JOHN WALSH HAD been making known his feelings about the recent reorganization above him at CSFB for some weeks before Jerry Wood finally went in to talk to him on the first Friday in April. It was never going to be a cosy chat. Walsh, the bank’s head of global debt capital markets, was not happy, and what vexed him most was the appointment two months before of the man now standing before him. Wood, who had been hired by CSFB CEO John Mack from his old stomping ground at Morgan Stanley, is now co-head of CSFB’s fixed-income division, and thus Walsh’s boss.
But seniority counted for nothing here. As Wood was trying to talk to him about his recent abrasiveness, Walsh cut him off, told him they weren’t going to have this conversation, and made it clear he wanted Wood to leave his office.
Tom Nides, CSFB’s chief administrative officer, was soon on the phone, but Walsh had already made up his mind. After a heated exchange, according to insiders, Walsh told Nides he was resigning.
A senior CSFB fixed-income banker unhappy with who he’s reporting to decides to quit? If it sounds eerily familiar, that’s because it is. Along with his friend, colleague and former boss Jack DiMaio, head of fixed income for North America, Walsh was the leader of 40 or so fixed-income bankers who resigned en masse two years ago to move to Barclays Capital because they had a problem reporting to Stephen Hester. Hester had been made head of fixed income by then CEO Allen Wheat in May 2000 as a thank you for his four years as CFO. Unfortunately, few of those who reported to him had much respect for his debt markets skills; he hadn’t worked in fixed income since the start of his career.
The naughty 40 decided to stay, but only after Wheat promised to remove Hester, as well as to top Barclays Capital CEO Bob Diamond’s offer, which was generous enough at around $300 million for the group. Best guesses on the packages given to the five most senior of the group were between $20 million and $30 million, guaranteed for three years, while the rest were on smaller packages with two-year guarantees.
Many of them have since been renegotiated downwards, along with other generous Wheat-era deals, as a concession to Mack’s attempts to reduce costs and restore some balance to the firm’s culture.
The role of head of fixed income died with Hester’s demotion. But Mack recently chose to resurrect it. Since he was made co-CEO of Credit Suisse Group last year in addition to his responsibilities at the investment bank, Mack has added an extra layer of management at CSFB. Brady Dougan and Brian Finn became co-presidents of institutional securities, and Mike Clark and James Kreitman were made co-heads of the equity division. Fixed income was more fractured, with various fiefdoms – or clusters, as they are called internally – the remnants of past structures, created by Wheat’s unique approach to hiring and retention, or the by-product of mergers.
One of Mack’s aims as CEO has been to get rid of bunkers such as these to create instead what he calls “a one-firm firm”. When appointing Wood and promoting global head of emerging markets Jim Healy to the resurrected post of head of fixed income he must have known that he risked upsetting top producers in one or more of these camps.
It has, thus far, been limited to a handful. Walsh was first to go officially but DiMaio had already announced his intention to leave. His 2001 contract expired in February, insiders say, as he had agreed to reduce his guarantee period when renegotiating it with Mack.
Mack offered DiMaio the role of co-head of fixed income but, say people close to the situation, he was already pondering whether he wanted to stay at the investment bank.
He’d been at CSFB since joining as a summer intern in 1987, had built up one of the most successful franchises in terms of earnings and had renegotiated the deals struck with Wheat in 2001. Undertaking another reorganization didn’t appeal. “CSFB’s fixed-income division is organized around four clusters,” says a former CSFB debt markets banker. “They had duplicative strategies and resources in many cases, and were run by strong personalities. DiMaio wasn’t sure that he wanted a job that was more bureaucratic than suited him and one which would require breaking glass.”
DiMaio told Mack that he should look outside the firm for a co-head for Healy.
But he also told Mack about his nascent plans to move into asset management, more specifically alternative investments and structured finance. Mack was intrigued and, keen to retain DiMaio’s services if at all possible, suggested that he chat with Jeff Peek, whose role as head of CSFB financial services includes oversight of Credit Suisse Asset Management (CSAM). Peek wanted to improve the alternative investments offering at CSAM and was as receptive to DiMaio’s ideas as Mack had been.
But Peek was still on the hunt for a CEO for CSAM. Any move by DiMaio would have to wait for that post to be filled first, although the likelihood that he would be leaving leaked in early February, just as Wood was joining the firm.
