The last tycoons: the secret history of Lazard Frères & Co

by William D. Cohan

  Naturally, there was intense speculation inside the firm about how Michel would run it. Some believed that, compared to Andre anyway, Michel was "lovely," "nice," and "courteous," and hoped that the manic intensity of the firm would be curtailed. Speculated Disque Deane: "The partners' blood pressure will go down, there will be fewer ulcers and maybe some people will take a day or two of vacation." The latter thought, of course, was a reference to the fact that Andre rarely took vacations--even when he was in Switzerland, he was always working--and didn't like his partners to take them, either. Mullarkey used to tell his wife to tell Andre, when he called Mullarkey on Sunday mornings, that her husband had gone to church, simply to avoid the senior partner's regular calls. That was but one of many legendary stories about the lengths Andre would go to in order to thwart his partners' vacation plans. But the Fortune article also tipped the partners to the fact that wholesale cuts in the partnership ranks were coming, an exceedingly rare occurrence for Lazard, where most partners considered their position a tenured one.

  Michel, however, made clear that he viewed the "optimum number" of partners to be twelve, since "it's possible to get that number around a conference table"--not that the Lazard partners had ever met to decide anything of substance about running the firm before (or very often since). The article suggested that the new, smaller group of partners would form the basis of an "inner circle" of leaders who would begin to resurrect the firm. Michel also indicated a willingness to allow Lazard partners to once again make private-equity investments, a throwback to Lazard's pioneering days of the 1950s and 1960s. Andre had pulled back from this activity in the 1970s because corporate merger activity made the cost of such deals for financial buyers prohibitively expensive and because principal investing required a time horizon that Andre's illness began to rob him of. Michel believed the private-equity angle would help Lazard attract new bankers. His mantra was simply that a few Great Men could transform the franchise. According to Fortune: "The appealing atmosphere of a small organization coupled with the chance to build wealth, he reasons, could bring Lazard the brains that might otherwise be attracted to its larger, more visible competitors."

  THERE WAS ONLY one subject where the Fortune article went off the rails: Was there to be a meaningful role for Patrick Gerschel, Andre's grandson? Although Michel had literally just taken over, there remained speculation about who would succeed him. As Michel had four daughters, none of whom was interested in working at Lazard, the inevitable focus fell on Gerschel. The perspicacious and pugnacious Gerschel became, in 1971, at all of twenty-five years old, one of the youngest partners in the history of the firm. By 1977, Gerschel had become one of only three New York partners who was also a partner in Paris. The other two were Andre and Michel (although Michel kicked Gerschel out of the Paris partnership soon after he took over after Pierre's death in 1975). His grandfather was referred to as Zeus, making Gerschel "Son of God" and creating much resentment of him among the other partners.

  In the late 1960s, Gerschel had graduated from Cornell and had moved to Paris to become an assistant bureau manager for NBC News. He knew nothing about television journalism, but his grandfather was, of course, intimate friends with David Sarnoff, the man who controlled RCA, NBC's parent company at the time. After a couple of years in Paris, Andre asked his newly married grandson to join Lazard in New York, in October 1969--just as the ITT-Hartford deal was about to close. Gerschel had grown up in the corridors of Lazard at 44 Wall Street, under his grandfather's tutelage, since the age of five. He worked summers at Lazard all through college. Unlike Andre's son Philippe, who declined his father's persistent efforts to have him join Lazard and instead became a scientist, Gerschel had Lazard in his DNA. Andre hired him to work full-time in the research department writing due diligence reports on companies in the underwriting queue. Although he considered it a "rather menial" job usually "done by a lady in the syndicate department," Patrick loved it. He was paid $22,000 a year, then the lowest level of compensation for a Lazard professional. He felt like he was thrown into the pool to see if he would sink or swim. He received no special attention from his grandfather and indeed felt like he was starting at the very bottom. "You know a clerk is a clerk," he said.

