The last tycoons: the secret history of Lazard Frères & Co (102 page)

When the meeting resumed in the afternoon, Loomis recommended implementing the massive restructuring plan that would have reduced New York to ten or fifteen partners. "Gratuitous violence" is how one senior partner put it. The opposition from the executive committee to this idea was equally fierce. Still, costs needed to be cut to accommodate the rapidly falling revenues. To that end, after the October 16 meeting, Lazard announced its intention to eliminate sixty, or 30 percent, of the New York office's two hundred investment bankers.

The firings were tangible evidence of how badly things at the firm--and across Wall Street--were spiraling out of control. At the time the cuts were made, the firm publicly announced that its full-year 2001 profit was to be about $150 million, a drop of about 75 percent from 2000. (In 1999, the New York office
alone
made $300 million.)

Finally, with cash running low and the prospects of year-end compensation greatly diminished, Loomis convinced Michel to distribute
real
equity to the working partners--"a watershed event" in the history of Lazard, Michel said, "and a mistake." He acceded to Loomis's request at the October 16 meeting only very reluctantly and because the internal and external pressures to do so were no longer bearable. "In a partnership," goes Michel's thinking, "the ownership of the partnership was virtual. It belonged to the partners, but who the partners were depended upon when you were speaking. It changed with the partners. Completely unfair system? Sure, but every system is unfair. Because if the firm were ever sold, the people who would get the percentage would be the people who worked there at the time it was sold." The details of how the equity would be distributed--and how much--remained to be determined. But the basic deal Loomis struck with Michel was that profit points would be turned into ownership points at a 70 percent conversion ratio. In other words, if you were a 1 percent profit partner, your ownership stake would be 0.7 percent. Since partners' cash compensation would be greatly diminished because of the firm's poor 2001 results, the distribution of real equity gave people a reason to stay around.

All of these events--the worsening financial performance, the failed talks with Lehman, September 11, the firing of bankers, the confrontation about closing capital markets, the palpable European dissatisfaction, Michel's begrudging decision to distribute real equity--took their toll on Loomis. He was no longer sleeping well, if at all. He explained: "I reached the conclusion that I was in an impossible position between the views of Michel, the views of various members of the executive committee, and my ability to reconcile people's views.... I felt two things. One is that I thought that I was in an impossible position to do a good job, and secondly I thought that if I continued, I would get progressively frustrated and unhappy and"--here he paused for some time--"Michel had already started to put strictures on what I could or couldn't do by way of restructuring the firm." And of course, Michel had already started talking to Bruce Wasserstein, which Loomis now knew.

Michel was a good poker player, though. He didn't let on to anyone, aside from his CEO (and perhaps Haas), that he was talking to Bruce. And Loomis wasn't telling anyone, not even his wife. So when his partner Ken Jacobs, then the head of M&A, who knew Bruce well socially--their wives, both French, were very friendly--asked Michel if he would like to speak again with Bruce, now that Bruce looked to be free from Allianz and Dresdner, Michel encouraged Jacobs to set up an appointment. "At that point I knew Bruce had left DKW," Jacobs explained, referring to Dresdner Kleinwort Wasserstein. "I asked Bruce if he thought he'd be interested in this. He clearly was. I said to Michel I thought that Bruce could be interested in this." But of course Michel already knew this information. As did Loomis. "So here I am in a situation where he's restricting what I can do to restructure," Loomis said. "The Europeans, particularly, are saying New York has to be restructured. The costs are too high. But my hands are tied in terms of making decisions, and he's holding conversations with Bruce Wasserstein."

Michel and Loomis agreed to meet at nine-thirty on Saturday morning, October 20, at Viking's Cove, Michel's mansion in Lattingtown. The afternoon before, Loomis had suggested a quotidian agenda for the discussion--including Braggiotti's compensation, what to do about new partner candidates where representations had been made previously, Lazard Asset Management, and clarifying his own role in banking. That morning Loomis drove from his house overlooking Long Island Sound in Greenwich to Lattingtown. As the crow flies, the distance between their two waterfront homes was roughly nine miles. The drive, that warm fall morning, some forty-five miles along some of the most heavily trafficked roads in the country, must have seemed like an eternity to Loomis. He had gone to see Michel to get his advice about the myriad of looming unresolved issues. He got that, and more: he got fired.

Michel eschewed Loomis's agenda and told him he was no longer being effective, had no base of support in either New York or Europe, and was unequivocally failing. "His advice was to hold on until Bruce could get there," Loomis said. "And also not to do anything to upset any of the partners--key partners, like people on the executive committee--who might then leave, and that I, essentially, had failed." Taken aback, Loomis told Michel, "'Look, since I only took this job because of you and you don't have confidence in me, I don't have any interest in continuing the job, and it's very important in that I was and am very happy with my experience at Lazard.' I'd seen all these people who were bitter or walked away and I didn't want that." He remembered the conversation as being intense and emotional. But he did not cry.

On the ride back to Greenwich, he replayed the conversation over and over in his head. Michel had not only removed Loomis but also told him to sit on his hands, compromise with people, and wait to see if Michel could cut a deal with Bruce to replace him. There was also still a remote chance something could be done with Credit Agricole. And oh, by the way, don't piss off anyone important in the interim, either, especially Braggiotti or Jacobs. Also, there appeared to no longer be a role of any sort for Loomis at the firm, not even as a banker. "Maybe you were once a banker, but others wouldn't regard you as one," Michel told him. Had his opportunity of a lifetime really dissipated in the span of eleven months? "This was an impossible situation," Loomis said. By the next day, he had thought even more about the conversation. And then it dawned on him: "I thought about it on Sunday, and then it's one of those things like, you know, how stupid can you be?"--and here he laughed at the memory. "You know, you've just been fired. You know, 'Oh. Now I get it.'" He decided the best thing to do would be to resign. "Otherwise, I just get tarred and kicked around after being judged a failure and having no leverage to make any decisions," he wrote. "Everyone ends up unhappy."

