CHAPTER 16

“ALL THE RESPONSIBILITY BUT NONE OF THE AUTHORITY”

With Édouard gone and Felix soon to be, there was the usual speculation in the press about who would fill Lazard’s leadership vacuum. But inside the firm, surprisingly, a certain contentment reigned. Nineteen ninety-six had been the firm’s best year ever, financially, with pretax net income worldwide of $379 million, up from $357 million the previous year. Édouard had not been particularly focused on being a banker anyway, and his presence was more disruptive than anything else. He would not be especially missed. Felix’s departure, meanwhile, though a big loss for sure, was also no surprise.

Indeed, rather than everyone bemoaning the turn of events, there was a sense that now was the time for the younger generation of partners to shine. Soon after Clinton nominated Felix and it was clear he was going to leave the firm, many of the senior partners, led by Steve, demanded that Michel meet with them to begin to figure out a way to loosen his autocratic grip on Lazard. “We demanded that he attend,” one partner told Euromoney, “and in effect dragged him into the room and said we wanted him to know what we thought. We said: ‘This is no way to run a railroad—it cannot go on like this!’”

The collected partners had three points to make to Michel: First, he should explain what he intended for Lazard’s future, as there had been numerous rumors about his trying to once again recruit Bruce Wasserstein, then CEO of Wasserstein Perella & Co., to Lazard. The opposition to Bruce was particularly intense. “You don’t understand who Bruce is,” one banker recalled Michel being told. “He’s not at all consistent with our firm’s culture.” Second, the partners wanted to end Michel’s secretive machinations, whether cutting separate deals with individual partners or bringing in his son-in-law Édouard Stern and acting as if he were the anointed successor. Third, the partners expressed doubts about Michel being able to continue to run the firm single-handedly, a tack that during the previous decade had led to lax controls and unprofessional behavior. (The firm still had to settle the two pieces of the municipal finance scandal, which promised to be costly.)

Michel had another plan, though, just as some of his partners feared. One day around this time, while having lunch at the “21” Club, he saw Wasserstein sitting across the dining room. Bruce’s office at Wasserstein Perella was just a hundred yards west of “21,” and the restaurant had become his cafeteria. For rainmakers like Felix, Steve, and Bruce a power lunch at the Four Seasons, “21,” or that ilk was a chance to show off their plumage. They tended to pick a place, and then become regulars, to ensure appropriately fawning behavior. At these spots, one wag observed, “the pecking order is measured not by what you eat but rather with whom you eat and what direction you face.” Another favorite lunch spot for the nonboldface Lazard partners was the secretive Rockefeller Center Club, founded in 1934 as part of the Rainbow Room complex on the sixty-fifth floor of 30 Rockefeller Center (now three floors above Lazard’s offices). This was the ultimate—a scrumptious buffet of gourmet salads, fresh shrimp, and filet mignon, an uninterrupted view south of lower Manhattan, and the private companionship of numerous corporate CEOs and Wall Street bankers and attorneys. There was no bill or menu, just a warm greeting from the maître d’ and the quiet comfort of exclusivity. Maybe the appeal of the Rockefeller Center Club was nothing more complicated than Fitzgerald’s observation of the “consoling proximity of millionaires.” But Michel rarely ate outside the firm. Not only was such theater not his style, but also he had the best French chef in New York on his premises, so why bother going out? Indeed, one of the best places to dine on the planet may have been the quiet wood-paneled dining room at Lazard’s office in Paris, on the Boulevard Haussmann. There, white-jacketed waiters breathlessly served the finest French wines and cuisine to a very fortunate few. And besides, Michel’s lunchtime appetite often ran to nothing more sophisticated than a baguette slathered in French butter and salt.

That rare day at “21”—so the story goes—Bruce came up to Michel, and the two men spoke briefly. Bruce had confirmed an idea Michel had been mulling. When Michel came back to Rockefeller Center, he walked into Felix’s office and announced: “We’re going to try to merge with Wasserstein Perella.” Felix was stunned—and appalled. While he thought there may have been some logic to hiring Bruce Wasserstein, Gary Parr (a highly regarded financial institutions banker), and a few other talented Wasserstein Perella bankers, with Lazard still under the cloud of ongoing federal investigations into its municipal finance department, a merger between the two firms—even if it could be negotiated and announced would never close. There was also the concern that the majority of the Wasserstein Perella bankers weren’t up to Lazard’s standards, and that even Bruce himself was not cut from the traditional mold of a Lazard banker, to say nothing of the fact that a full-blown merger with Bruce’s firm would be a total slap in the face to the aspirations of the younger Lazard partners who had been waiting patiently for the very moment, now at hand, when Felix’s departure, like the felling of a mighty old-growth Douglas fir, would allow a little sunlight to hit the forest floor. Furthermore, the word was that Wasserstein Perella had not been making any money. Add to that the fact that Lazard had never, ever grown through acquisition, and there were any number of compelling reasons why Michel’s brainstorm was stillborn. Felix told Michel, “You can’t merge with Wasserstein Perella, you know. There’s 120 people or something like that.”

But Mr. 4.1 pushed ahead anyway. A small group comprising Mel Heineman, the general counsel; Steve Golub, a partner who had once been the deputy chief accountant at the SEC; and Steve Niemczyk, a young partner who worked for Wilson in the FIG group, were secretly dispatched to review the books and records of Wasserstein Perella & Co. Felix and Ken Wilson were kept abreast of their findings. Steve Rattner was kept in the dark. “Felix was deeply skeptical,” Wilson remembered. “When you looked at the business that Wasserstein was doing, I think their average fee was like $250,000. I mean, it was a lot of tiny deals, marginal people and offices. Their capital markets unit was a joke.” Wilson said the due diligence revealed that the firm was running out of money and had little in the way of backlog or receivables. “They were a bunch of turkeys,” he said. As word of the potential merger started to circulate around the firm, Wilson recommended to Michel that a partners’ meeting be held to “get this on the table.” On a Friday afternoon, Michel invited only a subset of New York’s most important partners to an impromptu meeting in a conference room on the sixty-second floor of 30 Rockefeller Center to discuss the possibility of a merger. “There was good attendance,” Wilson remembered, a wry little smile forming on his face. Another partner at the meeting said of Michel, “It took a two-by-four piece of wood to gain his attention, but at some point he woke up. Like all of us, he tried to push things under the rug. But sooner or later he became a realist. He realized he could not avoid the fact that he had a problem.”

Michel kicked off the meeting by talking about the potential merger and about the cost savings that could result. But mostly he spoke about Bruce as the next Great Man of Lazard. Michel explained that Bruce had always loved Lazard and had conceived of Wasserstein Perella in Lazard’s image. This was a chance to get Bruce, Michel told his partners. Incredibly, Michel had been so utterly indifferent to his partners’ hopes and dreams that he dashed them completely by proposing this combination. Ken Wilson recalled that Michel’s “views were so far from reality that it was time to go around the table” to get input from the other partners. Jerry Rosenfeld, who had been seated next to Michel, spoke first.

Wilson remembered Rosenfeld’s comments as being quite blunt. “So he turns to Jerry,” Wilson said. “Jerry says, ‘This is the dumbest fucking deal I’ve ever heard of. There isn’t a single one of those people we would ever hire. We would never take them off the street. It makes no fucking sense.’ And the comments went downhill all the way around.” Steve Rattner recalled that “one by one, everybody just laid into Michel and just let him have it right between the eyes.” All parties remembered that after the negative consensus had formed—a rare showing of unity of the partners against Michel—the Sun King backed down. “Then I will not go forward,” Michel said quietly. And just like that, the Wasserstein deal was dead. But despite this victory, to some partners the Rubicon had been crossed. “In response to these comments that Michel had made at the outset about the fit and everything else, they were just so far from reality that his credibility was shot,” Wilson said. “And Bill Kneisel, [a partner] who I recruited [from Morgan Stanley], a good guy—and at the end of the meeting, I walked out with Bill. He turned to me, he said, ‘You know, Wils,’ he said, ‘this emperor has no fucking clothes.’ He said, ‘I’m gonna watch a lotta football games with my son this fall, and I’m out of here.’” (He left soon afterward and returned to Morgan Stanley.) Wilson recalled that Kneisel’s reaction was typical. “The average foot soldier left that meeting saying, ‘What the hell is going on?’ There was no logic for it. And when Michel tried to articulate it, it just sounded awful.”

