The last tycoons: the secret history of Lazard Frères & Co (99 page)

He continued, building an impressive oratorical case for distributing
real
equity to the current and future partners or, if that was an unacceptable option, implementing a hugely divisive restructuring that would mean firing most partners and retrenching back to a very small core group of senior partners in New York--Loomis's target was said to be ten, a number he disputes--with a pared-down support staff to help them.

But, he noted, the radical restructuring concept wouldn't work, because the people the firm most wanted to keep were unlikely to stick around.

Loomis came to the conclusion at the end of June that the firm's only viable choice was to sell. Then he sought to round up support for his decision. Nothing was coming easily for him anymore. "A house divided against itself cannot stand," Loomis wrote Evans, quoting from the famous Lincoln speech from June 1858. Evans responded: "Yes, indeed, but you will recall that he had some pretty big 'restructuring' to undertake a year or two after he made that remark"--a not so subtle reference to his preference to pursue the "restructuring" rather than the sale. "It was only after that managerial tidy-up that the house became undivided and entered its golden era. Let us speak." Loomis either missed Evans's meaning or chose to ignore it. "Actually, Lincoln then had the bloodiest war in American history, a civil war," he responded. One London partner passed this exchange on to his senior colleagues with the thought: "Irony is always lost on Americans. I suggest this series of communications is deeply confidential."

After the July 4 holiday, Loomis continued to thrash over how the restructuring might work--at Michel's request--while having concluded himself that the firm should be sold. He spent two days working up an "economic analysis" of the restructuring. He then got a call from Michel, adding to his already immense anxiety. Michel had three messages for him: first, that Georges Ralli had spent five hours with Michel, at his house in Long Island, complaining relentlessly and specifically about Loomis's "failure" as CEO; second, that the "restructuring" should focus first on New York rather than on the firm as a whole ("which is impractical even in the simplest political terms," Loomis wrote later); and third, that since Braggiotti would not come to see Michel--implying he was well off the reservation--Michel would fly to see Braggiotti in London.

After hanging up, Loomis was fit to be tied. "With that, I went to bed seriously questioning why I had spent any effort for such a still dysfunctional place with so little concept of the otherwise universally accepted linkage between responsibility and authority," he wrote to Evans. Still, he soldiered on. "I got up this morning anyway and decided to change the paper back to about where I had it before, or five pages (instead of twenty-five of texts and charts). I am hurt, frustrated and furious. But I don't give up which is why I am still at Lazard. I can only promise you a lively meeting on Thursday. And courage." This gut-wrenching communication prompted Evans's genuine sympathy. As Loomis's leadership had now been openly called into question, Evans told him, for what it was worth, that the partners in London backed him as the CEO but that "if others wish to put themselves forward let them do so on Thursday and their claims will be considered. At the end of Thursday, however, we must have decided who is boss, that we back him, that we have an action plan, and that those who do not want to stay must go
whoever
they are." Evans pledged to Loomis to do whatever was necessary until these matters were resolved, even if it took all weekend. "We are close to being the team that put Lazard's future behind it and I do not wish to be part of that disgraceful brotherhood." With that, Evans was off to Tuscany for the weekend and urged Loomis to "have a wonderful weekend" and think of the meeting the following Thursday "as one of the best School Plays you are ever likely to be allowed to act in."

Evans kicked off the crucial July 12 executive committee session in London by reminding his partners of those--perhaps forgotten--moments in Lazard's history when the three houses stood together in times of crisis: in the early 1930s, when Paris and the Bank of England helped keep London afloat, and after the Nazis were defeated, when New York and London helped to resurrect Paris. Today, he told them, New York is in a difficult spot, with the loss of many productive partners and a high cost structure. "Perhaps it was an illusion that we could avoid a dangerous and difficult restructuring," he told them. "The danger facing us is that simply we disintegrate by people using their feet, taking the door and disappearing from sight."

