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

by William D. Cohan

  While the country struggled to grapple with the import of the single most devastating attack on American soil, Michel remained largely unfazed by it. He made a symbolic point of coming back to the office first thing the next morning to resume his routine. "The curious thing with me is because of the war in my childhood, catastrophe is normal," he explained. "Peace is relatively strange. But catastrophe! Ah, I think, back to normal!" In truth, Michel had little time to focus on the devastation downtown, for all around him at Lazard, his Cartesian order--so carefully constructed during the past twenty-five years of his absolute reign--was becoming completely unglued.

  Following the attacks, Michel and Loomis held a telephone meeting of the executive committee, on September 13. The collapse of the World Trade Center had caused a tremendous amount of collateral damage to Lehman's headquarters in the World Financial Center, directly across West Street from the disaster. Lehman also had 618 employees working in the Twin Towers. All but one were safe. The Lehman headquarters building had to be evacuated and was no longer usable as an office. Lehman's employees were scattered around the city, many working from hotel rooms. Michel began to drop hints that any deal with Lehman, even if it was still interested, would be less desirable from his point of view for the very obvious reason that Lazard management would be utterly redundant. Michel wondered whether people in London, Paris, or Milan wished to work for a firm like Lehman. He wondered whether it made a difference if the name of the resulting firm was adjusted somehow. And what about value? Michel was greatly concerned that the price Lehman would have to pay for Lazard would so dilute Lehman's earnings that the stock would fall and the value of the Lehman stock Lazard would receive would fall, too.

  "I was not totally against a deal with Lehman," he said. "You know I am very traditional, and Lehman was the second place I ever worked at. It's the same kind of firm, traditionally, as Lazard. So why not? But the truth is that you simply have to look at their price, and their P/E multiple, and their book value multiple. To do any deal is impossible. It's impossible. They would have been delighted at a third of the price, or let's say half the price, but they were completely unable to do more. I mean, because they would have been killed with dilution. Killed. So it couldn't work."

  Taking the hint, Loomis wrote Fuld a letter suspending the discussions. Loomis was worried that, among other things, after the events of September 11, the relative valuations between the firms would have shifted unfavorably. Michel also called Fuld, whom he had never met in person. "Look," Michel said he told Fuld, "you know I never participated in the meetings you had with Loomis." Michel turned off the discussions. Not that Fuld had reason to care anymore, either. Lehman was in its own fight for survival.

  Lazard had its share of problems, too, after September 11. Even though no Lazard employees were killed in the attack, many were traumatized by the horror they had witnessed downtown, thanks to the front-row seat their high perch in Rockefeller Center afforded them. For a time, half the firm didn't even bother showing up, because they "weren't even sure the sun was going to come up," one partner explained.

  While not in any physical danger, five American Lazard partners were stuck in London during the days right after September 11 and were quite anxious to return to New York to see their families. But since the U.S. government grounded all commercial jets for three days, returning home would not be so easy. Using a little investment banker ingenuity--the kind with the unlimited checkbook--the bankers located a private Gulfstream jet in Switzerland that they could charter to take them home, at a cost of $75,000. One of the partners called up Ken Jacobs, his boss in New York, to arrange for Lazard to pay the bill. "There are five of us stuck here," he told Jacobs. "We're not sitting here anymore. I don't know when we'll be able to get on a commercial airline, but I can tell you, I found a plane, and we can get out of here, starting on Friday, I think we can leave on Friday. I'm gonna charter the plane." Jacobs hesitated. Given the expense pressure on the firm at that moment, a $75,000 bill for a seven-hour flight gave him pause. "He said, 'Well, I don't know,'" this partner continued. "I said, 'Ken, fuck you. I'm going to charter the plane, and you guys are going to pay the bill.'" Jacobs told him, though, there may be another way. "I said, 'What are you talking about?' and he says, 'Well, Michel's got a plane.' So then it starts unfolding."

