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

by William D. Cohan

  And true to her word, Maureen sought to devote her time and energy to public service as well. Until 2006, she was the national finance chair of the Democratic National Committee and, according to her biography, is an "active national and international human rights advocate." She serves as a U.S. government representative to UNICEF and as the chair of the Leadership Council on Children Affected by Armed Conflict. The couple, among the very top Democratic Party fund-raisers, became very close to the Clintons, especially during the second term. They once stayed in the infamous Lincoln Bedroom at the White House. They were frequent guests of the Clintons at Camp David. They have given hundreds of thousands of dollars to Democratic candidates around the country and to the party itself, according to public records--other reports put their giving for the Democrats in the millions. The Rattners caused a momentary fillip in the fall of 2005 when they publicly announced their support for the reelection of New York City's mayor, Michael Bloomberg, a Republican, whom Steve believes is the best mayor since La Guardia.

  Steve also continued to attract--or to court, depending on your point of view--publicity. In September 1995, Broadcasting & Cable magazine featured him in a two-part interview on the state of media and telecom mergers. "The subject is so provocative, and his treatment of it so comprehensive and valuable, that the editors are publishing the Rattner interview in two parts, this issue and next," the magazine purred. The magazine's cover photograph showed a confident and inscrutable Steve, collar unbuttoned on his Paul Stuart shirt, Hermes tie knotted handsomely. The interview conveyed that Steve could be at once extremely chatty and remarkably astute--as one might expect--about the doings in the media and telecom industries. He made a number of bold--and correct--predictions: that intense competition among telecom service providers would lead to a financial bloodbath, that cable and radio broadcasting would see further consolidation, and that video on demand would be a powerful force. "Why would you go to a video store if you could call up, five minutes before you wanted to watch it, and get any number of movies to start when you wanted, to play, pause, fast forward, rewind?" he mused. Remember, this was 1995. The interview, which mentioned Lazard not at all, further incensed Felix, although, except for professional jealousy, it is difficult to discern why. He called Michel at home one weekend morning to complain after the appearance of the Broadcasting & Cable interview. "Oh, Felix, go back to bed," Michel reportedly responded.

  But the publicity coup de grace came in October 1995 when Vanity Fair, again, featured Steve in an article about the top fifty members of "the New Establishment," without putting on the list anyone else at Lazard, including Felix. Sandwiched between Esther Dyson (information newsletter guru) and Gordon Crawford (famed media and entertainment investor), at number 43 on the list, was Steve, pictured half smiling with his arms crossed confidently. (He has since fallen to number 99 out of a list of 100.) "There are lots of young, hotshot investment bankers on Wall Street, but in the telecommunications-and-media business Steven Rattner is the hottest shot," the magazine gushed. But in a mere 250 words there was much to feast on for Rattner's growing number of enemies inside Lazard. Among the most incendiary were these: "He keeps secrets like a priest and has a way of putting older men at ease" (neither was true if Felix was to be believed). "He has a Rolodex to kill for, and the guest lists at his Martha's Vineyard parties boggle his clients' minds, helping him win business and press. He flies his own plane, is investing in a disco on Martha's Vineyard with his pals Strauss Zelnick, Dirk Ziff and Carly Simon, and has an expensive art collection, but says money doesn't drive him." And the piece de resistance: "Sniping colleagues say Rattner doesn't like to share his deals with Rohatyn, even though Rohatyn brings Rattner in on his." Even though this wasn't completely true--Rattner brought Felix into the McCaw Cellular deals, for instance--the two men stopped speaking completely. "That last article," Felix said later, without the slightest sense of irony, "was bad for the younger people here"--not that he had ever shown one whit of evidence that he cared about Lazard's younger bankers. "It hurt morale. People who yearn for publicity and exposure don't realize how dangerous it is in terms of business. Clients do not want us to go public on their deals."

