The last tycoons: the secret history of Lazard Frères & Co (57 page)

THE ARTICLE ALSO announced that Lazard had hired J. Ira Harris, then fifty, as a senior partner in M&A, from Salomon Brothers, where he had built up the firm's Chicago office into a big moneymaker. Harris, a walrus of a man who was born in the Bronx and played stickball growing up--he could hit the ball three sewer lengths--had known Felix for years and had worked on the opposite side of many deals with him. Harris remained in Chicago--although he often shuttled back and forth to his palatial home in Palm Beach and to New York--where he built up a Lazard office by hiring a number of new partners, including William Gottschalk and Jeffrey Golman. Lazard, oddly, took to marketing the "Felix and Ira" show--"two mature bankers with decades of experience behind them, men whom a corporate executive can trust" is how the overture went. Of course, Felix and Ira couldn't have been more different--the massive, gregarious, and outgoing Harris loved spending time with clients playing golf or attending Chicago Bears football games, whereas the aloof and cerebral Felix rarely socialized with clients; it has been suggested that Felix's idea of a good time in Chicago was to "speak to the Economic Club." Ira, meanwhile, organized an annual golf tournament in Chicago that attracted around a hundred of the nation's top executives. There is even an Ira Harris sandwich at a local Chicago deli.

But the tag team proved effective--for a while--with Ira playing a prominent role at Lazard in a number of legendary deals: representing the special committee of the board of directors of RJR Nabisco during the infamous saga that resulted in the largest leveraged buyout of a company until late 2006 (and a $14 million fee); the sale of Kraft to Philip Morris; the merger of Primerica with Commercial Credit; the sale of Associates Financial from Gulf & Western to Ford; and Bridgestone's acquisition of Firestone. Felix and Ira worked together on these deals, with one pinch-hitting for the other in meetings if needed. "It's not bad having Babe Ruth as a substitute" is how Harris described his partnership with Felix to the
New York Times.

Despite his success at Lazard, which would have put him in the top of the partnership percentage ranks, the financially conservative Harris maintained a special arrangement with Michel whereby--unlike every other Lazard partner--he was paid a large fixed salary that worked out to around a synthetic 3 percent stake of the firm's profits with a significant upside potential based on his own performance
only
, without having any actual percentage of the firm's overall profits, which of course depended on how all the partners together performed. On the one hand, this spared Ira from having to make the annual fall pilgrimage to Michel's office in New York to determine his profit percentage, and also absolved him from liability in the event something went wrong and partners' capital accounts were docked. His thinking was that since he had spent twenty-five years making his money at other Wall Street firms before coming to Lazard, he had no intention of losing it there if someone did something stupid--another bit of prescience on his part. When other partners became aware of Harris's deal with Michel, some of them became so paranoid that they scurried around trying to figure out what he was getting that they weren't. One of them was so concerned that he marched into Tom Mullarkey's office to demand to know what was going on with Ira's deal. "None of your goddamn business," Mullarkey told the startled partner on his way out.

The May 1988
BusinessWeek
cover story also revealed that Michel had--for the first time, but not for the last--assiduously courted Bruce Wasserstein in 1987, just as Bruce was deciding whether to leave First Boston, the Wall Street firm he had helped build into an M&A powerhouse. As Loomis alluded to in his manifesto, in the end Wasserstein and his partner Joseph Perella, and a handful of other First Boston bankers, including Chuck Ward, started Wasserstein Perella & Co., an M&A boutique that competed against other Wall Street firms and went on to have many successes during its twelve-year life. "The Fortune 500 is our target clients," Wasserstein told the
Wall Street Journal
in February 1988 on the day he left First Boston. "We think the custom-tailored merchant bank is the wave of the future. We want to be the Lazard of the 90s." At the
real
Lazard, meanwhile, there was great relief that Michel and Bruce couldn't agree on the terms under which he would come to the firm. "The Wasserstein thing was viewed with horror because it looked like Michel might be going back to importing top partners instead of promoting from within" was how one relieved Lazard M&A banker put it. Loomis obviously had a different view, that somehow Lazard was so impaired that more money could be made competing against it than working for it.

LATE IN THE summer of 1988, Loomis tried again to convince Michel that the banking group needed more structure to become more productive. He noted for Michel that despite having better and more bankers, banking's revenues were trending down in 1988 both absolutely and compared with those of other firms. He also pinpointed one of the firm's key problems: the failure of the partnership to function as one. He then bemoaned as a "major problem for us"--correctly as usual--the firm's complete lack of accountability. "Accountability for partners at Lazard is not a clear concept, or, at least, does not closely track our goals," he continued. "Accountability tends to be perceived as individual in nature and either a negative incentive (fear of failure) or an endorsement of raw personal ambition (to become a hero)."

Lazard also had no formal training program for new hires or even anyone who gave much thought to what happened to new employees when they arrived. In this sense, and in many others, the firm was totally Darwinian, a fact Loomis lamented, metaphorically. "Interestingly, the 'freedom' of being left to sink or swim in a pool of 100 individuals increasingly raises the question at all levels, 'What are we doing and what am I part of?'" He further explained to Michel that some partners recommended to him shrinking Lazard back to a few partners and associates. "Simple is best," goes this argument, "and all the problems disappear--just fire people." Loomis preferred, though, to find a way to work more effectively with the existing talent. To that end, he told Michel, "We have to be willing to make real changes in our daily pattern of doing business."