  After the July 2000 crash of the Concorde outside of Paris, where 113 people died--resulting in the suspension of Concorde travel and an unfounded rumor that Felix, then the ambassador, was on that flight--Michel had arranged to lease a Gulfstream jet, a G4. Michel, of course, needed to easily get back and forth from New York, Paris, and London, and with the Concorde no longer reliably available, he joined the ranks of the other billionaires with their own private jets. After September 11, in the same way that Osama bin Laden's family members were allowed to return on a private jet to Saudi Arabia from the United States, Michel's wife was permitted to fly on September 13 to Paris from New York on Michel's jet. Michel's plane would then be permitted to return to its home base in New York.

  This partner continued: "I said, 'Well, Ken, that's a no-brainer. You just send his plane to London to pick us up. It's coming back anyway.'" He wouldn't do it.

  That really pissed me off. When Ken called, and he said, "Well, it's not going to work. Michel's not going to do it," I said, "Fuck all of you. We're chartering this plane." The long and short of it is that I had become friends with Annik, Michel's secretary, who is an institution. She thought Michel was behaving very badly. She knew this was all going on. She browbeat him into doing it.

  Ken called. He said, "Michel is going to let you guys come back on his plane. But you can't tell anyone," because Michel doesn't want anyone to know he's got this plane. But everyone knows he's got this stupid plane. Ken said, "But the plane's picking up someone in London." We go into the London Luton Airport, and sitting in the lounge is this guy I went to college with. His name is Tim Barakett. He runs a hedge fund here. One of the big investors in the hedge fund is the Rothschilds, who are of course good friends of Michel. So I said, "Tim, what are you doing here?" He says, "I'm taking this plane back." And I said, "Oh, we're taking the plane back, too. Where are you going?" He said, "Well, I'm just waiting for this group that this plane belongs to." It's Michel's plane. This fucker spent a day negotiating with us--his partners--about riding his plane back. It's coming back anyway. Not only was it going to Paris, it was going to London to pick up a guy who worked for a hedge fund where the big investors were the Rothschilds.

  They all came back together on Michel's plane, and the Lazard partners were so angry at him, on the one hand, and so pleased to be returning home in luxury, on the other, that they helped themselves to Michel's stash of rare wines.

  As life in New York slowly returned to the "new normal," and Lazard along with it, Loomis now seemed to feel even more pressure--even though several issues seemed resolved. For instance, after Evans sent around an e-mail to the executive committee on Friday afternoon, September 21, explaining that CALFP, the revived derivatives joint venture Edouard Stern created years before with Credit Agricole, would lose as much as $15 million in 2001, Loomis sent a response (at 12:21 a.m. Sunday morning) to Evans, copying Michel, and laying into him. The controlled rage is palpable. "I have long been concerned and articulate about CALFP, including asking for (delayed) reviews," he wrote. "We have now late notice of a major problem there on a weekend, and you are just dumping this on the Executive Committee as a whole immediately by e-mail. Your conduct confuses me and shakes my confidence in you. I know that you are shooting some sort of birds on Monday. I would very much appreciate your finding a phone that day (and not calling me on Sunday)."

  Loomis wasn't the only one whose behavior was mercurial. Michel, too, was having mood swings. Two weeks after September 11, he was in London, and London partners found him to be "joking" and "happy." When this assessment found its way to Paris, a partner there expressed his surprise. "Very interesting, very odd, very puzzling to h
ave found qui vous savez full of beans etc.... I saw him today and found him resigned, quietly reconciled with the idea that sooner or later inescapably the end would come. Not tomorrow, but round the corner. Sure he may still enjoy a few days of artificial fun as if...But I feel he is somewhat like little boys playing at soldiers aware that at 5pm mummy will come to take them home, have their bath: game's up."

  LOOMIS WAS NOW in a tough spot, as he was faced with having to make an argument about why Lazard should stay independent and private, after having pushed so hard for the sale. He was now adamant against this course of action--with Michel's support--because the valuations had dropped precipitously after the terrorist attacks and would no longer be appealing. But several members of the executive committee--Steve Golub, Ken Jacobs, and Dave Tashjian among them--were still pushing for a sale. Loomis, though, nixed it. He refocused the committee back on the increasingly controversial restructuring plan, which, among other things, would have meant deep cuts in New York and shuttering most of the capital markets operation. Closing capital markets would have meant firing many of the people involved, including Dave Tashjian, the head of the unit. On the evening of October 15, Loomis told Tashjian he was going to recommend closing the capital markets business the next day. Not only did he not want Tashjian to oppose him on this, but he also wanted Tashjian to resign and to think about not even showing up at the meeting. Loomis promised Tashjian a sizable retirement package if he went quietly.

