The last tycoons: the secret history of Lazard Frères & Co (44 page)

A barrage of positive publicity for Lazard ensued, including a lengthy assessment of the matter in London's
Economist,
which hailed Felix's long record of "notable public service" and blasted Koch for remarks the magazine found to be "both ill-timed and needlessly offensive, apparently calculatingly so." More favorable press came when the
Daily News
reported that the city had actually asked Lazard to serve as
its
financial adviser, for a $500,000 annual fee, but that the firm turned down the opportunity out of concern about a possible conflict of interest with what Felix had been doing with MAC. (Dillon Read took the assignment, and the fee.) The
News
described the whole matter as "a pretty shabby episode" and said that "Ed Koch would be a lot better mayor if he would learn to use his brain before shooting off his big mouth." Koch made a feeble attempt to apologize to Felix. Those "who want to run the city should stand for election," he went around town saying. To which Felix replied, "I don't accept that notion. Nothing precludes me from criticism. I pay taxes. If you pay to see Isaac Stern and he gives a bad performance, then you reserve the right to criticize that performance. And the critic doesn't have to have had violin lessons."

A month after the testimonial dinners, Governor Carey asked Felix to
return
to MAC as its chairman. George Gould had resigned after only five months. Some Lazard partners believed Felix engineered Gould's resignation so that he could get back the powerful position he missed. "If Guidry can pitch relief for the Yankees, I guess I can pitch relief for the governor," Felix said, doing his best common man imitation. Lazard also returned to advising MAC, once again without pay. The next day Felix and Koch supposedly patched up their differences, although the tension would linger for years. The recollection of Koch accusing Felix and Lazard of having a "moral conflict of interest" still rankles. "I thought it was outrageous," Felix said in 2005. "I still do." But the two men were able to let bygones be bygones. "Well, he didn't hurt me," Felix allowed. "I mean, if he said that and if it had been true, that would have been a different thing. But no, he popped off in terrible taste and I reacted. After a while, we both grew older and we were both out of power. And he's an amusing guy, and every once in a while we have lunch together." Felix's return to MAC and the ongoing kerfuffle with Koch seemed to reinvigorate both Lazard and Felix (after he got back from his honeymoon), and now, led by the "bicameral" team of Michel and Felix, the firm began a lengthy renaissance, but not one without more than a few bumps in the road.

ON SEPTEMBER 9, Andre died at the Nestle Hospital in Lausanne, Switzerland. He had turned eighty-one six days before. Andre's death, of course, occasioned yet another rewriting of New York's partnership agreement. Michel now had the absolute authority, under section 4.1, to unilaterally make all decisions for the partnership. He no longer had to check with anyone at all. Publicly, Lazard liked to keep the fiction alive that New York had merely $17.5 million of capital, when in fact the partners' capital totaled close to $31 million, still unbelievably modest for a Wall Street firm--not that Michel or Felix found there to be a particular need for more money.

In the French tradition, a photograph of Andre was placed above his Lazard desk with a ribbon of black crinoline draped across one corner. One year to the day exactly, Michel removed the desk and the photograph. Outwardly, Michel had great respect for Andre, but according to one partner, "the fact was that he did not like Andre's ghost lingering around." Indeed, in the early days of Michel's stewardship, one of the quickest ways to become, in the words of one partner, "persona non grata" would be to invoke the memory of how "Mr. Meyer" would have done this or that. Michel slowly but surely began to put his own imprint on the firm. In addition to the high-profile Lehman Brothers raid, he made a few hires in the municipal finance area, authorized the new partner Frank Zarb to set up the "International Group" to advise sovereign governments, and promoted Stanley Nabi, who had been president of the New York Society of Security Analysts, to head and increase the assets of Lazard Asset Management, or LAM, after the death of Engelbert Grommers.

Mostly, though, Michel kept the firm focused on M&A work, and in 1979 alone Lazard advised RCA on its $1.3 billion acquisition of CIT Financial (Lazard's former partner in Andre's hugely successful SOVAC deal); Reliance Electric on its $1.2 billion acquisition by Exxon; United Technologies on its more than $1 billion acquisition of Carrier; and International Paper on its $805 million acquisition of Bodcaw. "They are making a fortune right now," a partner at a competitor told the
New York Times.
"They are a merger house, and mergers have hit it big." Indeed, Lazard would have its best year to that time, in 1979. In New York, profits had risen almost twofold from the year before. In 1980, the firm made even more money--$84.1 million, $39.2 million from New York and $29 million from London. In the two years since Michel had taken over the New York office, pretax income had risen from $12 million to $39 million. His five-year stewardship of Paris had increased pretax income from $6.8 million in 1975 to $15.6 million in 1980--thanks to Paris's involvement in a wildly profitable partnership that produced precious-metal coins for the 1980 Moscow Olympics. Felix made almost $2.4 million in 1980, and Michel, from the New York profits alone, took home more than $7 million.

The firm was on an unprecedented roll, and Michel's leadership was winning some fast converts. "In any walk of life I have been in, you have six months to fail and two years to succeed," Michel told
Euromoney
in March 1981. "The first six months here [in New York] were crucial. The arrival of the people from Lehman was more than an accolade. It was manifest proof that important people outside, who had their professional life at stake, were willing to agree with me and the partners here that this was a place which had a great future. For the outside world, it was probably the most important event. But to me the most important and the most difficult task was to take hold of a nebulous something and that was not made very easy by the presence of Andre Meyer."

