During his July 12 conference call from Zurich, Credit
Suisse Group chairman Lukas Mühlemann could not have sounded happier as he sung
the praises of John Mack, his new chief executive at Credit Suisse First
Boston. Punctilious and formal, his English refined and slightly accented, Mr.
Mühlemann sounded as if he were phoning in from a Gstaad ski lift with nary a
care in the world.
Then Mr. Mack came on. He’s suddenly the man charged with
turning the troubled CSFB around, cleaning up its I.P.O. mess while keeping it
at the top of the bulge bracket. And even as he moves forward with a mandate
from the coolly confident Mr. Mühlemann, he still must deal with the
entanglements of the past.
Asked about the propriety of holding a still very sizable
share in Morgan Stanley, the company he left as president last January, the
56-year-old Mr. Mack’s reply was as blunt as his Carolina drawl was pronounced.
“I still have Morgan Stanley stock, and now I’m lucky enough to have CSFB
stock,” he said. “Look, I think I can handle the conflict.”
The gnomes of Zurich have spoken. Out with Allen Wheat,
CSFB’s former chief executive, and his taint of federal I.P.O. probes; in with
Mack the Knife. And if Mr. Mack remains one of the largest individual
shareholders of Morgan Stanley, so what? Mr. Mack, as he himself said, would no
doubt work it out.
Mr. Mack’s Morgan Stanley stake is a big one-the rich fruit
of his 28 years spent with the firm. According to Morgan Stanley’s most recent
proxy, he holds 7,540,306 shares, or $438 million worth of stock.
In the annals of Wall Street, it’s a unique situation:
picture the Red Sox bringing in George Steinbrenner in the hopes of finally
securing another World Series.
“It’s pretty unusual,” said Guy Moszkowski, a securities analyst
for Salomon Smith Barney Inc. “But Morgan Stanley generally has pretty tight
windows through which former employees can sell stock.”
That’s just one of the potential conflicts Mr. Mack faces.
Morgan Stanley and CSFB, like the Red Sox and Yankees, are bitter longtime
rivals in all areas of banking, but especially in technology, where star
rainmaker Frank Quattrone has made hundreds of millions for CSFB from his
mini-fiefdom in Silicon Valley (attracting the suspicious eye of federal
regulators in the process). Now Mr. Mack is being called upon to cement CSFB’s
status in the bulge bracket.
Whether he does this by poaching from his old firm or
restructuring from within, there’s no getting around the fact that, if Mr. Mack
is to succeed on the scale that his outsized ego surely demands, CSFB will have
to take market share away from Morgan Stanley. Morgan Stanley’s share price
would no doubt be affected by this, as would Mr. Mack’s net worth.
According to regulatory filings, Mr. Mack has registered to
sell two million shares, and in an interview with The New York Times he said that he was restricted in selling the
rest of his horde. A Morgan Stanley spokeswoman confirms that, as part of his
severance agreement, Mr. Mack is subject to restrictions with regard to the
sale of the rest of his stock.
Meanwhile, he has other potential conflicts. Wall Street is
asking: When will the poaching begin?
Analysts have argued that Mr. Mack is unlikely to cut too
much of a swath through his old firm’s banking ranks. Fair point: CSFB’s cost
base is already the highest in the industry, and in a slack market environment,
many managing directors will prefer the safer shores of Morgan Stanley to the
more turbulent waters of CSFB. Mr. Mack also has an understanding with his
former firm that precludes hiring from its ranks in the coming months.
Nonetheless, Mr. Mack is known to place a very high premium
on having a cadre of loyal senior aides reporting to him. Call them John Mack
guys: men-and a few women-whose careers at Morgan Stanley were nurtured over
the years by Mr. Mack as he, and they, ascended through the ranks.
Vikram Pandit, now co-head of investment banking at Morgan
Stanley, was one banker whose star was burnished to a high sheen during Mr.
Mack’s reign. Zoe Cruz, head of fixed income, was another.
