When John J. Mack took charge of investment bank Credit Suisse First Boston last July, it was in big trouble. The freewheeling bank had become a symbol of the initial public offering con game and was headed for a $1 billion loss. Worse, internal warfare resulting from CSFB's purchase of rival Donaldson, Lufkin & Jenrette for $12 billion in 2000 was tearing it apart.
Mack has brought CSFB back from the brink, but now he wants to transform it from one of Wall Street's most troubled investment banks into one of its most credible. To achieve that, at a bare minimum, Mack must show that CSFB is well-managed and profitable. Mack recently shared some of his plans for doing that with BusinessWeek Investment Banking Editor Emily Thornton. Here are edited excerpts of their conversation:
Q: You have said that you don't expect the economy to rebound for as long as another 18 months. Why is that?
A: Most people are saying in the first quarter of the next year the
[stock] market should be doing better and the economy will be growing at 3.25%. I just don't see anything that indicates that. When I talk to CEOs, no one seems to have a robust view. No one seems optimistic.
Q: Even if Wall Street's doldrums continue for that long, you have said that you expect to deliver a return on equity between 15% to 20%. How did you arrive at that range?
A: I've been in the business for 30 years. I thought about what we targeted in [my] old firm [Morgan Stanley], what other firms are doing, and what this firm did in its best year in 2000. Then, CSFB had a 22% return on equity. If we can complete the strategic initiatives that we've laid out, this business in a tough market should generate a double-digit return on equity in a 15% range.
Q: You have spoken about how bankers' expensive multiyear guaranteed contracts have weighed down CSFB. Besides contracts, are there other elements of CSFB's past that you are still carrying?
A: Absolutely. I'm lugging a legacy of real estate investments made in 1999. Originally, I'm told that the total portfolio was $19 billion in real estate mortgages. We had reduced it down to less than $4 billion. I want out of it in a prudent way. We're not in the real estate business. That's a legacy dragging on us.
The firm also made fairly large investments in other people's funds. They put money in a number of leveraged buyout firms. That's not the business we're in That has been a drag especially in this market. A number of people who invest in those funds are trying to sell a piece of their partnership, and we're exploring that.
Q: There's a lot of talk that there could be more layoffs on Wall Street. What about CSFB?
A: On the investment banking side, we're down 35% from when I arrived. We're down now to where we're only 300 heads more than what we had [at the time of] the merger with DLJ [in investment banking]. If [business] stays where it was in the first six months [of 2002], I think I have it about right in investment banking. Then the question becomes what's happening in the securities market? Banking is probably right-sized, but we need to look at other businesses.
Q: You have asked a number of your best people to break lavish multiyear guaranteed contracts to cut costs and to unite the firm. Are you concerned that you may lose some of them after this next bonus season?
A: I'm concerned. How concerned is a broad question mark. Some of these issues, like contracts in research, are issues that all the firms will face. No one can define the future structure of research. Some people will say "I've had enough."
If you're an analyst today, you've really been beaten up. Some people deserve to be beaten up. But the larger group did world-class work. The whole industry will face this [challenge]. Having said that, I know I'll lose people at yearend. Sorry. But I'm not going to do contracts. At this firm, it was always "I'm going to leave unless..." I don't work that way.
Q: Ealier this year, despite aggressive cost cutting, you spent roughly $65 million to buy Chicago-based Holt Value Associates, a company with a research database. Why was this important?
A: It was a reasonable acquisition for a product that we were trying to build. We were probably 35% to 50% in building out the product and spending a lot more to do it. [This was] a chance to acquire [a company] that covered 18,000 companies around the world, had clients, and 4,000 portfolio managers. It was a natural. Most research departments cover 3,000 to 4,000 companies. We can slice and dice 18,000 companies. From that data, you can get information about the 7,522nd company and their characteristics. It opens up a whole portfolio of companies not covered by the Street. Tremendous value.
Q: What's your position on proprietary trading?
A: I'm getting the reputation internally that I don't like proprietary trading. It's not my first love. I believe there is a place for proprietary trading in this firm. But in the past, this firm made it a centerpiece of its strategy. It is not the centerpiece of my strategy. I'm prepared to take a fair amount of market risk for clients. I'm not prepared to take outsized proprietary risk just for the firm's account.
Q: You have said that you want CSFB to be an "ethical" investment bank. What is ethical and what isn't?
A: Ethical is "I'll wait and do what's right even in the hardest times and even if I have to give up gains to do it." The Street has the reputation of doing whatever it takes to do a deal. And it doesn't make sense. The whole money culture has skewed a lot of firms. We want people to be successful and wealthy. But not to the detriment of our clients.
In the most honest, best-intentioned manner of doing business, markets and volatility could create situations where it looks like you're taking advantage of people. That's in the best case. So just add people on the edge, and it gets way out of kilter. And that's why people don't trust Wall Street.
I want people to feel that they're doing their job when they tell a client "don't do this." There are a lot of ethical firms on Wall Street. We want to be known as an ethical firm on Wall Street, and we want to be trusted. I want other firms to be known as ethical and trusted firms. I want to be in an industry that people trust. I don't want to be the only one.
Q: Are you running CSFB differently from the way you ran Morgan Stanley?
A: There are different things to do. But I am what I am. I didn't change because I walked across the street.
Q: Five years from now, what will CSFB look like?
A: We will be much more profitable. CSFB is going to be a place where people want to come to work. It's going to be a place where people say "I don't need a three-year contract, I just want to work at this firm. I like the culture." And clients are going to say, "I can trust this firm. They know what I need, and they deliver the entire firm." People of color and women are going to say, "This firm treats me fairly, gives me a chance to grow and lead the firm." In five years, I wouldn't be surprised if someone of color or a woman isn't the most senior person in this organization.
Q: There are rumors that CSFB could be sold.
A: I've heard a lot of rumors. But this firm is pretty good now, and I believe we can make it. The answer is, I don't want to do it. We have a lot to do on our own.