall perspective on business."

  No surprise, Loomis described his relationship with Damon as poor. "I am viewed by Damon as a threat, active or in remission depending on the week or month, and only as an ally on a specific issue when he senses that I, at least partially, already agree with his own plans or conclusions," he wrote. "(Having said this, I think that you could put Daffy Duck in my role, and Damon would be defensive, as I am sure I could get a dozen Morgan Stanley partners to agree.)" Loomis, who, after he wrote this memo, occasionally referred to himself internally as "Daffy Duck," offered Michel two options for capital markets: do nothing or undertake a substantive revamp, the details of which were then undetermined.

  To further illustrate his concerns, Loomis shared with Michel a copy of a memo he had asked the partner Kim Fennebresque to write about his recent experience on a financing project. Loomis had recruited the flamboyant Fennebresque to Lazard the previous year after First Boston had let him go "in the wake of difficulties the firm suffered in connection with a problematic bridge loan," according to the New York Times. Fennebresque's wife, Debby, and Loomis's wife, Kirstin, were good friends, and the wives played an important role in bringing the husbands together. Not surprisingly, Fennebresque's memo bolstered Loomis's view that the capital markets effort at Lazard was badly broken. "Those responsible for the capital raising process at Lazard appear to view the protection of the firm's capital as their principal function," Fennebresque observed, in a concise summary of Lazard's longtime strategy that Loomis seemed eager to change. "Having been at a firm which did not view that as its function at all"--First Boston--"I can readily appreciate that notion. However, as we appear to be in an era where capital raising is going to be an important long-term aspect of providing client service, perhaps, a more balanced view should be considered. Risking capital is a pejorative term here, and it should not be."

  For his part, Mezzacappa had no idea Loomis had written these critical memos to Michel about him and his department. The two men did not get along. Mezzacappa described Loomis as "an empty suit," "a fraud" who was "full of shit," and "in way over his head." He added: "Loomis learned to talk in riddles. He learned to talk a language that only Michel could understand. And people thought there was deep meaning there, but it was all just bullshit."

  The tortured Loomis, whose political instincts were, if nothing else, finely tuned, must have known Sisyphus's boulder was about to smother him. Apparently without having been prompted, he sent Michel a handwritten letter--the day before he sent the "Capital Markets (II)" memo--voluntarily reducing his prospective partnership percentage for 1993 to 1.8 percent, from 2.5 percent in 1992. He had been pondering the decision for two months. Aside from Felix, no other Lazard partner had ever voluntarily reduced his percentage, and Felix had done so to be assured of his freedom from internal politics while still feeling free to contribute to them. Loomis, on the contrary, seemed to be acutely frustrated and just plain angry. Reducing his percentage was a quasi protest vote--although he was not doing anything as rash as resigning and would still be making $3.3 million a year. "The purpose in telling you now is so that you can take it into account in your overall percentage calculations," he explained to Michel.

  In taking this unusual step, Loomis became preoccupied with how it would be perceived by the other partners, as the list of partner percentages circulated each January was proof positive of whose star was rising and whose was falling. "As importantly, I want you to know before you review your list further with other partners," he continued. "This should not appear in September as an apparent outcome of any particular conversation. My decision is, in fact, independent of conversations and events this fall." In truth, Loomis's decision was hardly voluntary; he was shoved aside by the firm's more powerful partners, whom he had systematically alienated. "There was a cabal that came after him," one partner remembered. "I think Rattner was a part of that. Mezzacappa was definitely part of it. And Felix was part of it.... They thought he was a do-nothing partner who took a lot of money out of the place."

  Not the slightest inkling of this Sturm und Drang filtered down to the rank and file in the firm. Which is probably as it should be. Certainly, the associates knew the firm was basically dysfunctional, not as a commercial enterprise to be sure, but rather as a social community. Internal calls to peers would often go unreturned. There was little cooperation among the three houses. Partners always seemed to be angry at one another or rarely spoke. Partner meetings were infrequent and accomplished little. There was a widespread feeling among the bankers that Loomis played favorites, promoting his acolytes at the expense of those less attentive. "There absolutely was a cult of Bill," Kim Fennebresque said, in a typical rendering of the "FOB" phenomenon. "I had drunk the Bill Loomis Kool-Aid big-time from the day I got there, and I thought everybody did, but it turned out that Bill had engendered some enmity, which surprised me." Mezzacappa thought Loomis's habit of playing favorites drove some good people to leave the firm. "I think Bill does have qualities of leadership," he said. "But he punished people who didn't support him, which was an extraordinarily mean thing to do if you are a leader. I remember when Bill took over banking there were certain guys who were in and certain guys who were out. Just extraordinary. You can't do that."

  Habitually, like a swallow to San Juan Capistrano, Michel returned to Manhattan from Sous-le-Vent after Labor Day. His return signaled the start of the annual groveling about compensation. That was to be expected. What was unusual in 1992, though, was the terse, Kremlinesque memorandum Michel distributed to the banking group on September 22. "Steve Rattner and Kim Fennebresque have accepted, after consultation with Felix Rohatyn, to take on responsibility for coordinating the Banking Group," the memo began. "Obviously this will be done in concert with Felix Rohatyn and Bill Loomis as well as myself. Bill Loomis has agreed to take on additional responsibilities regarding the coordination of the 3 Houses and international business, which is increasingly important to us. Bill will also devote more time to
developing business. Because both Steve and Kim will continue to work with clients, it will be important for everyone to give them their fullest cooperation. I hope and expect that we will thus all meet the challenges of a relatively difficult period."

  Although plenty amorphous, this news shot through the firm like a bolt of lightning. In the imperious Lazard partnership, the always inscrutable and enigmatic Loomis was one of the few relatively accessible authority figures. Not only had he had a hand in hiring most, if not all, of the junior bankers then at the firm, but he also seemed to be one of the few partners who at least gave an impression of caring for them. But even this was a mirage. Whether it was Rattner, Fennebresque, or Loomis running banking didn't much matter: pay for midlevel nonpartners continued to be relatively low compared with other Wall Street firms, and the grunts that passed for performance reviews were equally disappointing. Indeed, in 1991 more than one associate received no performance review at all from Loomis and was able to calculate the amount of his annual bonus only by grossing up for taxes his bank account balance after it was spit out of a Rockefeller Center ATM machine one late December day. "What the fuck was that all about?" Fennebresque remembered wondering at the time.

  Indeed, there was always a Kafkaesque quality to the annual performance reviews, which merely added to the firm's iconoclasm. Unlike other investment banks, Lazard never asked junior bankers (let alone partners) for a written self-assessment of performance in any given year, nor was it ever clear to the junior bankers whether the partners had ever been asked to put performance assessments in writing. Certainly, no such evaluations were ever shared. Rather, year after year the heads of banking always told at least one associate the same thing: You are doing an excellent job, but unfortunately you are working for the "wrong" partners--a message taken to mean that there were Great Men at Lazard, and not so great men, and that the poor soul had better figure out a way pretty darn quick to start working for the Great Men if he was ever to have a chance of becoming a partner. Of course, he had very little control over whom he worked for or on what assignments, and so was left with a bit of a political Catch-22, Kafka-style.