  Tashjian was not happy, nor was he one to go without a fight. He called Michel and told him what Loomis had said. Michel told him that as a member of the executive committee, he had every right to be at the meeting the next day. Tashjian also called Golub and Jacobs, and the three of them strategized overnight on how to counter Loomis's argument for closing capital markets. By the morning, they had their plan.

  For starters, Tashjian attended the meeting. When Loomis recommended eliminating his group, he objected. Golub agreed with Tashjian and said the firm's capital markets effort, while small, was critical to the M&A effort because, among other things, it allowed the bankers intelligently to provide clients with a sense of how the market would react to their deals. He then reported that Pfizer--one of Golub's and the firm's most important clients--very much appreciated Lazard's ability to do stock buybacks for the company. Jacobs agreed and cited both Microsoft and Amazon as two more clients that appreciated the firm's capital markets work. "Fundamentally, if you shut down Capital Markets, you will have a meltdown of banking in New York," Jacobs said. Loomis and Jacobs started to argue.

  At one point, Jacobs, speaking in a voice Evans described as a "menacing monotone," said, "To be perfectly frank, certain steps we take will drive away some of our best people and this is one. How will I explain this? The people who I have hired, say, to cover Pharma [the pharmaceutical industry], will go within a year." Loomis responded equally testily: "Every time we have this discussion, you go on to talk about a meltdown in Banking." The discussion of eliminating capital markets ended. Loomis had lost. At the lunch break, Tashjian approached Loomis, held out his hand, and hoped that despite the outcome, they could go on professionally with no hard feelings. While in the line to get food, off to one side, Loomis said there would be no hard feelings--and then he fired Tashjian. Nobody else on the executive committee heard what had happened. Tashjian was shocked.

  When the meeting resumed in the afternoon, Loomis recommended implementing the massive restructuring plan that would have reduced New York to ten or fifteen partners. "Gratuitous violence" is how one senior partner put it. The opposition from the executive committee to this idea was equally fierce. Still, costs needed to be cut to accommodate the rapidly falling revenues. To that end, after the October 16 meeting, Lazard announced its intention to eliminate sixty, or 30 percent, of the New York office's two hundred investment bankers.

  The firings were tangible evidence of how badly things at the firm--and across Wall Street--were spiraling out of control. At the time the cuts were made, the firm publicly announced that its full-year 2001 profit was to be about $150 million, a drop of about 75 percent from 2000. (In 1999, the New York office alone made $300 million.)

  Finally, with cash running low and the prospects of year-end compensation greatly diminished, Loomis convinced Michel to distribute real equity to the working partners--"a watershed event" in the history of Lazard, Michel said, "and a mistake." He acceded to Loomis's request at the October 16 meeting only very reluctantly and because the internal and external pressures to do so were no longer bearable. "In a partnership," goes Michel's thinking, "the ownership of the partnership was virtual. It belonged to the partners, but who the partners were depended upon when you were speaking. It changed with the partners. Completely unfair system? Sure, but every system is unfair. Because if the firm were ever sold, the people who would get the percentage would be the people who worked there at the time it was sold." The details of how the equity would be distributed--and how much--remained to be determined. But the basic deal Loomis struck with Michel was that profit points would be turned into ownership points at a 70 percent conversion ratio. In other words, if you were a 1 percent profit partner, your ownership stake would be 0.7 percent. Since partners' cash compensation would be greatly diminished because of the firm's poor 2001 results, the distribution of real equity gave people a reason to stay around.