He then proposed the previously discussed radical solution--radical for Lazard anyway--of dividing banking into four industry-focused groups. "The partners would be evaluated, in large part, by the ability to work effectively together," he wrote. The beauty of this structure, Loomis believed, would be a more productive and accountable banking effort where junior bankers could be more efficiently employed, mentored, and evaluated and where the productive senior partners could lead by example for those less productive. "Instead of simply being busy as individuals, we need to focus attention on how we become more successful as a firm," he concluded.

Loomis's proposal was thoughtful and well conceived--and utterly ignored by Michel and Felix. Loomis was right that above all Michel and Felix favored the status quo. Loomis was wrong in that the firm was doing fine--in 1988, New York made $141 million, up from $134 million--and the two leaders were each making tremendous amounts of money. His recommendations all but ignored, Loomis entered one of his periodic phases of introspection and frustration. On November 30, Michel announced that his first head of banking would be giving up the post after a mere six months. "Bill Loomis has decided to turn his attention full time to client relationships and transactions," Michel informed the firm. In his place, Michel had asked the partners Tom Haack and Nat Gregory "to assist the Banking Group in various roles previously undertaken by Bill." An odder duo of leaders could not have been conceived. Haack was the son of the former president of the New York Stock Exchange whom Felix worked with on the back-office crisis of the early 1970s, and Gregory, a North Carolina native, had been an academic at the University of Chicago and worked at Bechtel before coming to Lazard in 1983 with no previous investment banking experience.

Although their tenure was brief--Loomis returned to head banking six months later--Gregory was the embodiment of the sink-or-swim mentality then pervading the firm. On one of his first days at Lazard, at the last minute, Lou Perlmutter dragged Gregory into a meeting with the top management of Beatrice Foods. The Beatrice executives--led by the company's CEO, Jim Dutt--had flown to New York from Chicago because they were concerned that someone was buying up their stock and wanted advice on how to react to the potential threat. But after greeting the executives, Perlmutter left Gregory alone in the meeting and disappeared for thirty minutes. One of the Beatrice executives asked Gregory, who was in his mid-thirties, how long he had been at Lazard. "It was one of those moments where you had to decide how you were going to play the fish," Gregory remembered. He chose candor. Here he was faced with a group of nervous executives looking to their investment banker for advice and succor and the partner was nowhere to be found, leaving a neophyte to deal with the situation.

Soon after the Beatrice fiasco, Gregory found himself on another high-powered deal for which he was ill prepared. The raider Victor Posner had assembled a large minority stake in one of Lazard's Chicago clients, and Gregory was sent to the company along with the partner Arnold Spangler. But neither of them was particularly proficient in the emerging art of takeover defense. When they returned to New York a few days later and Gregory was informing Ward Woods about the developments, Felix popped his head into Gregory's office. He didn't like what he heard Gregory saying, and he ordered Woods to fire Gregory on the spot. Woods ignored Felix, and Gregory stayed. He became a partner in 1986. By late 1988, he was running banking. "Running banking at Lazard was like being dean of a business school," Gregory said. "It was not an easy thing to do because, as you know, it was Michel's firm."

INTO THIS RELATIVE anarchy, intense quirkiness, and immense prosperity strolled Steven Rattner, the one Wall Street investment banker who was every bit as scarily talented, media savvy, and professionally and politically ambitious as Felix and who, much to Felix's surprise and eventual dismay, refused to be cowed by the Great Man's prowess or play by his long-established rules. The impish Rattner, a former
New York Times
reporter in Washington and London, joined Lazard as a partner from Morgan Stanley, where he had run media investment banking and had made it one of the top groups on Wall Street. He was all of thirty-six years old, but his slight build and elfin appearance made him look even younger. He turned out to be a huge business generator for Lazard, but he often came across as cool, aloof, and indifferent. Surviving depressions and wars was one thing, but the conflict that would soon erupt between Felix and Steve, whose father-son relationship for a time mirrored in many ways that between Andre and Felix, would test Michel, and Lazard, as never before.

CHAPTER
11

THE BOY WONDER

S
teve Rattner, pride of Great Neck, New York, a wealthy Jewish enclave some twenty miles outside of Manhattan along Long Island's North Shore, joined Lazard in the early spring of 1989 with surprisingly little fanfare, especially for someone as well connected in media circles as he. Ironically, as the discussions with Steve originally unfolded, at his own insistence, he was willing to consider leaving Morgan Stanley only if Lazard would allow him to do something
other
than media banking. And the firm, with Loomis as chief negotiator, was more than willing to try to accommodate Steve's wishes. After an often tortured five-month negotiation, where, much to Michel's chagrin, he initially said he would come to the firm before equivocating, he was hired at Lazard as the partner in charge of a new group providing advice and capital in "special situations," an oblique reference to his desire to work with smaller, "emerging growth" companies as either a principal or an agent and to help build Lazard's nonexistent high-yield finance business. Hiring Steve for this role not only satisfied him but was all of a piece with the firm's desire to reinvigorate its long-dormant private-equity business, as evidenced by the creation of Corporate Partners and the much smaller Centre Partners, another Lazard-affiliated fund that invested about $150 million of the partners' money in LBOs.