The Trials of John Mack

Scandal, big egos, money down the drain. The CSFB chief inherited them all. "I didn't know how much trouble the firm had," he now says. So how did he bring it back to life?

By Patricia Sellers

(FORTUNE Magazine) – John Mack had been running Credit Suisse First Boston for three months when he suited up for his showdown with Frank Quattrone, the investment firm's powerful tech banker. It was October 2001, and in a telling bit of dramatic staging, the two had agreed to meet not in New York, where the firm has its headquarters, and not in Palo Alto, where Quattrone was based, but in Kansas City, Mo., because it was halfway between.

There was an unpleasant history between the two men dating back to their days at another firm, Morgan Stanley. Mack, then Morgan Stanley's president, had rejected Quattrone's demand for broad authority and a special pay deal. So Quattrone, in 1996, gathered his bankers and defected. He eventually ended up at CSFB, where he was given free rein to run his tech group--the industry's most prodigious deal generator. Then, in July 2001, Mack was named chief executive of CSFB. He was now back in Quattrone's company just as securities regulators were investigating CSFB's IPO underwriting and allocation practices--that is, whether the firm had improperly doled out shares in the hot stock offerings it was underwriting to favored clients in exchange for inflated trading commissions.

When he got the nod to run the firm, Mack thought he would make a clean break and ask Quattrone to leave. Mack considered the firm's fiefdoms to be the root of its problems, and Quattrone was the most powerful lord in the realm. But once he got to CSFB, Mack discovered the situation was complicated. The firm's lawyers had found no evidence that Quattrone had broken any laws in connection with the IPO probe, and that made asking him to leave a problem. Quattrone's cushy contract triggered a colossal severance--believed to be in the hundreds of millions--if he were dismissed without cause. So Mack, sitting across from Quattrone in a private dining room in the Fairmont Hotel, went to plan B.

"I'm going to tear up your contract," Mack told Quattrone over their steak dinners.

"You can't do that. It's a contract," Quattrone replied, according to CSFB people who were present.

"I can do it," Mack countered. "I believe I have legal grounds, and I'm prepared to go to court."

Mack told Quattrone that the contract was a hindrance to his running the firm. People familiar with Quattrone's contract say it gave him sole authority to hire and fire in his tech banking group; it also made it difficult to fire Quattrone for cause. The two were at it for hours. At the end of the meal, they agreed to renegotiate. "He knew I was determined," says Mack. "And if he didn't tear it up, we'd get into a protracted fight." By agreeing, however, Quattrone would be rewarded in other ways. Mack adds proudly, "He did it because he trusted me."

Being trustworthy, giving back, rewarding sacrifice, doing the right thing--those are important values to Mack, who learned the ways of business from his father, a Lebanese immigrant who owned a small store in Mooresville, N.C. The way Mack saw it, Quattrone gave him what he wanted. He agreed to tie his pay to the performance of the entire firm. And he made a sacrifice: His pay fell from a reported $100 million in 1999, his boom year, to a fraction of that in 2002. So Mack offered his reward. He appointed Quattrone to CSFB's 27-member executive board and publicly proclaimed his "complete confidence in his integrity and ethics." The relationship between the two men was "healthy, very professional," Mack says, for about a year. And then, of course, Frank Quattrone was indicted.

On Sept. 29, Quattrone is scheduled to go on trial on three counts of obstruction of justice. He's the biggest gun on Wall Street to be criminally charged thus far in the current era of scandals. He has pleaded not guilty. While Quattrone, not CSFB, is on trial, the courtroom drama will put the spotlight on the cowboy culture that Mack inherited and possibly blot his image as a reformer. Asked what he has learned from the Quattrone experience, Mack says, "I learned that life is complicated."

This is not a story of unvarnished success. It's a story of survival--and remarkable progress. Mack, 58, took on a monumental mess when he came to CSFB in July 2001. Last year Wall Street and the business media (including FORTUNE) were abuzz with rumors that CSFB was a dead franchise and might well be sold. No one says that anymore. In early August, CSFB posted better-than-expected earnings of $296 million for the second quarter. Analysts had been expecting the firm--the fifth-largest investment bank by revenues--to earn $350 million in net profits this year, vs. last year's $1.2 billion loss. The strong quarter is spurring upward revisions.

