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

by William D. Cohan

  Just as the reality of the first wave of firings started to register around the firm came the news that a European financial analyst, working in New York, died while sitting at his desk, of an apparent heart attack. "Everyone at the firm knows it," one colleague said, before adding that the firm was not particularly forthcoming about the incident. "They are just trying to hide stuff and lay blame elsewhere." Lazard also was said to demand that one Web site, Vault.com, that offered an online outlet for employees' thoughts shut down the Lazard forum.

  Tensions were mounting inside the firm. "First, you had this level of expectations raised about, you know, we're partners, we're going to get something permanent in the firm," one partner explained. "Then you had a shift in the business occurring. The business environment turned very negative in 2001. Very negative. We went into the year with a projection that we were going to do $900 million in revenue. Michel said at the end of 2000 that his goal for Lazard for 2001--and he really believed it--was $900 million in revenue, up from seven-something in 2000. The backlog was disappearing by the minute going into 2001. Nothing was building. Everything was just closing stuff. It was pretty obvious by February or March to anybody that had been in the business for a while that we were going to be lucky to do $600 or $700 million in revenue that particular year." Michel seemed no more in touch with the reality of the situation as winter turned into spring. "By March," a partner recalled, "he was saying, 'Well, I've been in this business so long and we're going to have the exact same year as the year before.' And by March and April it was obvious that we were going to be lucky to have revenues of $550 million. At the end of the year, revenues were $435 million, by the way."

  AGAINST THIS BACKDROP, there was an increasingly loud chorus inside Lazard calling for Michel to think seriously about selling the firm. For Michel, of course, just the thought of a public Lazard was anathema. This led him to deliver a lengthy speech against any scheme to sell shares on the market and for having the courage to try to rebuild the franchise. He also opposed the suggestion, dubbed Project S, that Lazard merge with Eurazeo as another way to go public. "The day we go public one way or another," he told the executive committee, "that is when trouble starts. Look at the way Warburg"--a reference to Jon Wood--"is blackmailing us. I don't anymore believe in the control of public companies."

  At the March 15 executive committee meeting in Paris, the firm's leaders turned once again to the central question of "Who owns Lazard and for whom does its wealth operate?" Michel, Verey, and others took the rather restrictive view that whatever equity plan is pursued, it must maintain the status quo. This was no theoretical discussion, though. What quickly became apparent was that, once again, Loomis had been having one-off discussions about distributing equity. This time, it turned out, he had been negotiating with the leaders of Lazard Asset Management to give equity to its "key players" to prevent them from leaving. Eig and Gullquist told the committee they felt "shabbily dealt with" by Loomis, who was subjecting them to a "divide and rule programme."

  Once again the stage was set for confrontation. "If Loomis goes ahead with a LAM equity offer," Evans wrote, "I suspect Verey will resign. If the Executive Committee prevents Loomis from going ahead, presumably he will resign (although I do not know him well enough to be sure of this). In any event, the withdrawal from LAM of what looks to be a pretty clear offer of equity will no doubt cause several or all of them to resign. So, the game is afoot." The discussion of the LAM equity plan was postponed to the April 24 meeting in London.

  At that meeting, Loomis outlined a highly complex idea for providing an equity incentive plan to LAM that involved reducing the huge contractual payments to Eig and Gullquist and sheltering income on a tax-free basis using earnings from the firm's hedge funds. Loomis said he thought the incentive plan should be more fully developed in time for the June meeting. He also told his colleagues that the firm was negotiating to keep Eig and Gullquist since, Michel said, LAM would not be able to "cope with the 'rumours' of Eig and Gullquist leaving unhappily." Michel said that the LAM co-heads wanted to stay and run the business while preparing for an orderly succession.

  Verey found himself disagreeing with Michel during much of the day. And Evans and Verey agreed "it had been a rotten day and that it was hard to feel involved." Before he left to go back home, Michel visited with Evans and Verey in London, in part, Evans believed, because he wanted to leave Verey "on a friendly basis after a day where they had repeatedly disagreed." The next morning Verey told Evans he had decided to resign. He had been approached by both Rothschild and Cazenove and felt that only by resigning could he "honorably consider alternatives."

  Verey flew to New York on May 9--one day before the next executive committee meeting--to tell Michel and Loomis he was resigning. There was some speculation that Michel might resign as chairman and turn that position over to Verey, but that did not happen. Verey's resignation, on May 10, was yet another serious blow to the firm. Verey, then fifty and the longtime head of Lazard in London, had been with the firm for twenty-eight years. Despite his very public support for the three-house merger and for Loomis as its CEO, he no doubt felt diminished by the Loomis appointment, as it certainly was one he had hoped to get. A very proper British banker who had forgone deal execution for administration and had returned Lazard in London to respectability during his ten years at the helm, Verey had been described as "Dickensian" for his exacting behavior, which prompted one of his partners to refer to him as a "cheese parer." Michel said Verey left the firm because Michel didn't name him CEO. "The difficulty I had with David is that he wanted to run Lazard as a whole," Michel said. "And I didn't think he would fly in New York at all. And it's not my fault, it's a fact." Michel added that Verey is "a very nice man. I like him." It is an open question as to whether, in accepting the resignation, Michel recalled the day in 1996 when Verey was offered--and turned down--the job of chief executive officer of Pearson, preferring instead to stay at Lazard. "My first loyalty is to Michel David-Weill," Verey told Lord Blakenham at Pearson in turning down this attractive offer. Michel recalled years later that at the time, he was "very touched by that" display of loyalty.