Peek finally announced the appointment of Michael Kenneally, chief investment officer at Bank of America asset management, in March. DiMaio’s switch to become CEO of alternative investments, along with four of the desk’s best traders, was confirmed a few weeks later on April 7.
DiMaio’s move was a blow to Walsh. “Jack’s decision to leave struck John more personally than it did others,” says one insider. “The two did talk about whether there could be a role for John at CSAM, but he’s from the origination side and what they were looking for was traders.”
Walsh did not like the appointments above him, and with DiMaio going felt even less inclined to stay. “John had well established in his own mind what his abilities were and what he wanted to do,” says a former colleague. “And he was very vocal about it.”
Thus far only Jeff Blum, co-head of global high-grade syndicate and another of the naughty 40, has followed Walsh out of the door. He left on April 9 to become sole global head of syndicate at UBS Warburg as a replacement for Richard Johnson, who quit as syndicate head in March and has left the industry.
Whether the departures of DiMaio, Walsh and Blum hurts CSFB’s business is another matter. The first two were the face of the business, and the departure of the traders DiMaio took with him will have an immediate negative impact on the fixed-income division’s bottom line.
The new co-heads are sanguine about the loss, with Wood stating that the effect on business will be just “a short-term disruption, that’s it”.
Healy says: “We did have a face for the business in Jack and John, but the ability to run the business for our clients and for our own book remains intact. We have a huge reservoir of talent here.”
You hear the phrase “deep bench” a lot from CSFB these days. It’s overused but has some truth to it. Next to each other along one section of the trading floor are the offices for Tom Pascale, head of CDOs, John Romanelli, a long-serving senior debt capital markets banker, and Bill Battey, who’s been through almost all CSFB’s wars.
Taking Walsh’s place are veteran CSFBers. As part of the reorganisation of the business heralded by the resurrection of the role of head of fixed income the bank is merging the high-grade and emerging-markets capital markets desks. Healy and Wood have therefore appointed two people to run it. They’re also two of the naughty 40. Peter Milhaupt, formerly the head of US debt capital markets, will remain in New York, while Paul Tregidgo, who ran emerging debt capital markets out of New York, is moving to London. They’ll report direct to Wood and Healy.
Thus far, only a few of the naughty 40 have actually left. “We’ve been able to retain a significant core of that group,” says Wood. “More than 75% are still with us.” But there have been other defections from fixed income of late. They’re not connected to the naughty 40, and it’s unlikely that most of them have to do with the changes Wood and Healy are starting to put in place. It could simply be part of the usual musical chairs after bonus time, but CSFB has lost several senior bankers in fixed income in the past few months: JC Perrig, co-head of European corporate debt capital markets, has been lured away to run European debt capital markets for Banc of America Securities; Stuart Bell left his role as head of European corporate debt syndicate and head of sterling credit to join ABN Amro; global head of credit derivatives in London Sanjeev Gupta resigned to get married and move to Italy; Mark Davies, head of credit derivatives in the US, left to go to Bear Stearns last month; head of asset-backed CDOs Chris Ricciardi moved to Merrill Lynch.
Healy and Wood don’t seem to be too concerned, though. “We’ll not be replacing some of the people who have left,” says Healy. In fact, they seem to be using the departure of DiMaio and Walsh as an opportunity to restructure the division earlier than they might had the bankers stayed. On April 28 they made their plan known in a six-page memo sent to all fixed-income staff. “The management structure’s being changed from being pyramid-shaped to become flatter,” says Healy. “There’ll be fewer managers of managers.”
It’s an attempt to remove the walls between three of the four main units of fixed income: emerging markets, credit and interest rate products. “The ability to go back and forth between them for clients was often a problem,” says Healy. “It’s much like what we did with Credit Suisse Financial Products. That was a great, strong model for its time when swaps were traded just as swaps, for example. But then clients started trading swaps against govvies, or mortgages, or trading mortgages with swaption volatility, and the need to have all product desks working together grew stronger and stronger.”
That wasn’t the easiest task. CSFP traders had a reputation as hunter-killers, which didn’t sit well with some of the more client-oriented bankers at CSFB.
But customers are looking for greater integration of products from the banks – witness the decision by firms such as Morgan Stanley last year to merge debt and equity capital markets. “Wall Street is trying to figure out what the best way is to sell products to clients,” explains Milhaupt. “More and more capital markets decisions are made in the corporate treasurer’s office now, and it’s the debt capital markets groups that are best set up to deal with that on a daily basis.”