  Soon, he was told to move over to the corporate finance department--really M&A--to work in Felix's group. His pay was increased to $35,000 per year. "It was a very curious kind of place," he said. "You would be told to write a report, which you wrote, and you never knew whether it meant anything or not. In fact, there were times I would write reports over a week and spend all night, every night for a week, getting a report done, hand it in to Felix, and he'd throw it in the trash." Felix would ask him to write a memo about, say, Gulf & Western, then an important conglomerate, and then change his mind about the need for it. "People who write memos drive Chevrolets," Felix told him. But somehow, Gerschel found a way to feel okay about Felix's mercurial behavior. "At least you got your day," he said. "The worst thing would be if he hadn't asked you."

  To Andre's grandson, Lazard at that time was somewhere between Kafka's The Trial and the Fellini movie Amarcord, with George C. Scott's performance in The Hospital thrown in for good measure. "This was cuckoo land with very, very, very smart, able people who knew something," he said. "There are no people like that on Wall Street today, maybe Bob Rubin." Gerschel rose quickly through the ranks of the firm, with Andre's blessing, having one of the highest percentages--at 4.455 percent--of the firm's profits and one of the largest capital accounts, at $1.4 million, almost three times that of Felix. "I owed and he knew I owed," Gerschel said of his relationship with Andre. Francois Voss, the longtime French partner and Gerschel's relative, believed that Gerschel simply did not have the requisite personality to one day be the senior partner of Lazard. "To be number one at Lazard, you have to--how can I say?--show to the world that you deserve it by the way you are presenting yourself," he said. "It's a very important job."

  Many at Lazard believed that Gerschel's presence was Andre's not-so-subtle effort to keep control of Lazard in the Meyer family. The first inkling of trouble, in this regard, was young Patrick's elevation to a full partner, nearly immediately upon joining the firm. "It was a shocking breach of investment-banking etiquette," Meyer's biographer wrote in Financier. Gerschel was said to be brusque, arrogant, and condescending toward the other partners. "At first, Patrick was just a nuisance," recalled one former Lazard banker, "but then he became a pain in the neck. Andre kept pushing him into the middle of conversations with business people about their problems, and Patrick wasn't capable of handling it. The clients rejected the premise that Patrick was a proper lead man for their business. He lost us at least two clients that I'm familiar with." Disque Deane, no friend of Gerschel's, said Andre's grandson badly overstepped his perceived authority. "Patrick was trying to become the senior partner of the firm, and Felix did not want to work for Patrick," he said, adding diplomatically: "Patrick is a different type of person." As the secretary to the management committee, Gerschel found that job required him to report to Cook what various partners were working on, including Felix, "since he never talked to Cook in his life. So guess what kind of position that put me in? And I wasn't smart enough to know it. I should have made a beeline for the door right then."

  In the 1977 Fortune article, Gerschel compounded his problems with Felix by being quoted saying he hoped Lazard would attract more "avaricious" people, people more like D. K. Ludwig, the secretive billionaire industrialist known as the "father of the supertanker," and less like Felix, who "seems to put fame above fortune." "Most Lazard partners would rather be like Felix Rohatyn than D. K. Ludwig," he lamented. With uncharacteristic understatement, Gerschel confided that his relationship with Felix "wasn't very good" after the article came out. Felix said of the Ludwig comparison, "I thought that was an asinine remark and I still do. If I'm setting an example, I think I'm egotistical enough to believe I'm not that bad an example. And I think people who spend some of their time not just gr
ubbing around doing business are better people. And ultimately they become better businessmen than rich young kids who think the world is nothing but money." But Gerschel also believed that the "end" for him "came long before that. The end came the day I entered." As proof, he pointed to the contrast between his own treatment at Lazard and Michel's. "Andre Meyer's view of life is that he would put my foot in the stirrup, but I had to climb on the horse," he said. "David and Pierre believed that Michel should be put on the horse." He continued: "There are two things that work in an investment bank, ability and legitimacy, all right? Felix believes and believed that I was incompetent. That destroyed ability. And when Andre Meyer refused to put me in the saddle, that destroyed legitimacy. Game over. 'Bien vaincre,' as they say in French."

