For his part, Bruce found the schizophrenic discussions bizarre. One person who knows him well said, "Bruce describes it as like one of the most surreal experiences of his life. I mean, Michel comes to him. Michel proposes this to him. Bruce says, 'Well, what about all the partners in New York? I can work with Steve. I can work with Ken. I'll do whatever it takes to make it work with those guys.' Michel says to him, 'You don't need to. I don't care about those guys.' And this is one of the many times he says this. And, you know, Bruce is stunned when they all come back, after Michel saying it's all done, come back and say, 'No deal.' So it was kind of interesting."
Indeed, Mike Biondi, Bruce's longtime consigliere, doesn't even recognize the Lazard version of the brief courtship. Wasserstein Perella was doing fine financially, he said, and was growing faster than Lazard at this time. "The Lazard spin versus the reality of what happened there is 180 degrees different," Biondi explained in a conference room at Lazard, where, ironically, he is now a partner. According to Biondi, the process actually started with Felix, who, while leaving Lazard for Paris, wanted to have a hand in shaping the future of the firm. "Our perception was he didn't want the place turned over to any of the likely suspects who were here," Biondi said. "There was a lot of broken glass between him and Rattner and others, and in a very old Lazardian way. Felix preferred to turn Lazard over to somebody from the outside because, first, it would have been sort of his doing and, second, he had no confidence in the folks that he had lived with every day." With Michel's blessing, there were a series of negotiating sessions at the Manhattan offices of Wachtell, Lipton between Michel, Felix, Heineman, and Niemczyk (for Lazard) and Bruce, Biondi, and Clay Kingsbury (for Wasserstein Perella). Rather quickly, according to Biondi, there was a meeting of the minds among the executives that Lazard and Wasserstein Perella would combine in a no-premium "merger of equals" deal, where Bruce would become the CEO of the New York partnership. When the long-anticipated merger of the three houses of Lazard followed subsequently, Bruce would have a seat on the management committee of the merged global firm.
"The Lazard thing broke down in 1997 on one issue, as far as I'm concerned, and one issue alone," Biondi said.
It broke down because when you got down to talking about what it really meant that Bruce would be chief executive--in Bruce's mind and my mind--it meant that we would have the ability to pay people and promote people, and do all that sort of stuff, without interference, other than obviously having to have a budget and being part of the firm. But that Bruce was going to be the final decision maker for that in New York. And we felt very strongly that if we were going to fix the difficult culture that existed at Lazard and make it more team-oriented and get the synergy out of doing the thing, people had to understand that Bruce was in charge and that he was serious about running it in a collegial, team-oriented way. But Michel said, "No, I'm going to have a veto, of course, over all this stuff." And I remember very clearly having a heart-to-heart with Bruce and with this fellow Clay Kingsbury and saying, "It won't work. It just won't work. People are going to run around us, keep going to him, and it'll be a nightmare. We're better off on our own." And Bruce is a smart guy. He understood that himself, and that's why the deal died.
Biondi and Bruce believed that Michel then--very cleverly--went back to his partners, announced that he was going to pursue a deal with Bruce anyway, and then when he retreated--following the easily anticipated firestorm--Michel would look like he had listened to the demands of his partners. The story of the Lazard partner revolt was then leaked to the press as the reason for the deal's demise. "You've been around Michel for a long time," Biondi concluded. "Do you think Michel gives a shit about what the Lazard partners say? The deal was dead before that ever happened because we killed it."
Regardless of what really happened, over the next few weeks Michel's massive office on the sixty-second floor of 30 Rockefeller Center became, if not quite the Bastille, then the epicenter of the revolutionary fervor surging through the New York partnership. In the wake of that Friday afternoon partnership meeting, Michel had learned firsthand about the dangers of the First Amendment's guarantee of freedom of speech and peaceful assembly. There would be no more group discussions with the partners about seminal matters. Instead, Michel met one by one with key partners to try to reach a consensus about how the firm should be managed in the post-Felix era. "Michel likes to do things one on one," a former partner said. "He hated big meetings because people could gang up on him." Out of these discussions emerged the evolving view that Michel could no longer run the firm unilaterally. The argument ran that Lazard's historically flat structure, where basically everyone--from banking to asset management to capital markets to real estate--reported to him, since he alone decided partner compensation and promotion, no longer worked. The firm was now too big and in too many business lines for Michel to manage alone. Left unsaid by most of the senior partners--but now painfully obvious since the firm seemed so out of control--was that they believed Michel no longer had the skills, either intellectually or temperamentally, to run Lazard day to day.
