The last tycoons: the secret history of Lazard Frères & Co (38 page)

LAZARD WAS OBVIOUSLY suffering one of its periodic generational crises, which, in a firm so utterly dependent on the machinations and idiosyncrasies of its Great Men, are to be expected. Through the sheer force of his personality, will, and searing intelligence, Andre had resurrected Lazard from irrelevance and made it one of the most important firms on Wall Street. This was not a firm, like Goldman Sachs, Morgan Stanley, or Merrill Lynch, that worshipped at the altars of a unifying, all-powerful corporate culture, where professional management deployed well-schooled armies and abundant capital to solve clients' problems. Lazard had nothing to sell but the power of its exceptional people and their ideas. With Andre quite ill and the "flamboyant" Felix largely focused on the problems of New York City, Lazard was facing a Job-like test.

A January 1977
Times
article, "End of an Era at Lazard," exposed the festering sore by focusing the spotlight squarely on the nagging question of who, if anyone, could succeed Andre. His debilitating illness (the details about which he coyly tried to sidestep, calling it "strictly confidential, very painful and not something you brag about") had kept him away from the office he had once ruled with an iron fist for going on two years. Felix wouldn't consider it. Kniffin was ill. Although Andre had recruited Cook to run the firm, the
Times
article served to undermine his authority, as had the September memo from Andre and Michel. The story also confirmed that Michel was the only potential leader of Lazard with the legitimacy that ownership and bloodlines bestow. Cook had no legitimacy because he had no ownership and no power of the purse, the true Wall Street currency. Andre "didn't do what an institution builder has to do, which was to put in place a plan for pulling out," one Lazard observer said. "He didn't do it but kept talking about doing it, which was even
worse."
Much the same thing would be said over time about Michel.

The reasons Cook's efforts flopped were made evident by his comments to the
Times.
Cook explained that the old Lazard management style--and here he drew a picture of a hub and spokes for the reporter--was a wheel with Meyer at the center. "He was obviously the dominant figure but the wheel-and-hub organization no longer will produce the best results for the firm." In the Cook regime--and here he drew another diagram--Lazard would be run in a pyramid structure, with a board of directors at the top, a CEO beneath the board, and executives reporting to the CEO, a "more classic" corporate structure, he explained: "I'm the resident bureaucrat; what I can do for this firm is be the architect of the transitional period."

Clearly Cook had failed--really failed--to understand the Lazard ethos. Felix told the
Times
that he agreed the firm was in a transitional period, but he knew better than to concur that Cook's management approach would work for Lazard. "When you no longer have a Mr. Meyer," he said, "you have to change your method of operation--and we have. Mr. Cook is the managing partner and he runs the firm but no one of us will make a policy decision without conferring with the other.... We act as partners, not as servants." Cook's influence waned steadily from the moment the article appeared. His economic stake, though, remained at 4 percent, while Felix's fell to 11 percent. "There was a sense of drifting here," one Lazard partner observed at the time. "It was a discouraging period."

Competitors began to notice. "We saw them drifting downward and becoming uncompetitive," the unnamed head of another investment banking firm told
Institutional Investor
at the time. "They were losing clients and not leaving a good impression on the clients they had. Andre was elderly, sick, but still not willing to turn over the reins completely." Michel would later say of that rudderless time, "The risk was not of losing business. It was of losing people. That we were losing clients was unimportant, curiously enough. We were losing people. That was serious.... But the people were getting discouraged. Morale was bad. The eternal question was 'What is the future in this place? Should I stay? Should I not stay?' People are extraordinarily easily disquieted, and extraordinarily easily quieted."