Steve was furious with Michel about the Wasserstein gambit. Not only had Michel not explicitly told him about what was happening; Michel denied there was anything to the rumors Steve had heard even after he went into Michel’s office to ask him. “The next thing I know, he’s locked in meetings with him,” Steve explained. Felix, who was leaving regardless of the outcome, remembered the meeting as initiating “a real revolution inside the firm.” Independently, Steve used the exact same word to describe what happened as a result of the confluence of Felix and Édouard leaving, Bruce being approached secretly, and the mushrooming cost to the firm of the municipal finance scandal (eventually the firm paid a whopping $100 million to settle all aspects of the scandal). “This was a revolution,” he said. “This was not Michel’s idea. Michel did not want this. He agreed to it grudgingly, but it was a revolution.” The news of the Wasserstein discussions and their abandonment was leaked, without color, to the Wall Street Journal, which published the story on May 2, the day after Édouard left the firm.

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 détente 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 attended. 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 Frères & 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 Frères & 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.”

There are partners who believe to this day that Michel’s inability to find a way for Rattner and Wilson to coexist peacefully and productively was one of his larger mistakes. Wilson, many felt, had innate leadership qualities: intelligence, charisma, a ribald sense of humor, perspective, and a true understanding of Wall Street’s competitive dynamics and Lazard’s place in them. He had run banking very well for two years. “The fact that Ken Wilson and Rattner were under the tent and Michel didn’t find some way to make it work, and basically chased them away, it’s unbelievable, it’s sinful,” one partner said. Another partner chalked up Michel’s refusal to let Rattner and Wilson run New York together as yet one more piece of irrefutable evidence of Michel’s demented Machiavellianism. “I think he fundamentally decided that Ken was a good leader and that if he left it with Ken, it was gonna be pretty goddamn difficult to ever get it back again,” he said. “If he chose Steve, Ken would leave. If Ken left, he’d have Steve. And Steve would burn out. And then he’d get it completely back again, full control. I think fundamentally that’s what he did.” Still, at the press conference announcing Steve’s appointment, Wilson played the role of the loyal soldier. He agreed, for the time being, to continue to run banking and to report to Steve. He had also been appointed a vice chairman of the firm.

Jerry Rosenfeld, whom Wilson used to blow cigar smoke on when they shared an office at Salomon Brothers, was also more than a little irked by Steve’s appointment. He had been having a good run—though some of his partners felt it to be greatly exaggerated—in the mid-1990s, most notably for his role in bringing in and executing the IBM-Lotus deal, among many others, and he had been an important and high-profile supporter of Wilson’s in the race with Steve. But with Wilson having been bested, Rosenfeld began to think about what he might want to do next. He had always had an interest in private-equity investing. Indeed, when he decided to leave Salomon Brothers years earlier, he had tried to partner with Xerox, one of his clients, to set up a private-equity fund. But that did not work out. Instead, he went to Bankers Trust, now part of Deutsche Bank, to try to lead a private-equity and leveraged-finance effort there. With Bankers Trust more intent on becoming a powerhouse in derivatives rather than in private equity, Rosenfeld, with Felix’s help, jumped to Lazard. He became very friendly with Édouard Stern, and their friendship blossomed. Theirs was an exceedingly odd match. On the one hand was Stern—the ruthless, flamboyant, smoldering, impulsive, bizarre demi-billionaire—and on the other Rosenfeld, the low-key, shaggy-haired, almost sheepish, cerebral Ph.D. in applied mathematics, former college professor, and McKinsey consultant. He nearly went to work with Stern at IRR but decided the strange dynamic between Michel and Édouard made it inadvisable.

Soon after Rosenfeld reached this difficult decision, Michel and Steve announced, in November 1997, his appointment as head of banking, replacing Ken Wilson immediately. Like all those before him, Wilson had grown tired of the administrative headaches of running banking without any commensurate authority. So in the wake of Steve’s appointment, he told Michel he wanted to give up the position. He remained a vice chairman, a member of the management committee, and the leader of Lazard’s Financial Institutions Group. Rosenfeld also was appointed to the firm’s management committee, which may or may not have been a reward for not joining Édouard. But from the start his heart wasn’t in the job. “And so I got to be head of investment banking, for whatever that was at Lazard,” he said. “It was all right. It was fine. It was good. I tried to help people. It was a nice thing. Whatever.”

The effort—such as it was—to appease the Felix loyalists in the wake of his departure was an utter failure, a fact that became painfully apparent after Lazard paid its partner bonuses at the end of 1997. Ira Harris, then fifty-nine, was the first to leave, in January 1998. “It was total frustration with Michel David-Weill and unhappiness with the way the firm was run,” Harris told Bloomberg Markets in February 2005 about why he quit Lazard. Then, two months later, Ken Wilson left to become a partner at Goldman Sachs, one of Lazard’s chief rivals, as head of its Financial Institutions Group. Goldman was in the throes of its massive internal debate about going public. When the Goldman IPO did happen, in November 1999, many of the longtime partners were worth, on paper, as much as $350 million. Wilson, who had been at Goldman all of eighteen months prior to the IPO, was said to have received stock worth around $50 million after the IPO. Several of his former partners thought the astute Wilson had made one of the best trades ever. (Wilson’s Goldman stock is worth closer to $150 million today.) Two weeks after Wilson left, Rosenfeld announced his departure to run a new, $600 million private-equity fund with all the money coming from the newly merged Charlotte, North Carolina–based banking behemoth NationsBanc Montgomery Securities. He had been head of banking at Lazard for four months.

The loss of Felix, Ira Harris, Ken Wilson, and Jerry Rosenfeld in a twelve-month period was a major blow to Lazard’s M&A business, from both a prestige and an economic standpoint. Even though these departures could have been anticipated, the actual loss of these highly productive bankers, from a firm where partners rarely, if ever, left voluntarily, was a major challenge for Rattner and Michel to confront. Steve spent several weeks after Rosenfeld left in one-on-one meetings with top partners reassigning his duties. “The beginning of a period of generational change is always a very difficult period,” Michel said. “But change in itself is always pretty good.” Instead of replacing Rosenfeld with one person, Michel and Steve decided to appoint a new committee to oversee banking at the firm. Along with Steve, who was its head, the new committee consisted of Bill Loomis—marking the start of yet another of his resurrections—and the newcomers Ken Jacobs, a young partner who had been recruited by Agostinelli from Goldman in 1988, and, even though he didn’t get along with Loomis, Bob Lovejoy, a former M&A partner at Davis Polk, the Wall Street law firm.

The firm also announced it was ratcheting up its principal investing activities, both as a nod to its legacy under André Meyer and, more important, as a way to increase partner compensation at a time when other firms offered their senior bankers not only private equity but also stock options and restricted stock. Since it was not a public company, Lazard could not offer stock or options to its bankers and so had to figure out another way to increase compensation to prevent them from being lured by other firms and to attract new partners. In addition to Jupiter Partners, which Édouard had started, there was now LF Capital Partners, $130 million of capital for minority stakes in smaller companies; a $500 million Singapore-based Asia fund; the $100 million Lazard Technology Partners fund; and a second $1.5 billion real estate fund, following the success of the first $810 million fund. Steve had arranged for the hiring of David Tanner, the son of a longtime friend, the investment banker Harold Tanner, to lead a new—still-to-be-raised—$750 million private-equity fund that would focus on bigger deals. Tanner was to work with Thomas Lynch, who came to Lazard from the Blackstone Group. As for selling the firm or taking it public, which would have been another way for the Lazard partners to get increased compensation, Michel told the New York Times, “I will never do it.”

Not all the news on the personnel front after the 1997 bonus season was bad. The firm, at Michel’s insistence, was able to make the very important hire, in February 1998, of Gerardo Braggiotti, the former second in command at Mediobanca, the influential and secretive Italian investment bank that Lazard had been close to since the 1950s, to head up the firm’s investment banking business in Europe, outside of England and France. He also became one of the very few men to hold a partnership stake in each of the Paris, London, and New York firms. Along with Steve and David Verey, Braggiotti was named a vice chairman of Lazard Partners, the holding company with financial and ownership interests in the three firms. Braggiotti moved into Stern’s old office at Lazard in Paris, next to Michel’s. Even the furniture was the same. As he did with many Paris partners, Michel asked Braggiotti to sign an undated letter of resignation, so that it would be easier to fire him in the future. Understandably offended, Braggiotti signed the letter with that day’s date on it, suggesting he was willing to resign before even starting at Lazard. He hand-delivered the letter to Michel. That was the last he ever heard from Michel on that topic. “I am starting to see the outlines of the next generation of the Lazard group,” Michel said of Rattner, Verey, and Braggiotti, who were all in their forties.

HIGH-PROFILE HIRES and departures—and those still rumored—aside, Steve now had the responsibility of a lifetime running the New York partnership, which still accounted for nearly half of the profits of the Lazard entities worldwide. By all accounts, he could not have been less interested in whether he was Michel’s anointed successor. There was simply too much to do to worry about that. He took as his immediate mandate the task of dragging the firm into the late twentieth century after decades of Kremlinesque ossification. Like Gorbachev in the Soviet Union, Steve was determined to initiate a period of glasnost. “His job right now is to lead an organization,” his friend Arthur Sulzberger Jr. explained, “and you don’t do that by putting yourself up front. The story is Lazard, not Steve Rattner.”

