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

by William D. Cohan

  Maybe it was because he was not yet finished playing that role. In the fall of 1990, Felix's friend and literary agent, Mort Janklow, asked him to lunch at the Four Seasons restaurant to meet Michael Ovitz, the uber-Hollywood talent agent, who was then the head of the Creative Artists Agency. Ovitz had just represented Sony in its acquisition of Columbia Pictures, and Felix had never met him before. He was plenty controversial, even in those pre-Disney years, for it was rare for someone who was not an investment banker to play a central role in a high-profile corporate marriage. But such was Ovitz's standing at that time that he was uniquely able to pull it off, much to the envy of traditional bankers. Perhaps, Felix thought, Ovitz was cooking up some new corporate assignation, and that was why Janklow wanted Felix to meet him. "Lunch at the Four Seasons, and breakfast at the Regency, are at the heart of New York finance, the arts, publishing and high-level gossip," Felix once observed. "You do not go there if you want privacy. You go there if you are not averse to publicity." After Felix and Ovitz chatted a bit about their mutual experiences working with Japanese companies, Janklow left the two men alone.

  Ovitz then told Felix he had been working for more than a year with a Japanese company, Matsushita, that was interested in buying MCA. Ovitz said Matsushita believed MCA's mix of business--movies, theme parks, and music (after Felix had just sold them Geffen Records)--would mesh well, in a Sony-Columbia Pictures way, with its consumer electronics business. Ovitz insisted on confidentiality and told Felix the Japanese would walk away if there was a leak. He asked Felix to speak to Lew Wasserman about the possibility of a deal. "By asking me to arrange a meeting with Wasserman to broach the possibility of an acquisition of MCA, he was making me an interested party to a possible transaction and at the same time, as an outside director, putting me at somewhat of a fiduciary obligation to try to give his transaction a fair hearing," Felix recalled.

  Thus began the usual two months of intense deal making between the unlikely protagonists--the Jewish Hollywood royalty, on the one hand, and the conservative, secretive Japanese businessmen, on the other. Felix remembered one Sunday night dinner, in November 1990, between the two sides held at the Hotel Plaza Athenee, ironically the very site of Felix's lengthy affair a few years earlier with Helene Gaillet. It was "one of the oddest dinners I have ever attended," filled with awkward silences between the top brass of both companies, punctuated by equally awkward non sequiturs, duly translated. The first course was melon and prosciutto. "I hear you have very good melons in Japan," Sid Sheinberg observed. To which Masahiko Hirita, a Matsushita vice president, responded: "Yes, we have wonderful melons because we have very well electronically heated hothouses." This went on for three hours. "I thought I was in a Kafka novel where the central character never knows whether he is crazy or everyone around him is crazy," Felix commented later. But the deal progressed, despite concerns about the cultural fit--and the potential political fallout. To try to grapple with the latter, Matsushita agreed to spin off to MCA shareholders WOR-TV, MCA's independent television station, and to transfer MCA's concession in Yellowstone Park to a new, American operator. Wasserman and Sheinberg were to be left alone by the Japanese to continue to run MCA.

  When the deal was announced just before Thanksgiving 1990, it was, at $6.6 billion, the largest nonindustrial deal to that time. "This deal might be another feather in my cap and in Lazard's cap," Felix remembered, "but I still had a bad feeling about the whole thing." His instinct was correct. The deal was a total bust. Less than seven years later, and without a word to Wasserman or Sheinberg, Ovitz advised Matsushita in the sale of MCA, for almost $6 billion, to Seagram. (That deal proved to be a disaster, too, and Seagram eventually unloaded Universal to what became Vivendi Universal, an overly ambitious former French utility then run by the former Lazard partner, Jean-Marie Messier. Once again, Universal proved poisonous. To avoid a possible bankruptcy, Vivendi ended up selling Universal to GE, which combined it with NBC.)