  Soon after Michel arrived in New York, Felix demoted Gerschel to a limited partner, with Andre's blessing. But Andre remained hopeful, Gerschel said later, that somehow his grandson would be restored to his full partnership over time. "He loved that firm more than he loved many things, including his family," Gerschel said. "But he wanted his family taken care of." He said he had a "very unique altercation" with Felix beyond what was said in the Fortune article but would not elaborate because "it truly doesn't help me very much." For his part, Felix said that Gerschel harbored the "total" fantasy that he could run Lazard. "He was just a young man who thought his family positions entitled him to authority in the firm," Felix said. "And he got into difficulties with some of the people, and finally I think Andre had to let him go." So it was Andre, not Felix. In any event, Gerschel received a letter from DeForest Billyou, the former ITT lawyer then at Paul, Weiss, informing him what it meant to be a limited partner at Lazard.

  He was no longer permitted to step foot on the partners' floor. He was no longer permitted to attend partners' meetings. He was no longer able to use Lazard stationery. "I was a special case," Gerschel said. "To get rid of the Meyer influence that had beaten the shit out of all these characters for years. I was between a rock and a hard place. And, man, I should have been smart enough, tough enough and smart enough." He moved down to an office on the thirty-first floor of One Rock and put up some green curtains. Then Felix had the idea that Gerschel should open a Lazard office in Texas. Then Andre had the idea he could open an office in San Francisco. "I said, 'Don't be so silly,'" Gerschel recalled. "Ain't going to San Francisco. I ain't going to Texas. I may go somewhere else to get a job...because I knew it was over." He talked to Wertheim, a small investment bank, about going there. He thought about selling used equipment from Alaska to the Philippines and Iran. He then learned how to work on the floor of the American Stock Exchange, with a defrocked priest. "That was sorta fun," he said. He did a quick deal with the Bass brothers in Texas and made some money. Finally, he landed on the idea of working with Jerry Speyer to recapitalize the Tishman Company into something called Tishman Speyer, now one of the largest real estate developers in New York and the owner of Rockefeller Center. He turned to Andre to help accomplish the deal, and quickly Michel was brought in with a few other Lazard partners as well. They all made money.

  Gerschel became a limited partner on January 1, 1978. He still received his partnership points, which remained fairly steady at a sizable 4.45 percent, and he still had his capital account. A little more than four years later, Michel fired him from even that tiny role. In a one-paragraph letter, signed by Michel but not on Lazard letterhead, Michel invoked his power under section 3.2 of the Lazard Freres & Co. partnership agreement, which clearly stated: "If in the sole and unreviewable determination of the Partner under section 4.1"--Michel--"it shall be in the best interest of the Partnership and of the remaining partners desiring to continue the firm for any general or limited partner, other than Andre Meyer, to retire, he may be required to retire upon the request of the Partner under section 4.1 as of any future date which he may determine." Gerschel keeps a framed copy of the letter on his desk at Gerschel & Co., his private investment firm on Madison Avenue. He had to sue Lazard to get his capital out, since Michel didn't want to give it to him.

  THE IMPLEMENTATION OF Michel's vision for Lazard began in January 1978 with the rewritten partnership agreement. Michel's new percentage share rocketed to 19.05387 percent, and he alone became the all-important partner under section 4.1 of the firm's new partnership agreement. Michel agreed, though, that "decisions" made pursuant to the agreement "shall be made after consultation with Andre Meyer," but with Meyer ailing steadily, Michel now controlled the purse strings, alone. Furthermore, the new agreement announced that Andre, Patrick Gerschel, Disque Deane, and Howard Kniffin were "retiring" as "general partners" to become "limited partners." Joining them as limited partners were Ned Herzog, Stanley Osborne, and Fred Wilson. Also shoved off to sea as limited partners were Patrick Gerschel's siblings, Laurent and Marianne Gerschel. Patrick's brother and sister had never been involved in the business but had each received some 2.7255 percent of the firm's profits in 1976. The new partnership agreement spelled out for the first time that all of Andre's family interests taken together had to equal 67.301 percent of Michel's family interests taken together. So, in 1977, all of the Meyer family stake totaled some 17.3352 percent of the profits, making the David-Weill stake equal to some 25.7552 percent of the profits. In other words, together the two families were taking out more than 43 percent of the profits in New York--a fact that over time would be a serious drain on the firm, especially since, with Andre gone, none of these beneficiaries, including Michel, were bringing in much business, if any, to the firm.