  No matter, life moves on, and Michel replaced Verey with Marcus Agius, who joined Lazard on the same day as Verey in 1972. Agius quickly made Michel look smart by advising the Halifax Group on its PS28 billion merger with the Bank of Scotland, one of the largest European deals of the past five years. The day after Verey resigned, Bruno Roger sent a letter of support to Evans. "Your essential qualities--professional and human--are essential during these delicate moments," Roger wrote in his broken English. "I wish you to reassure my full and friendly support and the full and friendly support from all the team in Paris." Evans, touched and deeply appreciative, wrote back, "It seems to me that the point of Lazard is the extraordinary team (almost extended family) spirit that exists among us. Your kind letter is confirmation of this." No mention of Verey's resignation appeared in the minutes of the May meeting.

  Nor was there any mention in the minutes of the other momentous decision made at that meeting: to seriously explore the sale of Lazard. But a problem loomed in that, per the terms of the three-house merger in 2000, the partners in London would not be entitled to any goodwill if the firm were sold. Only the New York and Paris partners, plus the capitalists, would be so entitled. No serious discussion of selling the firm could take place until the discrepancy with the London partners was resolved. There also needed to be a backup plan--in this case, a thorough, fully vetted internal restructuring--in the event that the sale process did not succeed.

  Two weeks after Verey abruptly resigned, Loomis appeared before the Lazard supervisory board, where he made a somewhat opaque assessment of the increasingly acute problems: the firm's backlog was evaporating; Michel's unrealistic revenue goals were being missed, and badly; the firm's first layoffs had started; Verey had left, and there were rumblings that Braggiotti and Georges Ralli in Paris were not far behind; the co-heads of the asset ma
nagement business were agitating for the unit's independence; the hiring outlook was bleak, Lazard could no longer pay people top dollar; and Loomis's initial two efforts to distribute equity to the top partners--first to the top twenty-three and then to LAM--were an embarrassment.

  Furthermore, a consensus seemed to be building that Loomis may not have been up to the task of running the firm, which of course was not going to be easy for anyone with Michel still around. There were reports that he would get visibly angry when things did not go his way or when Michel did not support his initiatives. His temper was quick. He had taken to writing e-mails to other partners about how frustrated and angry he had become in the job, chiefly because of Michel. Some partners noticed that he would shake visibly in their presence. Had he started drinking more heavily? they wondered. "He lost control of the situation completely," one senior Lazard partner said. "He was nice to Michel, but for the rest he completely lost control. He never did anything. Anything. You should look at his speeches. He said all the right things, all the right words. He gets it all right, but then nothing happens. I don't know what he has in his mind. I mean he certainly has a problem, a psychiatric problem or something."

  Loomis's May 25 speech to the supervisory board was yet another example of insight without execution. "We need to have more vibrant incentives to keep and attract outstanding partners here," he said. "There is nothing wrong with Lazard's business model, but the economic model needs rejuvenation. There is a need for us to better fit our business model by greater strength in retention and recruitment. Enhanced and longer-term incentives are necessary. We will accomplish this during the current year, or owe you an explanation of why not. We cannot have a convincing thesis if a working partner of excellence is remunerated less here than peers who work at boring banks."

  He continued, building an impressive oratorical case for distributing real equity to the current and future partners or, if that was an unacceptable option, implementing a hugely divisive restructuring that would mean firing most partners and retrenching back to a very small core group of senior partners in New York--Loomis's target was said to be ten, a number he disputes--with a pared-down support staff to help them.

  But, he noted, the radical restructuring concept wouldn't work, because the people the firm most wanted to keep were unlikely to stick around.

  Loomis came to the conclusion at the end of June that the firm's only viable choice was to sell. Then he sought to round up support for his decision. Nothing was coming easily for him anymore. "A house divided against itself cannot stand," Loomis wrote Evans, quoting from the famous Lincoln speech from June 1858. Evans responded: "Yes, indeed, but you will recall that he had some pretty big 'restructuring' to undertake a year or two after he made that remark"--a not so subtle reference to his preference to pursue the "restructuring" rather than the sale. "It was only after that managerial tidy-up that the house became undivided and entered its golden era. Let us speak." Loomis either missed Evans's meaning or chose to ignore it. "Actually, Lincoln then had the bloodiest war in American history, a civil war," he responded. One London partner passed this exchange on to his senior colleagues with the thought: "Irony is always lost on Americans. I suggest this series of communications is deeply confidential."

