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

by William D. Cohan

  Also that Saturday, Evans reported to his colleagues back in London, he and Loomis had received yet another call from Michel, who had Bruno Roger on the line with him. After delivering a fifteen-minute "lecture on Paris' feeling of isolation," Michel resurrected the idea of paying certain European managing directors fixed cash bonuses. Specifically, it seemed, the Lazard partner Jean-Jacques Guiony wanted a cash guarantee, and other Lazard Paris partners felt similarly. Years later, Roger said he believed that Michel's failure, by July 2001, to make good on his early 2001 promise of distributing goodwill to the partners had fomented nothing short of an insurrection in Paris. "When you say to partners, before the end of May, I give a gift to you, and then in September nothing arrives, in December nothing arrives, you create a revolt," Roger explained. "Because Michel is the king, and he has the power. And each person wished to have the goodwill. But Michel doesn't decide. Instead, he created a fantastic revolt.... It was not an individual revolt; it was a collective revolt. It's not necessary to read Machiavelli to know that we would have an automatic revolt. This is a case. A Harvard Business School case."

  On the call with Loomis, Michel complained again that he was not involved in the PeopleSoft selection decision. This struck Evans as the height of absurdity. "To imagine Michel becoming involved is like contemplating Brigitte Bardot running NATO," he wrote his colleagues before signing off in his usual reference to Lazard as a theater of the absurd. "This amazing scene cannot possibly be repeated and I would not miss it for anything," he concluded.

  Loomis was not even slightly joking when he wrote Michel the equivalent of a "Come to Jesus" letter on Monday morning, July 23. The purpose was to set the stage for the August 2 meeting and to let Michel know that Loomis had reluctantly, but unequivocally, decided the firm had to be sold. Coming as it did amid such protracted and unmitigated turmoil, the seven-paragraph missive from a beleaguered CEO to his chairman is nothing less than a cry of utter despair. "We need to be honest in our assessment of Lazard today, just as we need to keep our wits about us," he wrote. He described a perfect storm--"an accumulation of longstanding differences mixed with a recent merger in a very bad market environment"--coinciding with the near end of Michel's imperial reign. "We are under attack, internally and externally, on an exposed plain," he eloquently wrote. "We are without the protection of where we came from, or the sanctuary of our intended destination." He continued, "The restructuring numbers are not large enough to compensate for the lack of faith in our fragile constitution as one firm. There is no 'quick fix' for the reality of the 2001 results. The facts, however unattractive, remain stubborn things. We will continue to work diligently on the restructuring while preparing for a sale process. We will be in a position to start discussions with others immediately after the Paris meeting."

  In a mere six hundred words, while excoriating his partners, Loomis had vitiated the restructuring and the efficacy of trying to placate the asset management team in one fell swoop. He had decided to sell the firm, ratifying the collective judgment first reached on May 10. "And that was the only future," one partner said of Loomis's thinking about this decision. "Who was going to follow him after that?" Another partner, who began to look for a new job at around this time, said: "I would say that I started to seriously question whether or not the firm could make it at that point in time because I felt that there was a recognition that we were not gathering enough revenue, that the asset management guys were angling for their own deal, that we didn't have a leader who could speak for the whole firm, and then frankly the economic substance of what kept you there was quickly coming to a close."

  Michel's response to Loomis's extraordinary letter would take several months to play out fully. In the meantime, though, his initial reaction was filtering down through the partnership ranks. The French now appeared to believe it was "ridiculous to float or sell now" given the deteriorating performance of financial services companies in the market. "A sale is therefore very poorly timed," one French partner explained. "Therefore the restructuring becomes a necessity." There was also some discussion of having Michel come back as CEO, replacing Loomis--London's idea of the so-called MDW reinstitution--but this French partner rejected this as unlikely to be effective. "We might prefer restructuring but we do not have the people or the energy," he continued. But he predicted--absolutely correctly as it turned out--that Michel would manipulate the sale process because he did not want to sell the firm. "So nothing will happen," he said, adding that Michel wanted to give the firm "three months to find a rainmaker" to replace Loomis.