Getting to this point, profitability, has been harder than Mack imagined. "I didn't know going in how much trouble the firm had," he acknowledges. Once an innovative blue-chip investment firm that was renowned for its whip-smart bankers and alums like M&A giants Bruce Wasserstein and Joe Perella, First Boston had lost its discipline and purpose. (Credit Suisse Group took a controlling stake in First Boston in 1988.) In 2000, amid a wave of mergers in financial services, the renamed CSFB acquired Donaldson Lufkin & Jenrette for $12 billion. It was a bad deal for several reasons. For one thing, CSFB bought at the top of the stock market bubble. And unlike other mergers that combined an investment house with a retail brokerage, CSFB and DLJ were essentially in the same businesses. To keep bankers from bolting, Mack's predecessor, Allen Wheat, liberally ladled on the perks and agreed to contracts guaranteeing astonishing levels of pay and job security. The result was a bloated firm, full of big-ego bankers running their groups as they saw fit.

Mack has attacked those problems with his characteristic tough love. During his 29 years at Morgan Stanley, Mack, who rose from bond salesman to president, was a dedicated team builder--to many the "heart and soul" of the firm. But he was equally tenacious as a cost-cutter, known by the not-so-loving moniker "Mack the Knife." He brought his Ginzu to CSFB, cutting 10,000 jobs from the 27,500-person workforce and slashing more than $3 billion in costs. He also went after the guaranteed cash compensation that the firm had offered after the DLJ acquisition. "A tremendous amount of shareholder equity was just thrown away," Mack says. Incredibly, he managed to persuade the firm's long-coddled bankers to give back $421 million in cash pay. Consider that a moment: investment bankers slashing their own bonuses. "We have great people here willing to sacrifice to create a great firm," Mack says.

Mack has a lofty mission--to build not just a great firm but the most admired on Wall Street. Even as he has sliced and diced, he has been working to create a new culture at CSFB. He recruited a team of renowned straight arrows and rooted out abuses. He asked people to give but has also given in return. He retained key people and started to rebuild the firm on a foundation of mutual interest rather than rival domains. "He's extremely focused on creating the right behavior and a strong sense of togetherness," says Walter Kielholz, chairman of Credit Suisse Group, CSFB's parent.

The kudos he gets from the Credit Suisse board are more than he asked for, in fact. Last September the board ousted CEO Lukas Muhlemann, who was slow to fix problems, and tapped Mack to take the additional job of co-CEO at the parent. Mack did so reluctantly, he says, out of duty and also in the hope that power in Zurich would help him advance his turnaround in New York. So now he spends a few days a month in Zurich and logs a fair amount of time in long-distance calls to his counterpart, Oswald Grubel, 59, who is shoring up the company's private and retail banks and insurance businesses. The partnership works because "neither of us is pitching to be sole CEO," says Mack, who is the first American to sit atop such a large, publicly held European bank. For a man who goads everyone he knows to "move out of your comfort zone," how could he not take the job? Says Christy Mack, his wife of 30 years: "This is taking him out of his comfort zone."

John Mack could have opted for comfort. Two years ago, he walked out of Morgan Stanley with $600 million in accumulated stock and options. As president of the firm, he had largely engineered its 1997 merger with Dean Witter. But after losing a bitter power struggle with merger partner Phil Purcell, he decided to leave. The fact that he had pulled off a successful deal--Morgan Stanley stock nearly quadrupled in the four years after the merger--didn't relieve Mack's need to prove his worth.

Running Credit Suisse's troubled investment bank has given him that chance. Getting admiration isn't easy for any Wall Street firm in a post-Eliot Spitzer world. But in addition to allegations of ethical misconduct--IPO abuses, Enron financing, and assorted regulatory troubles in Europe and Asia--that stained CSFB as well as other firms, CSFB's finances were rotting under the surface. With its out-of-whack cost structure--largely due to those whopping employment contracts--it was poorly positioned for the economic downturn. It was the only major investment bank, in fact, to lose money in 2001.

