Fixing The Tech Stock Factory

By Daniel Kadlec

By most accounts, John Mack is a tenacious, intimidating, demanding, no-excuses kind of manager. Get called into his office, and you better be prepared. Show him up, and you've made an enemy for years. His verbal dressing downs while at the helm of mighty Morgan Stanley left underlings nearly needing a change of underthings. He is, it seems, just the tough s.o.b. to rescue scandal-ridden Credit Suisse First Boston--and restore a badly needed ounce of credibility to Wall Street. Hello, Mack the Knight.

Mack took over at CSFB, like Morgan a power player in global banking and trading, after its Swiss bosses sacked CEO Allen Wheat two weeks ago. Mack was available, having left the No. 2 job at Morgan Stanley in March following a huge career miscalculation. After Morgan Stanley merged with Dean Witter a few years back, Mack thought he would get to run it. He didn't, so he moved on. That's the way it is with type A's, a breed drawn to Wall Street like suckers to a flawed IPO.

Speaking of which, as most know by now, there has been no shortage of such offenses in recent years--a good many of the disaster deals having sprung from the IPO factories at Mack's new firm as well as his old one. That's noteworthy because at the heart of CSFB's problems, and one of the main reasons Mack was hired, is an IPO scandal that has shredded the firm's reputation. There are other issues at CSFB too. The firm overpaid for competitor Donaldson Lufkin & Jenrette, and now is losing some of the star bankers that came with that acquisition. CSFB defines excess: 60% of revenue goes toward employee compensation, a full 10 percentage points over the industry norm.

But Job 1 will be restoring credibility in the area of ipos. At CSFB, allegations include kickbacks from those who got hefty IPO allocations. Three brokers have been fired.

At Morgan Stanley, the question is more along the lines of, Did the firm do right by its customers? Should it have underwritten so many high-risk companies? The short answer is yes. The firm was merely doing what it always does: matching those who need capital (dreamy dotcom start-ups) with those eager to supply it (dreamier market neophytes, as well as a large number of institutional investors). Sometimes the dreams come true. After all, Morgan floated Microsoft and AOL, speculative plays in their early days too.

But try telling that to folks who lost the ranch listening to glowing stock opinions of star analysts like Henry Blodget at Merrill Lynch. The wounded want blood. Just last week Merrill revealed that it had settled a case with an investor who lost $800,000 in part, the investor says, by following Blodget's advice. Merrill says there is no mention of Blodget in the settlement, and it merely wanted to avoid arbitration expense. In any event, the settlement was considerable: $400,000. Although most arbitration cases lack precedential value, you can imagine that tech-IPO underwriters will be hearing from lawyers for other investors who lost bundles.

Mack attracts attention because both his new and old firms were doing much of the underwriting. At CSFB, star tech banker Frank Quattrone brought in the mother lode: CSFB took public 142 tech companies in 1998-2000. In the same period, while Mack was the top hands-on manager at Morgan Stanley, his firm underwrote 68 tech-stock ipos, according to Thomson Financial. The firms ranked 1 and 3, with Goldman Sachs notched in between.

Running a big-time Wall Street firm is not like running a carmaker. GE wonderboss Jack Welch cried uncle shortly after acquiring Kidder Peabody in 1986, and the Solomonic Warren Buffett couldn't run fast enough from his interim job as chief of Salomon Brothers in 1992. So you can see why stumbling CSFB grabbed Mack, whose own record for running a clean ship is pretty much unblemished. Mack was even rumored to be on the short list to succeed Arthur Levitt as head of the Securities and Exchange Commission. He's known for giving egocentric bankers--Quattrone while at Morgan Stanley, for one--the boot rather than caving to princely demands.

So the bet everywhere is that Mack will succeed by enforcing strict management controls that tend to get lost in a bull market. Others will too, it is hoped, because so far all we've got is a set of "best practices" for bankers and analysts and yet no way to enforce them. A few firms have eliminated some conflicts of interest--but not the worst ones. As ever, buyer beware.

See Dan on CNNfn's MoneyGang, Tuesday at 2:15 p.m. E.T.