The last tycoons: the secret history of Lazard Frères & Co (52 page)

CHAPTER
10

THE VICAR

B
ut slowly, at least one person inside the firm began to feel the need to fill the organizational vacuum, with the hope of bringing the woefully byzantine firm into the latter half of the twentieth century. While the task had a Sisyphean feel to it, William Loomis--known to everyone at the firm as Bill--decided the time had come to attempt the impossible: modernize Lazard. Not that he had any special qualifications for the job, other than the desire to do it. Tall and handsome, he looked like a slightly less angular version of the late writer George Plimpton, which gave him a somewhat ministerial air. Some of the partners referred to him as the Vicar, while the younger bankers called him Lurch. According to the
Financial Times,
Loomis "spent part of his youth hanging out with Muslim rebels in the Sulu Sea, off the Philippines, and wandering through Asia on a grant to write fiction in the style of Somerset Maugham." Loomis once elaborated on this phase of his life in a letter he wrote to a young Lazard associate after he resigned. "At the risk of intruding on your personal life, I'd like to offer a couple of observations," he wrote in 1988. "Some of your frustration I may have avoided by flying to Afghanistan on graduation from college, with an Olivetti portable typewriter and a change of Khaki pants, only to emerge by freighter from Borneo a year later. Having spent time previously in India, I already knew that the Peace Corps was the U.S. Army of altruism. I never considered graduate school, architecture or otherwise, as a substitute for dusty Jeep rides, shooting with a Pathan tribesman or small boats in the Sulu Sea. In short, I forgot about my resume and decided I would figure out a career later."

Like the firm he loved, Loomis's often enigmatic and inscrutable behavior masked his ambition. Loomis worked in New York until around 1980, became "the world's best associate," and was outspoken about the need to improve the pay and the training of the younger Lazard bankers, all of whom he thought were underpaid, compared with Lehman, and had no idea what was expected of them to become a partner. In need of a "new experience," though, and frustrated by Michel's decision not to make any new partners for the time being, Loomis asked Michel if he could go to Hong Kong with Steve Oliver to start an advisory business there. "I was concerned that I was ever more expert at analysis and at observing partners but not having the opportunity to develop the client skills which would be needed when I was a partner later," Loomis explained. East Asia Partners, as it was called--Michel wouldn't allow them to use the Lazard name--was 20 percent owned by each of the Lazard houses, with the balance being owned by the C. V. Starr affiliate of AIG, the big insurer, and by Loomis and Oliver themselves. After two years, Lazard bought AIG's stake in the business. All parties did "okay," Loomis said, but the business wasn't "important" or much supported by Lazard.

Meanwhile, in New York, Lazard's M&A business was booming. Loomis wanted back into the action. He returned to New York, and as of January 1, 1984, became a partner. Almost immediately, he began discussing with Michel and Felix ways to improve "organizational discipline." Loomis was partial to writing detailed, often passionate memos to Michel and Felix about his ideas for the firm. In an early missive, he made the heretofore-unheard-of argument that Michel needed to appoint one partner to coordinate the assignments for and evaluations of the junior professionals, including the making of all hiring and firing decisions for these bankers. This task, Loomis supposed, would take about half of the chosen partner's time. He volunteered for the job. As he saw it, his mandate would be to coordinate all staffing of associates on M&A deals, requiring partners to go through him--Felix's recommendation--as new assignments came up, as opposed to going directly to their favorite associates, as had been the custom. He also described the need to quickly "weed out" a handful of poorly performing associates and to hire replacements, of higher quality, "aggressively."

