The last tycoons: the secret history of Lazard Frères & Co (40 page)

Many of the partner profit percentages were shifted about as well, without any discernible pattern. The ailing Kniffin's stake was reduced to 1 percent from 4.5 percent and Felix's take was reduced to 8 percent from 11 percent. Donald Petrie, one of the key figures in the success of Avis, returned to the firm as a partner, with a 2.5 percent stake.

Michel had taken the first steps in reducing the size of the firm in keeping with his statements to
Fortune.
And his concern was justified by the deteriorating financial performance of the New York partnership. Yes, Lazard in New York had made $13.1 million in 1971, 44 percent of the three houses' net income of almost $30 million. But that number had fallen steadily, reaching a mere $8.1 million in 1974--the "Dark Ages" on Wall Street, according to Felix--before increasing again in the mid-1970s, to $15.4 million in 1977. In 1978, though, net income fell again, dramatically, to $11.9 million in New York, well below the profitability of London, which was $16.8 million. Even the much smaller Paris house was no longer far behind New York, earning $6.7 million in 1978.

Michel determined he had to fix New York--and fix it he did. "In New York, if you had asked people around Wall Street if I could have been successful, I think the answer would have been no," he said in 1981. "They would have told you three years ago that the idea of sending a young Frenchman, nice, wealthy, relatively well educated, into a jungle like Wall Street, and especially into a jungle like Lazard Freres that was full of talented but very difficult personalities, was ludicrous." In 1988, Michel said of his first days in New York: "At that time and even seen retrospectively, the odds seemed to be against me. But I never had doubts. Difficulties, yes. Doubts, no."

Still, by July 1978, Michel was feeling sufficiently well about his growing importance at the firm that he decided to have a coming-out party of sorts for the French business community in the pages of
Le Nouvel Economiste,
a respected business journal. There, for all his wealthy friends to see--and for one of the first and last times--was, on the cover, a half-smiling forty-five-year-old Michel, resplendent in an expensive gray three-piece suit, vest buttoned tightly, save for the requisite one at the bottom. His jet-black hair (where had his red hair disappeared to?), unparted, was slicked back well off his prominent brow. Inside, another picture, slightly out of focus, showed Michel seated in a sparse conference room in Paris below four black-framed pictures of his forebears, with a caption citing him as "the heir of a celebrated line of bankers." The article added to the growing mythology of Lazard as an incredibly secretive, incredibly powerful collection of important men doing important business around the globe. Many of the old chestnuts were trotted out: an ability to control billions of dollars at a moment's notice with only the tiniest drop of capital--$17.5 million in New York and 17 million francs in Paris; the spartan, almost unforgivable working conditions, where every two partners shared one secretary, in shabby leased offices; the importance of being long-term greedy by offering unparalleled advice to CEOs as opposed to simply loaning money.

There was hardly anything secretive about such a prominent and fawning article. But there were some subtle (and not-so-subtle) messages being conveyed by Michel to his partners, including the public reinforcement of the importance of partnership at the firm and the refutation of Cook's failed management philosophy. "It is a Lazard rule: No pyramid structures," Michel explained. Sorry, Mr. Cook. The article concluded by affirming that Lazard had "stayed true" to established principles of private European investment banks of the nineteenth century--"a sanctuary where all the different threads of a tightly knit network come together and where decisions are made whose authorship is given to others"--and left readers with a little morsel from Stendhal, where the arriviste protagonist of
Lucien Leuwen
wonders why his father, the banker, is keeping four foreign exchange traders waiting for him in the lobby of his office. His answer: "Their job is to wait for me. My job is to read the paper."

