The last tycoons: the secret history of Lazard Frères & Co (8 page)

FOLLOWING THE UNEXPECTED death, at age fifty-one, of the second Viscount Cowdray--also known as Weetman Harold Miller Pearson, the son of Weetman Pearson--on October 5, 1933, the executors of his estate commissioned a valuation from Deloittes (the accounting firm) of Lazard Brothers & Co. The remarkable fourteen-page document makes clear, at the time of the second Viscount Cowdray's death anyway, that S. Pearson & Son owned
100 percent
of the 337,500 then issued and outstanding shares of Lazard Brothers, not just
80 percent
of the firm. Understandably, resolving the May 1932 crisis in Paris must have wiped out, for a time anyway, the 20 percent stake in Lazard Brothers held by Lazard Freres et Cie. Also, the accounting states that Lazard Brothers' exposure to Creditanstalt was actually PS200,000, not PS40,000, and that the firm could reasonably expect to recover only 20 percent of the amount owed.

The document also revealed just how minuscule was Lazard Brothers' valuation at that time. Deloittes set PS931,250 as the "fair valuation for probate" of the holding of 337,500 shares, the total number of Lazard Brothers' outstanding shares. The conclusion was unmistakable: the events of the previous two years had fully wiped out the ownership stake in Lazard Brothers previously held by Lazard Freres et Cie and by the English working partners. Lazard Brothers did get back on its feet during the mid-1930s, thanks in large part to a slow but steady increase in the number of the firm's corporate bond underwritings and the general slow improvement of the European economy. Over time, the obligation to the Bank of England was repaid.

What role, if any, Lazard Freres in New York played in rescuing Lazard Brothers is difficult to discern. There is no public mention of its involvement, other than that contained in the "secret" Bank of England minutes suggesting that some of the PS1 million contribution to the rescue effort was to come from New York. Michel David-Weill said he believes Frank Altschul and his fellow New York partners were asked to support the rescue mission but that any contribution from them would have been small given the perilous economic environment at that time. "And the people of New York were furious," he explained. "Having successfully survived the Depression, they were now being asked, without explanation, to send money to Europe. This did not create a very happy atmosphere between Paris and New York." Altschul's many letters are devoid of any reference to what happened in London and Paris in 1931 and 1932. Indeed, there is no correspondence between Altschul and his partners in Paris and London between March 30, 1931, and April 13, 1934.

There was one very cryptic cablegram, dated August 10, 1931, between New York and London addressed to Altschul that seemed to relate to the London crisis. The original cable was written in a secret code, where each nonsensical word was ten letters long. The translation of the cable, a few weeks after London's rescue by the Bank of England, conveys an air of desperation: "In view of what we must be prepared to do here not for sake of prestige but as a matter of necessity in the event of those extremely unfavorable developments which appear every day more likely[,] we feel it might be serious and fundamental mistake to disturb our present position which though comfortable is no better than it really should be. [M]oreover it seems to us Paris would be in far better position if they borrowed entire amount from Banque de France at the beginning when skies are clear than if they borrowed a lesser amount and then filled their line under stress of circumstances at a time when doing so might create most unfavorable impression."

AT THIS TIME, Altschul appeared to be far more preoccupied with what the consequences of the recently passed Banking Act of 1933, also known as the Glass-Steagall Act after its main congressional sponsors, would mean for Lazard. The act, which rose out of the bank failures of the Depression, sought to separate commercial banking--the taking of deposits--from investment banking, that is, the underwriting of securities. Wall Street firms were given a year to decide which business line to choose. For Altschul and Lazard the decision was simple, considering it had long before withdrawn from its commercial banking roots in San Francisco.

Pursuant to the decision to focus on investment banking, at the end of September 1934 Lazard opened Lazard Freres & Co. Inc., at 15 Nassau Street, to underwrite and distribute corporate and municipal securities. Altschul was named chairman of the board of the new company, and Stanley Russell was recruited from National City Company (today's Citigroup) to be the president. "In the development of such business, it is our hope that Lazard Freres & Co., Inc., may play an appropriate part," Russell said at the time. The new business started with $5 million of capital.
Newsweek
lauded the firm at the time, without even the slightest hint that it had almost been dissolved: "While investment bankers complained that the Securities Act of 1933 was stifling their business, Lazard Freres boldly formed Lazard Freres & Co. to underwrite and sell corporate and municipal bonds. Although a smaller star in the financial firmament than J. P. Morgan & Co., Kuhn Loeb & Co., and Dillon Read & Co., Lazard Freres is no less brilliant. Its prestige is enhanced by its affiliated firms in Paris and London."