Loomis, correctly, foresaw looming danger for him as he set about breaking the thick glass of inertia at the firm. The memo to Michel was liberally sprinkled with caution flags. "Anyone who does this job will be subject to a lot of pressure and criticism," he wrote, adding parenthetically, "Whenever a partner is unable to have four people in Kansas City on a Tuesday, the person co-ordinating assignments will be the focus of direct and indirect criticism." With regard to assigning associates to deals, he asked for "the authority I need to intercede forcefully in the interest of priorities, balancing work etc. All of this involves consulting partners and senior associates, but at the end of the day, the system won't work if going around me is an easy alternative for people. (This is more of an issue at the outset when people will try it.)" And as for hiring people, Loomis wrote, "As long as I do this job, I don't want anybody hired informally by others without consulting me before a job offer is made. It is counterproductive to have inefficient people leave only to be replaced by other weak people."

In the wake of the numerous breaches of ethics and judgment that Lazard had just suffered as a result of Michel's laissez-faire management style, it was hard for Michel--or anyone else at the firm for that matter--to argue that the disciplines and controls were not necessary. In fact, they were needed, desperately. The firm had grown, but the internal systems had not kept pace. Michel moved Loomis's office to be near his on the thirty-second floor of One Rockefeller Plaza so they could speak regularly. But this being Lazard, the boldness of Loomis's approach caused some to begin to lay traps for him. Felix, for one, didn't want to run the firm, of course, but was none too happy when someone else stepped into the vacuum to try to run it, either. And neither Felix nor Mezzacappa was particularly pleased that Loomis had increasingly unfettered access to Michel.

WHILE LOOMIS TILTED at these internal windmills, Felix kept his focus on his high profile and on his high-profile deals. One of the more notorious deals at the time was Ron Perelman's 1985 bold and successful hostile bid to take over Revlon, the cosmetics company. Felix represented Revlon, thanks to his enduring friendship with its CEO, Michel Bergerac, a Frenchman whom Felix had met when Bergerac was one of Geneen's top lieutenants at ITT. While far from the biggest deal, at a mere $1.83 billion, the Perelman-Revlon fight seemed to have it all: an upstart corporate raider, using money borrowed with the help of Michael Milken, trying to buy one of the world's best-known consumer brands, versus a proud corporate pillar, run by a sophisticated Frenchman, desperately hoping to avoid his clutches. The process dragged on for months, with Bergerac and Felix bringing in Forstmann Little, the buyout firm, to put together a competing bid. At each turn, Perelman and Milken raised their price until finally the Delaware Supreme Court ruled that Revlon had put itself up for sale and had to sell itself to the highest bidder--the precedent forever more known as being in Revlon Mode--which turned out to be Perelman. "This damn thing turned into World War III," commented one of Perelman's lawyers at the time. The fight had cost Perelman $500 million more than he originally offered for the Revlon shares. (He still owns Revlon, but it has been one of his poorer investments.) And of course, the deal was an investment banking fee bonanza. Lazard was paid $11 million for its advice to Revlon, one of its largest fees ever to that point. But this was chump change compared with the $60 million Milken's firm, Drexel Burnham, pulled out for financing Perelman's deal and the $30 million Morgan Stanley received for advising Perelman and selling off some of Revlon's assets. "It's the deal of the century," one banker said at the time.

If that were the case, it was not for long. A little more than a month after Perelman won Revlon, GE announced that it was buying RCA, a longtime Lazard client, for $6.3 billion in cash, plus the assumption of debt. The GE-RCA deal was, to that moment, the largest non-oil deal in corporate history and reunited RCA with the company that started it some fifty-five years earlier. The combination was a corporate bombshell and has turned out to be one of the most successful mergers of all time, as NBC remains one of GE's most important assets. And it was Felix who got the ball rolling on the deal. He was "a regular breakfast companion" of Jack Welch, the GE chairman and CEO, although Lazard was not GE's banker. And of course, since Andre first wooed David Sarnoff with a $100,000 check to the UJA, Lazard had always been close to RCA and had a board seat for many years. Welch asked Felix at a breakfast in October 1985 to arrange a meeting for him with Thornton Bradshaw, the chairman of RCA. Felix happily complied (for this is an investment banker's dream, no matter how jaded). Cocktails were arranged between Welch and Bradshaw at Felix's apartment for the afternoon of November 6.

