The last tycoons: the secret history of Lazard Frères & Co (55 page)

LOOMIS ALSO FOCUSED on the concerns he had long harbored about his partners' lack of interest in a coordinated, dedicated, and professional new business development effort. He was greatly bothered both about the tendency of many Lazard partners "to wait for the phone to ring" to get new assignments and about preparing for the day when Felix retired from the firm or was no longer generating his perennial huge M&A fees. "There is a need to increase our ability to
generate
business in a tougher environment in order to balance our established ability to
execute
business," he wrote Michel. "We still have to spread the ethic of business development beyond Felix Rohatyn. In the absence of addressing these issues, we are likely to earn $50-$75 million less." The problem, as Loomis perceived it, was that Luis Rinaldini, "an extraordinary investment banker," who previously had been asked to lead the new business development effort, didn't have "a 'strategy' to increase our business." Indeed to Loomis, Rinaldini was "a particularly ironic volunteer as there is no demonstrated (versus expressed) inclination toward new business on his part, no consistent record of working effectively with peers and subordinates, scant inclination to organization, and a lexicon (e.g. 'control,' 'idiots,' 'screwed up,' 'inefficient') which hardly inspires confidence in his ability to
encourage,
as opposed to
discourage,
entrepreneurial activity by others who have equally large egos and ambitions." His perfectly logical solution was to have those partners skilled at developing new business teach those who were not and then to establish a set of loose and modest new business "goals." Loomis was right about the importance of these initiatives, of course, but like a battleship in the open sea, Lazard would not be turned around quickly or easily.

Six months later--just after the Black Monday stock market crash, when the Dow Jones average lost 22.6 percent of its value, or some $500 billion, in one October 1987 day, and when nerves were still a little raw from the market's fall--Loomis wrote a firm, three-page typed response to Michel's simple question to him of what is "wrong" with the associates. Loomis explained that while the quality of the associates had improved throughout the mid-1980s, the quality of their professional lives had deteriorated. He recounted for Michel what his partner Jon Kagan had recently told him. "When I was an associate, I learned a lot from Jon O'Herron, but now I sense that young people are missing that experience. Now O'Herron talks to Golub, Golub talks to Mohr, and Mohr talks to them." He also railed against many of his partners' tendencies to ask associates to create overly lengthy presentations to be used in client meetings. Loomis called this phenomenon the "blue book syndrome" since Lazard's corporate logo was often displayed in dark blue, or on a dark blue background, and the covers of these presentations were dark blue as well. Loomis took his partner Lou Perlmutter to task in the memo on the matter of "personal respect" for his fellow professionals. "One example says it all," Loomis wrote. "Lou Perlmutter did not want Jamie Kempner to do the McGraw-Hill 'blue book' analysis. When a conflict on McGraw-Hill became apparent, he did not bother to tell Jamie to stop work on the book. Three days later, he returned Jamie's two-day-old phone message, and Jamie asked Lou the status. The response? 'Oh yes, I thought Loomis would have told you that it's dead because of a conflict.'"

On Halloween 1987, two weeks after the crash, Loomis wrote Michel another emboldened memo, this one, essentially, about how to make Lazard a great firm. This goal was "of paramount concern" to him now that his fortieth birthday was on the horizon. His comments were made against the backdrop of the crash and the fact that, in New York, Lazard was on its way to making $133 million pretax, down some 26 percent from the $168 million the firm made the year before. "Associates understand very well that investment banks are under pressure and that Lazard may be under pressure in the future," he wrote. "We do not need references to Andre Meyer in 1974. Associates have already been offended by Felix gloating in the newspapers, as he did two weeks ago, about the Wall Street associates who would no longer earn $650,000 a year."

He then tackled the even more divisive issue of relative partnership pay and offered Michel, unsolicited, ways to redress the inequities he perceived. "The current partnership distributions are analogous to transfer payments and social security in the national budget," he wrote. "On the whole, there is a tendency to be more generous with the last generation than with the next generation. The partners in the middle and upper end, like myself, should accept the necessary dilution in current income, if the result is a bolder plan for a stronger partnership." He recommended that Michel cut the profit percentage of Bob Lovejoy, a former partner at Davis Polk who had joined Lazard the year before as a partner. Michel was considering paying Lovejoy a healthy 1.75 percent (worth about $2.3 million) of the pretax profits, up from 1.189 percent (worth about $2 million) in 1986. Loomis thought Lovejoy should be kept at his 1986 percentage or even decreased to 1 percent (which would have been worth about $1.3 million, a significant pay cut). He proposed taking from Lovejoy and giving to partners such as Luis Rinaldini (an increase to 1.25 percent, from 1 percent) and giving four younger partners a twenty-five basis-point increase as well. "The current plan," he told Michel, "risks keeping Bob Lovejoy and losing Luis Rinaldini, instead of just risking the loss of Bob Lovejoy." Needless to say, Lovejoy and Loomis were never close.

Loomis also urged Michel, "at the risk of seeming incorrigible," to institute partners' meetings. "I believe this firm has to evolve toward
real
partners, and thus,
real
partners' meetings," he wrote. "The two are inseparable." In closing, Loomis made certain Michel understood how respectful he was trying to be. "You have created this firm as it now exists with all of its stature and potential," he said. "The firm of Andre Meyer and his employees did not, could not, have such opportunities. You talk about firms of national character. You have a great firm that is fundamentally French in character, and another which is British in character. What you are still lacking is an American partnership. You can create a broadly based and self-perpetuating firm in New York--a great firm--only with partners."

