The last tycoons: the secret history of Lazard Frères & Co (98 page)

But even this relatively straightforward move set off a firestorm of protest inside the firm. Much of the frustration boiled over into Internet chat rooms, the new, albeit anonymous and sophomoric, outlet for mounting employee frustrations, regardless of industry. "We see the writing on the wall," one employee commented in March. "Is this the beginning of the end?????????? Lazard N.Y. MAY GO DOWN LIKE THE
TITANIC
!!!!!" "Lazard is being sold this year!!!" screamed the headline of another anonymous writer. "Due to the fact that MDW is now going to retire and no one in his family is willing to inherit Lazard's financial problems and managerial conflicts...This has been in the works for a long time; just look at the history of former well known MDs that left a while back, they knew and got the fuck out of here. For those of you stuck there like me run, run as fast as you can." Another warned a few days later, "In the next two weeks, all departments at Lazard will get hit: Trading, banking, asset management; specifically, departments like high yield, fixed income, accounts payable etc. Take it from me, no one is safe. Play it safe people and start getting those resumes out there and start loading up on the office supplies."

Morale at the firm, always low, dropped even further. "There are rumors of layoffs but no one has been laid off yet," another banker said. "That creates a level of panic that will not subside until they are made or it is made clear that they will not be made. This is coupled with markedly slower deal flow in M&A from a year ago across the Street. Furthermore, there are rumors that Lazard is being sold.... Right now, there is a level of group panic about something that could be very real and very ugly." Another disgruntled employee confided, "First of all for those support staff who have lost jobs and are supporting families, I am truly sorry. It is a shame that no managing director at Lazard has spine or soul enough to put down their martini and request a pay cut. I think it is about time that Lazard realizes where the true fat of the company lay. All the money in the world apparently can not buy common sense." A current employee, "getting his CV ready," wrote: "Lazard's reputation as an elite company has evaporated. Go in and talk to the employees. Take a look around. All that's left is a bunch of sheep headed for the slaughter. Lazard is like all the rest. No longer exclusive, simply common." Another wrote, "Imagine being in the middle of the ocean with a pair of cement shoes and an anchor around your waist. How would you feel? HOPELESS. That's what it feels like to be at Lazard." Another, fired employee was ecstatic. "I got a call from Bill Loomis last week and had to call friends to arrange a party before going down to his office," he wrote. "If they had been asking for volunteers to show up at Loomis' office I would have camped out all night to be first in line. While the poor people at Lazard go into their offices everyday and sit and pretend that Lazard has business, I will be in Africa for three months (still getting paid) before starting my new job in July." On a scale of one to ten, one banker claimed morale was minus ten. "It is shit," he wrote. "Imagine that every week you have to come into work wondering if the boss likes you or not (not based on any criteria but the closeness of your nose to his ass). On Tuesday everyone sweats, and no one is working. Why should we? Those wimps don't have the balls to do it at once. This has nothing to do with the market. They must have known for a while, but were too chicken to do it at one time. Typical."

Just as the reality of the first wave of firings started to register around the firm came the news that a European financial analyst, working in New York, died while sitting at his desk, of an apparent heart attack. "Everyone at the firm knows it," one colleague said, before adding that the firm was not particularly forthcoming about the incident. "They are just trying to hide stuff and lay blame elsewhere." Lazard also was said to demand that one Web site, Vault.com, that offered an online outlet for employees' thoughts shut down the Lazard forum.