Behind the scenes that year, somewhere between the dimly lit corridors of Lazard's Paris office on the Boulevard Haussmann and Andre's Swiss chalet, a fierce debate was once again raging about the future of the New York partnership. Unlike the Rothschilds, Lazard had no rule against a non-family member running the firm. Andre's fifty-one-year tenure, including thirty-four years at the helm, after having been among the most respected foreign currency traders in France, was clear evidence that the David-Weills didn't have the same concerns as the Rothschilds about looking outside the family for leaders. But it was obvious to Andre and to Michel--and to all the other partners at the firm, too--that Cook was not the answer. It was equally obvious that Andre could no longer be expected to run New York--not to suggest he wasn't still very much active in the firm from his outposts at the Carlyle and in Crans-sur-Sierre.

Felix should run the firm, they decided. He was an obvious choice. He was the preeminent investment banker of his generation. He knew how "to bring business." He was exceedingly well known. He spoke fluent French, German, and English. He understood both the American and the European cultures. In short, a Great Man. Just what the firm needed. But Felix was heavily involved with solving the New York City financial crisis. "He was politicking," according to Patrick Gerschel. And there was the persistent, nagging matter of Felix being steadfast in his refusal to accept the job. Publicly, he had always hidden behind events of the day. He couldn't run the firm, because he was solving the Wall Street back-office crisis, or was too busy being tarred by the ITT scandals, or was swamped by his commitment to MAC. Or he was doing deals. He once again told Andre to forget it. "I told him it wouldn't be good for him and it wouldn't be good for me," Felix told
Newsweek
in 1981. "It was a very subtle psychological situation."

There is no doubt Lazard would be a different firm today had Felix agreed to run it. He strongly believed in Andre's dictum that small is beautiful. He was frugal, he was discreet, and he could be ruthless. Felix was far more risk averse than Andre and shunned the principal investments that Andre, for a time, reveled in. Felix is said to favor government bonds for his personal investments and pointed out that he lives far less ostentatiously than his peers, which is probably true as a relative matter, despite his Fifth Avenue apartment, his Southampton spread, and his Wyoming ranch. Such fiscal conservatism paid off for Lazard at least once, in the early 1970s, when other firms were struggling financially--which Felix saw firsthand as head of the Crisis Committee of the New York Stock Exchange. "We were riding through the early Seventies on a mountain of treasury bills," Mullarkey once said.

Many of Felix's former partners could never figure out, though, why he never accepted his mandate to run the firm. Some understood his reluctance, since the task was a thankless one and he was so gifted at making them rich by bringing in so much business. Others, less charitably, pinned his refusal on selfishness. "Felix only cares about Felix" is the sum and substance of this argument. It wasn't selfishness, Felix countered, but realpolitik. "The Lazard I knew, you couldn't run it and do business at the same time," he explained. "And I would rather do business. And so it was that simple. Also, I knew that as long as Andre was really halfway healthy, the moment I accepted to run the business, I would become his number one enemy. And so there was, from that point, it was not a winner."

WITH FELIX REFUSING to take the job, there was only one person who could--Michel. "The firm was very lucky I existed," Michel would jokingly say several years later. Maybe, in truth, he was the only person with all of the required legitimacy, authority, and DNA. And Andre insisted upon it. "Andre was just really in very bad shape," Felix said. "I didn't want to do it. And Michel clearly was the only candidate, and actually was the right candidate." Perhaps that was Felix's greatest insight. He recognized the inherent danger for him in attempting to run a firm where the majority owners--Michel and Andre--were intensely hands-on and opinionated. Perhaps he had been cognizant of what happened to the dignified Frank Altschul, who like Felix had no ownership in the firm. Felix had the legitimacy and the authority for the post but not the bloodline. With Michel running Paris and so clearly focused on his birthright--"I was born to great opportunity and perhaps a little too much responsibility," he once said--Felix simply capitulated to the inevitable, however inconvenient it proved to be for Michel, who would now have to be a bona fide globe-trotter. Thanks to the Concorde, the plan was for Michel to spend three weeks each month in New York and one week (and two weekends) in Paris. Indeed, he was such an inveterate frequent flyer of the Concorde that he always had reserved for him both seats in the first row of the cramped jet, one seat for him and the other for his slim Louis Vuitton briefcase. To accommodate his new schedule, Michel bought an apartment at 810 Fifth Avenue, where Nelson Rockefeller had lived. (A few years later he moved next door, to 820 Fifth.)

