The last tycoons: the secret history of Lazard Frères & Co (66 page)

After he told Michel up front he had been fired by First Boston (to which Michel responded, "Yes, I know"), they spent the rest of the time "talking about everything under the sun." By the time he got home, Loomis had already called to tell him that Michel wanted him to become a partner at Lazard but first he had to meet with Felix and Damon. He did that the next day. "I went in and spent fifteen or twenty minutes with Felix, and Felix, as he always is, was unbelievably gracious, which I always find nice, and I met with Damon, and he said, 'Don't worry, I've been fired a bunch of times, too,' and it was a very pleasant conversation. Next thing you know it was January 1 and time to report for work. The single happiest day of my life, I believe."

The night before he started at the firm, he thought he should read the partnership agreement, a copy of which Loomis had sent him. Like so many others before him, he quickly discovered that the slim document gave all power to Michel, through section 4.1. "And it says such and such and such and such can happen only with the agreement of the partner in paragraph 4.1," he said. "Paragraph 4.1 this and paragraph 4.1 that--I nicknamed Michel that: '4.1.' And I remember the next day I walked into Bill's office, and you know me, I'm a bit of a wiseass and people don't know exactly how to read that, and so I walked into Bill's office and said, 'Who do I give my comments to on the partnership agreement?' And you could see the blood drain from his face:
What the fuck have I done bringing this asshole in here?
"

Fennebresque said it took him all of "thirty seconds" to figure out the Lazard culture. "If it takes longer than that, you're really, really stupid.... It comes at you like a fire hose--it's cold and powerful and it didn't bother me at all. I think the human condition is that people like to be led." What he had figured out instantly, of course, was that Michel made all the decisions, it was his firm, and "we were all staff." The only possible exception was Felix, an insight he got when he went to a meeting with both of them shortly after his arrival and they started talking in French to each other. "He wasn't in the family," Fennebresque said of Felix, "but he gets to eat with the family."

FENNEBRESQUE TOOK THE co-head of banking job, despite his misgivings. When Annik, Michel's secretary, called him the next day and asked him to come see "my boss," he joked with her: "Aah, it's not a good time for me." As he feared, Michel insisted he accept the job. "There was nothing about it I wanted," he said, looking back. "There was no glory to it. Nothing." With it, he moved his office right next to Steve's on the thirty-second floor of One Rock, and he received a raise. When he arrived at Lazard in 1991, his partnership percentage was 0.65 percent (worth about $860,000 that year), fairly modest as a comparative matter. (Steve's was closer to 4 percent, or some $5.3 million.) "Jeez," Loomis told him, "that's kind of low." Fennebresque concurred. At the end of his first year, Michel raised him up to 0.966643 percent. Now that he had been asked to become co-head of banking, he insisted on getting another raise. "Can you take it to 1 percent?" he demanded, with a smile. Michel gave him 1.1 percent, worth about $1.4 million in 1992.

The first thing the dynamic duo had to absorb was the deaths of two of the more important senior partners in the New York firm: the sudden one of Jim Glanville, sixty-nine, as a result of injuries suffered during an automobile accident in Houston, and the not unexpected one of Tom Mullarkey, fifty-nine, the longtime consigliere, who had had a stroke in 1987. Although Mullarkey had returned to work after a few months, the effects of the stroke were obvious. He roamed the barren halls of the firm like a character out of a Dickens novel. He died of brain cancer at his home in Locust Valley. He had devoted the last years of his life to philanthropy, a not unnatural extension of his responsibilities at Lazard, where for years he had saved the partners from one near-death experience after another--from the numerous ITT-Hartford-related investigations right up through the sentencing of Robert Wilkis for his role in the Dennis Levine insider trading scandal. That task now fell to Mel Heineman, the former lawyer and associate on the ITT-Hartford deal, who had been Mullarkey's apprentice for years. He would have his hands full.

For his part, Glanville was the last member still at Lazard of the original Gang of Four Lehman partners Michel had recruited in 1978. Glanville had been fairly productive at Lazard but could never adapt to the parsimonious culture. And his anti-Semitic bent rightly made him an enemy of Felix, never a good thing for anyone working at the firm. His most enduring legacy, it turned out, was the indefatigable Loomis, despite the recent turn of events. Loomis delivered the eulogy at Glanville's funeral. He said that Glanville had taught him that investment banking was about judgment and understanding people with "a little arithmetic tossed in." He acknowledged that Glanville did not fit well with the Wall Street community. "Fiercely blunt, Jim was a great intellect mixed with equally great emotions and encrusted with character." To illustrate, Loomis repeated one of Glanville's favorite stories: "There was a fella with a dry hole and some limited partners who weren't too happy. One of the limited partners said to him, 'You have to understand that for $10,000 I can get a New York lawyer to tie you in knots for five years.' And the Texas fella said, 'No, you have to understand that for $25 I can get a Mexican to blow your head off...right now.'" Glanville, Loomis said, understood the dry-hole business.

