The last tycoons: the secret history of Lazard Frères & Co (85 page)

On May 22, 1997, the firm held a rare press conference to announce the new management team. The night before the announcement, Michel hosted a cocktail party in the New York office in honor of Felix's retirement. Michel made a speech. Felix made a speech. "They gave me a vase or something like that," a still underwhelmed Felix recalled eight years later of that perfunctory event. "No, actually, they gave me a glass eagle, a U.S. eagle to take to France." Lazard also gave Felix a pension that paid him $1 million annually for life, the consideration for which was Felix's signature on a three-year noncompete agreement should he decide to return to investment banking after coming back from Paris. The
Times
reported on May 23 that Steve's appointment as deputy chief executive of Lazard Freres & Co. meant that he was "inheriting" Felix's "mantle as the firm's lead banker after several months of fierce internal squabbling." This observation, while a slight exaggeration, was a fair reflection of the turn of events. Steve would run the firm day to day and report directly to Michel. He would manage the New York partnership with the help of his four new vice chairmen, Ken Wilson, head of banking; Damon Mezzacappa, head of capital markets; and Norm Eig and Herb Gullquist, the co-heads of Lazard's $47 billion asset management business. Steve Golub was named chief financial officer--the first time that position existed. Michel, Steve, Wilson, Mezzacappa, Gullquist, Eig, Golub, and Mel Heineman, the firm's chief administrative officer and general counsel, formed the New York firm's new management committee.

"We wanted to both strengthen and broaden the base of management of the firm in New York," Michel said. At the press conference, Steve said of Michel, "Our goal is to take off his shoulders some of the things he has had to worry about." Michel explained that while the new management committee would strive for "very consensual" decision making, he retained his veto over any of its actions. Michel's personal ambition would be to continue to get the three houses working more closely together. And then, of course, he said, "The term 'Trinity' has been mentioned. We have to be one, and we have to be three. What is extremely gratifying in the three Lazard firms is how much the partners believe that our concept is not only viable but is going to make us even more successful."

After the press conference, Steve and Felix repaired to Felix's "usual conspicuous table" at the "21" Club for a very high-profile reconciliation lunch.
Newsweek
ran a short piece about Steve's promotion and wondered if the "fair-haired banker" was now in position to succeed Michel as well. Steve declined to make himself available to be interviewed. Instead, he issued a statement: "These changes are about the firm and not about me. We are moving forward as a team." Michel, though, as usual, felt the need to take his new deputy CEO down a peg. "Mr. Rattner is in an important position toward being part of the succession planning," he said. When asked by
BusinessWeek
if Steve was now heir apparent, Michel said, "Until things exist, they don't exist. He certainly is in line for that responsibility." Added another keen observer of the Lazard realpolitik, "Michel owns this firm. He runs the firm any way he wants." For
BusinessWeek,
Steve decided to comment about his hopes for democratizing the firm and Michel's role in that transformation: "Michel will be a little less the emperor and a little more the president." Felix also chimed in. "This isn't an industry that's appropriate for the superstar approach anymore," he said. "And the firm is a lot more diversified, a lot bigger, than when we ran a superstar business."

Despite Felix's view that the days of the Wall Street rainmaker were coming to a close--just as he seemed to be leaving the scene--Michel, incredibly, disagreed. He still longed for a superstar. The
Newsweek
article revealed that after the Wasserstein merger failed and as the negotiations with Steve were in full bloom, a group of senior Lazard partners, including Steve, approached the veteran deal maker Bob Greenhill about coming to Lazard as the firm's senior partner. Greenhill, who had spent thirty-one years at Morgan Stanley, including some time as Steve's boss there, had started his own eponymous firm in January 1996. The idea was for Greenhill to merge his small firm into Lazard and thereby bolster the senior ranks in the wake of Felix's departure.

Steve was fine with this. "I was the one who went to Greenhill, so it wasn't like I had any pride of place," he said. "I was willing to do almost anything to try to make it better for the firm." Greenhill turned down Lazard. In the
Newsweek
article, Michel defended his efforts to get Wasserstein and Greenhill, even though the efforts would have frustrated the aspirations of his younger partners. "As always, the difficulty is to get enough wind behind the sails," he said, adding in his convoluted logic that these efforts to recruit big-name outsiders had "helped provide the wind" to support Steve's ascension. Michel told
Institutional Investor
about the effort with Bruce, "The negotiations broke down because it proved impossible to combine the two firms without spending considerable money. If Mr. Wasserstein and a reasonable number of his colleagues had joined individually, we would have been very happy." He told
Fortune
about his effort to recruit Wasserstein, "Of course you can never have enough top talent." He stressed that Steve's selection was the result of a "collegial approach" where "certainly there have been no winners or losers."