The partnership agreement was rewritten to account for Michel's important new role in New York. Michel's capital account showed him to have just over $3.5 million in the firm, an amount previously shown under the Lazard Groupement account representing the stake in New York held by the French families. Most important, of course, Michel joined Andre, as of September 1, 1977, as one of the "partners under section 4.1," which, in effect, gave him absolute authority over the firm. Michel's arrival in New York as a general partner signaled the end of Cook's role as the interim leader. He hung on until the early 1980s, but his partnership shares slipped continuously, from 3.5 percent in January 1978 to 2.5 percent in September 1978 to 1 percent in 1979 and thereafter. Cook was another failed experiment. Meanwhile, Felix's stake was reduced--at his suggestion--to 8 percent from 11 percent, in January 1978, and again, to 6 percent, in September 1978, where it stayed for some time. Upon his arrival in New York, Michel picked up the bulk of his father's stake in the New York firm, at 9.36031 percent, just below the 9.431 percent his father had. Michel and Andre, "acting jointly," were the partners under section 4.1 and therefore set partner compensation.

Michel assumed control of the New York office in September 1977 without much fanfare. "I had the feeling, and Mr. Andre Meyer had the feeling, that the time had come," Michel said. He was forty-four years old. On his first day, Andre told him, "Too bad, you have come too late. And I said, Why? He said, Because the great age of investment banking is over."

The world received the news of Michel's ascendancy from
Fortune
magazine, in a carefully scripted article, "Passing the Baton at Lazard Freres," in the November 1977 issue. Michel was careful to make clear that he intended to run the firm just as Andre had: low overhead, M&A-focused, stay small.

Lazard still had about 250 employees, just as it did ten years earlier, with about thirty-two partners. At the same time, other firms, such as Goldman Sachs and Morgan Stanley, were beginning to grow their workforces; Morgan Stanley, which had been Lazard's size, was now more than a thousand people. But Lazard's small size kept the firm obscenely profitable, which redounded to the partners' benefit. In 1971, for instance, New York made $13.1 million of net income before taxes, a little bit more than London and four times as much as Paris. By 1977, Lazard in New York made $15.4 million. "It's the biggest racket on Wall Street," Disque Deane told
Fortune.

In the
Fortune
piece, Felix made clear he remained dedicated to helping New York City. "I do believe I've made a difference in New York," he said. "And to me the greatest sin one can commit is not to participate where one can help." But another partner confessed to the magazine that "Andre can't control Felix" anymore. Indeed Andre had asked Felix to reduce his time at MAC and return his focus to Lazard. "Because I love him, and think he is terribly smart, I've tried to explain," Felix said of Andre. "I've told him that everyone has some indulgence. Some people indulge in beautiful women.... MAC is my indulgence, my
peche mignon.
" Andre's reported response: "Get it out of your system."

Naturally, there was intense speculation inside the firm about how Michel would run it. Some believed that, compared to Andre anyway, Michel was "lovely," "nice," and "courteous," and hoped that the manic intensity of the firm would be curtailed. Speculated Disque Deane: "The partners' blood pressure will go down, there will be fewer ulcers and maybe some people will take a day or two of vacation." The latter thought, of course, was a reference to the fact that Andre rarely took vacations--even when he was in Switzerland, he was always working--and didn't like his partners to take them, either. Mullarkey used to tell his wife to tell Andre, when he called Mullarkey on Sunday mornings, that her husband had gone to church, simply to avoid the senior partner's regular calls. That was but one of many legendary stories about the lengths Andre would go to in order to thwart his partners' vacation plans. But the
Fortune
article also tipped the partners to the fact that wholesale cuts in the partnership ranks were coming, an exceedingly rare occurrence for Lazard, where most partners considered their position a tenured one.