The last tycoons: the secret history of Lazard Frères & Co (30 page)

"But Mr. Rohatyn would have been in charge of the ITT-Hartford merger as it affected Lazard?" Silverman asked again.

"Yes, but he was also helping or helped by a certain number of people who were dealing more in the machinery or with the legal work," Andre offered.

"Are you telling me that in the matter of the ITT-Hartford that would fall under new business, Mr. Rohatyn would not perform every single function that had to be performed in connection with it?" Silverman asked incredulously.

"Yes," Andre replied.

"Are you also telling me that in such a situation Mr. Rohatyn would be the partner who would be the supervisory person of all of the little functions?" Silverman asked.

"No, not the supervisory necessarily for all," Andre answered. "The machinery agreement and so on, I would say no, but if it comes to discussing with the chief executive of the company, it is certainly not Mr. Mullarkey or Mr. Fried who would do it."

That is as close as Andre got to trying to discern the logic of how Felix abdicated his advisory role for ITT at such an important moment. In any event, soon after the IRS ruled that the ITT-Hartford merger was now taxable to the Hartford shareholders, ITT made its offer to cover the taxes payable for any of the still eligible Hartford shareholders. In keeping with our litigious society, following this announcement by ITT four new derivative shareholder lawsuits were started against ITT. The Herbst case was settled in and around the first week of April 1977, with ITT agreeing to pay each original Hartford shareholder $1.25 in ITT stock for each of the twenty-two million Hartford shares, or about $27.5 million in ITT stock, and also agreed to indemnify any Hartford shareholders for any future tax liabilities that might arise from the IRS decision. Lazard and Felix were released from all the claims of the shareholder lawsuits.

DESPITE THE DEPOSITIONS, the never-ending lawsuits, and the harsh glare of negative publicity, Felix remained convinced he had done nothing wrong in his advocacy of ITT's goals, and so set about once again doing what he knew best how to do: advising on landmark M&A deals. And of course, he continued to rehabilitate his tarnished image. Both of these goals were happily advanced in one particularly timely pairing of June 1974 articles, one in
Time
and the other in the
New York Times.
Written once again by the reporter Michael Jensen, who had written about Felix and Lazard often in the past years, the
Times
article described Felix as a "merger mastermind" for his deft architecture of a cleverly conceived and structured rescue of the struggling Lockheed Aircraft Corporation by Textron. Felix's idea, as Lockheed's adviser, was to have Textron invest $100 million in the ailing Lockheed in exchange for a 46.8 percent interest in the company. The Textron investment would have also, crucially, relieved the federal government of some $250 million in controversial loan guarantees made to Lockheed's banks. These guarantees, approved by Congress by a single vote, saved Lockheed from bankruptcy in 1971. The Textron equity investment also convinced Lockheed's banks to convert $275 million of debt to preferred stock, reducing Lockheed's interest expense by $100 million in the first two years after the restructuring. "It's far and away the most intellectually satisfying thing I've been involved in," Felix told the paper. The generally laudatory article did contain the requisite cheap shot from an unnamed competitor, no doubt jealous of Felix's continued acclaim. "Nobody's better than he is," this person told the
Times.
"His ability is that he turns people on. With the backing of Lazard, he's able to get good people. I don't think all that highly of Felix, but that doesn't mean he isn't as good an investment banker as there is on Wall Street. The problem is that no one is a saint." The article correctly linked Felix's "rise" to two "powerful forces," Andre Meyer and Harold Geneen at ITT, the same two mentors Felix still credits. But it also offered the thought about Felix, presumably Jensen's own, that "some of his successes, generally heavily publicized, are considered on Wall Street to be as much a triumph of public relations as a display of financial acumen."

The
Time
article turned the epithet "Felix the Fixer" on its head, making it a laudatory reflection of his skill in putting together the Textron-Lockheed deal rather than a von Hoffman-esque reference to his unfettered access to political power. "If he pulls it off, it will be the investment banking deal of the decade," one corporate executive told the magazine. Felix described the deal to
Time
as "very satisfying from an aesthetic point of view."

Felix's efforts to resurrect his reputation had been boosted enormously by both the Jensen and the
Time
articles. He was once again heralded as the boy wonder of Wall Street. Rarely complacent, though, he used the opportunity afforded by the blast of favorable publicity--and the quieting of the negative--to, for the very first time, put a toe in the water of public policy debate. Obviously for years, on behalf of his clients, he had been cleverly pulling the levers of power in Washington, but this was something entirely different; this was Felix using his considerable intellect to take a stance politically. (More than thirty years later, he is still at it.) In a two-thousand-word essay on the Sunday
Times
editorial page, in December 1974, Felix boldly endorsed the idea, then being floated by several congressional Democrats, to resurrect the Depression-era Reconstruction Finance Corporation. The original RFC, commissioned by Congress in January 1932 with the former Lazard partner Eugene Meyer as its chairman, eventually disbursed some $10 billion in capital, both debt and equity, to struggling American corporations. Forty percent of the RFC's capital went to financial institutions. The original RFC effectively pumped badly needed capital into corporate America when the public markets were still having trouble providing that service. The economic struggles of the early 1970s had revived the idea in Felix's mind. He wanted the U.S. Treasury to capitalize the new RFC with a $5 billion equity pool, plus the authority to offer an additional $10 billion in federal guarantees, all of which could be used to again inject fresh capital into struggling American corporations, not unlike how Textron's offer to inject $100 million into Lockheed proved pivotal. "The RFC, therefore, should become a revolving fund--hopefully a profitable one--which steps in where no alternatives are available and which steps out when the public interest has been served and normal market forces can again operate." Felix suggested that the private sector would finance the Treasury's contribution to the RFC by having those companies earning more than $1 million donate 1 percent of pretax profits annually to the Treasury. In five years, the government would be repaid, he believed.