There were many challenges at first, not least of which was dealing with another piece of the still-unfolding scandal in the firm’s municipal department. On November 21, 1997, the SEC charged the former Lazard partner Richard Poirier with fraud in connection with secret payments, totaling $83,872, made by Lazard—at Poirier’s direction—to a consultant, Nat Cole, who then gave half the payment to a banker from Stephens Inc. who was, theoretically, an independent adviser to Fulton County, Georgia. The Stephens banker, in turn, made sure that Lazard won mandates to underwrite both a 1992 bond offering for Fulton County and a 1993 bond offering for the Fulton-DeKalb Hospital Authority. The SEC also alleged that Poirier was reimbursed by Lazard for political contributions, totaling $62,500, that he made to the campaigns of two governors at the same time he was seeking underwriting business from their states. The government also charged that Poirier had been conducting business similarly in Florida. The SEC’s charges were reminiscent of the malfeasance that Ferber committed. The SEC also charged James Eaton, a former vice president at Lazard, with having a role in the scam. Eaton settled with the government by paying a $15,000 fine and agreeing to never again work in the securities industry. A week later, the U.S. attorney in Atlanta indicted Poirier for wire fraud and conspiracy, among other crimes. That same day Lazard reached a settlement with both the SEC and the U.S. attorney’s office in Atlanta with regard to the actions of Poirier and Eaton. Mel Heineman, Lazard’s general counsel, explained that the settlement specifically recognized that the misbehavior was “limited to” Poirier and Eaton and “was hidden from the Firm.” Heineman continued, “The settlements also make clear the Government’s view that Messrs. Poirier and Eaton caused numerous false and misleading invoices to be submitted to us, thereby misappropriating the Firm’s funds to further their improper activities.” Notwithstanding the firm’s apparent absolution, Lazard agreed to pay $11 million to the government plus “restitutionary payments of the profits earned on the transactions at issue.”

With only the yield-burning piece of the municipal scandal left to be resolved, Rattner dispatched Steve Golub, the new CFO, to clarify, if possible, the firm’s famously opaque accounting system. No one ever really knew, perhaps not even Michel, whether individual business lines made money or not. For some reason, the firm’s accounting was done on a cash basis—recognizing revenue and expenses as actual cash either came in or went out—throughout the year, and then changed to an accrual basis—recognizing revenue and expenses when contracts were signed but before the cash associated with them had been received—at the end of the year. This worked to Michel’s advantage for years since, under the cash basis, he paid partners based only on the cash received by year end, not on the engagement letters signed for deals not yet closed. Rattner and Golub sought to change the old accounting methods. “None of it made any sense,” Rattner said. “It was beyond all description.” Worse, the capital markets people thought they were carrying the firm. The bankers thought capital markets was a total wasteland. Asset management was said to be providing half the firm’s profits. But no one really knew. With Michel deciding how much or how little his partners were paid each year, knowing where Lazard’s profits came from was not all that important, but if you had in mind actually managing the firm, then having some idea which departments made money and how much was close to essential.

Steve asked Golub to figure out the accounting and to see if it was even remotely possible to get the firm to report based on generally accepted accounting principles, or GAAP, as required by the SEC for public companies. “The stuff that was going on was breathtaking,” Rattner recalled. “Not crookedness, but stupidity.” One “tiny” example Golub found of the “stupidity” was that Lazard’s joint venture in Singapore with the two other houses was set up as a corporation, rather than a partnership, so that the annual million-dollar losses were trapped there and did not flow back to the United States to offset taxable gains. “We got no tax losses, and it was just $1 million or $2 million a year being pissed away for nothing,” he said.

A far more egregious offense, according to Steve, was taking place in Lazard’s storied real estate department. Since the days of André Meyer, real estate principal investing and real estate M&A advisory had always been important businesses for Lazard. Lazard and André also nurtured one of the smartest—and least known—real estate minds on Wall Street, Disque Deane, who under the careful watch of André set up in the 1960s Peerage Properties, Lazard’s real estate company, and then founded Corporate Property Investors, or CPI, one of the nation’s first real estate investment trusts. Over time many of Lazard’s real estate investments were funneled into CPI, including Peerage, before it was established as its own entity, making Deane a very wealthy man. He also was, according to Felix, Felix’s “blood enemy.” He had once, in the 1970s, been considered as André’s successor to run all of Lazard. “You may ask,” Deane said in the late 1970s, “why I wasn’t more interested in Lazard. Why I didn’t bow down to André Meyer and do his bidding and run the firm. The answer is money. When I came to Lazard in 1964 I had a cash net worth of $2 million. What do you think my net worth is today? Take a guess. It’s $70 million. Felix’s, I’d say, is $5 million.” These days, Deane’s net worth—he is still happy to convey—is closer to $1 billion, after having given away more than $150 million. He owns 80,000 hectares of land in Bolivia, some of which is mined for oil and some of which is agricultural. He also owns the six-thousand-unit Starrett City complex in Brooklyn, which was recently put up for sale at around $1 billion. Deane is also the man who ran into David Supino walking on Madison Avenue in the early 1990s, stopped, grabbed his former partner’s lapels, inquired, “David, do you understand the power of compound interest?” and, without waiting for an answer, walked briskly down the sidewalk. In August 2004, though he is not an economist, Deane wrote a letter nominating himself for a Nobel Prize in Economics. He also still believes that Michel reneged on an ownership stake in Lazard he had promised to him.

After CPI was spun out of Lazard, Michel decided the firm needed to return to the real estate business. So he lured back to One Rock two of Deane’s partners at CPI, Paul Taylor and Harvey Schulweis, a bearded former accountant who learned about real estate by auditing development companies. Taylor and Schulweis shared the responsibilities of running Lazard’s real estate efforts, until the business was split, with Taylor taking charge of LF Property Investment Co., which invested in existing commercial properties, and with Schulweis running Lazard Realty, a riskier and more adventurous enterprise designed to develop empty lots or find downtrodden buildings and fix them up. The two men were not close, and that led to some spectacular real estate blunders.

In 1981, Schulweis masterminded the purchase of three old adjacent factory buildings in Long Island City, just over the Fifty-ninth Street Bridge from Manhattan’s East Side. The original idea was to renovate the buildings and lease the space as offices. But with demand for office space sluggish, Schulweis came up with a new plan: the creation of the International Design Center, a massive redevelopment project, the idea being that interior designers and other businesses involved with home decorating would relocate from Manhattan to this new complex in nearby Queens. The cost to purchase and renovate the buildings was estimated at $150 million, with Lazard putting up $30 million. Schulweis’s rival Taylor said of the IDC from the outset: “We should have put the key to the place in a desk.” The project was a total disaster. Lazard fired Schulweis and lost a bundle on the IDC.

Art Solomon, who came to Lazard from Drexel in 1989, oversaw both the real estate advisory business and the billions of dollars in private-equity funds devoted exclusively to real estate. He had reported directly to Michel. Now, following Steve’s appointment as deputy CEO, Solomon, a former CFO of Fannie Mae with a Ph.D. in economics from Harvard, reported to Steve. And he was in no mood to be brought into Rattner’s fold. Solomon’s first real estate fund, started in 1996 with $810 million, did well, earning annualized returns in excess of 25 percent. This led to the successful raising of the second fund, at $1.5 billion. Taking a page from Deane’s book, Solomon attempted to engineer a spin-off of the Lazard real estate business in early 1999. He also wanted to recut his deal with the firm to get a bigger slice of the pie. Steve, not taking kindly to these moves, retaliated by telling Solomon he wouldn’t consider it until he understood better how the real estate business at the firm had been operated.

As part of getting that understanding, Steve asked Golub to undertake an internal audit of the new real estate fund—the $1.5 billion LF Strategic Realty Investors II Fund. As an investor, Steve had received a notice from the fund stating that after the first nine months, the returns were 29.07 percent. He remembered thinking how odd it was that the number was so precise. His curiosity was piqued, and the audit revealed that Solomon had “revalued the portfolio based on his own whim of what he thought it was worth,” Steve said. “It turned out to be a house of cards. The whole thing was jerry-rigged.” Golub discovered that the fund had lost nearly $400 million—Solomon disputed this finding—after a number of investments in assisted-living centers had fallen precipitously in value.

