The last tycoons: the secret history of Lazard Frères & Co (73 page)

Finally, during the summer of 2004, Steve threw down one more challenge to his neighbors: a rough proposal for a large new home on his property to be designed by his brother, Donald. To meet the Vineyard's strict guidelines for homes that tower above the tree line, the builder had proposed that "much of the property would be removed and carted away" by hauling out an estimated five hundred truckloads of dirt and thus lowering the siting of the new house so it would not extend above the tree line. Since there are no limits on the size of single-family homes on Martha's Vineyard as long as the onerous restrictions on building heights and setbacks, among other things, are met, the West Tisbury Planning Board could not stop the project although it tried to thwart it by referring the matter to the Martha's Vineyard Commission. The planning board asked Steve "to exercise restraint on his property." In September 2006, the Martha's Vineyard Commission voted 10-3 not to block the Rattners' plan to move their existing home to an adjacent lot and then to construct a new "trophy home" consisting of 15,575 gross square feet on the original home site overlooking Vineyard Sound.

WITHIN DAYS OF the second
Vanity Fair
article in as many years that featured Steve, the shoes began to drop in the firm's municipal finance scandals. On October 26, 1995, a federal grand jury indicted Ferber on sixty-three counts of fraud, attempted extortion, and acceptance of gratuities as part of his scheme to pressure Wall Street firms to give Lazard business in exchange for recommending them as underwriters of municipal bonds. A three-month trial in federal court ended in August 1996 with Ferber's conviction on fifty-eight of the counts. He was sentenced to thirty-three months in McKean federal prison in Bradford, Pennsylvania. He also was fined $1 million.

The same day Ferber was indicted, Lazard and Merrill each agreed to settle charges with the SEC that they willfully violated Rule G-17 of the Municipal Securities Rulemaking Board requiring securities firms to "deal fairly with all persons and...not engage in any deceptive, dishonest, or unfair practice." The SEC faulted Lazard for failing to have "a procedure" in place to accurately determine whether or not Ferber had told his New York partners that he had disclosed to his clients the existence of the Lazard-Merrill contract. But, the agreement said, Lazard's partners knew about the Lazard-Merrill contract and knew that it "created at least a potential conflict of interest for Lazard" and "Lazard did not take adequate steps to ensure that Mark Ferber met his obligations to disclose the true nature and extent of the contract." The SEC censured the firm, which, together with Merrill, agreed to pay a $24 million fine--$12 million each--to settle the charges. At the time, the fine was the largest in the municipal finance industry. Lazard issued a statement confirming the settlement agreement and pointed out that the investigation "uncovered no evidence that any of Lazard's other partners had knowledge of, participated in, or approved of any such misconduct" and that "Ferber actively misled his Lazard partners concerning disclosure of the contractual arrangement" with Merrill. The firm said it was "saddened by Mr. Ferber's apparent violation of the Firm's ethical standards." Much of the reporting about the municipal finance scandals couldn't help but mention Felix, since it was so ironic that Lazard--the firm synonymous with the man who saved New York--was caught up in a major scandal involving cities and states all across the country. "He was upset that his name was appearing in press stories about this," said one partner. On November 30, 1995, years after Loomis had recommended it, Lazard disbanded its municipal finance department and quit the business.

OBVIOUSLY FRUSTRATED WITH a dynamic inside Lazard that resulted in costly scandal in the municipal finance department, to say nothing of the titanic struggle over supremacy between himself and Steve, Felix made a bid, in February 1996, to become vice chairman of the Federal Reserve Board. The ill-advised effort, which all agreed was for a position well beneath his stature and accomplishments, ended swiftly in about a week when Felix withdrew his name from consideration in the face of seemingly endless protests from Senate Republicans--and without a hint of public support from Clinton during the ordeal.

Felix's mysterious desire for the Fed position had its origins in his own ample ambition, his frustration at not being selected Clinton's Treasury secretary, and, of course, his overwhelming--and now painfully obvious--desire to leave Lazard, but only for a position in government that was worthy of him.

During the mid-1990s, Felix had been closely monitoring the U.S. economy as it emerged from the Gulf War recession and before it exploded during the late 1990s. He felt that the economy could sustain a real growth rate of greater than the 2.5 percent per year White House economists were modeling and, accordingly, that Alan Greenspan's effort to slow the economy by doubling interest rates in 1994 and 1995 to 6 percent was simply bad monetary policy. In hindsight, doubling interest rates in twelve months without so much as a hint to the market
was
poor monetary policy, as the bond market plunged, which proved fatal, or nearly fatal, for, among others, Kidder, Peabody, the venerable investment bank founded in 1865; Orange County, California; and the Mexican economy. (Nowadays, the Fed telegraphs monetary policy months in advance.)

Alan Blinder, the Fed vice chairman, had long been frustrated with Greenspan on any number of topics, from interest rates to his own lack of career advancement, and so when his two-year term expired in early 1996, he chose not to seek reappointment and returned to Princeton. Felix had his opening. When Laura D'Andrea Tyson, head of the National Economic Council, canvassed Felix's views as to possible successors to Blinder, he surprised her by volunteering himself for the position. She tried to talk him out of it, explaining Blinder's frustrations with Greenspan, the position's inherent flaws, its subordinate role, and that it required attendance at boring meetings--in sum, not at all a role for a Great Man of Felix's experience, reputation, and proclivities. Felix liked to suck the air out of every room he entered; the conflict with Greenspan would be inevitable, and not pretty to watch. "We're friends," he explained to Tyson about Greenspan. "We've known each other for a long time. It would be different because we're friends. I would be able to have more influence."