And sitting on the sidelines are a bunch of former John Mack
guys-mostly in the fixed-income area, where Mr. Mack himself first made his
name-who were pushed out by Morgan Stanley chief executive Phil Purcell over
the course of last summer and fall, when telecommunications companies started
hitting the wall. Like many banks, Morgan Stanley had some big fixed-income
exposures that rapidly disintegrated-Shelby Bryan’s ICG Communications being
one notable case. But unlike other banks, Morgan Stanley, led by Mr. Purcell,
immediately started taking people out as a result. Many of those who “retired”
or decided to “pursue other interests” were John Mack loyalists-most prominent
being Peter Karches, the head of the institutional-banking business, who left
the firm in August.
Others who followed were fixed-income head Kenneth de Regt,
who left in September, and junk-bond maestro Dwight Sipprelle, who followed a
few weeks later. A few months after that, Michael Rankowitz-the high-yield co-head,
with Mr. Sipprelle-took a dive for Mr. Purcell following the fallout from
former President Bill Clinton’s address at a Morgan Stanley high-yield
With his core people gone, Mr. Mack was thus vulnerable to
Mr. Purcell’s mini-putsch in January.
So will Mr. Mack now turn to this ready and no doubt eager
lineup of followers to do his bidding as he shakes things up at CSFB?
If so, he’ll need to start letting some senior bankers go.
And to do that, he’ll have to wait until January, when all the lucrative bonus
guarantees handed out by Allen Wheat last October, at the time of the
Donaldson, Lufkin & Jenrette Inc. acquisition, finally expire. Despite the
bonuses, which were ladled out to bankers across the board, word on the Street
has it that only 50 percent of D.L.J.’s bankers remain at today’s CSFB, an
astonishingly low figure given the top-of-the-market price paid for the
company. According to a CSFB spokesman,
90 percent of D.L.J. employees remain at the firm.
Nevertheless, there’s still enough of a stench lingering
from the junk-bond losses that occurred during Messrs. de Regt, Sipprelle and
Rankowitz’s watch to make their return seem unlikely. That, at least, is the
view from within CSFB.
“Dwight Sipprelle lost a shitload of money,” said one CSFB
bond banker. “He was publicly flogged and executed by John Mack. I doubt he
would be anyone’s choice. He also worked from a different model over there at
Morgan Stanley. They were big proprietary traders; CSFB’s business is more
As for Mr. Karches, a 25-year Morgan Stanley veteran and
longtime friend and associate of Mr. Mack, he seems to be preparing more for
his golden years than a return to the trenches. He has registered to sell
816,432 shares of Morgan Stanley since his departure and, together with Mr.
Rankowitz, has been actively playing the ponies more than he’s been playing the
markets-the former bankers have been joint backers of a number of racehorses of
But Mr. Mack may have less need for his clique these days.
Within the nasty little world of the Morgan Stanley boardroom, he had more of a
need for supporters capable of guarding his flank. No matter how high he
climbed, he always had to watch his back. He survived bitter battles in the
1980’s with old-line bankers such as Robert Greenhill, the Morgan Stanley
president who preceded him, and powerful investment-banking head Joseph Fogg
III. It was Mr. Purcell, a retail broker from Dean Witter, who finally stuck
the shiv in him.
The climate for Mr. Mack is different at CSFB. His position
is more secure and his mandate broad. Now he’s running his own shop, and likely
will be for years to come.
Most important, the gnomes are with him. As far as they’re
concerned, it’s cleanup time at CSFB, and Mr. Mack is the man to do the job.
Mr. Mühlemann admitted it himself during the conference
call, in so many words-his bankers are overpaid and much too prone to playing
it fast and loose. It would be Mr. Mack’s charge to do as he saw fit to put
“There are no teams coming to CSFB,” Mr. Mack said at the
press conference announcing his appointment. “Clearly, though, if there are
individuals who would like to talk to us because they see strategic
opportunities here, we would always talk to them.” Stay tuned.