The last tycoons: the secret history of Lazard Frères & Co (43 page)

Michel and Felix worked out what Michel described as a "bicameral" approach to running the firm. They had a symbiotic relationship. Michel took care of the day-to-day management that Felix abhorred. Felix used his unparalleled access and M&A skills to keep Lazard at the top of the deal league tables. They made each other even richer. They shared, at least in the early years of their partnership, a similar devotion to low overhead, business lines (like M&A) requiring little capital, and a desire to remain unique. They thought about resurrecting Lazard's risk arbitrage and private-equity businesses. And Michel wanted to increase the firm's municipal bond trading business. Mostly, though, they focused on giving the respected bankers who worked there the room to run, increasingly free from Andre's micromanaging. "In the last couple of years we have probably had four, five or six different partners working start to finish on large transactions, partners other than me and Andre Meyer," Felix told
Institutional Investor.
"They are capable of taking on a piece of business and putting it through without the need for me or the equivalent of Andre Meyer getting involved. That's a new thing around here, people going off on their own. It gives a dimension to the place and a spirit it didn't have. We've had a flowering of people who had been in our shadows." In the old days, he continued, "We had Andre Meyer as a superstar and me as a junior superstar. People were encouraged to bring in business but they weren't left alone, partly because Andre had great difficulty trusting anybody other than a very, very small number of people. He would go along with me doing my own thing but not many other people. It takes a while for people to come out of that. If you asked me whether there has been any real change in what we are trying to do, I would say, no there hasn't. But in terms of how we do it, of course there has. You don't go from Julius Caesar to the Third Republic without having a change in how you do business." Observed one partner, fresh from a two-week, uninterrupted vacation in Mexico that was far from civilization,
"That's
the new Lazard."

Felix also made another attempt to instill a little discipline in the M&A team. He demanded, in a January 1979 memo, that associates in the group monitor the "broad tape," the old-fashioned paper version of the "crawl" that now appears at the bottom of the CNBC television screen, and immediately inform the "senior members" of the group of any M&A deals "within minutes of the announcement in order that we inform our clients in a timely manner." He instructed the associates, on a rotating basis, to write a one-page synopsis of the relevant deals. Felix's memo was an early and modest effort at marketing Lazard's services. He wanted the associates to answer the question "Should we call either of the companies involved to determine if our services may be useful and, if so, is there evidence to suggest, such as by means of a review of the directorate of both companies, who in this firm should make such a call?" But within a month, the system Felix had tried to set up had already malfunctioned. In a memo to all the partners, including Michel and Felix, Frank Pizzitola observed, "The procedure outlined in Felix Rohatyn's memorandum of January 24th, a copy of which is attached, appears to have broken down. We are going to make another concerted effort to see if this system will work to the benefit of us all."

Regardless of the system failure, in quick succession, the firm--principally Felix--represented United Technologies in its acquisition of Carrier, the air conditioner manufacturer; ABC in its acquisition of Chilton Books; and Unilever in its acquisition of National Starch. Indeed, the money once again started rolling in. After the shaky transition year of 1978, the firm earned $54.5 million in 1979, with fully 46 percent of that amount, or $25.3 million, coming from New York. Lazard as a whole had never earned more than $40 million in a given year and now had cracked the $50 million level. Felix earned more than $1.5 million in 1979; Michel made more than $4.5 million, just from New York
alone.
The partner Frank Zarb, for one, remembered this period as golden. "One year, we paid our entire expenses by the end of February," he said. "Invariably, we did the same thing. We'd look at the pipeline in December. Felix would panic. We'd put together a new business committee, have a new business committee meeting, talk about lists and bullshit. And by February, we were all so busy we couldn't go to meetings anymore. Year after year after year."

In the spring of 1979, two lengthy magazine articles--one about Andre in
Institutional Investor,
the other about Felix in
The New Yorker--
added immeasurably to the firm's growing luster. The Cary Reich article in
Institutional Investor
about Andre, coming some five months before his death, was both an homage to his legacy and an early obituary. One observation, by the partner David Supino, captured Andre's mysteriousness. "He has a European penchant for elegant inconspicuousness," Supino said. "Even if everybody knows who he is, nobody knows all the facts." In short, it was the portrait of a man in full, complex and brilliant, relentless and flawed.