But of course that wasn't true. Any power vacuum that is filled inevitably requires a wrenching political struggle among the possible contenders. Even though Michel didn't care to admit it, Steve's appointment as deputy CEO of Lazard Freres & Co. caused no fewer ripples. The most disaffected partners were those closest to Felix--Ken Wilson, Ira Harris, and Jerry Rosenfeld. All three had worked together at Salomon Brothers and had been heavily recruited to Lazard by Felix. And all three had been successful and productive at Lazard. With Felix gone and Steve, in effect, their new boss, there were many who felt it was just a matter of time before they followed their mentor out the door.

The bitter pill was probably toughest for Wilson to swallow. He had been running banking for two years, and at most other firms that would have meant he was Steve's boss. So with Steve's promotion he would now be reporting to someone who, theoretically, had been reporting to him. But the lines of authority at Lazard were never so clear. With Michel still making the compensation decisions alone, the job as head of banking was more titular and administrative than one with any real authority, especially when it came to the compensation of and authority over other partners.

For instance, without consulting Wilson, Michel asked Steve to do a study of the efficacy of Lazard's small capital markets business then, as ever, run by Damon Mezzacappa, Steve's ally and friend. Many Lazard partners believe Michel asked Steve to undertake the study as a way to help resurrect Steve's career at the firm. "Damon was in bed with Rattner, and so, not surprisingly, the study concluded that capital markets was pretty important when everyone except the brain-dead knew there was nothing there," said Wilson, who preferred to drastically curtail the department. "As Felix used to say about Lazard's capital markets business, 'Why don't we just stand on the street corner and sell cocaine?'" And while Wilson was himself an important producer of business, Steve was an even bigger producer, so in the Darwinian world of Lazard that gave him more overall leverage with Michel.

And Michel had decided for Steve. "It became clearer that there were two camps in the firm, two factions, two people, and Michel had to make a choice between either Rattner or myself," recalled Wilson, a former officer in the army special forces in Vietnam who used to walk up to the junior bankers at Lazard and ask them, "Is your shit tight?" "And, you know, I, to be honest, was losing a little bit of my ardor to want to have a dogfight, because, if anything, it was going to be a Pyrrhic victory. You know, Michel wasn't gonna go anywhere, and it dawned on me, as they used to say in the army, there's always the 10 percent that never gets the word." He remembered the jockeying being intense. "There was swirling, infighting, jostling," he continued, "and at a meeting in Paris that I went over for, Michel asked me to come by to see him. And I spent some hours at his house, and he was trying to work out a way that Rattner and I could work together, and, you know, to be honest, my heart was really at this stage not in it because I didn't see it leading to anything. Felix was gone. It was a personal kind of thing to me in terms of style and what he presented. Michel was gonna go nowhere, so that"--here he sounded very much like Bill Loomis--"you would have all the responsibility but none of the authority."

As one of the very top bankers worldwide who specialized in working with financial institutions, Wilson was acutely aware of Lazard's increasingly more difficult competitive position. He strongly advocated for significant strategic changes at the firm--among them folding the capital markets business, stopping the writing of equity research, terminating distressed-debt trading, and refocusing the M&A business on six or seven industries, eschewing the generalist Lazard bankers. "I felt Lazard really was getting a little too big for the space," he said. "It needed to be more crisp. Needed to be more focused. The quality needed to improve. I had tried to recruit some good people, and they would be turned off by what a deeply political place it was." Wilson argued that Michel and his family's annual take of the Lazard profits--then approaching 40 percent when all the various pieces were added together--made it nearly impossible to recruit the best bankers because there simply wasn't enough compensation left to go around when one nonproducer was taking so much out himself. He felt Michel's take should have been closer to 2 percent. He also would never have let Felix leave. Obviously, the kinds of changes Wilson was advocating were too revolutionary for Michel. "There was zero interest in this from Michel or the core group of partners loyal to him," he explained. "Michel was so wedded to the status quo because he felt it was a manifestation of his genius. Michel was definitely more comfortable with Rattner or someone more predictable."