Clinton loved the idea. He was eager for resolution on this whole question of real growth rates--and of course, a crumbling bond market would not be welcome news at election time. "We'll have a really interesting debate, a national debate about this issue between the Fed chair and the vice chair," he said privately. Clinton loved the politics of the Rohatyn appointment, too. The president could reappoint Greenspan, not inevitable at that precise moment as his term was to expire in a few months, and know that his man Felix would keep a close eye on the uncontrollable Fed chairman, a Republican no less. Tyson tried to persuade Clinton, to no avail, that economic warfare at the Fed served no purpose. In the end, though, she informed Felix of the president's enthusiasm. Thinking he had Clinton's support, Felix began calling in his chits from his corporate chieftain friends, and they responded by lobbying their contacts in Washington on Felix's behalf. Felix failed, though, to inform Michel that he wanted to go to the Fed. "That didn't make Michel happy," one observer said.

Then Blinder called. "Why are you doing it?" he asked Felix. "I'm leaving because I can't stand it." He conveyed to Felix the same message that Tyson had: everything at the Fed revolves around Greenspan; the staff is the next all-powerful force, implementing the chairman's bidding and "squelch[ing] dissident thoughts or alternative thinking unless Greenspan agreed," according to Bob Woodward's
Maestro.
Felix's wife, Liz, was in violent agreement with Blinder. "You're crazy," she told her husband. "You're lucky they don't lock you in a closet. Nobody will ever see you again. How would you have felt, when you were chairman of MAC, if Hugh Carey had put in Alan Greenspan as vice chairman of MAC? Would you have liked that?" Felix told Liz, "No, probably not." What Tyson, Blinder, and Liz had underestimated was Felix's twin desires to escape the Lazard insanity and to have, finally, a Jean Monnet-like chance, however modest, to influence the national political debate. For his part, Felix again badly misjudged the politics of the situation.

On January 19, 1996, the
Wall Street Journal
reported that Clinton was likely to name Felix to the vice chair post at the Fed, with all the usual plaudits about Felix's investment banking prowess, including the nugget "Unlike some previous Fed vice chairmen, Mr. Rohatyn probably would be seen as Mr. Greenspan's likely successor--if the Fed chairman were to leave office while a Democrat was president." Opposition from the Republicans on the Senate Banking Committee to Felix's nomination was swift--and devastating. The Republican senator Connie Mack, from Florida, blasted Felix immediately and publicly as a dangerous, big-government, liberal interventionist. Senator Al D'Amato, then the chairman of the Senate Banking Committee and a Republican from New York, didn't need to say much of anything; after first contemplating a run against D'Amato, Felix had opposed his reelection in 1992. Republican congressional staffers sent Senator Mack a memo complaining; "Put simply: R-O-H-A-T-Y-N spells stagflation," a reference to the low-growth, high-inflation 1970s. Felix was caught in a political vortex the likes of which this experienced man of the world could hardly imagine. On the one hand, the Republicans controlled the Senate, making iffy the ratification of any Democratic nominee of a Democratic president in the highly partisan Clinton Washington. Therefore, the boisterous opposition from the Republicans was to be expected and could easily serve as cover for the more subtle machinations going on behind closed doors. This, in fact, is what occurred, Woodward argued. He claimed both Rubin and Greenspan were sufficiently lukewarm about the Rohatyn appointment that they effectively killed it. Greenspan, the Republican, subtly communicated his indifference to the Republican senators. And Rubin served as the messenger.

"What will happen if we send you Greenspan as chairman and Rohatyn as vice chairman?" Rubin asked Senator Robert Bennett, Republican of Utah, on the committee.

"We will confirm Greenspan in a heartbeat," Bennett answered, "and Rohatyn will not get out of committee."

"Yeah, but they go together," Rubin responded. "We'll send them up together."

"It will take a nanosecond to separate them," the senator responded, "and Greenspan will be confirmed...and Rohatyn will be filibustered until Connie Mack doesn't have a breath left in his body."

Rubin had got what he came for.

Next came the requisite well-orchestrated media assault challenging the wisdom of Felix's economic views about growth rates. On January 29, the
Washington Post
ran a front-page story reporting that many economists, including Greenspan, doubted the higher-growth-rate scenario. Paul Krugman, then a Stanford economist and now a columnist for the
New York Times,
wrote in the
New York Times Magazine
that higher-growth-rate proponents like "financier-pundit Felix Rohatyn" were living a "delightful fairy tale." He continued, "In fact, the so-called revolutions in management, information technology and globalization are vastly overrated by their acolytes."

And that was pretty much it. On February 12, Felix sent his withdrawal letter to Clinton and spoke with Rubin and Greenspan.

A few days later, after it was over, Felix received a call from the White House telling him Clinton would be at a $1,000-a-plate fund-raising dinner February 15 at the Sheraton Hotel in New York and wanted to publicly thank him. When Felix arrived at the Sheraton, he ran into Vice President Al Gore and told him he could not stay for the dinner because he had something else to do. Although the president had never publicly stood up for Felix as his nomination was going down in flames, at the Sheraton, Clinton lambasted the Republicans for playing politics with the Rohatyn nomination. "An example of what should not be done that most people in this room are familiar with was the outrageous political treatment of my intention to nominate Felix Rohatyn to be the vice chairman of the Federal Reserve." He then asked Felix to stand and take a bow, but Felix had already left the event. Somebody stood up, and people started to applaud anyway.