Calello talks about Credit Suisse's business

A lot of people were surprised when Credit Suisse announced in December that it was cutting back on its investment banking business. Tell us about that plan.
We articulated in December, I think ahead of any other firm, what we called an acceleration of our existing investment banking strategy. We are focusing on more liquid products where Credit Suisse has already seen good momentum, such as algorithmic trading, cash equities, prime services, rates, foreign exchange, high grade credit and strategic advisory businesses. Now it seems everyone is talking about focusing on clients and the flow businesses, but I think we've had almost a year of executing on that strategy, and it's a viable one. 

I think, in fairness, we deserve credit for the initiative in cutting risk.

Can you give an example?
We brought our leveraged finance exposure from $60 billion in the third quarter of 2007 down to about a billion at the end of 2008. We did that with less than $3 billion of financing. That is quite remarkable. I don't think anyone has brought exposure down that much. I think this strategy makes an enormous amount of sense in the context of the new market reality, and the integrated bank model of Credit Suisse. 

How did you formulate this strategy?
We looked at a series of criteria -- ranging from a view that clients are going to move towards more liquid and transparent products, to the fact that regulators are going to have higher capital standards. The market is also becoming more sensitive to leverage and balance sheet usage. So we looked at our businesses along those criteria and questioned which fit. Businesses like cash equity, listed options and futures, standard derivative products, prime brokerage, rates and foreign exchange fit [into this criteria]. 

And then there's a series of businesses where we can't modify the business model to fit our current criteria. For example, complex mortgage-backed securities -- which is just too big a user of capital. Similarly, highly structured derivative products don't fit given the issues around transparency. Also we don't think it makes sense to be in businesses where we don't have a particular advantage. For example, power and gas trading doesn't make sense anymore. Perhaps during the bull market we moved away from some of our core competencies (and into new areas). Those are the areas where we have cut back now. 

In the middle are a number of businesses that we think we can modify to fit our business criteria going forward. For example, some of our emerging-markets businesses, or convertibles, where we were running our business with an enormous amount of inventory and we realised we don't need to have that much inventory. There is a way to reposition some of those businesses.

And that's how you made decisions about headcount reductions?
Yes, associated with this move was a headcount cut. And I believe we're best in class in terms of our non-compensation expense per employee ratio. It's very important in this environment to prove that we can be very efficient. 

A significant amount of the 5,300 cuts were in the investment bank. We didn't just take a big broad brush to it all and say that everybody's got to cut by 10%. Most of those cuts came out of the businesses that we are exiting and we repositioned some of the headcount as well. Geographically, Asia had a relatively small portion of the cuts though we don't give out specific numbers.  

You're doing quite well in M&A out here this year, what are your other growth areas?
M&A is very attractive because there is associated lending. The advisory business offers some of the best risk returns for an investment bank.

Cash equities continue to be very strong in Asia.  I think some of the flow derivatives will continue to be active. Prime brokerage is interesting in that several of the hedge funds, as you know very well, have left this market and the number of prime brokerage service providers are reduced. One of the things we know clients want -- particularly in businesses like prime brokerage and particularly post Lehman -- is to deal with an institution with unquestionable financial strength. So as the best capitalised major bank in the world, we have won enormous market share in the prime brokerage business all over the world, including Asia-Pacific. Rates and FX is important globally. And one area that was uninteresting for years but is gaining traction is high-grade debt.  People need to borrow.

Finally, we will continue to build our sector capability in investment banking. Yes, you have to pick your spots. One of the spots that we've picked is financial institutions, because they will continue to need to raise capital and think about consolidation. Now that valuations have come down, there are some opportunities for those [firms] that can afford them. And [we will invest in] resources, which will be particularly important to our Australia franchise.

How else have market dynamics changed?
It's an interesting mix. We have fewer competitors. We are also seeing wider margins because credit is being priced more rationally to reflect the perceived risk. But we are seeing that the effect of the reduction in asset values and de-leveraging reduces aggregate balances. So if you look at prime services you still see a lot of new balances coming in but the aggregate value of the assets is lower, although the margins on the business are higher.

Just before the end of 2008, the securities joint venture set up by Credit Suisse and Founder Securities finally received a business permit to offer investment banking services in the domestic Chinese market. How's it going? 
As you know, during my five years out here, getting the joint venture up and running was a top priority. I think we finally got the papers signed right before I left. To answer your question, the joint venture is going really well. They are looking to break even this year, which would be quite good. They've received a license to do domestic underwriting. I think the domestic bond business will be very important for the franchise. They've done several enterprise bond issues already... We are spending a great deal of time organising the business and have named Neil Ge the CEO and John Huang the chief operating officer. They are experienced Chinese bankers who have been with Credit Suisse for a long time. We took our top quality people and moved them over to assure success. And now we're rotating people through every three months in order to maintain our standards. Our partner, Founder Securities, is pulling in the same direction, so our interests are aligned.