  All of these deals--whether by Felix or Steve or many others--were large, high profile, and industry transforming, the completion of which meant big fees for Lazard. The MCA deal was particularly sweet not only because of the ongoing dearth of M&A deals but also because the financial advisers--Ovitz and Allen & Co. for the Japanese and Lazard for the Californians--were small boutiques, not the big Wall Street behemoths, a further validation of the Lazard business model. Generating these fees, of course, year in, year out, was essential to Lazard because it has always been, basically, a one-product firm: providing financial advice on M&A transactions. So while the larger, multiproduct Wall Street firms, such as Goldman Sachs, Merrill Lynch, Morgan Stanley, and Citigroup, have many ways to derive fees from their clients, especially from raising debt and equity capital for corporations, Lazard had, by design, precious little of that capability. The word around Lazard, repeated like a mantra every January, was, "Now we have to start again from scratch." Somehow, just as Frank Zarb had described, year in, year out, Lazard was able to do just that.

  In the post-credit-crunch environment of the early 1990s, Steve's ability to generate high-margin M&A fees was, not surprisingly, getting him noticed in the corner offices of Lazard's thirty-second floor, where Felix and Michel held court. Not only did Steve generate large M&A fees; he did so with clients that were not traditional Lazard clients. This gave him increasing authority and power. He was, of course, being well paid--to the tune of millions of dollars per year--and before long he was also being recognized and rewarded with leadership positions. At the end of 1990, the introspective and cerebral Loomis, then forty-two, had managed to regain his balance as the firm's loosely acknowledged head of banking, as Lazard referred to its leader of investment banking. Loomis was to provide some leadership and direction--a task he did minimally, at best, given his natural reserve and the constraints placed on him by Felix and Michel--and, most important, once a year, conduct performance reviews and pay the nonpartners. Michel still set partner pay at that time, an increasingly deeply flawed system that led to acute paranoia among partners but kept everyone on edge and completely loyal to Michel. But Loomis still had time for his thoughtful, if somewhat inscrutable, observations about the state of the partnership.

  He delivered one such tome in March 1991 to his banking partners. "After one year of some involvement on my part in the coordination of our banking business, it might be worthwhile to share observations," he wrote, with some modesty. One of his main points was to confirm that Lazard was doing quite well, especially when compared with the disarray being experienced by the bigger Wall Street firms after the credit crunch. That said, though, he enumerated eleven "observations, more or less obvious," that he believed had the ongoing potential to hinder the firm in the future. These ranged from the usual laments about proper use of scarce professional resources to how to continue to compete effectively against the firm's two largest perceived competitive threats. "Wall Street remains in disarray," he wrote. "Having said this, Morgan Stanley and Goldman Sachs are effective competition, not only because of their excellence but also because they have in common an enormous sense of drive currently and an almost imperial sense of an international approach."

  Loomis's paper also acknowledged that Lazard was "not a place where anyone is going to direct activity and bestow efficiency on the rest of us. Some of the inefficiency is inseparable from the strength of the place and some is a lack of effort on our part as partners day to day in a host of little ways. It is our problem and thus the solution is a shared response." The treatise continued in much this vein before concluding existentially:

  Success and happiness at Lazard flow from similar characteristics. By and large, the partners who are most successful here on a sustained basis combine individual talent with a natural or acquired tendency to present Lazard to major corporations rather than using our franchise to rise or fall as individuals. Success as an individual is only an indirect and cumulative result. We can't do this without seeking out those who have something different to s
ay or who can contribute a judgment before the die is cast. Similarly, there is a correlation here, among partners and associates, between the causes of success and happiness, as those seem most at ease who are most inclined to consult with others frequently and casually. A more solitary approach has an increasingly unattractive risk/reward ratio internally...and externally. And it diminishes the personal privilege of being part of a partnership.

  Once again, Loomis had produced a document the likes of which had never before been seen around the firm's threadbare hallways. In his professorial tone he had created a gumbo, with one dollop of positive reinforcement and a whole lot of opaque scolding. How this went down with his partners is tough to know for certain, but it would be hard to think it too dissimilar to castor oil. The document never made it to the nonpartners. Furthermore, there was not even the slightest perceptible change in the way the partners acted, approached new business, or worked with the junior professionals. Lazard remained as quirky, as dysfunctional, and as successful as ever.