One important convert, Damon Mezzacappa, then forty-five years old, came from Morgan Stanley, one of Lazard's main competitors, in March 1981 to establish at the firm a capital markets business. Capital markets--the underwriting and trading of stock and bond issues--had long been dormant at Lazard. Occasionally, it is true, Lazard would underwrite an offering for a favored client--such as the IPO of the Washington Post Company for the former partner Eugene Meyer, or of Avis for Geneen at ITT, or of Pearson, in the U.K., for the Lords Cowdray and their heirs--but after Andre Meyer's arrival in New York these underwritings were few and far between. From Andre's and Felix's perspective, the reasoning was simple. Underwriting required an ever-escalating amount of capital and a sales force of fancy brokers to sell the underwritten issues. With scale, it could be very lucrative and provide wonderful access to clients at the important moment of seeking capital. Accordingly, underwriting remains very competitive, with ongoing pressure on the prices firms can charge for the service. With the M&A business so ebullient and so profitable, requiring no capital, the logic was impeccable for Lazard to stay away from capital markets, where the competition was fierce. Michel, though, was willing to risk a bit more of the firm's slowly growing capital on the selective underwriting of stocks and bonds for the firm's growing stable of clients.

For this task, he recruited the Harvard-educated Mezzacappa, "the Peacock," as he was known around the firm in later years because of his ramrod-straight posture, his impeccable dress, and his penchant for preening. Immensely charming when he wanted to be and tough as shoe leather when he had to be, Mezzacappa and his wife, Liz, who ran a travel agency, were fixtures on the New York social scene, looking lithe and resplendent in the pages of
W
and the
Times
's Style section cavorting with the jet set at their homes on Fifth Avenue, in Southampton, and in Palm Beach.

At first, Michel offered Mezzacappa a 2 percent partnership stake, but then reduced it to 1.75 percent because, Michel told him, "It would be a mistake to bring you in at 2 percent because there are these guys, like Tamagni here and others, who are at 1.75 percent or whatever and I don't want to offend them." (Tamagni was actually at 2.25 percent, along with a slew of others such as Ward Woods, Frank Zarb, Jon O'Herron, Don Petrie, Lou Perlmutter, and Peter Jaquith. In 1981, 2.25 percent in New York was worth $1.125 million.) Mezzacappa experienced immediate culture shock. But, he said, "for me it was all about the future. I was either going to succeed or not. I was really quite sure I would succeed, and I saw it as a great opportunity, which it was because Lazard Freres needed me. Goldman Sachs didn't need me. Salomon Brothers didn't need me. There was definite evidence that Lazard had a banking franchise, either real or potential. They certainly had corporate relationships." But "they didn't know how to sell anything," he continued. "They had half a dozen guys down there, and they had weak leadership and very little authority and basically just syndicated this stuff and sold it into the Street and sold it, less reallowance, to bond brokers. I mean, if they were underwriting a deal for ITT, the rest of the Street would be out of bonds and they wouldn't know how to sell them, so they would sell them to a broker who would then sell them to another dealer." Here he laughed from the belly. "And so I met with a lot of animosity when I arrived."

Lazard's fledgling capital markets department was then housed on the thirty-first floor of One Rock, one floor below where the high-powered partners, like Felix and Michel, sat. These operations could not have been more different from what Michael Lewis satirized in
Liar's Poker
about the trading powerhouse Salomon Brothers. There was no football field expanse of humming computer screens and ribald traders. Rather, there was a modest, decidedly low-tech, L-shaped configuration of consoles with strange buttons and attached phone headsets. Equity guys were to one side, debt guys to another. The municipal team was around, too.

Mezzacappa first encountered resistance from the irascible Tom Mullarkey, who believed he ruled the roost on the thirty-first floor. "That was Tom's job, just to be difficult and not give anyone anything," Mezzacappa recalled. "He was trying to maintain his control of that floor, the trading floor." He then encountered Walter Eberstadt, a relative of one of Andre's favorite investing partners, Ferd Eberstadt. Mezzacappa became "quite fond" of Eberstadt over time, but at the beginning "he couldn't figure me out or what I was all about." Mezzacappa said he found that Stanley Nabi was running LAM "quite badly," with assets under management falling to $1 billion, from $1.4 billion when Nabi took over. And then there was Charlie McDaniel, who was running the trading operation. "A nice man but he wasn't building anything," Mezzacappa recalled. His first day at Lazard, Charlie asked Damon to lunch. "Charlie had a couple of martinis, and he sort of told me the way things ought to work, and I just kind of listened and took it all in," he said. Mezzacappa fired McDaniel five months later. "It was going to be my way, not his way," Damon said. His "way" meant recruiting about eight of his "guys" from Morgan Stanley, among them Mike Solomon, Phil Young, Harlan Batrus, Harry Rosenberg, John Connors, and Rick Levin. "We built a pretty good operation and made a lot of money for the firm," he said.

And Mezzacappa made a ton of money for himself as well. Eventually, he worked his profit percentage up to 4 percent, which in the late 1990s was worth more than $8 million in cash per year, excluding the infamous side deal that he cut with Michel. That deal, on top of his $900,000 salary (at least in 1999) and his percentage stake in the overall New York partnership--which "became a bit of a sore point to the other partners," Damon acknowledged--equaled another 5 percent of the pretax profits of the capital markets business, with a cap of $3 million. One of his former partners said many of the bankers were "absolutely shocked" by how much Mezzacappa was making with his side deal and described him as a
"ganef"
(Yiddish for thief or scoundrel). "So for a while, I was making my salary, my 4 percent, and another $3 million," he said with a faint smile, a total of around $12 million a year by the late 1990s.