Loomis then took the floor. He observed that there had been much discussion about him "both publicly and privately" but that he had been in charge only since November 2000 and had been asked by Michel "not to get too out in front too quickly." He became very emotional and started crying. He said that regardless of whether they decided to restructure or to sell, "we have to work together. If we are evidently in conflict, this will certainly complicate any sale. It is fundamental, too, in a restructuring." To that end, Loomis set a target of being able to tell the firm's partners "in early September" what "we are up to." He established two teams: Evans, Golub, Eig, Jacobs, and Ralli would focus on the restructuring (dubbed, appropriately, Project Darwin), and Michel and Loomis "alone" would focus on the sale of the firm.

The restructuring team went off to refine Project Darwin. But within a week, Loomis was already evidencing his frustration. He canceled one meeting, scheduled for July 19, and all but demanded that Evans come to New York in person in order to make real progress. As instructed, Evans flew to New York and continued to refine the Darwin analysis in preparation for a videoconference on July 24. On the prior Friday afternoon, July 20, while still in New York, he updated his senior colleagues in London about a series of disturbing phone calls Michel had made to Loomis and to him in New York.

Under the admonition "EAT BEFORE READING," Evans said that Michel had called on Thursday from Sous-le-Vent to report the following: that all the young partners in Paris "will go" and that "we" must give them cash bonuses, with the money perhaps coming from a shocking place--"capital retentions," the 10 percent annual holdback from partner pay given to retiring partners when they leave. Michel called again the next day, Friday, to report that Braggiotti had asked Ralli to go with him to Sous-le-Vent to see Michel to demand that the firm be sold. Ralli declined. Then, Evans reported, Loomis screeched when Michel told him he was disturbed by the firm's ongoing effort to integrate all the various management information systems under a new PeopleSoft platform. He then reported that Bruno Roger told him that the Paris office was between "secession and rebellion" and that he was "disturbed" ("evidently a catching phrase") that there is no one from Paris in New York helping on Project Darwin. Finally, Evans reported that he had been asked to join Loomis and Eig to try to "settle" the "LAM, Eig, Gullquist affair." He continued: "This will be colourful, if 'disturbing.'"

Michel set August 2 in Paris as the new day and place for the firm to figure out what to do. Meanwhile, the executives working on the restructuring had determined that to make the economics attractive, a partner with a 1 percent profit participation had to be paid $4 million. In other words, the firm needed to make $400 million pretax and pre-partnership distributions for the calculus to work. As the firm was on track to make only about $140 million pretax in 2001, not only would forty partners need to be fired (freeing up fifteen partnership points to distribute to others), but also another $75 million to $100 million of either cost savings or revenue increases were required to make the math work. Evans wrote, "$70 million is unlikely to be achievable. Thus we will need to believe that a re-structured Lazard works well enough to deliver increased revenue."

Also that Saturday, Evans reported to his colleagues back in London, he and Loomis had received yet another call from Michel, who had Bruno Roger on the line with him. After delivering a fifteen-minute "lecture on Paris' feeling of isolation," Michel resurrected the idea of paying certain European managing directors fixed cash bonuses. Specifically, it seemed, the Lazard partner Jean-Jacques Guiony wanted a cash guarantee, and other Lazard Paris partners felt similarly. Years later, Roger said he believed that Michel's failure, by July 2001, to make good on his early 2001 promise of distributing goodwill to the partners had fomented nothing short of an insurrection in Paris. "When you say to partners, before the end of May, I give a gift to you, and then in September nothing arrives, in December nothing arrives, you create a revolt," Roger explained. "Because Michel is the king, and he has the power. And each person wished to have the goodwill. But Michel doesn't decide. Instead, he created a fantastic revolt.... It was not an individual revolt; it was a collective revolt. It's not necessary to read Machiavelli to know that we would have an automatic revolt. This is a case. A Harvard Business School case."

On the call with Loomis, Michel complained again that he was not involved in the PeopleSoft selection decision. This struck Evans as the height of absurdity. "To imagine Michel becoming involved is like contemplating Brigitte Bardot running NATO," he wrote his colleagues before signing off in his usual reference to Lazard as a theater of the absurd. "This amazing scene cannot possibly be repeated and I would not miss it for anything," he concluded.