  Much of this absurdity was celebrated in a little-read October 1991 profile of Michel--"It's Good to Be the Emperor"--in M, Inc., Felix's friend Clay Felker's short-lived successor to Manhattan Inc. The heavily edited piece, written by Suzanna Andrews, celebrated both Michel and the firm and pointedly did not look under any rocks. "Today, Lazard is arguably the most profitable and powerful mergers house in the United States," the article purred. "In Europe, where it owns huge stakes in major continental corporations, Lazard is the most feared bank. And now, on the eve of the European economic integration next year, Lazard Freres is the investment banking firm in position to garner even more riches and more power. As Lazard's power has grown, so has the mystery surrounding David-Weill, its all-powerful eminence grise." The article portrayed the dapper Michel standing in his Paris office in front of the priceless portrait of his grandfather by Edouard Vuillard, the family friend.

  Felker gave Michel plenty of ink to convey his oddly charming quirkiness and aphorisms. "Every firm over the years basically developed their identity," Michel said of investment banks. "At least it's a great belief of mine that the walls speak to the people that are inside the walls, and that you can change everybody but they still speak the same language as in the past." Michel was celebrated for appearing to give his partners freedom to do their jobs, without the bureaucracy of Lazard's larger competitors. Much was made of his desire to collect bankers unlike others on Wall Street. Felix the immigrant. Steve the former New York Times reporter. Bill Loomis, who wanted to write in the style of Somerset Maugham. Luis Rinaldini, the former architect for Philip Johnson. "We have an emphasis on being individualists," Felix said. And supposedly everyone got along just fine. "It's like a family," Rinaldini said. "You know this brother is a drunk, this one works hard. You know that this sister is artistic and this one isn't."

  But the reality, touched on only briefly in the piece, was far darker. Michel had collected around him a unique group of people at once brilliant and insecure, hugely ambitious yet deeply risk averse, all of whom were willing to trade obeisance to Michel for nearly risk-free wealth. Michel tended exceedingly well to the proper care and feeding of his high-strung thoroughbreds. Felix, of course, was Exhibit A of this phenomenon. Lazard was "my home," he said. But as Andrews discovered, he proved highly sensitive to questions about this fact. She asked him about his supposed ten-year rolling employment contract with Michel. "The question touches a nerve," Andrews wrote, "because Rohatyn refuses to answer me and ends the interview." But, a fine reporter, she asked Michel about the contract. "Felix has always had an immigrant's mentality," he said. "He's always very concerned about security. So we have conversations or arrangements so that he feels that he is definitely at home." But others saw this odd dynamic between Felix and Michel as symptomatic of the firm's manic nature. "The place is totally overwrought," one competitor observed. "I'm sure you see this kind of thing at the entertainment companies, but by the standards of finance, it's off the scale."

  And Michel was behind it all. "I am the resident psychiatrist," he said. "You know that I am a great believer that the faults of people are very often more determining than their qualities. I look very carefully when I have somebody. I say, what is his fault? Where is the break in his personality which will motivate him?" What was his own weakness? Andrews wondered. "I don't mind at all that anybody is as good as me," he responded. "But I don't like when people are better." In truth, Michel was highly motivated by his ability to say no to other people, both socially and professionally. "I am equidistant from people," he once famously told Anne Sabouret, a French journalist who in 1987 wrote a book about Lazard. Michel told Sabouret he looked for ways to limit his "perimeter of suffering." Surrounding himself with expensive art and other tangible signs of his wealth was one way to rejuvenate after his days at his Lazard office. "I really need this confrontation with beautiful things to maintain my balance," he said. "It gives me back my sense of joy of living." To Andrews, he confided that another way he limited his perimeter of suffering was to be mostly alone. "It's not bad to be isolated," he said. "I think a lot is taken out of you by the urge to conform, and I never had that. I had no urge to conform. I was not with other kids. I was not part of a group."

