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

by William D. Cohan

  For his part, Steve took the news in stride. He recalled that after Felix "decided he was going to decapitate Bill," there was a "big leadership vacuum," and since "I had done a couple of big deals, they asked me to head banking. I said I wasn't going to do it alone. Kim was very close to Bill and Bill wasn't happy. I figured having someone with another set of relationships within the firm doing it with me would be a good thing." He had not known Fennebresque very well at all up to that point, although now they are the best of friends. "While I wasn't sure whether we would work well together, I felt that having a partner in this venture was more likely to lead to success than not. I think I was right about that but not right enough to make it work."

  Fennebresque was positively stunned by--and considerably wary of--the news that his good friend Loomis had been demoted and that he had been asked to take his place. "Someone told me Loomis was going to be out as head of banking, and I was so not plugged in I said, 'Pffft. Not a chance,'" he said. "I said it totally unencumbered by the facts, but I said it with some conviction because it was unimaginable to me that Bill would be out. But at one point, Michel called me into his office and said, 'We're going to make a change. Bill is going to go back to being just a banking partner, and I've asked Steve Rattner to run banking, and he has told me he won't do it unless you do it with him.'" Fennebresque asked Michel if he could think about his answer; Michel gave him the rest of the day. He said he wanted to think about the new assignment because "I didn't want to do it. I didn't want to do it. I had been in management before."

  He knew Steve a little bit by this time. He had first met him when Steve was thinking about leaving Lehman and Fennebresque interviewed him at First Boston. And Maureen, Steve's wife, had known of Kim from her days working at First Boston "because I was a colorful and funny guy," he said. But for Fennebresque there was also the problem of his friendship with the now-deposed Loomis. "I used to go by and see him every day, literally," Fennebresque said. "Just to smoke cigars and bullshit together. For all the acolytes and sycophants around Bill, I was his best friend in short order." And there were concerns that Felix didn't particularly like Fennebresque and resented the way Loomis had engineered his arrival at the firm. "I mean, what the fuck?" Fennebresque said. "I went to see Bill, and he said, 'Kim, I told Michel I didn't want to do this anymore. I told him this a month and a half ago.' And of course, I didn't know all the intrigue that led to that, but he said, 'I don't want you to give this a second thought. This is a good opportunity for you, and you should do it. I want you to do it. You have my blessing.'"

  Fennebresque said he quickly left the building without speaking with Steve for fear that Michel would call him back and insist that he take the job then and there. He met his wife and another couple for dinner.

  I was unbelievably morose at dinner, and no one could figure out why, and my friend said, "What's wrong? What's the matter with you?" I was just stunned. I was stunned by being there just eighteen months. I was shocked by Bill. The whole thing shocked me. It made no sense to me. So I told my friend what happened, and he said, "That's great!" I said, "No, this is the beginning of the end of my time at Lazard." He said, "Why?" I said, "Because it's not the kind of firm, especially in banking, where management takes you anywhere. The guy who runs the firm has his name on the door. I'm not getting his job. I'm going to have this job, and then I'm going to get thrown out or thrown back into the population or leave because I'm miserable or something. But this dog is not going to hunt, and I don't want to do it."

  Despite his better judgment and instincts, what choice did Fennebresque have? Michel wanted Steve to take the job, and Steve wouldn't take it without Kim, so Michel basically insisted that Kim take the job. Not only had he been at the firm a brief time; he had not really produced much business, either. "Steve Rattner was a luminary and I wasn't," he said. He knew there would be a rash of undefined envy, especially from the Loomis loyalists. ("Kim used that position to aggrandize himself to an extent" was the typical refrain of one partner close to Loomis.) There was also the difficulty of the job itself. "I thought managing the Lazard partners was like herding cats," he said. "I described it once to someone as when you are the managing partner of the banking group at Lazard, your job is to throw chum in the shark tank and try to stay in the boat." And then there was the matter that although the press release read that Steve and Kim were co-equals, such was not even close to being true. "I had zero illusions about that," Fennebresque said. "It was Batman and Robin. But Steve Rattner, to his credit, for which I will be undyingly grateful, always played it like we were equals."