  But there was also another indication of Michel's negative reaction to Loomis's letter: the fact they were now disagreeing aggressively about the firm's future direction. Michel had suggested that a number of partners be fired before the firm considered a sale and then, as part of a severance agreement with them, agree to pay them should a sale happen. One of the partners Michel wanted to fire was Tom Haack, whose father was the former head of the New York Stock Exchange. Haack had been a banking partner for about twenty-five years by that time, and a nicer person could not be found. Although not among the highly paid senior partners, he was well paid and worth every penny of it based on the fees he generated year after year. Still, Michel wanted to fire him. "You suggest that we 'fire' Tom in September but pay him in a sale within two years," Loomis wrote. "We then explore a sale. Thus, we create turmoil at no gain for anybody. Any prospective buyer would be aghast at the result of firings in New York, including your personal disloyalty to the ones loyal for so many years to you. It would be a complete mess and a forced sale because everyone would hate the management of the place. And then, we would pay Tom anyway by your terms, or because we would in arbitration. (We would also have to find someone to fire him; it will not be me in this scenario.)" Loomis signed off, "I will see you tomorrow. I am sadly pessimistic about the conversation and, more so, about the next day. With regret, Bill."

  THE AUGUST 2 meeting was, according to Evans, an "angry, quarrelsome" one. Michel accepted Loomis's recommendation that Lazard explore the possibility of selling the firm. "The guy was the manager, he's the CEO, if he wanted to look at something, I might have said no after having decided I thought it was wrong, but I'm not going to limit his imagination," Michel said. "I've kept negative powers so I can say no to an idea--but I don't think it belongs to somebody who is really in the position of being a chairman, and then a relatively active chairman, to bar the management from looking at solutions."

  The proposed sale was an extraordinary admission, by the firm's own executives, that either the firm could no longer be managed by the current leadership or its future and all its past--both its extraordinary accomplishments and its mythology--were better off in the hands of some other organization. "I think he was losing confidence in his ability to run the firm," Michel said of Loomis, "or for the firm to be run, other than him doing it. And I'm not sure it was personal; he just felt that we won't be able to manage." He added: "There's no doubt that the firm was in a state of disarray. Very frankly, it reminded me of when I arrived. It was full circle, exactly full circle. When I arrived in 1977, the firm was in total disarray. And 2001 was a little of the same atmosphere again, where basically, having given up authority, managerial authority, it was very difficult to take back managerial authority when Loomis didn't do the trick. So the place was in a feeling of flux."

  Of course, some of the same factors that made 2001 an annus horribilis for Lazard made it an equally difficult time for other firms to seriously consider its acquisition, especially at a price--said to be around $4 billion to $5 billion--that would motivate Michel to sell. The big, global firms either saw no need for or had no interest in Lazard--Goldman Sachs, Morgan Stanley, and Merrill Lynch (although Merrill called Michel and expressed interest in taking a look at Lazard)--or were still digesting the major deals they had recently completed, Citigroup, JPMorgan Chase, and Credit Suisse First Boston. There were some potential candidates, though. Deutsche Bank had dabbled
with the idea of helping the firm solve the Bollore conundrum and needed to jump-start its global M&A business. Credit Agricole was also an obvious choice since it already indirectly owned about a 10 percent stake in Lazard and had publicly announced in July that it wanted to buy another 20 percent. UBS, too, owned 15 percent of Eurazeo but was still working on the integration of Paine Webber.

  For any number of reasons, though, the most obvious potential buyer was Lehman Brothers, which had been utterly reengineered during the past decade by its brilliant CEO, Dick Fuld. In August 2001, Lehman's market value was around $18 billion, thanks largely to its powerhouse fixed-income division, and was eager to consider deals. The firm was then not quite as strong in investment banking, and especially in M&A, as it would later become. So Lazard would have been an excellent complement, especially in Europe, where Lehman had not yet started building aggressively. Lehman also coveted Lazard's asset management business.