While the near-disastrous events were unfolding in London and New York was focused on complying with Glass-Steagall, Andre Meyer was busy in Paris transforming himself from a currency trader into the then far more prestigious and respected role of investment banker and a man who provides counsel to governments and to corporate clients. The first opportunity he had to showcase his skills as a financial alchemist came in cooperation with Citroen, the French automobile manufacturer in which Lazard had previously bought an important stake, no doubt in part because Andre Citroen was the father-in-law of Pierre David-Weill's sister Antoinette. (Andre Citroen first met David David-Weill at his home in Neuilly, a wealthy suburb of Paris, where, after showing off his impressive art collection, David-Weill told the industrialist he must reorganize his company to make it more profitable.) Andre Meyer, in turn, also befriended Citroen and convinced him to sell to Lazard ownership of Citroen's finance subsidiary, known as Societe pour la Vente a Credit d'Automobile, or SOVAC. Andre's idea was to turn SOVAC into a broad-based finance company. With the help of his two financial partners, J. P. Morgan & Co. and Commercial Investment Trust, now known as CIT, Lazard bought SOVAC and turned it into a finance giant before selling it for a huge profit many years later to GE Capital, the finance subsidiary of GE. Andre's next astonishing performance was to rescue Citroen itself from sure bankruptcy during the depths of the Depression. At first, Andre Citroen had asked Pierre David-Weill to assist him, but the situation was so dire that Pierre turned the assignment over to Andre Meyer, who in short order went on the board of the company and negotiated a deal with the tire maker Michelin, Citroen's largest creditor, to exchange Michelin's debt for equity. Overnight, as this sophisticated alchemy had never been seen before, Andre had become a sensation in France, sought out by corporate executives throughout the industrialized world.

DESPITE MEYER'S RAPIDLY growing stature, a pall continued to envelop the three Lazard houses during the mid-1930s. London and Paris were still struggling to pay off the debts incurred to stave off the firm's near collapse. And New York was just muddling along in the ongoing Depression. New York had developed its underwriting business, but it was not all that profitable, given the intense competition. Most of the firm's profits seemed to be coming from its investment in General American, Altschul's pet project. A July 1936 letter from Pierre David-Weill to Altschul reflected the French partners' increasing concern about the poor financial performance of New York, and specifically the ongoing lack of the 4 percent interest payments on their invested capital, an eerie foreshadowing of the same problem Michel would have seventy years later with Bruce Wasserstein. "As you remember," Pierre wrote, "nothing has been paid for the year 1935, and the full interest has not been paid since 1931. Now that these amounts have been earned there is no longer any reason to postpone the payments. Perhaps you will be good enough to look into the matter and let us have your views. We have noticed for sometime the increase of the item 'Partners' Withdrawals' which stands at a rather big figure. I imagine there is some fiscal explanation to it. The whole fiscal problem of L.F., N.Y. seems to me worthwhile reconsidering in the light of the provisions of the new tax law concerning foreigners." When Altschul wrote back nine days later, he told Pierre he was working on the answers but was reluctant to write them down, as "some of the questions involved are of such a nature that they had better not be dealt with by correspondence."

Altschul asked his partner Albert Forsch to study the matter raised by Pierre's letter. Forsch reported back that the 4 percent annual payment on capital had been split into two tranches, a 2.5 percent piece and a 1.5 percent piece. "The method was employed for fiscal reasons and comes from the first profits earned," he wrote. He further elaborated that his understanding of the contract was such that the 2.5 percent piece "does not become payable until the contract has terminated and it is determined that profits remain from which this 2.5 percent can be paid."

No doubt the news that their payments would not be made anytime soon did not please the David-Weills and likely exacerbated the family's ongoing cash needs. After David David-Weill's 1898 marriage to Flora Raphael, herself the heir to a sizable London banking fortune, the couple settled in Neuilly, where they built a huge mansion, complete with separate servants' quarters, horse stables, tennis courts, and formal gardens. David David-Weill also pursued the passion for art he had discovered during his transatlantic move to Paris as a teenager. He bought his first painting--a portrait of the French playwright Marie-Joseph Chenier by Adelaide Labille-Guiard--when he was eighteen. His grandson Michel said that except during the war years, he bought or sold one piece of art, either for himself or for a museum, every day of his life. First thing every day, he would stroll through art galleries or arrange to meet an art dealer at the office, often postponing the day's business until the dealer's departure. While eighteenth-century painting was David-Weill's first love, his increasingly eclectic tastes also extended to medieval sculpture, enamels, Asian art, antiquities, textiles, tapestries, and oversized books of birds by the French counterpart of Audubon. He also indulged his love for silver; at one point he had amassed a world-class collection of nine hundred pieces. His wealth and artistic sensibility were such that by 1923, David Weill--no hyphen yet--had become one of the major benefactors of the Louvre Museum in Paris. His name, in gold-leaf lettering, remains sculpted into the marble walls of the museum. He was fifty-two years old.

In 1926, David Weill was named president of the Council of National Museums and announced a major gift of art to the Louvre to take place at his death. In 1927, Gabriel Henriot, the head of the French Library Association, undertook--with Weill's financial support--a luxurious two-volume catalog of David Weill's extraordinary art collection. Some 155 of Weill's paintings, watercolors, pastels, and gouaches were lovingly reproduced in the volumes, in black and white, and were accompanied by Henriot's descriptions. Included were works by Boucher, Chardin, David, de La Tour, Fragonard, Goya, Ingres, Prud'hon, Reynolds, and Watteau from the eighteenth century, and among the
tableaux modernes
were works by Corot, Daumier, Degas, Delacroix, Monet, and Renoir.