The New Yorker
article coincided with Felix's brief departure from MAC and with a pair of testimonial dinners designed to honor the key participants in the more than three-year drama to save the city. One dinner was to honor Victor Gotbaum, then the executive director of the city's biggest municipal employees union. The ordeal of saving New York from bankruptcy had forged--for a time--a formidable friendship between Gotbaum and Felix and their wives. At the first testimonial dinner, more than thirty years ago, Felix described Gotbaum as "today probably my closest personal friend."

The closeness of their friendship would often find its way into print. Gotbaum was the best man at Felix's 1979 wedding to Elizabeth Vagliano, one month after
The New Yorker
article appeared. Indeed, it was Victor Gotbaum who convinced Felix, while walking on a beach in Southampton, that he had better propose to Elizabeth or risk losing her. "Liz was getting very frustrated with it and was very negative about the whole thing, the way Felix was behaving," Gotbaum explained. "We took this famous walk on the beach, Felix and I, and I said, 'You know, what the fuck's holding you up?' He made all kinds of excuses about money, how you'd lose this and you'd lose that, and so I gave him my customary stuff. I said, 'Felix, you're full of shit, you know, you're just full of shit. You're insecure about it, okay, but you're not going with anybody else. You seem to care for her a great deal.' I said, basically--in much better language than this--'Shit or get off the pot.'"

The four were regular dinner companions, and the Gotbaums rarely failed to appear at the Rohatyns' annual Easter egg hunt in the Hamptons. And thanks to Felix, Gotbaum's son Josh was a partner at Lazard for thirteen years, beginning in 1981. "Felix wanted him," Gotbaum said of how his son ended up at Lazard. "We used to congratulate each other that we had two sons that were smarter than we were. Josh in my case and Nicky in his case." It was an unexpected friendship, this one between the refugee multimillionaire investment banker and the labor leader prone to Khrushchevian acts of violence. Felix used to refer to them as the "municipal 'Cage aux Folles'" and talked repeatedly about their close personal friendship. In his speech at the Gotbaum dinner, Felix described their first meeting, in July 1975. "We had an extraordinarily enlightening night, which ended at five in the morning with Victor pounding his shoe and being very vocal and intimidating." Felix's retort to Gotbaum after that episode: "Look, you're not Khrushchev and this is not the U.N. So stop pounding." Gotbaum said that his display was simply part of the early theater of the principals' staking out their positions.

But something happened to this beautiful friendship. Inexplicably, Felix no longer speaks with Gotbaum, one of the saddest developments in the former labor leader's life. Some mark the day Gotbaum retired--in 1987--as the city's most powerful labor leader as the day Felix lost interest in him. But the break became complete when Felix returned to New York in 2001, after serving as ambassador to France. "It didn't unwind," Gotbaum said. "It didn't unwind. I think a better word is it somehow dissipated. And somehow began to disappear. And I think a lot of it had to do--it wasn't just Felix, it had to do with me also. He became very rich indeed. I think the best way of saying it is we grew apart."

For a moment or two in the 1980s, Gotbaum toyed with the idea of running for mayor of New York City. As he was thinking about this decision, he shared his private ruminations with his dear friend Felix, who supposedly told Gotbaum that he was sorry, but he just would not be able to publicly--or privately, for that matter--endorse him for mayor. Now, lacking the endorsement of his high-profile partner in solving the city's financial crisis put Gotbaum in a most difficult position. When he left Felix's apartment after this conversation and got into his waiting car, he did two things. First, he decided to terminate his nascent efforts to become mayor; and second, he cried. Although Gotbaum said years later that he never seriously considered running for mayor and didn't recall crying in his car (what man would?), he did remember talking to Felix about the possibility and being very disappointed about how nervous Felix seemed to be about the prospect of his running for mayor. "Felix was very nervous about it in terms of his growing constituency," he said. "That bothered me. That bothered me because I wasn't going to run for office, you know. I figured, fuck it. Why the hell he was nervous, I don't know. And you know, it just reached a point where I almost told him, like, 'Felix, fuck off. I'm not running for office and that's it. And, you know, let's cut the shit.' But he was very nervous about it. The truth is that if he said he wouldn't support me, I'd have gone anyhow, and, guess what, he'd have looked like shit if he didn't support me. So I just really didn't care in that sense. One, I wasn't going to run, and two, if I ever decided to run, I had him by the balls, because there's almost no way he could get out of supporting me."