  Since no one expected banking to change much regardless of who ran it, the two aspects of this unexpected news (unless you had been privy to the confidential memos) that really got people talking were, first, the acknowledgment of Rattner's continued meteoric rise and, second, just who the heck was this guy Fennebresque, anyway? Rattner's rise into this thankless role was not surprising given how much business he was bringing in; he exuded confidence and connectedness, and there was that inevitability to him. Steve had learned at Morgan Stanley the kinds of things the best firms did to get that way, and he was prepared to try to implement some of those at Lazard. "Virtually every reporter thinks he'd be a great editor and wants to be an editor because he thinks it's more interesting," Steve said. "And virtually every banker thinks he should be running something. I was not any different in that respect. I didn't have huge ambitions, but I had been a banker for ten years at that point, and there was clearly a vacuum of leadership at the firm."

  Fennebresque was a different story. He seemed nothing more than a (most un-Lazard-like) stereotypical 1980s "Master of the Universe" banker: the tall, lithe, articulate Fennebresque, with a wicked sense of humor and permanently slicked-back hair, had spent fourteen years at First Boston, where, he said, "Bruce was king the whole time," referring to Bruce Wasserstein, the firm's M&A rainmaker. But behind that facade was not only a remarkably decent person but also one whose confidence had been badly shaken during the market meltdown. He had been named one of First Boston's fifteen "franchise partners." But in November 1990, First Boston fired him. "I got fired partially because I had a big mouth and partially because the place was hemorrhaging and coming apart and they wanted some blood and I was senior blood so they took me out," he explained. He was forty years old, married, with kids--and terrified. When First Boston went private in 1988, he had been strongly urged to buy stock in the firm using a seven-figure loan from the company. The value of the stock quickly decreased, but the loan was still payable. He was in financial distress. "Everyone was dying," he explained. "Every morning you'd pick up the paper and read that Merrill Lynch was laying off five thousand more people. It was awful. A terrible time to find a job." He had been looking around for something new for only a short time but was increasingly depressed about his future.

  Thanks to some behind-the-scenes communication between his wife and Loomis's, though, Loomis called him that November and invited him to lunch at the China Grill on West Fifty-third Street. They discussed Fennebresque's plight. When he got home that night, he found a long handwritten letter from Loomis waiting for him. "The letter was unbelievably touching," he recalled. But he still thought there was little chance of his being hired at Lazard; after all, Lazard was an M&A shop, and Kim had focused on financing LBOs at First Boston--plus, he was unemployed. Two weeks later, Loomis called and told Fennebresque he had been speaking to Michel about him. "I wonder if you would like to come by and see him and spend half an hour?" Loomis asked. "I told him you were someone he should know and he's someone you should know." He told Loomis of course he would come by and see Michel but thought, "I need a courtesy interview like a hole in the head. I'm looking for a job and this is a bad time to find one and I can't waste my time. But Bill Loomis has been unbelievably kind and I'm going." As he walked across Fifth Avenue in front of Saint Patrick's Cathedral from First Boston's office on East Fifty-second Street, he ran into George Shinn, then ch
airman of First Boston. He greatly admired Shinn--"The only hero I've had in business," he said--but hadn't seen him in a few years. They had a conversation about Fennebresque's new forlorn status during which Shinn told him everything would be fine, even though things at that moment looked particularly bleak. "I was raised Catholic," Fennebresque explained. "I am no longer a Catholic, but as my wife says, 'Once you are a Catholic, you are always superstitious.'" He walked into Michel's office at the appointed hour "and I sit on his couch and he's sitting in his chair and there's a big, not elegant--especially for a man who is the personification of elegance--hardware store kind of clock on the wall. And I sit down at 4:30 and the clock starts going around and around and the next thing I know it's 7:05 and I say to myself, 'Here I am, an out-of-work stiff, spending two and a half hours with Michel Fucking David-Weill. What's this all about?'"

  After he told Michel up front he had been fired by First Boston (to which Michel responded, "Yes, I know"), they spent the rest of the time "talking about everything under the sun." By the time he got home, Loomis had already called to tell him that Michel wanted him to become a partner at Lazard but first he had to meet with Felix and Damon. He did that the next day. "I went in and spent fifteen or twenty minutes with Felix, and Felix, as he always is, was unbelievably gracious, which I always find nice, and I met with Damon, and he said, 'Don't worry, I've been fired a bunch of times, too,' and it was a very pleasant conversation. Next thing you know it was January 1 and time to report for work. The single happiest day of my life, I believe."

