The last tycoons: the secret history of Lazard Frères & Co (90 page)

UNFORTUNATELY, IF ANYTHING,
Steve's headache was about to get--potentially--much worse. At the behest of the SEC, the U.S. attorney's office in Atlanta was deciding at that very moment whether to indict Lazard for its role in the so-called yield-burning municipal finance scandals that the government had been investigating since December 1993, when news stories about Mark Ferber's behavior in Massachusetts had first prompted Michael Lissack, the Smith Barney banker, to call the U.S. attorney's office to describe the greater, hidden scandal. Had Lazard been indicted, the firm would likely have gone out of business, as Arthur Andersen quickly did after being indicted in March 2002 for shredding files related to the meltdown of Enron. Certainly Michel feared that this was a real possibility, and he conveyed that fear to his partners.

This was another of those extremely serious moments in Lazard's history. "It's like earthquakes in California," explained Loomis. The firm needed to convince the prosecutors in Atlanta that the actions of a few bankers in the municipal finance department were isolated incidents and not indicative of a pattern of behavior throughout the firm that might have resulted in the invocation of the RICO statute. To accomplish that crucial task, Steve, Michel, Loomis, and Norm Eig flew to Atlanta to meet with the U.S. attorneys. Prior to their meeting with the prosecutors, Michel stayed by himself in one suite while his partners remained in another. Then, at one point, Michel summoned Steve to his suite, leaving the others behind to collect their thoughts and try to stay calm. The full Lazard team met with the prosecutors for hours. "It was obviously difficult," Loomis recalled. "You're dealing with a cynical, understandably cynical, tough audience," he explained. Miraculously, by having Steve and Bill--mostly--talk to the prosecutors about the firm's history and its values and how it conducted business, the prosecutors were slowly won over. Lazard avoided indictment and quickly agreed to yet another settlement--the fourth and final--in the decade-long scandal that plagued the firm and ended up costing its partners $100 million in fines and legal fees.

On April 22, 1999, the SEC announced a settlement with Lazard whereby it would pay another $11 million fine, with $7.5 million being paid to the U.S. Treasury and $3.5 million being paid to five municipal issuers, including the cities of Seattle, Pittsburgh, and Indianapolis, that had issued mispriced securities through Lazard. The settlement with Lazard was the "first comprehensive federal government resolution with a major Wall Street firm" involving "yield burning." In the end, the SEC settled with twenty-one Wall Street firms, for $171 million, in the yield-burning scandals. This was a very close call for the firm. Loomis said Lazard was within a hairbreadth of being indicted. Steve was less sure how close the firm came to indictment. "The whole municipal episode reinforced my conviction that the traditional Lazard way of managing, or not managing, its businesses could not go on," Steve said.

Michel was extremely upset. In fact, of all the many scandals to beset the firm over the years, the municipal scandal hurt him most deeply, although he is much to blame, since the people who ran the department reported to him. "There I got really, really hurt because there was a group of people who thought it was the only way to conduct their business," he said. "And obviously it wasn't. It was just bad. And that in the name of the firm 'conduct unbecoming' was practiced, that I find very, very hurtful and disagreeable to me personally.... There were basically layers of people looking at it at the firm. It's not to excuse myself, because I feel responsible. But it was one area which I didn't look at very much, because for obvious reasons. Municipal is really very close to local political life in the United States. I'm not American; I'm not in it."

Michel listed the men, aside from Ferber and Poirier, who he believed were most directly responsible for what happened: Del Guidice--"hired by Felix"--Mezzacappa, who was "looking after that department," and the longtime municipal partners, thereby spreading around the blame for the fiasco. "This really got to me, that one," he said. "That one was serious. We could've been--I mean, if a firm is indicted, it's the end of the firm." He said when the scandal first broke, he wanted to take the approach of admitting the wrongdoing and handing over the responsible people from the firm--an idea very similar to what Loomis recommended in September 1993. "When I first learned about the municipal problem, I remember vividly calling up the lawyers we had chosen on Friday during the weekend and saying, 'Why don't we say we did wrong? Why don't we just say, "Look, some of the people working at the firm have done the wrong thing. And if you considered--Mr. Client--that you've been hurt, we are ready to settle with you." ' And this lawyer, he said, 'You must be dreaming. It's not done that way. You cannot do it that way.' Which is interesting. It's interesting, because it shows that it's a wholly artificial experience. They had to shut me up. I was all the time ready to say, 'We have been wrong.'"