Loomis was not even slightly joking when he wrote Michel the equivalent of a "Come to Jesus" letter on Monday morning, July 23. The purpose was to set the stage for the August 2 meeting and to let Michel know that Loomis had reluctantly, but unequivocally, decided the firm had to be sold. Coming as it did amid such protracted and unmitigated turmoil, the seven-paragraph missive from a beleaguered CEO to his chairman is nothing less than a cry of utter despair. "We need to be honest in our assessment of Lazard today, just as we need to keep our wits about us," he wrote. He described a perfect storm--"an accumulation of longstanding differences mixed with a recent merger in a very bad market environment"--coinciding with the near end of Michel's imperial reign. "We are under attack, internally and externally, on an exposed plain," he eloquently wrote. "We are without the protection of where we came from, or the sanctuary of our intended destination." He continued, "The restructuring numbers are not large enough to compensate for the lack of faith in our fragile constitution as one firm. There is no 'quick fix' for the reality of the 2001 results. The facts, however unattractive, remain stubborn things. We will continue to work diligently on the restructuring while preparing for a sale process. We will be in a position to start discussions with others immediately after the Paris meeting."

In a mere six hundred words, while excoriating his partners, Loomis had vitiated the restructuring and the efficacy of trying to placate the asset management team in one fell swoop. He had decided to sell the firm, ratifying the collective judgment first reached on May 10. "And that was the
only
future," one partner said of Loomis's thinking about this decision. "Who was going to follow him after that?" Another partner, who began to look for a new job at around this time, said: "I would say that I started to seriously question whether or not the firm could make it at that point in time because I felt that there was a recognition that we were not gathering enough revenue, that the asset management guys were angling for their own deal, that we didn't have a leader who could speak for the whole firm, and then frankly the economic substance of what kept you there was quickly coming to a close."

Michel's response to Loomis's extraordinary letter would take several months to play out fully. In the meantime, though, his initial reaction was filtering down through the partnership ranks. The French now appeared to believe it was "ridiculous to float or sell now" given the deteriorating performance of financial services companies in the market. "A sale is therefore very poorly timed," one French partner explained. "Therefore the restructuring becomes a necessity." There was also some discussion of having Michel come back as CEO, replacing Loomis--London's idea of the so-called MDW reinstitution--but this French partner rejected this as unlikely to be effective. "We might prefer restructuring but we do not have the people or the energy," he continued. But he predicted--absolutely correctly as it turned out--that Michel would manipulate the sale process because he did not want to sell the firm. "So nothing will happen," he said, adding that Michel wanted to give the firm "three months to find a rainmaker" to replace Loomis.

But there was also another indication of Michel's negative reaction to Loomis's letter: the fact they were now disagreeing aggressively about the firm's future direction. Michel had suggested that a number of partners be fired before the firm considered a sale and then, as part of a severance agreement with them, agree to pay them should a sale happen. One of the partners Michel wanted to fire was Tom Haack, whose father was the former head of the New York Stock Exchange. Haack had been a banking partner for about twenty-five years by that time, and a nicer person could not be found. Although not among the highly paid senior partners, he was well paid and worth every penny of it based on the fees he generated year after year. Still, Michel wanted to fire him. "You suggest that we 'fire' Tom in September but pay him in a sale within two years," Loomis wrote. "We then explore a sale. Thus, we create turmoil at no gain for anybody. Any prospective buyer would be aghast at the result of firings in New York, including your personal disloyalty to the ones loyal for so many years to you. It would be a complete mess and a forced sale because everyone would hate the management of the place. And then, we would pay Tom anyway by your terms, or because we would in arbitration. (We would also have to find someone to fire him; it will not be me in this scenario.)" Loomis signed off, "I will see you tomorrow. I am sadly pessimistic about the conversation and, more so, about the next day. With regret, Bill."