Cs First Boston: Did Someone Say `Abandon Bank'?

Top execs are deserting the Swiss owned bank

Here we go again. For the third time in the past six years, CS First Boston Inc. appears to be imploding. Since February, the Swiss-owned investment bank has seen some two dozen senior professionals bail out. Among them: Robert E. Diamond Jr., an executive board member and head of the fixed-income department; Tracy L. Van Eck and Lesley D. Goldwasser, managing directors in charge of asset-backed securities; and Thomas H. Hanley, a well-known bank analyst, along with his staff of six. Inside the firm, more departures are anticipated.

The obvious reason behind the flight: In late February the firm paid out bonuses that were sharply lower than expected in both the fixed-income and equity departments. In the fixed-income department, for instance, bonuses were 15% to 20% lower than those paid in 1994, a year in which bonuses had been slashed by as much as 50%. That was despite CSFB's $207 million in 1995 earnings, its second-best year ever.

INFLAMED. Recently departed executives say the bulk of CSFB's $455 million bonus pool went to a handful of top managers and to investment bankers, who had a very good year. Employees say they were particularly inflamed by President Allen D. Wheat's 1995 pay package of $9 million. That came on top of the $25 million former employees say he received from 1990 to 1995 in compensation from Credit Suisse Financial Products, the derivatives unit that he helped build. "No one gives a damn anymore," says a former employee. "Everything is being done for Wheat and the Swiss."

The problems go deeper than pay. For years CSFB, 68.8% owned by Zurich-based CS Holdings, has been stymied by battles with its Swiss parent over the firm's long-term strategy and management. Now, current and former employees question whether Wheat, a ruthlessly bottom line-oriented manager, is willing to spend enough to maintain CSFB as a full-service investment bank, or whether his real agenda is to pare it down to a proprietary trading and mergers and acquisitions boutique. If CSFB went this route, "they could get rid of half to three-quarters of their fixed-income department," says Perrin Long, an independent brokerage industry analyst. Of 5,300 CSFB employees, 1,100 are in fixed income. Already, the firm has lost clout in key markets (table).

"PLAYING WITH FIRE." CSFB spokesman Maynard Toll denies the firm is changing its stripes. "CS Holdings is planning to be one of the top financial services groups of the 21st century," he says. "So why would they allow CSFB to become a boutique?" Still, CS Holdings has had success with smaller units before, notably Credit Suisse Financial Products, which Wheat headed until March, 1995.

Others maintain that lower bonuses were simply a reflection of the so-so performance of the equity department and $100 million in mortgage-backed securities losses that depressed the entire fixed-income department. Wheat's regime now is offering additional bonus checks to certain employees. He is also trying to fashion a formula-based compensation system that will allow staffers to more accurately anticipate their pay. But Wheat is walking a tightrope. "They're playing with fire because they're risking the franchise" when they lose so many employees, says a competitor. "At some point, they fall off everybody's screen."

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