Duchess in Debt

updated 02/05/1996 AT 01:00 AM EST

originally published 02/05/1996 AT 01:00 AM EST

MAKING HER WAY UP THE STEPS OF NED and Annie Lamont's house in Greenwich, Conn., the Duchess of York seemed to be bracing for battle—and with reason. Three days earlier, Buckingham Palace had announced that the Queen, presumed to be irritated at her daughter-in-law's spendthrift ways, was refusing to cover her debts—estimated by insiders at an immodest $2.3 million. Fleet Street leaped to the chase, and now 40-odd newshounds were poised on the couple's elegant suburban steps, waiting for her to join the fundraiser that would net $100,000 for her Manhattan-based charity, Chances for Children. When Fergie had arrived at the Four Seasons Hotel in Washington two days before, reporters had shouted at the duchess (whose entourage included Princesses Beatrice, 7, and Eugenie, 5, two bodyguards and a personal assistant), "Who'll pay the bill?"

In Greenwich on Jan. 20, the royals' somewhat blackened sheep swept past the press and turned a dazzling smile on her well-heeled hosts—he, a TV-cable-company owner and she, a venture capitalist. Wearing a lace gown with a modest diamond necklace, Fergie, 36, greeted guests who had paid $500 for a champagne reception and dinner. As she worked the crowd, a trio of young 2 girls made their way through the room, lugging I copies of her coffee-table opus Victoria and Albert: A Family Life at Osborne House and imploring, "Would you like to buy the duchess's book? It's $100. She'll sign it for you!"

Though only one book was sold by the time dinner began, the duchess seemed to have a reason to celebrate. Earlier her office had announced that a consortium had come to her rescue with a five-year, $5 million deal for future TV, video and film royalties from Fergie's perky book-and-cartoon character Budgie the Helicopter (protagonist of her 1989 children's book) and unspecified other projects. After the humiliation of the previous week, the duchess could look forward to paying off Coutts & Co.—the London bankers carrying her overdraft—and to an improved cash flow. She could also claim, somewhat improbably, to be a successful businesswoman instead of an undisciplined bankrupt.

Bailout or no, the chattering classes were still picking apart Fergie's balance sheet when she returned to London on Jan. 24. Although many found it hard to believe that a woman so fond of having someone else pick up the check managed to spend $1 million last year, it seemed that $230 haircuts from celeb stylist Nicky Clarke, a $4,600 housewarming at the mansion that she rents in Surrey and jaunts to Bermuda, Hong Kong and Los Angeles, among other big-ticket items, had sent her debt soaring (see page 50).

As tout London soon learned, Fergie's crisis began with her inability to live on a mere $500,000 a year. Since her 1992 separation from Andrew, she has received $62,000 annually from the prince, who pays $15,500 in school fees for Beatrice and Eugenie. (Although the Queen provided a settlement of $3 million, the bulk is in trust for the princesses.) This year, Fergie received royalties and gifts from chums worth another $300,000, while Hello! magazine, a British glossy, paid $155,000 in exchange for eight major stories.

Although $500,000 would be plenty for most royals, Fergie's impulse spending put her in the stratosphere: Last month, on a three-day trip to Qatar—whose government funded her flight and covered her $9,000 hotel bill—she took time from her charity work to drink late into the night with tennis player Thomas Muster (ranked No. 3 in the world). On Jan. 8, she flew first-class to Sydney; three days later, she met Muster in Melbourne, where they took separate rooms at a five-star hotel. The tab for that jaunt: about $30,000. (When reporters grilled press secretary Dominique Vulliamy about the trip, she refused Fergie's request to say that she had not joined Muster. Last month, that conflict, among others, prompted Vulliamy to resign.)

Household expenses are similarly excessive. Groceries come from Harrods, and meals are served in grand style. "Breakfast for the kids was a sight," says a friend. "They only ate cornflakes, but the cook was told to put out eight cereals and silver dishes with scrambled eggs, bacon and sausages." (Though she later slashed the grocery budget, Fergie "complained about the plain food," says the chum—who adds that the cook promptly quit.)

Nor does the duchess scrimp on entertaining: She once spent $7,500 for a celebration à deux to mark the birthday of John Bryan, the "financial adviser" who made headlines when a photographer snapped him kissing her feet in the South of France in 1992. And she is a regular at Mossiman's, a London restaurant where, according to columnist Ross Benson, "you have to take out a mortgage to pay the bill."

Of course, Fergie has snapped up perks that other royals accept in a more restrained manner—including discounts (Harrods is believed to trim her bills by 30 percent) and airline tickets from Virgin Atlantic Airways chairman Richard Branson. Cronies, including impresario Robert Stigwood, who paid for Fergie's May holiday in Bermuda, and Indian socialite Lily Mahtani, who reportedly contributed $150,000 toward a 1994 jaunt to the South of France, have also helped the duchess to live beyond her means. So, too, have a handful of London boutiques that allow her dresser, Jane Dunn-Butler, to borrow expensive outfits.