  Some of the qualities that made people perceive Steve as having a cool side--aloofness, elitism, lack of a common touch--seemed all to be operative in some of the interactions he has had with his neighbors on Martha's Vineyard, one of the two very pricey, hard-to-get-to, and breathtakingly beautiful islands off the southern coast of Massachusetts. Just after Steve started at Lazard, in April 1989, he and Maureen bought a 1930 shingle-style home with five bedrooms on close to thirty-two waterfront acres on Obed Daggett Road in West Tisbury. The purchase price was $1.99 million, which "sounds like a Wal-Mart price, and by today's standards it definitely is," one longtime Vineyard resident said. In December 1990, Steve subdivided the property into two parcels, the one with the house on 10.88 acres, and the other, 21.09 acres of undeveloped land. (In 2001, he transferred the two parcels into Maureen's given name--Patricia M. White--and today they are appraised for real estate tax purposes at $23.2 million.)

  By the summer of 1994, Steve found himself tussling with his neighbors over two projects, one of his own making and one not, but both engendered a fair amount of local controversy. In June 1994, he proposed building a 110-foot wooden seasonal pier off Lambert's Cove Beach on his property. The pier, to have been the first along the northern coast of the island in modern times, would lead to a floating dock, where his boats could be tied up. The problem he was trying to solve with the pier was that "our beach has become quite rocky, and particularly when there is any surf, bringing our boats into shore to load or unload our four small children can be a tricky and potentially dangerous exercise." The conservation-minded Vineyarders were quite opposed to Steve's dock. As the proposal was awaiting final approval and as protests from neighbors were mounting, Steve agreed to drop the proposal on the condition that his dozen or so neighbors sign a covenant forbidding the construction of piers along the northern coastline. Although the agreement was never signed, he decided to shelve his plan for the pier.

  Meanwhile, a few months after the pier controversy, Steve faced another problem. His immediate neighbors to the east, Margaret Smith-Burke and Cary Hart, wanted to develop their eighty-one-acre parcel on Vineyard Sound. The idea, approved by the West Tisbury Planning Board in 1995, was to subdivide the eighty-one acres into four lots, three of which could have one house on them and one of which could have two houses. Steve had opposed the development, such as it was, every step of the way.

  But after the planning board ruled against him, he took the additional step of filing a civil lawsuit, on October 4, 1995, in Dukes County Superior Court against the planning board, Smith-Burke, and Hart. The gist of Steve's lawsuit was that the owners of the new homes in the subdivision would be using the same dirt road that he used to get to his house. He complained that the dirt road was not suited to the extra traffic. The case went through the system for four years until Steve fashioned on a brilliant and unique solution: no doubt at Steve's suggestion, Brian Roberts, his longtime friend and client at Comcast, bought the whole property and put an end to the dispute. In July 1999, two Philadelphia attorneys, on Roberts's behalf, bought the eighty-one acres from Smith-Burke for $12 million, and then Roberts had constructed on the property a sixteen-thousand-square-foot home designed by the architect Robert A. M. Stern.

  That matter solved to his liking, in March 2000 Steve rekindled his effort to build his controversial pier, this time at 130 feet in length and 320 feet farther east. Not surprisingly, the new pier project once again engendered much vocal opposition. "Being tone-deaf comes with the territory," one of Steve's Martha's Vineyard neighbors said about him. By the time a public hearing was set for October 2000, Steve had decided to change the proposal from a 130-foot pier to a much smaller, 24-foot pier that would connect with a seasonal floating metal dock that he already used. The new pier would, he said, allow his family to
get to the floating dock "without having to wade through three feet of water" at high tide. Steve was the only person to speak at the hearing in support of the pier. Those opposed were outspoken and presented a petition with two hundred signatures against the building of a pier. Even his neighbor Brian Roberts was said to oppose the project. In the end, in December 2000, the Martha's Vineyard Commission voted 9-1 against even the slimmed-down pier.

