The last tycoons: the secret history of Lazard Frères & Co (60 page)

Maureen White told the
Washington Monthly
in 1986 why her husband had moved from journalism to investment banking: "It begins to get on you after a while that you are writing about people who have more power than you, more influence and more money and are not any more capable. Why in God's name are you trailing them around the world and writing about them when you are smart enough to make the money and have influence commensurate with theirs?"

Amen.

But how was Rattner to make the jump from reporter to investment banker? The tried-and-true way at that time, in 1982, especially for someone changing careers, would have been to go to business school, suffer through a two-year MBA program, and come out the other side as an associate at a Wall Street firm after successfully navigating the randomness of the on-campus interview process. To accomplish his move to investment banking, though, Rattner chose the much faster, higher-percentage approach of soliciting the former Carter administration officials he had carefully cultivated, many of whom were now on Wall Street.

Steve spent a "week or two" in New York, seeking the counsel of the top bankers at the best firms about what he should do next, as if no one had anything better to do than help further Steve Rattner's career. With the help of Bob Strauss, the doors were opened to him across Wall Street. First stop for Steve was his good friend Roger Altman, Carter's former assistant secretary of the Treasury, then at Lehman Brothers. They had dinner in downtown Manhattan to discuss Steve's future. Come to Lehman, Altman urged, convinced Rattner possessed the secret DNA of investment banking--the ability to gain the confidence and trust of important people and the intelligence to synthesize complex financial information. "He could understand the interplay of legal, tax regulatory, and finance questions, very complex stuff, to look at things like a three-dimensional chess game," Altman has said. He also spoke with Bill Miller, the former Treasury secretary whom he had profiled. Miller thought Rattner a "brilliant guy" and wanted him to join him at G. William Miller & Co., a merchant bank he started in Washington in 1983. Rattner met with Ken Lipper, then at Salomon Brothers, and Ace Greenberg, the longtime head of Bear Stearns & Co. He met with Bob Rubin at Goldman Sachs. After a cocktail of some Macbeth-like soul-searching as to whether investment banking would be fulfilling or meaningful enough and an evening of extreme drunkenness with Sulzberger in London, Rattner bolted the
Times
and joined Lehman. Sulzberger, while disappointed, understood his friend's decision.

Steve had no idea what bankers did or how they did it. Nevertheless, "it was like a match to dry wood," Jeffrey Garten, then also at Lehman, has said. "I have never seen anything like it. He was effective from day one. He had a gift of expression. He was a great briefer. He capitalized on the similar requirements of journalism and investment banking--to encapsulate a complicated subject and make it appear you know more than you do."

BY THE TIME Steve left Morgan Stanley for Lazard, he had perfected many of the nuances required to be a successful banker, and his career appeared headed on a higher trajectory. Despite his relative youth, he brought with him to Lazard a highly coveted asset--a stable of devoted, M&A-savvy clients, among them the cable and wireless tycoons Craig McCaw, Amos Hostetter, John Kluge, and the young Brian Roberts, now the acquisitive CEO of Comcast. Hostetter, whose cable company Rattner sold, actually offered to pay Lazard a fee higher than Rattner felt appropriate, so "Steve insisted that I reduce what I was proposing," Hostetter recalled. These ironclad relationships would prove invaluable to Rattner.

Of course, if you are an M&A banker, extraordinary client relationships aren't all that useful without deals to do. Consider the timing of Rattner's arrival at Lazard: April 1989 was but seventeen months after the October 1987 market crash, when the Dow Jones Industrial Average fell a stunning 22.6 percent in two trading sessions alone, effectively ending five years of wild speculation and merger mania. The severity and magnitude of the collapse, rivaled at that time only by 1929, initially paralyzed the country's deal-making machinery: CEOs and investors were petrified, having lost billions of dollars, and bankers and lawyers found themselves in one of those periods of uncertainty when deals come unhinged.

Only, this time, something unusual happened: in one sector of the deal-making world, activity actually
increased--
for so-called leveraged buyouts, where private-equity firms, run by such men as Henry Kravis and Ted Forstmann, use lots of debt to buy and "take private" companies that previously had traded in the public markets. There were two principal reasons the LBO market stayed hot after the crash of 1987. First, the price of public equities looked cheap, as stock had just fallen by more than 22 percent, and in many cases by far more. For instance, GE dropped to $43 per share on October 22, 1987, from $60 per share on October 7, 1987, a nearly 29 percent fall in two weeks. Second, and this is a bit of a mystery, financial institutions, such as banks and insurance companies, along with public investors, continued to finance these kinds of deals. The lines of fear and greed had not yet crossed. Since Lazard had no deal-financing capability to speak of and Felix had spent years publicly denouncing the use of so-called junk bonds to finance leveraged buyouts, Lazard missed many of these often very lucrative transactions. Compared with every other firm on Wall Street, Lazard may as well have not even been in the high-yield finance business. Rattner, though, had hoped Lazard would underwrite many more such high-yield financings, despite Felix's public objections to the product.

And so by the start of 1988, this unusual confluence produced all sorts of LBOs, culminating in the epic (and well-chronicled in
Barbarians at the Gate)
battle to take private RJR Nabisco, which Kohlberg Kravis Roberts won for $25 billion in cash, topping bids by Forstmann Little & Co. and Shearson Lehman. Hundreds of millions of dollars in fees were paid to bankers to advise on and to finance the RJR deal, somewhat mitigating the toll the crash was taking, at least on Wall Street. Lazard, led by Felix and Luis Rinaldini, his then golden boy, had the lucrative assignment advising the special committee of the RJR board of directors in its consideration of the bids; the firm earned $14 million for its trouble.

