Mack the Knife poised to make CSFB job cuts

Staff at the investment bank Credit Suisse First Boston are facing a nervous weekend, after being told yesterday that job losses would be announced internally next week.

The warning came despite Credit Suisse Group, the London-based bank's Swiss parent, posting better-than-expected second-quarter results, with net profits down 23 per cent on last year at SwFr1.29bn (£538m). Analysts had expected a decline of as much as 36 per cent.

CSFB's net profits were down only 14 per cent year on year, a performance Credit Suisse described as "good ... in demanding market conditions". However, the performance on costs at the unit, which recruited aggressively in 1999 and last year, was poor. Many of last year's recruits came in on guaranteed contracts that run until as late as March next year, making it hard for CSFB to fire them at a time when revenues from mergers and new issues work are scant.

Salaries and bonuses at CSFB amounted to 57.6 per cent of its operating income in the second quarter, barely down from 60.6 per cent in the same period last year.

That compares with an industry average of 50 per cent. The unit shed only 2 per cent of its workforce in the second quarter, or 524 people, although overall compensation was down 10 per cent.

Amid mounting calls from investors for action to be taken to address CSFB's cost base, Lukas Mühlemann, Credit Suisse's chairman and chief executive, said the bank would tell its staff of a renewed cost-cutting drive next week. The widely expected move follows the appointment last month of John J Mack, nicknamed Mack the Knife, as CSFB's chief executive. Mr Mack gained a reputation for merciless cost- cutting at his previous employer, the rival Wall Street investment bank Morgan Stanley Dean Witter.

Mr Mack has already invited staff on guaranteed contracts to consider their "relationship" with CSFB and think about taking a pay cut, a thinly veiled warning that the price of refusing a short-term dent in the salary would most likely be the loss of employment altogether as soon as the guarantee expires.

The proposal is not thought to have been widely taken up. "They have mortgages and school fees to pay too and they're not guaranteed a job anyway even if they take a pay cut," said one investment banker of his colleagues at CSFB yesterday.

The stock market downturn, in particular the collapse of the market for technology investments, also continued to take its toll on CSFB's other business units. The private equity arm, which enthusiastically invested in a host of New Economy start-ups in 1999 and last year, posted a pre-tax loss of SwFr217m. The group upped provisions against losses in the unit by a further SwFr100m.

Mr Mühlemann dashed the hopes of anyone still looking for a recovery in the investment banking industry this year. "We expect the world's economic climate and the situation in the global financial markets to be difficult in the third and fourth quarters, affecting our core activities in the areas of asset gathering and investment banking," he said. "We think third-quarter results will be below [the second quarter's]."

Meanwhile, the group continues to suffer following last November's $13bn (£897m) purchase of US rival Donaldson, Lufkin & Jenrette. Its integration contributed to an overall increase in operating income of 24 per cent year on year in the first half, against an increase in operating expenses of 38 per cent – and this despite shedding more than 2,600 jobs at the firm since the deal completed.

CSFB is also having to contend with investigations by the US Securities and Exchange Commission into allegations it offered preferential treatment to certain investors in the allocation of some of its initial public offerings throughout 1999 and 2000. It has denied any wrongdoing, and yesterday said it was continuing to cooperate with the regulators.

Still, Credit Suisse can take comfort from the similarly poor performance of rival investment banks and from the gathering upward momentum in other parts of its financial empire, notably wealth management. It is in the throes of integrating its retail banking, insurance, pensions and private banking arms, which is likely to yield cost savings of SwFr500m. Assets under management have grown by more than 4 per cent so far this year, to SwFr1.45bn.

While all investment banks have been selectively culling staff this year, few have formally announced large-scale lay-offs. However, the continuing stock market doldrums have made it increasingly likely that the autumn and winter will see an acceleration in City job losses.

Two weeks ago, Geoff Boise, the chief executive of JP Morgan Chase, issued a memo to staff warning of cutbacks ahead. "The bottom line is that we have too many people working on similar tasks," he said. "Our deal teams are too large. We are spending unnecessarily in almost every category."