Solomon was using the fund to buy control of companies—for instance, he invested $200 million in ARV Assisted Living Inc.—rather than just buying real property. ARV’s stock plunged 80 percent at the time. He also used the fund to make a bid—as principal—for a large movie theater chain at the same time Steve was representing KKR, the buyout firm, in a bid for the same company. There had been no internal coordination. Steve struggled to imagine how he would have explained to Henry Kravis why Lazard’s real estate fund had been bidding on the property at the same time as KKR, but fortunately it never came to that. Steve was not happy. As a result of these infractions, he fired two of Solomon’s colleagues and demoted Solomon to nonexecutive chairman of the real estate group. Solomon was not one to go quietly. He organized a meeting in early April 1999 between Steve and several of the large investors in the Lazard real estate funds, but he neglected to tell Steve the investors were coming. Solomon had invited Tom Dobrowski of the GM Investment Management Corporation; John Lane of the Pennsylvania Public School Employees Retirement System; and Barbara Cambon, an influential pension fund investment adviser.

Once the investors had assembled in a conference room, Solomon invited Steve to join. It was an ambush, and the investors demanded to know from Steve just what was going on with their money and the leadership of the funds, now that Solomon had been demoted and his two deputies fired. “We never would have invested had we known there were such troubles at Lazard,” one of the investors said. Steve asked them to give him a few days to review the situation and invited Solomon to his office as the guests were leaving. Once there, Steve fired Solomon “for cause.” Solomon responded by hiring Stanley Arkin, the white-collar litigator, and by filing a fiery arbitration suit “crafted in tabloid-ready prose” accusing Lazard of “breach of contract, defamation and other juicy charges.” In legal papers filed with the New York Stock Exchange, Solomon said his “ouster from overseeing the funds that he has so carefully cultivated and groomed over the past decade is nothing short of a high-class hijacking.” He also branded Steve a “journalist–cum–investment banker” whose “unbridled personal ambition and elbows-up demeanor” had resulted in a flood of senior-level departures from the firm.

A number of employees who worked for Solomon, though, wondered why he had been able to hang on for so long at Lazard. “We couldn’t believe it didn’t happen sooner,” said a former member of Lazard’s real estate department. Damon Mezzacappa applauded Steve for “cleaning up the whole real estate thing” because “these guys, these guys were just over the edge, in terms of ethics, over the edge.” But he added that Steve had paid a price, too, because the Solomon firing really upset Michel. “Michel took great umbrage,” he said. “But Michel was dead wrong. But he was really upset that we had basically fired these guys.”

Lazard settled the suit with Solomon out of court in June 1999 for (once again) $11 million, one of the largest payments ever by a Wall Street firm to an employee. “It was really just awful,” Steve said. “It was a consequence of there being no management.” The immediate other consequence of the blowup of the real estate fund was that Lazard’s effort to raise a separate, more generalized private-equity fund was totally derailed. The placement agent told Steve the real estate mess had badly damaged the firm’s reputation for managing capital.

While he was grappling with the Art Solomon debacle, Steve got it in his head that all the so-called side deals that Michel had entered into with various partners had to be revealed, too. This would be part of the general thawing, even though both his own lucrative undisclosed arrangement with Michel about the firm’s work for Providence Media(8.25 percent of the override in addition to his $900,000 annual salary and 4.75 percent of the firm’s pretax profits) and that of his chief ally Damon Mezzacappa (3 percent of the pretax profits of capital markets plus his $900,000 annual salary and 3 percent of the firm’s pretax profits) would all be disinfected by the sunlight, as the Supreme Court justice Louis Brandeis would say.

There were some startling revelations, especially among the non-banking partners. For instance, Norm Eig and Herb Gullquist—who together ran the asset management business—had contracts with Michel and the firm that paid each 15 percent of the net profits of their department. They received $15.8 million each in 1998. The contract called for them to continue to receive 15 percent of the net profits for the three years after their retirement. Jack Doyle and Dave Tashjian, who together ran Lazard’s fledgling high-yield debt business, each had 16.5 percent of the high-yield profit pool of $4.826 million in 1998—about $800,000—in addition to their salaries and their percentage stakes in the pretax profits of the firm. Harlan Batrus, who ran the lackluster but consistently profitable corporate bond desk, had a deal whereby he received 20.2 percent of the corporate bond profit pool of $5 million—just over $1 million—in addition to his salary and percentage stake in the firm’s pretax profits. Even Art Solomon had a deal with Michel to receive 3 percent of the gross real estate advisory fees and 33.3 percent of the real estate fund department profit pool, net of bonuses paid to others, as well as a 15 percent share of the override from Lazard’s first real estate investment fund. In 1998, this totaled, for Solomon, $8.235 million.

In sum, Rattner’s investigations revealed some twenty of these side arrangements. Partners well below the radar, whose contributions were considered modest at best, had been paid millions and millions. “Steve made all that stuff transparent,” a former partner said. “There were no more private deals.” Ironically, as Michel had always maintained, the M&A bankers for the most part had no side deals with him. “The reality of the side deals was not as bad as the perception of the side deals,” Steve said. “There were some but not as many as people feared. Part of the problem was the opaqueness. My approach was to be transparent. If I can’t look you in the eye and tell you why banker X is getting a $20 million bonus, then he shouldn’t be getting it. In other words, if he’s entitled to it, then I should be able to defend it to you or any other partner who asks me.” Steve also convinced Michel to reduce his personal take of the annual New York profits to 10 percent, from his traditional 15 percent, the idea being that in addition to the obvious symbolism, the extra five points could be used to recruit new partners or reward highly performing ones. He also convinced Michel to reduce the profit percentages for some of the other “capitalists” as well and established a policy for how to treat the older, limited partners whereby they would be paid a $75,000 salary, have an office and a secretary, and receive some small sliver of the profits. Steve said of Michel, “He didn’t care that much about the money, up to a point. It was all about his pride, his place, and his power. Michel had many wonderful expressions. One of these great expressions was that ‘all Americans care about is money; all the English care about is their lifestyle. And all the French care about is their pride.’”

Steve preached teamwork. He participated with Michel in determining partner compensation. He instituted weekly meetings of the management committee. He presided over substantive weekly partner meetings with reviews of actual deal pipelines and prospects. He instituted call reports to track whether bankers were making efforts to see their clients. He organized periodic dinners between bankers of specific industry groups and partners on the management committee. Steve insisted that partners have lunch together on a daily basis to try to warm the notoriously frosty partner relationships.

Previously, partners had had trays delivered to their offices, a lovely and simple Lazard tradition where one of the two full-time female French chefs whipped up an individually prepared meal of, say, salade niçoise with Dijon vinaigrette. Dressed in dark, conservative uniforms, the chefs, sequestered away in a cubby on the thirty-second floor (when the firm was at One Rock; the kitchen moved to its own floor at 30 Rock), would deliver the trays to each partner in his office at lunchtime, assuming he was not going out, a fact that would be ascertained sometime during the morning. It was not uncommon for partners to be chomping away on this little slice of a Parisian brasserie while vice presidents sat across from them without a morsel, taking down the latest deal directive. A rare treat indeed was to be invited into a partner’s office to dine with him, and having one’s own tray.

Steve also considerably dialed down his public persona as “a self-promoting guy in a hurry.” Of that image of him in the mid-1990s, he said later, “There was some reality to it, and there was some perception. But the reality doesn’t matter, because when it comes to image, perception is reality.” He realized that to lead the generational succession at Lazard, he himself had to change. “It was very, very clear to me that I had to do two things,” he said in 2001. “I had to really, to the best of my ability, lower my own profile way below the horizon, which I’ve tried my hardest to do for the last several years. Second, if I was going to succeed in making Lazard the kind of collegial environment that I wanted it to be, then I had to also lead by example…. The only way I had a chance of making all that work would be if I—to some considerable degree—changed my own style.”

Steve’s first year in charge in New York had been a whirlwind of activity, with many changes instituted and many more promised. The firm remained immensely profitable, making some $415 million worldwide in 1997. But Lazard’s position in the closely watched M&A league tables had slipped to tenth worldwide in 1997, from sixth the year before, reflecting the double whammy of increasing competition from global banks and the loss of some of the firm’s talent. In the press, Steve downplayed this development. “Our approach involves concentrating on high value-added business and doing quality work for our clients,” he told Fortune. “In that context, market share is not the primary focus.” Privately, though, he was more concerned. “I believed, and in retrospect I think I was completely right, the firm was living on borrowed time,” he said. “It was trying to live in a new world using an old business model that didn’t work anymore.” He remembered seeing at that time an industry magazine ranking of Wall Street firms based on the value they provided to clients. There were a series of categories—what firm do you like for M&A, what firm do you like for financing, among others—but the only category in which Lazard placed in the top ten was for which firm do you think is most overrated. “And that’s how I felt about it,” he said. “That we were underinvesting in the business and living on borrowed time.”