BY NOW, NOT
surprisingly, Steve was ready to abdicate his position as deputy CEO. He talked with Loomis, who despite his years in self-imposed exile was really the only logical person in New York to succeed Steve, given all the high-level partner departures during the previous two years. After a lunch together on April 23, the day after the firm settled the yield-burning scandal, Steve wrote Bill: "I could not have felt better after our lunch about the relationship between you and me. It gives me a great deal of pleasure to know that regardless of what else happens, we have established a strong feeling of mutual respect and affection. And regardless of where all this comes out, I will continue to do everything I can to support your efforts." Steve was thinking about when to resign as deputy CEO. Somehow, Loomis prevailed on him to not give up the job yet.

Within weeks, though, Steve told Loomis, "Forget it." A mad scramble began around the Memorial Day holiday to once again solve a management crisis in New York. On June 7, the firm was ready to explain the changes. Michel announced that effective September 1, Steve had "decided to step back from his responsibilities" as deputy CEO in New York to become deputy chairman and that Bill Loomis, the phoenix, had replaced him. Michel also announced that the three Lazard houses intended to "combine as a global force in investment banking," a process that would take, he said, six to nine months. Effectively, the merger discussions would start, once again, from scratch but with Michel directing their content and with his partners' knowledge, never mentioned overtly, that exile in Siberia awaited anyone who tried to dilute Michel's authority. "David-Weill or the Highway," one magazine headline declared.

The press release contained all the usual masking tape, covering up what really happened in the delicious way that corporations do. "We would have preferred to have Steve remain as Deputy Chief Executive, but we understand and respect his desire to step back from his operating responsibilities as we begin the next phase of consolidating our worldwide operations," the firm announced. "This management change will afford Steve the opportunity to remain as one of the firm's most senior bankers and at the same time pursue his interests outside investment banking."

Steve's "step back" and the firms' intention to merge were big news. Throughout the 1990s, no investment banker, with the possible exception of Felix, had as calculatedly high a public profile in the United States as Steve. He was as tactical about promoting his own career as he was in advising a client about a big merger. For two decades, he had come to symbolize his generation's asymptotic move toward Wall Street. His career trajectory had been nearly vertical. Had he now suddenly flatlined? The
Economist,
half owned by Pearson, divulged that the merger announcement was "hastily publicized" by Michel on June 7 "after a leak" but acknowledged that Michel "has long dreamed of uniting the three firms." In a nifty bit of foreshadowing, the
Economist
also speculated--about its parent company--that Pearson's stake in Lazard Partners would be worth somewhere between PS350 million and PS400 million and could easily be swapped for Michel's 7 percent stake in Pearson, worth about PS500 million.
BusinessWeek
reported that "once again" Michel had "lost a chosen successor."

But as usual, Michel was sanguine. "It is a very curious thing when a small internal decision provokes so much press," he said. "Lazard has an incredibly powerful brand. It is really quite magic. We have been a sort of irritant because we have never really changed. The question has [always] been, how can you compete?" Michel said, as usual, the perennial question of who would succeed him would be made easier by the merger and in the "coming years" would be clarified. "It's far easier with a unified structure to find a CEO in our midst, or a chairman," he said, "than it would be if we tried to replace me with somebody who has to run separate entities. I'm able to do it because I'm an owner."

For many of the younger Lazard partners, who had imbued in Steve their own ample ambitions for themselves and for the firm, his abdication was like a medicine ball thrown to the gut. "There [were] a tremendous number of people--not unlike Messier's in Paris a few years earlier--who thought that Steve's management was a complete breath of fresh air," observed a former partner. But there was also the belief that Steve failed as a leader because his mandate was to present, to Michel, by whatever means necessary, a united front for change. "All these people trying to do battle with Michel individually, trying to get Michel to change his ways, wasn't going to work," explained Luis Rinaldini, in comments representative of this point of view. "I don't think Michel was going to change voluntarily, because Michel was a very intelligent person and he had all the power under his senior partner designation in the partnership agreement. I think Michel's view was that 'it's kind of funny. If I'd wanted to change, I would have changed, so why are we having this discussion? I don't want to change. I want to do it this way.' I think that's pretty clear. And I think in that sense Michel was wrong but not necessarily deceitful.