The true fallout from the crash of 1987, though, did not hit Wall Street until almost two years later, during the summer of 1989, when the financial markets buckled amid the effort to finance the LBO of United Airlines, a $6 billion deal and one of the largest of the so-called employee-owned buyouts. Lazard was advising United, thanks to the management relationships of Eugene Keilin, whom Felix had recruited to the firm from MAC. At the eleventh hour, Citibank pulled its financing commitment for the buyout after failing to syndicate the huge loan package. Syndicating a loan--the time-honored practice of dividing it among other financial institutions--is an essential part of corporate finance, as no one bank would ever want to have on its own balance sheet the full exposure of a particular credit. Failure to syndicate a loan is the death knell of a deal and means that the market has voted no on its efficacy. Don Edwards, a Lazard associate and brilliant recent graduate of the University of Illinois, had been working on the United deal with Keilin and Ron Bloom, a vice president, running spreadsheet scenario after spreadsheet scenario on his computer. Edwards nearly physically collapsed along with the deal. "This is the junk-bond market's October 19," Rattner told the
Wall Street Journal
at the time, comparing the collapse of the United deal to the day the stock market crashed in 1987. "This looks like a cataclysmic event." The aftershocks of the United deal's end spread virally. So finally, two years after the crash, the M&A and financial markets imploded, causing scores of highly indebted companies to file for bankruptcy and bankers to lose their jobs. It is hard to overestimate the effect the combination of the crash and the closing of the financial markets had on deal makers. Felix had proved prescient about the dangers of junk bonds and too much corporate debt. Fear and loathing had returned to Wall Street.

AT THE SAME moment that the global financial markets went into a deep freeze, Lazard announced a historic development. For the first time, a single person--Michel--took executive control of the three Lazard houses. The "retirement" of Sir John Nott, who since the creation of Lazard Partners in 1984 had been the chairman and chief executive of Lazard Brothers, gave Michel this unprecedented opportunity. Nothing had changed in the ownership structure of the three firms--Michel and Pearson were still the largest shareholders--but the typically low-key announcement was momentous. "Our clients want to have the advantage of speaking to two and sometimes the three firms combined," Michel said. "Having a [single] chairman will make that easier. The three firms have some difficult sorting-out to do, all the time. If it is done for a time with one single voice, the sorting-out will be very easy."

Michel told the press that Nott, the British defense secretary during the Falklands War, accomplished in his five years at the helm of Lazard Brothers "what he set out to do and now he wants to do something else." Nott did not comment publicly about his departure, although his memoir,
Here Today, Gone Tomorrow,
recounts any number of his frustrations working for Michel. Several of his colleagues, though, confirmed he was furious at Michel, especially for his increased meddling in the business of Lazard Brothers since the formation of Lazard Partners. Michel's insistence from the start that David Verey, then thirty-three, be named as Nott's deputy caused Nott some anguish, especially since Verey leapfrogged a bunch of older, more seasoned partners to get the job.

And of course, the appearance of Agostinelli in London further infuriated the independent Nott. "Michel was starting to exert control," the former Lazard partner Jeremy Sillem explained. "And Robert was the instrument through which the New York partnership expressed their disdain for London. And their contempt for it. Because he would go and see companies in the U.K. and not tell anybody in London about it. I'm sure he was encouraged to do that by Michel. But Nott didn't really get along with Michel, and in particular, Michel used Robert Agostinelli--being American--and must have encouraged him to stir it up to make all kinds of trouble in London. And in the end, it undermined John Nott's authority. And he basically told Michel it was either Agostinelli or him. And it was Agostinelli. Agostinelli stayed and Nott left." (In his memoir, Nott claimed to have fired Agostinelli before deciding to leave himself after another six months.) Two years later, at the end of 1991, Michel relinquished his chairman title at Lazard Brothers to Verey. "David has been doing the job anyway," he told the
Wall Street Journal,
which pointed out that the "change won't significantly diminish Mr. David-Weill's power at the firm...but it does make room for a younger generation of executives."

THIS WAS THE backdrop for Rattner's rather subdued arrival at the firm. He quickly established that he would be
the
media banker, relegating Wambold to work with Lester Pollack on the Corporate Partners fund and Rinaldini to return to the generalist ranks. Among Steve's first actions was to serve as the placement agent for a novel $300 million private-equity fund focused solely on investing in media and communications companies. Lazard invested $7 million in the new fund, to be called Providence Media Partners, along with Jonathan Nelson and Greg Barber, two partners of Narragansett Capital, who together invested $10 million. Steve also negotiated for himself and for Lazard one of the sweetest fee arrangements in capital-raising history. Since some of the Providence fund had been committed at the outset, Lazard was to raise only $175 million. For that work, the firm was to be paid a 1 percent placement fee, or $1.75 million, plus--and highly unusually--one-third of the General Partner's carried interest, or profits. Since the fund was enormously successful--returning to investors four times the amount of money invested--Steve figured the General Partner made $100 million, of which Lazard took around $33 million. But Steve had a side arrangement with Michel that gave him 8.25 percent of the firm's take, amounting to some $2.72 million for Steve alone, leaving the Lazard New York partners with around $30 million. Talk about unprecedented!