By the time Loomis returned to the office on Monday morning, he was confirmed in his decision to resign. His position was untenable. He knew it. His partners knew it, too. He had served at Michel's pleasure, and Michel had determined Loomis could no longer be effective. Furthermore, he was simply in the way of Michel's twelve-year unrequited infatuation with the Wall Street legend Bruce Wasserstein. He spent part of that Monday huddled, confidentially, with Scott Hoffman, the firm's youthful general counsel (Michel having pushed out Mel Heineman after Rattner's departure), drawing up the requisite resignation and severance documents. All agreed there had been a constructive dismissal, and the new compensation arrangement he had created six weeks before, on September 10, was now operative.

Whether Michel actually thought Loomis would resign at this moment is not clear. On the morning of the day he decided to resign, Loomis received an e-mail from Agius saying he had spoken to Michel, who had said that he didn't think the restructuring plan "goes far enough in NYC, that he wishes you"--Loomis--"would insist on more and that he would support you if you did!!! I asked him what Ken's reaction would be to your being more aggressive, and he said he thought 'it would hold.' I don't know what's going on, but it sure feels like there's a crossed wire somewhere. Go for it!"

That same afternoon, at the partners' meeting, Loomis made his announcement: he would be leaving the firm by year end. He also said, "I must also tell you what I'm not going to do. I'm not going to discuss my reasons for doing this, and I'm not going to gossip about it, so please don't come by my office and say, 'What's really going on here?' because I won't say anything. You'll just put me in an uncomfortable position." That night before leaving the office, he took the time to recommend to Michel that Evans be paid at least 1 percent and "probably 1.25 percent" of the firm's dwindling profits. ("You are a great partner at whatever percentage," he told Evans.)

A day after the Tuesday partners' meeting, on October 24, Lazard announced to the world that Loomis would resign as CEO, marking yet another failed effort by Michel to find--and stick with--a successor.

The firm said Loomis would become a limited partner, "work with clients and focus on other interests," and leave Lazard entirely two months later, at the end of 2001. In fact, he disappeared almost immediately after the announcement, rarely coming into the office, leaving others--particularly Ken Jacobs--to pick up the pieces of the year-end compensation process. Lazard made neither Loomis nor Michel available to the press to discuss this turn of events. Instead, Michel asked Jacobs to do that job. Jacobs told the world Loomis's decision to leave "was entirely his own." The firm also announced it was, for the time being, eliminating the CEO position, in favor of creating a chief operating officer, and named Adrian Evans, the London veteran, to that position; he was to run the firm in close conjunction with Michel and the rest of the executive committee.

The press pinned Loomis's departure on political infighting related to compensation and cost cutting and the fact that, for the first time, the European partners were generating a far greater share of the global M&A business (some 77 percent, compared with 59 percent in 2000) than their American counterparts and wanted a recalibration of the equity splits. Said a European partner, "If Michel had to offer them the olive branch in the form of Loomis's head, he would give it to them." Mostly, though, there was simply a crisis of confidence in Loomis's leadership exacerbated by the firm's financial meltdown. "He was so much in David-Weill's shadow, if Michel stopped, Loomis would bump into him," said one observer. "He was a Michel clone." Loomis had turned out to be the mirror image of Rattner. Whereas Steve had chosen to make his partners' happiness his main focus, at the expense of Michel, Bill had chosen to make Michel's happiness his main focus, at the expense of his partners. At Lazard, ironically, both strategies proved to be highly combustible recipes for disaster.

Looking back now, Michel is able to be completely rational about the decision to fire Loomis, despite his copious personal affection for him. (They still see each other socially in California, where Loomis is working on a Ph.D. in American history at the University of California, Santa Barbara, and in New York.) "People don't have a long time to be successful," Michel explained, in one of his favorite refrains, "because after six months it's usually pretty clear that it's not working." Michel said Loomis capitulated to the inevitable, which, as Loomis acknowledged, was that he was pushed off his perch.

With Evans at his side, Michel briefly attempted to once again run the firm after Loomis quit. He had not been involved in the day-to-day managing of New York since before he appointed Steve deputy CEO; in Paris, his involvement dated to before 1992, when he appointed Edouard Stern to run the office, and he had never really been in charge in London. Predictably, Michel's return "was a catastrophe," one New York partner said. "It was a catastrophe here. It was a catastrophe in Europe. It was total chaos. There was no plan. There was no sense of where we were heading, no point about how we were getting out of the mess. No nothing." Michel acknowledged his return as Lazard's CEO was problematic. "Turning back the clock is very difficult to understand for some people. To tell them the sovereign returns is not a very good thing.... We had a problem. We had a problem, there's no doubt, because too many ideas had been put forward without a resolution. So we needed a watershed event of some kind."

LAZARD WAS ALSO
slipping precipitously in the M&A league tables, especially in the United States. Through November 1, 2001, Lazard ranked seventeenth in advising on U.S. deals, down from tenth the previous year. Globally, the firm ranked twelfth, down from eighth the year before. Lazard has "never been able to keep anybody as CEO," explained Roy Smith, a former Goldman partner who is now a professor at New York University, because Michel "never retires." There were also reports that UBS had increased its ownership stake in the web of Lazard holding companies and that Jon Wood, the UBS proprietary trader, and his erstwhile ally, Bollore, had met with Bruno Roger in Paris. They wanted Michel forced out. In an article titled "Men Overboard," the august
Economist
wondered what all "the high-profile departures" portended for the firm. "Are the rats leaving a sinking ship?"