Felix Rohatyn, a storied deal-maker who once was the preeminent investment banker on Wall Street is dead. I owe him a personal debt even though I spent only a little time in his presence.
Royatyn’s and Paul Volcker’s deaths this week symbolize the end of an era, of a time in the business world and in finance where it was widely understood among influential men (then the people with clout were all men) that it behooved everyone, including those at the top, to enforce rules and standards of conduct. That isn’t to say that there wasn’t corruption or plenty of self-interest, but that there were generally accepted norms that they had to be kept within bounds.
The press has given ample coverage to Royhatyn’s history: a Jew born in Vienna whose family twice fled the Nazis, landing them in Rio de Janeiro before they eventually came to the US, then a young ski buff and middling student at Middlebury College who eventually obtained a degree in physics and then served in the Korean War. Rohatyn’s early work waystops included briefly touting Edith Piaf in English and working in a brewery before his father landed him a job at Lazard Freres in New York.
Rohatyn’s next chapters are better known. As one of the few French speakers in the office, Rohatyn managed to endear himself to the powerful and very connected Andre Meyer, in many respects the top private banker of his era. As Meyer’s protege, Rohatyn became an important player in the emerging mergers & acquisitions business, with the increasingly infamous Harold Geneen of IT&T as a core client. Geneen was a leading practitioner of go-go era conglomeratization, using his high-flying stock to buy up sleepy, low valued companies….who earnings, when added into the IT&T empire, would be valued at the vastly higher IT&T multiple.
This 1960s mergers boom, and in particular, the creation of sprawling companies in unrelated businesses, set the foundation for the explosion of the leveraged buyout business in the 1980s. These once richly priced companies later traded at a conglomerate discount. Getting control of them was the hard part; breaking them up and selling the parts for more than the former whole was close to shooting fish in a barrel.
Rohatyn became known as “Felix the Fixer” thanks to his deep involvement in the 1960s deal frenzy. His at-times controversial but effective job in keeping New York City out of bankruptcy and restructuring its finances put him on a completely new level; for instance, the headline of his ABC obituary reads Banker, New York City savior Felix Rohatyn dies at 91. Royhatyn had been appointed the chairman of Municipal Assistance Corporation which had control over the city’s funding and expenditures. In a testament to his negotiating skills, Rohatyn secured concessions from the city’s unions….yet became a good personal friend of their lead representative, Victor Gotbaum.
Rohatyn’s success in mergers and acquisitions came from the fact that he came to be prized as a trusted advisor to often-isolated CEOs. The M&A bankers I knew at Lazard back in its heyday joked that they specialized in abnormal psychology. But Rohatyn’s reputation included being willing to discourage corporate leaders from doing dodgy-looking deals. In reality, I have no idea how often that this actually happened. But that it happened at all in that high-testosterone, mercenary business was a departure.
I had my brief experience with Rohatyn in action in 1986. At McKinsey, I was a manager (meaning a mid level working oar) on a global capital markets study for Sumitomo Bank, then the second-largest bank in the world and the pre-eminent financial institution in Japan. Sumitomo had ambitions that were unrealistic for a Japanese institution to achieve on its own. Rather than just saying no, or talking them into something modest, we came up with the idea of a minority investment in Goldman Sachs, with substantial business cooperation in Japan and Goldman assistance on Sumitomo’s foreign efforts.
The choice of Goldman fell out analytically: the firm was at risk of losing its vaunted leadership position by still being private at a time when the size of a firm’s capital base was a critical factor in staying competitive. Goldman also stood to net gain the most from an association with Sumitomo in the then-key Japanese market. And better to invest in a highly-successful, highly profitable firm with a strong culture.
We analyzed the regulatory issues, structured the deal and even valued Goldman. But we were concerned that we had all gotten high on our clever idea. Goldman was the virgin queen of Wall Street. Despite its obvious need for private capital, would Goldman entertain an approach from a Japanese bank? Sumitomo needed someone credible to make the pitch to Goldman.
