Out of credit

With a name like Credit Suisse, a bank should be the epitome of stability. But Thursday's ousting of Lukas Mühlemann, the chairman and chief executive, shows it to be the very opposite.

Mr Mühlemann is paying the price for a series of strategic decisions that backfired. The most important were the SFr14.3bn acquisition of Winterthur, the insurance group, in 1997 and the $11.5bn purchase of Donaldson Lufkin & Jenrette, the investment bank, at the top of the market in 2000. He will be replaced by Walter Kielholz, chief executive of Swiss Re, and already Credit Suisse's vice- chairman.

But the abrupt circumstances of Mr Mühlemann's removal have raised fears about the financial health of Switzerland's second largest bank after UBS, which is one of Europe's largest financial institutions. Furthermore, the management structure being put in place in his wake could prove unstable. The job of chief executive is being split between John Mack, the head of its investment banking arm Credit Suisse First Boston, and Oswald Grübel, the head of Credit Suisse Financial Services, which includes Winterthur and its retail and private banking operations.

Although this structure, in effect dividing power between the two sides of the bank, will probably be effective in the short term, some analysts question whether it is viable in the longer-term. Two facts have aroused suspicions among bankers in Zurich over Thursday's changes, with some believing they may indicate deep problems at Credit Suisse.

The first is that Mr Kielholz turned down the opportunity to become chairman of Credit Suisse in the summer, despite considerable pressure. Privately, he said taking the job would be like committing professional suicide. Mr Kielholz had so effectively ruled himself out of the top job that he was put on the committee established in July to seek a new chairman to replace Mr Mühlemann. Mr Mühlemann had agreed to give up the chairmanship at the annual meeting next year, while remaining as chief executive.

Second, the decision to remove Mr Mühlemann - he will not in fact leave until the end of the year - was taken in haste. Only two weeks ago he was defending his record and explaining his plans to investors and to journalists.

The banker says the changes suggest that Credit Suisse may have to make big strategic changes, or raise fresh capital, in order to prosper. "If there is a problem we may never know - but these changes may mean that a capital increase or divestitures are closer than we think," he says. Credit Suisse dismisses suggestions of a financial crisis.

Mr Kielholz says the changes had been made because of "the continuing controversy over the presence of Mr Mühlemann. He felt that this controversy would not go away; and to help the situation he should step down and allow an orderly transition." He adds that Credit Suisse has "a solid foundation of sound business fundamentals and a strong global platform on which to build for the future".

But big questions remain over what that future will be. Even Mr Mühlemann has begun to have doubts about what he built. Executives said the group had begun to consider options for CSFB and had even sounded out potential bidders. In an interview at the end of last month, Mr Mühlemann said: "Of course, it's our duty to review our portfolio periodically. And if there's a better owner that can convincingly create more value out of a particular asset, I think we then have to go over the books."

The uncertainty is increased by the decision to have joint chief executives, for it is not clear that either Mr Mack or Mr Grübel wants to continue with the current structure. Mr Mack is thought to harbour ambitions to spin off CSFB once market conditions improve. Few analysts see many synergies between the investment bank and Mr Grübel's operations. Yet however tenuous the rationale for keeping them all under one roof, analysts also doubt whether splitting the group in two now would generate value for shareholders. Not only are capital markets in turmoil but Mr Mack is also part of the way through a restructuring of CSFB aimed at changing the culture and restoring it to profitability.

The three most obvious buyers of CSFB - Citigroup, Bank of America and Deutsche Bank - are preoccupied elsewhere. Citi has shown an interest in the past but, despite some $4bn of potential synergies available to Citi from such a deal, it is distracted by regulatory problems. Bank of America's attention remains firmly domestic, as does Deutsche's. Nevertheless, Josef Ackermann, chairman of Deutsche Bank, is watching developments in his native Switzerland.

David Williams, an analyst at Morgan Stanley, says Winterthur is a more obvious candidate for disposal in the short term. "Probably both Mack and Grübel agree that the Winterthur operations could be non-core," he says.

Investment bankers doubt there would be many bidders for the whole of Winterthur. They think it is more likely that this business would be broken up and sold to different bidders in each market. Even if Winterthur suffers no more heavy losses on its investment portfolio and its capital position is truly stabilised, Mr Mühlemann's belief in bancassurance has not been borne out.

In Switzerland about 30 per cent of its products are sold through the bank. In Italy it is about half. But because Credit Suisse has little banking presence elsewhere, only 15 per cent of Winterthur products are sold through banking channels across Europe.

For the moment, both Mr Mack and Mr Grübel have enough remedial work to be getting on with in their own divisions without falling out over the future of Credit Suisse. But once they feel their businesses have been restored to health, the centrifugal forces may be difficult to resist.

Should it reach that stage, some observers worry about who will be defending shareholders' interests. The two chief executives each run their own division. The chairman is part-time and, as chief executive of Swiss Re, already has a busy day job. "A two-chief executive structure is never optimal," says Mr Williams. Another analyst adds: "Who is running Credit Suisse? To say 'everybody' is not a good answer. It is a company with one stock. If Mack wants out, who is going to make sure that he delivers the best price for CSFB?"

People close to Credit Suisse say it was not possible to appoint an executive figure over the heads of Mr Mack and Mr Grübel because each is a forceful personality who is determined not to be number two to the other. Mr Mack in particular is haunted by his experience at Morgan Stanley where, as second in command to Philip Purcell, he lost out in a power struggle and was forced to leave two years ago.

He has been happy to serve under Mr Mühlemann, who recruited him, but earlier this year he even threatened to leave if someone else was brought in as chief executive. When it became clear that Mr Mühlemann could hang on no longer, the trade-off with Mr Mack was that no chief executive would be brought in from outside to interfere with his work at CSFB.

"But you deal the same joker to Grübel when you do that and the result is that no one is in charge," says a banker. "It avoids bruising one of two big egos. Now, you want to make sure they work as a team, which is something [that] still has to be demonstrated."

Close followers of Credit Suisse are appalled that such a large and once proud institution should have allowed itself to fall victim to political infighting. It may, however, be some time before Credit Suisse is once again worthy of its name. One banker says: "Mack and Grübel have buried their hatchets for now - but they won't forget where."

Additional reporting by William Hall

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