The financial establishment warmed to Felix's proposal. "I agree emphatically," said Gus Levy, Felix's friend and the managing partner of Goldman Sachs. "It is essential we move in this direction," William McChesney Martin, the former chairman of the Federal Reserve, wrote the
Times.
But politically, where Felix often had a tin ear, the proposal was virtually dead on arrival. "If Lockheed is the kind of example Rohatyn is thinking of, he's dead before he starts," one senior congressional staffer told
Forbes,
in a typical comment. "Remember the vote on the Lockheed debt guarantees? It passed by one vote in the House and two votes in the Senate. Today the leadership wouldn't even bring it up!" Wisconsin's Democratic senator William Proxmire dismissed the idea as "a formula for protecting buggy whip manufacturers."

If by late 1974 Felix had begun the process of public rehabilitation, it was equally true that there was hardly a government entity that had not investigated, or itself been the subject of an investigation into, Felix's and Lazard's role in ITT's acquisition of the Hartford. The insurance commissioner of Connecticut had ruled twice. The federal courts in Connecticut had ruled repeatedly on the matter of ITT and antitrust. The state courts in Connecticut had ruled on Ralph Nader's lawsuits. The House of Representatives had conducted hearings into boxes of purloined ITT documents. The Senate Judiciary Committee had dredged up the whole sordid affair as part of the Kleindienst confirmation hearings. The Justice Department had settled antitrust claims against ITT after intervention from Nixon, Kleindienst, and Felix. Justice was also looking into charges of perjury against the witnesses at the Kleindienst hearing, including both Kleindienst and Mitchell, the current and former attorneys general. The SEC had settled securities fraud violations against ITT and Lazard before shipping the documentary evidence to the Justice Department. Nixon's White House was up to its eyeballs in trying to influence the outcome of the antitrust matters, thanks to ITT's intense lobbying efforts and its substantial donation to the Republican National Convention. The IRS had reversed its original rulings about the tax-free nature of the deal, and the original Hartford shareholders affected by the new IRS ruling had sued for damages. Shareholder litigation abounded. One could reasonably expect that by 1975 enough would be enough in the matter of Lazard, Mediobanca, ITT, and the Hartford.

And once again, one would be wrong. After reviewing all of the documents in the case ad nauseam, the SEC decided once more at the end of 1974 to open up a new investigation into whether ITT had violated certain provisions of federal securities laws in conjunction with its acquisition of the Hartford. Once again, the Lazard leadership found itself facing intense scrutiny. Felix would testify twice more, as would an increasingly ailing Andre Meyer.

The major focus of the SEC's
second
examination into the ITT-Hartford matter was Mediobanca's subsequent profitable resales of the ITT "N" stock, in 1970 and 1971, to what turned out to be an internecine web of companies one way or another affiliated with Mediobanca, Lazard, or both of them. Then, in two instances, the affiliated entities that bought the stock, at a profit as well, turned around and
sold
businesses they were investors in to ITT--all at the exact same time. The coincidences were too delicious for the SEC to ignore but proved exceedingly difficult to pin down precisely. Felix, of course, told the SEC that he knew very little, if anything, about the ITT-Mediobanca deal and very little, if anything, about these derivative sales. If any of these questions were irritating to Felix, it was not apparent. He seemed especially gracious with the SEC lawyers--several of whom he had befriended over the years--and they with him.

FIVE MONTHS LATER, in May 1975, a serendipitous phone call while he was once again working the corridors of power in Washington, D.C., would do far more for the resurrection of Felix's reputation than would his first op-ed piece in the
New York Times
or a feature about him in
Time
magazine. That fateful call from Hugh Carey, the New York governor, seeking Felix's help in solving New York City's looming fiscal crisis--a debacle Felix to that point had no inkling about--would transform Felix from a controversial man, reviled by editorial writers, into one of the most famous and highly respected men in the country. He would become the savior of New York City. Felix's adulation among common New Yorkers was such in the mid-1970s that cabdrivers would not let him pay for his fares and cops would volunteer to ferry him in their cruisers to his appointments. He started hanging out at Elaine's, the very social East Side pub, with the likes of Clay Felker and Jimmy Breslin.

According to Felix, one day in May 1975 he had been at a meeting at the SEC unrelated to its new ITT-Hartford investigation--he was now part of an advisory commission on the National Market System--and afterward paid a social visit to Senator Henry M. "Scoop" Jackson, Felix's ally in his effort to reestablish the Reconstruction Finance Corporation. "I got a call from David Burke, who was the chief of staff to Hugh Carey and who used to be Ted Kennedy's chief of staff," he explained. "He said the governor would like to see you urgently. I said, 'I'm about to take the shuttle back to New York, I'll stop in your office.' I go in there, and Carey is there with Burke, and Burke I had known a little bit. Burke used to also work for Howard Stein at Dreyfus, and is a remarkable, remarkable man. Carey goes over this thing with me, or Burke does, about the financial situation of the city." Carey and Abe Beame, then mayor of New York, had been to see President Ford with an urgent request for the federal government to provide $1 billion--"$1 billion being wildly less than we needed," Felix explained years later--to New York City in order to prevent a bankruptcy in the next thirty days. Ford told the mayor and the governor he would not help. Remember the infamous blaring
Daily News
headline "Ford to City: Drop Dead"?