We identified three possible intermediaries. It was critical that they not be perceived as competitive threats, hence boutiques. Lazard and the Blackstone Group were the first two picks. We had a third we didn’t wind up contacting.
McKinsey wound up getting the meeting with Pete Peterson and Steve Schwarzman first. We explained why we came to see them. We got 40 minutes (I kid you not, I checked my watch) of name-dropping by Peterson, of all the senior folks he knew in Japan. But that wasn’t why Sumitoma came to see him; had he bothered to listen, the matter at hand was in the US.
Then he and Schwarzman spent the next 20 minutes talking about Blackstone, and they make it abundantly clear how jealous they were of leveraged buyout king Henry Kravis (at the time, Peterson and Schwarzman were mere advisor types, their
looting wealth creating opportunities were far more limited than if they had oddles of investor and bank money to play with).
So in effect, they spent an hour telling us that they really wanted to be doing LBOs, that was SO much better paid than M&A, they wanted to grow up to be Henry Kravis, but since they hadn’t raised the money to do that yet, then yeah, our client’s deal might be worth their while in the interim.
I have never seen a pitch meeting (and this had been arranged at the senior levels of the firm) devolve into such a naked display of personal greed. The two partners who were there with me, neither one of them naifs, were as appalled as I was. As much as I have seen a lot of unprofessional conduct in my life, this still ranks as one of real doozies.
The contrast with Lazard could not have been more stark.
Rohatyn came to the meeting with the firm’s #2 partner and two addition partners. The most junior one got coffee.
The Sumitomo client team leader did the talking, outlined the proposed deal crisply and then asked Rohatyn, “What do you think?”
Rohatyn said, “I think it’s a terrific concept.”
That was the right answer if you want the business. That reaction gave us all at McKinsey great relief. Even if Rohatyn actually wasn’t 100% on board, it meant he thought there was enough there to make it worth the firm’s time.
Rohatyn did work on the deal personally. McKinsey also participated in some of the early meetings, and I wound up sitting next to Rohatyn because he had not worked out Japanese protocol (senior people in the middle of the table, juniors at the end).
Not surprisingly, Lazard elbowed McKinsey out. Dealmakers don’t want pesky consultants looking over their shoulders. And I learned much later (ironically from Covington’s Gene Ludwig, who I engaged as my lawyer later, before he became head of the Office of the Comptroller of the Currency) that Goldman had conspired against Sumitomo by offering to handle the Fed, then raising the specter of Japanese creeping control. In reality, Sumitomo didn’t begin to have enough people with remotely adequate English skills to attempt that even if it wanted to and the bank knew that well, plus its position as limited partner prohibited it from having any managerial say in Goldman.
So the Fed nixed the business cooperation elements that McKinsey and Sumitomo had regarded as important, and gave the bank only 24 hours to make up its mind. Sumitomo reluctantly went ahead. In the 13 years of its investment, it made a 24% compounded annual return in dollars. It never computed the return in yen, which would have been higher.
Without going on overmuch, Rohatyn making the Sumitomo investment in Goldman happen gave me a career boost.
Rohatyn still suffered later disappointments. Clinton had wanted him to be Fed vice chairman. Others had suggested he be Treasury Secretary. Neither came to pass due to Administration fear of Senate opposition. Instead he wound up with the consolation prize of being ambassador to France, a post he reportedly enjoyed.
It’s a shame because Rohatyn despite imposing austerity on New York City, had New Deal sensibilities, unlike Alan Greenspan or Robert Rubin. Rohatyn’s first book was Bold Endeavors: How Our Government Built America, and Why It Must Rebuild Now, and it was a series of case studies on US infrastructure successes, and pitch for a revival of large-scale, public funded projects.
Rohatyn was later turfed out of Lazard in a power struggle that led to the installation of the stylistic antithesis to Rohatyn, “Bid ’em Up Bruce” Wasserstein, for his famed ability to talk CEOs into crappy deals. He became chairman of Lazard just before its public offering in 2005. Rohatyn founded his own firm.