Michel said he appreciated these insights.

FIVE MONTHS LATER, in March 1988, Loomis broached the matter of "blue book" banking again, this time in a memo to both Michel and Felix. Very little of substance had changed since he first expressed his opinions to Michel. And then in April, all of Loomis's boundless ruminations congealed in a four-and-a-half-page, single-spaced manifesto to Michel following a breakfast the two had together. "Fundamentally, the issues of concern are competitive strategy and competitive appetite for success," he wrote. "We have two philosophical alternatives.
We can place, or we can win. A firm cannot win by seeking to place.
Your comments about patience, about the ability to sustain the loss of 75% of the partners, about keeping the doors open and not forcing business and about Felix's simple cure of getting two or three major deals in the newspaper--left me deeply disillusioned. If the objective is only to place, then these statements are consistent."

Loomis then criticized what he perceived had been years of drift at the firm. "This is the time to be commercially aggressive," he wrote. "And we have, after all, missed important opportunities. We came to junk bonds too late, valuation expertise too late, business development too late, industrial focus too complacently, business organization not yet, the concept of investment of resources in business segments not yet. The business has changed and we do not own a self-perpetuating franchise. It is not enough to be a larger Lazard of the 1970's in the 1980's. We must be the Lazard of the 1990's, now. It is deeply troubling to me that Wasserstein, Wilson and Volker [
sic
]"--Bruce Wasserstein, Ken Wilson, and Paul Volcker--"albeit for different reasons, all explored Lazard and then went elsewhere. We can rationalize individual decisions but collective judgment is indicative. And Wasserstein, in particular, having seen us, chose to compete with us." Loomis then recounted, with names, the "deep-seated constructive frustration about our lack of competitive strategy and drive" that he had been hearing from a diverse group of bankers he described as the "best under the age of 50 plus Damon" Mezzacappa. "People are crying out for direction, an organization, a desire to be the best in a changed and changing competitive environment."

Loomis continued by praising Michel as "extremely wise" but fretted that the firm could not "win" with the "dilution inherent" in having Michel running Lazard in New York and Paris and worrying about the problems of Lazard in London. He then lit into Felix in a most ungenerous way. "And Felix is both able and 60 in a world that is able and 45," he wrote.

Contrary to his stature internally at Lazard, there is a widespread consensus of takeover specialists outside the firm that Felix is too conservative and is simply no longer a leading factor in the industry. Meanwhile, he "sits" on our best resources when our best resources should be encouraged to blossom. This is a lesser but still important aspect of our future business strategy. Felix's interests do not necessarily coincide with those of the firm. In a laissez-faire administration, he would, consciously or unconsciously, leave the status-quo for the next 3-5 years, not upsetting his apple-cart, thereby leaving a sudden and substantial void upon his departure or retirement. Felix can be an asset or a liability--depending on your decisions now. Since he can be a constructive genius or a destructive force, much more deliberate thought needs to be given to his role from the perspective of others here. People like me are being encouraged by his conduct to view him as an adversary to progress. This is sad as I admire him and respect him. We need to find a better way to allow Felix to flourish and others to benefit (rather than rebel) from his presence in the future. As opposed to concentrating Lazard's efforts around Felix, we need to focus our attention on the rest of the firm. Let's build up something else of value which he can adapt to gracefully--eventually.

Finally, after all the critical words, Loomis offered his solution. He believed Michel should lead and delegate, by appointing--and overseeing--a new management committee comprising Mezzacappa, from capital markets, Norm Eig, from asset management, and...Bill Loomis, with a "disproportionate responsibility for banking." He wrote that this was only one alternative but urged Michel to give it a try. "If in 2-3 years, this does not work, so be it," he continued.

The risk of the firm taking a bold step now is less than the risk of the firm not taking it. I am young and ahead of my time. (But I am also ahead, after all, of David Verey.) There would be more pressure to increase the percentage of Ward Woods (producers like Felix, Ward, and later, Luis, should receive resources, respect, fame and cash but not the right to terrorize organizations and harass young people at the firm), and you need to hear the opposition of Lou Perlmutter. Beyond that, there would be the natural but strong resistance to change and direction where there has been a lack of commercial discipline. I am prepared for that as long as I have your support and a close relationship with you. I am less prepared for more large committee meetings which mimic the more serious focus of the 25 professionals at Wasserstein, Perella. And I am not anxious to be Lazard's Oliver North who takes the next 25 hills without authorization and is anointed or disowned according to the ultimate result.

He urged Michel not to let the good men of Lazard go stale.

As if this were not aggressive enough, a month later Loomis urged Michel to take on London next. He said London "is a long-lasting boil which should be lanced, once and for all, and then healed by respect for national tradition within certain parameters of commercial conduct and respect for you. Any other approach is, at best, confusing and has nothing to do with the tradition of Lazard.
You are that tradition.
My fear is that you, like the British, draw back because one is British and one is French, and it all fits into an inherited history of political sensitivities. You are above such defensiveness by your authority, which we, the Americans--the youngest and thus the most brash of the lot--have recognized out of personal and commercial respect for you as Lazard." For Loomis to be flying this aggressively close to the Sun King could result in only one of two outcomes: either his own feathers would shimmer in the reflection, or he would end up like Icarus, tumbling to his death.