  Once again, though, Steve took refuge in the legal system. In early January 2001, his attorney filed a five-page complaint in Dukes County Superior Court asking that the commission's decision be reversed and the pier project approved. The commission voted again to reject the pier in June 2001. While Steve continued to press his case, he unwittingly galvanized an unprecedented coalition against any future piers or docks jutting into the water on the north shore of Martha's Vineyard. The conservation commissions from the four towns that border the north shore voted to preserve the shoreline and keep it free from piers and docks. The Martha's Vineyard Commission then voted unanimously to recommend the designation. Slowly but surely, voters from each of the four towns approved the designation, with Steve's hometown of West Tisbury approving the measure 59-7 in March 2002, effectively killing Steve's effort to build the pier.

  Finally, during the summer of 2004, Steve threw down one more challenge to his neighbors: a rough proposal for a large new home on his property to be designed by his brother, Donald. To meet the Vineyard's strict guidelines for homes that tower above the tree line, the builder had proposed that "much of the property would be removed and carted away" by hauling out an estimated five hundred truckloads of dirt and thus lowering the siting of the new house so it would not extend above the tree line. Since there are no limits on the size of single-family homes on Martha's Vineyard as long as the onerous restrictions on building heights and setbacks, among other things, are met, the West Tisbury Planning Board could not stop the project although it tried to thwart it by referring the matter to the Martha's Vineyard Commission. The planning board asked Steve "to exercise restraint on his property." In September 2006, the Martha's Vineyard Commission voted 10-3 not to block the Rattners' plan to move their existing home to an adjacent lot and then to construct a new "trophy home" consisting of 15,575 gross square feet on the original home site overlooking Vineyard Sound.

  WITHIN DAYS OF the second Vanity Fair article in as many years that featured Steve, the shoes began to drop in the firm's municipal finance scandals. On October 26, 1995, a federal grand jury indicted Ferber on sixty-three counts of fraud, attempted extortion, and acceptance of gratuities as part of his scheme to pressure Wall Street firms to give Lazard business in exchange for recommending them as underwriters of municipal bonds. A three-month trial in federal court ended in August 1996 with Ferber's conviction on fifty-eight of the counts. He was sentenced to thirty-three months in McKean federal prison in Bradford, Pennsylvania. He also was fined $1 million.

  The same day Ferber was indicted, Lazard and Merrill each agreed to settle charges with the SEC that they willfully violated Rule G-17 of the Municipal Securities Rulemaking Board requiring securities firms to "deal fairly with all persons and...not engage in any deceptive, dishonest, or unfair practice." The SEC faulted Lazard for failing to have "a procedure" in place to accurately determine whether or not Ferber had told his New York partners that he had disclosed to his clients the existence of the Lazard-Merrill contract. But, the agreement said, Lazard's partners knew about the Lazard-Merrill contract and knew that it "created at least a potential conflict of interest for Lazard" and "Lazard did not take adequate steps to ensure that Mark Ferber met his obligations to disclose the true nature and extent of the contract." The SEC censured the firm, which, together with Merrill, agreed to pay a $24 million fine--$12 million each--to settle the charges. At the time, the fine was the largest in the municipal finance industry. Lazard issued a statement confirming the settlement agreement and pointed out that the investigation "uncovered no evidence that any of Lazard's other partners had knowledge of, participated in, or approved of any such misconduct" and that "Ferber actively misled his Lazard partners concerning disclosure of the contractual arrangement" with Merrill. The firm said it was "saddened by Mr. Ferber's apparent violation of the Firm's ethical standards." Much of the reporting about the municipal finance scandals couldn't help but mention Felix, since it was so ironic that Lazard--the firm synonymous with the man who saved New York--was caught up in a major scandal involving cities and states all across the country. "He was upset that his name was appearing in press stories about this," said one partner. On November 30, 1995, years after Loomis had recommended it, Lazard disbanded its municipal finance department and quit the business.

  OBVIOUSLY FRUSTRATED WITH a dynamic inside Lazard that resulted in costly scandal in the municipal finance department, to say nothing of the titanic struggle over supremacy between himself and Steve, Felix made a bid, in February 1996, to become vice chairman of the Federal Reserve Board. The ill-advised effort, which all agreed was for a position well beneath his stature and accomplishments, ended swiftly in about a week when Felix withdrew his name from consideration in the face of seemingly endless protests from Senate Republicans--and without a hint of public support from Clinton during the ordeal.