The landmark deal was announced a mere thirty-six days later after the usual furtive negotiations over price and legal terms. At one point, on a Saturday late in the negotiations, Felix took the Concorde to Paris to visit his ailing mother. He returned the next day to resume his position. There was lavish front-page coverage of the deal in both the
Times
and the
Wall Street Journal,
highlighting Felix's role in bringing the two sides together. A week later,
Time
weighed in with a rare business cover story, "Merger Tango," about this deal and others. Felix sat down with the magazine's editors and, in typical fashion, again criticized his profession for potentially endangering the country's financial system. "Today things are getting badly out of hand," he said. Although soon enough he would be wooing Perelman, he railed against Perelman-style takeovers, financed by junk bonds and "excessive risk taking." He called on the government to help. "The integrity of our securities markets and the soundness of our financial system are vital national assets that are being eroded today," he testified before the Senate in December 1985. "Actions are required to help them." And he offered any number of solutions to help ward off the impending disaster. "The way we are going will destroy all of us in this business," he told the
Time
editors. "Someday there is going to be a major recession, major scandals. All of us may be sitting in front of congressional committees trying to explain what we were doing."

Felix, as usual, was partly correct. There would be a major market correction, in 1987, and a plethora of corporate scandals. Ironically--and unbeknownst to Felix--another Lazard banker, Marcel Katz, engaged in illegal activity related to the GE-RCA merger. Katz, then a twenty-two-year-old recent Brown University graduate, was a financial analyst on the deal. He passed along inside information about it to his father, Harvey Katz, a wealthy Houston businessman. Harvey Katz and his father-in-law, Elie Mordo, made more than $2 million in illegal profits by trading in the stock and options of RCA before the GE-RCA deal became public. When confronted by Tom Mullarkey, the Lazard general counsel, about how it came about that his father had traded so extensively in the RCA securities before the GE deal was announced, Marcel denied passing along the information to his father. Marcel resigned from Lazard in February 1986, four months after he started and two months after the announcement of the GE-RCA deal. In August 1986, the SEC and the Katzes reached a settlement whereby Harvey Katz agreed to pay a fine of $2.1 million and repay more than $1 million in illegally obtained profits. Mordo agreed to give up $1.1 million in illegally obtained profits. As for Marcel, the SEC charged that he "knowingly disclosed to Harvey Katz material, non-public information" that he had gleaned from working on the deal at Lazard. As part of a consent decree with the SEC, Marcel agreed to be permanently barred from working in the securities industry.

But there seemed to be no stopping the Wall Street deal machine and the riches bestowed upon the people who put the deals together. Despite Felix's claim to modesty, his lifestyle improved steadily throughout the 1980s. Whereas he had once lived at the supposedly shabby Hotel Alrae and drove a beat-up BMW station wagon, with the help of his partner Alan McFarland (who was president of the co-op board) and Liz's social connections--and his own growing wealth and fame--he moved to a duplex at 770 Park Avenue, at the southwest corner of East Seventy-third Street, considered one of the best buildings on Park. Today, Felix has all the obvious trappings of considerable wealth but is careful not to go overboard in the vein of Steve Schwarzman, Saul Steinberg, or Dennis Kozlowski. He and Liz now share a full-floor co-op apartment, facing Central Park, at tony 810 Fifth Avenue (at Sixty-second Street), decorated in simple elegance by the Boston designer William Hodgins with Impressionist paintings and eighteenth-century pastels and drawings. In the early mornings Felix could be spotted strolling down the fourteen blocks of Fifth Avenue on his way to Rockefeller Center, as he had always wanted to do when he convinced Andre to move the Lazard office uptown. Eight hundred ten Fifth is much like Felix--refined, unobtrusive, elegant, and exclusive.