"So to say," Rinaldini continued, "poor little Steve Rattner couldn't deal with it, I don't think is a fair assessment.... Michel knew what he wanted to do, he was doing what he wanted to do, he had all the power to do what he wanted to do under the partnership agreement. Especially the third or fourth time, you knew he wasn't going to do it on his own. It was like Charlie Brown and the football. By the time Michel pulled the football out the third time, you should have figured it out he was going to do it again the next time."

Steve conceded that aspects of this argument make sense. "The first time I ran banking, I had 25 percent of the tools you need to actually do the job. I didn't do it terribly well, but I don't think anybody could have done it at that point in time. I think by the time I was deputy CEO, I probably had 50 percent of the tools I needed to do the job."

Michel suggested that he and Steve didn't get along. "He didn't relate well with me," Michel said. "I don't think it was my fault. I'm not saying it was his fault. It's like that in life. I think I got on his nerves." But Michel could also clearly see that Steve's vision threatened his authority. He saw it when Steve suggested, perhaps offhandedly, in June 1998 that Lazard consider an IPO, and he saw it again, in spades, in November 1998 in the steamy Paris conference room. Michel believed Steve and his band wanted to eventually force a sale of the firm. A friend summed up Michel's thinking, in
Euromoney:
"Michel was right in knowing that was what Steve wanted. Once he saw that was what Steve was after, he decided Steve was his enemy and he had to kill him, and he did. Steve picked a fight and he lost. Steve sensed an opportunity by getting the boys behind him to wrestle power from Michel. A number egged him on, seeing the possibility of making big money. I guess in the back of their minds was the thought: 'If we ever really want to make a bundle here, we need to be selling this thing.' It was in a way a kind of confusion because Michel was not motivated to do the most economically appropriate thing because he definitely wasn't and really isn't a purely economic man at all."

Steve agreed he could have done some things differently, but not many. He denied he was angling for an outright sale of the firm. His goal, he said, was simply to bring the firm into the modern age. And his supporters within the firm think he did just that before Michel eviscerated him. "In retrospect there are some things I probably could have done to get along with him better, but I'm not sure it ever would have really worked. As Loomis proved, you really only have two choices," he said. "You were either with the partners or you were with Michel. There was no way to be in the middle and survive. I chose to be with the partners."

CHAPTER
17

"HE LIT UP A HUMONGOUS CIGAR AND PUFFED IT IN OUR FACES FOR HALF AN HOUR"

E
ven though Steve's departure from Lazard was nine months away, on the evening of the June 7 press conference he delivered his "farewell remarks" to an impromptu gathering of the firm. He told his colleagues he was leaving "with a great deal of regret that I will not be in this chair to finish the journey together." He explained his reasons for exiting were "complex" and "not easy to describe," a mix of his desire to strike a more satisfying balance between work and family and his professional frustrations (although he never criticized Michel overtly; in fact he credited Michel with making possible the "successes of the past two years"). But there was no mistaking the slings and arrows directed at Michel. "As I hope you all feel," he said, "for the past two years my ambitions have been not for myself but entirely for this Firm. Since I took this job, I have asked for nothing for myself--not more compensation, not a grander title, not public recognition.... I have sought only the tools to make this Firm great again. In seeking those tools, I do not apologize for wanting us to win--this is not a business for people who are content to be second rate." He closed by expressing his deep gratitude for the new and prevailing spirit of partnership and made clear his desire that his legacy be judged by the successes the firm goes on to achieve rather than gloating should "chaos descend" after he departs. "You all have been of so much help to me that I hope you will never hesitate to call on me if I can reciprocate in any way," he concluded. "I am deeply, deeply grateful and wish you the very best in the years to come. I will never forget our time together and from the bottom of my heart, I thank each of you very, very much for the opportunity to serve you."