  Felix's mysterious desire for the Fed position had its origins in his own ample ambition, his frustration at not being selected Clinton's Treasury secretary, and, of course, his overwhelming--and now painfully obvious--desire to leave Lazard, but only for a position in government that was worthy of him.

  During the mid-1990s, Felix had been closely monitoring the U.S. economy as it emerged from the Gulf War recession and before it exploded during the late 1990s. He felt that the economy could sustain a real growth rate of greater than the 2.5 percent per year White House economists were modeling and, accordingly, that Alan Greenspan's effort to slow the economy by doubling interest rates in 1994 and 1995 to 6 percent was simply bad monetary policy. In hindsight, doubling interest rates in twelve months without so much as a hint to the market was poor monetary policy, as the bond market plunged, which proved fatal, or nearly fatal, for, among others, Kidder, Peabody, the venerable investment bank founded in 1865; Orange County, California; and the Mexican economy. (Nowadays, the Fed telegraphs monetary policy months in advance.)

  Alan Blinder, the Fed vice chairman, had long been frustrated with Greenspan on any number of topics, from interest rates to his own lack of career advancement, and so when his two-year term expired in early 1996, he chose not to seek reappointment and returned to Princeton. Felix had his opening. When Laura D'Andrea Tyson, head of the National Economic Council, canvassed Felix's views as to possible successors to Blinder, he surprised her by volunteering himself for the position. She tried to talk him out of it, explaining Blinder's frustrations with Greenspan, the position's inherent flaws, its subordinate role, and that it required attendance at boring meetings--in sum, not at all a role for a Great Man of Felix's experience, reputation, and proclivities. Felix liked to suck the air out of every room he entered; the conflict with Greenspan would be inevitable, and not pretty to watch. "We're friends," he explained to Tyson about Greenspan. "We've known each other for a long time. It would be different because we're friends. I would be able to have more influence."

  Clinton loved the idea. He was eager for resolution on this whole question of real growth rates--and of course, a crumbling bond market would not be welcome news at election time. "We'll have a really interesting debate, a national debate about this issue between the Fed chair and the vice chair," he said privately. Clinton loved the politics of the Rohatyn appointment, too. The president could reappoint Greenspan, not inevitable at that precise moment as his term was to expire in a few months, and know that his man Felix would keep a close eye on the uncontrollable Fed chairman, a Republican no less. Tyson tried to persuade Clinton, to no avail, that economic warfare at the Fed served no purpose. In the end, though, she informed Felix of the presiden
t's enthusiasm. Thinking he had Clinton's support, Felix began calling in his chits from his corporate chieftain friends, and they responded by lobbying their contacts in Washington on Felix's behalf. Felix failed, though, to inform Michel that he wanted to go to the Fed. "That didn't make Michel happy," one observer said.

  Then Blinder called. "Why are you doing it?" he asked Felix. "I'm leaving because I can't stand it." He conveyed to Felix the same message that Tyson had: everything at the Fed revolves around Greenspan; the staff is the next all-powerful force, implementing the chairman's bidding and "squelch[ing] dissident thoughts or alternative thinking unless Greenspan agreed," according to Bob Woodward's Maestro. Felix's wife, Liz, was in violent agreement with Blinder. "You're crazy," she told her husband. "You're lucky they don't lock you in a closet. Nobody will ever see you again. How would you have felt, when you were chairman of MAC, if Hugh Carey had put in Alan Greenspan as vice chairman of MAC? Would you have liked that?" Felix told Liz, "No, probably not." What Tyson, Blinder, and Liz had underestimated was Felix's twin desires to escape the Lazard insanity and to have, finally, a Jean Monnet-like chance, however modest, to influence the national political debate. For his part, Felix again badly misjudged the politics of the situation.