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

by William D. Cohan

  Then, fortunately, Corporate Partners' performance began to improve. The fund invested $146.5 million in First Bank System, which in 1997 bought U.S. Bancorp and took its name. The fund made almost $700 million on that investment. Good fortune struck again when, through Steve Rattner's relationship, Corporate Partners invested $300 million in Continental Cablevision. When the US West Media Group bought Continental in 1997, the fund made nearly a $600 million profit. In total, over its initial twelve-year existence, Corporate Partners invested $1.35 billion in nine companies and received in return $2.99 billion, for a profit before fees and carried interest of $1.64 billion. Private-equity funds are judged on how well their investments perform over time, a calculation known as the internal rate of return, or IRR. Corporate Partners' IRR during its existence was 15 percent, net of fees and carried interest; investors received an annualized return of 15 percent per year. That placed its performance in the top quartile of such funds.

  BILL CLINTON'S VICTORY in the 1992 presidential election handed Lazard another unexpected problem: a glum and cranky Felix Rohatyn. After twelve years of Republican Party rule, Felix rejoiced in the election of a Democrat to the White House. But Clinton's election soon became bittersweet for him, when he came to the realization that he was not going to be named Treasury secretary, the one government post he had long coveted.

  During the Reagan and Bush years, he had become a national figure, saved New York City, and, through his ubiquitous writings, led the lonely crusade against any number of Republican fiscal and monetary policies he deemed misguided. But he also made a few political mistakes that seem obvious in retrospect but were in keeping with his worldview. First, he supported Ross Perot, his former client at EDS. This was done partly out of loyalty and partly because Felix believed in much of what Perot had to say. To this day, though, Felix disputes the extent of his support for Perot and believes the press and the Perot campaign overstated it. In any event, he was not as early and as loyal a supporter of Clinton's (although he certainly came around) as were the expert fund-raisers Roger Altman and Bob Rubin--who together had, for instance, raised 20 percent of the money raised privately for the Mondale campaign in 1984--and this hurt him politically when the short lists were shortened even further. Felix's real political Achilles' heel, though, was his complete disinterest in political fund-raising. He was happy to give money to the Democrats--and lots of it--but could not be bothered to raise the mother's milk. What others were willing to do, he was not. No fund-raisers at his Fifth Avenue apartment or Southampton home. No dialing for dollars or putting the squeeze on his wealthy friends for a politician.

  His thinking was admirable enough, but the disconnect was also painfully obvious: in a political age when plum cabinet positions are often the reward for the hard work of a campaign, to try to play by different rules was not a winning strategy. For one of the world's best strategists not to comprehend that simple reality was stunning. Rattner remembered Felix coming into his small office, where he had moved so that he and Fennebresque could be nearer each other. "Felix liked to walk the halls, which was one of his good qualities," Steve said. "He came in my office one day after the election of 1992 and he said, 'You know, I used to think that being a policy guru and saving New York was enough to become Treasury secretary, but I found out that you really have to be in the mix and you really have to raise money. It's not going to happen for me.' I felt sorry for him." If Steve learned anything from Felix's misfortune, it was the old saw about money and politics; he and his wife, Maureen, have since become among the most effective fund-raisers in the Democratic Party. He also took up his pen again. Soon after Clinton's election, Steve wrote his first New York Times op-ed piece, "Short-Term Stimulus? Long-Term Error." He admitted he was a Democrat (although he gave $500 to Dole for President in October 1987) and urged the new president to focus on crafting long-term economic solutions, such as encouraging investment and increasing productivity.

  AS IF THE foibles of the Phar-Mor investment and Felix Rohatyn weren't difficult enough for the firm to digest, two investigative reporters for the Wall Street Journal chose the same moment to focus an unwanted spotlight on Lazard's tiny--but suddenly quite potent--municipal bond underwriting department. Ever since Felix had helped solve New York City's fiscal crisis, Lazard had been asked to help other cities with financial difficulties. For these advisory assignments, the firm received monthly fees.

  Naturally, Felix himself didn't have the time or the inclination to personally work on all of these assignments on a day-to-day basis, so at Michel's urging, Lazard hired a cadre of people into the banking group for this purpose, the most prominent being Eugene Keilin, the former executive director of MAC, and Franklin Raines, who would later become Lazard's first black partner and the CEO of Fannie Mae (where his reputation would be badly tarnished by scandal). An offshoot of the business of providing advice to municipalities was the business of underwriting their bond issues, which raised money from the market to build hospitals, schools, and roads or was used for a municipality's "general obligations." From the outset of Michel's management of the firm, he sought to build up the municipal finance department--both by hiring traders who bought and sold municipal securities and by hiring bankers whose job it was to win underwriting mandates from state and local governments (although in those days if Lazard was hired as a financial adviser to a municipality, the firm was precluded from acting also as an underwriter). The effort remained small but profitable, in the typical Lazard mold.