When he first arrived at CSFB, Mack says, "one of the hardest things for me was finding where the problems were." He recalls being approached by an in-house lawyer who asked him how he could help. "Tell me who's good here and who's bad," Mack said to the lawyer. "I'm going to find out sooner or later." Learning that the lawyer had approved some extravagant employment contracts, Mack fumed: "How could you let senior management sign these contracts?" The attorney told Mack that he had pointed out the problems with the contracts. "I would have resigned," Mack fired back. The lawyer has since left the firm.

His spitfire management style can sometimes rub people the wrong way. Mack is the type of CEO who, upon hearing a client's complaint, will pick up the phone and lay into the midlevel banker at fault--frightening the banker and annoying his boss. Tom Nides, Mack's chief administrative officer, tells him, "John, you get into the weeds too much." Mack tells Nides, "But I'm trying to change a culture!"

Mack admits that he sometimes has to "dial back my enthusiasm," as he puts it, and he counts on advisors like Nides to twist the dial. Shortly after he came to CSFB, he spoke at several meetings about creating an "ethical culture"--until his lieutenants told him that some people thought he was implying that they weren't ethical. "I underestimated how sensitive people were," Mack says. "I toned it down."

As much as he projects that Mack the Knife image, he also embraces his role as self-described "culture carrier"--Mack the Knight, if you will. His strategy has been to enter the bank's fiefdoms and try to pull together a collaborative "one-firm firm"--his mantra back at Morgan Stanley. This year Mack moved from CSFB's stuffy 27th floor, where the bigwigs sit, and is operating out of the various divisions for weeks at a time. These days, when he's not on the road visiting clients, he's embedded in leveraged finance on the fifth floor, viewing the traders and salespeople from a small, glass-walled office and roaming the floor, asking, "What do you do? What deals have you done lately?"

His questioning presence is a stark change from the old regime, where Wheat was hardly visible. (Wheat did not respond to FORTUNE's request for an interview.) Mack has a "Ronald Reagan--like focus on principles," says Brady Dougan, a CSFB veteran who was Wheat's supposed successor and now, under Mack, is co-president of the institutional securities business. "You know, like Reagan's 'Communism must be vanquished!' John cannot be distracted from his core principles." Those principles, according to Mack, are "client focus, long-term perspective, teamwork, accountability, and integrity."

To help him spread the message, Mack has filled CSFB's top ranks with nine newcomers. His first hire was Steve Volk, a well-respected elder statesman at the law firm Shearman & Sterling who had been weighing offers from several of CSFB's more prestigious rivals. Mack made him chairman. "This seemed to be the most interesting situation with the most upside," says Volk, 67. "Not necessarily financial upside but the chance to make an impact and create a strong, profitable firm."

Volk, in turn, recruited Gary Lynch. You may recall that Lynch was the SEC chief of enforcement who prosecuted Michael Milken and Ivan Boesky in the 1980s. As CSFB's general counsel, Lynch first helped settle charges filed by securities regulators that, Mack believes, "could have blown up the firm." (The most worrisome case, settled for $100 million in early 2002, focused on those outsized IPO commissions; Lynch also negotiated with New York State attorney general Eliot Spitzer in this year's industrywide global settlement.) In December, Lynch took charge of CSFB's research analysts, who, as at other firms, are living under new regulations.

Hiring Volk and Lynch sent the message that Mack is serious about reform. "We can't make close calls," says Lynch, who has tightened compliance in areas like document retention (save everything forever!). "We have to stay far from the foul line." Mack says that eagle-eyed lawyering is the new reality. "When I got into this business in 1968, Wall Street was about trusted advisors," he says. "Today Wall Street is not the trusted advisor." Will it be again? "I hope so. I don't know." Mack adds, "Whatever it takes to get that trust back, we have to go through."

As he strives to gain public confidence, he also displays gallantry to win over people inside the firm. Consider the way Mack persuaded hundreds of CSFB executives to give up the most lavish pay packages on Wall Street. Meeting with executives one on one, Mack approached them with this pitch: "Look, we're not making money. We have a lot of young people here who aren't going to get bonuses unless you give up some money. It's about fairness and building a great firm. Trust me. I'll remember what you did."