CSFB had fallen behind in recognizing these changes. Wood says: “Frankly, pulling together our interest-rate products with the rest of the group is a bit past its due date.” But, he continues, some of the changes CSFB is making are more cutting edge, such as merging cash trading and credit derivatives trading.
High-grade and emerging-markets businesses will now also be run as one with co-heads from each side of the business whether in capital markets or trading. Putting the two trading teams together, claimed Healy and Wood in the memo, “will allow for better coordination of crossover opportunities between the emerging-market and high-grade trading areas”.
Asset-backed securities will be more closely integrated by promoting Joe Donovan to the newly created role of chairman of ABS and debt financing. Donovan, who had run asset finance, will act as senior relationship officer for all fixed-income funding, regardless of whether unsecured or secured. Greg Richter is being promoted to run the new US asset finance capital markets unit.
CSFB had dumped much of its prop trading after its disaster following the Russia meltdown in 1998 but started to rebuild it last year. Mark Pattinson, described in the memo as “CSFB’s most consistent and most profitable derivatives trader for over a decade”, has been appointed to build a new prop trading business.
“This doesn’t mean that we’re going to become a prop trading shop,” Healy, who used to be a big prop trader himself, tells Euromoney. “But in my talks with John [Mack] he has said that if we have strong views and research to back it up, we shouldn’t be afraid to take risk. It’s part of our business. But we have to scale the business appropriately.”
Having Healy and Wood as co-heads is also part of the attempt to build a more comprehensive offering. “It wasn’t so much a question of whether we looked inside or outside the firm to fill the role,” says Healy. “It was more to do with getting the right combination of talents – capital markets and dealing with clients on the one hand, and risk management and trading on the other.”
By background, Healy is a prop trader and between 1993 and 1995 was co-head of CSFP, the standalone derivatives franchise, which has gradually been folded into CSFB over the past few years. Wood, by contrast, has spent much of his career in sales. His last role at Morgan Stanley was as head of the firm’s global senior relationship management group. “We want to increase our market share, so are improving our product offering and the way we provide liquidity,” says Wood. “And by taking away some of the toll booths the customers will have a cleaner execution.”
CSFB has slipped in the debt capital markets rankings in the past couple of years, from being third or fourth in both the US and Europe in 2001 to sixth or even lower. That, says Milhaupt, is in part because “we’ve been out of the league-table game for two years. We’re trying to be more holistic, so we will do them if they help us to increase our overall business, such as secondary trading.”
Its first quarter showing in the US was particularly disappointing, placing ninth in the investment-grade league table with 53 deals worth $8.8 billion, according to Bloomberg data. Even stripping out some of the league table boosters such as shorter-term paper and self-issuance, CSFB still only comes in third.
But it does better in the most lucrative part of the bond market, according to CreditSights analysts David Hendler. In a report last month he drilled down further into the league tables to see which banks had the more comprehensive investment-grade bond franchise, and which took a larger slice of the BBB market where fees are better. In the latter category CSFB placed sixth. Nonetheless, says Hendler, “it seems that Credit Suisse, unlike the other commercial bank-oriented underwriters, is not getting the same variety of companies and industries” in its underwriting business.
It’s somewhat unfair to judge on just one quarter. And, explains Milhaupt, the league tables don’t reveal everything the firm is doing in the US. “Auto companies were massive issuers of asset-backed securities, which benefits us as a firm but does hit us in the commercial and industrial high-grade straight debt league tables,” he says. “Also, although we weren’t in the large GECC onshore dollar deal we had a virtual monopoly on their offshore issuance this quarter, which was a large part of their issuance and was a strategy which we advocated.” Nonetheless, he’s not happy with ninth place overall. “We don’t want to be number one, but certainly top five globally.”
The question is whether they can do it without DiMaio, Walsh and the others who’ve left recently, and whether they can do it while restructuring the business, which might prompt others to go.
There’s one unit not included in the reorganization: leveraged finance, run by Bennet Goodman. It’s essentially the team that CSFB bought with its acquisition of DLJ in late 2000, the team that Wheat had to lock in with large bonuses after HSBC nearly lured them away before the merger had closed. There’s more chance that a wrong step by Healy and Wood in trying to knock down the walls of that fiefdom could lead to a large number of defections, which probably explains why it’s not being tackled just yet.
But never count CSFB out. Says one former employee: “It’s come back from much worse than this before.”