Out of these tortured discussions, a combination of Danton, Marat, and Robespierre emerged in the form of Steve Rattner. Since Ken Wilson had taken over as head of banking in 1995, Steve had returned to deal making almost exclusively. With Felix having retired on April 30, Steve was now the firm's largest producer. Steve recalled: "Everybody said to Michel, 'Michel, you've got to do something!' Michel said, 'What?' Out of it all came me, and frankly I was probably the last man standing. A lot of people said, 'Well, I don't know. He's never run anything. He ran banking once, and it didn't work out great for everybody, but who knows?' What happened was that a number of people who mattered, including the asset management guys, Damon, and some of the senior bankers, said, 'Steve may not be perfect, he may not have enough experience to do this'--which I surely didn't--'but there's nobody else. If you don't get him to do this, we're really heading toward a cliff.'"
Steve had also won the support of Loomis, then still in San Francisco but on his way back to live in New York, who wrote Michel a long letter on Steve's behalf. The problem, though, for Steve and Lazard in his being drafted to run the New York partnership was that at that very moment he was also considering whether to take a job in the second Clinton administration. Steve and Maureen had been ratcheting up to the stratosphere their interaction with and financial support for the Clintons. He raised millions for Clinton in 1996 as co-head of the Wall Street fund-raising effort. Soon after Clinton's second-term inauguration and as the revolutionary fervor inside Lazard was growing, Steve learned he was being considered for a "reasonably interesting job" in the second Clinton administration. He wouldn't say what job he had been offered, because he did not want the person who ended up with it thinking he or she had been second choice. "I wasn't going to be secretary of the Treasury" is all that he would allow. "It was a job that, but for this, I would have taken. Six months earlier, I was doing my banking thing, and the next thing I knew, I was thinking about either Washington, D.C., or being something at Lazard."
Having been nominated by his partners to run New York, Steve began a "long series of tortured negotiations" with Michel "over what I would do." He said he was not planning to accept the new Lazard job "without some authority" from Michel to actually run New York. At one point, in the middle of these negotiations, as a symbol of an emerging detente between the two men, Felix asked Steve if he wanted his office. Steve told him no--but what he really meant was "not yet." The negotiations between Michel and Steve produced a "kind of vague" agreement between them that was never formalized into a contract, although "we did actually write some stuff down and sign it," whereby Steve would participate in the meetings with Michel where individual partners received their annual profit percentage--a role Loomis had desperately wanted but Michel never before permitted. A new executive committee was set up, for which Steve both set the agenda and chaired. Steve also ran the weekly partners' meetings even if Michel atte
nded. He decided to move into Felix's office. "The kinds of things that would cause people to say, 'Well, this guy probably does have some responsibility,'" Steve explained. The one quirk was what his title would be. Steve suggested to Michel that he be president and chief operating officer of New York, with Michel being chairman and CEO. But Michel objected. This was one of his "eccentricities," Steve explained. Michel told Steve, "You can't be president, because in France the president is the one who does all the work and my friends will all think I've retired and I can't have that." The two men agreed that Steve would be deputy CEO of New York, of all things, after Steve confessed that he cared more about what he would be able to accomplish than about his title. One partner at the time said that Michel viewed Steve as "a terrific rainmaker, very well organized, disciplined, and ambitious. He'll do some good things; he'll be a good leader. He's the most able of this whole group. And maybe I can control him, and if not, I can always get rid of him. Michel viewed Steve as a convenient person at the moment but certainly not with the potential of thinking that Steve could be somehow a successor in the long term."