  That began to change in 1985, when Felix decided to hire Michael Del Guidice, the chief of staff to New York's governor, Mario Cuomo, to run the municipal finance business. Felix obviously knew Del Guidice well from his work with MAC and his numerous interactions over the years with Governor Cuomo. And certainly Del Guidice knew his way around the corridors of political power on the state level and knew how municipal underwriting assignments were awarded. Of course, he had never before worked on Wall Street or managed a group of bankers, but that was a minor detail; Lazard was well known (as were many other Wall Street firms) for providing a warm bath to former government officials with no prior Wall Street experience. "Del Guidice was really more of a political operative than he was a banker, and if anything, he took some pride in the fact that he wasn't a numbers guy, that he was more a relationship guy, a connections guy," observed one Lazard partner. Del Guidice, whom Mezzacappa, his boss, described as "a nice guy who was in way over his head," set out quickly to hire some new bankers with close ties to state government officials, figuring correctly that this was the way to win underwriting mandates. He was, after all, one of those guys himself. Among his hires were Richard Poirier Jr., a cigar-smoking six-footer from Prudential Securities, and Mark Ferber, then thirty-four, a supposed superstar municipal finance banker in Boston who had previously worked for First Boston and Kidder, Peabody.

  Soon enough, the marketing skills of these two men became apparent to their colleagues in the department. "Ferber and Poirier were two of the most productive bankers in the country," recalled one partner, "doing some of the biggest deals ever done. They were very aggressive guys in seeking business. Poirier was more 'I'm gonna go through that brick wall and get that business, and if you're standing in front of that brick wall, I'm going through you, too.' Ferber was much smoother. Ferber was more 'How can I get the most leverage I can out of the system?'" Both of them knew the municipal finance business far better than Del Guidice did and by the early 1990s had started operating independently of their titular boss. "Del Guidice had two guys that were bigger guys than he was," one Lazard partner remembered.

  Just how much bigger became clear in a surprising, twenty-eight-hundred-word front-page Wall Street Journal article in May 1993 that focused on how Poirier, who joined Lazard the same month as Rattner, was able to make Lazard the top underwriter of municipal securities in New Jersey in 1992, when as recently as two years before Lazard had not underwritten a single bond for the state. The article credited Poirier's
stunning success in New Jersey to his political connections, particularly with Joseph Salema, the chief of staff to Governor Jim Florio, and with Florio himself.

  Florio appointed Salema's brother-in-law, Sam Crane, to be state treasurer at just the same moment that Lazard was chosen to lead a $1.8 billion "general obligation" bond issue that the previous state treasurer had opposed both issuing and choosing Lazard to manage. Lazard made $10 million for its role in the underwriting. The article also described Poirier's ability to win a slew of state hospital underwritings, despite little experience in that discipline and despite the recommendations from hospital officials that other firms be hired instead. "We had selected Prudential," one hospital executive told the paper, "but then all of a sudden we got a call. It was obviously controlled by the governor's office." Poirier also won for Lazard the coveted role of advising the state's turnpike authority on the sale of $2.9 billion of bonds in 1991 and 1992. New Jersey paid Lazard a $2.3 million fee for that advice.

  The article revealed, though, that the SEC and the U.S. attorney's office in Manhattan were investigating Poirier's actions in relation to the sale of the turnpike bonds. Poirier's success in New Jersey notwithstanding, the Journal reporters also pointed out that his previous interactions with officials in Florida and Kentucky had gotten both him and Lazard into hot water. Lazard's lead underwriting of an $861 million bond offering for the Florida State Board of Education quickly turned sour amid charges that it had mispriced the deal. The outcry led to an inquiry about how Lazard had been chosen in the first place, and the answer--Poirier's political connections--led Governor Lawton Chiles to ban Wall Street firms that make political contributions to state officials from underwriting state bonds. In Kentucky, Poirier's handling of a $250 million turnpike bond caused state officials to write a "blistering" ten-page memo accusing him of "lying, making unauthorized trades on the state's behalf and overcharging the state by more than $1 million." Poirier's "attitude was antagonistic," and the deal "recalled many of the boilerroom tactics of an era we hoped was behind us." Poirier refused to be interviewed for the article. At least one of his former partners at Lazard believed that the highly damaging Journal article appeared because a number of competitors and colleagues, including Ferber, were just "getting even with Poirier" because he was so aggressive.

  When the Journal next appeared the following Monday, there was a letter to the editor from "Lazard Freres & Co." complaining about the article's portrayal of both Poirier and the firm. "We are dismayed by the article that appeared on page one Friday about the work of a partner in our Municipal Finance Department, and we take issue with its tenor as well as its specifics," the firm wrote. "Our review of the matters discussed in your article has not brought to our attention any evidence of illegality. Our code of conduct, subscribed to by everyone from our more senior partners to our most junior employees, states clearly our policy that all business affairs be conducted on the highest ethical level. Nothing falling short of this will be tolerated." The letter pointed out that the firm had met with the Journal reporters as they were preparing the article but that Lazard's input did not make it into the paper. "The day-to-day efforts of individuals in our firm to formulate innovative responses to the extremely complex financial issues that confront our state and local authorities were disregarded in exchange for the drama of unproven insinuations of improper influence," the letter concluded. Before long, the firm would rue the day these words were written.