I wish I could again find an interview with Rohatyn from the 2000s. His bushy eyebrows made him look a tad bemused and one could read that into this talk. He said without naming names that he was sought out for deal advice on a regular basis and wondered why, since many clients seemed set on sticking to their originally-planned course. I can’t recall the particulars of what he said, but he made it clear that his sensibility was at odds with a lot of current practices. He didn’t inveigh against greed or short-termism even though those were the big sources of divergence between him and those who wanted his views. And he didn’t seem resentful that his advice was often ignored. The world had gone in a puzzling and unwise direction. He wished it were otherwise but accepted his inability to do much about it.
Very interesting piece, Yves. Thank you.
Here’s a link to a Chariie Rose interview of Rohatyn from 2002:
A few quotes from the early part:
“We made this mantra of deregulation, and deregulation is not an answer. [Rose: “What’s the answer?”] The answer is intelligent regulation.”
“You cannot have a system where the senior managers, and people on the board of directors walk away with hundreds of millions of dollars and leave the employees holding the bag with their savings.”
Many thanks, Yves, for this fascinating post. You should write a book on this titan and his times.
The differences between Rohatyn and Bid ‘Em Up Bruce were picked up in William Cohan’s Last Tycoons and the French histories of Lazard Freres, the David-Weill family and their Rothschilds rivals. The “haute banque” gave way to much more transactional and confrontational relationships.
A(n English) school friend, a few years older than me and upper class, worked at Lazards as the David-Weill family exited and noted how the industry was changing. He joined Lazards from the army, having served in the Lancers, and knew nothing about the industry. With the right connections, could get away with it at the turn of the century.
In addition to his diplomatic duties near La Madeleine, Rohatyn enjoyed catching up with the David-Weill family in Paris and, in their Bordelais vineyards, the Dillons.
Yes, Yves, you should write this book. It would tell the best story of the 20th C. I’m just now going through my old boxed-up books and found my Almanac of the 20th Century – it ends prematurely in 1985. How ironic, because that’s when everything really changed. And throughout this collection of political details there is almost a complete absence of information on banking and finance. It mentions Bretton Woods and Keynes but not much else and certainly not in any coherent context. Please write this book.
My father’s journey to finance was kind of similar to Rohatyn’s, although he left Europe later with a degree in economics from the University of Lausanne.
Their world was so different, during the go-go years in the 60’s, my dad told me that all trades had to be matched up with physical stock certificates which hadn’t been an issue heretofore, but things were so much more busy and towards the end of the 60’s, it might take a few days to get ‘r done, and in his firm there were a number of employees whose sole job it was, to mate them up, ensconced in the certificate vault.
He had no patience for dishonesty and a call to the SEC back then brought swift justice to the perpetrator purloining from within. The agency really had teeth once upon a time.
The conglomerates of the era were pretty ridiculous, with AMF managing to do dozens of completely different things badly all at the same time, it takes a certain skill.
Ask a Harley Davidson fan about an AMF Harley from the early 70’s, they’ll give you a grimace
One thing that is becoming clear (to me, at least) is that the changes wrought in the 1980s really had their genesis in the 60s and 70s – in particular, crazy low (in retrospect) stock prices that opened the door to financial takeovers by people with no interest or competence in actually running the businesses they were taking over AND at the same time really lazy management by the people who were already running those businesses (and presumably competent to do so). I can already remember in my 70s youth how crappy so many new products were and yet that was nothing compared to what has followed.
Rohatyn and his generation, along with many of us, likely would be saddened but not surprised by that Links Canadian infrastructure article. Those generally accepted norms of a bygone era might be taught somehow to younger people to show that the world that they inherit could once again live up to its promise; that there might be richesse oblige along with noblesse oblige, and that a nobility of spirit is available to all people.
The Banker’s Coup of 1975 (erroneously called the NYC Fiscal Crisis) was the opening bell of the Neoliberal era in the US, and led to devastating austerity – 15,000 teachers and thousands of cops laid off, huge cutbacks and imposition of tuition at CUNY, firehouses, libraries and hospitals closed – that took decades for the city to recover from.