Meanwhile, Corporate Partners, Lazard's white knight fund, was itself learning rapidly about the dry-hole business, an education that would shortly prove further detrimental to the firm's reputation. The fund got off to a rough start. It was originally slated to be $2 billion when the fund-raising began before the 1987 market crash, but Lazard decided to stop the fund in August 1988 at $1.55 billion, when money for such efforts all but dried up. Then Lester Pollack, the fund's chief executive, tested his investors' patience by not making the fund's first investment until Christmas 1988, more than a year after the money had been raised. Around that time, Corporate Partners announced a $200 million convertible preferred stock investment in Transco Energy, as part of Transco's acquisition of a gas transmission subsidiary of CSX. It turned out that Lazard had advised Transco, a Glanville client, on the acquisition and received a fee for its advice. This was the exact opposite of the kind of deal Corporate Partners said it was in business to do--first, the Transco deal with CSX was friendly, so no thwarting of an unwanted interloper was necessary, and second, Lazard had received an advisory fee. Pollack, though, denied any conflict of interest or deviation from the fund's strategy. "They asked us to consider this, not the other way around," he said. (Corporate Partners' actual investment in Transco ended up being $120 million; the fund made a $65 million profit on the deal.)

The fund's next investment came six weeks later--$300 million of preferred stock, convertible into a 7.7 percent stake of Polaroid. This was more like it. Polaroid had been under attack from Shamrock Partners, Roy E. Disney's investment fund, which was trying to get control of the instant-film company. The combination of the investment by Corporate Partners, the sale of another chunk of stock to an employee fund, a stock buyback program, and a favorable court ruling led to Polaroid's successful rebuff of Shamrock. But it was a Pyrrhic victory, for Polaroid shareholders would have been better off with the Shamrock cash: Polaroid filed for bankruptcy in 2001 after the advent of digital photography made its business untenable. Corporate Partners did well, though, realizing a $215 million profit on its Polaroid investment.

More than another year passed before Corporate Partners made its third investment, in June 1991--$200 million for a 17 percent stake in Phar-Mor, a private Ohio-based deep-discount retailer (the fund ended up investing $216 million). The fast-growing Phar-Mor then operated 255 stores in twenty-eight states and had revenue of more than $2 billion. This investment, too, was outside the fund's stated mandate. Phar-Mor was private and claimed to need the new capital to grow, not to rebuff an unwanted suitor. From the outset, though, there was speculation that Phar-Mor actually needed the Lazard money to pay its vendors, who had been complaining about late payments from the company. Corporate Partners rejected the thought that Phar-Mor was financially distressed. "You should view our investment as a vindication of the company," David Golub, a vice president at Corporate Partners, said at the time. The Lazard partner Jonathan Kagan agreed to go on the board of Phar-Mor and quickly deflected questions about when Phar-Mor would go public--something other investment bankers had been urging the company to do--by saying that Phar-Mor "clearly chose to work with us because it's not eager to go public at this time." A year later disaster struck. On August 4, 1992, the company abruptly fired its founder, Michael Monus, and its CFO and announced that the FBI and the U.S. attorney had started a criminal investigation. Two weeks later the company filed for bankruptcy protection and announced that Monus and three other executives had systematically defrauded the company of more than $400 million "in a fraud-and-embezzlement scheme dating back to 1989." Corporate Partners sued, among others, Coopers & Lybrand, Phar-Mor's auditors, claiming that the accounting firm had participated in the fraud by certifying inaccurate audits. The head of Coopers at the time said Corporate Partners was "trying to shift the blame for their inadequate due diligence and judgment." Regardless of who was to blame, the fact remained that Corporate Partners had made a terrible investment, and all but $77 million of the $216 million was lost. The next investment, $83 million in Albert Fisher Group, a U.K. food distributor, also proved troublesome. The fund lost all but $37 million of the original investment.

Then, fortunately, Corporate Partners' performance began to improve. The fund invested $146.5 million in First Bank System, which in 1997 bought U.S. Bancorp and took its name. The fund made almost $700 million on that investment. Good fortune struck again when, through Steve Rattner's relationship, Corporate Partners invested $300 million in Continental Cablevision. When the US West Media Group bought Continental in 1997, the fund made nearly a $600 million profit. In total, over its initial twelve-year existence, Corporate Partners invested $1.35 billion in nine companies and received in return $2.99 billion, for a profit before fees and carried interest of $1.64 billion. Private-equity funds are judged on how well their investments perform over time, a calculation known as the internal rate of return, or IRR. Corporate Partners' IRR during its existence was 15 percent, net of fees and carried interest; investors received an annualized return of 15 percent per year. That placed its performance in the top quartile of such funds.

BILL CLINTON'S VICTORY in the 1992 presidential election handed Lazard another unexpected problem: a glum and cranky Felix Rohatyn. After twelve years of Republican Party rule, Felix rejoiced in the election of a Democrat to the White House. But Clinton's election soon became bittersweet for him, when he came to the realization that he was not going to be named Treasury secretary, the one government post he had long coveted.

During the Reagan and Bush years, he had become a national figure, saved New York City, and, through his ubiquitous writings, led the lonely crusade against any number of Republican fiscal and monetary policies he deemed misguided. But he also made a few political mistakes that seem obvious in retrospect but were in keeping with his worldview. First, he supported Ross Perot, his former client at EDS. This was done partly out of loyalty and partly because Felix believed in much of what Perot had to say. To this day, though, Felix disputes the extent of his support for Perot and believes the press and the Perot campaign overstated it. In any event, he was not as early and as loyal a supporter of Clinton's (although he certainly came around) as were the expert fund-raisers Roger Altman and Bob Rubin--who together had, for instance, raised 20 percent of the money raised privately for the Mondale campaign in 1984--and this hurt him politically when the short lists were shortened even further. Felix's real political Achilles' heel, though, was his complete disinterest in political fund-raising. He was happy to give money to the Democrats--and lots of it--but could not be bothered to raise the mother's milk. What others were willing to do, he was not. No fund-raisers at his Fifth Avenue apartment or Southampton home. No dialing for dollars or putting the squeeze on his wealthy friends for a politician.