Tensions were mounting inside the firm. "First, you had this level of expectations raised about, you know, we're partners, we're going to get something permanent in the firm," one partner explained. "Then you had a shift in the business occurring. The business environment turned very negative in 2001. Very negative. We went into the year with a projection that we were going to do $900 million in revenue. Michel said at the end of 2000 that his goal for Lazard for 2001--and he really believed it--was $900 million in revenue, up from seven-something in 2000. The backlog was disappearing by the minute going into 2001. Nothing was building. Everything was just closing stuff. It was pretty obvious by February or March to anybody that had been in the business for a while that we were going to be lucky to do $600 or $700 million in revenue that particular year." Michel seemed no more in touch with the reality of the situation as winter turned into spring. "By March," a partner recalled, "he was saying, 'Well, I've been in this business so long and we're going to have the exact same year as the year before.' And by March and April it was obvious that we were going to be lucky to have revenues of $550 million. At the end of the year, revenues were $435 million, by the way."

AGAINST THIS BACKDROP,
there was an increasingly loud chorus inside Lazard calling for Michel to think seriously about selling the firm. For Michel, of course, just the thought of a public Lazard was anathema. This led him to deliver a lengthy speech against any scheme to sell shares on the market and for having the courage to try to rebuild the franchise. He also opposed the suggestion, dubbed Project S, that Lazard merge with Eurazeo as another way to go public. "The day we go public one way or another," he told the executive committee, "that is when trouble starts. Look at the way Warburg"--a reference to Jon Wood--"is blackmailing us. I don't anymore believe in the control of public companies."

At the March 15 executive committee meeting in Paris, the firm's leaders turned once again to the central question of "Who owns Lazard and for whom does its wealth operate?" Michel, Verey, and others took the rather restrictive view that whatever equity plan is pursued, it must maintain the status quo. This was no theoretical discussion, though. What quickly became apparent was that, once again, Loomis had been having one-off discussions about distributing equity. This time, it turned out, he had been negotiating with the leaders of Lazard Asset Management to give equity to its "key players" to prevent them from leaving. Eig and Gullquist told the committee they felt "shabbily dealt with" by Loomis, who was subjecting them to a "divide and rule programme."

Once again the stage was set for confrontation. "If Loomis goes ahead with a LAM equity offer," Evans wrote, "I suspect Verey will resign. If the Executive Committee prevents Loomis from going ahead, presumably he will resign (although I do not know him well enough to be sure of this). In any event, the withdrawal from LAM of what looks to be a pretty clear offer of equity will no doubt cause several or all of them to resign. So, the game is afoot." The discussion of the LAM equity plan was postponed to the April 24 meeting in London.

At that meeting, Loomis outlined a highly complex idea for providing an equity incentive plan to LAM that involved reducing the huge contractual payments to Eig and Gullquist and sheltering income on a tax-free basis using earnings from the firm's hedge funds. Loomis said he thought the incentive plan should be more fully developed in time for the June meeting. He also told his colleagues that the firm was negotiating to keep Eig and Gullquist since, Michel said, LAM would not be able to "cope with the 'rumours' of Eig and Gullquist leaving unhappily." Michel said that the LAM co-heads wanted to stay and run the business while preparing for an orderly succession.

Verey found himself disagreeing with Michel during much of the day. And Evans and Verey agreed "it had been a rotten day and that it was hard to feel involved." Before he left to go back home, Michel visited with Evans and Verey in London, in part, Evans believed, because he wanted to leave Verey "on a friendly basis after a day where they had repeatedly disagreed." The next morning Verey told Evans he had decided to resign. He had been approached by both Rothschild and Cazenove and felt that only by resigning could he "honorably consider alternatives."