  The night before he started at the firm, he thought he should read the partnership agreement, a copy of which Loomis had sent him. Like so many others before him, he quickly discovered that the slim document gave all power to Michel, through section 4.1. "And it says such and such and such and such can happen only with the agreement of the partner in paragraph 4.1," he said. "Paragraph 4.1 this and paragraph 4.1 that--I nicknamed Michel that: '4.1.' And I remember the next day I walked into Bill's office, and you know me, I'm a bit of a wiseass and people don't know exactly how to read that, and so I walked into Bill's office and said, 'Who do I give my comments to on the partnership agreement?' And you could see the blood drain from his face: What the fuck have I done bringing this asshole in here?"

  Fennebresque said it took him all of "thirty seconds" to figure out the Lazard culture. "If it takes longer than that, you're really, really stupid.... It comes at you like a fire hose--it's cold and powerful and it didn't bother me at all. I think the human condition is that people like to be led." What he had figured out instantly, of course, was that Michel made all the decisions, it was his firm, and "we were all staff." The only possible exception was Felix, an insight he got when he went to a meeting with both of them shortly after his arrival and they started talking in French to each other. "He wasn't in the family," Fennebresque said of Felix, "but he gets to eat with the family."

  FENNEBRESQUE TOOK THE co-head of banking job, despite his misgivings. When Annik, Michel's secretary, called him the next day and asked him to come see "my boss," he joked with her: "Aah, it's not a good time for me." As he feared, Michel insisted he accept the job. "There was nothing about it I wanted," he said, looking back. "There was no glory to it. Nothing." With it, he moved his office right next to Steve's on the thirty-second floor of One Rock, and he received a raise. When he arrived at Lazard in 1991, his partnership percentage was 0.65 percent (worth about $860,000 that year), fairly modest as a comparative matter. (Steve's was closer to 4 percent, or some $5.3 million.) "Jeez," Loomis told him, "that's kind of low." Fennebresque concurred. At the end of his first year, Michel raised him up to 0.966643 percent. Now that he had been asked to become co-head of banking, he insisted on getting another raise. "Can you take it to 1 percent?" he demanded, with a smile. Michel gave him 1.1 percent, worth about $1.4 million in 1992.

  The first thing the dynamic duo had to absorb was the deaths of two of the more important senior partners in the New York firm: the sudden one of Jim Glanville, sixty-nine, as a result of injuries suffered during an automobile accident in Houston, and the not unexpected one of Tom Mullarkey, fifty-nine, the longtime consigliere, who had had a stroke in 1987. Although Mullarkey had returned to work after a few months, the effects of the stroke were obvious. He roamed the barren halls of the firm like a character out of a Dickens novel. He died of brain cancer at his home in Locust Valley. He had devoted the last years of his life to philanthropy, a not unnatural extension of his responsibilities at Lazard, where for years he had saved the partners from one near-death experience after another--from the numerous ITT-Hartford-related investigations right up through the sentencing of Robert Wilkis for his role in the Dennis Levine insider trading scandal. That task now fell to Mel Heineman, the former lawyer and associate on the ITT-Hartford deal, who had been Mullarkey's apprentice for years. He would have his hands full.

  For his part, Glanville was the last member still at Lazard of the original Gang of Four Lehman partners Michel had recruited in 1978. Glanville had been fairly productive at Lazard but could never adapt to the parsimonious culture. And his anti-Semitic bent rightly made him an enemy of Felix, never a good thing for anyone working at the firm. His most enduring legacy, it turned out, was the indefatigable Loomis, despite the recent turn of events. Loomis delivered the eulogy at Glanville's funeral. He said that Glanville had taught him that investment banking was about judgment and understanding people with "a little arithmetic tossed in." He acknowledged that Glanville did not fit well with the Wall Street community. "Fiercely blunt, Jim was a great intellect mixed with equally great emotions and encrusted with character." To illustrate, Loomis repeated one of Glanville's favorite stories: "There was a fella with a dry hole and some limited partners who weren't too happy. One of the limited partners said to him, 'You have to understand that for $10,000 I can get a New York lawyer to tie you in knots for five years.' And the Texas fella said, 'No, you have to understand that for $25 I can get a Mexican to blow your head off...right now.'" Glanville, Loomis said, understood the dry-hole business.