Rohatyn was the face of that, and was celebrated for it.
Considering the misery and decades-long political losses that entailed, his standing as an exemplar of a (questionably) more refined and gentlemanly capitalism is pretty weak tea.
Another confluence in 1975 was the first pro athletes pulling down a million a season, and i’m of the opinion that it was a catalyst to Wall*Street, and then it was off to the money races.
They had to keep up.
Somebody was trying to justify a third of a billion $ deal for a pitcher yesterday, leaving me amused.
Thank you, Michael. That’s not wrong.
Lazards pioneered hostile takeovers and break ups in France. As part of his apprenticeship under the tutelage of Andre Meyer, scion Michel David-Weill was assigned the destruction of Franco-Wyoming.
Thank you for this reminder. As I read Yves’ brilliant mini-memoir of bygone times, not just on WS, but also in corporate law circles, my brain was alternating between Yes! it *was* like that, and Yeah, but, I also remember . . .
I still hate the late great Felix and his partner in crime Marty Lipton of WLRK fame for NY’s financial remake. They were indeed “good” men with an endearingly patriarchal old-school style. They were also ruthless takers — the ‘oblige’ always in service to the ‘richesse.’… Peterson & Schwartzman mere harbingers of what was set loose. They knew their plans would destroy the poor and middle classes of New York. Forty years on, we see the results in a city with no economic base — no manufacturing, nothing, save debauched & destructive “developers.” Their stated plan was to expel the Puerto Ricans and minorities lured to NY as cheap labor during WWII and to bring in monied classes to make NYC “a little Switzerland” (viz., Ed Koch speeches) in order to shore up the tax base. In every way, they have succeeded to the detriment of the character and panache of the City they claimed to love.
Please read Robert Fitch. He has documented that the plan to turn New York City into corporate offices and residences for professionals is a long term vision that was set in the 1930s. This wasn’t a creation of the Rohatyn era.
Narrowly that may seem to be true, but you forget the alternative was bankruptcy. I suggest you look at the rough handling of Detroit. The unions negotiated with MAC. They would not have been able to negotiate with a bankruptcy-court-appointed administrator.
A good reminder Yves. It’s always tough to prove things like this but where would NYC be if Rohatyn did not step in?
It is not pretty to face choices that are bad versus less bad.
People forget how serious the fiscal crisis was. New York City’s future as a business and financial center really was at stake. Even when I first worked there, in 1980 for a summer, a few years after the worst had passed, New York City was seen as questionable as a place to live: crime ridden, terrible subways (not just covered with graffiti but dangerous to ride on, for instance, women were regularly badly injured by men grabbing and trying to pull off gold or gold-looking necklaces), poor services, a fair number of store vacancies. It was at best scruffy and very much down at the heels.
I went to NYC every December for a coin show in Manhattan from 1977 to 1980, and took it all in, and yes the Big Apple was rotten, a basketcase compared to LA. Times Square was still all about peep shows, and everything about the place was tawdry, you’d see carcasses of cars, stripped of everything except the chassis that had been there quite awhile. Half of the periphery around Central Park was scary, the other half was high end.
It all changes when Wall*Street rises from the ashes in the 80’s with new chimera ruses, otherwise the place could’ve ended up like any other rust belt city.
The bankers went on strike and stopped buying the city’s bonds, for explicitly political reasons; that makes “bankruptcy” seems like far from a natural event.
And yes, as Bob Fitch revealed, the plan to bourgeois-ify NYC had been in place for decades: so what? It doesn’t change the fact that Rohatyn helped implement it, at brutal cost.
Fascinating reading. Thank you.
>Royatyn’s and Paul Volcker’s deaths this week …
Who should be worried … Alan Greenspan? Hank Greenberg? Young’un Warren Buffett?
Great article. Thank you.
Fantastic write-up on Rohatyn.