There are less obvious benefits as well. Though the duchess maintains that she pays her own way on charity missions, some are underwritten by corporate contributors. And though other royals are careful to keep such sorties separate from holidays, Fergie has never taken such care—leaving herself open to allegations that expeditions like her trip to Qatar are merely window dressing for her vacations.

Veteran Windsor watchers, at least, are not surprised by Fergie's predicament. Noting that her father, Maj. Ronald Ferguson, has often been in debt, Brian Hoey says, "She was raised in a family with champagne tastes and root-beer capabilities—she has no idea of the value of money."

At the moment, it seems, Sarah's major adversary is the Queen, who lost patience when she began to suspect that her daughter-in-law was funneling money to the debt-ridden Bryan, 40. On Jan. 18, the duchess informed reporters that she was the target of a conspiracy—that "enemies at the Palace" had leaked reports about her debts. Royal watchers say that such paranoid talk puts her on a par with the increasingly isolated Princess of Wales (who last week lost three staffers, including top aide Patrick Jephson) and note that Fergie must make her own way in the future. "The Palace suspects that if they threw 10 million pounds at her this week, in a year she'd be back for more," says Chris Hutchins, author of a Fergie bio.

When the duchess's office announced the bailout on Jan. 20, the Palace responded with terse approval. "If a financial agreement has been reached," one courtier told The Daily Telegraph, "it would be welcomed."

Last week's deal—which was hammered out by Michael Spiessbach, lawyer for the consortium; Fergie's accountant, Jeremy Scott (a friend of Bryan's); and a representative of Sleepy Kids PLC, the British firm that owns licensing rights to Budgie—marks the first time any royal has peddled herself to foreign investors, and the Palace was expected to examine it from every angle. As one wary aide told Hoey, "It seems as if charity begins at home for Fergie."

At minimum, Fergie will be required to promote Budgie products and work on behalf of several charities supported by her benefactors and their friends. Among them: the Millennium Foundation, a scholarship fund whose cochair Cate Wyatt is the wife of Fergie's—and Bryan's—close friend Texas oil millionaire Steve Wyatt (who apparently was not a member of the bailout team).

British newspapers, including The Sunday Times of London, claimed that the consortium was headed by a pair of publicity-shy Americans: New Jersey-based millionaire Ray Chambers, 53, who made his fortune in leveraged buyouts, and Washington investor Frank Pearl, 52. A source close to the two, however, asserted that financiers in London played the leading role and that their own involvement—and investment—had been "very minor."

Though some were surprised that tycoons anywhere were willing to rescue her, Fergie has always found friends with deep pockets. According to London's Daily Mirror, Chambers met her through former U.S. Treasury-Secretary William Simon, a partner with Bryan in Oceanics Deutschland, a construction firm that collapsed in April 1995. By other accounts, the meeting came about at a White House dinner last December. In any case, when Bryan and the duchess parted last August (apparently because Fergie realized that he was a liability), Chambers is believed to have offered occasional financial advice.

A kind of folk hero in Newark, N.J., where he has channeled much of his $400 million into charity, Chambers, who lives in Morristown with his wife and three children, was a partner with Simon and Pearl (now head of the Rappahannock Investment Company) in the leveraged-buyout firm of Wesray Capital Corp. A Connecticut-born lawyer who happened to know the Yorks, Pearl shares Chambers's passion for philanthropy: He has given millions to the John F. Kennedy Center for the Performing Arts and established a scholarship foundation as well.

Although no one close to the deal has provided details about the terms or the consortium, Fergie reportedly will receive $3 million up front, an arrangement that presumably will keep her from being tempted to write a lucrative tell-all—a prospect that the Palace dreads—or to accept last year's $1 million-plus offer to model No Excuses jeans. It may also make pitches from Hello!—which has donated $150,000 to her various charities, in addition to making outright payments to the duchess—seem less appealing.

The question is what the bailout could do for Fergie's friends: Budgie has not been the earner he was predicted to be in 1992, when Bryan sold TV and merchandising rights to Sleepy Kids, a deal that netted Fergie just $500,000. Still, her partners can now collect royalties from 100 licensees who market items including toys, towels and greeting cards and from a cartoon series for which Fox TV paid $1.3 million. And observers, including Robert Launey, president of the New York ad agency that has handled Budgie licensing, expect the market to improve. "Budgie has only been on Fox since October," he says. "It's not a Barney yet, but we believe it has a great deal of potential."

And the duchess's potential?

"She'll cut back until it all dies down," says Hutchins, "and then she'll be up and running again."

Hoey agrees. "Now that she's managed to get rid of this overdraft with such apparent ease," he says, "I don't think it will curb her in the least. She'll carry on with her lifestyle, and we'll still see her shopping and flying all over the world."

For all that, says Hoey, the Queen may have little to fear from Fergie henceforth. "I don't think this latest did the Windsors any good," he says. "But she can't do much further damage. Most people no longer think of her as a member of the royal family."

LYDIA DENWORTH and MARGARET WRIGHT in London, ANNE LONGLEY in Connecticut and MAGGIE HALL in Washington

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