  At the contentious August 2 executive committee meeting, two approaches were authorized: to ascertain whether either Credit Agricole or Lehman had any interest in buying Lazard, Michel would contact Credit Agricole and Loomis would approach Lehman. Michel, of course, had masterminded the Credit Agricole purchase of the Bollore stake. He was highly confident Credit Agricole would be interested. Loomis, of course, had worked at Lehman before Lazard. And the two firms had a rich history together dating back to the days when Andre used to intimidate Bobbie Lehman. Credit Agricole, while not as tony as Lehman, would be willing to give Lazard nearly complete autonomy and would be one of those French solutions that appealed greatly to Michel and his French partners. Michel had never been excited about selling Lazard to an American firm for fear the Americans would gut the firm's very Frenchness.

  MICHEL AND LOOMIS were to take the month of August, make their inquiries, and report back at the August 29 executive committee meeting. Loomis called Fuld after August 2, without saying what he wanted to speak about; Fuld told him he would be away most of the month and they should meet in early September. Michel's Credit Agricole report, therefore, would be the only update provided at the end of August. As a fallback position, in case the sale process did not work, Michel insisted that Loomis and Evans also pursue the separate "restructuring" exercise.

  Michel had one other, supersecret strategy up his sleeve: unbeknownst to anyone except for Loomis, and perhaps Jean-Claude Haas, in August 2001, as part of his effort to see if a rainmaker could be found outside the firm, he had quietly rekindled his discussion with Bruce Wasserstein about becoming Lazard's CEO. By an odd and unexpected confluence of events, Wasserstein was once again free to discuss this possibility because in April 2001, three months after he had sold Wasserstein Perella to Dresdner Bank, Allianz, the large German insurer, bought the 80 percent of Dresdner it didn't already own for $20 billion in cash. Wasserstein was in the middle of a dispute with his new boss at Allianz, and was thinking of leaving his eponymous firm.

  On August 29, Michel gave the executive committee an update on his discussions with Jean Laurent, then CEO of Credit Agricole, about buying Lazard. Michel led off the discussion with the deliciously juxtaposed thought that while it was "unproductive and highly dangerous to open the firm to a sale process," there were "two possible, very interested parties": Credit Agricole and Lehman (there was also mention of Merrill Lynch, so maybe there were three interested parties). As for Credit Agricole, Michel reported, "we speak with them all the time and we know their minds." He said that he had two meetings with Laurent in Biarritz during August and that while "they are dying to do something with us," because Credit Agricole had commenced the process of going public (completed in December 2001), the bank preferred taking a minority stake in Lazard that could be increased over time. The Lazard executives would be left in place to manage the firm. "Personally," Michel told his partners, "I am not against it." But as usual, he had concerns. "The only problem is that Credit Agricole says, 'We do not want to manage.' Therefore, we have to manage." And Michel was not sure the leaders of the firm could manage it anymore. In sum, he said he had his doubts that Credit Agricole would step up, especially given the asking price of around $5 billion.

  Ralli offered his thought that Merrill and Lehman "were all the same" and that he would leave if these firms bought Lazard. To which Ken Jacobs replied, "You would be bribed to stay and work your butt off." The bribe would work, Jacobs argued, because "We are all the same, flesh and blood." To which Ralli responded, "I would not work hard."

  At the beginning of September 2001, Loomis had lunch with Fuld at the Lehman Brothers dining room at the World Financial Center and brought up the idea of a merger. Fuld said that when Loomis had called him in August, he had figured that this was what he wanted to speak about. Fuld was interested enough in the idea to schedule a second meeting, with a wider group, for September 10. Obviously, Michel knew that Loomis had approached Fuld and even had a value in mind for Lazard at which he would consider selling.

  "There was my knowledge but not my approval," Michel said three years later. "There is a difference. I told him, 'If you want to explore, explore.'" Debate rages about how serious the discussions became: some say Fuld offered Lazard one-third of Lehman's equity, then valued at around $6 billion; others say this is preposterous and Fuld would never have offered anywhere near that amount for Lazard. Some of his own partners didn't think Loomis knew how to sell the firm effectively and so tend to think the talks were never that serious. "I mean, even though they went to talk to Lehman to sell the firm, they didn't know what they were selling," one partner said. "They had no idea. I mean, so it was again talking about things but no one could actually take actions. Just out of control, totally out of control." This person thought Loomis should have given Felix--then still staked out on the fiftieth floor--the mandate to sell the firm. "Felix would've done it," he said.