On May 22, 1997, the firm held a rare press conference to announce the new management team. The night before the announcement, Michel hosted a cocktail party in the New York office in honor of Felix's retirement. Michel made a speech. Felix made a speech. "They gave me a vase or something like that," a still underwhelmed Felix recalled eight years later of that perfunctory event. "No, actually, they gave me a glass eagle, a U.S. eagle to take to France." Lazard also gave Felix a pension that paid him $1 million annually for life, the consideration for which was Felix's signature on a three-year noncompete agreement should he decide to return to investment banking after coming back from Paris. The Times reported on May 23 that Steve's appointment as deputy chief executive of Lazard Freres & Co. meant that he was "inheriting" Felix's "mantle as the firm's lead banker after several months of fierce internal squabbling." This observation, while a slight exaggeration, was a fair reflection of the turn of events. Steve would run the firm day to day and report directly to Michel. He would manage the New York partnership with the help of his four new vice chairmen, Ken Wilson, head of banking; Damon Mezzacappa, head of capital markets; and Norm Eig and Herb Gullquist, the co-heads of Lazard's $47 billion asset management business. Steve Golub was named chief financial officer--the first time that position existed. Michel, Steve, Wilson, Mezzacappa, Gullquist, Eig, Golub, and Mel Heineman, the firm's chief administrative officer and general counsel, formed the New York firm's new management committee.
"We wanted to both strengthen and broaden the base of management of the firm in New York," Michel said. At the press conference, Steve said of Michel, "Our goal is to take off his shoulders some of the things he has had to worry about." Michel explained that while the new management committee would strive for "very consensual" decision making, he retained his veto over any of its actions. Michel's personal ambition would be to continue to get the three houses working more closely together. And then, of course, he said, "The term 'Trinity' has been mentioned. We have to be one, and we have to be three. What is extremely gratifying in the three Lazard firms is how much the partners believe that our concept is not only viable but is going to make us even more successful."
After the press conference, Steve and Felix repaired to Felix's "usual conspicuous table" at the "21" Club for a very high-profile reconciliation lunch. Newsweek ran a short piece about Steve's promotion and wondered if the "fair-haired banker" was now in position to succeed Michel as well. Steve declined to make himself available to be interviewed. Instead, he issued a statement: "These changes are about the firm and not about me. We are moving forward as a team." Michel, though, as usual, felt the need to take his new deputy CEO down a peg. "Mr. Rattner is in an important position toward being part of the succession planning," he said. When asked by BusinessWeek if Steve was now heir apparent, Michel said, "Until things exist, they don't exist. He certainly is in line for that responsibility." Added another keen observer of the Lazard realpolitik, "Michel owns this firm. He runs the firm any way he wants." For BusinessWeek, Steve decided to comment about his hopes for democratizing the firm and Michel's role in that transformation: "Michel will be a little less the emperor and a little more the president." Felix also chimed in. "This isn't an industry that's appropriate for the superstar approach anymore," he said. "And the firm is a lot more diversified, a lot bigger, than when we ran a superstar business."
Despite Felix's view that the days of the Wall Street rainmaker were coming to a close--just as he seemed to be leaving the scene--Michel, incredibly, disagreed. He still longed for a superstar. The Newsweek article revealed that after the Wasserstein merger failed and as the negotiations with Steve were in full bloom, a group of senior Lazard partners, including Steve, approached the veteran deal maker Bob Greenhill about coming to Lazard as the firm's senior partner. Greenhill, who had spent thirty-one years at Morgan Stanley, including some time as Steve's boss there, had started his own eponymous firm in January 1996. The idea was for Greenhill to merge his small firm into Lazard and thereby bolster the senior ranks in the wake of Felix's departure.
Steve was fine with this. "I was the one who went to Greenhill, so it wasn't like I had any pride of place," he said. "I was willing to do almost anything to try to make it better for the firm." Greenhill turned down Lazard. In the Newsweek article, Michel defended his efforts to get Wasserstein and Greenhill, even though the efforts would have frustrated the aspirations of his younger partners. "As always, the difficulty is to get enough wind behind the sails," he said, adding in his convoluted logic that these efforts to recruit big-name outsiders had "helped provide the wind" to support Steve's ascension. Michel told Institutional Investor about the effort with Bruce, "The negotiations broke down because it proved impossible to combine the two firms without spending considerable money. If Mr. Wasserstein and a reasonable number of his colleagues had joined individually, we would have been very happy." He told Fortune about his effort to recruit Wasserstein, "Of course you can never have enough top talent." He stressed that Steve's selection was the result of a "collegial approach" where "certainly there have been no winners or losers."