  All of these events--the worsening financial performance, the failed talks with Lehman, September 11, the firing of bankers, the confrontation about closing capital markets, the palpable European dissatisfaction, Michel's begrudging decision to distribute real equity--took their toll on Loomis. He was no longer sleeping well, if at all. He explained: "I reached the conclusion that I was in an impossible position between the views of Michel, the views of various members of the executive committee, and my ability to reconcile people's views.... I felt two things. One is that I thought that I was in an impossible position to do a good job, and secondly I thought that if I continued, I would get progressively frustrated and unhappy and"--here he paused for some time--"Michel had already started to put strictures on what I could or couldn't do by way of restructuring the firm." And of course, Michel had already started talking to Bruce Wasserstein, which Loomis now knew.

  Michel was a good poker player, though. He didn't let on to anyone, aside from his CEO (and perhaps Haas), that he was talking to Bruce. And Loomis wasn't telling anyone, not even his wife. So when his partner Ken Jacobs, then the head of M&A, who knew Bruce well socially--their wives, both French, were very friendly--asked Michel if he would like to speak again with Bruce, now that Bruce looked to be free from Allianz and Dresdner, Michel encouraged Jacobs to set up an appointment. "At that point I knew Bruce had left DKW," Jacobs explained, referring to Dresdner Kleinwort Wasserstein. "I asked Bruce if he thought he'd be interested in this. He clearly was. I said to Michel I thought that Bruce could be interested in this." But of course Michel already knew this information. As did Loomis. "So here I am in a situation where he's restricting what I can do to restructure," Loomis said. "The Europeans, particularly, are saying New York has to be restructured. The costs are too high. But my hands are tied in terms of making decisions, and he's holding conversations with Bruce Wasserstein."

  Michel and Loomis agreed to meet at nine-thirty on Saturday morning, October 20, at Viking's Cove, Michel's mansion in Lattingtown. The afternoon before, Loomis had suggested a quotidian agenda for the discussion--including Braggiotti's compensation, what to do about new partner candidates where representations had been made previously, Lazard Asset Management, and clarifying his own role in banking. That morning Loomis drove from his house overlooking Long Island Sound in Greenwich to Lattingtown. As the crow flies, the distance between their two waterfront homes was roughly nine miles. The drive, that warm fall morning, some forty-five miles along some of the most heavily trafficked roads in the country, must have seemed like an eternity to Loomis. He had gone to see Michel to get his advice about the myriad
of looming unresolved issues. He got that, and more: he got fired.

  Michel eschewed Loomis's agenda and told him he was no longer being effective, had no base of support in either New York or Europe, and was unequivocally failing. "His advice was to hold on until Bruce could get there," Loomis said. "And also not to do anything to upset any of the partners--key partners, like people on the executive committee--who might then leave, and that I, essentially, had failed." Taken aback, Loomis told Michel, "'Look, since I only took this job because of you and you don't have confidence in me, I don't have any interest in continuing the job, and it's very important in that I was and am very happy with my experience at Lazard.' I'd seen all these people who were bitter or walked away and I didn't want that." He remembered the conversation as being intense and emotional. But he did not cry.

  On the ride back to Greenwich, he replayed the conversation over and over in his head. Michel had not only removed Loomis but also told him to sit on his hands, compromise with people, and wait to see if Michel could cut a deal with Bruce to replace him. There was also still a remote chance something could be done with Credit Agricole. And oh, by the way, don't piss off anyone important in the interim, either, especially Braggiotti or Jacobs. Also, there appeared to no longer be a role of any sort for Loomis at the firm, not even as a banker. "Maybe you were once a banker, but others wouldn't regard you as one," Michel told him. Had his opportunity of a lifetime really dissipated in the span of eleven months? "This was an impossible situation," Loomis said. By the next day, he had thought even more about the conversation. And then it dawned on him: "I thought about it on Sunday, and then it's one of those things like, you know, how stupid can you be?"--and here he laughed at the memory. "You know, you've just been fired. You know, 'Oh. Now I get it.'" He decided the best thing to do would be to resign. "Otherwise, I just get tarred and kicked around after being judged a failure and having no leverage to make any decisions," he wrote. "Everyone ends up unhappy."