Jack DiMaio, who gave up more than $20 million and prodded 39 others in his bond group to give up millions more, says that Mack has since invited him to dinners and to play golf in North Carolina, where Mack has a vacation home. "He keeps reinforcing that he's a big believer in me," says DiMaio, 36, who recently asked Mack if he could shift from trading to asset management. After the two men wrangled over pay--of course!--DiMaio became CEO of alternative investments and is now creating a new fund business for CSFB. DiMaio says about the boss, "He wins you over by giving you the full sense of John Mack."

Giving the full John Mack is something he learned to do as a kid back in Mooresville. His father, Charlie Machoul, started out as a door-to-door peddler selling needles, thread, and sundries and eventually opened a small store. Despite changing their name to Mack, the Machouls stood out. They were not only Lebanese but also Catholics in Baptist country. But the community warmed to them because they were warm to the community. They raised money for the school and the orphanage, and helped build the town's first Catholic church. John's mother cooked for sick people.

Outsider Mack has carried the hospitality-as-management style to CSFB. As part of his diversity drive, for instance, he flies women executives to North Carolina for golf outings; they dine with John and Christy and stay overnight at their beach house. "You can't build a culture unless you get to know your people in a relaxed atmosphere," says Christy.

There's no better example of the power of Mack's personal touch than his pay negotiations with Bennett Goodman, who heads CSFB's merchant-banking and leveraged-finance businesses. In Goodman's fifth-floor office one day, Mack noticed a Duke basketball book on his table. Mack learned that the junk bond boss is an avid Duke fan who takes his two kids to the Duke vs. North Carolina game every spring. After Mack, who is a Duke grad, pitched Goodman on decency and fair pay, he left him to decide whether he would relinquish his contract.

Goodman opted to be a team player. He told his leveraged-finance colleagues: "We can be pigs. But if the firm implodes, that isn't good for the long term. Let's think about helping John." They all agreed to pitch in. He went to Mack's office and announced that his group would give back $50 million. "I expected him to jump up and hug me," Goodman recalls. "But he just said, 'Hmmm.'" Goodman returned to his office, deflated.

But an hour later he got a phone call. It was Coach K, as Duke's fabled Mike Krzyzewski is known. "Bennett, I'm best friends with John Mack," Krzyzewski said. "He's a cold S.O.B. I just want you to know that what you did today warmed his heart. That's what leadership is all about." Krzyzewski told Goodman that he was the "Shane Battier of CSFB," referring to Duke's selfless star player. Goodman hung on to Coach K's every word for an hour. "I told him he'd need to give back more if he wanted longer phone calls," jokes the coach. In fact, Goodman did. In 2002 he and his group gave back another $50 million.

"There's going to be A trial. It involves one of our former employees." Mack is talking to some 5,800 CSFB executives at a recent early-morning "town hall" meeting. "Our name is going to be in the papers a lot. Let's make sure that we look back at the progress we've made with regulators. We've made a lot of progress."

Mack never mentioned the name Frank Quattrone at that town hall meeting. But the man and his alleged misdeeds continue to haunt CSFB. The case is particularly discomforting for Gary Lynch, who, like Mack, put his faith in Quattrone. "Frank said he wanted to be part of the team here," Lynch says. "People believed him." The turning point came this past January when Lynch, responding to a press inquiry, asked Quattrone about an e-mail he had sent to the tech group: Did Quattrone know that CSFB was being investigated when, in late 2000, he had urged co-workers to clean up their files? Quattrone assured Lynch that he did not know. Two days later, at 3:45 P.M. on a Friday, CSFB's lawyers discovered one e-mail that suggested otherwise. "I was nauseous," Lynch recalls. "Suddenly we had a new controversy." Mack, who was out of town and was reached by phone, took the news better than Lynch did. "It is what it is," Mack told Lynch. "We've got to protect the firm. Call the regulators today."

