The last tycoons: the secret history of Lazard Frères & Co (56 page)

FOR A WHILE, remarkably, he soared. The former "world's best associate," whose father was a respected career naval officer, was about to get a battlefield promotion. Somehow he had turned all of this frank talk into career advancement. Just eleven days after his "lance the boil" memo, in a May 20, 1988, memo to the "Banking Group"--most of the New York partnership--that could have been written by Loomis himself (and probably was), Michel and Felix sounded the trumpets, albeit in a low-key way. "The excellence of our partners and associates, as well as our business philosophy, have allowed us in the past few years to outperform other firms," the memo said. "At the same time, our banking business is larger, more complex and faces tougher competition in the future." Felix and Michel wrote that Lazard had a finite "window of opportunity" to exploit the unresolved internal problems of larger firms and the still evolving role to be played by several emerging advisory boutiques. "We need to address successfully difficult issues of organization, priorities, allocation of scarce resources, new undertakings, momentum and accountability for performance," they continued. "Without fundamentally changing the nature of the Firm, a more formal process and some centralization of authority are required to achieve our banking objectives."

With that, Loomis became the firm's first official head of investment banking. To be fair, through the Andre years, of course, others such as Felix, Frank Pizzitola, and George Ames had loosely held the reins of the firm's advisory business. But they all understood the pointlessness of the role in a small firm so totally dominated by the presence of Andre Meyer (in Felix's case) and Felix (in Pizzitola's and Ames's cases). Loomis became the first person under Michel's leadership to successfully maneuver himself into a position of relative authority just as it was beginning to mean (a little) something more than just being a clerk for Andre or Felix. Loomis was to "work closely" with Mezzacappa to ensure an "effective relationship" between banking and capital markets, and, of course, he was to "seek guidance" from Felix and Michel, "as appropriate."

The memo was eerily reminiscent in its conclusion of those few written some fifteen years earlier when Andre pretended to cede some of his absolute authority to Donald Cook. "We also intend to continue to use small meetings with a few partners to discuss issues of business direction or potential engagements with policy implications for the Firm," they concluded. Loomis's promotion was an "evolution not a creation" that sprang from his initial and ongoing concerns about the proper treatment of the junior professionals. This had led him to be given incremental responsibility first for recruiting, then for assignments, then for a general review of the promotion process, then to head of banking. In a firm famous for the independence of its idiosyncratic bankers and where Michel
alone
still made all the important decisions regarding partner pay, promotion, hiring, and firing, for Loomis to be named head of banking appeared to be, at best, an oddly Pyrrhic victory. But there was no denying his role, pretty much out of nowhere, as a member of the loosely taken management committee and the important symbolism of moving his office, at Michel's request, to between Michel and Felix.

But Lazard being Lazard, May 1988 would mark for Loomis the beginning of a thirteen-year period that left him resembling Saint Sebastian, where his "authority was always informal" and his frustration was always immense, caught between the Sun King and an ever-changing committee of senior partners ready, willing, and able to launch arrows at him. Whereas Felix had an intuitive sense that a management role of any kind at Lazard "was not a winner," Loomis, whether through ambition or naivete, possessed no such instinct. He would have to learn the hard way.

THE FIRST INDIGNITY came within ten days of his appointment.
Business-Week
ran its first-ever cover story about the firm (as opposed to just about Felix)--and Loomis was not even mentioned. The article, titled "The Last Emperor," featured on the cover an imperious-looking Michel, hair slicked back, holding one of his ubiquitous Cuban cigars. He acknowledged that as a man with four daughters, none of whom had an interest in finance, he was likely to be the last David-Weill to lead Lazard. But at a mere fifty-five years old, he was quick to point out this was not about to happen anytime soon. "It's more than probable that the firm will move outside my family when I die or retire," the emperor acknowledged. "I'm getting used to the idea--slowly." One of the reasons he was in no hurry was simply how well the firm was doing and how fabulously wealthy he was becoming as a result. "Compact, steady Lazard Freres, meanwhile, is thriving as never before," the article stated. For the first time since the creation of Lazard Partners forced the firm to reveal five years of its historical financial performance, Michel shared the firm's financial performance: In 1987, New York made $134 million before taxes (but down from $168 million in 1986); Paris made $70 million pretax (up from $36 million in 1986, reflective of the firm's luck and skill in avoiding nationalization); and London made $58 million (although this number is after payments to partners, whereas the New York and Paris numbers are before those payments).

Michel received in 1987 about 20 percent of the profits from New York alone, or some $25 million, and likely another $20 million or so from the other two houses. Not a bad haul, making him one of the wealthiest bankers on Wall Street with a net worth around $1 billion. (Michel, though, was a distant runner-up to Mike Milken, of Drexel Burnham infamy, who made $550 million in 1987.) Felix's 6 percent take put his 1987 pay at around $8 million.