THE MID-1970S were a period of profound change across Wall Street. The back-office crisis of the early part of the decade, which Felix had helped to solve, resulted in any number of old-line brokerages being merged out of existence and others being liquidated. Then, on May 1, 1975, the SEC ordered the end of fixed commissions on stock transactions. "After 183 years of doing business under fixed commissions, Wall Street will have to respond to the challenges of free enterprises," Donald T. Regan, then the chairman and CEO of Merrill Lynch, told the
New York Times.
Added Billy Salomon, the head of Salomon Brothers, "There was a time when a client handled by X firm stayed with that firm. Today it's a dog-eat-dog world." That decision began to break the clubby covalent bonds that had existed between many Wall Street firms and their corporate and institutional clients. This benefited firms outside of the club (many of which happened to be predominantly Jewish), such as Lazard, which had lower overhead and could gain access to new clients as a result of the rapid breakdown of the conventional order. The decline in brokerage-fee revenues further exacerbated the need for the large brokers to consolidate, so, among others, Bache Halsey Stuart, itself formed by the merger of Bache & Company and Halsey, Stuart & Company, bought Shields Model Roland. Then Paine Webber bought Mitchell Hutchins. If this weren't enough commotion, a number of the old-line investment banking partnerships were facing succession issues. Not only was Lazard struggling with succession, but so were Allen & Company, where Charles Allen Jr., then seventy-four, was slowly disengaging from the highly secretive media boutique; and Dillon, Read & Company, where Clarence Dillon, then ninety-four, no longer came in to the office. Sidney Weinberg, Gus Levy, and Bobbie Lehman--giants among men--had died. Pete Peterson, Felix's old friend from Bell & Howell and the Nixon administration, had left Washington in 1973 to help rescue the financially troubled Lehman Brothers, after turning down an offer from Andre to come to Lazard. Then there were both Loeb, Rhoades & Company, run by John Loeb, then seventy-four, and Kuhn, Loeb & Company, run by John Schiff, then seventy-three. Both of these firms were pondering their future, given the aging of their leaders. The two even considered merging their complementary businesses as a way to compete more effectively. In the end, both Loeb, Rhoades and Kuhn, Loeb ended up being bought, at separate times, by Lehman Brothers.

Michel, ever protective of his birthright, determined early on not to let Lazard fall prey to the merger forces running rampant on Wall Street. He needed to make Lazard more profitable and the Lazard partnership more meaningful. His decision to demote seven partners (including Mel Heineman) and then force another seven (including Andre, at his request) to become limited partners sent a powerful message. "It was a Napoleonic first act, if you will," one partner remembered. "I am sure it was all calculated to instill fear and trembling in the troops." Many said Michel took a page from Voltaire, in
Candide,
where the great French writer explained how the British executed one of their own admirals who lost an important battle
"pour encourager les autres"
(to encourage the others). Michel also declared that for the next four years, he had no intention of promoting any internal candidates to the partnership ranks, a decision that added to the frustrations of the firm's long-suffering younger bankers. One of the demoted partners, Peter Lewis, remembered being "disappointed" by Michel's decision but also understood his logic for it, given that Lewis's main focus at Lazard to that point had been on Blackwell Land, the huge agricultural enterprise in California owned by the original family heirs, including Michel, individually and not by the firm. Lewis eventually became a partner again after he "reinvented himself as an M&A banker." Peter Smith, who also was demoted, reclaimed his partnership two years later. Mel Heineman thought his demotion related directly to his SEC testimony and his clear-eyed sentiment that he would not go to jail to protect Felix. Not surprisingly, Felix took a different view of the cuts. "We cut back quite a bit," he said. "It was a brilliant piece of work." He noted that as a result of the cuts, a Lazard partnership was now more "meaningful," as in, the remaining partners all made more money. "It was a difficult, thankless task," he added.