  Many of the partner profit percentages were shifted about as well, without any discernible pattern. The ailing Kniffin's stake was reduced to 1 percent from 4.5 percent and Felix's take was reduced to 8 percent from 11 percent. Donald Petrie, one of the key figures in the success of Avis, returned to the firm as a partner, with a 2.5 percent stake.

  Michel had taken the first steps in reducing the size of the firm in keeping with his statements to Fortune. And his concern was justified by the deteriorating financial performance of the New York partnership. Yes, Lazard in New York had made $13.1 million in 1971, 44 percent of the three houses' net income of almost $30 million. But that number had fallen steadily, reaching a mere $8.1 million in 1974--the "Dark Ages" on Wall Street, according to Felix--before increasing again in the mid-1970s, to $15.4 million in 1977. In 1978, though, net income fell again, dramatically, to $11.9 million in New York, well below the profitability of London, which was $16.8 million. Even the much smaller Paris house was no longer far behind New York, earning $6.7 million in 1978.

  Michel determined he had to fix New York--and fix it he did. "In New York, if you had asked people around Wall Street if I could have been successful, I think the answer would have been no," he said in 1981. "They would have told you three years ago that the idea of sending a young Frenchman, nice, wealthy, relatively well educated, into a jungle like Wall Street, and especially into a jungle like Lazard Freres that was full of talented but very difficult personalities, was ludicrous." In 1988, Michel said of his first days in New York: "At that time and even seen retrospectively, the odds seemed to be against me. But I never had doubts. Difficulties, yes. Doubts, no."

  Still, by July 1978, Michel was feeling sufficiently well about his growing importance at the firm that he decided to have a coming-out party of sorts for the French business community in the pages of Le Nouvel Economiste, a respected business journal. There, for all his wealthy friends to see--and for one of the first and last times--was, on the cover, a half-smiling forty-five-year-old Michel, resplendent in an expensive gray three-piece suit, vest buttoned tightly, save for the requisite one at the bottom. His jet-black hair (where had his red hair disappeared to?), unparted, was slicked back well off his prominent brow. Inside, another picture, slightly out of focus, showed Michel seated in a sparse conference room in Paris below four black-framed pictures of his forebears, with a caption citing him as "the heir of a celebrated line of bankers." The article added to the growi
ng mythology of Lazard as an incredibly secretive, incredibly powerful collection of important men doing important business around the globe. Many of the old chestnuts were trotted out: an ability to control billions of dollars at a moment's notice with only the tiniest drop of capital--$17.5 million in New York and 17 million francs in Paris; the spartan, almost unforgivable working conditions, where every two partners shared one secretary, in shabby leased offices; the importance of being long-term greedy by offering unparalleled advice to CEOs as opposed to simply loaning money.

  There was hardly anything secretive about such a prominent and fawning article. But there were some subtle (and not-so-subtle) messages being conveyed by Michel to his partners, including the public reinforcement of the importance of partnership at the firm and the refutation of Cook's failed management philosophy. "It is a Lazard rule: No pyramid structures," Michel explained. Sorry, Mr. Cook. The article concluded by affirming that Lazard had "stayed true" to established principles of private European investment banks of the nineteenth century--"a sanctuary where all the different threads of a tightly knit network come together and where decisions are made whose authorship is given to others"--and left readers with a little morsel from Stendhal, where the arriviste protagonist of Lucien Leuwen wonders why his father, the banker, is keeping four foreign exchange traders waiting for him in the lobby of his office. His answer: "Their job is to wait for me. My job is to read the paper."