Dinosaurs; Incentives; Readers who must get out more
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Dinosaurs; Incentives; Readers who must get out more

Wasserstein shakes things up, but does anyone care?; Are incentive schemes morally hazardous?; Congratulations and commiserations

Abigail's biography

According to one source, _____________ is a dinosaur.

a) Prince Charles
b) The GBP
c) The Loch Ness Monster
d) Lazard

2. Q: How can you invest in a fund where you receive a loan of $2 for every $1 you commit, and where you cannot lose your initial equity, despite the leverage involved?    A:____________

3. Choose the correct option:
a) David Reid Scott:
b) Muhammad Yunus:
c) Readers who didn’t get my recent Miranda Priestly reference:

Wasserstein shakes up Lazard, but does anyone care?

My source spat one word – ‘dinosaur’ – in my direction and flounced off. To whom did he refer? Prince Charles, who can’t seem to grasp the point of modern architecture? President Bush, who can’t seem to grasp that America is haemorrhaging life and reputation in Iraq?

No. Source was lambasting Lazard, the legendary investment bank. “Only geriatric goats care who’s in charge,” he said, referring to the recently announced management changes and mixing his animals with aplomb. “Lazards is an old movie no one wants to watch again. How can they compete with firms like Goldman and Citigroup?”

Marcus Agius, whose sobriquet should be Marcus the Magnificent, is quitting as chairman of Lazard in London to be chairman of Barclays. Georges Ralli, head of the Paris office, becomes chief executive of Lazard’s European investment banking business and William Rucker, who runs the London office will be his deputy. Bitter briefing has ensued regarding the Lazardian geographical balance of power. This is irrelevant to the outside world. “All that ‘nail in the coffin for London’ stuff. It’s yawnsville! Only employees are intrigued by the intrigue,” my mole harrumphed.

Many financial organisations suffer from a London/New York tension, but Lazard throws Paris in to the cauldron as well. No wonder no one understands what goes on there. But I find my source’s analysis superficial. The Lazard versus Goldman race is also the single product versus the multi-platform debate. And each camp has advocates. Trouble is, it could be argued that, Lazard is too big to be niche and too small to offer a full service. Stuck in the middle is not a good place to be.

However, if you find finance boring, delve in to the Lazard back-story. The bank’s annals are populated with colourful characters: Andre Meyer, Michel David-Weill, Gerardo Braggiotti, and Nick, “the Stud” (racing horses not women), Jones. Forbes magazine reported a delicious David-Weill anecdote. Apparently, the former chief executive was chairing a partners’ meeting in 1998. Puffing on a plump cigar, he pointed at various henchmen and thundered: “I don’t need you, I don’t need you, I don’t need you and I don’t need you.” Well, I suppose this is one way to win friends and influence people!

Bruce Wasserstein
Some call Bruce Wasserstein a bruiser, others refer to him as “Brucey babe”. Maybe he’s a tough toffee: needs a lot of chewing, but when you reach the gooey core, it’s worth it
The press are fascinated by Lazard. I am fascinated by its chairman and chief executive, Bruce Wasserstein. Some call Bruce a bruiser, others refer to him as “Brucey babe”. Maybe, he’s a tough toffee: needs a lot of chewing, but when you reach the gooey core, it’s worth it. Bruce sold his firm Wasserstein Perella to Dresdner Bank in 2001, at the height of the last bull market, and left a year later to run Lazard. He took the firm public after a mere 150 years as a private partnership. Hardly the deed of a dinosaur? What do you think?

And since its New York listing last May, Lazards’ shares have soared some 66%. This partially reflects the booming M&A sector (over the same period, Goldman’s shares rose by 75%), but also shows that investors do not consider Lazard a lightweight. League tables are less flattering. According to Dealogic, Lazard was ranked an insignificant 12th in the global, announced M&A 2006 table (to September 30, 2006), behind both Rothschild and BNP Paribas. For the equivalent period last year, Lazard was a more buoyant eighth. Detractors also highlight a disappointing brush with private equity. Lazard European Private Equity Partners died quietly this summer. LEPEP was not part of the company that floated last year. A Lazard spokesperson refused to comment on its fate. Others cite as unseemly a dalliance with elderly corporate raider, Carl Icahn, who employed Lazard to help him in his tussle with Time Warner. It’s not clear to me that Carl was a winner in this battle.