The
BusinessWeek
story also trotted out the usual Lazard myths--some of them patently untrue--and embellished upon them. Back was one of Michel's favorite descriptions of the firm as a
"haute banque d'affaires,"
an elite private bank. "To me, private banking is a state of mind vis-a-vis the world," he explained yet again. "It means not being in the way, being one who helps instead of being a power unto oneself. I see our role as very, very modest." He shared this same mantra with the new young hires, when he met with them once each year. There was also mention of Lazard's renowned frugality with regard to office space, with a new twist: When workers found a "magnificent slab" of marble in the Lazard lobby on the thirty-second floor of One Rock that Andre had considered "ostentatious" and ordered covered up with drab wallpaper, "there was serious discussion around here about putting the wallpaper back," one partner said. Michel made the decision to reveal the marble. "That's the new Lazard," the same partner said, joking. "Damn the overhead." There was the de rigueur discussion of Felix's prowess as a deal maker, his devotion to public service, and the need for Lazard to prepare for the day when he was gone. "It is beginning what might be called its post-Felix era,"
BusinessWeek
confided, "which is greatly complicated, to be sure, by the fact that Rohatyn is still very much a force at the firm." But there was also the acknowledgment that the firm had grown and Felix, alone, could no longer generate sufficient business to cover everyone's high-level compensation expectations. "Lazard is not exactly kicking down the door any more in terms of major new business coming to Felix Rohatyn," Eric Gleacher, then head of M&A at Morgan Stanley, told the magazine hopefully. But Michel dismissed this speculation. "The intimacy between Felix and I," he said, "has been the cornerstone of the firm's success--not
a
cornerstone,
the
cornerstone." Take that, Loomis.

Part of Lazard's problem was the "cruelly ironic" fact that--as the economist Joseph Schumpeter said about capitalism itself--the seeds of its own destruction were being sown by its own unparalleled success. As Felix aged--he was sixty at the time of the
BusinessWeek
piece--he was steadily selling off the firm's historic clients, among them RCA, Revlon, and Owens-Illinois. Loomis had recognized this as a problem but had had no success in solving it. This dilemma, while hugely lucrative in the short term as large fees rolled into the firm, presented Michel with the long-term conundrum of somehow attracting new clients.

Lazard had always resisted prostrating itself for business. "The best way to get business is over the transom" is how the onetime partner Bob Lovejoy put it, much to Loomis's ongoing consternation. Unlike the other, far better capitalized Wall Street firms, Lazard had few ways, other than sound advice, to get its hooks into new clients. The firm didn't make corporate loans and rarely underwrote corporate bonds, high-yield bonds, or corporate equity. Once the leader in principal investing--the buying and selling of companies for its own account--Lazard had long ago abandoned the business, leaving behind the possibility of healthy profits and a steady stream of captive clients.

The article revealed that while there would be no changes to the basic business model, created by Andre, of offering blue-chip clients world-class advice, Michel was now prepared to make tweaks on the margins. First, following Loomis's recommendation, the firm would make a stab--perish the thought--at actually calling on clients with thoughtful M&A ideas. Partners made a list of likely prospects and organized themselves into four separate teams of about twenty professionals each, including six partners per team. Each team was responsible for particular industries. Loomis was to assist coordination among the groups as well as be part of the group focused on the retailing and financial services industries. This
surely
had never been done before at Lazard. "Everything is being done to fan out clients and encourage quite a number of people to go out and get business," Felix said.

Another new development was the introduction of a $1.5 billion white knight fund--so called because the firm used the capital to help corporations under attack from raiders by putting a slug of stock into friendly hands--to be called Crossroad Partners and headed by Lester Pollack, the former general counsel of Loews Corporation (a Felix client) and a former partner of Odyssey Partners, an early private-equity fund. Ali Wambold, another Lazard partner, by way of Lehman Brothers, was to work with Pollack on investing the fund.

The fund, to be an entity separate from Lazard, had a five-member board made up entirely of Lazard partners, including Michel. The Lazard partners invested $60 million of their own money in the fund. And of course, Pollack and Wambold would remain partners of Lazard. (Lazard changed the name Crossroad Partners to Corporate Partners after lawyers told them they had to, and the fund ended up being $1.55 billion, less than the hoped-for $2 billion.) The idea for the fund was for Lazard to buy between 10 and 40 percent of the stock of a company under attack from an unwanted suitor. By putting a chunk of stock into friendly hands, the raiders would, theoretically, go away. "The gist is Corporate Partners represents a pool of capital to invest in the company to allow the company to do something constructive and have the time to do it," Pollack said.

This was a different strategy by far from the one Andre used to buy Avis and Matador Ranch, but that didn't stop Pollack from spinning Lazard's historical success in principal investing to his advantage in promoting the new fund. "Lazard in Paris has been operating as a principal, acting as a friendly shareholder, for a long time and has been very successful," he said. "Lazard in New York has also acted as a principal from time to time and has done very well at it. Because we do act as principals, as proprietors, we have longstanding relationships with corporations. We're on a lot of boards not only of clients but other companies where we provide an active director role. Other investment-banking firms are finding ways to buy market share through use of their own capital. That's the phenomenon of bridge financing and the like. We're not in that business."

Wambold, who had conceptualized the fund, tried to slice the Lazard difference even thinner. "I think if you asked Michel whether he is an investment banker investing in companies, he would tell you the answer is no," Wambold said at the time. "He would say he is a senior partner of an investment-banking entity. He is also an investor. We are very suspicious of mixing the two mentalities because there is always the danger of using capital on the investment side to generate fees on the current income side. You're making $20 million on the income side, while putting $300 million at risk on the investment side." Before long, Lazard and Corporate Partners would find there were big risks investing this fund, risks that reflected very poorly on Lazard. But with the new Corporate Partners fund at least Lazard could say it was back in the often lucrative business of private equity, with its own differentiated twist.