By 5:30 that Friday afternoon, Lynch and his legal team had placed calls to all of the regulators and prosecutors. When summoned weeks later by the National Association of Securities Dealers, Quattrone, on the advice of his lawyers, refused to testify. "That changed everything," Mack says. "I can't have someone here not cooperating with regulators, no matter what the reason." By mutual agreement, Quattrone (who had testified before the NASD last fall) resigned through his lawyers. Federal prosecutors indicted Quattrone for obstruction of justice by interfering with federal investigations and urging colleagues to destroy evidence. (Quattrone's defense team contends that there is no connection between the IPO allocation probe and the documents he encouraged his co-workers to destroy.) Asked whether he erred in keeping Quattrone at the firm as long as he did, Mack says, "Maybe it was a mistake, but I had to be fair." He adds, "We've had some bad actors. We have to question them, but in doing so, we have to give people the benefit of the doubt. I still say about Frank: Let him have his day in court."

When all is said and done, Mack has much more to worry about than the collateral damage from the Quattrone trial. He still needs to prove that CSFB can be a profitable and healthy enterprise in good times and bad. CSFB's return on equity, 18.5% in the second quarter, exceeded that of Morgan Stanley and Goldman Sachs, but was below Citigroup's--the firms to beat, in Mack's mind. Meanwhile, productivity, measured by revenue per employee, is behind the peer group's. So while major cost cutting is done, "there's still more trimming to do," Mack says. "There's probably a couple hundred million left to cut. We just have to find it."

More importantly now, he has to find new revenues. He sees a pickup in dealmaking, but he is wary. "Do I think this is a long-term cyclical recovery for the industry? No," he says. "The markets are still fragile." He's boosted the firm's business with existing clients such as LBO firm KKR, Nestle, and AT&T. New clients include General Electric, Deutsche Telekom, and Oracle. (CSFB is advising Oracle on its PeopleSoft takeover attempt.) But wooing blue-chip clients can be a messy affair. In the auction for Vivendi Universal's U.S. entertainment assets, CSFB had lined up to be a nonexclusive financing partner with a consortium that included oil billionaire Marvin Davis and buyout firms Carlyle Group, Texas Pacific Group, and Bain Capital. In June, GE decided to join in the Vivendi bidding and asked CSFB to be its advisor--if CSFB agreed not to finance other bidders. Mack chose GE. "It was a tough call, but I think we made the right decision for the firm," he says. In retrospect, he wishes he had informed the consortium members himself rather than had his bankers do it. Now CSFB needs to rebuild bridges to those buyout firms, all major CSFB clients.

Then there's Mack's bigger goal--creating that one-firm firm. Jeff Peek, a CSFB vice chairman who resigned in July, says that Mack is halfway there. Peek never got firm footing under Mack and opted to leave after CSFB sold Pershing, a stock clearing-house that he oversaw. "John has true followers in his ten direct reports, but the really difficult part is converting the next 100 people," says Peek, who is joining CIT Group as president in September. Mack acknowledges the problem. "The firm needs to build trust internally," the CEO told the troops at the recent town hall meeting. "I'm talking about how we treat each other. At the senior management level we've made a lot of progress." But below the top ranks, Mack says, "I'm not happy. It's hard to change a culture."

Morale is improving, but that has as much to do with Credit Suisse's rising stock as with cultural change. Bankers who traded guaranteed cash pay for equity have been pleased to see the stock, which trades as an ADR on the New York Stock Exchange, double since last fall. Mack criticizes Wall Street's "money culture," but let's get real: People work here to make money.

So why is Mack, who doesn't need the money, putting himself through this? Hank Paulson, CEO of Goldman Sachs, is amazed by Mack's stamina: "At times when he ought to be down, he looks almost energized." Coach K tells Mack, when his friend seems exhausted: "Are you an idiot? You're going to kill yourself." Mack typically shoots back: "I can see it getting better. I'm doing fine. How are you doing?" And if you survey Mack's other friends, you'll hear many say that they bet he would not have taken this job if he had known how difficult it was going to be.

Mack disabuses them of that thought. "I would do it again," he says. "This has been the biggest challenge, the most interesting challenge. 'Fun' is not the right word. Do you have fun when you work out? No. You do it because it makes you feel good afterward. It gets your blood pumping." Sitting in his temporary office, he peers out onto the trading floor. "At the end of the day, I'm addicted to what I do," he says. "And I think about winning all the time. I'm obsessed with it." You have to believe him. He still has something to prove.