Michel elaborated: "Particularly during the years when Mr. Andre Meyer was sick, there was a natural tendency to satisfy the ambition of young individuals by naming them partners relatively quickly. But to me being a partner is not an honor; it is either a fact or not a fact. It is much better to be a highly paid senior vice president when you are in fact doing the job of a senior vice president than to be a partner, which attracts other partners' attention to the fact that you're not completely right to be one." Or, put another, more metaphorical way, Michel explained, "It was like looking in the mirror. You don't realize you're gaining weight, until one morning you look at yourself and realize you're getting fat. Then you do something about it." In another act laden with symbolism, Michel moved into Andre's old office but was careful to keep Andre's desk exactly as it had always been, untouched. He moved his own desk into the opposing corner, near where his father had a desk during his infrequent visits to New York. He kept the Lazard offices as drab as ever and echoed Andre's old saw: "Luxury helps at home, not in the office." Partners noticed that while Michel may have occupied Andre's office, he was not Andre. "Mr. Meyer wanted to know every time a pebble turned over," the partner David Supino told Cary Reich approvingly. "Not Michel." Michel also, for the first time, invited Lazard Brothers, the U.K. affiliate still owned 80 percent by S. Pearson & Son, to invest $1.5 million in the fixed capital of Lazard in New York and to receive a 1.5 percent stake in the firm's profits. "It is a little different if you are a partner of the owner than if you are just a cousin of his" is how Michel put it at the time. This was a critical first step toward Michel realizing his vision to reunite the ownership of the three houses of Lazard. "The relationships are getting closer and closer all the time," Michel explained. "I have a sense of being at home when I am at Lazard Brothers. To me it's very much a part of the family."

But perhaps his most important initial decision was to recruit four highly productive partners from Lehman Brothers to Lazard in New York. The defection of the Lehman partners--known as "the Gang of Four"--in the wake of the Kuhn, Loeb merger, was organized and led by James W. Glanville, an oil and gas banker with one of the largest ownership stakes in the Lehman partnership, and included Ian MacGregor, the former chairman of AMAX, a U.K.-based minerals and coal giant, Alan McFarland Jr., and Ward Woods, two younger partners who had worked with Glanville. "Last month, four Lehman partners chose the more measured music of Lazard, with its golden notes and emphasis on solo turns, over the orchestrated innovations of the much larger Lehman firm,"
Fortune
reported in September 1978.

Notwithstanding the sweet music being composed in the pages of
Fortune,
this was a
highly
controversial decision inside both firms, the reverberations from which are felt by many of the individuals involved to this day. Glanville hated that Pete Peterson was pushing Lehman to become a full-service firm and opposed him openly on the executive committee. Beyond that, he just hated Peterson. The feeling was mutual. "Before coming to Lehman Brothers," Peterson told Ken Auletta in
Greed and Glory on Wall Street,
"I was told the firm itself was seriously divided and Jim Glanville was at once very productive in the energy area and perhaps the most divisive and even vindictive of the partners. I found both statements to be accurate." One month before his first discussion with Michel about decamping, Glanville asked Lehman to write a $5,000 bonus check out to William Loomis, an associate who worked for Glanville. Peterson and the executive committee rebuffed Glanville since determining bonuses was not the purview of an individual partner but rather the responsibility of the firm. "So it is to be war," Glanville wrote Peterson after the rebuff, in July 1977.

Soon Glanville "whispered" his displeasure with Peterson and Lehman to the Lazard partner Frank Pizzitola, who knew Glanville from energy deals. Thanks to Pizzitola, Glanville met with Michel in August 1977--just before he took control--to see "what Lazard might be like under its new managing partner." In December 1977, Lehman completed the acquisition of Kuhn, Loeb, but the tension between Glanville and Peterson continued. Michel and Glanville met again in the spring of 1978, and afterward Michel urged Glanville to meet with Felix. Felix met with Glanville several times and even volunteered to reduce his percentage of the firm's profits to help recruit the Lehman team. (Felix voluntarily cut his points by 25 percent, to 6 percent, from 8 percent, in September 1978, which cost him $240,000 that year; Michel, too, reduced his points to 13.2 percent, from 19.1 percent, but his stake went back up to 18 percent the next year while Felix's take stayed fixed at 6 percent.)