CSFB &quotneeds to cut $1bn&quot from staff costs
The need for massive cuts to its compensation costs are behind the latest round of job cuts at CSFB, which could lead to over 750 bankers, or 20% of the investment banking division, losing their jobs. The lay-offs will be the third significant cutbacks by the firm in less than a year.
It fired over 3,000 staff in the wake of its acquisition of Donaldson, Lufkin & Jenrette, and has subsequently trimmed several hundred more as a result of the market downturn.
The problem facing CSFB and John Mack, who was appointed chief executive this summer, is that the bank has the highest compensation ratio - or cost of salaries and bonuses as a proportion of net revenues - of any bulge bracket investment bank.
In the second quarter of this year CSFB had a compensation ratio of 57.6%, compared to an average of six Wall Street firms of just 51.1%, according to a recent research report by CSFB's own European banks team. CSFB's compensation ratio in the second quarter was already a significant improvement on last year, when compensation swallowed 59% of net revenues.
Based on its second quarter performance, CSFB would have to cut nearly $260m from its compensation bill in just one quarter to bring its ratio down to the Wall Street average for the second quarter. Assuming market activity remains constant for the rest of the year, that would work out at around $1bn in compensation savings a year.
One banker said: "It is an unusually large number, but it gives some indication of the cost problem faced by CSFB."
Mack has already started addressing the cost problem by renegotiating some contracts with some of CSFB's biggest earners last year and in 1999, when the firm was one of the market leaders in technology stocks, particularly in US underwriting.
The task will, however, be daunting. Goldman Sachs had a compensation ratio of 47.8% in the second quarter of this year, and Salomon Smith Barney's ratio was 49.4%, according to Freeman & Co, a US consulting and advisory firm. Even firms that have been aggressively expanding, such as Lehman Brothers and Bear Stearns, have compensation ratios in the low 50s.
CSFB's problems have been exacerbated by the sharp decline in activity. In a recent filing with the Securities and Exchange Commission, Credit Suisse, CSFB's parent company, warned that the attacks in the US would "exacerbate the already difficult economic and market conditions experienced by all our businesses, and in particular CSFB, over the past year". It warned that third quarter results would be significantly lower than in the second quarter, when CSFB reported a net operating profit of $255m, down 37% from the same period in 2000.
CSFB in the US refused to comment on the latest round of job cuts.
