Last week Allen Wheat was harvested by John Mack "the knife". The coronation of the former Morgan Stanley boss signals the end of an eight-year experiment by CSFB to reinvent the 1980s.
The money culture built up at the Swiss-owned, but Wall Street run, bank produces mixed emotions for most people. They abhor the naked greed and Darwinian management concepts which investment banks cultivate. Yet they envy the lolly paid to the kings of the jungle who thrive in these environments. It is a classic New Labour dilemma. We want to reward ambition and hard work but in moderation, just as we want American tax levels yet still desire European social services.
But you can't have both. And what the CSFB saga shows is that there is something wrong in the state of Wall Street.
In the years of Wheat, CSFB expanded aggressively. Two of its crucial deals were to acquire a team of 40 investment bankers, based in Palo Alto, California, from Deutsche Bank and to take over DLJ, the niche investment bank with strengths in financial services and technology.
The latter is in the "jury's out" stage. That is "jury's out" in the Hanging Judge sense of the phrase rather than 12 Angry Men. Most people would say – after a collapse in DLJ's profits, scores of defections and integration problems – that this deal of Wheat is not going to earn its corn.
Financial services was a success for a while, but is now most definitely adding to the stress levels among the Gnomes of Zurich. The team, led by Frank Quattrone (evocatively described by the New York Post as a "South-Philly-born Broad Street brawler"), received signing-on deals and guaranteed bonus arrangements that made many of them overnight multi-millionaires. They were at the heart of the California dot-com boom, striking deals to finance many of the companies that are changing our world – and a few that disappeared without trace.
The money rolled in for Frank, Allen and CSFB. But, it appears, it wasn't enough for everyone. Excessive commissions were paid to CSFB for front-row seats on certain top flotations. The authorities are investigating. Three brokers have lost their jobs. And the talk is that Frank Quattrone could follow them.
But it was not only this that led to Wheat not being flavour of the month. There was a feeling in the culture that anything could be tolerated as long as the money rolled in. Firms such as Merrill Lynch and the house that Mack built, Morgan Stanley, tightened their rules for whatbankers and brokers could and could not do. But compliance procedures at CSFB gave so much cause for concern that, in London, the Financial Services Authority has virtually taken up residence in the bank's offices (conveniently situated 100 yards down the road). When CSFB's Philip Remnant took the important posting as director-general of the Takeover Panel there was a problem that the watchdog could not match his £1m-a-year salary. But the CSFB was not alone in this dash for cash. What has happened in the last decade and a half is that investment bankers have taken over the world. They have created an accelerated meritocracy where achievement – and remuneration – is decided on short-term targets. At an investment bank, typically, an annual bonus is paid reflecting how well employees have worked to short-term objectives. This leads to risk taking, lack of vision and a disloyalty that sees headhunters flooded with CVs once the bonuses are paid.
While some banks are trying to counter this culture with longer-term bonus arrangements and deals related to an investment in the company, the arrangements have infected the body corporate in the US, the UK and parts of Europe.
A sad statistic is that the average time a FTSE 100 chief executive stays in a job is shortening to a little over three and a half years. If you take into account that they have 12-month contracts and often benefit from extra pension payments, this means that if they are forced to resign they end up with about five years' money (plus share options, bonuses, cars, etc etc) for 42 months' work. Where can I sign up for this?
The reason for this short life span is that public company bosses have to answer to a short-term-fixated City. The investment banks push deals at the public companies – demanding seven and eight-figure fees even if the transactions fail – and if the companies cannot make those deals work, then it is the chief executive, not the investment bank, who carries the can.
Except, of course, at CSFB, where Allen Wheat has taken the rap for all the problems. But, as he has been paid more than $200m over the eight years that he ran the operation, he won't be suffering too badly.Reuse content