How Lazard Is Making Millions Off Defunct Lehman

Lehman and Lazard have been rivals for decades. It looks like Lazard’s got the last laugh.

God love investment bankers, they’ll always figure out a way to make money even in the middle of one of the worst markets for financial services in a century. Case in point is Lazard’s highly lucrative—$20-million plus—assignment advising what remains of Lehman Brothers, Lazard’s one-time competitor, during its Chapter 11 bankruptcy proceeding. Lazard’s retention and fee arrangement is expected to be approved by the bankruptcy court on December 16.

Since Jewish refugees founded both firms as clothing retailers south of the Mason-Dixon line more than 150 years ago, it is not surprising that the relationship between them spans decades, too. And not always happily. Andre Meyer, the Lazard partner credited with rebuilding the firm in New York after he escaped Nazi-occupied France during World War II, fancied himself a superior rival to Bobbie Lehman, the Lehman patriarch who ran Lehman for 44 years, until 1969, and has been credited with presiding over the firm’s Golden Age. Meyer often bested Lehman in the marketplace but Lehman had the better art collection at a time when bankers measured their status by such things.

Wasserstein tried to pick up where Loomis left off in selling Lazard to Lehman. An outraged Fuld told Wasserstein at the time: “I can see why you are such a shitty M&A banker.”

After Meyer died in 1979, Michel David-Weill, the Lazard patriarch, sought to once-again resurrect the firm by raiding Lehman Brothers of four of its senior partners at a time when such things weren’t done. Before September 11, 2001, when Lazard’s business had again fallen on hard times, another Lehman alumnus, William Loomis, then Lazard’s CEO, tried to sell Lazard to Lehman for around $6 billion in Lehman stock, when Lehman was worth around $12 billion. The deal fell apart—understandably—after September 11 before the two sides could figure out whether the name of the combined firm should be LazardLehman or LehmanLazard.

After Bruce Wasserstein wrested control of Lazard from David-Weill, in 2002, and before Wasserstein launched Lazard’s IPO, in May 2005, he went to see Dick Fuld, Lehman’s longtime CEO. Wasserstein tried to pick up where Loomis left off in selling Lazard to Lehman. Wasserstein’s price was $6 billion to $7 billion. Ken Wilson, then a partner at Goldman Sachs and former Lazard partner, told me that an outraged Fuld said to Wasserstein at the time: “I can see why you are such a shitty M&A banker. Why do you give such bad fucking advice? If this is what you tell people, you gotta be out of your fucking mind.” The meeting ended quickly thereafter.

But now, according to documents filed with the U.S. Bankruptcy Court in lower Manhattan, a very much alive Lazard is getting the last laugh. For its services in advising the Lehman board of directors and Bryan Marsal, the turnaround expert who took over running what’s left of the firm from Fuld, Lazard will get paid $400,000 a month—$4.8 million annually—for two years and then $150,000 a month thereafter.

But that’s not all, of course. In addition to the monthly fees, Lazard will also get a $5 million fee for the week’s worth of work it did in September advising Lehman, the debtor, on the sale of Lehman’s U.S. investment banking business and its building at 750 Seventh Avenue to Barclay’s plc. Lazard is also expected to receive another $5 million fee for its work on the sale of Lehman’s investment-management business. That sale, originally expected to be to private-equity firms Bain Capital and Hellman & Friedman for $2.15 billion fell apart Wednesday. Now, subject to bankruptcy court approval, it appears that the management of that business—once the crown jewel of Lehman Brothers—will be “buying” the business for its sweat equity. The Lehman estate will retain a 49% stake in the business, which the forlorn Lehman creditors hope will be worth something someday. So, all tolled, that’s just about $20 million right there.

And if, one day down the road, what’s left of Lehman is able to fashion a plan of reorganization to distribute whatever proceeds there are from all the asset sales that Lazard is overseeing, Lazard will receive an additional fee equal to 0.5% of the cash and “property” distributed to the “stakeholders” as part of the plan of reorganization subject to a maximum fee of another $17.5 million. Lazard will also get fees if it somehow is able to raise money for the debtor in the private or public markets. And Lazard will also get its expenses paid, too.

According to the court documents, Lazard began its advisory role for Lehman this past July. This was not Lazard’s finest hour. At that time, Lehman’s “management was exploring several different options to deal with its liquidity crisis, including selling its investment management division and spinning off certain illiquid mortgage-backed assets.” The idea had been to do what was necessary to stave off bankruptcy. By the time Lazard was engaged formally by Lehman on September 12, the bankruptcy filing was three days away. According to Lazard’s fee documents field with the court, Lazard has kindly agreed to wave any fees earned or expenses incurred for its work prior to Lehman’s September 15 Chapter 11 filing. Such acts of largesse by bankers are rare indeed these days.

William D. Cohan, a former senior-level M&A banker on Wall Street, is the author of The Last Tycoons: The Secret History of Lazard Freres & Co. Cohan's House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, will be published by Doubleday in 2009. He also writes for Fortune, ArtNews, The Financial Times, and The Washington Post.