July 25, 2002 Dow Jones Newswires, New York
"CSFB's Mack One Year Later:
Progress But More Work Ahead"
by Cheryl Winokur and Lynn Cowan

It's been a year since John Mack took over the helm at Credit Suisse First Boston, and the jury is still out on how successful he'll be at overhauling the investment bank.

The 57-year old former president of Morgan Stanley (MWD) has made some progress in his tenure so far, including quickly settling a nettlesome regulatory scandal over CSFB's IPO allocation process and chipping away at the firm's bloated cost structure.

But Mack, who joined the firm in mid-July 2001, still has a lot of work ahead as he tries to turn around the investment banking unit of Zurich-based Credit Suisse Group (CSR). The company is still suffering the effects of a contentious merger with Donaldson Lufkin & Jenrette Inc. two years ago, which saddled CSFB with high expenses and created rancorous relations between employees.

It's also difficult to measure Mack's ability to sufficiently cut costs and motivate employees, as the slow business environment has put a lid on profits industrywide.

"It's sort of like turning an aircraft carrier around on a dime. You can't do it," said Barry Honig, who used to work with Mack at Morgan Stanley as principal of risk management technology. "But I think that they are making progress," said Honig, now president of Riskon, an executive search and management consulting firm in Tenafly, N.J.

Mack declined through a spokeswoman to be interviewed for this article. But interviews with current and former employees, as well as industry observers, paint a picture of a firm that's made improvements but still has a long way to go.

"He's gone through a year of pain to get to a basic takeoff level," said James Freeman, an industry consultant and adjunct professor of finance and economics at Columbia University's graduate school of business.

Much of Mack's first year was devoted to putting out fires that he didn't set. One of his first steps was to tighten inner controls that had grown lax over the years. Mack hired several top advisors to help in this task, including Gary Lynch, former head of enforcement at the Securities and Exchange Commission, who was instrumental in getting the IPO matter settled with regulators quickly. He also tapped Jeffrey Peek to lead the firm's asset-management and high-net-worth-brokerage operations. Peek had led Merrill Lynch & Co.'s (MER) asset-management business, but left after being passed over for the Merrill president's post. CSFB's asset management unit is one of the larger money managers on Wall Street.

Mack, whose reputation for cost-cutting earned him the nickname, "Mack the Knife", also sought to reign in CSFB's out-of-control costs, pledging to reduce $1 billion of expenses annually. He's already more than met that goal on an annualized basis.

Since Aug. 1, CSFB's employee count is down slightly more than 14%, through layoffs and attrition, after ballooning in 2000 with the expensive acquisition of DLJ. Mack has said publicly that he doesn't expect more investment banking cuts unless market conditions continue to deteriorate, but some industry watchers said staffing could stand to fall further and that they wouldn't be surprised to see more cuts.

To help reduce expenses, Mack convinced nearly all bankers from DLJ and CSFB who received contract guarantees from his predecessor, Allen Wheat, to give up as much as 25% of their promised compensation, an unusual concession. He persuaded the bond team led by Jack DiMaio to accept options instead of cash for the third year of their contracts and also reached an agreement with star technology-stock banker Frank Quattrone to adjust his group's lofty pay packages.

What's more, the firm is no longer handing out multi-year guarantees and has lost some employees by refusing to give counteroffers in cases where the firm felt the price was too high to pay.

Still, compensation costs remain higher than the industry norm. Personnel expenses were $1.8 billion in the first quarter of 2002, down 30% from the year-ago period; compensation as a percentage of operating income was at 55% at the end of the first quarter, down from 57% a year ago. The average ratio on Wall Street is 50%.

Although at least one banker at the firm feels things have already gotten better, that's not necessarily the popular view. There's an impression among employees that the contract concessions have been over-hyped. Several former and current employees say the issue of compensation continues to be divisive.

Of course, spirits are not high at most Wall Street firms, given the prolonged downturn that has cut into compensation and resulted in layoffs. But, some of the anger at CSFB has only grown worse as poor market conditions have lowered non-contract employees' bonuses, said one former employee who left for a higher-paying job at a rival firm.

Some changes within investment banking have also generated ill-will. In February, Mack promoted banker Adebayo Ogunlesi to run the firm's global investment-banking business, after losing a highly publicized attempt to woo Walid Chammah from Morgan Stanley to share the post. Charles Ward, who co-headed the group with Hamilton "Tony" James, left the company to become president of Lazard. James remains at the firm.

One change Ogunlesi made that sat well with some, but not with others, was to take some top producers out of day-to-day management in order to focus exclusively on rainmaking. One of the disgruntled bankers, Russell Ray, is now suing the firm.

CSFB has also had some major defections within its asset management arm following the hiring of Peek. Phillip Colebatch, chief executive of Credit Suisse Asset Management, left the firm. James McCaughan who was chief executive of CSAM in the Americas, soon followed. The fixed-income department has also suffered some losses. At the same time, CSAM has been making new hires, including Greg Sawers from Sanford C. Bernstein & Co. as global head of research.

Despite the various upheavals, voluntary turnover is lower than expected, according to a person familiar with the firm. That could be because employees are willing to give Mack a chance, or because the job market is so bleak right now; no one will know which it is until the market turns. To its credit, CSFB has been able to attract some big-name talent over the past year, such as Lynch, Peek, veteran banker Brian Finn and lawyer Stephen Volk, who is now chairman of CSFB.

Another area where Mack has made some strides is in diversity. One example of this occurred in April, when the firm named Susan Saltzbart Kilsby co-chief of its European mergers-and-acquisitions business, making her the only woman to head up a mergers business at a major investment bank. Also in Mack's favor is the relative autonomy he's been given by Credit Suisse Group. There are rumors that the parent, which has its own troubles right now, would be interested in selling CSFB, but with brokerage stocks at such depressed prices it doesn't seem likely at the present time.

Perhaps a bigger issue for Mack at this point is profitability. For the first quarter of 2002, the most recent data available, CSFB had a net loss of $19 million, compared to net profit of $272 million a year-earlier and a net loss of $939 million in the fourth quarter; for the full year 2001, it lost $961 million, compared to a net profit of $1.4 billion in 2000. CSFB has made some strides in its league table status. The firm jumped in rank to No. 1 in announced mergers and acquisitions worldwide for the first half of 2002, compared to No. 4 a year ago, increasing its market share to 21.1% from 17.7%, according to Thomson Financial Securities Data.

"Right now, this is an unfinished novel, in some respects. There's no denying that what he's already achieved is a step up," said one executive recruiter who asked not to be named. "But there's a big unknown: The level of profitability that could be achieved in a normalized economy. It's easy to say you've reduced expenses from X to Y. Everyone has reduced expenses."