  Others, closer to Fuld, downplayed the level of Lehman's interest in a deal. "It's unclear how far the Lehman discussions got," explained Fuld's friend and former Lazard partner Ken Wilson, from his executive floor office at Goldman Sachs. "Some people would say quite far. Dick Fuld will not tell you that. Loomis really thought this thing had traction at one time. He was pushing hard. But I don't think Dick Fuld's recollection would be consistent with that." Michel recalled that Fuld called him at Sous-le-Vent in late August or early September to discuss the possibility of a combination. Michel remembered telling him that he would see him "with pleasure" but that perhaps it would be best if they waited "until the end of the year" for that get-together. Still, after that first lunch with Fuld at the World Financial Center, there was sufficient optimism in the air at Lazard about a deal with Lehman that, on September 4 anyway, detailed financial models were run divvying up the goodwill, according to section 7.03 of the operating agreement, among various groups of partners--New York, Paris, London, and the rest of the world. There was even a proposed name, Lazard Lehman, for the new firm.

  Loomis pushed forward with Fuld, independent of Michel. The discussions between the two firms reached their apex on September 10, 2001, when Loomis and Golub met with Fuld and Brad Jack, then the head of investment banking at Lehman, and outlined the potential synergies of the combination. The Lazard team made a presentation about how it all might work, but no specific valuation was conveyed or discussed. They agreed to keep talking. Figuring he might soon be out of a job, Loomis that day--presciently--executed a two-paragraph agreement with Michel that called for him to receive, for one more year, a fixed percentage of the firm's profits plus some real equity in the event he was dismissed.

  ALTHOUGH THE TWO firms planned to continue the discussions, the events of the next day derailed them, and then Loomis's banking career. On September 11, Michel was in his palatial sixty-second-floor office on that pristine morning as the panorama of horrors unfolded outside his windows, three miles away. Many of his partners had a clear and unobstructed view south and saw everything, but Michel didn't see the two jets hit the Twin Towers. He couldn't miss
the fireballs shooting out of them, though, and watched, alone and aghast, as the two 110-story buildings caught fire and collapsed. "Because I am an eternal optimist, my first thought was, what a crazy accident," he recalled. "The weather was absolutely beautiful. How could this happen?" Like the rest of us, he began slowly to comprehend the magnitude of the unfolding events. Unlike many others, though, he calmly completed his early morning business--presiding over a board meeting of the American Hospital of Paris. Finally, after nearly everybody else in the firm had left the building, Michel's longtime assistant, Annik Percival, insisted Michel leave, too. He eventually rode the elevator down to Rockefeller Plaza. With him were Loomis and Vernon Jordan. Walking together uptown, Michel borrowed Vernon's cell phone--since he himself did not have one--to see if he could reach his wife, Helene. Unable to reach her since the attacks had interrupted cell phone service, he went to his apartment at 820 Fifth Avenue to await her return. Loomis went back to Greenwich.

  Vernon continued on to his suite at the Regency. He had watched "horrified" with his secretary from his window at 30 Rockefeller Center as the second plane hit the South Tower. "I spent the rest of the day the same way many of you did--watching the disasters for hours on end," he said almost two weeks later in an incredibly moving sermon he gave to the First Congregational Church in Atlanta.

  Like you, I have seen interviews with the survivors, the lucky ones who escaped the burning towers in time. I have walked the streets where, on every corner, are sad homemade posters with names and pictures of the missing, pleading for information about them. Those survivors and the victims on the posters are Whites and Blacks, Asians, Latinos and Arabs. They are Christians, Jews, and Muslims. They are executives and janitors, bureaucrats and messengers. They are rich and they are poor. They are young, old and middle-aged. They are Republicans and Democrats. Politically, some are on the far right; some are on the far left, and some may even have sympathized with some of the terrorists' ideas. But they are all Americans. And in the eyes of the terrorists, they all stand for values that are central to the American fabric. And that was enough to make them targets, just as you and I and all our loved ones are targets now.