THE JUNE 1998 150th anniversary of Lazard’s founding provided a convenient backdrop to assess the firm’s performance in the post-Felix era. Under Steve’s direction, the firm threw a huge party for itself in and around the breathtaking Temple of Dendur at the Metropolitan Museum of Art (in stark contrast to André’s decision to basically ignore the firm’s one hundredth anniversary). Hundreds of tuxedoed guests, from corporate CEOs to political and cultural leaders, were invited to dine and to toast the firm along with its partners, who had come from all over the world to New York for the celebration. Felix came back from Paris. Michel gave a speech, as did Steve. In his speech, Michel failed to thank Felix and Antoine Bernheim, the longtime Paris partner, for their help in building the firm. “Investment bankers getting up and doing that sort of stuff is cringe-making,” said one man who was there. The famous soprano Jessye Norman sang, and sang. “She was sort of prancing around the place and sang rather badly for too long,” remembered a partner. Some partners thought the event was wholly inappropriate, from its pageantry to its history. “It was dear old Steve Rattner at his very worst,” said one. “Because it was sort of in praise of Steve Rattner, really.” Some partners objected to celebrating the 150th anniversary of the dry goods store as if it were the same as the founding of the investment banking firm, which did not get established until the late 1850s (accounts differ precisely as to its origin) in Paris. London opened its doors in 1870. The New York office was not started until 1880. When some of the partners deigned to point that out, Steve reportedly said, “Don’t let the history interfere with a good story.” Lazard continued to propagate its legends.

The firm published 750 copies of an expensive slim, leather-bound, and heavily abridged version of its story, titled Lazard Frères & Co.: The First One Hundred Fifty Years. The author is unknown but likely was someone in the public relations office. At the end, the author wrote of Michel’s perception that the firm’s 150th year marked a time for “contraction and recentralization” and that he was “optimistic” that could be achieved. “The job he sees for now is to prepare the Firm for the next generation,” according to the book. “This has been achieved in London with David Verey and his partners. It is being achieved in New York with Steven Rattner and his forward-looking, collegial decision making. And the movement toward a fully coordinated approach with Paris and among and between the three Firms has, and is, progressing each and every month. ‘I do believe there is a soul which is quite independent from whoever is presently here,’ David-Weill said. ‘With every passage of a generation, there is always the question: “Okay, you were lucky. You had good people. But what happens next?” I believe that as long as the spirit is there, the people get recreated.’”

Since most of the top partners worldwide were in New York for the celebration, Michel invited about twenty-four of them to a meeting atop 30 Rockefeller Center. The partners of Goldman Sachs had voted a few days earlier to end the firm’s 129-year run as a private partnership. The agenda for the very unusual Lazard meeting had two momentous items: Should the firm’s three houses be merged into one, as the written history suggested that steps toward that ultimate goal were “progressing each and every month”? And should partners be given, for the first time, an actual equity stake in the firm, which would carry with it not only an ownership interest but also an ability to vote on important matters, such as taking the firm public or seeking a merger? Both were items that the partners at Lazard, unlike at Goldman, had no say in whatsoever.

Several partners who were there said the meeting was “inconclusive.” That was true, but that accounting omitted a material event that occurred—Steve’s rather offhanded suggestion that the firm consider an IPO. Michel’s response was legendary. “We were up on the sixty-third-floor dining room with the management committee,” Steve recalled. “There was one guy on the phone. We were struggling. I remember saying, ‘One option is we go public.’ Michel went nuts and said, ‘Absolutely not.’ He went around the room and said, ‘I don’t need you, and I don’t need you, and I don’t need you.’ Then he pointed at the speakerphone and he said, ‘I don’t need you.’”

One thing was agreed, though. With Michel’s blessing, and at Steve’s urging, the firm hired McKinsey, the leading management consulting firm, to help sort through how the three houses could manage themselves in as closely a coordinated way as possible, as if they were one merged firm. There was also a desire to create a new set of management systems—regarding promotions, compensation, and accountability—that would reflect the best of what other Wall Street firms were doing.

Given Lazard’s peculiar autocratic management history, the McKinsey agenda was radical stuff indeed. Calls went to McKinsey offices simultaneously in New York, Paris, and London to begin the assignment indigenously in each of the three locations. Forty-six managing directors were interviewed globally. Partner compensation was shared. Lazard’s management practices were compared with the best practices in the industry. There seemed to be a high level of enthusiasm among the key partners in the various cities that the McKinsey study would be an important catalyst for making the governance changes needed to compete more effectively.

Steve was wholly supportive of combining the three firms but wary of the idea of providing actual equity in the firm to partners. “So many of the senior guys came from somewhere else,” recalled the McKinsey partner Roger Klein, “so they didn’t have to guess that there was another way to run the place. They just have to remember what it was like at Morgan Stanley or Goldman or whatever. And that made them less fearful of going in that direction because they knew it could be made to work. The firm was essentially operating on a model that other firms hadn’t been operating on for twenty years.”

Left unsaid, of course, was the fact that in the zero-sum world of power and control at Lazard, any McKinsey proposal for authority sharing was authority diluted from Michel, the Sun King. But at least at the outset, Michel seemed to be outwardly cordial and accepting that some changes needed to occur. For instance, at one point in the nine-month assignment, McKinsey suggested Lazard establish worldwide co-heads of its M&A business, as almost every major firm on Wall Street had already done. Lazard had never had a head of M&A. Over the years, Lazard had a head of banking—Loomis, Rattner, Wilson, and Rosenfeld—but since so much of the firm’s banking business derived from M&A work, the idea of a separate head of M&A seemed redundant and needlessly bureaucratic. But McKinsey felt there was a need for Lazard to be able to deliver its product expertise—M&A advice—across industries and geographies. The new co-heads would be the ones to best coordinate the delivery of that service—again as most other firms had been doing for years. A conference call on the subject occurred in August 1998, with the Lazard team at their various summer retreats and the McKinsey guys in their offices. “Michel had previously been resisting that idea before we showed up,” Klein recalled, after receiving permission from his client to recount the conversation. “On the phone he said, ‘I don’t think that will work.’ I said, ‘It works in a lot of other firms.’ I gave him three examples of firms, and I named the guys. He said, ‘Oh.’” The firm decided, for the first time, to make the appointments. Steve was very appreciative of McKinsey’s help in getting Michel to accept this change.

As McKinsey was working on its research and recommendations, two somewhat existential articles—in Institutional Investor (“Lazard in Search of Self”) and in Fortune (“Can Lazard Still Cut It?”)—tried to grapple with all the changes taking place and determine whether Lazard was still relevant. As always, the articles broached the question of who would succeed Michel. Somewhat surprisingly, given his short tenure as deputy CEO of New York, these articles—obviously based on reporting—began to dismiss the possibility of Steve being the One. He was said to be too desirous of a top position in Washington, should Al Gore be elected in 2000. But Fortune also suggested that Steve’s partners in London and Paris wouldn’t abide him running the whole firm. Institutional Investor quoted an unnamed client saying, “As long as Michel is still running things, I’d emphasize the ‘deputy’ in Rattner’s title.” Both articles mentioned a rather shocking possibility that Michel still hadn’t fully dismissed the idea that he would one day tap either Édouard Stern or Bruce Wasserstein to run the firm. “Not me,” Stern told Fortune when asked if he would possibly return; Wasserstein did not respond to questions on the matter.

Lazard—and Steve in particular—suffered another blow in the fall of 1998 when Michael Price, then forty, who ran the firm’s highly successful telecommunications practice, announced he was leaving to be co-CEO of FirstMark Communications, a much-hyped Madison Avenue–based startup telecommunications company in Europe. He called on telecom companies at Lazard because no one else was doing it and “because they were big.” While his unusual combination of zaniness, fearlessness, and intelligence had propelled his success at Lazard independent of Steve, he nonetheless benefited immensely from Steve’s rise. Steve paid Price well and allowed him to start and run Lazard Technology Partners, one of the firm’s new private-equity funds. They were also quite friendly. But like so many bankers—and others—in the late 1990s who saw the rise of the Internet as a sure path to wealth and fame, Price couldn’t resist the allure of Internet riches, despite living a rather modest lifestyle in Closter, New Jersey. “I spent my whole life advising the best and the brightest, and kept looking at these people and said, ‘Why aren’t I doing it?’” he told the Wall Street Journal. (FirstMark crashed and burned in the telecom meltdown; Price now works for Roger Altman’s M&A boutique.)

Price’s departure was not only a personal loss for Steve, given their friendship and professional success together; it was also emblematic of yet another, wider problem at Lazard: aside from them having drunk the Lazard Kool-Aid, there was no longer anything to bind the partners financially to the firm. In the Internet era, when competitors were easily matching and exceeding the compensation of Lazard partners and then sweetening the whole package with stock options, restricted stock, and investment opportunities in private equity and venture capital, the firm simply could not compete. Lazard used to pay the best on Wall Street, all in cash, because its costs were so low and its margins so high. No longer. In addition to Price’s departure, the longtime partner Michael Solomon, a twenty-year veteran, left to form his own private-equity fund. At the same time a ten-person convertible bond team at Lazard left for ABN AMRO, a large Dutch bank. Then, in another huge blow, in January 1999 John Nelson, vice chairman of Lazard Brothers and a prolific deal maker, left for the rival Credit Suisse First Boston.