But of course that wasn't true. Any power vacuum that is filled inevitably requires a wrenching political struggle among the possible contenders. Even though Michel didn't care to admit it, Steve's appointment as deputy CEO of Lazard Freres & Co. caused no fewer ripples. The most disaffected partners were those closest to Felix--Ken Wilson, Ira Harris, and Jerry Rosenfeld. All three had worked together at Salomon Brothers and had been heavily recruited to Lazard by Felix. And all three had been successful and productive at Lazard. With Felix gone and Steve, in effect, their new boss, there were many who felt it was just a matter of time before they followed their mentor out the door.
The bitter pill was probably toughest for Wilson to swallow. He had been running banking for two years, and at most other firms that would have meant he was Steve's boss. So with Steve's promotion he would now be reporting to someone who, theoretically, had been reporting to him. But the lines of authority at Lazard were never so clear. With Michel still making the compensation decisions alone, the job as head of banking was more titular and administrative than one with any real authority, especially when it came to the compensation of and authority over other partners.
For instance, without consulting Wilson, Michel asked Steve to do a study of the efficacy of Lazard's small capital markets business then, as ever, run by Damon Mezzacappa, Steve's ally and friend. Many Lazard partners believe Michel asked Steve to undertake the study as a way to help resurrect Steve's career at the firm. "Damon was in bed with Rattner, and so, not surprisingly, the study concluded that capital markets was pretty important when everyone except the brain-dead knew there was nothing there," said Wilson, who preferred to drastically curtail the department. "As Felix used to say about Lazard's capital markets business, 'Why don't we just stand on the street corner and sell
cocaine?'" And while Wilson was himself an important producer of business, Steve was an even bigger producer, so in the Darwinian world of Lazard that gave him more overall leverage with Michel.
And Michel had decided for Steve. "It became clearer that there were two camps in the firm, two factions, two people, and Michel had to make a choice between either Rattner or myself," recalled Wilson, a former officer in the army special forces in Vietnam who used to walk up to the junior bankers at Lazard and ask them, "Is your shit tight?" "And, you know, I, to be honest, was losing a little bit of my ardor to want to have a dogfight, because, if anything, it was going to be a Pyrrhic victory. You know, Michel wasn't gonna go anywhere, and it dawned on me, as they used to say in the army, there's always the 10 percent that never gets the word." He remembered the jockeying being intense. "There was swirling, infighting, jostling," he continued, "and at a meeting in Paris that I went over for, Michel asked me to come by to see him. And I spent some hours at his house, and he was trying to work out a way that Rattner and I could work together, and, you know, to be honest, my heart was really at this stage not in it because I didn't see it leading to anything. Felix was gone. It was a personal kind of thing to me in terms of style and what he presented. Michel was gonna go nowhere, so that"--here he sounded very much like Bill Loomis--"you would have all the responsibility but none of the authority."
As one of the very top bankers worldwide who specialized in working with financial institutions, Wilson was acutely aware of Lazard's increasingly more difficult competitive position. He strongly advocated for significant strategic changes at the firm--among them folding the capital markets business, stopping the writing of equity research, terminating distressed-debt trading, and refocusing the M&A business on six or seven industries, eschewing the generalist Lazard bankers. "I felt Lazard really was getting a little too big for the space," he said. "It needed to be more crisp. Needed to be more focused. The quality needed to improve. I had tried to recruit some good people, and they would be turned off by what a deeply political place it was." Wilson argued that Michel and his family's annual take of the Lazard profits--then approaching 40 percent when all the various pieces were added together--made it nearly impossible to recruit the best bankers because there simply wasn't enough compensation left to go around when one nonproducer was taking so much out himself. He felt Michel's take should have been closer to 2 percent. He also would never have let Felix leave. Obviously, the kinds of changes Wilson was advocating were too revolutionary for Michel. "There was zero interest in this from Michel or the core group of partners loyal to him," he explained. "Michel was so wedded to the status quo because he felt it was a manifestation of his genius. Michel was definitely more comfortable with Rattner or someone more predictable."
The last tycoons: the secret history of Lazard Frères & Co Page 61