  Meanwhile, Corporate Partners, Lazard's white knight fund, was itself learning rapidly about the dry-hole business, an education that would shortly prove further detrimental to the firm's reputation. The fund got off to a rough start. It was originally slated to be $2 billion when the fund-raising began before the 1987 market crash, but Lazard decided to stop the fund in August 1988 at $1.55 billion, when money for such efforts all but dried up. Then Lester Pollack, the fund's chief executive, tested his investors' patience by not making the fund's first investment until Christmas 1988, more than a year after the money had been raised. Around that time, Corporate Partners announced a $200 million convertible preferred stock investment in Transco Energy, as part of Transco's acquisition of a gas transmission subsidiary of CSX. It turned out that Lazard had advised Transco, a Glanville client, on the acquisition and received a fee for its advice. This was the exact opposite of the kind of deal Corporate Partners said it was in business to do--first, the Transco deal with CSX was friendly, so no thwarting of an unwanted interloper was necessary, and second, Lazard had received an advisory fee. Pollack, though, denied any conflict of interest or deviation from the fund's strategy. "They asked us to consider this, not the other way around," he said. (Corporate Partners' actual investment in Transco ended up being $120 million; the fund made a $65 million profit on the deal.)

  The fund's next investment came six weeks later--$300 million of preferred stock, convertible into a 7.7 percent stake of Polaroid. This was more like it. Polaroid had been under attack from Shamrock Partners, Roy E. Disney's investment fund, which was trying to get control of the instant-film company. The combination of the investment by Corporate Partners, the sale of another chunk of stock to an employee fund, a stock buyback program, and a favorable court ruling led to Polaroid's successful rebuff of Shamrock. But it was a Pyrrhic victory, for Polaroid shareholders would have been better off with the Shamrock cash:
Polaroid filed for bankruptcy in 2001 after the advent of digital photography made its business untenable. Corporate Partners did well, though, realizing a $215 million profit on its Polaroid investment.

  More than another year passed before Corporate Partners made its third investment, in June 1991--$200 million for a 17 percent stake in Phar-Mor, a private Ohio-based deep-discount retailer (the fund ended up investing $216 million). The fast-growing Phar-Mor then operated 255 stores in twenty-eight states and had revenue of more than $2 billion. This investment, too, was outside the fund's stated mandate. Phar-Mor was private and claimed to need the new capital to grow, not to rebuff an unwanted suitor. From the outset, though, there was speculation that Phar-Mor actually needed the Lazard money to pay its vendors, who had been complaining about late payments from the company. Corporate Partners rejected the thought that Phar-Mor was financially distressed. "You should view our investment as a vindication of the company," David Golub, a vice president at Corporate Partners, said at the time. The Lazard partner Jonathan Kagan agreed to go on the board of Phar-Mor and quickly deflected questions about when Phar-Mor would go public--something other investment bankers had been urging the company to do--by saying that Phar-Mor "clearly chose to work with us because it's not eager to go public at this time." A year later disaster struck. On August 4, 1992, the company abruptly fired its founder, Michael Monus, and its CFO and announced that the FBI and the U.S. attorney had started a criminal investigation. Two weeks later the company filed for bankruptcy protection and announced that Monus and three other executives had systematically defrauded the company of more than $400 million "in a fraud-and-embezzlement scheme dating back to 1989." Corporate Partners sued, among others, Coopers & Lybrand, Phar-Mor's auditors, claiming that the accounting firm had participated in the fraud by certifying inaccurate audits. The head of Coopers at the time said Corporate Partners was "trying to shift the blame for their inadequate due diligence and judgment." Regardless of who was to blame, the fact remained that Corporate Partners had made a terrible investment, and all but $77 million of the $216 million was lost. The next investment, $83 million in Albert Fisher Group, a U.K. food distributor, also proved troublesome. The fund lost all but $37 million of the original investment.