Quotes of the Day

For a man whose company just announced a record €1.4 billion third-quarter net loss, John Mack, incoming co-CEO of the Credit Suisse Group, sounds mighty confident. Despite the red ink, the affable American, whose manner belies his nickname of "Mack the Knife," is buoyant. "I'm an optimist," he told Time.

Given Credit Suisse's recent track record, Mack could be accused of wishful thinking. Consider how the 146-year-old bank — Switzerland's second-largest, with operations globally — has seen its key divisions gouged by hostile market conditions. In the third quarter Winterthur, Credit Suisse's insurance arm, punched a €955 million hole in the books, as sagging equity prices took their toll on the unit's investment portfolio. And Credit Suisse First Boston (CSFB), the investment banking side, recorded a net loss of €423 million.

But in spite of the dire numbers, Mack insists that the company is on track to return to profitability in 2003. Some analysts concur. "They are addressing the right issues," says Heinrich Wiemer, an analyst at Sal. Oppenheim in Zurich. "They are trying to work out the legacies of the past."

Those legacies? Badly timed investments and shortsighted management. Five years and 21 billion euros in acquisitions ago, Credit Suisse's then-CEO, Lukas Mühlemann, plotted a course to bolster the firm's insurance business and expand its investment banking side — a "bancassurance" strategy that left Credit Suisse heavily exposed to market vagaries. In 1997, Credit Suisse bought Winterthur for €.5 billion. Three years later, at the top of the cycle, it paid €1.5 billion for U.S. investment bank Donaldson, Lufkin & Jenrette (DLJ) — a deal that proved to be Mühlemann's undoing. This past September, after the group's share price had plunged more than 50% during the year, he was forced out. Into the void stepped two new co-CEOs who formally take over next year: Mack, a former president of Morgan Stanley who arrived at CSFB in 2001, and German Oswald Grübel, a three-decade Credit Suisse veteran.

Even in placid times, a two-headed creature in the CEO's suite can be a problem. But Mack and Grübel were parachuted into a storm. They can blame prior management, and harsh markets. But some of Credit Suisse's rivals have fared much better. Last week UBS, Switzerland's largest bank, recorded an unexpectedly large third-quarter profit of €42 million, thanks to its strong private-banking business.

So how will Credit Suisse match that? The logical place to start is Winterthur, where Credit Suisse has had to inject an extra €.5 billion in capital this year. Mack says much hard work has already been done. The unit has altered its asset mix — reducing its equity expo-sure and putting more money into bonds and cash. Credit Suisse also last week appointed Leonhard Fischer to head Winterthur. Does Fischer — who ran investment banking at Germany's Dresdner Bank — have the right background to run an insurance firm? Says Mack: "We have a lot of insurance experts. What we need are risk-management experts."

Next, CSFB needs an overhaul. By year's end, the unit expects to have slashed 6,500 jobs since Mack's arrival. It has cut costs by €.4 billion, and plans to slice off a further €00 million. But by zapping more bodies, the bank risks losing its ability to offer full coverage. Mack is undaunted: "I think we're properly sized for this market." Another piece of unfinished business: the DLJ debacle. Through at least mid-next year, about €00 million in guaranteed bonuses — used to retain DLJ staff — will weigh heavily on Credit Suisse's results. Mack is adamant the bank will not fall into the same trap again. "I can't run a firm," he says, "where employees and shareholders are not tied to the same objectives."

One solution to the current dilemma? Divest major assets for a quick capital fix. But it's an issue of timing — as Mack puts it, "It would not make sense to sell." Moreover, before these businesses can be sold, says Peter Thorne, an analyst at Pictet & Cie, "they need fixing." Other analysts, noting bad investments in everything from real estate to Internet companies, question whether Credit Suisse has purged its ghosts. "They're still carrying their old portfolios, and they will certainly want to exit many of those businesses," says Thomas Kalbermatten, who covers CS for Switzerland's Bank Sarasin. "In the meantime, the losses are definitely not finished."

Amid all these struggles, the one many see as inevitable — a supremacy battle between Mack and Grübel — seems to have taken a back seat. "For now, I think it works better to have two people," says Kalbermatten. But he asserts that later "the leadership structure may change." In the meantime, Mack is using the current gloom as an opportunity. "If this were a bull market or a stronger market," he says, "I wouldn't be able to make the changes that I'm making." Now that's looking at the bright side.

• JENNIE JAMES
• How its two captains plan to turn around banking giant Credit Suisse