Verey flew to New York on May 9--one day before the next executive committee meeting--to tell Michel and Loomis he was resigning. There was some speculation that Michel might resign as chairman and turn that position over to Verey, but that did not happen. Verey's resignation, on May 10, was yet another serious blow to the firm. Verey, then fifty and the longtime head of Lazard in London, had been with the firm for twenty-eight years. Despite his very public support for the three-house merger and for Loomis as its CEO, he no doubt felt diminished by the Loomis appointment, as it certainly was one he had hoped to get. A very proper British banker who had forgone deal execution for administration and had returned Lazard in London to respectability during his ten years at the helm, Verey had been described as "Dickensian" for his exacting behavior, which prompted one of his partners to refer to him as a "cheese parer." Michel said Verey left the firm because Michel didn't name him CEO. "The difficulty I had with David is that he wanted to run Lazard as a whole," Michel said. "And I didn't think he would fly in New York at all. And it's not my fault, it's a fact." Michel added that Verey is "a very nice man. I like him." It is an open question as to whether, in accepting the resignation, Michel recalled the day in 1996 when Verey was offered--and turned down--the job of chief executive officer of Pearson, preferring instead to stay at Lazard. "My first loyalty is to Michel David-Weill," Verey told Lord Blakenham at Pearson in turning down this attractive offer. Michel recalled years later that at the time, he was "very touched by that" display of loyalty.

No matter, life moves on, and Michel replaced Verey with Marcus Agius, who joined Lazard on the same day as Verey in 1972. Agius quickly made Michel look smart by advising the Halifax Group on its PS28 billion merger with the Bank of Scotland, one of the largest European deals of the past five years. The day after Verey resigned, Bruno Roger sent a letter of support to Evans. "Your essential qualities--professional and human--are essential during these delicate moments," Roger wrote in his broken English. "I wish you to reassure my full and friendly support and the full and friendly support from all the team in Paris." Evans, touched and deeply appreciative, wrote back, "It seems to me that the point of Lazard is the extraordinary team (almost extended family) spirit that exists among us. Your kind letter is confirmation of this." No mention of Verey's resignation appeared in the minutes of the May meeting.

Nor was there any mention in the minutes of the other momentous decision made at that meeting: to
seriously
explore the sale of Lazard. But a problem loomed in that, per the terms of the three-house merger in 2000, the partners in London would not be entitled to any goodwill if the firm were sold. Only the New York and Paris partners, plus the capitalists, would be so entitled. No serious discussion of selling the firm could take place until the discrepancy with the London partners was resolved. There also needed to be a backup plan--in this case, a thorough, fully vetted internal restructuring--in the event that the sale process did not succeed.

Two weeks after Verey abruptly resigned, Loomis appeared before the Lazard supervisory board, where he made a somewhat opaque assessment of the increasingly acute problems: the firm's backlog was evaporating; Michel's unrealistic revenue goals were being missed, and badly; the firm's first layoffs had started; Verey had left, and there were rumblings that Braggiotti and Georges Ralli in Paris were not far behind; the co-heads of the asset management business were agitating for the unit's independence; the hiring outlook was bleak, Lazard could no longer pay people top dollar; and Loomis's initial two efforts to distribute equity to the top partners--first to the top twenty-three and then to LAM--were an embarrassment.

Furthermore, a consensus seemed to be building that Loomis may not have been up to the task of running the firm, which of course was not going to be easy for anyone with Michel still around. There were reports that he would get visibly angry when things did not go his way or when Michel did not support his initiatives. His temper was quick. He had taken to writing e-mails to other partners about how frustrated and angry he had become in the job, chiefly because of Michel. Some partners noticed that he would shake visibly in their presence. Had he started drinking more heavily? they wondered. "He lost control of the situation completely," one senior Lazard partner said. "He was nice to Michel, but for the rest he completely lost control. He never did anything. Anything. You should look at his speeches. He said all the right things, all the right words. He gets it all right, but then nothing happens. I don't know what he has in his mind. I mean he certainly has a problem, a psychiatric problem or something."

Loomis's May 25 speech to the supervisory board was yet another example of insight without execution. "We need to have more vibrant incentives to keep and attract outstanding partners here," he said. "There is nothing wrong with Lazard's business model, but the economic model needs rejuvenation. There is a need for us to better fit our business model by greater strength in retention and recruitment. Enhanced and longer-term incentives are necessary. We will accomplish this during the current year, or owe you an explanation of why not. We cannot have a convincing thesis if a working partner of excellence is remunerated less here than peers who work at boring banks."