  After the July 4 holiday, Loomis continued to thrash over how the restructuring might work--at Michel's request--while having concluded himself that the firm should be sold. He spent two days working up an "economic analysis" of the restructuring. He then got a call from Michel, adding to his already immense anxiety. Michel had three messages for him: first, that Georges Ralli had spent five hours with Michel, at his house in Long Island, complaining relentlessly and specifically about Loomis's "failure" as CEO; second, that the "restructuring" should focus first on New York rather than on the firm as a whole ("which is impractical even in the simplest political terms," Loomis wrote later); and third, that since Braggiotti would not come to see Michel--implying he was well off the reservation--Michel would fly to see Braggiotti in London.

  After hanging up, Loomis was fit to be tied. "With that, I went to bed seriously questioning why I had spent any effort for such a still dysfunctional place with so little concept of the otherwise universally accepted linkage between responsibility and authority," he wrote to Evans. Still, he soldiered on. "I got up this morning anyway and decided to change the paper back to about where I had it before, or five pages (instead of twenty-five of texts and charts). I am hurt, frustrated and furious. But I don't give up which is why I am still at Lazard. I can only promise you a lively meeting on Thursday. And courage." This gut-wrenching communication prompted Evans's genuine sympathy. As Loomis's leadership had now been openly called into question, Evans told him, for what it was worth, that the partners in London backed him as the CEO but that "if others wish to put themselves forward let them do so on Thursday and their claims will be considered. At the end of Thursday, however, we must have decided who is boss, that we back him, that we have an action plan, and that those who do not want to stay must go whoever they are." Evans pledged to Loomis to do whatever was necessary until these matters were resolved, even if it took all weekend. "We are close to being the team that put Lazard's future behind it and I do not wish to be part of that disgraceful brotherhood." With that, Evans was off to Tuscany for the weekend and urged Loomis to "have a wonderful weekend" and think of the meeting the following Thursday "as one of the best School Plays you are ever likely to be allowed to act in."

  Evans kicked off the crucial July 12 executive committee session in London by reminding his partners of those--perhaps forgotten--moments in Lazard's history when the three houses stood together in times of crisis: in the early 1930s, when Paris and the Bank of England helped keep London afloat, and after the Nazis were defeated, when New York and London helped to resurrect Paris. Today, he told them, New York is in a difficult spot, with the loss of many productive partners and a high cost structure. "Perhaps it was an illusion that we could avoid a dangerous and difficult restructuring," he told them. "The danger facing us is that simply we disintegrate by people using their feet, taking the door and disappearing from sight."

  Loomis then took the floor. He observed that there had been much discussion about him "both publicly and privately" but that he had been in charge only since November 2000 and had been asked by Michel "not to get too out in front too quickly." He became very emotional and started crying. He said that regardless of whether they decided to restructure or to sell, "we have to work together. If we are evidently in conflict, this will certainly complicate any sale. It is fundamental, too, in a restructuring." To that end, Loomis set a target of being able to tell the firm's partners "in early September" what "we are up to." He established two teams: Evans, Golub, Eig, Jacobs, and Ralli would focus on the restructuring (dubbed, appropriately, Project Darwin), and Michel and Loomis "alone" would focus on the sale of the firm.

  The restructuring team went off to refine Project Darwin. But within a week, Loomis was already evidencing his frustration. He canceled one meeting, scheduled for July 19, and all but demanded that Evans come to New York in person in order to make real progress. As instructed, Evans flew to New York and continued to refine the Darwin analysis in preparation for a videoconference on July 24. On the prior Friday afternoon, July 20, while still in New York, he updated his senior colleagues in London about a series of disturbing phone calls Michel had made to Loomis and to him in New York.

  Under the admonition "EAT BEFORE READING," Evans said that Michel had called on Thursday from Sous-le-Vent to report the following: that all the young partners in Paris "will go" and that "we" must give them cash bonuses, with the money perhaps coming from a shocking place--"capital retentions," the 10 percent annual holdback from partner pay given to retiring partners when they leave. Michel called again the next day, Friday, to report that Braggiotti had asked Ralli to go with him to Sous-le-Vent to see Michel to demand that the firm be sold. Ralli declined. Then, Evans reported, Loomis sc
reeched when Michel told him he was disturbed by the firm's ongoing effort to integrate all the various management information systems under a new PeopleSoft platform. He then reported that Bruno Roger told him that the Paris office was between "secession and rebellion" and that he was "disturbed" ("evidently a catching phrase") that there is no one from Paris in New York helping on Project Darwin. Finally, Evans reported that he had been asked to join Loomis and Eig to try to "settle" the "LAM, Eig, Gullquist affair." He continued: "This will be colourful, if 'disturbing.'"

  Michel set August 2 in Paris as the new day and place for the firm to figure out what to do. Meanwhile, the executives working on the restructuring had determined that to make the economics attractive, a partner with a 1 percent profit participation had to be paid $4 million. In other words, the firm needed to make $400 million pretax and pre-partnership distributions for the calculus to work. As the firm was on track to make only about $140 million pretax in 2001, not only would forty partners need to be fired (freeing up fifteen partnership points to distribute to others), but also another $75 million to $100 million of either cost savings or revenue increases were required to make the math work. Evans wrote, "$70 million is unlikely to be achievable. Thus we will need to believe that a re-structured Lazard works well enough to deliver increased revenue."