  The same day the firm's letter appeared in the Journal, Rattner wrote Michel a memo suggesting that he was already tiring of the job as co-head of banking--a mere eight months after his appointment. He had run the weekly partners' meetings, given reviews to some of the junior bankers, and tried to give input to Michel on the partnership percentages, a process he called "tinkering with tenths," a reference to his minor role in trying to influence Michel's thinking. "If you go back in time (and it was before my time), no one was running banking," Steve explained. "Bill was the first one to try to run banking. He was quite good at it in a certain way, but--and Bill would be the first one to admit it--it still had a long way to go to really be effective. Kim and I were trying to take it to the next level. We met with enormous resistance from all the old guard, although Felix was relaxed about it," since what Steve and Kim were attempting rarely affected Felix. And of course, Felix was then still fond of Steve and his successes. Steve's frustrations, and even some of his thoughts, were curiously reminiscent of many of Loomis's feelings about being head of banking. "You asked that I try to articulate the key elements of my coordination responsibilities and what might be done to arrange them in a way that satisfies everyone's needs," Steve wrote. "Let me reiterate at the outset that my first choice is to be relieved of all of those responsibilities for the reasons that we have discussed. While I understand why this might not make sense for the Firm, I'm not concerned from my own standpoint about any reverberations." He recommended nothing less than dismantling much of the internal banking infrastructure that he and Loomis had so carefully constructed in the past decade. He was immensely frustrated and thought the time had come to "eliminate my efforts to influence decisions as to the direction of the Firm. The many conversations that I have had with you, Felix, Damon, Mel and others and the several significant analyses that have been prepared regarding size, profitability, productivity, etc. have taken an extraordinary amount of time. At this point, I've expressed everything that's on my mind so it would be relatively easy to relieve myself of this activity."

  Despite this diatribe, which few knew about, once again not much changed outwardly. Summer was right around the corner anyway, and that meant Michel's departure for Sous-le-Vent and the general disappearance of most other partners to their fancy homes in the Hamptons, the Vineyard, the Hudson Valley, Litchfield County, or Wyoming, among other places. After Steve had written the memo, Fennebresque remembered one "summer evening" when he and Michel were "bullshitting" in Michel's office and the topic of managing the banking group came up. Michel had been doodling on a piece of paper, and then he said to Kim, "The problem is, you know, that you and Steve want to manage the banking group and the banking group is really the heart of the firm, and it's really my firm." To which the startled Fennebresque responded, "'I've got that message, pal. I get it. My foot's coming off the accelerator.' So, um, that was quite a telling moment." From that evening on, Fennebresque said, he was far more low-key about his already subdued efforts to run banking. "I didn't see any reason to increase the enemies list or make the enemies list," he said. He resolved to let Steve be even more out front managing the banking partners than before. Together, they continued to interview some big-name M&A bankers, such as Geoff Boisi, Roger Altman, Joe Perella, and Tom Hill, about coming to Lazard (all of whom declined), but mostly they focused on doing deals.

  Like the few before him, Steve had quickly discovered the frustrations and the thanklessness of the task Michel had given him. He was frustrated with his inability to get things done with Michel's incessant micromanaging and undermining. He felt he was wasting his time and energy on trying to reform a system that would not be changed, at least not as long as Michel retained the power of the purse and Felix was free to meddle. He decided he was spending his time unwisely on internal matters when he could spend it far more profitably with clients.

  In coming to the decision to abdicate his position as head of banking, Steve had an obvious role model at Lazard: Felix. Through all the changes taking place on Wall Street generally and at the firm specifically, Felix remained the embodiment of the Lazard culture and ethos, and he had never chosen to manage anyone or anything. Aside from Michel, he was the highest-paid partner at the firm. He just did his deals and anything else he wanted. True, Felix tended to thwart the careers of the young partners who worked for him, but Steve didn't care about that. He would be different: he had his own clients, and he had shown a willingness to bring Felix into major deals (for instance, AT&T's acquisition of McCaw Cellular, which generat
ed a $20 million fee) as often as Felix had brought him into deals. Felix actually seemed to like and respect Steve, and he even started to acknowledge around the firm and in New York social circles that Steve appeared to have the potential to match, one day, Felix's business-getting acumen. And since Michel valued what Felix did more highly than what anyone else at the firm did, it wasn't difficult for Steve to figure out what he should do, not only at the firm but also beyond it.

  Fennebresque put Felix's continuing importance to the firm in perspective. He remembered being called by a reporter in 2004 who was writing a story about Bob Greenhill on the eve of the incredibly successful IPO of Greenhill's eponymous investment bank. "And this guy didn't know what he was talking about," he recalled. "And he referred to Greenhill as the best investment banker of his time. And I said, 'You could have the opinion that he was in the top echelon, but you can't say anyone was the best banker of his time if they lived when Felix Rohatyn lived. You just can't say it. You can say he's in the top echelon. You can say he's in the pantheon, but you can't say he's the best.'"