“There was nothing holding people together at Lazard,” Steve explained. “There was no stock. Every other firm on Wall Street had these golden handcuffs. We had none. Everybody could leave for the next deal or for a signing bonus, and they did. So that made it all a lot more difficult.” The impetus had never been clearer to take all necessary and immediate steps to restructure and merge the three houses into a single, global firm capable of providing its professionals competitive wealth creation opportunities, or what used to be called simply “more money.”

In August 1998, just before hosting President Clinton—then in the midst of the worst of the Monica Lewinsky debacle—on Martha’s Vineyard at his annual August bash, Steve convened the management committee to begin to outline some of his feelings about a potential three-house merger, “particularly coupled with initiatives to address concerns about ownership and wealth creation,” he wrote in what amounted to a manifesto that revealed the extent of the firm’s existential crisis. Steve argued that the “consequences” to “merging badly” were “enormous.” He criticized a preliminary merger proposal, as outlined by McKinsey, as “not logical” in its governance provisions, and specifically blasted as “unjust” the “underrepresentation” on various management committees of partners “resident in New York, who have consistently contributed a majority of the Group’s earnings.” Steve was prepared to postpone the pursuit of a merger for a year and instead to continue to “concentrate on improving the relationships among the three houses.” In closing, he reiterated the importance of addressing Lazard’s competitive disadvantages during the Internet bubble: “It is critical to show substantial progress on the issues of ownership, wealth creation and governance by the end of the year, when many of our colleagues will be reassessing career options.”

Throughout the fall of 1998, with McKinsey as their occasional sounding board, the senior Lazard partners thrashed around how best to combine the three houses. By all accounts, McKinsey had a rough time trying to craft a structure to satisfy the deeply entrenched partners in each of the three time zones. Some thought the McKinsey work had produced the equivalent of a camel—the “horse designed by a committee.” “You ended up with this mishmash of a structure that wasn’t any better than we already had, really,” remembered one person familiar with the McKinsey work. Still, five versions of various proposals went back and forth across the Atlantic. Steve recalled: “It was all these things designed by committees, with this committee and that committee. Michel was still in charge of the whole thing, which was completely insane given what we had seen in New York. We understood how the place was running, and it would have been the exact opposite of how Jack Welch told us how to run something. The exact opposite. It made absolutely no sense.” But, he continued, “some of the Europeans wanted it to stay as it was because they knew if we changed anything, they would end up further down the totem pole from New York.” As these various drafts were circulating, Michel’s posture with Steve was that he could live with the changes but he doubted whether the French or the English could. Michel said the proposal would fail not because of him but because of the Europeans. They were going around in circles.

During the first week of November 1998, there was a regularly scheduled meeting in Paris of Lazard Partners, the holding company for the three firms. The meeting kicked off with a dinner on November 5 at Michel’s mansion on Rue Saint-Guillaume. Since wives were invited to these quarterly meetings, Maureen accompanied Steve to Paris for the dinner. She returned to New York the next morning just as the meeting commenced in an overheated conference room at the nondescript Lazard Paris office at 121 Boulevard Haussmann. Steve went into the 10:00 meeting the next morning, a Friday, feeling ambivalent about whether the fractious group would ever agree on something as complicated and momentous as a full-blown merger.

He was also rapidly coming to the conclusion that his career at Lazard was nearing its logical end, something he and Maureen had been talking about. The frustrations of the job—given Michel’s iron grip and reluctance to change—were simply wearing him down. So he wasn’t expecting much when Michel started the meeting off by going around the room eliciting comments about the draft proposal. While others were speaking about how they thought the merger should work, Steve made notes on the blotter in front of him. He wanted to talk last, and he sensed that Michel wanted that as well. When Michel called on him, at the very end, he had no prepared remarks but suddenly felt overwhelmed with emotion. By all accounts, he gave an impassioned “evangelical” plea for the merger, for doing the merger “right” and not getting “too cute” by succumbing to the various impractical compromises that McKinsey had fashioned. “We had to be one firm,” Steve explained. “We had to have one direction, and we really couldn’t fight this war with one hand tied behind our back. There was only one right way to do it, and we could all be respectful of each other.” After he finished his comments, everyone looked at him and, according to one participant, said, “You’re right, why don’t you just do it? And we should get on with it.”

Steve was more than a little giddy with this turn of events and the possibility of transforming the firm. Seconds later, as everyone was leaving the stuffy conference room, Michel pulled Steve aside and into his sparse office. There was a couch, the priceless Vuillard painting of his grandfather, and his desk, with nothing on it. Michel spoke. Imitating a French accent, Steve recalled his exact words: “‘Look, I have only two questions about this. One, what will you do with Mr. Verey?’ Because there was nobody in Paris who could run it. Bruno [Roger] didn’t want to run it; he was a little old, and the younger guys weren’t quite ready. That was an advantage we had. Verey was the problem. So he said, ‘You know, whatever you decide, you should think about Mr. Verey. He’s a good guy. If you humiliate him, he will leave. You should find a place for him.’ I said, ‘I understand all that. What’s the second thing?’ And he said, ‘Me! You know, I think I can be helpful,’ and I said, ‘Of course you can, and I want you to be helpful.’”

Despite the foreshadowing of this odd encounter with Michel, Steve was euphoric. He called Maureen and told her what had transpired and how it now looked like he might be finishing out his career at Lazard after all. With renewed vigor, he immediately set to drafting version six of the “Framework for Governance.” “I said to myself, if I were starting from scratch and I wanted to do this right, what would I do?” He worked over the weekend, sending versions back and forth to Sally Wrennall-Montes, his assistant, indicating to her how the previous, unsatisfactory draft number five should be revamped and rewritten. In Steve’s revolutionary blueprint, the old Lazard partnership agreement would be scrapped, along with Michel’s absolute authority, and in its place would be established a more traditional corporate governance structure. This would be nothing less than the democratization of Lazard.

“I set it up so that the partners in effect elected a board and the board picked the CEO,” Steve said. “The board could also fire the CEO, and the board was mostly working partners. I was always prepared to basically live or die by what the partners wanted. This proposal basically codified that commitment and said if the partners aren’t happy, they can vote you off the island.” Instead of a typical board of directors, though, the newly merged Lazard Group was to have a twelve-member supervisory board, to meet twice a year, consisting of three “capitalists” (the actual owners of Lazard’s equity, for instance, Michel, his sister, and Pearson) and nine “working partners.” Michel was to be the first chairman of the supervisory board for an initial five-year term. The board would enjoy a myriad of powers, among them the ability to hire and fire the CEO and to approve the sale, merger, or initial public offering of the firm. During the first five years of Michel’s chairmanship, though, he would have the unilateral right to veto such an event.

Under Steve’s construct, there was also to have been a nine-member management committee that would meet weekly and be chaired by the CEO. The management committee would make all compensation decisions as well as all decisions regarding promotion, hiring, and firing. The initial officers of the Lazard Group would be Michel, as chairman, Steve, as president and CEO, and Eig, Gullquist, Mezzacappa, Verey, and Braggiotti. Steve anticipated a formal announcement of the agreement to merge the three houses by Christmas 1998 and set the start of the new millennium as the “target date for full implementation.” He circulated the revised term sheets to the relevant parties on Sunday.

To the existing New York management committee, he attached a cover memo with some of his thoughts about his new proposal. “The organization described in the attached term sheet is intended to address the present inadequacy of the Lazard Group to respond to the competitive threat that it faces,” he wrote revealingly. The extent of the proposed dilution to Michel’s historic authority was now abundantly clear.

THE BETRAYAL WAS swift. So swift, in fact, that Steve never even saw it coming. On Monday morning, Michel had the Paris partner Bruno Roger call Steve in his New York office. Roger, whom Steve described as a “very talented banker who clearly saw Michel as his most important client,” complained from the outset of the call about many aspects of the term sheet. Along with the call, Roger had faxed to Steve a list of objections. “Michel had read the proposal,” Steve recalled, “and realized it marginalized him. He gave Bruno all these reasons why it was a bad idea and told Bruno to call me, kind of ‘as Paris,’ to tell me why it was a bad idea.” Of course, Roger played it straight during the phone call with Steve. It was only later that Steve learned the truth of what had happened from Braggiotti, who told him that Michel had “torpedoed it” and enlisted Roger as his messenger.