There are partners who believe to this day that Michel's inability to find a way for Rattner and Wilson to coexist peacefully and productively was one of his larger mistakes. Wilson, many felt, had innate leadership qualities: intelligence, charisma, a ribald sense of humor, perspective, and a true understanding of Wall Street's competitive dynamics and Lazard's place in them. He had run banking very well for two years. "The fact that Ken Wilson and Rattner were under the tent and Michel didn't find some way to make it work, and basically chased them away, it's unbelievable, it's sinful," one partner said. Another partner chalked up Michel's refusal to let Rattner and Wilson run New York together as yet one more piece of irrefutable evidence of Michel's demented Machiavellianism. "I think he fundamentally decided that Ken was a good leader and that if he left it with Ken, it was gonna be pretty goddamn difficult to ever get it back again," he said. "If he chose Steve, Ken would leave. If Ken left, he'd have Steve. And Steve would burn out. And then he'd get it completely back again, full control. I think fundamentally that's what he did." Still, at the press conference announcing Steve's appointment, Wilson played the role of the loyal soldier. He agreed, for the time being, to continue to run banking and to report to Steve. He had also been appointed a vice chairman of the firm.

Jerry Rosenfeld, whom Wilson used to blow cigar smoke on when they shared an office at Salomon Brothers, was also more than a little irked by Steve's appointment. He had been having a good run--though some of his partners felt it to be greatly exaggerated--in the mid-1990s, most notably for his role in bringing in and executing the IBM-Lotus deal, among many others, and he had been an important and high-profile supporter of Wilson's in the race with Steve. But with Wilson having been bested, Rosenfeld began to think about what he might want to do next. He had always had an interest in private-equity investing. Indeed, when he decided to leave Salomon Brothers years earlier, he had tried to partner with Xerox, one of his clients, to set up a private-equity fund. But that did not work out. Instead, he went to Bankers Trust, now part of Deutsche Bank, to try to lead a private-equity and leveraged-finance effort there. With Bankers Trust more intent on becoming a powerhouse in derivatives rather than in private equity, Rosenfeld, with Felix's help, jumped to Lazard. He became very friendly with Edouard Stern, and their friendship blossomed. Theirs was an exceedingly odd match. On the one hand was Stern--the ruthless, flamboyant, smoldering, impulsive, bizarre demi-billionaire--and on the other Rosenfeld, the low-key, shaggy-haired, almost sheepish, cerebral Ph.D. in applied mathematics, former college professor, and McKinsey consultant. He nearly went to work with Stern at IRR but decided the strange dynamic between Michel and Edouard made it inadvisable.

Soon after Rosenfeld reached this difficult decision, Michel and Steve announced, in November 1997, his appointment as head of banking, replacing Ken Wilson immediately. Like all those before him, Wilson had grown tired of the administrative headaches of running banking without any commensurate authority. So in the wake of Steve's appointment, he told Michel he wanted to give up the position. He remained a vice chairman, a member of the management committee, and the leader of Lazard's Financial Institutions Group. Rosenfeld also was appointed to the firm's management committee, which may or may not have been a reward for not joining Edouard. But from the start his heart wasn't in the job. "And so I got to be head of investment banking, for whatever that was at Lazard," he said. "It was all right. It was fine. It was good. I tried to help people. It was a nice thing. Whatever."

The effort--such as it was--to appease the Felix loyalists in the wake of his departure was an utter failure, a fact that became painfully apparent after Lazard paid its partner bonuses at the end of 1997. Ira Harris, then fifty-nine, was the first to leave, in January 1998. "It was total frustration with Michel David-Weill and unhappiness with the way the firm was run," Harris told
Bloomberg Markets
in February 2005 about why he quit Lazard. Then, two months later, Ken Wilson left to become a partner at Goldman Sachs, one of Lazard's chief rivals, as head of its Financial Institutions Group. Goldman was in the throes of its massive internal debate about going public. When the Goldman IPO did happen, in November 1999, many of the longtime partners were worth, on paper, as much as $350 million. Wilson, who had been at Goldman all of eighteen months prior to the IPO, was said to have received stock worth around $50 million after the IPO. Several of his former partners thought the astute Wilson had made one of the best trades ever. (Wilson's Goldman stock is worth closer to $150 million today.) Two weeks after Wilson left, Rosenfeld announced his departure to run a new, $600 million private-equity fund with all the money coming from the newly merged Charlotte, North Carolina-based banking behemoth NationsBanc Montgomery Securities. He had been head of banking at Lazard for four months.