However, league tables only tell part of the story. Market share can be expensive. “Revenue is all that counts with Bruce,” an insider opined. That doesn’t sound like a dinosaur to me. It could be a Goldman Sachs partner speaking. “The dinosaur is evolving. Watch this space,” the insider continued.

Anyway, dinosaurs deserve respect. The elegant Duchess of Windsor could be classified as a female fossil. But her catchphrase: “You can never be too rich or too thin,” captures the spirit of our age. Note to Bruce (may I call you Brucey Babe?): you qualify on the first count. But you may have some way to travel as regards the second.

The moral hazard of incentive schemes

And talking of rich, some commentators are indignant about cunningly crafted schemes to enhance the wealth of investment bankers. A research report from Evolution Securities this August discloses that employees at BGI, the asset-management division of Barclays, enjoy a generous share option scheme. The note states:

“The BGI share option scheme has delivered net value to employees since inception (2000) of £1.26 billion... Over that period, BGI’s aggregate post-tax profits amount to £1.03 billion (including H1 06).” BGI sets aside 20% of its equity to give staff share options. These options are usually repurchased after three years by the company. As the value of the group has grown, the worth of the options has soared. In 2005, BGI’s pre-tax profits were £542 million compared with £71 million for 2001.

The Evolution analysts go on: “One number you won’t have seen in Barclays’ recent results is the £211 million cash cost of buying back BGI shares from BGI employees in the half year. You don’t see it because this is a cost that doesn’t touch the P&L account... For the avoidance of doubt, the accounting treatment is 100% in accordance with the rules.”

Barclays is not alone in looking after its employees. A senior industry figure remarked: “I’m surprised there’s not been more fuss about the Morgan Stanley incentive plan.” In early October, news seeped out that Stanley would permit employees who earn more than $500,000 to invest some of their annual bonus in the firm’s hedge funds, leveraged buyout funds and real estate funds.

Mother Morgan will lend $2 for every $1 the employee commits. Anyone who leaves the firm within three years loses their investment.

Nevertheless, there lurk potential conflicts of interest. How do you prevent internal funds being favoured over client funds as regards trade ideas or deal flow? “It’s part of an investment bank’s job to manage conflicts appropriately,” a Morgan Stanley spokesman told me. Isn’t there also an element of moral hazard, since employees cannot lose more than their initial equity, despite the leverage involved?

I may not be as clever as the accountant eggheads who devise these vices. I call them vices because their purported objective is to bind employees closer to the company. But would I be alone in applying the following adjectives to them: abstruse and ambiguous?

Such schemes cement in Joe public’s mind the notion of a fat-cat culture. This will backfire one day: think about the current kerfuffle in the US over the backdating of stock options. City bosses insist: “There’s a war for talent out there. We need to be competitive on comp.” I remain unconvinced. After all, if a rival firm desperately wants you, they will buy you out of existing incentive packages. So do the schemes serve to enhance employee loyalty? What do you think?

Readers who should get out more

Congratulations of the week to dishy David Reid Scott, chairman of Hawkpoint Partners. David looks set to make another squillion if he sells the advisory firm to Collins Stewart Tullett. And congratulations also to Bangladeshi micro-credit banker Muhammad Yunus and his Grameen Bank. They share the 2006 Nobel Peace Prize for their efforts to create economic and social development from below. “Every single individual on earth has both the potential and the right to live a decent life,” the Nobel Committee’s press release states.

Commiserations of the week to those readers who didn’t get my recent Miranda Priestly reference. Do try and get out more. It’s essential to keep up with modern culture. Beg, borrow or steal a ticket to see The Devil wears Prada. Meryl Streep gives an outstanding performance as evil editrix, aka La Priestley. Streep is tipped for an Oscar. And for this week, that’s all.

Next week: N is for nice, nasty and, perhaps, something else.

Please send news and views to abigail@euromoney.com

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