Steve knew at that precise moment les jeux sont faits for him at Lazard as well. Both his clarity and his disappointment were total. “I think Michel was balancing two things,” Steve said later. “What was right for the firm and what was right for him. The problem was that what was right for him consistently won out. While I think he knew that we had to do something like this, he was never willing. This moment finally exposed that, because until then he had been saying, ‘I would appreciate this,’ or ‘This is fine with me, but the French will never live with it and the British will never live with it.’ So we went into this meeting, and everybody with the possible exception of Verey, who was very quiet in the meeting, said, ‘Great.’ Now Michel had to come out of the closet in effect and say, ‘Okay, it’s about me. It’s not about the English. It’s not about the French. It’s about me.’” A senior partner added that he believed Michel did not want Steve to have one more bit of authority. “That’s why he had Bruno call,” he said.

Another partner remembered, incredulously, “Michel dictated the fax to Bruno, and Bruno sent it. He doesn’t even deny it. And that fundamentally killed that deal.” Damon Mezzacappa, Steve’s close ally, remembered how excited he and Steve were after the Paris meeting. Mezzacappa, who had informed a few people he was thinking of leaving the firm, told Steve he would reverse course and stay on under Steve’s leadership. “We were excited because I think we could have put the firms together and run them very effectively,” he said. “The potential was just enormous.” But after he heard about the call from Roger, “the whole thing came apart and that was the end.”

For his part, Verey was none too happy about the turn of events that Friday morning in Paris. He was every bit as ambitious as Steve. He had been head of Lazard Brothers for almost ten years and had helped resurrect the franchise by hiring a number of talented bankers and spurring them on to great achievements. He was not paid as well as Steve—due in part to the fact that London, in 1996, made half of what New York made, Verey got $3.5 million, whereas Steve was closer to $9 million—but he loved advising CEOs. He still proudly remembered the day, in October 1997, when the New York Times reported that Lazard Brothers was involved in five of the six large mergers announced in Europe that day. Verey and Steve were, according to Steve, “friendly rivals.” Quite frankly, Verey wanted the job as Lazard CEO, too, even though he had no interest in moving to New York, the firm’s locus of power since World War II. He held out some slight hope that Michel would consider allowing him to run the firm from London. Verey had a certain disdain for Steve’s American-centric thinking, his apparent lack of appreciation of the firm’s history, and his lack of understanding of the outside forces swirling around the two European houses.

In London, Pearson, the U.K. publishing conglomerate, had been considering selling its stake in Lazard at least since the Texan Marjorie Scardino became CEO in January 1997. The rumors heated up again in May 1998 after Pearson purchased Simon & Schuster’s educational publishing business for $4.6 billion. Conversations between Michel and Scardino about the sale were well under way by the November 1998 Paris meeting. Verey, who was on the Pearson board, felt Steve had failed to factor in how Scardino would react to his merger proposal. Then there were the series of interlocking French holding companies—some public, some private—all with funny-sounding names, that held a portion of Michel’s (and others’) stake in Lazard. Verey believed Steve had no appreciation for how these holding companies had to be integrated into the mix as well. The Paris meeting and the consensus that formed around Steve that morning, though, dashed Verey’s aspirations. But even before Verey himself could begin to try to rectify the “Rattner putsch,” as he called it, Michel had already counterpunched.

Looking back on this unexpected turn of events, Steve fully comprehends Michel’s convoluted, if crystalline, logic. “At that point, he wanted me gone,” Steve said, “because that meeting—not to be immodest—but that meeting in that room in Paris was like the French Revolution.

Michel saw me for the first time as someone who could rally the troops, not only in New York, which he had seen, but globally, in a way that was dangerous to him. At that point, it didn’t matter how much revenue I produced. Michel’s control of the firm was more important than the firm’s success. He didn’t fire me, but he was terrified about what might happen with me still rattling around.” With Felix gone, Michel was the only person at the firm who could have stopped Steve. And he did.

Steve didn’t resign at that moment, or even step down as deputy CEO, because both he and Michel were concerned about how the professionals in New York would react. “He didn’t want me to leave, because he knew I had a lot of support in New York,” Steve said. “He was afraid that New York would unravel if I left.” Also, while he knew his “democratic” proposal to merge the firms was dead, the need for the merger hadn’t diminished one iota, and he thought he could have some impact, on the margins, on the eventual—and inevitable—merger by staying in his seat a while longer. “I felt that it was important for all concerned that I give it my best shot to effect a happy resolution,” he said. But in truth, there was also a certain lame-duck quality to Steve’s leadership during the next six or so months.

For instance, in March 1999, he organized one of the first dinners for the New York partners at the Four Seasons. The ostensible reason for the dinner was to honor the handful of new partners. But when Steve got up to speak “very much from the heart,” his words, while inspirational, sounded like a swan song. “Nearly two years ago we set forth on a great adventure together to see if we could successfully navigate some pretty fundamental changes in our Firm,” he said. The changes, he said, were not related to business strategy, to corporate structure, or to Michel (“to whom I am indebted for the willingness he has shown to allow this experiment to go forward, even though at times I’m sure he had doubts”). Rather, he told his partners, what he set out to do was to overhaul how partners related to one another and to the firm. “Our great adventure has been to begin to forge a true partnership among the people in this room,” he said. “Having a true partnership does mean treating each other with collegiality and with respect. Having a true partnership does mean working closely together in the recognition that coordination and combination of effort, where appropriate, can make the whole greater than the sum of the parts.”

He went on in this vein a bit longer, taking no credit personally for the firm’s successes in the previous two years, giving special thanks to the members of the management committee, and lavishing compliments on the talented rank and file. “I am grateful to all of you,” he said in conclusion, “and I know the many talented colleagues who are not part of this group but who will in turn inherit this Firm from us in the future should also be very grateful to you. Working together, all of us—the more than 1,000 men and women of Lazard Frères NY—can bring this Firm to even greater heights in the future.” This was Steve at his best.

Throughout the early and late spring of 1999, Steve continued to contribute to the ongoing discussions about how to merge the firms. There was a spurt of inconclusive activity in April. And in the second week of May, a meeting was scheduled at the luxurious Bristol Hotel in Paris, near the American ambassador’s residence. “My last shot to get something sensible done,” Steve said. But “draft #9.2” was not all that different from what Steve had proposed the previous November, with the major exception that Michel, not Steve or Verey, would be the combined firm’s chairman and CEO, for an initial period of six years.

But Michel would not endorse even this proposal, making it impossible for Steve to win support for it from either Verey or Roger during the meeting at the Bristol. “Michel had a plan to merge the firms as a headless monster,” Steve said. “He wanted to do a lot of things that I thought were wrong. I said, ‘Look, if you want to do that, that’s fine, but I don’t want to be part of it. I think I’ve done a reasonably good job in New York, and I think I can do this. I am happy to be part of something that makes sense, but this doesn’t make any sense.’ I was exhausted after two years of beating my head against the wall.”

UNFORTUNATELY, IF ANYTHING, Steve’s headache was about to get—potentially—much worse. At the behest of the SEC, the U.S. attorney’s office in Atlanta was deciding at that very moment whether to indict Lazard for its role in the so-called yield-burning municipal finance scandals that the government had been investigating since December 1993, when news stories about Mark Ferber’s behavior in Massachusetts had first prompted Michael Lissack, the Smith Barney banker, to call the U.S. attorney’s office to describe the greater, hidden scandal. Had Lazard been indicted, the firm would likely have gone out of business, as Arthur Andersen quickly did after being indicted in March 2002 for shredding files related to the meltdown of Enron. Certainly Michel feared that this was a real possibility, and he conveyed that fear to his partners.

This was another of those extremely serious moments in Lazard’s history. “It’s like earthquakes in California,” explained Loomis. The firm needed to convince the prosecutors in Atlanta that the actions of a few bankers in the municipal finance department were isolated incidents and not indicative of a pattern of behavior throughout the firm that might have resulted in the invocation of the RICO statute. To accomplish that crucial task, Steve, Michel, Loomis, and Norm Eig flew to Atlanta to meet with the U.S. attorneys. Prior to their meeting with the prosecutors, Michel stayed by himself in one suite while his partners remained in another. Then, at one point, Michel summoned Steve to his suite, leaving the others behind to collect their thoughts and try to stay calm. The full Lazard team met with the prosecutors for hours. “It was obviously difficult,” Loomis recalled. “You’re dealing with a cynical, understandably cynical, tough audience,” he explained. Miraculously, by having Steve and Bill—mostly—talk to the prosecutors about the firm’s history and its values and how it conducted business, the prosecutors were slowly won over. Lazard avoided indictment and quickly agreed to yet another settlement—the fourth and final—in the decade-long scandal that plagued the firm and ended up costing its partners $100 million in fines and legal fees.