  This sense of being apart informed the way Michel and Felix directed the firm professionally, too. Felix, of course, was a leading critic of the Wall Street fads of junk bonds, bridge loans, and advising corporate raiders, a source of huge but unsustainable profits at places like First Boston and Drexel Burnham in the 1980s. Michel defended Felix and the firm's decision to keep away from most of the faddish behavior, a variation of the ability to just say no. "We pride ourselves that we don't have to do anything," Michel said often. "It's an illusion that you have to rush into anything."

  When Michel did emerge from his cocoon, it was usually in the company of women. "My friends are mostly ladies," he told Andrews. "I do not like men socially that much. At work they are interesting. But in life women are more interesting." Atypically on Wall Street, Michel often spoke to his partners about the need to bring to deals the tactical skills of a woman. "Michel always says that you need a certain degree of femininity to be a good investment banker," explained Robert Agostinelli. "You have to be intuitive and sensitive. You know, men don't often get a lot of things." Added Michel: "Men very often lose all sense of proportion." Andrews described Helene Lehideux, Michel's wife and the daughter of a once-prominent French banking family, as "a beautiful woman who in many ways is as socially reserved as her husband. But when she summons, le tout Paris responds." A "Parisian socialite" told Women's Wear Daily, "She has a way of getting everyone to show up." In keeping with Felker's purpose of lusciously laminating Michel's image, no mention was made of his longtime affair with Margo Walker, a woman well known in the exclusive world of Locust Valley, Long Island, where Michel owned a weekend estate. Andrews would reveal the affair between Michel and Walker to the general public in her next, explosive article about Lazard just over four years later.

  CHAPTER 12

  THE FRANCHISE

  On Java, the most populous island in Indonesia, there is a fable about a beautiful but deadly tree--known as the upas (the word means "poisonous" in Javanese)--that emits such noxious odors that nothing around it can grow. A Dutch physician who visited the island in 1783 and claimed to have seen the tree firsthand wrote of it: "Not a tree nor blade of grass is to be found in the valley or surrounding mountains. Not a beast or bird or living thing, lives in the vicinity." No less an authority than Erasmus Darwin, grandfather of Charles, repeated the tale eight years later.

  The effect of the upas is a useful metaphor to describe the fate of many, if not all, of the partners who toiled away in anonymity for Felix while he became an investment banking legend. His modus operandi was to have at least one, more junior, partner work for him on all of his important deals and be responsible for coordinating the larger team that did the actual deal execution--due diligence, crunching the numb
ers, putting presentations together, staying up all night, and so on--while he wisely focused his energy on coaxing along the principals and wowing the board of directors. But the landscape is littered with frustrated bankers who worked for Felix--no doubt thinking it was a ticket to stardom, only to be disappointed to find there appeared to be no limit to Felix's own ambitions. "[Felix] has been cutting people off at the knees for years," one man told New York magazine in 1996. "Anyone who has gotten close to him has gotten fucked."

  One of the best-known examples of this phenomenon is the well-documented story of the former Lazard partner Peter Jaquith. A graduate of Andover and Dartmouth, Jaquith joined Lazard in 1970 after having been an associate at Shearman & Sterling, the Wall Street law firm. He worked for Felix on many deals, including those for Seagram. "He was my chief lieutenant," Felix told the New York Times in a lengthy profile of Jaquith. "When transactions needed financial and legal structuring, he worked on that." Jaquith was one of Lazard's best-paid partners and accumulated a fortune, with all the requisite toys, of some $20 million at one time. But according to the Times article, which chiefly described his sad descent into drug addiction and destitution, Jaquith began to resent his "secondary role" at Lazard. He remembered a closing dinner in 1981 for a Seagram deal, held at the "21" Club, where Edgar Bronfman, the Seagram CEO, singled him out for public congratulations. Bronfman's father had been the man who, more than twenty years earlier, had advised Felix to get out of foreign exchange and work on mergers at Lazard with Andre.