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CSFB Can't Catch a Break

Three years in, its merger with DLJ is a bust, and its bubble-era issues look far from resolved.

In retrospect,

Credit Suisse First Boston

had a much bigger Y2K problem than anyone suspected.

CSFB's woes weren't a technical bug invading its computers in the first days of 2000. Rather, they were a series of bad decisions about everything from underwriting to acquisitions that continue to afflict the company three years later.

Indeed, much of the $1.2 billion in net losses CSFB rung up last year is tied to fines, lawsuits and restructuring charges that date back to events that took place in late 2000.

It was then that federal regulators began investigating allegations that the Wall Street firm took kickbacks from money managers seeking shares in its initial public offerings. CSFB settled that inquiry by paying a $100 million fine. It has also agreed to pay a $150 million fine to settle allegations that its analysts helped hype stocks during the bull market in order to win investment-banking business.

Now regulators are looking into a new allegation that one of its top investment bankers, Frank Quattrone, tried in December 2000 to obstruct the IPO inquiry by directing some of his underlings to destroy documents. Even though CSFB quickly moved this week to distance itself from Quattrone by suspending him with pay, this latest inquiry threatens to create a new round of embarrassing headlines for the firm.


But the costliest misstep CSFB may have made in 2000 was its $13.4 billion acquisition of

Donaldson Lufkin & Jenrette

-- the New York investment bank founded by William Donaldson, the Bush administration's nominee to head the

Securities and Exchange Commission


Many Wall Street observers now rate that deal a bust because CSFB, a division of

Credit Suisse Group


, significantly overpaid for DLJ. Since the day in November 2000 when the deal closed, the stocks of Wall Street competitors

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Goldman Sachs

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, are down 50%, 30% and 28%, respectively.

More significantly, CSFB since has shed much of what made the DLJ acquisition seem attractive. And of the pieces of the heritage that remain, one is a legal entanglement with shareholders of


over work done for the fallen energy trader by DLJ investment bankers.

"There's not a huge amount left from that merger," said Sean Egan, president of Egan-Jones Ratings, a small corporate ratings firm that monitors CSFB's parent, Credit Suisse. "If they had the wisdom of the fallout, they probably wouldn't have done it. But it's going to keep their legal department busy."

Nature, Nurture

To be sure, the deal's timing, coming on the eve of one of the worst bear markets ever, has played a part in the deal's misfortune.

For instance, one DLJ strength had been stock research. But the economic slowdown has forced CSFB to lay off 20% of its research team over the past year, leaving the operation a shell.

Just a few weeks ago, the firm sold its Pershing stock-clearing and trade-processing division to

Bank of New York

(BK) - Get Bank of New York Mellon Corporation Report

for $2 billion. Pershing had been one of DLJ's more profitable ventures, but in making the deal with Bank of New York, CSFB incurred a $250 million after-tax loss. The sale of Pershing, which processed roughly 10% of all trades on the

New York Stock Exchange

, was widely seen as an attempt by Credit Suisse to raise cash.

A year earlier, CSFB jettisoned DLJ's popular online brokerage division to the

Bank of Montreal

for $520 million. It now operates under the name

Harris Direct


CSFB officials declined to comment on the aftermath of the DLJ acquisition. But sources close to the firm say it's no secret that many top-level managers now question it, and some wish it never had happened.

Punch Drunk

The investment bank is in such a weakened state right now that some industry observers believe it's only a matter of a time before the Switzerland-based financial conglomerate looks to unload CSFB. One U.S. brokerage analyst, who did not want to be identified, said there's a lot of speculation on Wall Street about Credit Suisse either selling or spinning off CSFB in an IPO.

But the problem with that scenario is there doesn't seem to be a lot of ready buyers.

"There are no logical acquirers right now for it," said Egan. "They will likely just putter along for the next year."

The trouble for CSFB is that things may be no better this year. The stock market continues to look weak. On Wednesday, CSFB had to delay a planned $240 million IPO for

Infinity Property & Casualty

, a division of

American Financial Group

(AFG) - Get American Financial Group, Inc. Report

because of the weak market. And now the Enron litigation is starting to heat up.

While CSFB's role in the Enron mess has not drawn as much attention as other Wall Street firms, it was front and center in arranging many of Enron's biggest off balance sheet transactions. A dozen DLJ investment bankers, many of whom are now at CSFB, were the chief architects behind many of Enron's biggest off balance sheet ventures. One of the deals the DLJ team put together was the Osprey Trust, a corporate entity that bought more than $1 billion in ailing assets from Enron by selling now-worthless bonds to institutional investors.

Next week, in a much-anticipated 2,000-page report, a special examiner in the Enron bankruptcy proceeding likely will shed a lot more light on some of the off balance sheet transactions the DLJ team orchestrated for Enron. That report is slated for release on Feb. 14.

CSFB also is a lead defendant in a shareholder class action brought by investors in

New Power Co.

, a bankrupt power company that Enron sold in a November 2000 initial public offering jointly led by DLJ and CSFB. The lawsuit alleges that DLJ and CSFB were reckless in taking the power company public because Enron was engaged in a behind-the-scenes strategy to hedge its remaining 40% stake in the company and convert those illiquid shares into income that could be used to inflate its fourth-quarter 2000 revenue.

Yet with a little more than $400 million in a litigation reserve to cover all of its potential exposure in Enron, critics say CSFB is not setting aside enough money to cover its potential payout to all these angry investors. The critics note that other Wall Street firms embroiled in the Enron litigation -- Citigroup and

J.P. Morgan

(JPM) - Get JPMorgan Chase & Co. Report

-- each have set aside nearly $1 billion to cover claims

If the critics are right, CSFB could be looking at more big charges before the final chapter is written.