The New Yorkerr
piece made another point. While Felix's involvement with the city's financial crisis consumed much of his time for three-plus years beginning in 1975, neither he nor Lazard charged the city a penny. Nor did Lazard charge the city for the services of the other partners who, on occasion, worked with Felix on MAC. This was not as crazy as it sounds. The three houses of Lazard took precisely this tack during the franc crisis of 1924, when together they eschewed their fees in favor of copious amounts of favorable publicity. True, Lazard was by no means a charitable organization, as Felix had told the Celler commission in 1969, but the amount of glowing press coverage that Felix, and by extension Lazard, received was immeasurable and invaluable. Felix's increasingly high profile, according to the
New York Times
, "propelled him to national prominence and showered more incidental publicity on the firm than it desired." The
Times
got half of it right: Felix had become a national figure, but nobody inside Lazard was complaining anymore about the firm's increasing renown. The days of Andre's false modesty were decidedly over.

Soon enough, Lazard would be asked for its professional advice to solve the financial problems of other cities in crisis, such as Detroit, Cleveland, and Washington, D.C. "I like big cities," Felix told
Newsweek.
"Civilization grows there. Religion develops in the open air, I suspect. But civilization--that is in the cities." Lazard was also asked by the state of Illinois to help with a crisis in public education finances and by the U.S. Treasury to help it evaluate the proposed $1.2 billion--later $1.5 billion--federal bailout of the Chrysler Corporation. (Lazard had been an adviser to Chrysler but had resigned over "policy differences.") Felix's role in the Chrysler bailout caused him once again to champion a new version of the Reconstruction Finance Corporation on the editorial page of the
New York Times.
"Somebody told me we were getting to be the Red Adair of municipal finance," he said at the time.

Felix estimated that
had
Lazard charged MAC for its services, the bill would have been in the range of $2.5 million. And Lazard was the only adviser to MAC to serve pro bono; Paul, Weiss, Simon Rifkind's law firm, albeit at a reduced rate, billed MAC--and received--$500,000 for the legal work necessary to set up the corporation. But when he resolved to leave his position at MAC, in January 1979, Felix "felt that it was unfair to expect his partners to continue on the old basis," Andy Logan wrote in
The New Yorker.
The Lazard partners met to discuss the situation and decided to continue the firm's advisory work with MAC, since the firm possessed an immense institutional knowledge about the city's financial picture. The firm also decided, though, to ask for a monthly retainer, at a reduced rate, which also specified that Felix would not receive his percentage share of the pretax income the MAC fees generated. The new chairman of MAC, George Gould, recommended hiring Lazard at a modest annual retainer of $250,000 (assuming this was all profit, Felix's sacrifice for not taking his 6 percent share was to have been $15,000). Representatives of Ed Koch, the new New York City mayor, were present at the MAC board meeting two weeks later when the board unanimously approved the Lazard arrangement.

It turned out, though, that after Felix had independently made some negative comments about Koch's proposed city budget, Koch decided to take his anger out on Lazard and its proposed financial arrangement with MAC. Before going to the dinner to honor Felix, Koch gave an impromptu interview to the
New York Post
where he derided Lazard's hiring, without a competitive bidding procedure, as "certainly a moral conflict of interest." When asked by a reporter if he was going to confront Felix with this issue at the tribute, Koch demurred. "This is Felix's Bar Mitzvah, and you don't say mean things to the Bar Mitzvah boy," he said. A predictable firestorm ensued. Two days after the
Post
story appeared, Lazard resigned its MAC assignment. "The privilege of public service does not carry with it the obligation to be subjected to needless abuse," the Lazard partner Jack Tamagni wrote MAC in the firm's letter of resignation. Governor Carey, the board of MAC, and Simon Rifkind all defended MAC's hiring of Lazard and urged the firm to reconsider.