On April 22, 1999, the SEC announced a settlement with Lazard whereby it would pay another $11 million fine, with $7.5 million being paid to the U.S. Treasury and $3.5 million being paid to five municipal issuers, including the cities of Seattle, Pittsburgh, and Indianapolis, that had issued mispriced securities through Lazard. The settlement with Lazard was the “first comprehensive federal government resolution with a major Wall Street firm” involving “yield burning.” In the end, the SEC settled with twenty-one Wall Street firms, for $171 million, in the yield-burning scandals. This was a very close call for the firm. Loomis said Lazard was within a hairbreadth of being indicted. Steve was less sure how close the firm came to indictment. “The whole municipal episode reinforced my conviction that the traditional Lazard way of managing, or not managing, its businesses could not go on,” Steve said.

Michel was extremely upset. In fact, of all the many scandals to beset the firm over the years, the municipal scandal hurt him most deeply, although he is much to blame, since the people who ran the department reported to him. “There I got really, really hurt because there was a group of people who thought it was the only way to conduct their business,” he said. “And obviously it wasn’t. It was just bad. And that in the name of the firm ‘conduct unbecoming’ was practiced, that I find very, very hurtful and disagreeable to me personally…. There were basically layers of people looking at it at the firm. It’s not to excuse myself, because I feel responsible. But it was one area which I didn’t look at very much, because for obvious reasons. Municipal is really very close to local political life in the United States. I’m not American; I’m not in it.”

Michel listed the men, aside from Ferber and Poirier, who he believed were most directly responsible for what happened: Del Guidice—“hired by Felix”—Mezzacappa, who was “looking after that department,” and the longtime municipal partners, thereby spreading around the blame for the fiasco. “This really got to me, that one,” he said. “That one was serious. We could’ve been—I mean, if a firm is indicted, it’s the end of the firm.” He said when the scandal first broke, he wanted to take the approach of admitting the wrongdoing and handing over the responsible people from the firm—an idea very similar to what Loomis recommended in September 1993. “When I first learned about the municipal problem, I remember vividly calling up the lawyers we had chosen on Friday during the weekend and saying, ‘Why don’t we say we did wrong? Why don’t we just say, “Look, some of the people working at the firm have done the wrong thing. And if you considered—Mr. Client—that you’ve been hurt, we are ready to settle with you.” ’ And this lawyer, he said, ‘You must be dreaming. It’s not done that way. You cannot do it that way.’ Which is interesting. It’s interesting, because it shows that it’s a wholly artificial experience. They had to shut me up. I was all the time ready to say, ‘We have been wrong.’”

BY NOW, NOT surprisingly, Steve was ready to abdicate his position as deputy CEO. He talked with Loomis, who despite his years in self-imposed exile was really the only logical person in New York to succeed Steve, given all the high-level partner departures during the previous two years. After a lunch together on April 23, the day after the firm settled the yield-burning scandal, Steve wrote Bill: “I could not have felt better after our lunch about the relationship between you and me. It gives me a great deal of pleasure to know that regardless of what else happens, we have established a strong feeling of mutual respect and affection. And regardless of where all this comes out, I will continue to do everything I can to support your efforts.” Steve was thinking about when to resign as deputy CEO. Somehow, Loomis prevailed on him to not give up the job yet.

Within weeks, though, Steve told Loomis, “Forget it.” A mad scramble began around the Memorial Day holiday to once again solve a management crisis in New York. On June 7, the firm was ready to explain the changes. Michel announced that effective September 1, Steve had “decided to step back from his responsibilities” as deputy CEO in New York to become deputy chairman and that Bill Loomis, the phoenix, had replaced him. Michel also announced that the three Lazard houses intended to “combine as a global force in investment banking,” a process that would take, he said, six to nine months. Effectively, the merger discussions would start, once again, from scratch but with Michel directing their content and with his partners’ knowledge, never mentioned overtly, that exile in Siberia awaited anyone who tried to dilute Michel’s authority. “David-Weill or the Highway,” one magazine headline declared.

The press release contained all the usual masking tape, covering up what really happened in the delicious way that corporations do. “We would have preferred to have Steve remain as Deputy Chief Executive, but we understand and respect his desire to step back from his operating responsibilities as we begin the next phase of consolidating our worldwide operations,” the firm announced. “This management change will afford Steve the opportunity to remain as one of the firm’s most senior bankers and at the same time pursue his interests outside investment banking.”

Steve’s “step back” and the firms’ intention to merge were big news. Throughout the 1990s, no investment banker, with the possible exception of Felix, had as calculatedly high a public profile in the United States as Steve. He was as tactical about promoting his own career as he was in advising a client about a big merger. For two decades, he had come to symbolize his generation’s asymptotic move toward Wall Street. His career trajectory had been nearly vertical. Had he now suddenly flatlined? The Economist, half owned by Pearson, divulged that the merger announcement was “hastily publicized” by Michel on June 7 “after a leak” but acknowledged that Michel “has long dreamed of uniting the three firms.” In a nifty bit of foreshadowing, the Economist also speculated—about its parent company—that Pearson’s stake in Lazard Partners would be worth somewhere between £350 million and £400 million and could easily be swapped for Michel’s 7 percent stake in Pearson, worth about £500 million. BusinessWeek reported that “once again” Michel had “lost a chosen successor.”

But as usual, Michel was sanguine. “It is a very curious thing when a small internal decision provokes so much press,” he said. “Lazard has an incredibly powerful brand. It is really quite magic. We have been a sort of irritant because we have never really changed. The question has [always] been, how can you compete?” Michel said, as usual, the perennial question of who would succeed him would be made easier by the merger and in the “coming years” would be clarified. “It’s far easier with a unified structure to find a CEO in our midst, or a chairman,” he said, “than it would be if we tried to replace me with somebody who has to run separate entities. I’m able to do it because I’m an owner.”

For many of the younger Lazard partners, who had imbued in Steve their own ample ambitions for themselves and for the firm, his abdication was like a medicine ball thrown to the gut. “There [were] a tremendous number of people—not unlike Messier’s in Paris a few years earlier—who thought that Steve’s management was a complete breath of fresh air,” observed a former partner. But there was also the belief that Steve failed as a leader because his mandate was to present, to Michel, by whatever means necessary, a united front for change. “All these people trying to do battle with Michel individually, trying to get Michel to change his ways, wasn’t going to work,” explained Luis Rinaldini, in comments representative of this point of view. “I don’t think Michel was going to change voluntarily, because Michel was a very intelligent person and he had all the power under his senior partner designation in the partnership agreement. I think Michel’s view was that ‘it’s kind of funny. If I’d wanted to change, I would have changed, so why are we having this discussion? I don’t want to change. I want to do it this way.’ I think that’s pretty clear. And I think in that sense Michel was wrong but not necessarily deceitful.

“So to say,” Rinaldini continued, “poor little Steve Rattner couldn’t deal with it, I don’t think is a fair assessment…. Michel knew what he wanted to do, he was doing what he wanted to do, he had all the power to do what he wanted to do under the partnership agreement. Especially the third or fourth time, you knew he wasn’t going to do it on his own. It was like Charlie Brown and the football. By the time Michel pulled the football out the third time, you should have figured it out he was going to do it again the next time.”

Steve conceded that aspects of this argument make sense. “The first time I ran banking, I had 25 percent of the tools you need to actually do the job. I didn’t do it terribly well, but I don’t think anybody could have done it at that point in time. I think by the time I was deputy CEO, I probably had 50 percent of the tools I needed to do the job.”

Michel suggested that he and Steve didn’t get along. “He didn’t relate well with me,” Michel said. “I don’t think it was my fault. I’m not saying it was his fault. It’s like that in life. I think I got on his nerves.” But Michel could also clearly see that Steve’s vision threatened his authority. He saw it when Steve suggested, perhaps offhandedly, in June 1998 that Lazard consider an IPO, and he saw it again, in spades, in November 1998 in the steamy Paris conference room. Michel believed Steve and his band wanted to eventually force a sale of the firm. A friend summed up Michel’s thinking, in Euromoney: “Michel was right in knowing that was what Steve wanted. Once he saw that was what Steve was after, he decided Steve was his enemy and he had to kill him, and he did. Steve picked a fight and he lost. Steve sensed an opportunity by getting the boys behind him to wrestle power from Michel. A number egged him on, seeing the possibility of making big money. I guess in the back of their minds was the thought: ‘If we ever really want to make a bundle here, we need to be selling this thing.’ It was in a way a kind of confusion because Michel was not motivated to do the most economically appropriate thing because he definitely wasn’t and really isn’t a purely economic man at all.”

Steve agreed he could have done some things differently, but not many. He denied he was angling for an outright sale of the firm. His goal, he said, was simply to bring the firm into the modern age. And his supporters within the firm think he did just that before Michel eviscerated him. “In retrospect there are some things I probably could have done to get along with him better, but I’m not sure it ever would have really worked. As Loomis proved, you really only have two choices,” he said. “You were either with the partners or you were with Michel. There was no way to be in the middle and survive. I chose to be with the partners.”